Louis Gries - CEO Matthew Marsh - EVP & CFO.

Brook Campbell-Crawford - JPMorgan Peter Steyn - Macquarie Simon Thackray - CLSA Limited Peter Wilson - Crédit Suisse Keith Chau - Evans & Partners Lee Power - Deutsche Bank AG Andrew Scott - Morgan Stanley David Pace - Greencape Capital.

Thank you for standing by, and welcome to the James Hardie Q1 FY '19 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Louis Gries, CEO. Please go ahead..

Thank you. Hi, everybody. This is Louis Gries. Matt and I are in Dublin this evening. So we'll be calling out slide numbers as we flip through them. So I'll jump from the cover sheet to Slides 2 and 3, which are the forward-looking statement notes.

Slide 4, which talks about the change in segment reporting and 5 is the non-GAAP and then we're on the agenda. We'll take the same approach as always. I'll have a pretty brief summary of the operating results. Matt will have a little more detail as he goes through the financial review, and then we'll come back for questions.

Slide 7 is another cover sheet. Slide 8 is the first one with information on it. Most of you remember we had a weak Q1 last year, so we're comping against a weak quarter. But having said that, all our finances were up strongly. The only red there on the page just reflects the integration of Fermacell into our company.

So that pulled EBIT margin down a bit. Go to Slide 9, please. Nine is the first slide on the U.S. business; net sales, up 10%; volume, 5%; price, 5%; EBIT, 34%. The price is a bit stronger than you'll see for the full year or at least that's how it looks to us. That was more about last quarter than this quarter.

We're getting the price we are expecting to get with the price increase that went into effect in April. But from a comp perspective, it will settle down a little bit through the year. So the [5 is] a little stronger than we expect to go through the year at. Sales volume, up 5%. We kind of got there with 6.5% in exteriors and 1% up in interiors.

We'd like to be a couple points better than that even in this quarter, but it kind of fits the guidance we gave you. We thought we'd need to build traction through the year to hit the target three to five in exteriors for growth above the market index, and we definitely think we need to build traction and obviously working on that.

In interiors, one to three, we came in at one. There are some things to figure out on interiors. We'll probably address that more deeply for sure than we will on this results call in our September tour because we have been doing a lot of work in the interiors segment and we'll bring everyone up to date on it. So again, the EBIT was good.

Price obviously drove a lot of it, offset by higher input cost, especially pulp and freight, which we expect that to continue and actually even increase from where it is. So -- but generally, a quarter that we were expecting on the U.S. business. But again, we also expect that we need to build momentum as we go through the year to hit our targets.

Slide 10, you can see we're sitting on the depth part of our range there, which is our expectation. We'll be in the depth part of the range for the year is what we're thinking. Obviously, there's a few things that aren't as clear externally as we'd like them to be, the input cost being probably the bigger one.

We're pretty satisfied with where the market's at, but it does seem like most companies have come up a little bit short on their volume comp. So I'm wondering if it's as good as we forecasted coming into the year, but obviously we'll find that out as we go through the quarters.

Slide number 11 shows the price increase slide or the price -- realized price slide, reflecting the increase. You'll remember 2 years ago we kind of started to get back to our normal [puts] on pricing and tune up our tactical pricing a bit. We had a few -- a little bit more leakage in the system than we should have had.

And since then, price is good, but the market's gone up as well. So our price relative to close alternatives in the market really haven't changed to any material degree. Top line growth slide, we always give you the housing against the volume against the revenue, and I guess there's not much of a story there.

We're looking to increase the volume growth against the market index, which isn't 100% new construction, as you know. But that's really a primary focus of the organization and continues to be and probably will be for the next several years. Slide number 12, Asia Pac. Asia Pac was good across the board.

You see sales up; volumes up about the same; price, flat, reflecting more country mix. It wasn't flat in all countries. Obviously, it's just a mix of the Philippines growth being pretty good offset by -- so there's a lower price board offset by the two other countries that have a higher priced board. But good story in all three countries.

On the market side, you see demand -- we've got -- just on the EBIT side, we've got a plant from New Zealand we're working through. That's shown on Slide 13. Again, Australia, up. Volume, sales and EBIT up pretty strongly. New Zealand, up on volume and sales but down on EBIT due to plant performance. It's a relatively small plant in New Zealand.

But fiber cement is a business when your plants don't perform, you can see it on the bottom line and that's what we're seeing in New Zealand right now. And in the Philippines, very good result. In addition to that, they've done a nice job in their start-up. So they're on track with the start-up, putting the machine down there.

So again, pretty solid result from this [part]. Europe, which is the one you're not used to looking at, volume was good. We're very satisfied with the Fermacell business. The integration's gone well. The management organization has really responded to [indiscernible] and we've aligned quite quickly on how we think about things.

And we're feeling really good about the approach that organization has taken. And their comps are good. I think it was 8% up when you take out FX. The EBIT, you can see the note down there, that doesn't reflect the business performance as much as the integration costs and the inventory adjustment due to the acquisition.

The other thing we like about Fermacell is, now that we own the business and been in a bit, the similarities with fiber cement are every bit as great as we thought they were, and it's really a good fit business for us.

We feel very confident since we're off to a good start and thinking on that being a platform for fiber cement growth in Europe is definitely going to play out for us. All right. I'll hand it over to Matt..

Thanks, Louis. Good morning to everybody joining us in Australia. We'll start on Slide 16 with an overview of the group results. So in the first quarter, we had net sales of $651 million, up 28%.

You'll be reminded that we closed Fermacell early in the quarter, and this result obviously includes the impact of our first full quarter of having Fermacell start in the company. If you were to exclude Fermacell and kind of get to the comparable business, we'd have revenues up 11%.

We had higher average selling price and volumes in North America and higher volumes as we've already talked about in Asia Pacific. Gross profit was up 31%. You can see adjusted net operating profit increased 29% up to the $79.9 million.

I just wanted to -- you'll notice as you go through the filing that our adjusted net operating profit is including above the line both the integration, transaction and one purchase price adjustment. So those costs are being reflected above the line in the management analysis of results.

We've provided a WACC that will hopefully help everyone go from the reported EBIT number to the EBIT number in Europe, excluding those costs. If we go to Slide 17, you can see foreign exchange, the Aussie dollars continuing to weaken.

So the translation impact, while still small, is at least larger than it's been the last couple of quarters on a percentage basis, fairly immaterial on a dollar basis, about $7 million of favorable impact on net sales and slightly unfavorable to the bottom line.

Slide 18, we're continuing to see input costs inflationary pressure really across most major areas of our purchasing.

So you see the freight market prices are up almost 30%, pulp's up 20%, cement is up slightly, gas is up almost 10% and the inflation and the rate of increase is greater than even kind of when we talked back in May at the year-end result. On Slide 19, you can see the segment results. North America EBIT was up 34%. Almost all of that increase -- 34%.

Almost all of that increase was price and volume with a little bit of favorability on delivered unit cost compared to a year ago. And as I noted on the last page, those margins are going to continue to be compressed by the inflationary pressure that we're seeing in freight and in pulp especially.

For Asia Pacific, they had an increase of 7% on a 15% net sales growth. Both Australia and the Philippines had really good quarters, top to bottom. And we've already talked about the New Zealand plant underperforming, which was compressing the segment EBIT a bit, as well as they're also experiencing higher pulp and freight costs.

The pulp is obviously purchased and translated into U.S. dollars, so that's why you're seeing kind of the [1 for 1] impact there. On Slide 20, the European building segment. In the reported $4.6 million loss, we had almost $16 million of kind of nonrecurring cost.

$8.7 million of that is transaction, integration costs, and then the first quarter is primarily transaction cost, a little bit integration cost. You can see that we think for the remainder of the year we're expecting to spend about another $15 million on the integration cost side.

When you -- and then the other item that hit in the quarter was a noncash item. As you're closing on purchase price accounting, we had to do an adjustment on fair value of the inventory that we acquired, and then that accounting transaction has to go through expense based on inventory turns.

So we expect that all that impact is realized in the first quarter. We're not expecting that to continue for the rest of the year. Obviously, being a noncash item, it's not something that we would have anticipated or talked about in May when we were talking about kind of ongoing onetime cost for the transaction.

So if we exclude those two items, the underlying business is kind of running in the 1.9, 12% range. So a little bit higher than the 10% that we had talked about previously. We think there'll be normal variation quarter-to-quarter. This happens to be a bit higher.

We still think the guidance that we provided in May for the business is right about on, but it's certainly a good first quarter. The Other Business, we're continuing to invest in those products and manufacturing, organizational capabilities. You can see the losses are within reasonable normal variations, slightly lower than they were a year ago.

On Slide 21, Research and Development. No real material change there. We're still pretty consistently right around 2% of net sales. That ebbs and flows based on the number of projects at any given time. General corporate costs. There's two items to kind of note that are impacting the underlying kind of ongoing cost.

One is I'll remind everyone that we had a $3.4 million gain in the prior year same quarter as a result of building near our Fontana facility in California that we sold. We did have a New Zealand weather tightness claim in the quarter. It's been some time since we've had one.

And so we've reflected that cost here, a $1.6 million impact on general corporate costs. Those 2 items obviously caused some comparability from year-to-year. And when you normalize those out, the underlying general corporate costs are relatively flat. Page 22. We talked a little bit about this in the May result.

I just want to remind everyone that effective this quarter, so our April 1 starting quarter and the one that we're talking about tonight, the way ETR under U.S. GAAP changed.

So we recorded a net deferred tax asset of almost $1.2 billion that arose from all the previous intragroup transfers that we've done, including that internal restructuring that we talked about in the fourth quarter of last fiscal year that was related to intangible assets and moving those into our U.S. business.

The accounting rule that changed effective April 1 requires that the amortization of those intangible assets reduce the deferred tax asset instead of reducing income tax expense. So the economic impact of that, we think, is either constant or neutral, if you will, to slightly improving from our prior position.

So if we go to Slide 23, you'll see that we're estimating our adjusted effective tax rate for the year at 17.1%. The adjusted income tax expense decrease was primarily driven by the change in U.S. statutory corporate tax rate following the change in U.S. tax rates in December as a result of the U.S.

Tax Cuts and Jobs Act as well as the adjustments that were related to the ongoing amortization of intangible treatment as a result of the fourth quarter transaction.

On Slide 24, you can see increase -- we've increased our -- in net operating cash flows of 36% up to $113.3 million primarily because of the net income and the underlying business's performance in the first quarter. We had some favorable movements in inventory as a result of the volumes being higher and somewhat of seasonality.

And then there -- you'll note that the other net operating activity is the use of cash, but I'd say that's just from the normal course of business. Higher investing activities. Obviously, we funded the Fermacell acquisition in the quarter. We're continuing to increase our capital allocation on capacity expansion-related capital expenditures.

So that was up almost 54%. And if we go to Slide 25, you can see the profile of the $73.6 million in CapEx for the quarter. In North America, we completed the start-up at our Summerville facility. We've completed the commissioning and are into the start-up phase now of our Tacoma facility.

And we've broken ground and commence the construction of the new greenfield capacity in Prattville that we're expecting to open in the first half of next fiscal year.

For Asia Pacific, we've got two projects; one in the Philippines, where we're continuing to start up the additional capacity there and that's going well so far; and we're in the middle of a brownfield expansion project at the Carole Park facility that we expect to commission in the early part of fiscal '21.

On Slide 26, no change in the financial management. The company continues to start with strong margins and operating cash flows and governance and transparencies, and most of our decision-making framework is oriented around a investment-grade financial management approach. No change in the capital allocation.

So our top priority continues to be and remains funding organic growth both for R&D and capacity expansion to support organic growth, maintaining the ordinary dividend and then flexibility for other things. We are maintaining the 1 to 2x leverage range of adjusted EBITDA. I know for the quarter we're at the high end of that range.

We'll talk about that in a moment. On Page 27, I think the balance sheet is in a strong position and continues to be in a strong position. We have almost $183 million of cash, just over $1 billion -- almost $1.1 billion of net debt. We still have the $500 million revolving credit facility. You can see the debt structure.

No real change their other than I note the -- we've got the bridge financing loan in place for Fermacell, and we expect that to be replaced with a long-term funding strategy during this fiscal year. But the 1.9x net debt is at the higher end of the range. That will float a little bit higher.

We tend to peak in terms of our net debt to adjusted EBITDA in the second quarter with the payment to the fund. So that will float a little bit higher. We'll continue to be above the range for probably another 4 to 6 quarters, and then we'd expect to come back down inside the range. On Page 28, talk a little bit about guidance.

For the year, you can see the analyst forecast and the range there, $313 million and $358 million. We're expecting adjusted net operating profit to be somewhere between $300 million and $340 million for the year. You can see the assumptions there. We've got U.S. housing conditions similar to the way they were over the last year.

So kind of modest growth in the 1.2 million and 1.3 million start range on the new construction side. Input prices remain consistent. The average U.S. and Aussie exchange rates, no significant fluctuations with those. And while we say kind of moderate inflationary trends, meaning moderate in comparison to kind of the most recent trends.

So with that, operator that ends the presentation. We can open it up for questions. Operator Thank you. [Operator Instructions].

Before we take the first question, can I just add one comment, additional comment and then we'll take the first question?.

No problem..

That's great. Just like last quarter, I don't think results calls are good time to take questions on my retirement and who's going to replace me as CEO of Hardie. So I will give you an update. Basically, 3 months later, everything's tracking as planned.

We've gone through a few more of the gates, and I say we -- I'm kind of speaking for the board and I think Mike Hammes will still have a bit of an update with his AGM comments tomorrow. But anyway, the last 3 months have gone as planned. We do believe in the near term, we will be naming a successor. We're not quite there yet, but we're getting close.

And then when we name a successor, there will be a transition period. So we'll name a successor. He'll become President and COO who will have responsibility for our operations. And then the transition period will run roughly 6 months where I'll remain in the CEO role. And upon my departure, obviously, we plan to transition to the new CEO.

So that's a summary. I mean, it's right on track. I think it's very consistent with what we talked about over the last probably 3 or 4 quarters. Everyone knows I'm retiring, and everyone knows we're working on the succession. So everything's going as planned. Okay. The first question's good to go..

And we will now take the first question from Brook Campbell-Crawford from JPMorgan..

Question's just reflecting on, Louis, your comments around increased traction required to hit PDG target for this year. And just interested to understand if you identified what might be causing the slight drag relative to what, I believe, was a 3% to 5% PDG target for FY '19..

Yes, it will be a bunch of small adjustments rather than any one kind of gap. So it's -- if you think about a year ago, we were worried that winning back business from a [indiscernible] capacity wasn't coming back as quickly as we anticipated it would. And that was kind of a singular focus for us at the time. Now we're running all our programs.

We're running our programs against vinyl, close alternatives, all regions. And like any business, we got some regions ahead of where we thought they'd be and a few regions lagging. Same thing with -- so just generally variance in the market.

But it would be a bunch of small things at this point to just keep building momentum and no one thing that we have to go to knock over in order to get there..

Just one more for me for Matt on input costs. At the FY '18 results, you noted that input cost is going to be $30 million to $40 million in FY '19. Just came to understand if that's still a reasonable estimate..

Yes, we think it's probably north of that now by another $10 million. I think that the range could be $40 million to $50 million. The pulp definitely hasn't come off, and the freight market remains really tight in terms of both truck availability and just market pricing. So probably an incremental $10 million from when we talked last time..

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

Perhaps just taking off from that particular question. In relation to price, Lou, you mentioned -- obviously, mix played a role in that 5%.

But have you thought then incrementally differently about your prior thoughts about 2.5% to 3% price growth for FY '19 in the context of what you're seeing from a cost point of view? Are you trying to get a little bit more of that?.

No, we're not trying to get a little bit more, but we probably will get a little bit more than our initial variance. And like you said, it depends on regional mix and product mix, but we're probably in the 3% to 4% range for the full year. So the 5 -- 5's definitely higher than we think we end up the full year.

As far as calling it closer to 3% or closer to 4% now, I think that depends on kind of what I said about market traction. Our color product is the area we get the most traction on, and that brings price up per square foot, vice versa if basic [bid] builder. Cemplank is the area we get the acceleration, and that brings it down.

So I think 3% to 4% is now a safe range, and I can't really say it would be biased toward the 3% and 4% yet. But it's definitely settling down from the 5% because that was more about last year's comps than where we're at this year..

Okay. And then perhaps just a broader market question, Lou. The -- your comment about still having to see how some of the headline sort of flow through for you through the course of the year.

What are you hearing? What are you seeing? What are you thinking about the next sort of 6 months from a volume point of view given what one's seen in the indicators recently?.

Yes, I mean, I definitely don't think we know. It doesn't quite feel like the market index is fine for us. And when we read other results, especially the ones in our space, so vinyl, LP, the other fiber cement guys, I don't see anyone getting out front necessarily.

So -- and then you look at the gypsums and the OSBs and that, it didn't see any big quarters. So I'm just thinking maybe it's not five. Maybe it's like a four-market comp. But I'm telling you, I don't know, and we're not managing to that. We're fine with either one.

There's going to be more houses built this year than last year, and that's really all we care about in our market development model is that the market's increasing, that builders want to sell more homes. Therefore, they'll go to a value-add product like ours over an OSB, a hardboard or a vinyl..

To be clear, you're not concerned about a significant reduction in the cyclical growth of the market at a [indiscernible]?.

No. I -- yes, I'm glad you asked the question because I don't have that at all in my head. Now that doesn't mean I know it. It should be in my head, but I don't have it at all in my head and I haven't [run to] anyone in our industry that kind of is bearish on where housing's at.

It's just more of a -- because we turned our kind of growth index, which we initially called PDG and now I prefer to call it growth above the market index, we turned that into kind of exact arithmetic.

So when the market's just a little bit different, you got to ask yourself, was that growth above the market index or is that a difference in the index? And I'm saying this year it's too early to tell.

But I don't think the market is running stronger than we thought it would, and maybe it's running exactly like we thought it would, meaning the forecast or maybe it's a little bit softer. But I'd be pretty sure it's not stronger..

Your next question comes from Simon Thackray from CLSA..

I'm going to follow up on that question, Lou, because it's just been [7] years that we had PDG and now growth above the market index. So just a really simple question because I'm not sure I understand what you're saying.

Did you or did you not grow above your index in the quarter?.

Yes, just of that, we're at 6.5. We'd say our index is between 4 and 5. So we think if you want to measure a single quarter, which we always guard against, you're probably looking more like a two than the three to five range we've talked about.

But if you go back to our initial discussions, I think, in November and February, we said we're going to have to build back to our PDG growth model rather than flip a switch to get there, and that's basically the focus of the organization..

Yes, and that was the exit rate that you spoke about last time at 4Q as well for the end of the year, building towards an exit rate?.

Yes..

And you're still confident with that exit rate?.

So just to sum it up, I don't talk about volume a lot because that's what we're working on. But coming out this quarter, we're not feeling like we have a problem, but we know we still have the challenge of increasing market traction to get where we want to go..

Okay. That makes sense. Matt, can I ask a favor? Can we -- can you build us a bridge, please, back from this -- the guidance that you provided, the $300 million to $340 million NPAT? Given your guidance now for an effective tax rate of 17.1% for the year, I don't know where interest is going to end up for the year. Maybe you can help us with that.

But the implication against, I guess, where the consensus EBIT would be looks like a 10% to 11% downgrade to full year EBIT based on that lower tax rate.

Have I missed something? Or is that exactly what you intended to signal?.

Yes, we don't normally kind of compare on the EBIT basis. Obviously, we normally do adjusted NOPAT. I'd say on -- you mentioned interest. Just keep in mind that interest costs for the first quarter will be lower than they will be for most of the year as we refinanced the bridge loan to kind of longer-term debt.

And so there'll be kind of marginal cost increase on that as well as total net debt will increase. So it's not first quarter rate times 4 to kind of get to your full year rate..

I didn't hear -- are you prepared to give a number just for interest, I mean, a range what you think it'll be for the year?.

No. Kind of on that one, no, sorry, not prepared to do that. I think we can maybe have Jason work with you offline if you're trying to reconcile back on kind of consensus EBIT.

From the $300 million to $340 million, just keep in mind, we're going have about $30 million of kind of onetime cost included in that guidance range, of which $7 million is the inventory adjustment we took in the quarter and $8 million -- a little under $9 million or $8 million of integration and transaction costs in the quarter and another $15 million to go.

So those are included obviously in that $30 million to $40 million range..

Got it. So -- but in terms of....

In that -- sorry, in that $300 million to $340 million range..

$340 million. Right. Yes, yes, understood. So largely what we're talking about is the impact of Fermacell acquisition in terms of expectation where the underlying businesses are going. Asia Pac or international and U.S.

all seem to be in line, and that's still tracking in line with expectations notwithstanding, Lou, your comments that there's more work that definitely needs to be done to get to that exit rate right on PDG.

Is that the way I should be interpreting this guidance and this result?.

Yes, I think Asia Pac, we're feeling like we're in better shape than we thought we might be in the first quarter, and second quarter start looks pretty strong. In Fermacell, I think we -- it's a sigh of relief because we're not a company that does a lot of acquisitions, and it looks like we've done this one well without any speed bumps.

Now what I do understand with Fermacell, this was -- it was owned by a private equity group and they were a pretty big group. So the plants were in pretty good shape, but we're going to look at maintenance a little bit longer term than they probably did.

So we're actually bringing 100 facilities down for eight weeks to fix up the press that they've been living with for a while. And we have several of the other facilities coming down for some extra maintenance. I think we already took the one down in Spain for a week.

And so we'll spend a little money in Fermacell in this first year to make sure reliability on manufacturing site is there. So you got that piece Now the U.S., I said Asia Pac's a little bit ahead of where we want to be. I wish that's a couple points ahead on volume right now.

So I'm not saying I love where we're at in the U.S., but it kind of fits what I described for both the external market and our internal guys that, "Hey, we're going to have to build this traction. We're going to have to really tune up our programs right across the board in order to get back." And the three to five is a range for this year.

But obviously, it ratchets up next year. So whatever we do this year, if we end up in the three to five range, then next year we got to get into the maybe 5 to 7 range. So more like a 6 average, maybe even a seven average. So you got to do all this stuff right. We ran out of capacity.

It's old news, but it's still kind of resetting the growth side of our business in the U.S. It's a process, and so far, so good. But I'm not -- we're not ahead in the U.S. I'm not saying we're behind. We're not ahead. We're ahead in Asia Pac. The guys in Australia, the guys in the Philippines, they've done a really good job at those businesses.

And on the market side in New Zealand, we've done a good job. So like any business, it's a mixed bag, but we're pretty good where we're at based on where we thought -- where we communicated to market we thought we'd be at. So we're kind of okay..

Your next question comes from Peter Wilson from Crédit Suisse..

Maybe just one on Fermacell.

The roughly $30 million in transaction, integration costs, am I right to compare that to the EUR 20 million you called out at the fourth quarter results? Or was it always going to be EUR 20 million integration plus transaction costs?.

It's the same with the exception of, obviously, we didn't anticipate the fair market value adjustment in inventory at the time that we said EUR 20 million.

So you take the EUR 20 million of integration and transaction, add the fair market value adjustment, which, again, the noncash adjustment, and that's how you get to kind of that $30 million range that we're now providing..

Okay. Perfect.

And Lou, back to North America, I mean, I don't want to [belabor] the point too much, but the lack of share gain, can you just give us a bit more granularity on kind of which regions you did gain share, which you didn't? In those regions that you didn't, who's taking the share from you -- not taking the share from you, but yes, who's taking those sales from you that you thought you might....

Yes, well, as I've said, when you look at our space, you can't find anyone doing better than kind of -- doing better than we think they would be in a market like this, okay? So if you take first half of the calendar year, where we're at, where vinyl is at, where LP is at, which are the 3 big players and then throw Allura in, a smaller player, it doesn't look like it's clear someone's winning on the regional mix or someone's winning on the segment mix or someone's winning just the market share gains.

If it's there, I -- we can't find it. So -- and as far as regions that are ahead or behind, it just moves around too much. We don't have a problem region. We had a bit of a problem last year in the south central because that's where capacity was most constrained in our HLD product. That's been taken care of.

So we don't have like -- the regional variance is going to move around. The ones that are up the most now will probably taper off some, and the ones that are lagging a bit will kind of progress back toward the main. But there are opportunities [to write] programs better.

And when I say programs, remember there's -- first one is your conversion process and then how quickly your conversion process turns into volume, and that differs based on what it is you're converting off of. So you got to make sure you're running those programs right. And then you got your R&R, which is very separate in new construction.

And then you go to trim, we built more trim capacity in the south to sell more trim. So trim is different than the siding conversions. And then of course, at times, we run into markets leaking on us. And right now, like I say, it's not obvious that any markets are leaking on us.

But it's something that we need to make sure whatever channel arrangements we have in place, they work the way they're supposed to work. And for the most part, Nielsen, who runs sales force now, that's his emphasis, making sure him and Gadd work to tune up the game plans, tune up the execution. And that's it.

I mean, there's no -- like I said, there's no one thing to talk about. It's just -- let's make sure we're hitting on all cylinders and as many markets, as many segments as we possibly can..

Okay. Your comment on LP, I know it's just one competitor.

But would you not consider that they seem to be gaining some share over and above what you're [printing]?.

I think you read the results a lot of different ways. So what bothers me with the product they have, they're kind of playing even Steven. They're not gaining share because if you look at their first half versus our first half, we -- we're a little bit ahead. But it's close enough to why I said we're not gaining share either against them.

I think the clearer answer is vinyl's giving up share, but it doesn't seem to be at the rate that you'd think, but they are giving up share. And then it's kind of even split in the Hardie siding category. Now Allura was down. So they're not picking it up.

We're not picking it up as fast as we want, and LP doesn't seem to pick it up -- be picking it up as fast as us. Now everyone's got a different market index because of their bias toward new construction where our bias is to participate in all segments.

So we're actually bigger on R&R because the R&R segment's bigger, not because our share [is way higher] in R&R, sorry. Our shares are kind of good in all segments where they're more biased toward -- obviously, they have a natural advantage selling sheds. So they got a very good share there, and then their next big share is new construction.

So the market index is a little bit different than ours, but it doesn't matter. We have the value proposition against LP and the market's playing even Steven on us and LP, and it's just -- like I said, we got to tune up our game plans because we don't think that's right.

We think we create more customer volume is not being reflected in our growth rate right now. So we got to do a better job..

Okay. Fair enough. And just one last one. I think last time we spoke, you anticipated that you'd actually fill a better part of your volume in the first 6 months of this year. But on this call, you seem to be suggesting that your volumes will build throughout the year. Maybe just some comments on that....

Yes, I want to correct that perception because the seasonal demand will mean that market activity is lower in the winter than it is in the summer. But growth above the market index is tied to seasonal demand.

So if the market comes off, say, 6% in the winter months, in order to get a growth above the market index of five, you don't need as big of a headline volume growth number.

So I do believe it's a fact that our growth above the market index has to be higher in the second half than it is -- will be in the first half, but that doesn't mean our volume has to be higher in the second half than it is in the first half..

Okay. Understand.

And can I ask, is there anything in your order book now that gives you confidence going forward?.

Yes, I'll be honest. I mean, it's kind of like when you're playing this game this close, a couple percent above the index, the margin for rare is not very big. And in May, when we did results, I actually liked that order book. It came off starting late May kind of through June, and July was an okay shipping month.

And right now I'd say, just like I said earlier, I'd like a strong order book because I'd like to make sure we're going to step up another couple points before year-end and the growth above the market index. So right now I'd say our order book's not where I want it. But keep in mind, our order book is like 3-week look at it.

It's not like we know what we're going to ship in November. But based on what we have booked in August, we know what we'll ship three, four weeks out based on what we booked so far. But right now I don't like it. I think it's a little softer than we should be comfortable with.

Now going back to your earlier question, do I think someone else is getting that, I don't really think that's the case. I just think we're not gaining momentum at the rate that we want to gain momentum..

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

Lou, just a question on volume growth, and it's an important point given the expectations that have been set out over the last probably six to nine months for a stronger volume growth to return.

To your point, Lou, your order book looking out to 3 weeks, we're about halfway through the second quarter of this financial year, so if we look out to the end of the second quarter, it sounds like we're setting ourselves up for another kind of mid-single-digit volume growth quarter.

So in that context, I'm just wondering, should we be looking at the bottom end of that 3% to 5% PDG range? And I guess to your point around looking at a 4-quarter rolling average, the growth has been pretty tepid.

So rather than talking about PDG and market growth, what do you think the total volume growth for FY '19 could be?.

Yes, I'm no better -- let me stay with growth above the market index. So we're forecasting based on building momentum.

So do I think we should be in the bottom of the range? I'd say I don't know how we're going to know that because it's kind of hard to measure how much momentum you're building and what your orders are going to look like in December, January and February.

So the range is 3% to 5%, and if we fall in the range, I think we tick the box and then we have a 5 to 7 range next year. So I think the biggest thing is for our organization is, hey, let's do the work. But let's not fool ourselves. This isn't about delivering 4 next year and then not building on that the following year.

So should you fall -- should you think the bottom of the range, I'd say it's your choice. Right now I'm thinking the range is fine if it leads to the five to seven range next year. So where we fall on the range is fine just so it leads to further acceleration next year.

Now go back to the -- you want to take a shortcut, which I don't blame you, I take a lot of shortcuts myself, and say, "Well, what should your total volume comp be for the year?" and I'm going to say, well, I don't know what the market exactly is. We came in thinking it's five, and it may be exactly five.

If it's exactly five and you say you hit the bottom of the range, then you're eight. You hit the middle of the range, you're nine. But if you come in four, with a market index, then everything comes down a point. I want to repeat.

I don't like where we're at just because the margin for error is small, and Hardie's got to be -- get back to where the market share gains are big enough to where little fluctuations here and there don't -- we don't sweat it. We don't sweat it internally. We don't sweat it externally.

And clearly, we're not at that point, that's why we're getting so many questions on the volume..

Just a second question on volumes but focusing more on the interior product....

Yes, interior's a little different story. So on exteriors, clear path, clear programs. With interiors, we have a one to three. We came in, in the one. We didn't talk about building through the year. So basically, we're at the bottom of our indicative range.

And we're going to talk about interiors in September because there's a few things happening externally, not competitively, but externally in the industry that requires Hardie to make some adjustments on how they want to grow their interiors business. So again, a results call isn't a great place to go in the new starts.

So we'll go into that at the September investor tour. But having said all that, the one to three, again, it's not a range. It's too early to move off the one to three. But there is some headwind in interior volumes. And in external, it's not competitive..

Okay. And then just a final one and [indiscernible] the volume question, but I think in the past when PDG or volume growth has been soft, I think the company's been able to turn that around in a reasonably quick manner. I think this time now it's just probably taking a bit longer than the market, or we, would've at least expect it.

So is there anything that's fundamentally changed within the business? I know you talked about it's a little tune-ups here and there and a lack of transparency as to where the other market competitors have strengthened over the years.

So anything else you can point to which kind of means that it's been a bit harder this year -- sorry, this time around than it has in the past?.

It's a good question and basically you're saying, "Why don't you just tell me what you talk about in your internal meetings?" and we're not going to do that. I can tell you the business is bigger.

So obviously, the percentage is a lot more volume, and being able to chase that much volume, we're juggling more balls, more segments, more markets, more customers. And organizationally, maybe we're just catching up to that, I'm not sure. But there's nothing external.

I think the other point you should make is, "Hey, I thought LP would be less of a split in the pie if you buy now," and I agree with you. I thought they'd be less of the split in the pie with us.

So if I had to say two things, I'd say the scale of the business is bigger and organizationally, maybe we got a little bit too used to thinking about how much volume we have to add rather than the percentage of what you have to add.

So our bars have to get a bit higher, and I think they have gotten a bit higher and both Gadd and Nielsen are working with their organizations on that.

And then the other thing is I think we'd let LP exist as a company that's growing their volumes in a good market when their value proposition is just not as strong as ours and their price discounts don't really drive the business.

So we just need to do a better job on making sure kind of everyone understands the equation, and we enable the conversions and it is blocking and tackling. I couldn't agree with you more. It's taking longer than we thought it would. The capacity shortage definitely added -- made it more challenging to get back on the front foot.

But that's now been, I think, five quarters. There's just absolutely no reason we can accelerate. That's the focus at Hardie. We need to accelerate. You guys are right. This quarter's -- you're just creeping up a little bit here.

When's that really going to happen? And I think it's a good question, but I -- again, I can't tell you specifically when it's going to happen. But I can tell you that's the focus of the organization. In the meantime, we're delivering pretty good results.

So it's not like we have a problem, but we do have to accelerate addressing the opportunity of further market share gains..

Your next question comes from Lee Power from Deutsche Bank..

Lou, just touching on interiors. I know you are exiting some product lines.

Is that -- can you confirm that's all done now?.

Yes, that's done. Our price repositioning at G2 was done. So the resetting of the interiors business is done..

Okay. And then just touching on Fermacell, so I think you said that you've gone into some of the plants and you had some -- you'd plan some maintenance on, I think it was one of them.

Can you -- I mean, have you gone through all the plants now? Are you happy having had the business since the time you've had it, that there's nothing there that you're going to come across where you're going to need more maintenance [out of the cycle]?.

I haven't been through all the plants, but as an organization, we're very happy with what we bought. What I was trying to communicate earlier, I don't know what a normal PE owner has as their time horizon. Maybe seven years. We're a 30-year time horizon.

So there's certain things we're going to do with a facility that are different than what a kind of PE owner's going to do with this facility, and we're in the process of doing that. It's not going to be a huge cash outflow, but there were a few things that they were operating around that as part of Hardie, it didn't make sense to operate around.

So we'll take a plant down for eight weeks. We'll spend some money in there. We'll incur higher freight cost while we do that. So I was just trying to give the heads-up. I thought they delivered -- for the first quarter in Hardie, I thought they delivered a really good result.

And so far in the second quarter, the momentum in that business looks very good. But they're going to deal with this manufacturing outage at one of their big sites for eight weeks. So their EBIT's not going to look this good.

It's going to be good for the year, but it's going to be bumpy; the first quarter better than the second and probably third quarter better than the second. So -- but it's all as planned. I couldn't be happier with the Fermacell acquisition. I think it's the right acquisition to get serious about fiber cement growth in Europe.

It's a good incremental market share growth company on its own. It has a very nice brand, very good sales organization, very good position in some key markets. And the management is really aligned quickly with Hardie -- how Hardie wants to think about growing the business. So I couldn't be happier with Fermacell.

You -- those of you that know Hardie for a long time know I'm not an acquisition guy. I didn't have much to do with the acquisition going right and the integration going right.

But I do really feel our organization did a good job delivering on that because we're not a company that has that as a core capability, but our organization did step up and do that really well..

Your next question comes from Andrew Scott from Morgan Stanley..

Just on the Tacoma start-up, Lou. I wonder if you could just speak on that. It sounds like that it's going well.

And just the level, if any, of margin impact that fell later into this quarter or that you think will fall into this quarter -- the second quarter as a way of starting up?.

Yes, we don't want to over guide you on Fermacell. It's a brand-new business. It's relatively small -- Tacoma 2. Tacoma 2, sorry. I misunderstood you. Tacoma 2 is going as planned, and I don't know if we've given any guidance [indiscernible]..

No..

No. But I would say the way it's going, you shouldn't see it in our results..

Right. And then input cost, obviously....

But it doesn't mean it's not going to cost us -- it doesn't mean it's not going to cost us anything. Of course, it costs [a bit], but we're on track. So it's not a big enough start-up cost if you're going to look at the EBIT margin and say, "Oh, they're just starting up the plant." I don't think that will be the case. It's going pretty well..

Got it. Input costs, obviously [there's some you kind of talk] a lot about like pulp.

But can you talk about things like transport and maybe how you're reacting with the business there and how that plays into some of your scheduling, particularly going into the winter where you had run some plants a lot harder and maybe shipped products a lot further? Does that get harder in this transport cost environment?.

You guys are wearing me out here [indiscernible] eight questions in a row.

I'm going to flick this one to Matt, all right?.

Yes, on freight cost, most of the pressure is market pressure. So we're seeing that across modes. We're seeing that across markets. There is one third of it which we're, obviously, we're very trying to manage through by pulling regional levers and optimizing sourcing decisions across the network. But the main pressure is just on getting trucks.

And as a result of the lack of trucks, we end up with higher pricing in order to switch our trucks in and be able to hit freight windows. So we -- the freight costs for the year are doubling, continuing to increase up and higher than kind of where we thought they were going to be, and most of it is kind of across market.

We're not really seeing a particular area of the country that's stronger or weaker relative to others. So -- and the levers that we end up having to pull is trying to optimize around lowest [related] cost and distance within a plant to a market kind of mode to optimize when we can. And those are some of the things that obviously we're trying to do.

The other thing that I think has helped us a little bit this year is we had the distributed inventory program last year where we were able to take board and put it in closer to the market. But that's had a benefit both during the winter, the way we're able to produce and schedule the plants.

But also, we got it there on a mode optimized and a lower market rate at the time [and having been able] to produce that board this year. So that's kind of a handful of the levers that we're trying to do to try to fend off, if you will, the inflationary environment we're seeing in the market..

Your next question is a follow-up question from Simon Thackray from CLSA..

Matt, just following on from that freight question. I know you guys value price. But just in terms of competitive activity, the freight costs have been rising so quickly, and I know you spoke about that in the fourth quarter as well.

Has there been any out of cycle price rise put through by any of the competitors so far for freight? And in the remote possibility that you ever did it, would you ever consider that being a possibility for Hardie if the freight is rising across the whole industry?.

You probably have a better handle, Simon, on what the competitors are doing from a pricing standpoint with respect to freight markets than we would. We look at our prices relative to the competitive alternatives in the market. I think you know, because you've been with us a long time, that we value price.

So our pricing decision is done really outside of any context on what input costs are doing, what we're trying to do to gain market share. We're trying to balance that. We're getting value for our product in the market.

So when we do, do the annual strategic price increase, it's always against the backdrop of where we're at versus the alternative in the market. And our objective is to gain market share in that market. And we're not considering or there's no discussions that we're having that would reconsider that given kind of the inflationary environment.

The benefit and the strategic value of getting market share far outweighs kind of the momentary point that we'd seem to be in a cycle where inflation costs kind of all going one way, which is just kind of creating a discussion.

We're trying to stay focused on the longer term, which is right price in the right market for the right customer that allows us to continue to drive towards 35/90..

Yes, I expected and anticipated that, that would be your answer, which is consistent with the last 15 years.

I guess it's -- the other -- the flip side of that then is if we are seeing price rises around because of inflation, is that giving the value pricing for Hardie better traction? So I guess, Lou, coming back to your point, would you be anticipating better growth above the index because you're more competitive now than you've been against some of your competing products?.

That does apply to close alternatives. It doesn't apply to vinyl because vinyl's really purchased almost exclusively on a delta in installed cost rather purchase price. But I would say anyone in fiber cement prices off us, so they wouldn't be trying to give a premium for a high freight if we're not.

So I'd be pretty sure that the fiber cement guys haven't move. As far as LP, [probably] the biggest one in the group, I don't know what they would do. But I don't think -- the problem with freight surcharges is if you put one in, you've got to take it back. And it's just a distraction for everyone in the channel.

I know it happens with lumber, OSB, engineered wood, all that stuff, and they learn to live with it. But as you indicated, over a long period of time, one of the things we've got to deliver to the market is consistent pricing with annual reviews. So we deviated by mistake a few times. But for the most part, it's an annual review.

And then you're kind of locked for the year, so you can bid jobs without worrying about what the price of siding is going to be in September, whether it's pulp or freight or something else. So yes, we definitely stay with that. It's -- I'm sure on the margin it's a little bit better if the other guy's trying to get their higher freight cost.

And when the freight cost go the other way and we don't take anything off, I'm sure it hurts us a little bit. But I don't think you'd see it in any real metric as far as growth goes..

Okay. And then just finally, Matt, I guess coming back to that question about the incremental cost of the acquisition this year. Just -- I think the question was asked, but just confirming. You had previously guided fairly quickly of that EUR 20 million of integration costs this year.

As far as I'm looking at it, the only incremental cost that I can see so far is the USD 7.5 million inventory adjustment. Is that the only incremental cost that we've got? Over and above that, you've got additional downtime that Lee talked to about the -- taking a few of these factories down.

Is that it? Is that the -- are they the only incremental cost beyond that EUR 20 million integration that you've previously guided?.

Yes, just to be clear, Simon, we wouldn't think of the incremental cost being a factor down as kind of integration or acquisition cost. It's just the choice that we make and as a result, the way the business -- the underlying business happens to run.

But of the EUR 20 million, the only real difference between that and the range I gave everyone today, or the math I gave everyone today, is that noncash item that we announced today, the $7.3 million inventory fair value. So that's just part of purchase price accounting, and again, it's kind of noncash.

On a cash basis, there's really not much difference in what we talked about last time on an expense basis because of the way accounting works. You end up with cost this year closer to the USD 30 million..

Got it. Got it.

So it's not broadly different to what we should have already known anyway?.

Yes, that's right. You wouldn't -- I wouldn't have expected anyone to have had the $7.3 million. I didn't have the $7.3 million -- not really anticipate that until you go through purchase price accounting. So I wouldn't expect anyone to have that.

But the USD 20 million -- or the EUR 20 million is still about right and you add to that USD 7 million, it gets you kind of into that range that we talked about today..

Your next question comes from David Schwartz from Goldman Sachs. We will move on. Your next question comes from David Pace from Greencape Capital..

I was just wondering whether you can provide an update on the evaluation and planning of the business case for the Alabama mega plant..

Yes, so I think we announced the -- we announced, I think, in May that we're building the plant. We're going to start with a 2-line plant. That's in a really good location in Alabama. It's got a strong labor force around it.

And it'll have a lot of inherent cost advantages that will allow us to optimize our sourcing decisions kind of across the network that will have an overall benefit.

The other thing we like about that plant is we're building it on a piece of land that will allow us to expand the plant over time, assuming kind of our long-term demand forecast hold at a relatively economical brownfield cost.

So that plant, we broke ground on this quarter, and we've got about 4, 5 quarters ahead of us in order to complete the construction and get that plant commissioned and start it up..

Does it ultimately help you with the freight-in cost as well, Matt?.

Yes. It will allow us to get a freight advantage across the network. We'll see it probably in 4, 5 different plants. It will allow us to narrow the shipping radius of certain plants in the network.

And the other component of that plant is we're building it at least with an idea that we may build real board into the northeast as a way to optimize freight for delivering product into that region..

Your next question is a follow-up question from Keith Chau from Evans & Partners..

Matt, just a quick question on the input cost. I know you presented a slide talking about the market increase and also the input cost. I'm just wondering if you can give us a sense of whether James Hardie's freight and pulp costs are [tracking] to market or whether it's slightly below, please..

Yes, we're continuing to be slightly below.

The reason, I think, we're having to talk about input cost so much is when you've got market prices on freight that are up almost 30% and pulp's up 20% and the forecast for pulp is not coming down, those are obviously [indiscernible] input for us for saying the cost drivers for us and they're up quite a bit. So we are performing better than that.

Our pricing is not up to that extent, but it's up significant enough that it's become a feature in our discussion the last couple quarters and likely to continue to be a feature, we think, for the fiscal year..

Thank you. That concludes our question-and-answer session. I'll now hand back for some brief closing remarks..

We don't have any wrap-up comments other than we appreciate everyone joining the call, and hopefully we'll see a lot of you in September. Thank you. Bye..