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

Simon Thackray - Citigroup Peter Steyn - Macquarie Keith Chau - Evans & Partners Andrew Johnston - CLSA Andrew Scott - Morgan Stanley Brook Campbell Crawford - JPMorgan Peter Wilson - Credit Suisse.

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 a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Louis Gries, Chief Executive Officer. Please go ahead..

Thank you. Hi, everybody. Thanks for joining the call. I'm in Europe with Matt Marsh. We'll walk through the results in a normal way. If you go to slide 5, you'll see the agenda.

We actually have added an item, Fermacell Update, but you'll soon find it is not much of an update because we haven’t closed, so we can't talk about it, but I, now we'll go to the Operating Review and I'll hand it over to Matt for financial review and then we'll come back to questions and answers.

So going to slide 7, we've got our Fermacell slide which is something we covered in November after we entered into the purchase agreement. We did put a bridge loan facility in place in December and everything is striking down plan and we expect to close the acquisition late fourth quarter.

Slide number 9, filtered down the – this business overview is going to be an easy result to talk to because everything in the businesses did go pretty much as expected and pretty much how we've been indicating we thought would perform after fiscal year '18.

The EBIT margin in the quarter was higher than I think most people expected including us and that's just a reflection of most things in the business in the last quarter kind of went to the positive variance side. That's the operations, the pricing was good.

The volume was good and I'll comment on that in North America and Asia-Pac continue to perform very well.

So you put it all again, we've got a little bit more on the EBIT margin line than we were expecting, but it is consistent with the story we started the year with and that's going to be a backwards year meaning we're going to get better as we went through the year which is unusual seasonal impact in the U.S.

but that's how it has played out and we can't expect to continue with the current momentum. You can see the cash flow is down a bit. We talked to you. In the U.S.

we went to a new program for winter distribution of inventory close to the market so that program has been running well and seems to be working for us the way we wanted it to work, but does result in higher inventory this quarter being pulled down in the first quarter of next year.

North American specifically you can see prices pretty much what we've been doing throughout the year, a good price gap of 5%. Sales volume, the comp is 2% which is better than the second quarter obviously. We got there by getting to market rate on exteriors a quarter quicker than we thought we were going to.

So our gains then we'd be 2% or 3% up on last year this quarter as things played out the way we thought they would, we actually come in more at the market index rate of above 5 on exteriors.

Pouring it down at 2% was negative interiors comp, the negative interiors comp not necessarily happened half but it was driven by the product line exits we did early last year and early this year late last year and then we're just traction in some regions in retail, we lost traction in gypsum regions and we need to regain that.

But so that's how we got there on volume. Obviously the EBIT came in strong. Like I said everything kind of just went just a bit better than expected and that added up to EBIT margin coming in very high for the third quarter. Third quarter is normally our lowest margin quarter. Your page 11, delivered unit cost.

We give you that graph now because obviously we got it off track with our unit cost and you can see we've kind of gotten selves back on track. The low indications for Q1 and Q2 of '17, I think we have communicated that, we didn’t think those were sustainable. We didn’t think. We thought they were lower than they should be.

We weren’t spending at the, you know ideal level. We were under spending in our plants. So we kind of took care of that and that's a big part that we pulled the unit cost up and we've now come back down just to back down. We're comfortable with spending levels in the plant. We've done a lot at catch-up where we felt we had to do.

You can see us Q3 '18 is about the same as our Q3 '17. That's despite the fact that input costs are up and freight costs are up, so we were offsetting and pretty much offset that improved performance over same quarter last year.

Go to slide 12, you know I had commented that it was going to be backwards year and it is turning into a backwards year, meaning you know either Q1, Q2 is normal year investing that margin market and then you take the dip in three and then four and you see had a bit of a bounce back.

So we came in very weak in the first quarter starting to get some of our financial traction back or bottom line back in the second quarter and like I said it came in a little bit higher in the third quarter although we were expecting that to improve in the third quarter. I'm not going to [indiscernible] that here.

If we go to slide 13, I commented early that prices went south all year, not much going on there. We took an increase this time last year. It was an effective increase.

We had a mixed advantage going forwards this year reportedly due to the product line exits I referred to earlier, but also you know when interior is tracking behind exteriors, interiors is lower price product line. So that gives you a little mix advantage when it comes to price and then our tactical pricing has been well managed.

We've gotten better when that tactical pricing efficiency over the last two or three years and that's been showing up pretty good for us.

Top line growth, obviously you guys know that story we talked about getting our traction back in the market, so we got top line growth from price and a little bit of volume this quarter and we expect that to improve as we move into next year.

We're not really changing, you know when you get to G&A you're going to find we're not really changing our story of how we think this plays out. We think the quarter was pretty much as expected. So it doesn't lead us to a more bullish view at this point. So I think our PDG [ph] we talked about 3 to may be 5 next year.

We still feel the same way about that. We feel our EBIT margin will be good. We have the capacity lined up to service the market. We have our programs to drive PDG fully funded.

So everything is kind of as we've been talking right through the year and this is just this quarter to me is more of a confirmation that we're on the track that we felt we are on rather than something that would you know a quarter that would lead us to change our expectations.

Slide 14, International Fiber Cement it's just had a really solid year and it continues to perform well month to month, quarter to quarter.

Go to slide 15 and you'll see the only little negative is our New Zealand plant hasn’t performed as well as it should and we've had a little bit of an EBIT drop there, but other than that, you know, Asia-Pac has been a really strong performer for us and we expect that to continue.

You've seen down in Europe, in the Europe it says lower volume in certain regions and then says little better EBIT result due to lower SG&A basically we're more selective on our market participation than we were over the last couple of years we've kind of got out of some product markets that we didn’t think had as much value for us.

Obviously with the purchase of Fermacell we're going to reset our whole approach to fiber cement in Europe.

So it's not really, I wouldn't want it to be read as any kind of pull back, it's just kind of a fixing up the base business in Europe which is still pretty small until we get into a relaunch in a more high growth organic strategy post Fermacell acquisition, after it closes. Okay, I'll hand it over to Matt Marsh..

Thank you, Louis. Good morning to everybody joining us from Australia and good evening and afternoon to everybody else in the world. On slide 17 we'll go to the – we'll start with the financial review for the third quarter.

We had sales of 495 million up 9% as Louis indicated as a combination of net sales price and volume in North America as well as a strong volume quarter internationally. Gross profits increased 18%.

Gross margin rate is up 270 basis points as the plants continue to come in line with our performance expectations and again improvement year-over-year due to the comparable year ago where we were just coming into some of the trouble North American the capacity constraint.

SG&A expenses were up modestly at above 4% we do continue to fund our growth programs and at the same time manage our discretionary cost and then adjusted net operating profit for the quarter of 79.9 million up 33% again on the back of a good quarter in North America and International.

On page 18 for the nine months net sales were up 7% to $1.5 billion on largely North America the momentum that's building on volume in the third quarter from a volume standpoint in North America is certainly helping and then again just another good quarter of international on both volume and revenue.

Gross profits for the nine months are up 5% gross margins down 70 basis points. I think what's important on gross profits is that the third quarter is improving on the first half and we're continuing to make good progress throughout the year as Louis talked about in the delivered unit cost chart as manufacturing continues to get back on track.

SG&A expenses for the nine months pretty consistent with the third quarter up 5% and adjusted net operating profit of $203.7 million up 6% with North America EBIT up 4% and international EBIT up 15%. On page 19, you can see the dollar weakening a bit. It is having a small impact on an adjusted net income basis of about 1%.

Not all that material to the overall result, but it is certainly a bit of a reversal of the trend that we saw in the first half of the year. On slide 20 input cost for North America continued to just to be an inflationary pressure for the business.

They've been that way for the year and what we saw in the third quarter is no different from kind of what we're expecting to close the year out and going into next year is that input costs will remain kind of headwind for the business. Freight costs, the freight market is very tight and you can see freight market prices are up almost 21%.

Pulp continues to increase up nearly 20%. Electricity is up 9% and cement is up 5%. So, particularly pulp and freight and electricity are all churning higher than we would have thought at the beginning of the year freight and pulp to a more significant degree.

You see gas prices are down 5% but most of our raw materials are up and despite that the plan is now to get delivered unit cost back churning down but nonetheless it's creating a headwind to margin rates.

On page 21, third quarter and nine months business performance of the North America segment you see for the quarter that was up 34%, for the nine months it was up 4 and as we've discussed it's primarily volumes are coming at the same time that the manufacturing issues that we had talked about last year and coming into the early parts of this year are continuing to – improvements are continuing to be made on them.

For the nine months it’s a very similar dynamic with the momentum building obviously in the quarter and the nine months being dragged down from the first half performance. Internationally, you know, very good nine months performance. You can see for the nine months EBIT is up 15%.

Similarly in the third quarter they've just had a very good string of results here. So they're doing a good job on volume and market penetration as well as running manufacturing is on a good performance strength as well. And the markets are favorable conditions overall in our addressable markets.

On page 22, our other business is trending where we kind of thought it would throughout this year. We're continuing to make some product and manufacturing investments in the Windows business. We like the performance the team has given us in Windows.

Obviously it's still at an EBIT lost, but we still like what we see out of the business and it's tracked in the third quarter more or less where we thought it was going to be. No real change in R&D and either the quarter or the nine months, still continues to be on strategy and our 2% to 3% been as a percent of sales.

You see general corporate costs are up on a headline basis what looks to be a substantial now most of that is just stock compensation obviously with the appreciation of share prices in the quarter drove an increase.

If you take stock compensation out and just look at the underlying general corporate cost they are up a bit, we're continuing to spend in discretionary funds around training and organization and continue to invest in the business and but nothing out of the ordinary in general corporate cost. A couple of pages on income tax.

Our estimated adjusted effective tax rate for the year is at 23.1%, so still in that range that we had been talking about the last two results. The remainder of the comments on the page are pretty similar prior periods. The year-to-date adjustment in the quarter decreased driven by the reduction of the U.S.

tax rates that's obviously a new dynamic, I'll talk a little bit more about the tax laws on the next slide.

But income taxes are continuing to be paid in Ireland, the U.S., Canada, New Zealand, the Philippines and they are not payable or paid in either Europe or Australia due to the losses and I think everyone is familiar there are losses and tax losses in Australia are primarily the result of the deductions relating to the asbestos fund.

On page 24 obviously the U.S. tax cuts and Job Act was enacted in late December. A pretty significant regulatory reform and law reform from a tax standpoint. It has a kind of a variety of effects for the quarter. It didn’t have a net effect you know that was that significant.

We had a $32.5 million provisional charge as a result of deemed repatriated earnings which is a new aspect of the tax law that was almost entirely offset by about $30 million as we reevaluated our deferred tax liability and so as those rates came down obviously liability comes down. The impact of U.S.

tax reform which I'm sure will get you in some of our questions, for us it is a bit has some uncertainty around obviously the corporate rate dropping from 35% to 21% is a positive and the revaluation of the deferred tax liability is also positive.

But there are some things like the repatriation as well as probably more significantly the "base erosion and anti-abuse tax" which is in concept the same thing as an alternative minimum tax on corporations. Those two things are obviously negative and so the next impact for us we think is about neutral and probably more uncertain than anything else.

And as we get into fiscal 2019 and we start talking about next year and how guidance will play out we'll provide more comments in May and in August. The law was passed relatively late in December and so a lot of the interpretation and a lot of the guidance on it is still coming out.

And so that's really the nature of the commentary that we've got in the presentation and then the disclosures at this time that's creating some of the uncertainty. From a cash standpoint, we generated $239 million for the nine months, down about 10%. For the most part it's on just building inventory levels.

We had mentioned earlier in the year that we are going to do that as a way to both take advantage of inefficient way to get product into the market and go into fiscal maintained with certainty of supply. We're executing to that plan.

We like the way the distributor inventory program is working, obviously that resulted in higher level of inventory that we'd expect would come down starting in the fourth quarter and then throughout fiscal 2019. There was also an increase in the payment to AICF.

I'd say the other working capital adjustments that you'll probably know in the financial statements, there is nothing unusual in them.

It just happened to be a quarter where we had some foreign exchange and dividend payments and just some normal ordinary course of business items that seemed to be more of an outflow than inflow for the quarter, but certainly nothing unusual. The key feature on cash for the quarter is definitely inventory.

I'll talk more about CapEx on the next page, you can see on cash flow on page 25 there is a higher level on investments activity around capacity expansion and we'll talk more on financing activity in the quarter when we get to the capital allocation pages. So on page 26, year-to-date CapEx spend of about $149 million increased $90 million.

In North America we've got the three capacity projects and we're continuing to start up our Summerville facility. We like where we are with that startup. We are continuing to construct the Greenfield expansion project in Tacoma. For those of you that joined us in September at the U.S.

tour you saw that that construction project was just getting off and running and we're about – right about on track for that project and we should start running machines in the first quarter in that facility, first quarter of fiscal 2019.

And then our third capacity project in Prattville, Alabama we're continuing to do work on civil and completing construction and engineering plans for that facility. We expect to commission that facility in the first half of our fiscal 20.

Additionally, in the Philippines we're wrapping up the re-expansion of our Philippines facility and that's expected to be completed during the fourth quarter of the current fiscal year.

And then additionally today, we're announcing a $22 million Brownfield expansion at our Carole Park facility in Australia with an expected commissioning date in early physical 21. On page 27 no change to how we're thinking about the financial management framework in the company.

It continues and it remains to start with strong margins in operating cash flows and ensuring that we're being transparent with that good governance over the way that we're using cash.

We continue to internally think of our financial management framework and our investment grade has an investment grade credit, you can see the ratings are unchanged down below. During the quarter we received affirmed rating from all three of the agencies as we went to market with the bond. The capital allocation hasn't changed in any significant way.

You know the tougher you continue to remain R&D and capacity expansion support organic growth followed by maintaining the ordinary dividend within our defined payout ratio.

You can see just given some of the activity between the purchase of Fermacell that we're anticipating the close as well as the capacity expansion, you can see the flexibility priorities as you might imagine are a lot more focused and are ensuring that we've got adequate liquidity for any changes in the external market or any other kind of volatility.

From a liquidity standpoint I'll talk more about on the next couple of pages will remain above our one to two time adjusted EBIT target for some period of time probably for about six to eight quarters as we close Fermacell and we get that operating that combined with the elevated level of CapEx in the business as is temporarily above the range we certainly intend to bring it back down.

If we go to page 28, the liquidity profile of the balance sheet remains in very good condition. We ended the quarter about $231 million of cash. We had a successful bond offering in the fourth quarter where we refinanced an existing bond as well as took out an additional amount on the bond and took advantage of good market rates and strong execution.

We were able to refinance from the 6% bond that we had prior to this offering down to as you can see here $400 million tranche of 4.75% and $400 million tranche of 5%.

We continue to have the $500 million unsecured revolving credit facility that was extended out to a December 22 maturity in the quarter and then we closed on a bridge financing for Fermacell and we've got that in place as well.

The favorable market conditions and the good execution on the bond we were able to upsize that offering up to that the $800 million that you see noted and secure those good rates for Fermacell, the purchase of Fermacell.

We're still planning on refinancing the bridge at some point over the next 12 months and most likely in a Euro bond, call it in the first half of fiscal ’19.

On page 29 as a result of the redemption of the former 2023 unsecured notes we had make all premium that redemption premium on $19.5 million as charges simply lays out why economically that ends up being a good event.

So you can seek on an undiscounted basis in about 4.5 years you get to on a cumulative basis where that's a good economic decision and a decision that you pick up two years of tenor and so, well it creates a little bit of short term volatility that's certainly from an economic standpoint and from a credit management perspective seemed like a wise decision.

On slide 30 on guidance we've taken our guidance range up to $260 million to $275 million. As Louis said a lot of the story of this quarter has been more or less has played out the way that we expected it to play out with a couple things in the third quarter, kind of all going in the same direction in the quarter.

So we think we're going to end up obviously at the beginning of the year we give a much wider range of like to $240 million to $280 million besides those in the upper end of that range as which is just a reflection of volume starting to come along as well as manufacturing pacing where we think, where we thought it would be at this stage of the game, and so the $260 million to $275 million is the updated guidance.

So that will open it up to questions..

Thank you. [Operator Instructions] your first question comes from Lee Paul [Ph] from Deutsche Bank. Please go ahead..

Thanks. Lou, you mention Q1, Q2 seven, eight and you under spent, so that delivered unit costs was lower than they should have been. I mean your unit costs are obviously coming back down a steady right.

Do you think you are at the point where you kind of expect them to be or should we expect a little bit more in Q4? And then second question, do you think you've seen any meaningful uplift from demand from last year's hurricanes or is that more of a Q4 story? Thanks..

Yes, I think the question I'm spending in manufacturing, that chart we had Q1 and Q2, ‘17. Unfortunately, the understanding started a bit before that and started to really impact the performance and the operations. So we did have a lot of catch-up to do. So I don't think we get back to those levels.

I'm pretty comfortable that our spending is right now on the plans. I do think there's if you're getting performance maybe give us some benefits going forward. We have higher input costs hitting us we think again next year.

So it's unclear to me kind of how it all balances out because on performance gains they're hard to predict exactly when you kind of get where you want to be on those, so the way I’m looking at the businesses our delivery unit cost is at an acceptable level.

We still have programs going for more but from a forecasting perspective I say we’re comfortable with where we are at right now. As far as our hurricane, we would have picked up a little bit of business during the hurricanes at retail stores mainly G2 with people boarding up windows in that not enough to really see it in our results.

As far as any rebuild done in Houston, yes it’s very early days. I’m not sure we would come on the fourth quarter and I’m not sure it’s big enough to really move the PDG number around very much. I think just market traction across the board is what is moving us back into what we think is very quickly going to be parts of PDG..

Thanks..

Thank you. Your next question comes from Simon Thackray from Citigroup. Please go ahead..

Thanks very much. Good morning, Lou, good morning, Matt. Couple of quick questions if I may.

Could you – can we just talk about your expectation or your satisfaction in that quarter, Lou with volume in terms of customers are on allocation, share that you'd lost, how you’re feeling against those targets specifically and will we see increasing traction in the current quarter would be my first question?.

Yes, I'd say the quarter came in a little better. We had our Q&As in November. I kind of indicated I thought maybe would be up three and previous year which would still leave us a couple of points behind market index. We actually ended up 5 right up market index, so on exterior products. So, fourth quarter is going to be hard to read.

We had a price increase last year. We had a price increase we announced just recently. So theoretically they should balance each other out, but when you have price increase and you allow step forward buying, we’re allowing the same amount forward buying.

So it should all match up pretty well, but you’re still less certain how much it add board goes in the inventory versus after the markets very quickly, but my guess would be, it is going to be flat to the index or up a little bit on the index, I don’t expect to be behind the index in the fourth quarter..

Okay.

So the price rises in the market and I know that pricing is different in different markets, different products, but assuming a fairly constant mix, are we talking about similar level to what we have realized this year and that for the 3.5% to 4% range, is that what we should be thinking about?.

No, I think we’re thinking 3, again this year we got a little bit over 3 and then we've got the mix given us another one or so and then we got active pricing giving us another half point or so..

Got it..

So we don’t know how all the mixes work out next year. As far as just the market increase if like the balance of regional mix and product mix this is relatively similar. We think 3 is the right number for us this year..

Okay, that is perfect.

So I guess with all of that in mind with momentum involved with the improvement in production and startup costs with the price right potentially bringing some volume forward into 4Q like it historically has done, can you explain to me simplistically how it is you will have a flat sequential impact on the fourth quarter to get to the top end of the guidance you provided?.

I can't explain it in detail. Like we say, I agree with you that kind of all the indicators are pointing in the right direction. That has not really changed in January, we had a pretty nice January..

Okay.

So nothing has changed dramatically?.

Nothing has changed dramatically and I'd just go back to the fourth quarter is the hardest quarter to predict when you have a price increase because, a lot of your customers will stop buying. If they don’t need to board once they are done with their allocation.

Now on some years you get them right buy them right through the allocation because the market demand is there and we will know that well into March. So we just don’t know for sure where our volume ends up. I think that is the only answer to your question..

That is certainly fair enough and I guess the other part would be, Matt to your point about rising pulp, rising freight, rising cement, there was a gross margin improvement versus the pcp in this quarter.

Obviously there may be a comp if you like to think about it that way given the problems in 3Q ’17, but is there any expectation that these price rises, I’m sorry, the cost increases again be margin detracted in the fourth quarter or indeed going into FY ’19 you made the comment later you think it is FY ’19 event the inflation in cost?.

Well, I think it’s a continuation of what we're seeing in this year. So we’re in a ballpark of like $20 million input cost that we have offset this year. So if you divide by 4, you would say, well it is going to offset 5 more on the fourth quarter.

But we like to top in a range, but obviously I mean nothing is guaranteed that comes in right where we think it will. But I think it's more volume driven than manufacturing driven.

The other thing you've got to remember is we do take time off during the Holidays and that more expensive board in December because of the hours we took off will show up in our Q4 results. Again I don’t think it’s a big deal. I think we are kind of tracking like we said we would. We are getting better as we go through the year.

So I just think fourth quarter is going to be a good quarter, but I don’t want everyone to start thinking we think is pointing up not we are ready to spike..

I understand. And just get the price rise low intensive competitive behavior it will pay and as the market feels solid in terms of the external moves and company results have been good, is everybody sort of following in the market because they’re obviously experiencing similar inflations? I think the industry is experiencing inflation.

Our price rise is that you were noting from competitive similar or better or more or less?.

You know the problem in our industry hardly is a price that when we announce an increase we don’t come off it because we don’t go for a lot and then see what we can back down to where we’re happy with it. When we announce 3, we get 3.

The rest of the industry or a lot of other players in the industry are out there with higher numbers, but again with those businesses typically come off some of their headline numbers.

So we maybe a little bit on a low side with our 3 but I would say we are kind of in a range that most of the industry will go for, you probably see the same things as us from a lower LP and USG, so..

Okay, all right.

And then just finally the Carole Park A$28.5 million which is new, the Brownfield’s expansion just a little bit of detail on that, for us what is happening there, what is the detail on that one?.

Yes, when we did the Carole Park kind of rebuild we had a Phase 1, Phase 2. So we always had this in our planning, but we didn’t need both slugs of demand right out of the chute. Carole Park is actually one of our really good stories this year. Their ramp up of that new line in Carole Park has been very good this year.

So they are right up to where, they are almost right at design utilization and then new line. But at the same time, they’ve been doing well enough in the market that they are still getting tied on capacity. So we’re doing a little bit more capacity than we had in the original planning, but it’s very cost effective investment.

So it’s going to have very high returns attached to it..

That’s perfect Lou and just in terms of capacity increase percentage wise or square foot wise just for us to get an idea?.

I’m going by memory here, it is 4 million standard meters..

Right. All right, thanks so much guys. I appreciate it..

Yes..

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

Hi Lou and Matt. Excuse me thanks very much for your time. I just wanted to explore the movements in gross margins in the North American segment for a moment.

And in the context of 400 basis points improvement high unit sales contributing 310 of that, your lower production costs of 0.4, I would have thought that we would probably see a little bit more in lower production costs and particularly seen in net sales particularly in the context of your unit cost reductions, production unit cost reductions.

Just curious whether these four sort of tail of the discretionary expenses going into production or perhaps below the production line from a cost point of view that may be impacting or impinging on just how fully you realize the gross margin benefits of that cost trend?.

Yes, I mean you've got a lot of different machines run we're still fairly, were in a pretty inefficient window in Fontana as far as unit cost. We've got Somerville starting out their unit cost will be, where it will be in the future. But having said that we're pretty comfortable on the spend side.

We think you know unfortunately we got into a period of under spending without realizing. We were doing that, unfortunately we weren't on top of it the way we should have been. We've gone through what I think is our big correction. We ramped up, did a lot of catch-up.

That catch-up is over, but what we do have is more regular kind of facilities upgrade spending going on in pretty much every facilities. So we're going to spend at a higher level probably pretty close to the same level as we are now. I would say for the next two or three years. We're not looking for efficiencies on the spending side in the plants.

What I think is a valuable to us and we've talked about it before is we still have some gains on the rate and the utilization in our sites. Now they don't come overnight and they're pretty big initiatives. We have some plans obviously at the curve and some behind the curve.

I think that's the next time you see maybe a shift in our delivered unit cost outside of the freight becomes more affordable or something like that. But I wouldn’t, - it sounds like you had some numbers built in your model where your unit cost, that whether unit cost is keep going and keep coming down.

And what I would say is yes, there's probably an opportunity but it is not on the spend side and it's not that predictable As far as when we'll get it, I think there's no doubt we will get it. It's is just a matter of when. So I would kind of think our delivered unit cost at current input cost kind of rates and current freight rates is about right.

And keep in mind we had a set, we had offset about 20 million ballpark last year meaning current year. So this is the right thing and you know I guess 19 if it continues at the same rate we might have to offset another 20 or so next year.

So it's not that we're not still getting some efficiency benefits in the plants, but most of the overspend has been pull our catch-up spend and I want to call they were no to spend, mostly catch-up spending has been completed and now we're kind of settling into our run rate level of spending..

Perfect thanks Lou. Matt just, I appreciate that it's early days on the [indiscernible] rules on a stretching aides and for you guys it's a lot more significant, but could you give us scratching I had for you guys to look more significant.

But could you give us a very quick sense so the repatriation tax presumably that's on the undistributed earnings that you haven't provided tax for before that you're going to bring back to the U.S..

But what I'm interested in is maybe just the slightly longer term view, in light of the fact that you've got accelerated CapEx coming your way that should be a positive.

And how is one to think about the Irish domicile in that context could that be an offsetting factor that potentially neutralizes the value of those accelerated CapEx going forward?.

Hey, you certainly picked up on a lot of the provisions that create the uncertainty for us. That most certain of the provisions is bad line rate.

You mentioned the CapEx, there's a pretty significant change in the CapEx where they've moved it to in service date versus when you spend it and so that creates quite a bit of uncertainty and may create a little bit of frankly some volatility as in service dates.

We should be able to predict but nonetheless is very different than certainly how we're thinking about it today, especially in the context of the other major change in the tax provision which is in a beat or the base erosion anti abuse tax.

So that's a long winded way of saying, we're pretty neutral at this stage of an uncertain frankly of kind of how both ETR and cash tax is paid. The impact of how it's going to impact the company kind of going forward.

So we think it's going to end up being neutral, but and I think we've got a lot to learn on how the provisions of the tax law get interpreted and what guidance we get from the regulators before we can provide your real forward guidance on either a cash or on an ETR basis..

And sorry, just one quick follow up, so presumably you're viewing this as so significant that it may or may not change corporate structures as a result?.

Yes, sorry I'd meant to answer that Peter, so thanks for bringing it back to the domicile. I mean we're happy with how the corporate structure is set up. So we like being an Irish company and it works very effectively for us and I think that's a safe assumption for me to carry forward..

Got it. Perfect thanks..

Thanks, very much..

Thank you. Your next question comes from Keith Chau from Evans & Partners. Please go ahead..

Good evening, Louis and Matt. Louis just a couple of questions firstly on this response from some of those customers that you lost in late FY '17, early FY '18. I think obviously the company has been putting some, I guess high marketing spin into the market just to get some of the customers back.

What are some of the responses that you're seeing at the moment from the customers that you lost and is there a prospect that you'll regain some of those including some of the larger homebuilders as well?.

Yes two, the large homebuilders you are probably referring to would be our national deal with Total [ph] and our national deal with KB which expired last year. So no movement on that front, so that's unchanged.

As far as the customers that had to move to a different product when we were considering capacity and then there were moving back to Hardie that we have talked about a couple different times. We have those programs in place. We've got basically an S Curve of the track at what rate we're bringing them back.

We're like I said in the third quarter we are a couple of points up of what we thought we'd be and that would probably be chipping away at those customers that were natural Hardie customers and all of our product lines had to move off maybe one of our product lines is step to a stocking when we were assured and now we're moving back and in a position where it becomes natural Hardie customers again and get the preferred board and they've got guarantees fly.

So that's been going well. That was mainly in the south, so that's been going well.

Like I said earlier, I just said in earlier results one of our kind of flawed assumptions was that there would be a pretty quick win back and it's starting kind of generate momentum, but it's not quick not because the customers have to think hard by coming back it's just that it's not always their highest priority in their business to kind of make that decision and maybe either deemphasizes the product or destock the other product and then bring ours back on, but we've been doing a pretty good job with that, so we're pretty happy with it..

Okay, thanks Louis. And then just secondly on the competitive dynamics in the market, one of key alternative for competitors has just switched on a bit of capacity in the U.S.

Are you seeing anything rational or overly aggressive from that participant and what are your expectations of that going forward as they ramp up capacity utilization?.

Yes, I know you've known our business well Keith, so everyone sells at a discount to Hardie as they sell [indiscernible]. So that competitor has always sold at a discount. Discounts are never coming at the same by market same by customer.

We have seen some numbers that look like they're different and then wait around and you see some numbers that look like they’re the same, so and they have announced a price increase. So my general feeling, you can never be sure on it is, they're not trying to buy market share.

I think their cross position and their price position probably is maybe an acceptable level now, but if they pull that price down too much maybe it's not. So I think everything will be, new capacity is coming on just like we're bringing new capacity on.

So that will be a little bit more intensity between competitors, but that is not the main game, that's never been a big challenge at Hardie.

Big challenge at Hardie has always been market development against lino [ph] and then more recently it has been kind of controlling the close alternatives that are coming behind us and with a discounted position and a good enough brand promise and we’ve got our programs and I think our programs will continue to work especially they’ve been very successful about direct, I mean they've got their volume bump when we ran out of materials.

So we got our capacity back, so now it is more of a fair fight again..

Fantastic, thanks Louis.

And maybe just one on the Tacoma startup, just wondering if you'd be able to provide us with just a bit more insight into how that one is tracking some of the key extremes and risks remaining on the project before startup and also maybe an estimate of the startup costs relating to that project that will be incurred on the P&L in the FY ’19?.

Yes I guess. I can give you the headlines just because we just came out of a Board meeting where we reviewed that, the projects tracking time wise really well. We will start commissioning in the first quarter ’19.

Right now we’re thinking startup cost approaching $20 million, but maybe not quite hitting $20 million and it’s going to low unit cost plant. It doesn’t have as much reach as a plant in the middle of the country.

So we will just start it up on two shifts and only bring it up to four when that either the West Coast capacity justifies it or possibly if overall capacity gets tight they can pick up the market like Denver that. So I think it will be – I think it was very difficult for Hardie when we were tied on board and had to bring new capacity up.

So we had – we had to kind of take a throughput approach to start it up meaning try to optimize throughputs so we could service more customers, that becomes very cost and effective. And Tacoma because that situation, we’re not facing that situation.

It would take more of a cost optimization approaches startup and so you see, you will see whatever startup costs we have spread over more months, more quarters. So, but we are thinking maybe approaching 20 for next year as start up cost for Takoma. It is a big site, it has got some automation in it that we never put in one of our plants before.

So we will have to learn how to do that. So I'm sure there'll be a learning curve involved there. We get very experienced salaried stuff and a lot of experienced hourly operators transferring into that site. So we’re optimistic, it’s going to be a good setup, but as you know that's been a bit of a source back for us over the last several years.

So we want to kind of show you how we can do a start-up and tell you it is going to be at a certain level, but certainly our planning looks good and our execution so far looks good..

And that start-up will just with respect to those costs just in FY ’19 phenomenon not necessarily traveling into FY ’20, so the start-up might be…?.

It’s hard to say. It really depends on how much board we need out at that side. So your start-up costs are kind of a per day cost. So if you run more days in a year you would get it all pulled into a year but if the start-up goes pretty well and we have less need for the board, so those days, those start-up days cold slip into 20.

So it could, it's just too hard to call. I mean we just kind of see what the overall demand is and how much is that on West Coast..

The other thing to keep in mind Keith is, right behind Tacoma is Alabama. So the start-up costs in Tacoma are primarily next year, but then the following year we are going to get Alabama started up..

Okay, great..

And that’s also a Greenfield site, it's slightly a bigger site and you would expect start-up costs for that to be at least equivalent to kind of Tacoma..

Sure. And Matt maybe just a quick one on tax and apologies for harping on about this, but there is a provision or couple of provisions taken one positive, one negative.

How do you expect the cash impact benefits of those provisions to transpire over the next year, two years?.

Yes, I wish I was certain as much for our own benefit as being able to answer the question.

I think that the biggest cash, there are two provisions that are going to play pretty significantly on cash taxes and that’s what we are referring to and I think a lot of others are referring to will be the base erosion and anti-abuse tax, the way that's going to play with the change in CapEx and those assets being tax deductible at the time of their place and service versus when the cash is actually spent.

So those two provisions are very co-dependent upon one another and we really got to still work through both the interpretation of the rules as well as our own business assumptions to have a better sense on cash taxes..

Okay, thanks Matt, thanks Louis. I appreciate it..

Thank you. Your next question comes from Andrew Johnston from CLSA. Please go ahead..

It is good evening. So, just a couple of questions just wanting to go back to the make-up of the delivered unit cost.

In the past you've provided some guidance around the contributions to change in gross margins from price of raw materials, ahead of that look for the 3Q for those two items?.

Sorry Andrew can you hear me? Yes I mean for the year, I don’t have in front of me the quarter Andrew, but for the year we’ve had material and freight inflation and inflationary pressures in the business kind of accelerating throughout the year.

So meaning we will have one curve more on the second half on both material and freight inflation than we did in the first half. So the third quarter was higher than the second quarter and we think the fourth quarter will be at least the size of the third quarter. For the year we think that that's about $20 million as Louis mentioned.

So and it looks like that is going to be a feature at least going into the first quarter of fiscal ’19 and then we will kind of have to see how the commodity markets play out. But within the quarter I don’t have a quick split for you of how freight and input costs impact the third quarter results..

I mean, fast aside that your manufacturing costs, so if you breakup that contribution to gross margin between freight raw materials and startup costs and manufacturing costs for this site has been pretty substantial improvement, new contribution to gross margins from those lower production both lower production costs so that would be fair?.

Yes that is fair, I think.

The other thing is just to sort of keep in mind is we obviously have certain levels of inventory in any given I think given point in the year and it would normally take about 60 days for especially during the summer months about 60 days for board that we make this month actually come out of inventory and end up in our financials on the P&L side.

We’re in the winter, so obviously we are building inventory and then on top of that we are you know if the distributed inventory program for board building additional inventory. So that inventory turn will obviously be slightly longer in the third quarter than that two months is probably closer to three months at the moment.

So a little bit of what you're getting in the third quarter is mainly product that was made in some combination of the second quarter and the third quarter.

So I don’t think if you are trying to do it by quarter it is not, where I would encourage you to have the focus, I would try to do it for the year, the underlying dynamics was still about right that manufacturing performance in comparison to where we were coming end of the year has obviously improved pretty significantly and what is offsetting that is primarily or our release partially material cost inflation as well as the freight market..

Okay.

And Lou you commented about delivered unit bad right, but in the next couple of quarters what don’t we continue to see improvement in gross margins compared to pcp and what we are looking at because we are starting much higher costs in the next two quarters?.

Yes, you know, I mean, like I said, I don’t want everyone to get carried away with all things are pointing in the right direction and you know I just extended all out. We're doing a lot in the business. You know, we've got everything stabilized. We’re back on our front foot in the market.

We're spending on programs in both on the market side for PDG and in the manufacturing side trying to get these future gains. We've got headwinds on the input cost [indiscernible]. We got start-ups coming on the backend at Summerville, but we're getting ready to start Tacoma.

It's just a lot of moving parts and I wouldn’t want everyone to kind of just kind of misread all that. Our read is pretty simple. We got our delivered unit cost back in an acceptable band, not saying we won't improve on it.

But our main focus now is we've got capacity, we've got at the right to delivered unit cost, let's get the PDG ramped up and I'm quite sure the manufacturing guys will get their gains, but I wouldn't be trying to forecast them by quarter..

All right, I mean if I look at the input costs that would appear to be the biggest drag on the fourth quarter, I think they have I think same time in pcp. I haven’t got the numbers in front of me, but I think it's pretty substantial.

So it looks like you're getting it delivered the rest of the delivered unit cost is getting back to a level that's offsetting that.

There looking forward, do you just in terms of forecasting your pulp products you just take the count all cost and just run that out into the rest of this year and next year?.

No, we don't forecast pulp that far out. I mean we have to take a gas for our financial planning but we will use the same forecast is as you'd probably look at for the market so. But anyway several times in the last six quarters I said we're not comfortable with this, we're not comfortable with that. We need to fix it. We're no longer in that position.

We like where the businesses is heading and we feel we have the opportunity now to really get focused on the growth side again and we're maybe a quarter ahead at where we thought we'd be. But it's still the same challenge. We want to get back up six or eight PDG and we can't do that overnight. We've got to work our way there..

Yes, okay great, thanks very much..

Thank you. Your next question comes from Andrew Scott from Morgan Stanley. Please go ahead..

Good evening guys. Thank you. Matt you spoke to inventory levels just a minute ago. I just remember in September you talked to having a new target for February I think it was 20% of prior year sales.

In inventory and if you didn't have that, you'd look to adjust these patterns to get there? I wonder if you could just give us that and when we ask for that and what are you thinking you need to get to those levels?.

Yes, let me just clarify that kind of the 20%. We wanted to come into fiscal '19 had been able to protect up to 20% volume upside and we really looked to multiple different ways to accomplish that and one of which is inventory.

You know the other two most common ways is you want hours in existing assets that are already performing at design and then you've got new assets that you're either constructing or starting up and in an ideal state you want us to have - we want to have kind of those insurance levels built into to all three of those areas and we and we're executing to that plan, so we've obviously got inventories back up.

The distributed inventory program was on top of our normal inventory levels and provided kind of additional assurance and allowed us to pilot a program where we also thought we could take advantage of putting some inventory close to market and getting out of the delivered unit cost benefit the freight efficient freight and that program is being we like where that that program is right now and it's about where we thought it would be right now and I'd say the other the other two areas.

We've got ours in the existing network, the networks continuing to perform well quarter-to-quarter and then we've got assets that are either in construction in the case of Tacoma being planned in the case of Alabama and the start-up of Summerville and PC are right where we kind of thought they'd be at this stage of the game when we gave you that guidance back in September.

So yeah, we kind of think we're where we thought we would be at this stage of the game and we feel good about having supply ahead of demand going into next fiscal year..

And in that case, inventory levels more build into the fourth quarter or where about right?.

Yes, you'll start to see them come off.

They should start to come off in the fourth quarter and I think a lot of that just depends on how as Lou has said probably the biggest unknown for the fourth quarter is volume with respect to price the price increase and where we are with customers and buy forward program, so that will play into it a bit for the most part inventory we think we've got it right about where we thought we'd get it will continue to build here a little bit and then start to come down and in the second half of the current quarter.

And it will just depend on how volumes, how strong volumes are when in the quarter those come in..

Great, thank you and Lou I think the other thing happening this winter was maybe a bit of a trial where you are flexing to flex up your lower cost plants more and may be brining the higher cost plants down a little bit.

Just wonderingso I can tell us how that way and what the learning’s were is that something we expect going forward?.

Yes, that's all built into the distributed inventory program. So Cleburne is 24/7, Peru is 24/7, Tacoma is 24/7, Reno 24/7 and then you get to like Polanski’s I mean sorry, Fontana is just running one line at a time [indiscernible] we took hours off wax, we took hours of PC.

And partly t of that was the unit costs out of those plants, before there was just how well the plants were running and what we want to try to accomplish running better. I think that would wax hatch and PC are both kind of potentially very low unit cost plants, but they weren’t running as well as they should be running.

So we took the few hours off just to give those organizations a chance to kind of get ahead at game plans a bit. So it's actually worked out very well, like Matt said at the end of the year we'll do the analysis. I have a feeling we'll write some version of distributed inventory pretty much going every winter. It's good for our employees.

If it's good for cost, if it's good for our customers obviously we're going to do it and it looks like there's benefits for all three. If you do it to some degree obviously you could overdo it, we're not going to do that but we're pretty happy with how it's gone..

Thanks Lou. And finally Matt, just tell me how you sort of confirm you expected to close this quarter, I know there is an element of some upfront costs there, could you give us an idea on how you expect that to size and maybe what's embedded in that guidance you provided today. .

Yes, the guidance we gave you today it was excluding transaction costs related to Fermacell. Once it closes, we'll obviously be very transparent on what those costs are. There's obviously the financing and closing costs that are associated with the transaction.

There's some due diligence cost that we're incurring here in the fourth quarter that we'll make sure are visible. And then there will ongoing integration costs, as we get into fiscal '19. So those are the types of costs that you should expect to see when we announce that the deals have closed..

Thank you..

Thank you. Your next question comes from Brook Campbell Crawford from JPMorgan. Please go ahead..

Yes, hi Louis.

Just a question of following on from a comment earlier on, on the interiors business and you mentioned that’s been we can certain regions into retail channels, so just interested to learn a bit more about calls out and what you're doing to sort of address this issue?.

Yes, unfortunately that's one of the areas we just we have fresh up. We haven’t managed it as well as we should have. So we did a good analysis of the interior business profitability.

About six quarters ago we made some good decisions on not participating in gypsum channel and not participating with 4byG2, so that's a fair chunk of the reduction in volume. But in addition to that, I think our affectedness in the retail channel adjust down on us. And we just need to get it turned around.

Is it more than normal variance, it's probably a little bit more than normal variance, but I don't want you guys thinking think it's any, it's not huge issue for the business. We’ll get it turned the other way and we know how to do that. Our boards to prefer board in the market it sells in a big premium to competitive boards.

Market shares are high compared to the other boards, so it's just loss of focus by that organization and you just need to get back..

Okay, thanks and just a question on policy lines in Europe, so I appreciate the deal it hasn’t completed yet, but has the strategy to leverage Fermacell to cell refurbishment, manufacturers, how many guys in the U.S.

evolved at all over the next few months, anything that you've picked upon?.

Yes, not other than that, you have to think about how to put the organization in place and how to do the strategy development work. Basically the first year we own Fermacell we are going to try and make sure from comes into our company and the business, Fermacell business has a lot of momentum now. We don’t want to lose any of that momentum.

So we will just be focused on continuing to run Fermacell well as it becomes part of James Hardie. And then you'll have a separate team starting to work on refurbishment time spent strategy development not that we got Fermacell platform to work with.

There will be some small changes that first year where we have common customers where it would be mainly our customers and our guys, meaning refurbishment guys bringing fiber chip cement or vice versa, there'll be small changes like that.

But I don’t want you to expect any big declaration of here is our new strategy and refurbishment Europe before about two years. We've got some platform R&D development work to do. It’s a masonry framed construction is going but still masonry market. We will be working on products with a different value proposition and what we have in either U.S.

or Australia. So like everything in Hardie it is not going to happen overnight. We have a long term view of where we want to be and will start moving down that track once we close the deal at least on the strategy development side..

All right.

Thanks and last question maybe for Matt and following on from there, raw materials conversation, just I’m hoping you might be able to provide us with a figure, if you look over the last 12 months or financial year-to-date could you share with us what percentage of your COGS in North America rates of raw material?.

Yes. I don’t think I will answer it in percentage, but like we said for the year it is about $20 million of material costs inflation and really the way to think about that is it has accelerated that inflationary pressures accelerated as we have gone quarter to quarter throughout the year.

So there was some evidence of some cost inflation exiting last year and that continued into the first quarter, we saw that really starting to elevate itself in the second quarter. Pulp in the second half of the year has definitely stayed at a much higher level from a market price standpoint.

And I think any of the forecast expected it to and certainly then we expected it too and then now you've got energy price inflation kind of right behind it.

Freight has been high now for the better part of probably the last four or five quarters, it has definitely accelerated throughout the current fiscal year and it’s accelerating both on utilization with not enough trucks on the road due to driver shortage and as well as fuel costs are going up and market rates are up on top of it.

So that $20 million is a good number for the year and that gives you some sense for kind of how it's phased throughout the year and we are forecasting that it will continue going into the early part of next year and we will certainly provide commentary in the May result and then in August when we get into fourth guidance for fiscal ’20 we will have a better view on kind of what the next 15 months will look like from an inflationary standpoint..

Thanks.

Just to clarify same $20 million for the first three quarters of the financial year, is it for the whole financial year?.

No, for the whole of the year..

I appreciate it, thanks..

Operator to the extent that we've got more questions, we are happy to take two more questions and then I think we will wrap it up..

Thank you. Your next question comes from Peter Wilson from Credit Suisse. Please go ahead..

Thank you. I have three questions, can we just take your path the 2% volume growth that you've got in North America. This quarter maybe finding a path for where trends.

So 2% growth you said, I think exteriors grew 5% which on an average splint would seem to imply that interiors were the same cent, north interiors were down 15% which attributed to a product line exit in some retail channels.

So I’m just wondering when does the drag on interiors roll off, so can you - which quarter and then in terms of the market growth you’re expecting is your thoughts in this quarter but then you referenced norms and increasing starts.

So when does the interior start to – the interior drag starts to move and if we could find a path for the growth coming in the next few quarters?.

Yes we were down 15%, so our arithmetic’s is a little different than yours and interiors, but I don’t have, I just scribbled out my calculation, you probably just did, I came up with a little different answer, so let’s not, let’s not worry about that.

So we dropped the product line in April 1 last year, we shipped remaining orders through that first quarter and I think a few slipped over in the second quarter. So we are almost getting past that story product line drop. The only real story for us on interiors is what I mentioned earlier is, hey we’ve lost some momentum with our retail store program.

It’s not across the board, it is not necessarily with both retailers, but it’s enough to drive the negative comp on top of the exited product lines. Most of you are aware the Cement Board market is in a little bit of decline, so all of the loss on our part isn’t necessarily market share loss.

But having said that, we still think we have market share opportunities. So we have an internal goal to grow the interiors business even facing decline of the Cement Board market in the U.S. which is not a rapid decline. So we just get off our game a little bit, we'll get back on our game.

I don’t know if it will take us a quarter or two, it’s not like or as you can see from the quarter, it’s not like driving any material results at Hardie, but it's still something having that we should fix and we will fix. And it is nothing more than just running our game plans better.

So there's no pricing, there's no product, there's no customer issues. It's just running our game plans better, so we get our fair share in the stores. Again the premium retailers charge for our product has steadily gone up over the years, but we don't even think that's the driver of market share, the market share that we had in some regions.

We just think we didn’t run our programs as good as we should..

Right guys, so on that basis when you talk PDG has traded 5% we should be thinking exterior growth of X plus 3% to 5% PDG less from continued drag from interiors given the - that market is in decline?.

You know, I'd like to think we're back to flat volume on interiors yesterday, next year, so you can just throw it out of the equation, but today we're not flat. Today we're comping negative. So, but again I said it's not a big deal to fix, so I say flats not high bar and we just got to start moving in that direction and get back to where we should be.

It's a small variance in our business. I know because there's so much focus on PDG and when makes that arithmetic probably to understand it becomes bigger than it should be, but believe me this is beyond normal variance, but not much beyond normal variance..

Thanks, guys. Excellent, thank you..

Thank you. There are no further questions at this time. I’ll now hand back for closing remarks..

No closing remarks. We do appreciate everyone joining the call though. Everyone have a good day. Thanks. Bye..