James Hardie Industries - Q1 2016

Transcript

Operator (participant)

Thank you for standing by, and welcome to the Q1 FY '16 briefing conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. At which time, if you wish to ask a question, you will need to press star, followed by the number one on your telephone keypad. I must advise you that this conference is being recorded today, Friday, the fourteenth of August, two thousand and fifteen. I would now like to hand the conference over to your first speaker today, Mr. Louis Gries. Please go ahead, Mr. Gries.

Louis Gries (CEO)

Okay, thank you, Eileen. Hi, everybody. Thanks for joining the call. Matt Marsh and I will walk through the call, our results in a normal way. As Eileen said, Q&A at the end, and any media questions we might get would be after investor and analyst questions. Matt and I are in Dublin tonight, so the slides will be flipped in Sydney. So we're gonna be calling out slide numbers. So the first one's obviously the cover sheet. Slide number two is page one of the disclaimer. Slide number three is page two disclaimer. Slide four is the normal agenda we follow. Slide five is the cover sheet, and slide six starts the overview that I'll be talking through. So net sales are only up 3% for the quarter.

That's partly because the U.S. is flatter than it has been this quarter, competing against last year, than we've been experiencing. And the other part is the other businesses comp well in local currencies, but got knocked back as we brought in the US dollar. So sales up 3%. The operating profit line is kind of the opposite story. That's up strongly. That's really driven a lot by the US and just manufacturing efficiencies and some input cost benefits in the U.S. But again, all businesses performed well on the bottom line. Again, all the businesses had higher volumes and higher sales price. The U.S., again, below our target and below what we've been experiencing, and we'll talk about that some.

As I said, the big bottom line comp in the U.S really drove the large improvement on the bottom line, both for that business and the group. We came in at a 26.6% EBIT margin in the U.S. business, which is above our, obviously above our 20%-25% target. It's not that unusual for the first quarter, but we also feel like we'll operate above that target for the full year. So we really feel pretty comfortable how the business is operating, and the contribution margin we're getting through the better manufacturing performance is likely to carry itself through the year. As we had indicated, we were gonna be more active in the share buyback, and we have been. So Matt will cover that in some detail.

And we also have talked in the past about the Carole Park capacity startup. That continues to go well. We go to page seven. It gives you the group's kind of bottom line financials. Everything up strongly. So you know, a very good bottom line result for a quarter competing against last year, same quarter. Slide number eight brings us back to the U.S. You know, basically, the summary on the quarter in the U.S., it was a good quarter. We just need to gain traction on the market side. We indicated going into the year, we're growing above our market index. Market index, as we normally look at, or our PDG, or which is how we perform against the market index, we normally look at a four-quarter rolling.

We are above our market index. It's debatable whether this single quarter came in above the market index. The market wasn't great, but the 4% volume growth fell short of what our targets were for the quarter. So going to the chart, you see sales five, volume four, and average price one. And we kind of get to the average price increase in an unusual way. The market price was up close to 3%, which we'd indicated that was our expectation. But the 3% got knocked back in the quarter by both product mix and by foreign exchange, and foreign exchange is mainly the Canadian dollar coming off against the US dollar. And we have a reasonable position in Canada now, so that did affect the average price as it's published.

Again, EBIT margin up 32. We've been talking for several quarters now. Actually, it's been about a year since we started to really gain momentum in manufacturing, and that momentum continues. The first quarter comp for the U.S. business on the EBIT and the EBIT margin side was a little bit easier because what we'll see in future quarters is we are starting to get some of those manufacturing gains last year, where last year's first quarter didn't have any of the gains in the results. So, the 32% up on the EBIT line shows where we're at on manufacturing, where we were compared to where we were last year. And it also shows you know, more favorable input costs for pulp and energy, mainly. Go to slide nine.

That's just our normal chart. You can see a nice upward trend since fiscal year 2014. We're pretty much at the top or above the range now for about five quarters, and like I said, we actually feel like we're gonna stay above that 25 for a full year, so we're pretty confident about how the business is running. Like I said, our focus will be on top-line growth, which brings us to the next slide, page 10. The market index for Hardie's would be up slightly. We're still trying to figure out the new construction, exactly where this year is likely to come in on the new construction. As most of you know, we kind of felt we were going into a year that new construction would be up slightly.

I think that's still our view, and how flat it is right now, we haven't really taken a view. It's just obviously not a strongly up market we're operating in. Most of you know we have a good position in the Texas market, which is not up so far this year. So the impact that a lot of you, you know, had questions about in previous quarters, if Texas isn't a good market this year, how do our results come out, and I think we're kind of showing you that. Of course, the top line, if Texas isn't a contributor on the top line, it's big enough to dampen that result some.

But our bottom line result, we can power through, even without our good market in Texas and deliver the financials. Now, having said that, I don't want anyone to misinterpret my comment that our top-line problem is Texas. I think we have a couple things in play. Again, most of you that were on the call last quarter, we would've, you know, indicated we had moved our kind of annual price review up a month so that the board could get into the system before the building season started. So we went with a March first increase, which did bring some of our volume forward from the first quarter this year to, you know, fourth quarter last year. And, you know, obviously, we have an estimate of how much volume that is.

It's probably come in about where we thought it would. So that definitely was a factor. Now, what I don't want to get away from is the reality that we're working to increase our primary demand growth or our market share gains or our volumes above market index, however you want to describe it. And I think it's clear in the business that so far, we don't have traction on that lift up that we're looking for. Now there's normal variance. You get in your volume, especially when you're comping quarters. I think we have kind of normal variance that's you know, a little bit on the low side this time, but I do think it's normal variance.

Most of you would've seen that LP didn't comp well this quarter, and vinyl was slightly positive, but not much this quarter. So it's not like this is a market share problem. We think it's a market momentum, you know, situation where we're trying to increase traction in the market, and so far, that hasn't begun to happen. So again, looking at slide 10, the other thing that would be different this quarter than last quarter, our volume and, you know, revenue tick up would be about the same because we only got the 1% price improvement. Assuming that the, you know, Canadian dollar starts to stabilize at or near the level it's at, I think you'll see us come back to a more, closer to 3% that we're talking about.

By the way, I didn't expand on the product mix, but part of the product mix price dampening is actually good news because most of you know, since about this time last year, we've been focused on increasing our growth rate in interiors, in our backer board business. And clearly, that's started to happen, and it's picked up momentum quarter to quarter. So this quarter backer, meaning first quarter backer, was much better than last quarter backer, and it was actually a higher mix of our sales. Page eleven, it's just our price chart. You can see, except for that period of time in 2012 and 2013, where we kind of got off track with some of our tactical pricing, the price story is still a pretty good story.

Like I said, we don't think the 1% improvement on last year we saw in the first quarter will play out in a full year. We think we'll be closer to that 3% we've been talking about. Asia Pac business obviously operating in a good market. You know, all of the increases in housing, meaning in the medium density that you've seen in Australia, doesn't necessarily play to our strengths, but we're still in a good market in Asia Pac. That goes for the Philippines and New Zealand as well. In local currency or Australian dollars, sorry, 15%, volume up 10, so we got 5% on price. Of course, in US dollars, EBIT doesn't look good, but in Australian dollars, it does.

Now, a point, meaning it follows the top line, but there's no leverage against top line. And the only thing I wanna point out is, they don't get the same input cost benefits the U.S. does because they buy pulp in U.S. dollars, so they don't get that benefit. And their plants are on an improvement trend line like the U.S., not quite as steep of a slope, but also they're going through a startup at Carole Park, so you got your startup dollars in their quarterly result as well. We're about. We think we're about three quarters of the way through those startup dollars. Like I said, the startup is going well, so, it's been a very positive, you know, result for the Australian business, but it is largely absorbed in Q1 results.

So I'll hand it over to Matt for the financial.

Matt Marsh (CFO)

Thanks, Louis. Page thirteen is a flip. If you go to page fourteen, just a summary of the group results, and then I'll go through the normal set of pages that we've covered in prior quarters with you. So strong earnings growth, as Louis indicated, volumes were up across all of our business units, albeit a little bit lower than we expected them to be. Average sales prices were up in both the U.S. and Europe, as well as Asia Pacific. And lower input costs we're seeing in both segments, you know more so in the U.S. than as Lou just indicated in Asia Pacific.

But, you know, we're seeing a lot of our major input costs, pulp, utilities, that are trending favorably from a market index standpoint, and then we're performing a little bit better than that. So that's providing some additional uplift to margin rates, and we'll take you through the input cost trend lines in a little while. Organization costs were up a bit, mostly consisting of stock compensation that corresponded to the share price being up 14%. And the second biggest driver is foreign exchange losses as the U.S. dollar increase. And the core SG&A expenses of the business units were actually down a little bit, and the corporate SG&A expenses were up just slightly. Net operating cash flows were $55 million for the quarter.

Those were up in comparison to a year ago, where they were about 43 million. From a capital allocation standpoint, no real change in the strategy. We continue to execute on that. After the quarter end, on July first, we made a payment to the AICF of AUD 81.1 million, $62.8 million. That represents 35% of our free cash flow for last fiscal year. And after the June period, we purchased approximately 1.7 million shares for about $23 million as part of the share buyback program that we talked about in May on strategy to shift our additional shareholder returns this year to share repurchases from special dividends.

If we go to page 15, we'll walk through the group results on a reported and an adjusted basis, as we normally would. For the quarter, we reported sales of AUD 428 million. They were up about 3%, on both higher volumes and prices in local currencies. Gross profits of AUD 157.6 million. Those are up about 320 basis points, primarily driven by the performance of the plants in the U.S. Also a significant contributor were the input costs in the U.S., and the gross price increases, partially offset by the FX dynamics and the mix dynamics that Lou talked about earlier.

Total SG&A of AUD 61.5 in comparison to AUD 50.99 a year ago, so up about 3%. Like I said, stock compensation was the primary driver there. That's up about 14%, corresponding to the share price. Discretionary expenses and foreign exchange were both higher, and those were partially offset by kind of core SG&A expenses in the business units, in the divisions, if you will, were flat to down. On the non-operating side, so we had EBIT of about AUD 85 million in comparison to AUD 50 million a year ago, between EBIT and net operating profit. Really three dynamics. One, interest expense increase, now that we're feeling the full effect of our debt position.

Two, we had announced the sale of our Australian Pipes business, and there was a small gain on that sale, and so that's in other income, as well as some unrealized foreign exchange gains and impact of interest rate swaps, are down in that line item, and I'll talk about that more later. Income tax expense increased primarily as a result of the operating income, and I'll go through ETR as well. If we go to page 16, you can see asbestos adjustments in the quarter of about 4.5 million in comparison to 21.5 million a year ago.

Those adjustments are really driven by a 1% change in the Australian to U.S. dollar exchange rate from the beginning to end balance sheet date, and that compares to about a 2% change in the spot rate. So, note, you know, in the first, second, and third quarter, that the liability and the asbestos adjustments are all foreign exchange related, typically. The adjustments on net operating profits, sorry, the adjusted net operating profits were up strongly, as we've talked about, almost 30%, a 26% increase on adjusted EBITDA, a AUD 6 million swing in other income and expense. Again, there's really three major items in there.

About AUD 2 million of a favorable foreign exchange on forwards, about AUD 2 million favorable change in interest rate swaps, and the AUD 2 million gain in pipes, is how you get to the AUD 6 million change in that line item year-over-year, and gross interest expense of about AUD 6 million in the quarter. If you go to slide 17, you can see the gross margins, you know, are continuing to perform well. They're up at about almost 37%, quarter-to-quarter, you know, approximately flat, up, obviously, substantially versus a year ago, all driven by the dynamics that we've already talked about.

Price improvements in all of our businesses, and then we're benefiting from both plant performance as well as market for input costs, as well as our sourcing against those market trends. On Slide 18, you can see from an input cost standpoint, that pulp has stabilized and is starting to trend down. The NBSK, you know, is down 3%-5%, year-over-year, which is helpful. On the utility side, gas, in particular, is down quite a bit. Cement's, you know, one of the input costs that are up. Cement is, it definitely has a capacity or certainly a strong demand in the U.S., and as a result, cement pricing is up, and we're feeling that a bit.

Then you can see electricity year on years is down a bit, but it's stabilized over the last several quarters. If we go to page 19, we'll run through the segments in a little more detail. You can see the U.S. has EBIT of about $90 million, $89.5 million, up about 32% compared to last year, all of the dynamics that we've already talked about. Asia Pacific, the gray bar is in U.S. dollars, so it's what we report. You can see that on a U.S. dollar basis, it's down. On a local currency basis, in the blue bars, it's up. For the quarter, on a local currency basis, AUD 25.4 million, on a U.S. dollar basis, $19.7 million. Again, in local currency, that business is performing well.

It's being adversely affected by the strengthening dollar and the weakening Australian dollar. But in local currency, the segment results on EBIT in Asia Pacific were up about 15% compared to last year. On page 20, no significant change in R&D. You know, the trends broadly in line with our historic investment goal of having about 2%-3% of our top line invested in research and development. The fluctuation, you know, quarter to quarter, year on year is just normal variation. So no real change in research and development. On general corporate cost, you can see up 13.5%, mostly on the backs of stock compensation, which I've already talked about. A slight increase in discretionary expenses as well.

But, you know, the primary driver there is really stock compensation. Slide 21 is the chart that we normally show on the changes in the Australian versus the U.S. dollar. You can see that that translation trend had an unfavorable impact on the Asia Pacific results, which we've indicated has a favorable impact on our corporate costs in Australian dollars, which at the group level is not a substantial driver, and has an unfavorable impact on the translation of the asbestos liability. Slide 22, our effective tax rate for the year, we're estimating to be an adjusted effective tax rate of 26.5%. That adjusted income tax expense has increased due to the operating profits, primarily in the U.S.

The differences between adjusted income tax expense and income tax expense on a reported basis are up primarily due to lower asbestos and other tax adjustments. We continue to pay income taxes, and they're either paid or payable, and those jurisdictions you can see on the page. So in Ireland, the U.S., Canada, New Zealand, the Philippines, income taxes aren't currently payable or paid in Europe, excluding Ireland, or in Australia. The Australian tax losses primarily result from the asbestos deduction. The 26.5% effective tax rate is up, largely because of the geography of the earnings growth in the U.S., and then the Australian translation of their results into the U.S. dollar reported results acts as a headwind as well. Slide 23.

From a cash flow perspective, we have $55 million of cash flow from operations, up about 30% from a year ago, where we reported about $43 million. Net income increased $31 million compared to last year. Working capital improved in the quarter on both inventory turns, and accounts payable turns were slightly favorable year-over-year. Those were partially offset by accounts receivable in the quarter. The accounts receivable is really just related to the timing of when billing and collections go out. I think we'll see that come back within the next quarter. So for the half year, I'd expect I wouldn't expect the AR to be working as an unfavorable dynamic. The capital expenditures are obviously lower. Last year, we were investing heavily in some capacity projects.

As those wrap up, both in Carole Park, Plant City, and Cleburne, you should expect capital expenditures year-over-year to come down. You're seeing that in the cash flow. We're obviously gonna continue to invest in maintenance capital this year, and you know, we would expect our CapEx this year to be more in line with kind of the AUD 100 million, AUD 75 million-AUD 100 million range, in comparison to the last couple of years, which was significantly more elevated than that. On the financing side, you know, no dividends were paid in the current period, in comparison to about a AUD 125 million payment last year that related to the one-time special dividend for the 125-year anniversary, and that was the major swing in the financing activities.

Page 24, a very similar, this is the exact same chart we've now shown for several quarters around financial management and how we're thinking about our balance sheet. You know, the fundamentals and remain strong from a financial management standpoint. You know, margins and operating cash flow are in good shape. You know, we continue to stay focused on governance and being very transparent. We're still managing ourselves and thinking about our balance sheet from an investment grade perspective. Our capital allocation strategy has not changed. Our first priority, you know, continues to be investing in both research and development and supporting market organic growth programs.

Ordinary dividend continues to be our second priority, and then, our third area of priorities continue to be around flexibility to withstand cycles, you know, having a balance sheet that can support strategic and accretive inorganic opportunities, as well as additional shareholder returns. From a funding and liquidity standpoint, no real change since we last talked. Still about AUD 590 million of bank facilities. Our liquidity position is very strong at about 68%. We've got about a little over 2-year weighted average maturity on the bank facilities. The bond is obviously in place at AUD 325 million over eight years. Our leverage continues to be within our target range. If we go to page 25, a little bit more on liquidity.

You know, the balance sheet continues to be very strong. We've got about AUD 90 million of cash, about AUD 380 million of gross debt, AUD 590 million of bank facilities, the bond and plenty of liquidity. So we feel good about where we are from a capitalization standpoint. Our net debt at the end of June was AUD 290 million compared to net debt of AUD 331 million at the end of March. Also, at the end of June, we had the bond and the first interest payment was due, or will be due on the 15th of August.

And as I said on the previous page, you know, we're still well within our net debt target range of one to two times EBITDA excluding asbestos and in compliance with all covenants. On page 26, an update on asbestos for the quarter. So claims that were received at the trust during the quarter were 15% below the actuarial estimate and 11% lower than the prior corresponding period. Mesothelioma claims were up slightly in the quarter, both versus the expectation. In the actuarial estimate, they're down about 5% versus a year ago. The average claim settlement sizes are generally lower this year. The average claim settlement is significantly lower at the moment in comparison to the actuarial estimate.

You know, although as I think I've said in prior years, the first couple of quarters there tends to be a large number of large claims that the trust have to work through throughout the year. So while it is a positive trend that the average claim settlement is below the actuarial estimate by 23%, you know, we have to see how those large claims work themselves through before I take any great comfort in that one quarter of performance. On slide 27, just a quick wrap up, so as Louis and I have both said, group sales up 3% for the quarter.

Adjusted net operating profit is up 27% based on all the dynamics that we talked about, primarily really strong performance in the US from the plants and good local performance in Asia Pacific. The financial management of the company, you know, continues to be on strategy, and we continue to execute on the capital allocation that we've talked about, including funding our organic, the payment that we made in July to the trust, the share buyback activity that we've done in July, and in doing that, still maintaining a balance sheet position that we think is both conservative and representative of an investment grade company.

On page 28, if we go to guidance, so the range of forecasts for net operating profit, coming into the call was between AUD 244 million and AUD 286 million. As many of you will recall, last year, we did AUD 221 million. We expect our full year adjusted NOPAT to be somewhere between AUD 240 million and $270 million. Obviously, with a number of assumptions in there, probably the most significant assumptions are around seeing how the housing market and the conditions in the U.S. market continues for the rest of the year, as well as input prices and foreign exchange. With that, we can open it up for questions.

Operator (participant)

Thank you very much. Your first question comes from the line of Michael Ward from the Commonwealth Bank. Please go ahead.

Michael Ward (Executive Director of Equities Research)

Hi. Thanks, Eileen. Look, just very quickly, in the release this morning, you talked about the margin in FY 2017 coming back into that range of 20%-25%. Is there anything specific around why that will actually come down, or is it more just you guys sort of trying to stick with what you've always said, that in the long term, it'll be around that 20%-25% mark, and you don't necessarily think it will continue beyond sort of FY 2016?

Matt Marsh (CFO)

Yeah, I think you got it there with the last part of your question.

Louis Gries (CEO)

... You know, we got to. I think we're far enough into the year to feel pretty confident that you know, where 2016 is likely to come in. But as far as 2015, 2017 at this point, with input costs and program spending, we're just not gonna change our target range. We may come in above the target, but that's not something we're planning to do.

Michael Ward (Executive Director of Equities Research)

Okay. And then I guess, Louis, just extending on that, can you sort of outline what some of those target spending initiatives actually are that may dampen that margin next year?

Louis Gries (CEO)

Yeah, it's kind of all the stuff you hear about, you know, and you guys that come on the September tour will hear more about it. But you know, it's on the market side, obviously. You know, you can see, you know, kind of the trends in the business. Prior to 2014, we had a kind of a bottom-line efficiency gap relative to what we were trying to do, so we fixed that. You know, over the last twelve months, we grew our volume about 9% over prior four quarters. But this quarter, we're coming off, you know, volume count of 4%, and we think it'll be better in the second quarter, but it won't be up to 9%.

We're gonna come out of the first half with lower volume comps than we've been experiencing in the last couple of years. So that's where most of our work is. So that's, you know, all the stuff you always hear about, non-metro markets, you know, R&R and fiber cement standard markets, holes in our trim product line, you know, ColorPlus outside of the north, top-of-the-market product line, which probably has a fair amount of spending that's gonna be attached to it. So it's all the same stuff that's kind of part of our 35-90 and, you know, just getting moving that stuff down the track.

Michael Ward (Executive Director of Equities Research)

Okay. And sorry, just finally, the manufacturing, it looks like you made pretty decent gains this period, especially, relative to a pretty tough comp last year. How much longer do you think that manufacturing momentum will support, sort of margins?

Louis Gries (CEO)

Yeah, I think, you got to watch last year's first quarter comp. I don't think it was that tough, just because-

Michael Ward (Executive Director of Equities Research)

Yeah.

Louis Gries (CEO)

The manufacturing improvements weren't starting to come in at that point.

Michael Ward (Executive Director of Equities Research)

Yeah.

Louis Gries (CEO)

Whereas each quarter after that, you started to see some of it, and you saw more of it this quarter than you did last quarter. But the EBIT will be relatively tougher to comp against because the manufacturing improvements will start being built into some of the future quarters or some of the later quarters last year.

Michael Ward (Executive Director of Equities Research)

I got it.

Louis Gries (CEO)

But, hey, you know, I think somewhere along the line in the last two quarters, I think we got through the kind of the next phase of manufacturing development that we were working hard to get through over, you know, probably a six- or eight-quarter period, and we were having some trouble, and I think we broke through. And, you know, I think one of the reasons we feel better about coming through the winter months with our EBIT margin is 'cause, you know, we're not using high utilizations to get our, you know, that last little bit out of manufacturing. We're still not running our plants high utilization.

So I think, I think we're just generally better, you know, running the plants, and don't have to rely on twenty-four/seven on all machines to get that last, you know, bit of efficiency. So I think it's gonna continue, but like I said, some of it's already built into, later quarters last year, so it won't look as big as, far as EBIT improvement goes.

Michael Ward (Executive Director of Equities Research)

Okay. Thank you.

Louis Gries (CEO)

Yeah.

Operator (participant)

The next question comes from the line of Emily Smith from Deutsche Bank. Please go ahead.

Emily Smith (Director of General Industries)

Hi, Louis, and Matt, I have a couple of questions in terms of, you mentioned PDG. You weren't sort of sure how it went for the quarter. Just wondering, how you think it is tracking for the, full year? We're obviously in sort of mid or halfway through, the next quarter. Just wondering how you're seeing sort of volumes, so far in the Q2. And just finally, the volume growth that you guys did achieve in the quarter, up 4%, I think, you know, it shows that you outperformed LP, whose volumes were down around 6% in the quarter. Just wondering if you can give us, an update on how you think you're tracking versus LP at the moment.

Louis Gries (CEO)

Yeah. Okay. So, you know, I got my normal quarterly warnings. You know, it's a pretty short snapshot. As far as us and LP, if you look at four-quarter rolling, the last four quarters, we're both up 9% on volume. So, you know, that longer story is a story we've been talking about for a couple of years there at the end of the downturn and beginning of recovery. They grew faster than us. They have a different market index, so it's kind of hard to compare apples to apples. So if you just go to raw numbers, they grew faster than us. And then we kind of pulled even with them, and our plan is to get ahead of them on volume growth.

And over the last quarter, four quarters, we haven't done that. Now, we've done it for one quarter, but big deal, they did it the prior quarter. And even if you put those two quarters together, it's, it just, it doesn't really say we're where we want to be. As far as PDG this year, I think we'll kind of have to get to where we've been the last two years as the best case. So as you know, we're trying to kick it up two points. So I definitely think we're gonna lag with that expectation that we'd kick up PDG at least a couple points of where we've been running.

I think this year we might come in a little bit lighter than we have the last two years, but I think that's more kind of normal variance than it is market share loss, 'cause as you pointed out, LP's, you know, not outrunning us anymore. And vinyl did better this quarter, but again, it's only a quarterly number. I think the four quarter number on vinyl also points to, you know, their long-term trend, and I expect them. That's where I expect them to be. So I've already kind of let you know, we'll be. We expect to be up on our volume comp in the second quarter, higher than the 4% we realized in the first, but it's not gonna be a lot higher.

So, we're gonna come out, you know, like I said, we grew volume 9% over the last four quarters. We're gonna come out of these first two quarters, and we're gonna be well short of 9% on a volume comp.

Emily Smith (Director of General Industries)

Okay, and sorry, so where do you think the PDG will end up? What was it? Was it 8% last year, or 6%?

Louis Gries (CEO)

I mean, we've been operating in that six to eight range the last couple of years. You know, what I tried to say is, if I get to six, I think that'd be okay, looking at it right now. It might be a hair below six. I don't expect it to be at eight.

Emily Smith (Director of General Industries)

Okay, great. And so, does that sort of mean in the quarter, you sort of feel that the market growth was negative?

Louis Gries (CEO)

Yeah, I think I made that comment. If you wanna look at just a quarter, I think you'd have to say the market index was higher than 4%, but not much. I think new construction numbers aren't quite in, so, but I still feel like, you know, R&R is up around 4%, and that's a good part of our business. We're up 4%, so-

Emily Smith (Director of General Industries)

Yeah.

Louis Gries (CEO)

You know, if you know, new construction actually is less than four, then we got a very small gain. I don't expect new construction's up much more than the four. So I just think it's, you know. I just think we track with market index. LP for the quarter tracked below their market index. Vinyl tracked below their market index. Brick's not taking share, stone's not taking share, stucco's not taking share. So I just think it's a quarterly deal rather than, you know, anything you can point to as something that's happening in the market.

Emily Smith (Director of General Industries)

Okay, great, and just finally, do you think that there was some pull forward in the Q4 of 2015?

Louis Gries (CEO)

Oh, yeah. Yeah. There was some pull forward, and, you know, there's a bit of textures playing in our numbers. But again, at the end of the day, none of that stuff matters. It's a market share game we're trying to play. And even if you do all your adjustments and explain everything away, at the end of the day, we're still coming up short on where we want to on the market share gain, and that's our main job.

Emily Smith (Director of General Industries)

Okay, great. Thank you.

Operator (participant)

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

Simon Thackray (Senior Industrial Analyst)

Thanks very much. Morning, morning, guys. Just following on from Emily. I just want to understand your comment, Lou, on R&R, saying that that's growing, you know, reasonably well, around about 4%. Just given the trajectory for US housing is pretty moderate for new construction, can you just remind us of where you sit now in terms of volume mix between R&R and new construction? And given the trajectory of new housing versus R&R, how you expect that mix to change, if at all, over the next 12, 24 months?

Louis Gries (CEO)

Yeah, it doesn't change much. Obviously, we have a market share in each, in each segment, and then we have a growth rate in each segment. Even if our growth rate in the R&R segment is faster, it's not fast enough to change it, you know, in a two-year period. So, yeah, and what do we have as our current split on, Matt, on R&R and new construction?

Matt Marsh (CFO)

Sixty/forty.

Louis Gries (CEO)

Sixty/forty is kinda where we think we are on R&R and new construction. And if you ask me, what do you like your programs better in R&R, or you like your programs better in new construction? I would say in the market share growth areas, I like our programs better in R&R. So if you ask me which one I like to see the guys fix up the most, I'd say new construction. But again, it's not gonna dramatically change the mix. I mean, we're just shooting for market share growth in two separate segments, and they're kind of independent of each other. Now, they come together when you do a market task index and your growth, you know, against that index, that's where they come together.

Simon Thackray (Senior Industrial Analyst)

Sure. So just clarifying, was that 60% R&R, 40% new construction?

Louis Gries (CEO)

That's correct.

Simon Thackray (Senior Industrial Analyst)

Okay, cool. Then just another one. Just thinking through, Matt, if we can, the tax rate expectations for the balance of 2016, and then going forward, in expectation of absorbing any of the losses, what we think about 2017. Obviously, the US, as it ramps up, is lifting the tax rate. What should we be looking at for the full year for 2016? And then maybe give us a bit of a feel with those tax losses when we start what the tax rate might look like next year.

Matt Marsh (CFO)

Yeah. So for the year, obviously, we've estimated an effective tax rate of 26.5%. So, you know, with the way adjusted tax rate works, that is our estimate for the year, especially for the first quarter. So that's what we would expect. To the extent that total year estimate changes in subsequent quarters, you would, you know, you may see that swing from quarter to quarter. But our best estimate at the moment is that for the year, the ETR should be, the adjusted ETR should be 26.5%. You know, it feels like about every other quarter, I get the question on trying to forecast out ETR, and we obviously don't provide forward guidance on it.

And I actually don't spend a whole lot of time, you know, trying to forecast it out multiple years out on ETR. So, you know, I don't have a specific number that I would wanna guide you to for next year. I'd say for this year, the 26.5% is our best estimate. It is up, obviously, over the last year and up over the last two years. You know, that shouldn't be of too great surprise, given that the U.S. is a high tax rate jurisdiction, and a greater percentage of the total group profits are coming from that tax jurisdiction. So, it's really just the geographic mix of earnings that's causing the rate to rise.

Simon Thackray (Senior Industrial Analyst)

No, that's fine. I mean, would it be easier for me to ask, you know, how many underutilized or unutilized tax losses are still left in Europe and Australia?

Matt Marsh (CFO)

Yeah, I mean, that's not something that we would disclose.

Simon Thackray (Senior Industrial Analyst)

Okay, that's fine. We'll move on. Just in terms of whether it's possible or not in the quarter, to get a bit of a waterfall on the dollar impact of the input cost in terms of pulp and utility?

Matt Marsh (CFO)

Yeah. So I think in the MD&A, you know, in the U.S., we had about a 440 basis point increase in gross margin rates. A little over a point of that is related to price, and another three points of that's related to production costs. I think the best way to think about the production cost is about 25% of that benefit is coming from input costs, and another 75% is our performance with the plants running better. As I indicated on the input cost chart, you know, we're seeing at the moment favorable market conditions on pulp and utilities and unfavorable dynamics on cement. Obviously, those can change from quarter to quarter.

So, you know, I think it's a positive that about the, obviously, the vast majority of that performance is coming from the plants.

Simon Thackray (Senior Industrial Analyst)

Terrific. That's very helpful. And then one really quick one, Louis, if I may. Texas had record wet weather in May and then into June, so did Southern Oklahoma. Historically, you've said your share in those markets has been about 29%, from recollection. Was there any impact in the quarter from wet weather at all that was material to volume?

Louis Gries (CEO)

I mean, not only our quarter, but right through year to date, as we sit here today, our Texas volumes are down. So yeah, I mean, our volume growth is being pulled down. I don't think it's 29%. We'd have to check that number, but our volume growth is being pulled down because a relatively large chunk of the business is running negative, and it's not running negative due to our market share, it's running negative due to market opportunity.

Simon Thackray (Senior Industrial Analyst)

Right. But there's no number you can put around it in terms of the impact for the-

Louis Gries (CEO)

Not that we're gonna talk about. I don't... You know, again, we play a market share growth game, and, you know, there's no problem with our market share in Texas, so, it's not of huge concern to us if it rains or if the oil price knocks off some demand for housing. It's just something, you know, through.

Simon Thackray (Senior Industrial Analyst)

I'm just trying to understand it in the context of the volume number that you delivered year on year, that's all.

Louis Gries (CEO)

Yeah. What I want you to hear on volume is I don't like our traction on market share programs, so.

Simon Thackray (Senior Industrial Analyst)

Got you.

Louis Gries (CEO)

That's what I want you to hear on volume.

Simon Thackray (Senior Industrial Analyst)

Loud and clear. Thanks. Thanks, Louis. Thanks, Matt.

Operator (participant)

Next question comes from the line of Jason Steed from JPMorgan. Please go ahead.

Jason Steed (Head of Equity Research)

Morning, Louis, morning, Matt, or I guess good evening to you. Just wanted to come back on, just on the PDG point, and I guess, Louis, you just mentioned that you're not happy with where you've seen your market traction. At the moment, I guess in the last three months from, you know, when you reported in May, quite a significant scale back in that PDG from that 10%-11% territory that you were talking about then. Just curious as to exactly what you think is not gaining traction. Is it a case of making more investment, as you referred to in your comments, or is it when the market is, I guess, soggy and tepid like this, that there's a more difficult market to gain traction?

Just trying to understand, because I guess it is a big shift versus three months ago.

Louis Gries (CEO)

Yeah, I guess that's a good point. I did have a different view three months ago. I knew what things we were bumping up funding on. I knew what things we had, you know, management in place on. I guess all you could say is I underestimated the lifetime between what we do and what happens, you know, as far as in the movement in the market. Now, you framed your question exactly right. PDG doesn't mean you're going backwards. When your PDG drops, it doesn't mean you're going backward. It just means that you're not doing enough to get the next piece and the next piece and the next piece. That's kind of where we're at. I don't think we're going backwards.

I just think, you know, some of the emphasis or some of the programs you run in a market, you get really good gains, and then you kind of get near the end of that, kind of little S-curve, and then you gotta keep putting more S curves in front of that if you want, PDG to stay at the same level, and if you want to accelerate, obviously, you gotta get more in front of it. So that's where we're at. Believe me, I do not think this is a major problem in the business. I think this is a temporary situation, just like it was in, you know, thirteen and, and...

Summer fourteen, where we got, you know, our pricing, tactical pricing off, and we got our even margins to where we thought we were gonna come in higher on even margins. We didn't come in on any margin. I think it's just normal stuff that happens in an organization where you try and juggle five balls, and every once in a while, one of them's, you know, not being as well managed as it, you know, it theoretically could be based on our forecast. So, that's where we're at. I don't have much. I don't have a lot of concern. I think we certainly, as an organization, kind of know how to think about these things and know how to execute game plans, but right now, we're lagging behind where we thought we would.

Jason Steed (Head of Equity Research)

Okay. Okay. No, I understand that and sounds as though those sort of expectations are to recover from that lagging position. Just one further question.

Louis Gries (CEO)

I don't want you, I don't want you to be too easy on us. You don't, you don't get to 35% market share by growing a 4% comp.

Jason Steed (Head of Equity Research)

Yeah.

Louis Gries (CEO)

So we're not in the business for 4% volume comp. So

Jason Steed (Head of Equity Research)

Okay.

Louis Gries (CEO)

It's a quarterly result. We won't have a four for the year, but we won't have the kind of volume comp for the year that lines up well with thirty-five, ninety, so we have some work to do.

Jason Steed (Head of Equity Research)

Understood. And I guess that sort of ties in with your guidance, that you do expect, obviously, not to be where you were in terms of your guidance three months ago, but certainly a sort of an improving trajectory, I presume, on the PDG front.

Louis Gries (CEO)

Yep.

Jason Steed (Head of Equity Research)

Yep. Just one final-

Louis Gries (CEO)

That's the emphasis, and right now we're not delivering on that, but that is our emphasis. That's still our commitment.

Jason Steed (Head of Equity Research)

Okay. Okay, great. Thank you. One final question. Yeah, in circumstances like this in prior years, where volumes fallen short of where your expectations for the market are, it's proven to be difficult from a manufacturing perspective, and you've always seen pretty sharp movements in your manufacturing cost in light of getting ahead of the market, as you've described it in the past. Is it the case that you're now just fine-tuned sufficiently, and even when you fall short of market expectations, we're just not gonna see the kind of variance that we have in the past? Is that the reason why there's no drop-off?

Louis Gries (CEO)

Yeah, of course, anyone who runs a plant, I used to run plants, you like volume. You know, you can do more with volume than, you know, you can do with less volume. But yeah, I think, I think we've just matured our manufacturing model and approach to where, you know, the guys that run these facilities know that, you know, volume's gonna vary, and it's their job to deliver efficiencies at a given volume. So, for instance, when we start up Plant City four, there'll be several machines in our system that lose volume 'cause we started up that machine.

All those plant managers know that it's their job, not to say, "Hey, you know, I got higher costs 'cause I got, you know, lower demand or lower utilization." It's their job to say, "Okay, my new utilization is X, and here's how I run my plant to optimize my performance around X." So yeah, that's what I was trying to allude to earlier. I think in the past, we did live a lot on 24/7, delivering that last little bit of manufacturing, and clearly now we have a lot of machines that are used to not running 24/7, so that's not kind of like the key to getting the extra. We're getting the extra without, you know, the super high demand and super high utilizations of a machine.

Jason Steed (Head of Equity Research)

Great. Thanks, Lou.

Louis Gries (CEO)

Yeah.

Operator (participant)

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

Matthew McNee (Equities Analyst and Managing Director)

Thanks, Louis. Look, most of my questions have been answered, but just a couple of small ones. Can you give us a feel for Canada, what percentage of volumes, that is for the segment? Just to give an idea of the materiality.

Matt Marsh (CFO)

Yeah. Canada's, you know, between 10% and 15%.

Matthew McNee (Equities Analyst and Managing Director)

Of volumes, not revenue?

Matt Marsh (CFO)

Yeah, of volumes.

Matthew McNee (Equities Analyst and Managing Director)

Yeah.

Louis Gries (CEO)

And higher revenue-

Matt Marsh (CFO)

And, uh-

Louis Gries (CEO)

It's almost all ColorPlus up there.

Matt Marsh (CFO)

Yeah.

Matthew McNee (Equities Analyst and Managing Director)

Okay, and also-

Louis Gries (CEO)

I shouldn't say that. No, it's almost all ColorPlus when you get out of BC, and then BC has a decent ColorPlus position.

Matthew McNee (Equities Analyst and Managing Director)

Yeah. And just to clarify, Louis, you, you were saying that for the full year, you expect the average price to get closer back to that 3% up. Is that right?

Louis Gries (CEO)

I do expect that.

Matthew McNee (Equities Analyst and Managing Director)

Yeah.

Louis Gries (CEO)

Like I say, now. Yeah, I do expect that, but I did—no one's jumped on my comment about interiors yet, 'cause part of our mix quote problem in the first quarter-

Matthew McNee (Equities Analyst and Managing Director)

Yeah

Louis Gries (CEO)

... was very good performance in interiors. So if we, if we keep getting the type of growth rates we had in interiors, that will dampen our price, but it'll be a good story rather than a bad story.

Matthew McNee (Equities Analyst and Managing Director)

Mm.

Louis Gries (CEO)

It'll dampen our average price. Yeah.

Matthew McNee (Equities Analyst and Managing Director)

Yeah.

Matt Marsh (CFO)

Matt, I think the thing I'd add on prices, you know, probably the one thing that's a bit out of our control and getting to the three is just FX. So while it should trend up that way, we just keep in mind, we are seeing the 3% from a gross standpoint, so we are seeing the price realization come through based on the actions we took for March.

Matthew McNee (Equities Analyst and Managing Director)

Mm.

Matt Marsh (CFO)

That's dampened a bit by mix-

Matthew McNee (Equities Analyst and Managing Director)

Yeah

Matt Marsh (CFO)

- which is the part that'll really, you know, start to come back, we think, and then, we would expect there to be some stabilization in the Canadian dollar, but.

Matthew McNee (Equities Analyst and Managing Director)

Yeah, so on that basis, you expect to get to the three, but if the Canadian dollar depreciates further, that might put a bit of pressure on that?

Matt Marsh (CFO)

Down the track.

Matthew McNee (Equities Analyst and Managing Director)

Just the other one. Just in... Obviously, Australia-specific margin was down. You already mentioned that obviously, $8 pulp prices were up, which would have pulled on that. But was there any Carole Park drag on the margin, or was Carole Park, you know, the ramp up there not having any impact or any-

Louis Gries (CEO)

No, no, at Carole Park, starting up a big machine like Carole Park is enough to impact a business the size of Australia's results. So we didn't tell you how much the startup cost. It's going well, but it's in our numbers. So yeah, you got a little dampening, but you say they're down 10 basis points. Is that what you're referring to, down?

Matthew McNee (Equities Analyst and Managing Director)

Yeah. Yeah. Yeah.

Louis Gries (CEO)

Okay.

Matthew McNee (Equities Analyst and Managing Director)

But I just wanted to know whether there was a bit of a pull down on the Carole Park ramp up. Louis, the other thing you mentioned is, you know, the margin in the quarter of 26.6% for the US, and this is a question I know you're not going to answer, but I'm gonna have a go. If volumes are up 9%, just have a stab at where that margin could have been. You've already, you know, mentioned that volume is always better, but where could that have been?

Louis Gries (CEO)

I want to answer your question, so I'll tell you it could have been higher.

Matthew McNee (Equities Analyst and Managing Director)

Yeah. And the other thing, just going back to Jason's question about, you know, a fair change from three months ago on where I think you said you were targeting 10% PDG. You may not get there this year, but you're pretty confident you would get to a run rate of 10%. I mean, how much visibility do you see out? I mean, could October be a totally different PDG number, plus or minus 2% or 3% compared to what you think? Or do you have a key bit of visibility on that? I mean, how hard is it to gauge those sort of things?

Louis Gries (CEO)

Yeah, you know, I mean, when you talk about PDG, you can't talk months, and really, I hate to talk quarters.

Matthew McNee (Equities Analyst and Managing Director)

Mm.

Louis Gries (CEO)

So when you get to October, could we have a, you know, good market momentum and have a better volume count in October, even in the similar market we're in? The answer is yes. But when you look back over four quarters, which is kind of the appropriate measurement period for PDG, you know, whatever happens between now and October or November first, even, isn't going to dramatically change the PDG for the, you know, kind of trailing twelve months. So, you know, I'm trying to balance two things here. I don't want you to think we have a PDG problem that we don't think that we think is long term, but I'm also acknowledging, hey, we don't have the market momentum that we want in order to get to a ten PDG, and that's what we're working on.

Matthew McNee (Equities Analyst and Managing Director)

Yeah. No worries. Thanks.

Louis Gries (CEO)

Yeah.

Operator (participant)

Next question comes from the line of Andrew Johnston from CLSA. Please go ahead.

Andrew Johnston (Head of Basic Industrials and Services)

Good evening, guys. Just a couple of questions. Louis, in that question on interiors, so can you give us a number on volume growth in interiors?

Louis Gries (CEO)

No. I mean, what I can give you is kind of just general update. I think about this time last year, we told you we were tracking behind, even though the market index for interiors was ahead. We started working on a deep dive to figure out how much of it's you know the cement board category itself. Is it being you know substituted for, to what degree by mats and membranes? How much of it was the pro channel versus the box channel, where we have the bigger position in the box channel. So we went through all that. We went to a positive growth.

I think I'm going by memory here, but somewhere in, like, November, we went to positive growth, and we felt by about February, we were above the market index, and we continued to pick up from there. So, you know, you got a 4% total volume growth for the U.S. business. Interiors was actually higher than exteriors, so interiors was more than four.

Andrew Johnston (Head of Basic Industrials and Services)

Okay. And I mean, that, that's obviously good news for interiors, but also indicates that the PDG for the exteriors, which is what your target, which is what you really think about on PDG, isn't it, Louis? It's your exterior market.

Louis Gries (CEO)

Yeah, that's our calculation. Interiors is not into our PDG calculation.

Andrew Johnston (Head of Basic Industrials and Services)

Yeah.

Louis Gries (CEO)

It's just exteriors.

Andrew Johnston (Head of Basic Industrials and Services)

Okay, and that... Which implies that exteriors number might actually be a bit softer than that 4% from what we can see-

Louis Gries (CEO)

It is

Andrew Johnston (Head of Basic Industrials and Services)

See there. So

Louis Gries (CEO)

If backers higher than four, by definition-

Andrew Johnston (Head of Basic Industrials and Services)

Yeah

Louis Gries (CEO)

-exteriors.

Andrew Johnston (Head of Basic Industrials and Services)

I have interiors at about 25% of volumes. Is that about the right figure?

Louis Gries (CEO)

Yeah, that's a good estimate.

Andrew Johnston (Head of Basic Industrials and Services)

Okay. And just on marketing and R&D costs, I was sort of expecting those to actually be tracking higher, you know, with the savings coming out of the manufacturing improvements in particular, and obviously lower input costs as well. You'd flagged that we should expect to see higher marketing and R&D costs this year. Has your view changed on that, I suppose, and particularly, has it changed given that the market's now a bit softer than, and your volume is a bit softer than where you're hoping for?

Louis Gries (CEO)

Yeah, I don't think our view has changed at all. Obviously, we've just given you a little bit of guidance. We think we're going to come in above our 25% target for EBIT margin. But we've always had that. So we have the money to spend, but we've always had a second criteria. We gotta be able to spend it well.

Andrew Johnston (Head of Basic Industrials and Services)

Right.

Louis Gries (CEO)

Right now, I think the spend. It well, do we really think if we would have taken that 1.6% EBIT margin, put it in the programs, if we would've ended up a different result this year? The answer is no, we don't. We think we're funding some of these initiatives at a pretty high level, and we just gotta make sure we, you know, get the traction on the spend so we start, you know, kind of getting the market share result that we're looking for.

Having said that, there's increased spending that's being put in the business, not so much on the R&D side, because that's more project driven, but on the market side, there is increased spending that will continue to go into the business.

Andrew Johnston (Head of Basic Industrials and Services)

... Okay. And finally, on PDG, are you being a bit hard on the business from a group perspective? As you say, you're focused on primary demand growth in regions. So as you say, you're not losing share in Texas, it's just that it rained in Texas, and consequently, Texas is a bit weak. But is it possible if that's actually the reason for your primary demand growth? And then is it realistic to be expecting to get strong national primary demand growth when you overweight Texas?

Louis Gries (CEO)

Yeah, no, I mean, obviously, we don't, you know, you only get to look at our national numbers. We look at our regional numbers, and I'd say, you know, there's an opportunity, a gap in almost every region as far as, our market share programs. So Texas has nothing to do with, you know, the Northeast. It has nothing to do with Southwest. It has nothing to do with Southeast. And, we're not where we wanna be on PDG trend lines, you know, pretty much in most of our exterior regions. Again, it's, you know, again, you gotta remember, PDG is about taking someone else's market share. So it's not, when your PDG drops, that doesn't mean you've lost market share, just that means you're taking less of someone else's market share. So that's why I call it an opportunity gap.

If we were actually negative PDG in any of the regions, that means you're losing market share. That's more of a performance gap in my mind. So it's an opportunity.

Andrew Johnston (Head of Basic Industrials and Services)

Yeah, sure.

Louis Gries (CEO)

Yeah.

Andrew Johnston (Head of Basic Industrials and Services)

Okay. No, that's great, because, you know, if Texas is growing slowly, you could still actually be taking share in every particular region, but on a national basis, your PDG could still be, could still look quite soft. Is that the right way to think about it?

Louis Gries (CEO)

That is the right way to think about it.

Andrew Johnston (Head of Basic Industrials and Services)

Okay, great. Thanks very much.

Operator (participant)

The next question comes from the line of Peter Steyn from Macquarie. Please go ahead.

Peter Steyn (Equity Research Analyst)

Thanks first, Matt. Sorry to labor the point. I was curious just to come back to Simon's question and to some extent what has just gone before around Texas. Curious if you could just sort of split out your thoughts around the fundamentals of this of that market in the context of of the oil price and what we're seeing in in Houston particularly versus where the impacts I think be useful just to understand some of those fundamentals and how you saw that in the quarter.

Matt Marsh (CFO)

Yeah, we're, you know, I think we're trying to look at the same information that you are and that the rest of the market is.

Peter Steyn (Equity Research Analyst)

Sure.

Matt Marsh (CFO)

So, you know, a few things that we try to look at. We've been looking at payrolls, and we've been looking at just employment in the state. You know, early in the calendar year, there was obviously some effect with the oil companies announcing layoffs, particularly in the southern part of Texas, but those seem to have really subsided, and we haven't seen major changes in payrolls, and unemployment has kind of stabilized and remained actually fairly healthy, so we haven't seen really significant employment trend changes in Texas the way that we might have thought, given how much lower oil is and the dependency in that state on oil.

You know, another thing that we watch is how other manufacturers and builders are experiencing their volumes and permits and new homes that they dig in the state, and I think for this reporting period, you know, I think that data has been pretty mixed as well, so you saw some builders and some manufacturers talk about Texas as a drag. Others talked about it as a strength, and others were either neutral or quiet about it, so you know, our view is Texas is obviously a significant portion of our overall mix in the US.

You know, it's not trending up, but what we're trying to understand is what the new construction market did, and a lot of those indexes still aren't out yet. I think, you know, we use Dodge, and that indicator won't come out until the end of the month. Until we get a better sense of what happened in the new construction market, it's a bit hard to say how much did some of the drivers that you're hearing other manufacturers and builders talk about, like weather, really play into effect? And if so, you should see that in the market data. And if not, you know, you might see a different trend in the market data.

So we're trying to withhold drawing a quick judgment until we get some of the data. And I'd say it's been a mixed bag of indicators at best with what's going on in Texas.

Peter Steyn (Equity Research Analyst)

Great. Thanks, Matt. And then, perhaps just, to ask a question around the new sales segment and some of your developments with the builders, the major builders, how that's going, if you could comment on it?

Louis Gries (CEO)

Yeah, I think, as far as the national builders, I'd have to say, that's an area that we're pretty happy with our progress on. So a lot of national builders. Obviously, you guys know, they're just mostly the most price-conscious builders 'cause they got all the volume, they got professional purchasing organizations, this and that. But we've had some pretty good success. We still have agreements with the top twenty. I think we added the twentieth one sometime in the last three or four months. Plus, we're also getting more inclusive agreements, some of them including trim and some of them including backer. So, our progress with big builders is good. So no issues there.

That's not one of the areas that, you know, we really have to find that next level with. We're pretty comfortable where we're at with big builders, and I think they're pretty comfortable where they're at with our products. So I think that's a pretty good situation for us.

Peter Steyn (Equity Research Analyst)

Okay. Great. Thanks very much.

Operator (participant)

The next question comes from the line of John Hein from Merrill Lynch. Please go ahead.

John Hein (Analyst)

Good morning, Louis, Matt. You said earlier, you wouldn't get that 30% target market share on 4% growth. How are you gonna need to adjust the business to get that volume growth? And just keeping in mind that the FY 2017 margin guidance that you gave, which does that imply some price reductions to get that market share growth, given the likely benefit from the manufacturing investment?

Louis Gries (CEO)

Yeah, I think that's. I'm glad you bring that up, because it's not gonna be price. You know, we've talked before, when you're taking market share, it's normally not a price game, okay? Because we cost about twice as much installed as vinyl on a new construction and about 50% more on a R&R. So we're already at a big gap. So, any price adjustments, whether it be on our end or their end, doesn't really make much difference, 'cause when you're done with those price adjustments, it's still a big gap. So you obviously got to sell the value of a Hardie house over a vinyl house. And, in order to do that, you got. It's way more market development than it is sales development.

You got to be in front of the right customers at the right time, the right influence on the rest of the market. So no, it's not price. Remember, on our fiscal year 2017, we haven't really given you guidance that our EBIT margins are coming down. We've just told you we're not willing to go out and say, hey, we think our EBIT margins are gonna be above range anything more than this year, and this is pretty unique. I think this is the first time we've done that. I think in the past, we've always said, you know, we're either gonna be in range or, you know, we're gonna struggle to stretch up to the range.

So I don't want you to, I don't want you to read that as we're peeling off some money for seventeen, and we're definitely gonna use it. You know, it's kind of like I said, we'll be able to use money, we'll have some money to use, and if we can use it well, we'll use it. And if input costs stay low and manufacturing performance is good again, and you know, then you can fall above the range. You know, and I do expect manufacturing performance to be good again. So I don't want you, I don't want you overreading you know what we're gonna do. There's no real switches being flipped.

It's just that reality that, hey, we've done a good job on the financial efficiency side of our business model, and at the same time, we're starting to lag on the market share growth side of our business model. So, to me, market share, there's some product development involved, obviously, and maybe you could even go all the way back and say, hey, there's some basic R&D that needs to happen in the next three or four years as well. But really, on the market side, it's game plan design, game plan execution. We'll have some new products come along, but there'll not be any silver bullet, new product that's gonna change the PDG. It's game plan design, game plan execution, and we just need to put more of our management time into those two areas.

I think, you know, the GMs that are running the business probably are in a position now that the manufacturing thing's got about 12 months of momentum behind it now, and they can move away from that a little bit and spend even more time on the market side. They already spend a lot of time on the market side, but I think they can even spend more time on the market side.

John Hein (Analyst)

Thank you. And just finally, you softened your, I guess, consensus expectations by about 4% this morning. In your mind, can you advise what the key risks- what key risks have you built into those estimates on the upside and the downside, aside from, I guess, US housing volumes? Or is it just that, I think, your consensus was getting a little bit excited at that, at the top end?

Louis Gries (CEO)

So we don't comment on, you know, ranges until August of each year, so we haven't changed anything. Our expectations for the year are a little bit down on volume from where we started and a little bit higher on margin from where we started. But the actual, you know, number you're talking about for the group is we haven't changed our view. This is a range we would have been comfortable with, you know, three months ago, but again, we don't comment externally until August on ranges. So the external range was higher than our internal range, so that's kind of what we're trying to align.

John Hein (Analyst)

Okay, great. Thanks very much, Louis.

Operator (participant)

As a reminder, ladies and gentlemen, to ask a question, please press star one on your telephone keypad. And your next question comes from the line of Emily Smith from Deutsche Bank. Please go ahead.

Emily Smith (Director of General Industries)

Sorry, just a follow-up question for me on CapEx. Just wondering if your guidance for CapEx for the full year has changed?

Matt Marsh (CFO)

No, no change on that, Emily. We, you know, we'd still expect for the year to be somewhere in the $75 million-$100 million range, kind of a normal maintenance CapEx level. Certainly a reduced level from the heightened levels last year and the year before. As you know, we're back into kind of a normal maintenance cycle for the year.

Emily Smith (Director of General Industries)

Okay, great. And, I might just ask another question on LP, if I may. Do you, Louis, do you think that your programs that you currently have in place are going to put you in a good position versus LP, and there's just a lag before it actually, you know, before it impacts your volumes, you mentioned the twelve-month rolling? Or do you think that there's more work to do to get there, and do you have plans in, those sorts of plans in place?

Louis Gries (CEO)

... Yeah, certainly there's more work to do, but a lot of our, you know, a lot of our LP game planning is, you know, being built over time. So it's been added to in the last year versus what it was the year before, and I would expect that would continue. You know, I think most people that use LP know what to expect from a wood-based product in the exterior of a home. So, you know, I just think we just need to have that value right for the homeowner that's willing to trade, you know, one thing for a lower upfront cost.

Now, as I said in an earlier comment, you really can't get there by changing your price because, you know, you're still gonna have a higher upfront cost, so that's always gonna be attraction to a buyer that's not maybe being as logical as far as, you know, he's getting a discount, but what's he given up to get the discount? And I think we've talked about this before, but I think we, being a company that was so focused on vinyl as our market share opportunity, we forgot to, you know, continuing to message the market about the trade-offs you're making when you're going with a wood-based product. So, you know, it kind of goes back to what I said earlier about market programs, game plan design, game plan execution.

I'd say on game plan design, you know, if I had to rate it, you know, one out of ten, where I think we're at, you know, we're probably somewhere between six and eight. I like our game plan. And then execution, I think, is the same thing. Now, there's more enhancements to the program, more markets we can run programs in, more resources we can put into certain markets, so that would go, you know, more into the execution side of it. Now, you say, "Well, why haven't you done that yet?" And the only answer is, you know, we wanna do it well. So we kinda phase one of LP, we wanted to prove out the 100% Hardie, 100% Hardie value in the market. I think we've proved that out.

So now we're like, okay, how do you, how do you tweak that program and bring it to more markets? And how do you resource to do that well, and all the rest of it. So, this isn't, you know, this isn't a big... LP is not consuming us right now. On new stuff, it's really, we kinda like our reset, you know, to position ourselves against both the vinyl and a wood me-too product. So we kinda like the work that's been done there, and we gotta execute well and let it play out, and, you know, but I'm sure there'll be enhancements to our programs, and there'll be programs run more broadly as we move forward and feel more confident in their effectiveness.

Emily Smith (Director of General Industries)

Okay, thank you.

Operator (participant)

The next question comes from the line of George Clapham from Arnhem Investment Management. Please go ahead.

George Clapham (Head of Equities and Managing Partner)

Louis, I was just wanting to get a better feel for the margins in the Australian Asia Pacific business. I mean, obviously, they're below that of the US, but you've made considerable investment there. What's the potential to expand margins?

Louis Gries (CEO)

Well, in local Australian dollars, the Asia Pac business, EBIT margin is running about where the US is.

Matt Marsh (CFO)

Yeah, I mean, it's not. It's definitely not dilutive.

Louis Gries (CEO)

Yeah.

Matt Marsh (CFO)

So it runs about the same.

Louis Gries (CEO)

It runs about the same, but, you know, Carole Park capacity should help from two standpoints. One, it gives us the Scyon production, lower freight rate on Scyon production, and then you should get your machine scale unit cost advantage as well. But yeah, I mean, George, I'm the same in the U.S. as I am Australia now. Don't tell me what you can do with your EBIT margin. Tell me what you can do with growth, 'cause we got a lot of capacity down there now, and the best way to create shareholder value is sell more of what we do at the kind of same or close to same margin, you know, margin per unit, contribution margin per unit.

So I really don't think they have any kind of an EBIT margin issue in the US. I mean, in Australia, what I do think they have is an opportunity with a lot more capacity now to you know really grow the business quicker than we have over the last say five six years, which hasn't been bad. That's why we built a new capacity, is 'cause we have grown the business against the market index. Now you guys know, your market's been on fire down there, so part of it is the market being pretty hot. But I think Australia's way forward in the next five years is to grow market share against alternative products.

George Clapham (Head of Equities and Managing Partner)

Okay. And just a question on the US R&R market. Where do you sort of see that growing? Is it, I mean, how do we do?

Louis Gries (CEO)

Yeah, I think Hanley Wood is kind of pretty confident in a 4% forecast, and I think we don't see anything that makes us doubt that, so I'd say we think it's running around 4%, based on Hanley Wood and based on what we see from our customer base.

George Clapham (Head of Equities and Managing Partner)

Okay. Thanks very much.

Louis Gries (CEO)

Yeah.

Operator (participant)

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

Andrew Peros (Industrials Analyst)

Thank you, Matt. Just a quick one on the buyback. You're obviously more active in terms of buying back stock over the past quarter relative to last year. But I guess even at the current run rate, you probably won't even get close to buying back 4%-5% of the indicated buyback. Just wondering what your thoughts are there in terms of whether you anticipate in terms of stepping up the process going forward, or were there fewer opportunities to buy back stock over the past quarter, which kind of led you to only buying back a few shares? Yeah, just if you could talk us through that, that would be great.

Matt Marsh (CFO)

Yeah. I mean, I'd like to think that subsequent to the quarter, we bought more than just a few shares back. You know, we were in the market for, you know, about $22 million U.S., or almost AUD 30 million. So you know, it's not an insignificant amount. I think I've said in the past that we're a bit restricted in the summer months because of the various blackout and governance windows and the way in which the buybacks get administered kind of on a daily basis. All that being said, we're kind of right where I'd want us to be, you know, at this point in the year.

I think you'll know that from the way we do ordinary dividends, for -- as an example, you know, we tend to wanna see how the year is gonna play out. And so the activity that we do in the beginning of the year is always less than the activity that we do in the second half of the year. And, you know, you should expect that the way that we do special returns, like share buybacks, follows maybe not an exact pattern, but at least a similar pattern. Obviously, with the main subject is, you know, having favorable market conditions to buy at a price that works within our financial framework. So I'm pretty happy with where we are and how we've executed.

It's a more significant amount than we've done in the share buyback activity, certainly than several quarters. And it's kind of heading down the track that you could expect it to. Just one clarification, we did announce that the buyback would be up to 5%, so it wasn't a, you know, it wasn't an indicator that we'd necessarily go all the way to five. But I feel good about how we executed in the quarter on that, and I feel like we're more, we're on track.

Andrew Peros (Industrials Analyst)

Okay, thanks.

Operator (participant)

Your next question comes from the line of John Hein from Merrill Lynch. Please go ahead.

John Hein (Analyst)

So one more from me. Just circling back to Louisiana-Pacific. You obviously achieved better volume growth than them this quarter. Is this due to some traction in the East following your expansion of the sales force there, or is this gonna be a little bit more long-dated? Can you provide a bit of an update for us?

Louis Gries (CEO)

Yeah, I don't think you should care about the quarterly number. So, we obviously follow LP, and we can't figure out their quarters. So the number you should remember, the last four quarters, they were up nine, we were up nine. And, you know, I think that's the score sheet. So, we're not losing, we're not winning, but, we certainly don't like... you know, we don't like breaking even either. So we'll see how it plays out. Obviously, the negative six they counted this year wasn't bad news at Hardie, but it's certainly not anything to celebrate. It's one quarter.

John Hein (Analyst)

Sure. Thank you.

Matt Marsh (CFO)

The operator, Eileen, right?

Louis Gries (CEO)

What's that?

Matt Marsh (CFO)

Eileen, is she up there?

Louis Gries (CEO)

Yeah, Eileen?

Operator (participant)

Yes, sir.

Matt Marsh (CFO)

Eileen, why don't we try one or two more questions?

Operator (participant)

Okay. Yeah, and so your next question comes from the line of Matthew McNee from Goldman Sachs. Please go ahead.

Matthew McNee (Equities Analyst and Managing Director)

Just, just a very small housekeeping one. Just on the pipes business, what sort of contribution was that making? And, you know, going forward, what should we drop out?

Matt Marsh (CFO)

It's a rounding error, Matt, within your models. It's not even an amount that we've disclosed in the past. It won't move your volume, your sales-

Matthew McNee (Equities Analyst and Managing Director)

Even-

Matt Marsh (CFO)

or your EBIT numbers one way or the other. Yeah.

Matthew McNee (Equities Analyst and Managing Director)

No worries. All right, thanks for this.

Matt Marsh (CFO)

It was, you know, less than, you know, a single digit kind of contribution to EBIT.

Matthew McNee (Equities Analyst and Managing Director)

Yep. No worries. Thanks.

Matt Marsh (CFO)

Maybe one more?

Operator (participant)

The next question comes from the line of Greg Brown from News Corp. Please go ahead.

Greg Brown (Senior Journalist)

Hi, guys. Just a question on. You mentioned, you know, obviously, the Asia Pacific business is doing well because the Australian housing market is doing very well. There's been some talks, particularly one of Australia's biggest developers in their results yesterday, have said the housing market in Sydney has peaked, and there's been a number of people come out and said that this week. I mean, do you see that affecting the growth of the business in Australia?

Matt Marsh (CFO)

The market in Australia has been, you know, very good, obviously, for the last several years, and it's been very hot. A lot of the growth has come from high density and, you know, multifamily type as well as single-family residential. And so we don't obviously, our market index is a bit different, just given that we're more weighted towards low rise as well as weighted towards single family. So we don't experience the same kind of market index as the headline numbers do. You know, I think the other factor is a little bit of regional mix and where we're stronger in certain states versus other states. But, you know, we see from the first quarter, you know, a good market.

For us, it's a similar market index to what we experienced last year, and last year we felt good that we grew above our market index. We feel like we're on the same track and trajectory, both within the quarter and for this year, so we'd expect Australia to grow above market for the year, and we felt like it grew above market for this year, and that market index, you know, for the quarter and for this year is pretty similar to where it was last year for us.

Greg Brown (Senior Journalist)

Okay, so where is your regional ratings? Like, where are you most rated to?

Matt Marsh (CFO)

Primarily in Queensland and New South Wales is the primary market.

Greg Brown (Senior Journalist)

Okay. And I mean, just going on that, obviously, the banks are, you know, the regulators are really looking at that sector, and a lot of people are saying the reduction in the Chinese one could have an effect on new homes as well, the amount of investment. I mean, does that not give you a bit of pause for concern, I suppose?

Matt Marsh (CFO)

No, 'cause we don't. You know, we don't spend a lot of time reacting to kinda week to week or month to month macroeconomic news. You know, we-

Greg Brown (Senior Journalist)

Mm.

Matt Marsh (CFO)

We tend to look at the data points over a longer period of time. You know, similar to the US, our game plan in Australia is about market share gain and increasing our market penetration with existing products and new products. You know, we think Australia is a good market. We think our position in Australia is very strong.

Greg Brown (Senior Journalist)

Mm.

Matt Marsh (CFO)

We think we've got an opportunity to continue to improve that position, and, you know, we wouldn't react to kind of a short-term indicator of what the market may or may not do.

Greg Brown (Senior Journalist)

Sure. And if you have any movement in moving into the higher density space that you flagged last quarter?

Matt Marsh (CFO)

No. I mean, I'd say our mix of addressable market is pretty similar within the quarter, as it has been historically.

Greg Brown (Senior Journalist)

Sure. And just one more question. I mean, there's been a bit of... You've mentioned a bit about the impact in currency of, you know, specific parts of the business. I was hoping for just a bit of a broad outline of, you know, with the Fed expected to raise rates and the Aussie to go down to compared to the US. I mean, what sort of impact do you see the currency have on the business at the moment and sort of for the rest of the financial year?

Matt Marsh (CFO)

In the quarter, it obviously had an effect, and you can see that on, you know, the way the Asia Pacific results were translated into U.S. dollars. You know, when you've got an Australian dollar that's weakening to the extent that it has, it's obviously gonna have an impact, just given the percentage of our business that comes from Asia Pacific and from Australia. You know, but that being said, we don't really think of foreign exchange as a strategic component to the company, so we don't spend that much time thinking about our business strategy with how it's gonna get affected from foreign exchange. We think of that as just normal variation. You know, it is down. We don't spend much time, you know, on the speculative statements at all.

You know, I think we've heard everything from the Australian dollar is gonna dip into the sixties all the way-

Greg Brown (Senior Journalist)

Mm.

Matt Marsh (CFO)

and, you know, as late as twelve months ago, you know, and I've been hearing for two years that the Federal Reserve is gonna raise rates, and I'm sure at some point they will, and at some point, the prognosticators will be right. But, you know, none of those things are things that we can affect. None of those things are part of our core strategy. We think of those as things that are gonna have normal variance on our numbers. And, at least for the first quarter, it had an adverse effect. And how that plays out for the rest of the year, I think is, you know, we're as interested and eager to see how it plays out as many of you are.

Greg Brown (Senior Journalist)

Okay, sure. Okay, thanks a lot.

Matt Marsh (CFO)

Okay.

Louis Gries (CEO)

Okay, appreciate everyone joining the call, and we'll see you next quarter. Thank you. Thanks, everybody.

Operator (participant)

That does conclude our conference for today. Thank you for your participation, ladies and gentlemen. You may all disconnect.