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Edited Transcript of BLD.AX earnings conference call or presentation 26-Aug-19 1:00am GMT

Full Year 2019 Boral Ltd Earnings Call

Sydney Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Boral Ltd earnings conference call or presentation Monday, August 26, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Mariner

Boral Limited - President & CEO of Boral Industries Inc

* Frédéric de Rougemont

Boral Limited - CEO of USG Boral Building Products

* Michael Kane

Boral Limited - CEO, MD & Director

* Wayne Manners

Boral Limited - Executive General Manager for Western Australia

* Yuen Ling Ng

Boral Limited - Group President Ventures & CFO

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Conference Call Participants

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* Andrew Geoffrey Scott

Morgan Stanley, Research Division - Executive Director

* Brook Campbell-Crawford

JP Morgan Chase & Co, Research Division - Analyst

* Daniel Kang

Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research

* Keith Chau

MST Marquee - Building Materials & Packaging Analyst

* Peter Wilson

Crédit Suisse AG, Research Division - Associate

* Peter Steyn

Macquarie Research - Analyst

* Rohan Koreman-Smit

Goldman Sachs Group Inc., Research Division - Industrial Analyst

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Presentation

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Michael Kane, Boral Limited - CEO, MD & Director [1]

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Good morning. Thank you for joining us today. We appreciate UBS hosting us in their Sydney office. I'm joined by Ros Ng, Group President, Ventures and CFO, as well as other members of the senior management team, including Ross Harper, Group President of Operations; Wayne Manners, President and CEO, Boral Australia; David Mariner, President and CEO, Boral North America; and Frédéric de Rougemont, CEO of USG Boral.

Today, we've announced our results for the full year to 30 June 2019. We've also announced that we've reached agreement with Knauf to form an expanded gypsum joint venture in Asia and for Boral to return to 100% ownership of the gypsum business in Australia. I'd like the cover both, starting with the results.

As our usual format, I'll provide an overview of group and divisional performance and comment on outlook and Ros will present the financials in between. Ros and I will then talk through the transaction with Knauf.

This year, in line with our strategy to exit noncore businesses, we sold the Denver construction materials business and the U.S. Block business for combined proceeds of USD 283 million. Our lower reported results, in part, reflected the sale of these businesses but excluded discontinued businesses. I am pleased to report revenue grew 4% to $5.8 billion and EBITDA was up 2% to $1.03 billion. This was despite a decline in both Australian and U.S. housing activity and a $30 million lower earnings from Property. Our reported revenue, which includes discontinued operations, was steady at $5.86 billion, EBITDA was down 2%, and net profit after tax, but before significant items, of $440 million declined 7%. Including significant items, net profit after tax of $272 million declined by 38%. After-tax significant items totaled $168 million, including $174 million impairment of the U.S. Meridian brick joint venture. The board has declared a final dividend of $0.135 per share, which takes the full year dividend to $0.265

As you know, safety is our first priority. Our full-year safety results demonstrate ongoing improvements, which is very pleasing. We reported an LTIFR, lost time injury frequency rate, of 1.3 which is approaching world-class performance and compares with 1.6 in financial year '18. Boral's combined employee and contractor recordable injury frequency rate of 7.5 is a 14% improvement on 8.7 in financial year '18. Pleasingly, the improved performance was evident across all divisions with USG Boral and Boral North America delivering significant improvements. In fact, Boral North America delivered an LTIFR of 0.7 and USG Boral delivered an LTIFR of 1.0, both standout results. Anything less than 1 is considered world-best practice.

Group EBITDA for continuing operations, $1.03 billion, was $18 million higher than the prior year. Higher earnings from Boral North America were offset by lower contributions from Boral Australia and USG Boral. Boral North America reported a $66 million uplift in EBITDA to AUD 415 million, a 19% increase which was helped by a favorable currency movement. In U.S. dollars, EBITDA was up 10%, underpinned by strong earnings in Roofing and synergies of USD 32 million, which was ahead of plan.

EBITDA growth was lower than we had expected as housing starts contracted for the first time in 8 years and extreme rainfall in our key U.S. states disrupted construction and building activity.

Boral Australia reported EBITDA of $593 million which was $41 million lower year-on-year, a 6% decrease. Excluding Property, Boral Australia's EBITDA declined 2% as lower volumes were largely offset by price growth and improvement initiatives.

Our share of USG Boral equity-accounted earnings of $57 million was $6 million lower year-on-year, reflecting a cyclical decline in South Korea and heightened competition in Asia, particularly in Indonesia, and partly offset by cost reduction initiatives.

During the year, we saw cyclical housing pressures across our key markets, while underlying activity in non-res and infrastructure construction remains solid in Australia and the U.S. In Australia, non-res activity was up 2%. The roads, highway, subdivisions and bridges market was down 6% and residential construction declined 15%. Starts in financial year 2019 are estimated at 196,000, which is still well above the 20-year average.

In the U.S, total housing starts declined 2.4% to an annualized rate of 1.22 million. Single-family starts, which drives around 40% of our U.S. business, were down 3%. The repair and remodel market lifted by around 2%, non-res activity grew 2% and U.S. infrastructure based on ready-mix concrete volumes increased 6%.

In Asia, conditions were mixed. Residential construction in South Korea slowed considerably. In China, economic growth remains positive but construction activity was impacted by regulatory controls and tighter lending policies. Activity in Thailand remains stable and India and Vietnam continue to grow.

For Boral Australia, EBITDA excluding property, was broadly steady as a focused effort on taking cost out of the business and price growth largely offset the impacts of lower volumes and cost increases. Average prices were 1% to 3% higher in Concrete and Cement and steady in Quarries, while wages and other deflationary costs increased around 2.5% to 3%.

At the half year, we said we needed to redouble our efforts to right-size and take costs out of the business. I congratulate Wayne Manners, Ross Harper and the team on the outstanding job done to deliver the result we've seen today, typically given Concrete volumes were down 6% last year. Shortly, I'll ask Wayne to make a few comments on the improvement initiatives, what's been delivered and what we can expect in financial year 2020 but first, let me run through the divisional results.

Boral Australia's revenue was broadly stable, down 0.5%. Higher contributions from Quarries and Cement offset lower revenues from Concrete and Placing, Asphalt and Building Products. In Concrete and Placing, earnings declined due to a 6% decrease in Concrete volumes and a higher proportion of revenue derived from the lower-margin Concrete Placing business. Lower Concrete volumes reflect softer residential demand, particularly in detached and multi-residential activity in Sydney. A marked decline in nonresidential activity in Southeast Queensland and completion or near completion of several major projects ahead of others coming online.

In Quarries, revenue grew and earnings increased modestly. In Asphalt, earning softened on a 5% reduction in revenue with lower volumes and softer margins in Queensland and Victoria, as well as higher cost and lower productivity due to delay on some Major Projects.

In Cement, revenue was up 7% and earnings moderately higher with favorable pricing, higher external volumes and cost savings offsetting a lower contribution from Sunstate and higher fuel and clinker costs. Production at the Berrima kiln also returned to more normalized levels in the second half.

Building Products reported a decline in revenue and weaker earnings due to lower residential housing activity and higher costs. Property EBITDA of $33 million was $30 million lower than the prior year, with earnings from sales of our Jandakot and Donnybrook properties flowing through in the second half of financial year '19.

Overall, for Boral Australia, EBITDA margins were 16.8% or excluding property, were 15.8% broadly steady on last year.

Wayne, would you like to comment on improving programs in Boral Australia?

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Wayne Manners, Boral Limited - Executive General Manager for Western Australia [2]

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Sure. So ahead of the changes and the market conditions we're expecting, we undertook a number of initiatives around protecting our top line, but also controlling what we can control around our bottom line. I think supply chain is probably a really relevant example of that, which in FY '19 delivered in excess of $15 million in benefit to Boral Australia.

On top of that, in the second half of -- sorry, the second -- the latter part of first half of FY '19, we launched our organizational effectiveness project, which is really about realigning our overheads across Boral Australia. That, combined with some right-sizing across a number of the businesses across Australia, identified in excess of 300 roles to be made redundant and given the ongoing recruiting freezes and the like, in excess of 220 positions actually leaving, or people leaving the business. Overall, in FY '19 delivering a value of $13 million.

So the combination of all our right-sizing and other excellence projects delivered a combined value in excess of $60 million in FY '19. But clearly, that's not the end of the journey for us. With the softening in some markets, we're expecting to continue in FY '20. Those initiatives will continue and indeed, we'll be launching some other initiatives, which we've started already. We expect that to deliver in the order of $55 million in value into FY '20.

Now not all we're doing about is downsizing. Organizational effectiveness is about that, about being effective. So in areas such as procurement, we've actually increased our support to enable them to after further cost savings. That, combined with what is a very mature value improvement program, which has been underway for a number of years, will help us continue to deliver strong margins and indeed, grow and strengthen our margins into the future.

So what we've seen in this year in particular, is a very strong focus on timely execution of our programs, which is particularly important when you consider the infrastructure program that's coming out of some future years. During the year, there was a really strong focus on considered planning and execution to make sure we delivered value in FY '20 -- FY '19, not destroyed value. And going to FY '20, that focus will continue and even grow. Thank you.

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Michael Kane, Boral Limited - CEO, MD & Director [3]

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Thanks, Wayne. Turning now to Boral North America. We've previously talked about the impact of weather in our business and while we would rather avoid the topic, this year, we saw extended periods of extremely high levels of rainfall in the South, Midwest and Northeast with some parts the wettest on record. This caused significant delays in construction activity, particularly in Texas, our key U.S. state. The extended rains slowed volumes across all businesses and likely contributed to the contraction in U.S. housing starts.

Looking at the waterfall chart, EBITDA increased 10% or USD 27 million to USD 297 million. Price gains offset cost inflation, while the benefit of USD 32 million in synergies, together with cost savings, were somewhat eroded by an adverse volume impact and lower Meridian brick post-tax equity earnings. Embedded into the cost savings is a one-off, $10 million benefit associated with 3 legal cases related to the Headwaters acquisition which will resolve below expected cost outcomes.

With Florida largely unaffected by wet weather, we benefited from significant growth in Roofing, together with earnings growth from Windows, Stone and Light Building products. Boral North America's EBITDA margins of 18.6%, up from 17.5% last year, are the highest margins of our 3 divisions. In Fly Ash, we delivered strong price growth of 11%. This helped to offset lower volumes as the expected full-year impact of prior period utility closures in Texas flowed through, coupled with extremely wet weather conditions and unplanned power plant outages. While volumes were down 3% for the year, growth returned in the second half with 3% growth on the prior corresponding period. Fly Ash earnings were slightly lower and impacted by the completion of 2 large site service projects, known as [Barry] and Gaston ahead of new projects starting as well as higher costs. EBITDA margins of 22% compared to 24% in the prior year, excluding site services, revenues were up 7% and earnings were steady.

We made good progress to increase Fly Ash supply. Our landfill reclamation operation at Montour, in Pennsylvania was successfully commissioned with volumes ramping up by year-end after a slow winter, and we're supplying the market with modest volumes of imports from Mexico. Pleasingly, our continued investment in Fly Ash storage has seen our total capacity reach 600,000 tons.

Roofing delivered strong earnings growth driven by a 15% increase in revenue. Concrete roofing volumes benefited from strong demand in Colorado, Nevada and the Florida markets and prices increased 5%. Manufacturing performance at the Okeechobee, Lake Wales and Oceanside metal roofing plants continue to improve.

Light Building Products reported stable revenue and modest increase in earnings. Double-digit volume growth for TruExterior, siding and trim; and good price gains in Versetta and TruExterior were highlights in a period where other product categories slowed due to weather and lower housing activity.

In Stone, we delivered steady revenue and a modest increase in earnings with price gains and cost savings associated with the rationalization of 2 distribution facilities and completion of the Greencastle plant upgrade in the prior period. This was partly offset by inflationary cost pressures, primarily from labor and raw materials and lower volumes reflecting lower activity in the U.S. and Canada.

The Windows business reported a 5% lift in revenue and higher earnings with market share gains partly offset by volume impact of adverse weather conditions.

The Meridian brick JV delivered a post-tax equity loss of USD 7 million compared with a loss of $1 million in the prior year. The result reflects a significant downturn in the Canadian housing market, which has historically contributed a significant portion of the earnings of the joint venture and softer U.S. housing starts.

In response to lower demand, a significant number of plants were temporarily closed in the second half, helping to address inventory and working capital but adversely impacting EBITDA due to lower fixed cost recovery. These factors, together with the recent decline in brick intensity per housing start in the U.S.A., triggered a net impairment of the investment in the Meridian brick joint venture of AUD 174 million, reported as a significant item.

As mentioned, we delivered cost and revenue synergies of USD 32 million, ahead of our targeted $25 million. In financial year 2020, we expect to deliver USD 20 million with our 4-year synergy target of $115 million remaining on track.

Now to USG Boral. In USG Boral, cost savings and improvement initiatives offset inflationary cost increases but were not enough to offset the impact of lower plasterboard volumes, primarily in South Korea, and softer price outcomes in South Korea and Indonesia.

Underlying revenue was up 2% with growth in Thailand, China, Vietnam and India, a steady contribution from Australia and a higher non-board sales. Underlying earnings were 6% lower, reflecting the cyclical slowdown in South Korea and higher costs.

Our 50% share of USG Boral's post-tax earnings of $57 million was down 10%. Australia/New Zealand delivered broadly steady revenue with strong volumes maintained as share gains offset a soft fourth quarter.

In South Korea, plasterboard volumes were down around 10% and prices were lower, reflecting declining market demand and intense competition as a competitor added new capacity. While margins contracted, the business maintained its market share and margins continued to be well above USG Boral's average margins.

China reported higher revenue due to growth in non-board product. However, earnings were lower with the reduction in plasterboard volumes and higher production costs. Both plasterboard demand and price growth were lower-than-expected as a number of competitor plants reopened following the implementation of environmental controls in the prior period.

In Thailand, revenue and earnings were higher, with margins improving and market share remaining strong.

Indonesia revenue and earnings declined as pricing pressures, underpinned by excess industry capacity, continued and raw material cost increased.

Vietnam reported revenue and earnings growth underpinned by double-digit volume gains and strong price improvement.

We continue to target returns that exceed the cost of capital through the cycle. Boral Australia delivered an EBIT return on funds employed of 15.1%, well above our ROFE equivalent cost of capital of around 9%. Boral North America, with an improved ROFE of 5.6%, up from 4.4%, remains well-placed to deliver above cost of capital returns over time through full realization of acquisition synergies and market growth.

USG Boral's underlying ROFE of 8.1% fell below Boral's cost of capital, reflecting the lower earnings performance. Group ROFE was at 8.2% for the year.

I'll now hand over to Ros to go through the financials.

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [4]

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Thanks, Mike, and good morning, everyone.

Looking at the result in more detail. Reported revenue of just over $5.8 billion was steady and EBITDA of $1.04 billion was down 2%. Excluding discontinued operations, EBITDA increased 2%.

Depreciation and amortization of $316 million was up from $307 million reported last year. This excludes a $61 million of amortization of acquired intangibles relating to the Headwaters acquisition. Net interest of $103 million was broadly steady. Our interim tax expense of $116 million and effective tax rate of 21% were higher than the prior period. The effective tax rate was in line the guidance. If we exclude the benefit of further recognition of previously unrecognized tax losses and utilization of capital losses, our effective tax rate is around 24%.

Net profit after tax and net profit after tax before amortization, NPATA, were down 7% and 6% to $440 million and $486 million, respectively. Significant items, which I'll turn in the next slide, resulted in net loss of $168 million. Statutory net profit after tax was down 38% to $272 million from $441 million in the prior year.

Looking at significant items in more detail. The underperformance of the Meridian group business in the current year, reflecting a significant downturn in the Canadian market, softening of U.S. housing starts together with the continued decline in brick intensity triggered an impairment of investment in the Meridian bricks joint venture of AUD 196 million.

Headboard and integration costs, cost associated with cost reduction and right-sizing initiatives in Australia and USG Boral as well as USG Boral legal and consulting costs totaled $67 million. The sale of the Denver Construction Materials and U.S. Block businesses resulted in gains of $66 million and $4 million, respectively. Net of tax, we reported significant items of $168 million for the full year.

Turning to cash flow. Operating cash flow of $762 million increased 32% as a result of the reduction in Headwaters integration and acquisition cost; a decrease in working capital, interest and tax outflow compared to financial year '18. The current year's change in working capital was better than the prior year by $51 million. However, this year's working capital was unfavorably impacted by the settlement of several legal matters relating to the Headwaters acquisition. The underlying working capital was relatively stable compared to the prior year.

Interest paid was in line with last year, with tax paid decrease largely reflecting lower taxes installments in Australia as well as the continued utilization of tax losses in the U.S. Free cash flow of $712 million was $477 million higher as a result of the sale of the Denver Construction Materials and U.S. Block businesses. We also acquired a small Concrete Placing business in Queensland in the first half of this year, which is a relatively modest investment of $11 million. Net cash flow after dividends paid of $403 million was $457 million higher than 2019.

We continue to maintain a disciplined approach to capital management. Total capital expenditure increased 7% to $453 million. In Australia, our foreign investment in Orange Grove in Western Australia and Ormeau in Queensland were completed. Orange Grove is producing at nameplate capacity and almost has reached practical completion and continues to ramp up in line with expectations. We continue to progress construction of our new clinker and slag grinding and storage facility at Port Melbourne in Victoria, which is expected to be completed by end of calendar year 2020. We also made modest investments in Boral Concrete and Asphalt network, a new high-capacity Concrete batch plant at West Melbourne and a new Toowoomba asphalt plant. Both were commissioned during the year.

CapEx in Boral North America covered investments in Fly Ash, including our Montour reclaim facility, railcars and fixed storage. We also upgraded our Stonecraft plant in Ohio and our Rosarito manufactured stone plant in Mexico.

The USG Boral joint venture continues to self-fund its capital requirements. Our capital expenditure is expected to be lower in financial year 2020, in a range of $350 million to $400 million.

Now looking at the balance sheet. At 30 of June '19, Boral's net debt position was $2.19 billion, down from $2.45 billion at the 30 of June '18 due to the sale of the U.S. businesses, partially offset by a weaker exchange rate. We remain well within our group funding covenants with our principle debt gearing covenant of 29%, down from 31% at June '18. Significantly within our threshold, which is less than 60%. Our weighted average debt facility maturity is 4.5 years, down from around 5.5 years in June 2018.

Our balance sheet remains in a strong position and continues to put out existing BBB and Baa2 investment-grade credit rating. Our net interest covers 6.4x, is down from 6.6x in June. And our net gearing -- net debt over net debt plus equity was 27% at the end of June '19, down from around 30% at June 2018.

I'll now hand back to Mike.

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Michael Kane, Boral Limited - CEO, MD & Director [5]

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Thank you, Ros.

Outlook for 2020. Taking into account where we finished the year in financial year '19, the outlook for Boral's markets and financial year 2020 and trading conditions through July and August, we expect NPAT to be around 5% to 15% lower in financial year 2020 relative to financial year 2019. This reflects downward earnings pressure in Boral Australia and USG Boral but underlying earnings growth from Boral North America, together with higher depreciation charges as our quarry investments in Australia come online.

We expect Property earnings to be above the average $33 million per annum that we have delivered over the past 18 years and at the half year, we expect to be in some more -- to have more certainty around where that number may end up for the year. This outlook statement does not take into account any additional earnings from the announced USG Boral-Knauf transaction, which will depend on the timing of completion. There will also be implications of the new IFRS leasing standard that will impact our reported earnings, which are outlined in our discussion analysis and in the next back up slide.

I don't intend to talk through this slide, but it's here for your reference. Instead, let me turn to strategy.

During the year in Boral Australia, we made further progress on construction of a new, 1.3 million-ton clicker and slag grinding plant and storage facility at the Port of Geelong, which is expected to cost up to $130 million at the end of calendar year 2020.

Our Quarry reinvestments at Orange Grove quarry in Western Australia and Ormeau Quarry in Queensland were completed. Orange Grove is expected at targeted capacity and production in Ormeau is ramping up in line with expectations. Benefits will be delivered from financial year 2020.

In North America, we continue to deliver benefits from the Headwaters acquisition. We completed the first phase of plant network optimization in Stone. And in Roofing we launched our branding and channel-to-market strategies to grow our metal roofing line. Consolidation of back-office, finance and IT systems are continuing in line with our expectations. We've now delivered USD 71 million of acquisition synergies and remain on track to deliver our targeted year 4 synergies of USD 150 million per annum.

In the Fly Ash business, we are making progress to deliver our target of a net increase of 1.5 million to 2 million tons per annum on financial year 2018 volumes of available Fly Ash over the next 2 years. By the end of financial year '21, we expect to be supplying Fly Ash at a run rate of at least 8.6 million tons per annum, with volume growth coming from a range of initiatives including opportunistic imports, new contract volumes, fixed and mobile storage of off-season production, landfill reclamation and mining natural pozzolans to supplement ash production. In financial year 2020, we won't see a lot of growth as we still have to absorb the well-flagged closure of the Navajo plant in Nevada from December 2019, which will take 400,000 tons per annum of supply out of our network.

Also, in financial year 2020, site services revenue as a portion of total Fly Ash revenue, is expected to return to the longer term average of around 20% with the completion of the major site service project at the TVA Cumberland utility and the SynMat business, ahead of starting other potential work in the pipeline.

As previously mentioned, during the period, we continued the divestment of non-core businesses with the sale of Denver Construction Materials in July 2018 for USD 127 million. The divestment of the Texas-based U.S. Block business in November 2018 for USD 156 million and last week's announced divestment of Midland Brick for AUD 82 million, subject to closing conditions. Proceeds from these divestments total around USD 340 million, which will contribute to the funding of today's announced USG Boral transaction with Knauf.

Let me now talk about today's USG Boral announcement before asking Ros to go through details and Frédéric to give his perspective. The agreement with Knauf marks the completion of an exhaustive process of considering the full range of strategic options available to Boral and the USG Boral and I'm certain the agreement we've reached is the best outcome for Boral and for the JV.

While this opportunity only came about because of Knauf's acquisition of USG, the investment we are making in this business is completely aligned with Boral's stated strategy. We said we wanted to grow in low capital-intensive, higher-growth businesses and that is what we are doing. We said the USG Boral business was our long-term growth platform and we are strengthening that platform to deliver value today and in the future.

In Asia, we are forming an expanded 50-50 JV with Knauf, bringing together 2 highly complementary businesses: USG Boral in Asia; and Knauf Asia Plasterboard. Knauf is underlying -- undeniably the largest plasterboard player in the world and USG Boral has the most enviable position in plasterboard in Asia.

The JV is acquiring a highly profitable growth business in China and an emerging business to bolt on to existing operations in Southeast Asia. We expect to deliver USD 30 million of synergies in 4 years.

In Australia, Boral will acquire Knauf's 50% of USG Boral, returning Boral to 100% ownership of the business. When we last owned the business outright, we were the #2 player. Today, we have the leading brand in Sheetrock and a substantially strengthened position. We will continue to have R&D and IP support from USG, and we'll be well-placed to maintain USG Boral's strong position in Australia and emerging position in New Zealand.

We have agreed to purchase -- to a purchase price of USD 200 million, which represents an attractive EBITDA multiple of 5.7x. We've also agreed to grant Knauf a call option to return to 50% ownership of the business within 5 years. The granting and exercising of the call option are both subject to Australian and New Zealand regulatory approvals.

The total transaction delivers immediate EPS accretion to Boral of around 3% to 5% on financial year '19 pro forma financials.

Boral's total direct funding requirement is USD 335 million, which will be funded through debt and recent divestments. In fact, our 3 divestments of Colorado Construction Materials, U.S. Block and Midland Brick totaled $340 million, so we'll be drawing on debt by the equivalent amount of these non-core divestments. It's a great outcome.

Let me hand over to Ros to explain the transaction in more detail.

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [6]

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Thanks, Mike. Stepping through the transaction. Boral returned to 100% ownership of USG Boral Australia/New Zealand for an acquisition price of USD 200 million. The USG Boral Asia joint venture will acquire Knauf Asian plasterboard business for USD 532.5 million and the JV will sell the Middle East business to Knauf for USD 50 million. The net investment for USG Boral Asia joint venture is $482.5 million with Boral share being USD 241 million. So from Boral's perspective, our total net investment in the business is USD 241 million Asia plus USD 200 million for the Australia/New Zealand business, which gives a total of USD 441 million investment.

In terms of funding, the joint venture is self-funding a proportion for Boral's total direct funding is USD 335 million. This includes the USD 200 million for the Australia/New Zealand business and USD 135 million towards the acquisition of Knauf Asia Plasterboard business.

So the USD 135 million comes about because we start with the $532.5 million investment in Asia, less the USD 262 million to be self-funded in the joint venture, which leaves USD 270 million to be split equally between Boral and Knauf. So our total funding requirement is USD 335 million.

As Mike said, the transaction is immediately accretive for Boral in financial year 2019. Pro forma financial is around 3% to 5%, EPS accretion before synergies. And including year 4 synergies of USD 30 million, the transaction is highly accretive. If we look at the Asia investment alone, we still see solid mid-single-digit accretion, factoring the full run rate of the synergies.

We are buying the Australia/New Zealand business for FY '19 EBITDA multiple of 5.7x, recognizing where we are in the Australian housing cycle and that the Australian market is a relatively matured plasterboard market. It's a business we obviously know well and we'll continue to operate in much the same way as we have been.

Based on financial year 2019, we'll report an additional AUD 576 million revenue, [made] 100% of the business as we were previously equity accounting our 50% share of earnings. The business has attractive EBITDA margins, well above the 16% and once we close on the deal, we will consolidate 100% of EBITDA from the Australia/New Zealand business.

As Mike said, we have agreed to grant Knauf a call option, which would mean the business could return to the USG Boral joint venture within 5 years. This would be a good long-term strategic outcome as the business has been very successful being part of the joint venture.

But until such time, we are in a great position to enjoy 100% of the strong cash flow from the Australian business while retaining full technology and IP support out of the USG Libertyville R&D Center as well as the R&D support from USG Boral's innovation center in Thailand. We'll retain the USG Boral name and the Sheetrock brand, so the transition should be very seamless. We have replaced the previous royalty and non-royalty licensing arrangements with a simplified approach of a single low-cost fee of less than 0.5% of relevant revenues, which will give us access to current, next-generation and future breakthrough technologies. And Tony Charnock will remain as the CEO of the Australia/New Zealand business.

The investment in Asia is based on the multiple of 10.2x for the high-growth China business and the asset values of the emerging Southeast Asian business, which has minimal earnings but is well-positioned for growth.

Looking at our 2 footprints coming together, the USG Boral joint venture will more than double its revenue exposure in China, but with Knauf's more profitable Chinese business, the joint venture will deliver improved earnings out of China. We will see incremental revenue growth in Thailand and Indonesia and a good step up in Vietnam. We will double our revenue exposure in the Philippines and pleasingly, have capacity on the ground so we can reduce imports and better leverage Knauf's domestic manufacturing position over time.

The combined business has revenue of just over USD 900 million on the pro forma FY '19 with USG Boral businesses being around 75% and Knauf around 25%.

Let me now ask Frédéric to take a little bit more time to go through our relative positions in each country.

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Frédéric de Rougemont, Boral Limited - CEO of USG Boral Building Products [7]

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Thank you, Ros, and good day to all. Move one slide.

So to understand the great complementarity within the 2 businesses, let's look at the current positions in every market, market-by-market, where both Knauf and USG Boral are currently present in Asia.

So starting with China. Both businesses have similar size, similar market share and revenue. Knauf has an excellent regional position there and a very high-end market position -- market perception. They are like -- we are in the Shanghai area and they also have a very good position in the South, in the Guangzhou area and in the North, Beijing/Tianjin, where they have only in both regions one high-end competitor being in BNBM. They have successfully established a very strong Knauf brand since they started about 20 years ago, which attracts customer with the highest price on the market.

Regarding Vietnam. Putting the 2 assets together will provide excellent logistics synergies as we have 1 plant in the south, near Ho Chi Minh City and Knauf has one plant in the north, in Haiphong, not far from Hanoi.

In the Philippines, USG Boral brand has a very strong reputation, having been there for years. But all our Boards are imported from Thailand. They recently started plant from Knauf in the Philippines, nearby Manila, will save logistics costs and reinforce further out of preposition in the very fast-growing high population market. Without this deal, we would have invested pretty soon in a plant in the Philippines and obviously, we can now postpone that.

In both Thailand and Indonesia, whilst USG Boral is recognized as the leading plasterboard player with highly reputable brands -- premium brands, Knauf brings additional capacity, which will make our position stronger in both markets.

They have been longer in Indonesia and their brand being reasonably recognized there.

In Thailand, they entered more recently. Their capacity will allow us to postpone some capacity investments, would have had to do without this deal. And they also have a gypsum reserve, which will double our gypsum reserves in Thailand.

In the other 4 countries: Korea, Malaysia, Singapore and India, Knauf presence is very limited and we'll continue executing our existing strategy.

So turning to the last page -- the next page.

I'm very confident that this expanded USG Boral JV will create substantial value. First of all, they are real synergies on the cost side and essentially on the cost side, so that makes them pretty certain regardless of the market conditions.

We have the obvious impact of merging local teams in 5D countries: China, the Philippines, Vietnam, Thailand, Indonesia, plus combining our central offices, Singapore and KL for USG Boral and Bangkok for Knauf. This leads obviously to significant general and administration cost savings and in fact, it makes the biggest part of the $30 million.

Integrating the 9 plants of Knauf into the USG Boral manufacturing network will obviously help reducing the freight costs, the increased size of the network will provide procurement benefits.

The extended network of manufacturing sites will allow some optimization of plant fixed costs.

For example, in Thailand, we have 2 plants side-by-side which will also provide fixed cost savings opportunity as we can have a senior team to manage both sites.

Speaking of capacity. A combination of both networks puts us back in a more comfortable utilization rate, which gives a bit of time before investing further in our fast-growing markets. On day 1, we will keep on each market the existing brands and will work on defining the best branding strategy in a specific way for each market, taking into account the existing position of the respected brands. We already know that we'll have the opportunity to grow to multi-tier branding which can be very powerful in some markets to better address specific customer segment needs. Last but not least, we'll keep our access to USG-leading technology and IP. And we have now -- well, we will have the access to Knauf worldwide leadership, providing not only access to more research and development and product development but also access to critical resources like paper and gypsum. Now that I have visited the R&D center in Iphofen and knowing USG's research center, I'm very excited about the potential of being supported by both, which in my view, are very complementary and really world-class. So Knauf is really a best partner that we can think of in many respects.

Back to you, Ros.

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [8]

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Thanks, Frédéric.

Last slide. This slide shows actual financial year 2019 earnings from USG Boral before the transaction and pro forma earnings with the impact of the transaction. The top table shows underlying USG Boral revenue of 1.1 -- of 1.6 billion and EBITDA of AUD 252 million as we reported today. The pro forma column includes the additional revenue and earnings from Knauf Asia plasterboard, all combined in Asia and including Australia and New Zealand business. The bottom table is what Boral reported for financial year 2019 and a $57 million of equity earnings under the actual column. The pro forma column is 100% of the Australia and New Zealand revenues, which is what Boral would have pro forma report on the transaction, revenues of $576 million in financial year '19 and EBITDA of $127 million, which represents $105 million of consolidated EBITDA earnings from 100% of the Australia and New Zealand business and $22 million being our 50% share of after-tax equity earnings from Asia plasterboard joint venture. These pro forma numbers are after adjusting for funding cost in the joint venture and after IP royalty cost in both joint venture in the Australia and New Zealand business and in the new Australia and New Zealand business. However, these numbers are before synergies, and of course, Boral's funding cost would come out after this. PPA adjustments also may be considered then we'll have a better idea of PPA adjustments next time we report. We also have a few additional backup slides that will hopefully serve as useful reference information.

Before we open up to Q&A, I would like to close by saying there is some complexity in working out through the math and understanding the deal, and we are obviously happy to help you through that process. It has taken us many months to get to this point, and we're very excited by what we have achieved and the opportunities ahead for the business in Asia and the business in Australia. I will continue in the role as the Chairman of the USG Boral Asian joint venture until December 2021, where the chair will then rotate to Knauf. We will have equal representation on the Board and Frederic will remain as CEO. Both Boral and Knauf are very much aligned in our strategic and operational objectives, and we're working extremely well together. We have forged new partnership, which we are very excited about.

On that note, we'll open up the room first for any questions for Mike or myself or Frederic or the rest of the management team here about our results or about the deal that we just spoke to.

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Questions and Answers

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Unidentified Analyst, [1]

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Just 2 questions for me. Firstly, just in terms of the FY '20 guidance. Can you provide some detail around what macro housing assumptions you've assumed in there?

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Michael Kane, Boral Limited - CEO, MD & Director [2]

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So for Australia, we're assuming another 15% decline in housing starts in Australia, bring it down to about 166, something at that level. Our view is that, that may be the bottom of the decline in the housing market in Australia, but we still think there's 15% more for it to decline. If you look at housing starts in North America, we expect a small uptick. We don't see a repeat of this year's decline of 2.5%.

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Unidentified Analyst, [3]

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Okay. And then just in terms of positioning the business to be further resilient to these type of market conditions. What do you think that -- what initiatives do you think are further to come from Boral in regards to better positioning the business?

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Michael Kane, Boral Limited - CEO, MD & Director [4]

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So as Ros was talking about the portfolio, we have made just about all the portfolio changes with the last exception being the ultimate divestiture of the Meridian Brick business in the U.S. which will take several more years. But we've done the work. We have reshaped the portfolio in Australia. We've substantially reshaped the plasterboard business in Asia with the deal that we've announced today. The Headwaters acquisition in 2016 has remarkably reshaped the business in North America. So we don't see any more significant adjustments to that. We -- Our investment in the business, we now have a significant lighter investment portfolio than we did 7 years ago. We don't have the bricks business to continue to reinvest in. And we think that what we've been able to do in Australia in terms of the investments in our quarry positions around the country sets us up generationally for quite some time. So if you look at the additional capacity we've taken in to Asia through the Knauf deal, just to give you a relative point of view to look at, our capacity utilization in USG Boral was roughly 80% capacity utilization and they're about 60%. And so there's a lot of free capacity that comes with this deal that will give us the opportunity to avoid a lot of capital costs that we would have to undertake ourselves. So when we look across the network, what we see is we've got the assets that we want and now we have to deliver the synergies for all of these assets, and we're encouraged by what we've seen with the Headwaters synergies and our overshoot this year in the delivery of synergies, and so we're well on track to deliver the $115 million for that.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [5]

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Peter Wilson, Credit Suisse. Just another one on the Boral Australia guidance. Can you give us a comment on what concrete volume and price you're factoring into guidance? In your presentation, you have presented an external forecast for a 2% volume decline. I actually can't imagine is there any way you're close to what you're actually expecting.

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Michael Kane, Boral Limited - CEO, MD & Director [6]

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Ros, do you want to take a shot at that?

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [7]

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So the guidance that we have provided does take into account -- I mean their total industry concrete volumes. As we note that nationally, it's down 2%. And I think that New South Wales will be heavily impacted still with the multi-family coming on. So New South Wales is about a decline in concrete for the industry around 5%. So those elements are included and considered in our guidance.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [8]

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Okay. So you're still expecting a 2% decline because that's now -- I guess, 3 of the major cement or concrete companies in Australia that you ever have talked to, 10% to 15% to even 20% volume declines. Just wondering how the market could still be down 2% and may be a comment on how Boral's volumes might be so much different to the market outcome.

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Michael Kane, Boral Limited - CEO, MD & Director [9]

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Well obviously, one of the differences that we have is Adelaide Brighton. They're operating in different markets that we do, that's the first exception. But Wayne, why don't you comment on that.

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Wayne Manners, Boral Limited - Executive General Manager for Western Australia [10]

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Sure. Thank you. So yes, as Ros and Mike alluded to, housing starts being both attached and multi-residential will be down. On the flip side of it, we expect our nonresidential to be up. And if you look in the different markets in Victoria, we're starting to really see Melbourne Metro kickoff. The West Gate Tunnel project really kicking off. So Sydney's Northern -- NorthConnex is coming off in the coming months as is Sydney Metro, so it's really a mixed bag. But compared to the Adelaide Brightons and the like, we are in a really strong position on our major projects and some of those are really picking up through those -- through -- particularly Victoria and also some south really, Cross River Rail and the likes coming up, Queen's Street Wharf and the like in Queensland. So a mixed bag but yes, I think 2% roughly in line.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [11]

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Can you just maybe build those comments into -- currently, you talked about July and August trading additions which I get the implication was that July and August are being weighted. Can you just, I guess, build those -- your comments just then into -- put that into context in July and August?

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Wayne Manners, Boral Limited - Executive General Manager for Western Australia [12]

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So in July and August, and we've seen the project in Victoria I spoke about are really ramping up. They're not at full steam right yet. But NorthConnex and the like is still going very strong in Sydney. So in terms of volume and everything else in July and August, relatively good. And we expect them to improve as the projects really ramp up in other states.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [13]

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Okay, maybe I misconstrued. So the comment in the presentation on July and August was actually meant to be a positive comment that July and August volumes were looking good?

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Michael Kane, Boral Limited - CEO, MD & Director [14]

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Okay, well maybe we send it to Ros?

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [15]

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Well, I think the comment really refers to that. We obviously now had July's trading so that's taken into consideration when we give that broader outlook for 2020. And obviously, we want to point to the industry concrete demand estimated to be declined by 2%. We did talk about New South Wales, do expect that to decline further more than the 2%. And as you know that we have a very big waiting in New South Wales. So overall, that will impact and that's also in our guidance.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [16]

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It's Andrew Scott from Morgan Stanley. Just a couple on the U.S. if I can, and I'll come back to the transaction. So maybe for David, just if you could talk about the Fly Ash there. You -- there were information where you've got storage up and running now where Montour is running, you've got imports working. So first of all, Mike mentioned Navajo coming off later this year. Can you talk about confidence on getting volumes to grow in FY '20? And then secondly, as the -- as we are proving up those various sources of supply, how is the margin stacking up? Do we need more price to maintain margins or these alternative sources of supply coming in at similar margin levels?

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David Mariner, Boral Limited - President & CEO of Boral Industries Inc [17]

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So on the first one, we're confident that our volumes will grow next year even though we will be paid for the half year. So not only it's going to close above midyear, so 400,000 tons in total per annum. So we've got a headwind of about 200 overcome. And I would put that in context of this year, we had about 0.5 million tons of headwind to overcome from the full year effect of the Texas closures as well as one that came through this year. And we were close to breaking even on volume year-on-year. So I think we've done a good job of adding and bolstering volumes throughout the course of this year, almost getting back to where we were last year but not quite. And this upcoming year, the headwind is not nearly as great and so we're pretty comfortable and confident that those initiatives that have already come through and those that we're working on will carry us through at least FY '20. On the second piece around the margins, we -- I've said it before and we continually strive to bring on new volume at roughly the same margins that we've experienced in the past. And so what does that mean in the grand scheme of things? Last year, we had about an 11% rise in price, and that was needed in order to execute the strategic projects when you've got larger and broader geographic expansion, additional logistics costs, et cetera, et cetera. So we've been -- we're pretty comfortable that we've been -- we work well in order to maintain our margin profile albeit with bringing on additional strategic work. And as we move forward into next year, we do anticipate pricing to be similar, may be not as high as 11% but strong pricing, and then it'll underpin the further strategic work that we've got going on right now.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [18]

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And just a couple on the transaction. Ros, first of all, leverage kicks up towards 2.5x. We're probably there or thereabouts after Headwaters, but this time we're going to have a declining earnings profile. Can you talk about the pace at which you see that coming through? And do I take Mike's comments earlier about the portfolio reshaping largely done to mean there aren't any further divestments at this stage?

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [19]

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Well, as just commenting on the balance sheet. Obviously, we see levels quite a bit for this year in terms of FY '19 with the sales that we've spoken about and the Middle East sale will continue to have a positive impact in terms of our leverage. In considering also taking into account our outlook that we've just spoken about, where we'll still be within the credit metrics that we sized in particular similar to Headwaters where the net debt-to-EBITDA, 2.5x -- of the low 2.5x even taking into account our outlook statement as well as our gearing, which will still be maintained around 30%. So -- and again, taking into account the outlook. As Mike mentioned, look, a couple of years out, we might have the opportunity to continue to exit from the bricks business in the U.S. in particular so that will help with the balance sheet. And as we going to full swing with the new deal and with Australia coming in 100% and the joint venture growing the joint venture, that's going to be very helpful going forward to continue to delever the balance sheet beyond 2020.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [20]

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And last one for me. May be Mike you talked the whole way through the Knauf process about the strength of Boral's bargaining position. You basically had a for-sale here in Australia and sub-6x EBITDA looks like a pretty good transaction. I guess I just struggled to understand why Knauf gets to buyback, gets that option at the same rate. It would seem to belie that the strength of your position there.

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Michael Kane, Boral Limited - CEO, MD & Director [21]

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So from our perspective, in the fullness of time, in the long run, it's much better to have all of our gypsum assets in the same vehicle to make sure -- there's an issue around the IP and when the IP exclusively expires, and it -- we've arranged it so that it expires at the end of the option period. It was supposed to expire slightly earlier. We extended it with these negotiations. So my view and the view of the team is that this business -- the business is better off connected to the Asian business so that you never have to worry about a -- having an isolated asset that doesn't have access to IP and technology improvements. So that's the first driver. It was very clear based on the regulatory results when Knauf went to close on the USG deal that they were told they could not own both. And so a combination needed to be made. This is exactly the same structure that we had in the old Lafarge days, where in Lafarge competed against us in Australia and we were joint venture partners in Asia. So for a period of time, as we've described it, that 5-year period, we don't think that's going to be a negative factor. We see it frankly as a positive factor because we'll get the benefit of the earnings through that period of time. But in the long run, there are some implications for perhaps staying out of the joint venture, which means we have to make additional investments in R&D that would be difficult to support based on 3 plants in Australia. So that's our thinking. Clearly, to get the deal, we got -- we basically said we have to have a discount for a couple of reasons. One, because we were in a position to be able to deliver the solution to their problem; but two, looking at the housing decline in Australia, we're well aware that we expect some diminishing returns on the Australian business in the interim, but not sufficient so that at the price we pay, it would hurt the acquisition. So it was a little complicated. We had a similar issue in the Middle East, where we divested the businesses in the Middle East to them because they have a competing network in the Middle East. But within the area of Asia Pacific region, there is no -- there'll be no competition from Knauf businesses against our businesses. And we picked up some other positive things that we don't even mention in the -- we're going to have distribution arrangements for their insulation, and what am I missing, and the ceiling tiles. So they have -- in the process of acquiring Armstrong ceiling tile on a global basis, and they're picking up the Asia position. So we have the access to these key lines which tend to be sold within our channels, and Armstrong is the leading ceiling tile provider in the world and Knauf Insulation is a world leader as well. So there are lot of reasons for the way the package was put together, and it can suggest you why it took so long to negotiate this deal.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [22]

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Got it. And it's our last one but just very quickly. Sheetrock 2. Thoughts on whether that's going to be commercially attractive?

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Michael Kane, Boral Limited - CEO, MD & Director [23]

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We believe it is, and we've got test work going on right now to think about and as well as...

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [24]

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(inaudible)

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Michael Kane, Boral Limited - CEO, MD & Director [25]

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What -- so we're looking at it in 2 stages. One, possible formulation changes that could improve all plants based on some of the discoveries in the Sheetrock 2, and then we're looking at delivering the full portfolio of changes in 1 or 2 plants and to test out how that works and how best to market it. So that work is continuing and we don't expect that to slow down.

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Peter Steyn, Macquarie Research - Analyst [26]

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Peter Steyn from Macquarie. Just a quick hone in on your Australian environment and particularly the New South Wales infrastructure market. There's obviously been some delays in some projects coming through there. But I'm just interested to understand whether you have not won some business that was important to hold up the economics of that operation. And then you also very briefly spoke about South East Queensland. Concrete volumes, steel volumes, if we can just get a bit of detail on those two.

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Michael Kane, Boral Limited - CEO, MD & Director [27]

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And I'll ask Wayne to comment more specifically on it. We're still getting the share of billable work that we've been getting all along. So we're -- we haven't lost pace in terms of -- and I guess based on some of the comments, it's about $1 billion worth of work that we're bidding on right now but I'll let Wayne talk about it, and specifically he wants to understand New South Wales and what's going on inside that.

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Wayne Manners, Boral Limited - Executive General Manager for Western Australia [28]

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Sure. So thanks for the question. In New South Wales, the answer is no. We haven't lost any big projects we're expecting. We articulated back in May, I think, that there was a bit of a gap coming up in New South Wales' major projects. But ahead of this is all the stuff coming up in Western Sydney Airport. We're actively involved in discussions on -- with our SROs on Snowy Hydro and the like. There's a number of big projects coming through in New South Wales. There was always going to be a bit of a hiatus, if you like, in FY '20 and that's what we're seeing. With respect to Queensland and concrete volumes in particular, a lot of slow down there, a lot of project delays and the like which we all saw pre-election and those sort of things into Queensland whether it be detached multi-res, non-residential, the whole lot, that certainly we're seeing some of that looking to improve going forward. But in FY '20, we are seeing both detached and multiresidential still declining in Queensland, but -- so that's -- hence the Queensland result. But certainly New South Wales, we see this is just a short-term delay in major project activity. As Mike rightly said, lot of tendering activity going on right now. The pipeline going forward is incredibly strong.

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [29]

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I think we may open up questions for people on the phone, please.

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Operator [30]

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(Operator Instructions) Your first question from the phone today comes from the line of Brook Campbell-Crawford from JPMorgan.

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Brook Campbell-Crawford, JP Morgan Chase & Co, Research Division - Analyst [31]

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You noted possible volumes were soft in the fourth quarter. Could you provide a sense of how you're significant with time loss in Australia plasterboard in 4Q?

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Michael Kane, Boral Limited - CEO, MD & Director [32]

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So I think simply, plasterboard is an interior-aligning product that goes -- one of the last things that's put in, in high-rise buildings and homes. And so in terms of the lead lag cycle in the construction process, we actually saw a result for full year 2019 that was minimally impacted by the decline, the 15% decline we saw in housing starts. But we fully now expect that will flow through and the way the year ended was the classic indication that it was starting to feed through into our space in plasterboard. And so we expect that to continue in 2020. And frankly, if there's another 15% decline in housing starts in 2020, that will accelerate that.

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Brook Campbell-Crawford, JP Morgan Chase & Co, Research Division - Analyst [33]

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Okay. And you noted there were 2 higher-margin site service projects in North America Fly Ash business falling off. What was the impact to Fly Ash margins due to those 2 projects?

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [34]

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I think the Barry and Gaston, that was a project where there was a plant constructed so that we can actually then get the marketing contract to broker the ash. So the margins achieved on those 2 projects during construction was around 28% EBITDA margin. And as you know, our average Fly Ash margin across both the brokering of ash as well as site services averaged around 24%, 25%. So with that coming off, that had an impact, so we showed a slight reduction in the overall Fly Ash EBITDA margin this year.

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Brook Campbell-Crawford, JP Morgan Chase & Co, Research Division - Analyst [35]

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Okay. That's great. And one last one, it might be in the releases as well. But what's the return on the pro forma Asia plasterboard JV on a pro forma '19 basis?

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [36]

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We haven't given the ROFE on a pro forma basis. I think all the numbers and all the assumptions are in the presentation, and I think you can easily construct that. But I'm more than happy to go through that today at our 3:30 call. As we talked about the joint venture itself, it is a little bit more complicated because obviously, we equity account the current joint venture. The extent joint venture will acquire those Knauf assets and we've spoken about the EBITDA multiple and the China business at just over 10x, which obviously Boral shares only 50-50 of that investment. We've given the pro forma EBITDA earnings as well as the EBIT earnings, so I think all the numbers are there but more than happy to take the work -- work through the math this afternoon on our call.

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Operator [37]

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Your next question comes from the line of Daniel Kang from Citigroup.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [38]

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Just a quick question for David on Fly Ash. You've indicated that your target run rate for FY '21 by the end of that is 8.6 million tons, and that's quite a significant uplift from the 7 million tons or thereabouts slightly higher in FY '20. Just what gives you the confidence that this additional 1.6 million tons can be reached? Can you provide some color and breakdown of that additional 1.6 million tons, what do you expect from imports, new contracts and the like?

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David Mariner, Boral Limited - President & CEO of Boral Industries Inc [39]

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So I can't necessarily break it down into their individual buckets. But what I can say is that we have about a 7 point, let's call it, strategic streams that were running through. And we described those last year at our visit in the U.S. and they'll be -- we'll provide an update on that this year. It ranges from storage to new contracts to imports to blending to technology advancements to the harvesting of the reclamation work that we've done in Montour, Pennsylvania. And all of those combined, I can't say for certain which one is going to be what volume. But all of those are moving forward from a progressing standpoint in which ones

[Audio Gap]

We'll let you know as they hit. We've got.

Audio Gap

that we're going to have some announcements in the future around one or multiple of those. I just don't have that timing right now. And until I have that, all I can really say is that when I add up all of the potential of all of those different streams, it's well above the target that we've provided. But we've obviously factored in some timing and some, I don't want to call it risk, but some conservatism into what we've put out in the market.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [40]

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And in terms of the margin shortfall in FY '19, do you expect a recovery back to 24%, 25% levels in FY '20?

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David Mariner, Boral Limited - President & CEO of Boral Industries Inc [41]

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Broadly, we hope to return to the mid-20s.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [42]

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Mid-20s. In FY '20 or in the medium term?

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David Mariner, Boral Limited - President & CEO of Boral Industries Inc [43]

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In both.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [44]

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Okay. Switching to Australia. You booked -- I think Wayne you mentioned about further savings from organizational effectiveness program of about $40 million to $50 million. Just wondering if this is a net off inflation benefit? Or to put another way, what's the annual cost inflation that you're expecting for FY '20.

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Wayne Manners, Boral Limited - Executive General Manager for Western Australia [45]

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So the cost -- so I'll answer that question. There's -- the net interest in the direct cost saving that we're looking to around that, I think, we indicated $40 million to $50 million or $55 million of direct savings. So again, we expect that to be a direct savings with a lot of the organizational effectiveness. We only partly delivered that in FY '19. The rest is to come. And we expect it mostly completed in FY '20, and other focuses on rightsizing the cost savings that we expect to deliver -- we'll deliver around that $45 million to $55 million mark into FY '20 as a direct saving.

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Michael Kane, Boral Limited - CEO, MD & Director [46]

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The cost inflation?

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Wayne Manners, Boral Limited - Executive General Manager for Western Australia [47]

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Cost inflation, we still think it will be around the 2% mark, 1.8% to 2%. We're expecting -- we're looking at salaries and wages to continue along the normal stream around the 2.5% mark, and then -- but items such as electricity and coal, we expect to decline. Diesel are largely steady, so yes, so but overall around the 2% mark.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [48]

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And Wayne, do you expect to try to push through some price hikes to recover the cost inflation?

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Wayne Manners, Boral Limited - Executive General Manager for Western Australia [49]

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So we previously committed to 2 price reviews per annum and we're certainly doing that. If we add some context to FY '19, a 6% decline in concrete volume, still achieving over a 2% price increase, is a reflection of all the good work done on our customer excellence programs. So one thing we learned from that is very, very strategic and targeted price increases get us better traction. So we are -- we have done a price review. That is being communicated out to the different segments now. But in this case, for this year, it is very strategic and very targeted based on a whole lot more information, a training development that we've done to recover the best we can.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [50]

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And just the last one, may be for Ros or Frédéric. In terms of USG Boral, post the deal, when do you expect your ROIC to return to your cost of capital? Is it within the 4 years of your synergies delivery?

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [51]

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So with the cost of capital, as were reported at the -- in our results, we're sitting at around 8% on the current joint venture, underlying. Yes, like we said earlier to your previous question, we can kind of work out the math in acquiring bringing the Knauf business into the joint venture. They are, that you have heard, profitable business in China but we are essentially buying the assets that they've placed in Southeast Asia. So it's going to take a little bit of time to get the combined earnings from the bigger footprint in Asia. We've got the $30 million that we've talked about in terms of synergy targets. That's going to be in year 4. So I think even without Australia in there, I think we'll continue to see the ROFE improvement underlying basis and get to cost of capital in 4 years and obviously, if we include Australia, we'll get their a lot sooner.

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Operator [52]

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The next question comes from the line of Keith Chau from MST Marquee.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [53]

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May be Wayne, can I just follow up on the concrete price discussion that we've just had. Obviously announcing price increases is one thing but realizing them is certainly another particularly in the competitive dynamic that we're seeing in Australia at the moment. So I'm wondering if you can just outline within the key states where concrete prices are going. Queensland looks like it's obviously tough given the capacity that's being added and New South Wales coming off the peak from a demand perspective. So can you just characterize what you're seeing in the market at the moment across all of those major states, please?

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Wayne Manners, Boral Limited - Executive General Manager for Western Australia [54]

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So I won't go through state by state, but -- and again a lot of it is about -- if you look across the detached and multiresidential coming down pretty much in every state, then nonresidential going up in some states and not others, it really is a horses for courses. We're seeing nonresidential improve in both New South Wales and Victoria. Some roads, highways and those sort of projects, particularly in Victoria. And so again, it's very targeted but nonresidential improving in New South Wales and Victoria. Our placing business demand in gas around the commercial being nonresidential is performing strongly in FY '20. So it really is a mixed bag. And again, our objective is our price increases to more than offset the cost of inflation, and that's still our target.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [55]

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Okay. So I mean, with that being the target, I guess factoring in the competitive dynamic and looking everyone's going to have different expectations of volumes for next year. But how realistic is it to actually be able to achieve the weighted average price growth across the entire portfolio given the macro backdrop at the moment?

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Wayne Manners, Boral Limited - Executive General Manager for Western Australia [56]

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Well, again, I think if you reflect back on FY '19, where we had a 6% decline in concrete volumes but we still achieved 2.2% of price increase on a like-for-like basis in concrete, I think what it reflects is that our customer excellence program is more than just about announcing a nationwide price increase. It's about having the dialogue, the strategy, the information, the training and everything else to deliver the best possible outcomes you can on a product-by-product basis and a client-by-client basis, and that's what we're doing.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [57]

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Okay. And perhaps just one more on the cement market. So your volumes are going to be external market. I think its competition is higher in concrete, it's probably even more so in cement. So can you characterize the outlook for pricing in the cement market, please, across your weighted average exposure?

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Wayne Manners, Boral Limited - Executive General Manager for Western Australia [58]

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We saw in FY '19 the -- effectively, on a like-for-like basis, cement price increase by about 1%. We're really working through that at the moment. Again, it's market by market, Southeast Queensland is different to other markets. So yes, it's the same as the other story. We're expecting to put out on a targeted basis around cement pricing depending on the differences in the market.

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Operator [59]

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Your next question comes on the line of Rohan Koreman-Smit from Goldman Sachs.

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Rohan Koreman-Smit, Goldman Sachs Group Inc., Research Division - Industrial Analyst [60]

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Just a couple of quick questions. Sorry to really get the point on concrete. But it looked like the second half was probably where you had most of the volume decline, and pricing was particularly weak. Can you just maybe give us a bit more color on, I guess, how the second half in particular played out? And then also on Australia, just some color on the margins going forward particularly given that, I guess, New South Wales is falling more than the national average and that's probably where you have your strongest margins. That does feel like there's a bit of a shift away from you, particularly as you were talking to your increased non-res and infrastructure and the effect where the margins are strong in the business, in my understanding. And then last question is more about gearing. I know you talked to gearing below the 2.5x post the acquisition, but you're putting a bit at the end of the new JV. Do you have some color on what the kind of look-through gearing will be for the entire business?

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Michael Kane, Boral Limited - CEO, MD & Director [61]

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Okay, so I'll answer the first question which was around first half versus second half before I understand that correctly in concrete volumes. What we saw in the second half was impact on several concrete projects being delayed, but there was still a skew in the second half of 51% to 48% on a year-on-year basis. So concrete volumes were still strong, but we did see some delays in projects which we've talked about quite probably before. In terms of -- yes, no doubt. I think as we've articulated, the concrete volumes in New South Wales we expect in FY '20 to decline by 5% with detached and multiresidential coming off as well. So there's no doubt margins in New South Wales and across the business are going to be a challenge and that's where offsetting in nonresidential through demand in gas and marine picked up in projects in Victoria but also our self-help projects really need to come into play in FY '20. I'll let Ros answer the...

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [62]

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So with the joint venture, the Asian joint venture, as we talked through the slides, they're acquiring for $532 million. We get proceeds of $50 million in the joint venture, so it's $482 million. We talked about that the joint venture in itself will acquire external debt of $200 million, and the balance of around $270 million will be funded through equity contributions from both 50% from bond, 50% from Knauf. So then if we concentrate just on the joint venture, you'll see that from our results last year as well as this year in FY '19, we actually have a net cash position in the joint venture. And roughly, we've been holding on average around $60 million up to $80 million of net cash in joint venture. So when you think about the joint venture acquiring $200 million of external debt, it's already got the $60 million, $70 million of cash. It's a very modest net debt that we'll be putting in the joint venture. So from a net debt-to-EBITDA at the joint venture level, it's less than 1. So it's not going to have a big impact on a look through.

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Operator [63]

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Your next question comes from the line of Brook Campbell-Crawford from JPMorgan.

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Brook Campbell-Crawford, JP Morgan Chase & Co, Research Division - Analyst [64]

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Just a follow-up from me on the North America Fly Ash business. For David, what proportion of your Fly Ash contracts pricing resets during FY '19?

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David Mariner, Boral Limited - President & CEO of Boral Industries Inc [65]

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I think the easiest way is most have pricing resets only because they're tied to revenues. So we -- those contracts, which is the majority of them that are tried -- tied to a revenue share of -- that moves consistently. Beyond that, we're continuously either extending contracts or working with the utilities on a case-by-case basis, and I don't believe we disclosed that figure. So it's an ongoing effort in terms of extending current contracts, getting new contracts and therefore, all I can say is that it's what we do all the time and I don't believe we disclosed that.

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Brook Campbell-Crawford, JP Morgan Chase & Co, Research Division - Analyst [66]

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No, that's fair. I guess what I'm trying to get at here is double-digit price increases, synergies coming through but margins looks pretty down, pretty meaningfully in the second half, putting these site services to one side. So is the issue here repricing these royalties, or is there a bigger issue here that we should be focused on?

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David Mariner, Boral Limited - President & CEO of Boral Industries Inc [67]

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There's cost inflation that comes through the business. If you look at the MD&A, revenue is up about 7%, pricing is up 11%, volume is down 3%. So you can do that rough math and you can see that. We held our own in terms of total profitability on the nonsite-specific work, and that was largely due to revenue being above what it has been in the past as well as the volume decline of roughly 3% year-on-year.

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Operator [68]

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(Operator Instructions) There are no further questions at this time. I'd now like to hand the conference back to today's presenters. Please continue.

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Michael Kane, Boral Limited - CEO, MD & Director [69]

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Well, thank you very much for those on the line and those in the audience for your patience, and I realized it's a lot of dry run through a lot of twisting numbers. But we're confident that the outlook that we put is the best realistic focus on what's happening in the market today, and we think that we've got a portfolio of businesses that can weather this and come out stronger on the other end. Thank you.