James Hardie Industries plc - Shareholder/Analyst Call

Aug.12.13 | About: James Hardie (JHX)

James Hardie Industries SE (NYSE:JHX)

August 12, 2013 2:30 am ET

Executives

Michael N. Hammes - Chairman of the Board, Member of Audit Committee, Member of Nominating & Governance Committee and Member of Remuneration Committee

Louis Gries - Chief Executive Officer, Executive General Manager of U.S.A, Executive Director and Member of Financial Statements Disclosure Committee

Marcin Firek - Company Secretary, Legal Counsel, Company Secretary of Australia and Member of Financial Statements Disclosure Committee

Michael N. Hammes

Hello, my name is Mike Hammes. I'm Chairman of the Board of James Hardie plc. I'd like to welcome you all to the company's 2013 Annual General Meeting. As the appointed time has arrived and the necessary quorum for the meeting is present, I declare this meeting open.

I'd like to start by introducing the members of the Board and management present here in Dublin. Seated on the stage from your left are the directors, James Osborne; Brian Andersen; Donald McGauchie, our Deputy Chairman; Russell Chenu, our outgoing Chief Financial Officer; and to my right, your left, is Louis Gries, our CEO. Moving on, Marcin Ferik is to my left, your right, followed by the Board member, David Harrison, Alison Littley and Rudy Van Der Meer. We're also joined here in Dublin by George Deegan, Mike Schoenfeld and John Faulkner, representatives of the company's external auditors, Ernst & Young, and some of the company's senior U.S. and Ireland-based executives, including our incoming Chief Financial Officer, Matt Marsh and our General Counsel, Joe Blasko.

The meeting will give you the opportunity to express to the Board and management your views on the resolutions which are the subject of this meeting, and through me, ask any questions. We welcome an open discussion, expression of views as long as it's relevant to the business of the meeting and respects the views of others. We will allow all holders to speak and ask questions at the meeting, however, unless you appointed yourself as a proxy for the meeting, you'll not be able to vote on the resolutions at this meeting, and your vote as submitted on your voting instruction form cannot be changed.

The Notice of the Meeting describes how proxy holders who have an open proxy but are unable to attend the meeting can instruct the company regarding their voting directions. We will allow proxy holders to do so until 1 hour after the commencement of the meeting.

As Chairman, I note I have the sole authority to preserve order and regulate the procedure and conduct of the meeting. We will use voting cards for all resolutions. All holders and proxy holders who are eligible to vote have been handed a green voting card when they registered. If you are eligible to vote on the resolutions, you will need to complete your voting card. Voting cards will be collected at the end of the meeting.

A number of documents are available for inspection at the back of the meeting room in Dublin and at our company offices in both Sydney and Dublin. These include the minutes of the previous AGM, annual General Meeting, and a copy of the registers required to be available for inspection under Irish law.

I'd like to begin the meeting by talking to you briefly before handing over the meeting to our Chief Executive Officer, Louis Gries.

In the past year, James Hardie has performed well financially and continues both operationally and financially strong. With the steady recovery in the U.S. housing market now entering its third year and the gradual improvement of market conditions in the Asia-Pacific region, our focus in fiscal year 2013 was in -- was on investing in our business to ensure they are well positioned to take advantage of future market opportunities. Operating earnings for the group were stable relative to fiscal year 2012 in the U.S. We experienced improving demand for our products and are maintaining our category share and growing our market share against other colliding products.

Similarly in Australia, despite the subdued operating environment, we continue to enjoy strong category share, with Scyon product range becoming a larger part of that business. The investment of AUD 89 million in our Carole Park, Brisbane Australia manufacturing facility to expand our Australian fiber cement manufacturing capacity will support the continued growth of Scyon in Australia and ensure the Australian business is well placed to respond to the increasing preference for composite building materials in both residential and commercial construction.

Louis Gries, our Chief Executive Officer, will address the group financial results, the current operating environment and the outlook in greater detail in his presentation.

Now turning our attention to capital management. Our continued solid operating performance and confidence in future market opportunities enabled the Board to declare a first half dividend of USD 0.05, and a second half ordinary dividend of USD 0.13, as well as a special dividend of USD 0.24 per security in May of 2013. The resulting full year dividend of USD 0.42 per security in respect of the fiscal year 2013 totaling approximately USD 185.5 million was equal to the prior full year dividend.

The ordinary dividend announced in May of 2013 represents an early increase in the company's dividend payout ratio which we announced in November of 2012, from between 20% and 30% to between 30% and 50% of net operating profit, excluding, of course, the asbestos adjustments beginning in fiscal year of 2014 onwards. The special dividend represents amounts that were not utilized in the company's share buyback program which expired in May of 2013.

In May this year, we also announced a new share buyback program to acquire up to 5% of the company's issued capital. To the extent we did not undertake share buybacks, the Board may consider future distributions to shareholders during fiscal year 2014 as part of our capital management strategy.

I would like now to briefly discuss the issue of Board renewal.

Donald McGauchie has advised the Board he will not be standing for a further term if he is reelected at today's meeting. For more than 10 years, Donald has made a very significant contribution to the success of this company, particularly in his capacity as Deputy Chairman during the past 6 years. The Board and I have been very fortunate to benefit from his considerable financial and commercial expertise as well as his insight into Australian matters. We are pleased that Donald has agreed to serve a further term so the Board can consider an appropriate Director in due time to take his place.

David Dilger has also advised the Board of his intention to retire at the conclusion of his current term in August of 2013. During the past 4 years, David has served as a member of the Audit and Remuneration committees as well as a director of some of the company's Irish subsidiaries. The company has benefited from his substantial executive and board-level experience, and the Board and I thank him for his valuable contribution.

I would also like, at this time, to acknowledge especially the contribution to the company of Russell Chenu who announced his intention to retire as James Hardie's Chief Financial Officer on June 12 this year. Russell joined James Hardie as Interim CFO in October 2004 and was appointed CFO in February 2005. During his tenure, Russell has intimately involved -- was intimately involved in the resolution of several significant legacy issues facing James Hardie, including establishment of the Amended and Restated Final Funding Agreement, covering the company's asbestos compensation arrangements in Australia, the redomicile of James Hardie from the Netherlands to Ireland, and the resolution of the 1999 Disputed Amended Assessment with the Australian Tax Office.

Russell has also served as James Hardie's managing board -- on managing James Hardie's Managing Board between August of 2005 and June of 2010. Russell's contribution to James Hardie has been frankly immense. There is no doubt that the company is in a significantly stronger position than it was when he joined, both from a financial and organizational capability perspective.

In conclusion, under the leadership of Louis Gries, our CEO, and the management team, the company has delivered yet another set of sound operating results, and the company is strongly positioned to leverage the increased -- its increased capabilities for the medium and long term.

Now I'd like to turn the meeting over to our CEO, Louis Gries, and following his presentation, we'll open the meeting up for questions and answers on the items of business for today's meeting. Louis?

Louis Gries

Thanks, Mike. Okay, we'll do a brief presentation I have in the business. Go to Slide 4, if you could, a short agenda of the items I'll be covering today.

Flip to Slide 5, the strategy. The James Hardie company has once -- we went to the global fibre cement strategy in early 2000. We've been on the same strategy which had been a real benefit to the company, continues to work well. It's about growing the category for fibre cement in the markets that we participate. It's about holding our position as we grow the category. And the way we mainly do that is through product differentiation. So again, a long-standing strategy that continues to work well for the company.

Slide 6 will give an overview of net operating profit for last year and for this quarter we just closed and announced today. The second line more reflects the business. The first line reflects the overall financials and results with all the adjustments that run through balance sheet adjustments for the asbestos liability. But if you look at the second line, fiscal year '13 was pretty flat than fiscal year '12 despite having a better housing market in the U.S. The main drivers for it remaining flat were extra cost that we put into the business in anticipation of a better marketing, getting ready for market growth and weaker pricing than we were expecting. So flat result financially but we accomplished a lot of things as far as getting capacity ready, ramping up programs in the market and just organizational additions that would get -- prepare us for growth which we expect the business cycle to run positive for at least 3, 4, 5 years.

First quarter results were up on last year. Last year's first quarter was actually the best quarter of the year, and this year's first quarter, we were able to exceed those results with a 19% increase in net operating profit.

Slide 7, just to remind you, U.S. business has basically 2 targets. It aims for long-term 35 90 [ph] which is kind of a measure of the market share and scale we're aiming for, and then 20% to 25% EBIT margin is more of the returns we see in the short quarter-to-quarter basis, short-term quarter-to-quarter.

During the downturn, early in the downturn, we were very successful, kind of keeping our results in range. In the last couple of years of the downturn, we fell below the range. You can see this quarter, we've come back up 21.4% was the EBIT margin in the U.S. business and we're anticipating that the full year result would be back in range.

Slide #8 just a quick summary of the Q1 results. Basically, both divisions are running well and the U.S. market is also positive so we expect a good year at our U.S. business. The Australian market is kind of flat to slightly positive but both the Philippines and New Zealand, we have good market conditions there. So just generally, we expect a good year out of the businesses with the markets where they are and the way the businesses are running. We have spent some money in the U.S. getting capacity ready to restart. So Fontana is our major project going on right now. We'll start that in January. We also have work going on at Somerville in South Carolina, and we're planning new capacity both in Texas and Florida. We did purchase the Carole Park site. We have leased that site for several years, but now that we're expanding out the site, we felt more comfortable owning the site so we did close on the purchase of the Carole Park site this quarter.

As far as guidance, the Australian analysts had established the range $164 million to $194 million -- $165 million to $194 million, that we're comfortable with. That's what all the exclusions that normally are excluded from our results. Probably the biggest thing impacting our ability to forecast where we might end up year end is the foreign exchange. So with the Australian dollar depreciating against the U.S. dollar does affect our results a bit. But again, we're comfortable with the guidance that the -- the guidance range that the analysts have developed and probably the biggest variable in there is where the foreign exchange rate between the Australian dollar and the U.S. dollar will end up for the year.

I mentioned earlier housing starts are good especially in the U.S., and if you get the outlook so, I kind of I've already summarized that. We expect to be in the 20% to 25% range in the U.S. business. We expect to have a good market both in new construction and repair and remodel, and we'll be working on capacity and recommissioning capacity during the year.

Asia Pac, again flat in Australia but a good business result. Good market in New Zealand with -- in addition, they had a good business result. And then Philippines, actually the market is pretty good. The business has been kind of flat the last 2, 3 quarters, and we're hoping to see better performance on our Philippines business although it is generating good returns currently.

Now I hand it back to you, Mike.

Michael N. Hammes

Thank you, Louis. Now let's turn to the business of the meeting. The agenda for this meeting was included in the Notice of the Meeting. I'll proceed on that basis, that the agenda is taken as read to the meeting. The mailing with the Notice of the Meeting also included a form you could use to send in your questions. Most of the questions we received related to the business of the meeting, and we have either covered this in Louis' and/or my presentations or we'll do so during the course of the meeting.

For each resolution, I propose to take questions from holders participating in the AGM via teleconference first. I will then ask the Company Secretary, Marcin Firek, to read out any questions submitted via the webcast. I'll take any questions from holders present in Dublin last before moving on to the next resolution.

[Operator Instructions]. If you have dialed into the webcast, please select the questions tab at the top of the presentation screen. Question screen will appear, and you can type your question in that space. Questions will be forwarded on to the Company Secretary who will read out the questions relevant to the business being dealt with. The webcast has multiple screen options which will allow you to view both proceedings in the room as well as the presentations referred to by the speakers. Please address your questions to me so I can direct them to the most appropriate person to answer. If a holder has asked 2 questions on a resolution, I'll give priority to the question from other holders on that resolution, before inviting the original holder to ask any further questions. Again, limited to 2 at a time.

I reminded in the meeting that only holders of James Hardie shares or their nominated proxies are entitled to speak at this meeting. There are 6 resolutions for consideration of this meeting. The Board believes they are all in the best interest of shareholders and recommends you vote in favor of each resolution.

To the teleconference operator please prepare to take questions on resolution #1.

Resolution #1 is to receive and consider the financial statements and reports for year ended 31st of March, 2013. The full text of this and each remaining resolution is set out in the notice of the meeting as well as on the monitors here in the meeting. Before we move on to the discussion, we'll show you the proxy votes submitted for this resolution. Irish law -- on Resolution 1, Irish law requires that the external auditor's report be read at the AGM. I'll proceed on the basis that this report is taken as read at the meeting.

Are there any questions related to the 2013 financial statements or more general questions relating to the business that are not covered by other resolutions the be considered at this meeting?

If there are no questions, I now put Resolution #1 to the vote of the meeting as an ordinary resolution. The aggregate results of the votes on this and on each other resolution will be announced to the ASX following the final tabulation of the results.

Resolution #2. We'll now move to Resolution #2. This resolution is to consider and receive the Remuneration Report for the year ended 31st of March, 2013. The Remuneration Report is set out on pages 28 to 64 of the 2013 Annual Report. We voluntarily produced a remuneration report to give shareholders an opportunity to understand the company's remuneration framework. These are the proxy votes already submitted on this resolution.

Are there any questions or comments about the company's 2013 Remuneration Report? I now put Resolution 2 to the vote of the meeting as an ordinary resolution and we'll now move on to Resolutions 3a and b.

Dave Harrison and Donald McGauchie, who will retire at the 2013 AGM each offered himself for reelection. Each of these resolutions as a separate resolution 3a and 3b. The Board nominating and governance committee has assessed the performance of each of these 2 individuals and believe it is in the interest of the shareholders that each of the individuals continue as a director of the company. The notice of the meeting also includes information about the candidates.

Are there any questions about this resolution? I now put resolutions 3a and 3b to separate votes of the meeting as ordinary resolutions.

Resolution #4. We'll now move to Resolution #4. This resolution asks shareholders to authorize the Board to fix the remuneration of the external auditors for the financial year ending 31st of March 2014. This resolution is required because Irish law requires shareholders to fix or authorize the Board to fix the remuneration of the auditors for the current year at the AGM. These are the proxy votes already submitted on this resolution.

Are there any questions related to Resolution #4? I now put Resolution 4 to a vote of the meeting as an ordinary resolution.

We'll now move to Resolution #5. This resolution asks shareholders to approve the grant of Return On Capital Employed or ROCE Restricted Stock Units to the CEO, Louis Gries. The Notice of the Meeting and our Remuneration Report contains a detailed description or explanation of the recent reviews ROCE RSUs key legal terms and performance hurdles as well as the changes proposed for fiscal year 2014. This year, we are proposing to increase the performance hurdles for the ROCE RSUs in line with expectations of continued recovery in the U.S. housing market. We'll also index those hurdles for changes to our addressable market, otherwise the ROCE RSUs remain largely unchanged. These are the proxy votes already submitted on the resolution.

Are there any questions about Resolution #5? I now put Resolution 5 to a vote of the meeting as a special resolution.

We'll now move to Resolution #6. This resolution asks shareholders to approve the grant of Relative Total Shareholder return or TSR RSUs to the CEO Louis Gries. The Notice of the Meeting and our Remuneration Report contain a detailed explanation of Relative TSR RSUs, their key terms and performance hurdles, as well as the changes proposed for fiscal year 2014. This year, we are proposing to reduce the number of retests for relative TSR RSUs from 4 to 3. We have also changed the payout slope so the vesting will commence at the 40th percentile level. A target payout is reached if the company is -- only if the company is at the 60th percentile of its peers and maximum payout is only achieved if the company is at the -- in the top 80th percentile or above of its peers. Otherwise, the relative TSR RSUs remain largely unchanged.

These are the proxy votes already submitted for this resolution. Are there any questions on Resolution #6?

Operator

[Operator Instructions] .

Marcin Firek

Chairman, there are no questions on this resolution.

Michael N. Hammes

Okay. I now put the Resolution #6 to a vote of the meeting as a special resolution.

Now let's move on to other businesses. Can the Company Secretary inform me if there are any other items of business or proposals that have been properly made by shareholders or proxy holders of the company?

Marcin Firek

No, Chairman and there are no other questions.

Michael N. Hammes

Okay, collection of the cards, representatives from the company share registry. Computershare will now collect voting cards. I note that proxy voters still have until 8:30 a.m. Dublin time today to submit the proxy voting directions that are set out in the Notice of the Meeting, subject to the final tabulation of the votes confirming the results including any such proxy holder directed votes. I declare that all the resolutions have been carried. The final voting results will be announced in the Australian Securities Exchange and the U.S. Securities Exchange Commission once they are available.

That concludes our meeting for today, and on behalf of all the directors, I'd like to thank you for attending our Annual General Meeting and wish you a good evening in Australia. Thank you very much.

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