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Edited Transcript of BLD.AX earnings conference call or presentation 25-Feb-19 12:00am GMT

Half Year 2019 Boral Ltd Earnings Call

Sydney Jun 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Boral Ltd earnings conference call or presentation Monday, February 25, 2019 at 12:00:00am 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

* Michael Kane

Boral Limited - CEO, MD & Director

* Ross T. Harper

Boral Limited - Group President of Operations

* Tony Charnock

USG Boral Building Products Pte Limited - SVP of Asia Pacific

* 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

* Daniel Kang

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

* James Brennan-Chong

UBS Investment Bank, Research Division - Associate Director and Mining Associate Analyst

* Keith Chau

Evans & Partners Pty. Ltd., Research Division - Former Senior Research Analyst

* Lee Power

Deutsche Bank AG, Research Division - Associate Analyst

* Peter Wilson

Crédit Suisse AG, Research Division - Associate

* Peter Steyn

Macquarie Research - Analyst

* Simon Thackray

CLSA Limited, Research Division - Research Analyst

* Sophie Spartalis

BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Boral 1H '19 results financial community call. (Operator Instructions) I must advise you that this conference is being recorded today, February 25, 2019.

I would now like to hand the conference over to your first speaker today, Sir Mike Kane, CEO and Managing Director. Thank you. Please go ahead.

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

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Good morning, and thank you for joining us today. We appreciate Macquarie hosting us in their Sydney office. Today, we've made 3 announcements: we've announced our results for the half year to December 2018; we've announced progress towards a potential growth strategy, the USG Boral; and we've announced changes to our senior leadership team. I'd like to cover all 3 topics starting with the results.

As our usual format, I'll provide an overview of group individual performance and comment on outlook, and Ros will present the financials in between. I'll then talk through the progress we are making in relation to USG Boral and finish by commenting on our new organizational structure.

I'm joined by Ros Ng, who takes on an expanded role as Group President, Ventures and CFO; as well as Ross Harper, in new role as Group President, Operations; Wayne Manners, now President and CEO of Boral Australia; and David Mariner, President and CEO of Boral North America.

A few weeks ago, we announced our headline numbers for the half year as part of a trading update. I can confirm to the half year, we delivered EBITDA of $485 million, down 3% on the prior period; and net profit after tax but before significant items of $200 million, down 6%. These numbers include discontinued operations. Including significant items, net profit after tax of $237 million was up 37%. The board has declared an interim dividend of $0.13 per share, a 4% increase on the interim dividend last year. The interim dividend is 50% franked, which is in line with Boral's proportion of offshore earnings.

At Boral, managing safety well remains our highest priority. Our first half safety results are very gratifying. We pushed through the resistance to improved recordable and lost time injury frequency rates. We reported an LTIFR of 1.1, which is approximating world-class performance and compares with 1.6 for financial year 2018. Boral's combined employee and contractor recordable injury frequency rate of 6.7 compared with 8.3 in the first half last year and 8.7 for financial year '18. Pleasingly, the improved performance was sustained across all divisions with the legacy Headwaters business delivering a significant turnaround in performance.

Looking now at group EBITDA, which was $485 million for the half year compared with $500 million for the first half last year. The $15 million year-on-year difference in EBITDA is equivalent to the impact of reduced earnings due to divestments of U.S. Block and Denver Construction Materials. Higher earnings from Boral North America and lower corporate costs were offset by lower contributions from Boral Australia and USG Boral.

Boral North America reported a $31 million uplift in EBITDA to AUD 196 million, an 18% increase, which was helped by exchange rate movements. In U.S. dollars, EBITDA was up 9%, underpinned by strong earnings in Roofing and USD 14 million in synergies. However, we experienced extreme rain in key U.S. states, which significantly slowed activity in volumes.

Boral Australia reported EBITDA of $271 million, which was $24 million lower year-on-year or an 8% decrease. Underpinned by an 8% decline in Concrete volumes, the result primarily reflects moderating residential demand, not yet fully offset by infrastructure volumes due to delays and disruptions on some projects and project phasing, coupled with adverse weather in New South Wales in October. In USG Boral, our share of equity accounted earnings of $25 million was $14 million lower year-on-year reflecting lower earnings out of South Korea due to a cyclical decline and increased competitive intensity as well as higher input costs associated with gypsum, paper, labor and energy, which impacted most businesses. Our post-tax equity earnings also reflect a higher effective tax rate, mainly due to higher Australian earnings and an increase in withholding tax.

During the half, underlying activity in most of our key markets remained solid, although growth rates were slower than previously expected. In Australia, the roads, highways, subdivisions and bridges market grew 4%. Non-residential activity was up 3%. And residential construction remained strong with market forecasters expecting approximately 199,000 starts in financial year '19. This is still well above long-term average levels. In the U.S., total housing starts were up a modest 2% to an annualized rate of 1.23 million, driven by multifamily starts up 8% nationally. On average, market forecasters expect U.S. starts to lift about 2% to 1.27 million in financial year '19. The repair and remodel market lifted by around 3%, nonres activity grew 5% and U.S. infrastructure based on ready mix concrete volumes was up 4%.

In Asia, the residential market slowed in South Korea with the market falling from a cyclical peak. While activity in China is positive, environmental regulations continued to reduce the plasterboard industry's capacity, but not to the same extent as previously reported. Activity in Thailand and Indonesia remained subdued, while India and Vietnam continued to grow.

Next to the weather chart. We've previously spoken about the impact of weather on our business. In the half, we saw extended periods of above average rainfall in the South, Midwest and Northeast, with some parts of the wettest on record. This caused significant delays in construction activity, particularly in Texas, our key U.S. state. The overall rain impact was more significant in over a wider geography than that experienced from 2 hurricanes in the first half of financial year '18. Our Windows and Fly Ash businesses were particularly impacted.

Turning to our 3 divisions. Boral Australia revenue increased modestly by 1%, reflecting a higher contribution from Quarries, Cement and Asphalt, but a lower contribution from Concrete & Placing. Overall, the business benefited from growing infrastructure activity. However, softer residential construction, adverse weather in New South Wales in October, project delays and phased translation into lower concrete -- translated into lower concrete volumes. Compared to the prior period, this contributed to a less favorable product mix of lower margins in Australia.

In Concrete & Placing, earnings were adversely impacted by lower concrete volumes and a higher proportion of revenue from the lower margin placing business, which reported strong growth. In Quarries, while revenue grew, earnings were lower due to strong growth in lower-value products in Southeast Queensland and New South Wales. We also experienced higher production costs, particularly in Victoria, where both the new and old plants are operating concurrently at Deer Park to supply/demand.

In Asphalt, revenues strengthened but earnings declined as strong growth in infrastructure activity was tempered, several major project delays and phasing impacts in Queensland and New South Wales, rain impacts in New South Wales in October as well as some project delays in Victoria. In Cement, total volumes were lower. Lost production days at our Berrima kiln as well as higher fuel and clinker costs underpinned slightly lower earnings.

In the small Building Products business, revenues were steady but earnings weaker as price gains did not quite offset inflationary cost increases.

Overall, for Boral Australia, EBITDA decreased 8% to $271 million, and excluding property, EBITDA was down 7%. EBITDA margins of 14.8% were softer than the strong 16.3% margins delivered in the first half last year. The softer margins reflect a less favorable product mix and the costs and inefficiencies associated with lower than expected volumes.

On a like-for-like basis, prices were up between 1% to 3% across Quarries, Cement and Concrete; wages are growing around 2.5% to 3%; and inflationary costs in other areas are running at about the same. So price alone was not enough to recover costs, which remains our goal.

Cost reduction initiatives continued to play a key role and will be an important feature going forward. Energy and fuel prices were $10 million higher, largely due to diesel fuel costs. The second half we expect to see a similar $10 million to $15 million cost impose due to higher energy and fuel prices.

Now to Boral North America. The division benefited from significant growth in Roofing and acquisition synergies. As previously noted, extensive rain falls in the half year across the South, Midwest and Northeast significantly impacted the business from a volume and cost perspective. EBITDA increased 9% $141 million, benefiting from a further U.S. $14 million in synergies. Solid overall price gains across all businesses and operational improvements substantially offset higher costs. Higher earnings contributions from Roofing, Stone, Windows and Meridian Brick JV were partially offset by weaker earnings from Light Building Products. EBITDA margins in Boral North America are approaching 18%, the highest divisional margins this half.

Looking at each business in more detail, we delivered strong price growth of 13% in Fly Ash, and pleasingly EBITDA margins for Fly Ash remained steady at 24% as higher costs were offset by price. Fly Ash volumes declined by 6%, reflecting prior period Texas utility closures, intermittent utility outages, which are a common feature of the business, and extreme wet weather conditions. Despite this, we are making progress to optimize our network and increase supply. During the half, we added 20,000 tonnes of new mobile storage capacity and a further 50,000 tonnes of storage capacity coming online this calendar year. We are selling Fly Ash from our first landfill reclaim site, and we have started importing ash from Mexico into the U.S.

Roofing delivered strong earnings growth driven by a 16% increase in revenue. Significant growth in concrete tile was underpinned by strength in the Florida market where demand growth exceeded housing starts. Operational improvements at the Okeechobee plant and completion of the Lake Wales plan upgrade helped the result. We continued to experience some production constraints at the Oceanside metal roofing plant where we expect higher volumes and lower costs in the second half following improvements in manufacturing capacity.

Light Building Products reported a 2% revenue lift of softer earnings. Significant volume gains in Versetta and TruExterior trim and siding were offset by softer volumes across most other product lines due to weaker market demand in the Northeast and Midwest markets, which were also weather affected. Earnings in Light Building Products were impacted by higher raw material and labor costs and continued high production costs in the TruExterior trim and siding business.

Stone revenue and volumes were modestly higher. Earnings benefited from solid price gains and completion of commissioning of the upgrade at Greencastle, Eldorado stone plant. This was partly offset by cost pressures, particularly from raw materials and labor and a modest decline in volumes reflecting softer demand in the U.S. Central, Northeast and Southern regions. The Windows business benefited from strong underlying demand despite the record rainfall in Texas. While this led to a decline in revenue, earnings were stronger.

The Meridian Brick JV delivered post-tax equity earnings of U.S. $1 million, up from a loss of $2 million in the prior period. Prices were higher but volumes lower, reflecting a smaller distribution network following prior period manufacturing and distribution asset closures, softer market demand in Canada, weather impacts as well as continued downward pressure on brick intensity.

As I've mentioned, we've delivered cost and revenue synergies in the first half of U.S. $14 million. These are in line with our target of an additional USD 25 million in financial year 2019. USD 14 million delivered in this half year had the full year benefit of prior year headcount reductions flowing through. A 4-year synergy target of $150 million remains on track.

Boral's North America total cost base is around U.S. $720 million with materials, labor and logistics accounting for 3/4 of this. In the half, we saw 4% to 6% increase in raw materials depending on the region, the material, including increases in cement, vinyl and PVC. We expect these raw material prices to stabilize in the second half. We have previously noted that labor market conditions remained tight in some regions, and this is still the case.

In terms of logistics, the availability of carriers and equipment along with increased fuel prices has been challenging but manageable. Around 35% of our transport costs are billed direct to customers in our Fly Ash and in part of our Roofing and LBP businesses. We continue to target to recover cost increases through price.

Turning to USG Boral. Revenue was up 2% with volume growth in Australia, Indonesia, Vietnam and India as well as higher non-board revenues and some benefits from FX impact. This was offset by lower revenues in South Korea. Earnings were 16% lower reflecting the cyclical slowdown in South Korea and a higher material, labor and energy costs more broadly. Excluding South Korea, earnings were only marginally lower as increased contributions from Australia, Vietnam and India were offset by lower earnings from Indonesia, China and the Philippines.

Our 50% share of USG Boral's post-tax earnings of $25 million was down 35% partly due to a higher effective tax rate in the JV as mentioned earlier. Australia and New Zealand saw broadly steady prices, but higher board volumes and growth in non-board revenue, most notably for contracting service. Higher earnings in Australia reflect continued strength in residential and commercial construction demand and lower cost compared with the prior year, which was impacted by one-off costs associated with gypsum supply issues through GRA.

In South Korea, volumes were down around 15% to 20%, and prices were also lower, reflecting declining market demand and increasing competition as the housing market comes off its cyclical peak. Volumes and margins were also impacted by Typhoon Soulik and associated rain in the September quarter. While margins were down year-on-year, importantly, the business is sustaining its market share and margins for South Korea remained well above USG Boral's average margins.

China reported revenue growth, reflecting growth in non-board products and favorable currency impacts. Earnings were softer with price gains offset by lower plasterboard volumes and cost increases. Flooding in our Chongqing plant in July and August resulted in 5 days of lost production. Earnings in Thailand and Indonesia were broadly steady, while India and Vietnam both reported revenue growth and improved earnings.

We continue to target returns that exceed the cost of capital through this cycle. Boral Australia delivered an EBIT return on funds employed of 15.9%, well above ROFE equivalent cost of capital of 9% to 9.5%. Boral North America with a ROFE of 4.6% 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% dipped below Boral's cost of capital, reflecting the lower half year earnings performance. Group ROFE was 8.1% for the half year.

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

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [3]

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Thanks, Mike, and good morning, everyone. Boral's 2019 half year results is in line with guidance provided earlier this month. Reported revenue of just under $3 billion was up 2%, and EBITDA of $485 million was down 3%. Excluding discontinued operations, EBITDA was broadly steady. Depreciation and amortization of $156 million was up from $150 million reported for the first half last year.

EBITA, that is EBIT before the $32 million of amortization of intangibles, was $329 million, down 6%, and EBIT of $297 million was also down 6%. Net interest of $49 million was slightly lower than the prior period. Our income tax expense of $48 million and the effective tax rate of 19.4% were also lower than the prior period. The lower effective tax rate reflects further recognition of previous unrecognized tax losses as well as favorable adjustments to tax provision from the reassessment of tax exposures. Excluding these items, the underlying effective tax rate was around 23%.

Net profit after tax and net profit after tax before amortization, NPATA, were both down 6% to $200 million and $224 million, respectively. Significant items, which I'll turn to in the next slide, resulted in net gain of $36 million, and statutory net profit after tax was up 37% to $237 million from a $173 million for the first half last year.

Looking at significant items in more detail, Headwaters integration and other IT integration costs as well as the costs associated with rationalization of some of our U.S. Stone plants totaled $13 million. This now brings our total Headwaters integration costs to around USD 75 million. Our forecast remains unchanged of around USD 95 million to USD $100 million as announced on acquisition. During the half, we sold 2 businesses, Denver Construction Materials and U.S. Block business. We recorded a gain on sale for both business being $63 million and $3 million, respectively. Net of tax, we recorded significant items of $36 million for half year.

Now turning to cash flow. Operating cash flow of $253 million increased 17% as a result of the reduction in Headwaters integration costs compared to first half last year as well as lower tax payments and vesting of share acquisition rights. This was partially offset by an increase in working capital, mainly due to high inventories, slight increase in debtor days, and by unbilled receivables with respect to construction projects and asset sales in Fly Ash of $28 million. The unbilled receivables with respect to construction projects in Fly Ash are expected to receive the second half of this year.

In addition, there were lower bonus incentive provisions in the half compared to prior half. Free cash flow of $441 million was higher as a result of sale of Denver Construction Materials and U.S. Block businesses. We also acquired a small concrete placing business in Queensland. This was a relatively modest investment of the $11 million.

We continue to maintain a disciplined approach to capital management. Total capital expenditure increased 11% to $182 million (sic) [$183 million] driven by our capital investment program. In Australia, this program includes cement and quarry upgrade. We completed the Orange Grove plant upgrade in Western Australia, and we expect to complete the Ormeau Quarry expansion in Queensland in the second half of this year. During the half, we continued to make modest investments in Boral's concrete and asphalt network, a new high capacity concrete plant at West Melbourne. It's being commissioned and will replace our closed North Melbourne plant. We are also commissioning our new Toowoomba asphalt plant in Queensland.

Last year, we finalized plans to build a new clinker and slag grinding and cement storage facility at Port of Melbourne, Port of Geelong in Victoria and commenced early works on the project. CapEx in Boral North America includes investment in Fly Ash, including rail cars, the Montour reclaim facility and fixed storage. We are also upgrading our Stonecraft plant in Ohio and our manufacturing stone plant in Mexico. The USG Boral joint venture continues to self-fund its capital requirements. Our updated CapEx range for Fly Ash in 2019 is expected to be in the range of $425 million to $450 million.

Now looking at our balance sheet. At 31st December 2018, Boral's net debt position was $2.3 billion, down from $2.45 billion at June '18 due to repayment of syndicated bank loans with proceeds from the sale of the U.S. businesses, which was partially offset by weaker exchange rate. We remain well within all our group's funding covenants, with our principal debt gearing covenant at 29%, down from 31% at June 2018. A weighted average debt facility maturity is 5 years, down from 5.5 years at June 2018. Our balance sheet remains in a strong position and continues to support existing BBB and Baa2 investment-grade credit rating. Our net interest cover of 6.1x is down from 6.6x in June. And our net gearing, net debt over net debt plus equity was 28% at the end of December '18, down from 30% at June 2018.

I'll now hand back to Mike to cover our outlook.

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

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Thanks, Ros. Turning to the outlook for the remainder of financial year '19, which we provided in an update to the market earlier this month. We expect that Boral Australia will deliver broadly similar EBITDA this year to financial year '18, excluding property in both years. We expect property earnings to be around $30 million this year compared to $63 million last year. Boral North America is expected to deliver EBITDA growth of approximately 15% in U.S. dollars for financial year '19 for continuing operations, reflecting volume growth, further synergy delivery and operational improvements. And USG Boral is expected to deliver slightly lower profits in financial year '19 compared with financial year '18. Across most businesses, we expect higher volumes and business improvement initiatives to contribute to the second half's skew.

Before I open up to questions, let me talk through the other 2 announcements we made today. USG Boral continues to provide an exciting long-term growth platform for Boral. On the back of Knauf entering into a merger agreement with USG earlier last year, we have been considering a range of strategic opportunities in relation to USG Boral, including whether to exercise our call option to acquire USG's 50% share of the JV.

While moving to a 100% ownership of the business still remains an option for us, this morning we announced that we are working with Knauf to progress a value-creating strategy for the USG Boral plasterboard business. We have entered into nonbinding term sheets with Knauf to explore forming a new expanded Asian plasterboard JV, which would see Knauf's and USG Boral's plasterboard assets in Asia come together.

Despite the cyclical challenges faced by USG Boral in the past half year, we are very confident of further growth and expansion for our Asian plasterboard business. Joining forces with Knauf to deliver that growth presents a very attractive scenario. We are also considering the opportunity to acquire USG Boral's Australian and New Zealand business returning Boral to a 100% ownership in that region. It's a business we know well and one which has strengthened considerably in recent years through the rollout of Sheetrock in particular. Should we return to owning a 100% of this business, it will be conditional on continued technical and R&D support from USG Knauf.

Any deal with Knauf is still subject to valuations and further negotiations and subject to Knauf completing the merger with USG, and we are pleased with the progress we have been making. While we are working with Knauf, the current valuation process underway with USG for the USG Boral business is continuing. Importantly, we are under no obligation, and we'll only invest if it is value creating for our shareholders.

There are various contractual arrangements in place. We will retain our call option in the event a transaction is not agreed to with Knauf. A standstill is in place, while negotiations are continuing on any potential litigation by Boral against Knauf, should Knauf complete its merger with USG before reaching a definitive deal with Boral. And as we've indicated previously, should an investment be made, we have a strong preference to use debt and the proceeds from asset sales.

Now, let me comment on the organizational changes that we also announced this morning. The changes to our executive team effective the 1st of March are important for executive development and to ensure Boral is well prepared for senior level succession in the coming years. I expect to stay in the CEO role for another 2 to 3 years. But it's important to plan for the future and for the Board to be able to consider highly capable internal executives with strong operational experience at the appropriate time.

Joe Goss, who has been Chief Executive of Boral Australia for the past 6 years, is moving to a senior advisory role reporting to me. Joe's move makes way for Wayne Manners to step up into the role of President and CEO of Boral Australia. Wayne, who many of you know, is currently EGM, Western Australia, Building Products and Major Projects.

Ross Harper, currently Executive General Manager, Cement, steps up into a new role of Group President, Operations, responsible for Boral Australia and Boral North America. Ross will be returning -- working closely with Wayne, initially focusing on Boral Australia and over time he will work more closely with David Mariner, President and CEO of Boral North America in this new role, giving Ross the opportunity to better understand the U.S. business and to help David further strengthen our operational and safety outcomes in North America.

Ros Ng, who's been CFO, working alongside me for the past 6 years, takes on an expanded role as Group President, Ventures and CFO. This is a natural transition for Ros as she has been progressively leading the execution of our strategy in relation to USG Boral and has been the Chair of USG Boral for the past year. Ros will work closely with Frédéric de Rougemont, CEO, USG Boral, and also Chris Fenwick, who is recently appointed CEO of Meridian Brick, moving across from Building Products.

These changes recognize the skills and capabilities of Wayne, Ross and Ros and provide them with the opportunity for deeper operational and leadership development. I wish them well and look forward to the leadership team coming together to outperform and deliver on Boral's strategy.

I also want to thank Joe for the significant contribution he has made as Chief Executive of Boral Australia over the past 6 years, including delivering solid financial performance and significant safety gains. He's created a strong foundation for Wayne and Ross to build on.

On that note, I thank you for your attention, and Ros and I will now open to questions starting with those in the room first, followed by questions from those on the call. Peter?

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Questions and Answers

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Peter Steyn, Macquarie Research - Analyst [1]

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Perhaps just delving very quickly into the Australian market environment. Could you give us a little bit more of a detailed sense of how you're expecting the infrastructure environment to come alive for you in the very short term relative to what you're seeing in the residential market? Could you just give us a little bit more detailed view there?

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

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So, I think I've discussed this in the past. It's not a seamless handoff between residential and infrastructure. But if you just look at the Macromonitor charts and what we've tried to do, I think we've got it somewhere in the presentation, shows several years of that, you'll see that the peak just keeps getting larger and larger on the infrastructure. And so as we've tempered down on residential, we're not always picking up volume for volume immediately. But we think that, that -- because of the continued growth of the pipeline of infrastructure, we think that will moderate in the next couple of years, and we expect infrastructure to really overcome and overwhelm the housing demand.

Now our view on housing is something in the neighborhood of return to a trough of about 170,000 starts in Australia. We don't expect it to go down to 150,000 and below, where it's been historically in the past. And we then expect a modest return in the next 2 to 3 years in the housing market in Australia. I think that's evidenced by the fact that there's still significant demand for detached housing, albeit multifamily housing, and it's probably been a bit overdone.

When you look at the infrastructure work, clearly, there's -- there are some major projects that are being led right now. We're in the midst of a very large one in Victoria, and you will be able to make more announcements about that in the next 6 months. But suffice it to say that there is extraordinary volume of work. I think we're now up to the peak of the Macromonitor chart, $24 billion of work in place expected in the next 3 to 5 years and that's an extraordinary amount of work. And for us, it means significant volumes of asphalt, aggregates, cement and concrete. So we're still strong believers that the transition will benefit us in the long run. We have these transitions going, and I think we're at one right now, where housing was coming down faster than infrastructure was picking up, and sometimes it's the nature of these projects that we need to expect delays, and that's what's been happening.

A lot of competitive intensity in the contractor market space, but that same competitive intensity doesn't exist in the supplier base. That -- there's been no increase in competitive intensity between us and the other 2 majors in supplying materials to this marketplace. So we feel comfortable that we can manage these transitions quite well.

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Peter Steyn, Macquarie Research - Analyst [3]

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And then perhaps just a second question around the USG Boral joint venture option supply ahead of you. Perhaps just maybe a very quick question for Ros to provide context. But I am curious to understand at your current credit ratings, how much capacity lies in the balance sheet to fund any transaction? And then how do you think about the phasing of debt in the context of some very complex structural aspects of the contraction in potential asset sales.

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

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Let me let Ros answer the balance sheet questions, and I'll get into what we can reasonably expect.

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [5]

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Well, Peter, as you know, we've double echoing here I've got this one as well. But as you know, we've done lot of good work in the balance sheet, in particularly -- balance sheet with the 2 sales of the U.S. businesses. Despite the unfavorable FX rates, we're down to gearing of 28%, about $2.3 billion net debt. We say that there is lot of flexibility and headroom in our balance sheet. And as Mike mentioned, we're still obviously going through the next stage of valuation process. We've talked about where our preference would be with debt and asset sales, but you will find out we have a sufficient headroom to maintain those investment grade credit ratings as well.

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

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So I think the way to look at this -- there's a converse way of looking at our options here that may be a simpler way of describing that. And the first is, we have no requirement that we do anything. So if I sit on my hands and do absolutely nothing and cannot close the USG deal, I own 50% of the JV. I also own a significant portion of lawsuits that I'll be filing against my partner for violating the agreement immediately. So that's the first thing you need to understand. I'm required to do nothing and I still own 50% of the JV. Now the question is, can we end up in a better position than we are today? And that's what we're trying to work towards. So one of the options, and depending on the valuation process, is we can get through the end of the valuation process and there could be an attractive price with which I could buy the other 50% of the JV and take it in 100%. As soon as we know what that price is, I'll tell you whether or not it's attractive. But we'll certainly have a period of time, 28 days after that result comes back and, frankly, there's a second tier to that process, so that thing could last 6 months. But in any event, at some point, we will get a number, and we will have 28 days to decide whether we want to spend that amount of money. And that will all be subject to our ability to pay and the relative attractiveness of that option versus a third option. The third option is the one we're aggressively pursuing, and we've got the standstill arrangements in place with Knauf, is to see whether we can pull together a plasterboard JV in the Asia Pacific region that makes sense. And when you narrow it down to plasterboard compounds and plasters business in the Asia Pacific region, roughly, roughly, we have about 75% revenue and, by comparison, Knauf is about 25% the size of us. So if you just look at that, that's the relative size of the 2 pieces. And so it'll be a smaller check that we'd have to write on 50% of the Knauf assets coming in. The exact proportions of that JV, one of the things we discussed today is we're looking to pull the Australia business out of the JV. But we haven't finalized what we're going to do with some of the other assets in the JV that both Knauf might have as well as that we have in the JV. But suffice it to say, just looking at pure plasterboard, that's about the relative size that's between us and Knauf. We think there is real value-adding opportunity to join forces with Knauf. The global -- largest -- once they close the USG deal, the largest gypsum company in the planet with significant global resources and technology capability, it precludes our need to have to stand up R&D and the deep technical services bench. And so there's a lot of reasons why it make sense if we can come to a value-creating JV with Knauf, and we're working on that assiduously.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [7]

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Peter Wilson, Crédit Suisse. In regards on the Australian business, where do you expect the growth to come through in the second half? Is it revenue or EBIT? Because if we look at the first half, you pointed to the impact of weather and project delays, which I would have expected to impact revenue. But revenues were up 1% and the story of the first half was actually that costs were up significantly. So in the second half, are you expecting a large increase in revenues or some sort of cost abatement or reversal?

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Michael Kane, Boral Limited - CEO, MD & Director [8]

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So one of the problems as you work through the math is, what type of revenue are we talking about. So in the first half, Concrete Placing revenue was substantially up, we make a very low margin on Concrete Placing. Where we want the revenues to increase is in places like cement and quarry products more so than in downstream products like concrete or Concrete Placing. So that's the problem just looking at revenue as a stand-alone item. We are not -- as we said in the update and guidance a few weeks ago, we are not talking about completely dry weather in the second half and no rain impacts. We're just looking for normal second half in terms of weather impacts. And Ros?

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [9]

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And I just want to add that, as Mike mentioned, Concrete Placing is a low margin, we talked about concrete volumes being down 8%. Obviously, concrete volume is the most profitable because of the whole integrated margins that go with it. So your question, in the second half would you expect second half revenue to increase to deliver the full year outlook, and we do expect the benefit of the cost reduction, some of the cost issues that we've had in the first half to improve in the second half. So it's a combination both revenue and cost management in the second half.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [10]

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And then the U.S. business -- U.S. Building Products. The Roofing business was singled out as the -- or one of the best growing businesses in the first half, revenue up 16%. U.S. peers have attributed the very strong market in Florida, in particular through Hurricane Irma and noted a dramatic fall of in volumes after reworking effects from Hurricane Irma computed out. Is that your expectation or do you expect Roofing continue to be a strong contributor?

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Michael Kane, Boral Limited - CEO, MD & Director [11]

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I expect Roofing to be -- continue to be a strong contributor, but not nearly at the level that we saw in the first half. So clearly, the reroof activity behind the hurricane has impacted the results today. But we're seeing strength across the entire roofing network, not just in Florida, although Florida is a standout. So yes, we expect it to moderate back once all the reroof is done. But I can tell someone who owns property in Florida that the reroof work is still a way off of being completed. But I would expect in the next financial year that that work will wrap up and it will shrink back Florida's impact. But I expect continued strength from California, Arizona, Nevada, Texas, East -- continued strong market for our Roofing business.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [12]

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And one last one if I could on Light Building Products. There's bit of a change in, I guess, language towards that division. It's always held up as one of the shining lights in the portfolio, but now it's minting moderate revenue growth, earnings declines and there's some sort of other product categories that's dragging from revenue. Has there been any change in your thinking towards that business?

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Michael Kane, Boral Limited - CEO, MD & Director [13]

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So, what we've seen in the last year has been the impact of resin price increases probably began with the hurricane that hit Texas. And so we've seen cost impact in resins that immediately impact that business. I think in the long run, we view Light Building Products as a significant growth platform for us. We have strong positions at retail in the shutter market in some rather obscure PVC-type businesses. And then embedded in that division, we have emerging products like the BCI product and the Versetta product, which both are growing at substantial double digit growth margin -- or sales volumes every year. So it's a mixed bag. It's a maturing division. The strength of the U.S. market begins first and foremost in the Fly Ash side of things and then the more traditional products like roofing tile. But I fully expect in the long run that the Light Building Products division will take its quite a place, but it's going to take us a few years to develop that and make sure that that portfolio is robust enough. Our Windows business is very, very strong. And so, I look across the U.S. -- I see there's been positive outcomes in a marketplace that has given us 2% housing start growth. We're seeing improved performance, lower -- improved efficiencies out of our plants. We're having some cost impacts, but we're getting price to fully offset cost. And so therefore, I feel comfortable that the U.S. market is -- will continue to grow. This is why we invest in Headwaters. This is -- our view of the U.S. market is that it has significant upside growth to achieve 20-plus percent EBITDA margins. And really, as you can see in the results in the half, almost 2% higher in terms of EBITDA margin versus the Australian business. It's got a lot more upwards potential and growth potential in the long run than even Australia.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [14]

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Sophie Spartalis from Merrill Lynch. Just a couple of questions. Firstly, on USG JV. I guess 6 months ago, we thought that that decision was to be handed down now. We've now got a 6-month delay. Can you just talk through why you've got the delay, why you've got this extra time and then also what has changed? Because 6 months ago, we were talking about a potential partner swap. It now seems as though you are much more warmer towards now JVs than what you have otherwise been. And then just also more details around this extended JV, what that means in terms of the additional assets coming in and the technology support as well, please?

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Michael Kane, Boral Limited - CEO, MD & Director [15]

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So -- and there's a lot in that question. So let me try to unpack it somewhat. As in all negotiations and discussions, you sort of ebb and flow from optimism to pessimism to some downright depression from time to time. And sometimes you take a vacation from talking to each other, and we did that. In these discussions, we took some time off. Because there were outcome suggestions that I found not acceptable. We've been able to get across those issues more recently, and I've always felt that as a technology partner and as a competitor that Knauf presents the most attractive alternative to us in the Asia Pacific market. They are #2 to us in terms of chief competitors in that market. And frankly, as an inheritor of USG's technology base, it makes a lot easier for us to transition the technology support if the USG part of the business doesn't go away, which in all of the scenarios it would have to. And so there's a lot of good reasons why the Knauf alternative remains highly attractive to us if we can make it happen. What was the second part of your question?

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [16]

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I think the valuation process, Sophie, if that continues.

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Michael Kane, Boral Limited - CEO, MD & Director [17]

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Valuation process is -- it's just taking -- in order to get the right answer, we've done a lot of work on valuation, and of course you got a moving target, at which point in the cycle you want to try to value this business -- just take a look at what's happened with Korea. Historically, in recent years we've gotten 60% of our earnings out of Korea and Australia. Korea had been at all-time cyclical highs for quite some time and now clearly that correction is underway. And we've had to make adjustments to our submissions to the experts to reflect that work. So, yes, --

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [18]

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But yes, the submission is still going. As we spoke last time, this is with those 2 independent firms. So obviously, that work will continue as we continue to look at the expended joint venture with Knauf. We anticipate maybe in a month's time that we should have some indications from those independent experts. Those really we think -- they have to do the work. We've had some discussions with them, so that they can have a better understanding of our submission and, I'm sure, as well as with USG so that that process continues.

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Michael Kane, Boral Limited - CEO, MD & Director [19]

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But that doesn't end it. When the 2 experts reach their recommendations, there will be 2 different numbers. And the final number will be determined by a third expert and begins another process. I'm not necessarily in a hurry to get this thing over with. I like the fact that it sits out there as an alternative to us. I don't -- we're not slowing the process down. It's going to take whatever it takes. And I'm going to know the number that comes out of that process in all likelihood before I make a final decision on the JV. And so it's about just -- as I've said to my Board all along, if you're patient we will get the right outcome. If we get too eager, we won't. And so it's simply about working through the process and then doing a rather down and dirty analysis. Okay, what is the benefit of doing A, B or C. And nothing is off the table, including the possibility that if the numbers are just too crazy and too large, I can sit on my hands and say, I don't have this thing. I don't have a problem. But the new owner might have a problem.

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [20]

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And just to be clear, the definition of the expanded JV is within the existing market with Knauf potentially additional assets.

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

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What we're looking at right now -- and obviously, Australia, we're looking at -- taking Australia out of the JV. And we're -- what we're talking about is the Asia Pacific plasterboard compounds and plaster JV. And we haven't finalized decisions on other ancillary products or -- for example, the Middle East, all that is yet to be determined. But the truth of matter is, the bulk of the earnings in our business come from the plasterboard business, including Australia. Any other questions in the room? Okay, I think we can take a question from the callers.

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Operator [22]

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(Operator Instructions) Your first question is from Simon Thackray from CLSA.

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Simon Thackray, CLSA Limited, Research Division - Research Analyst [23]

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Just a couple of questions for me. Just in terms of Fly Ash, of course, the volumes, you talked about in the outlook from what I can see that the Fly Ash volumes will be up in the second half. The comment, I think, before was that it is broadly going to grow in line with cement demand, but it had a 6% decline in the first half. So we're expecting sequential growth in Fly Ash, is that correct in the second half?

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

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No. I think what we'd said is that, in the second half we expect the Fly Ash volumes to be higher than the prior corresponding period, Simon. So we expect that for the full year because there's some Fly Ash volumes to make up because we were short in the first half. So we expect to be at least broadly similar to last year in total for volume for Fly Ash for the year.

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Simon Thackray, CLSA Limited, Research Division - Research Analyst [25]

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Okay. That's helpful in terms of clarifying that. And just in terms of the status for the supply chain and the supply chain investment, Sydney sent their tonnage in terms of mobile investment and taking your total storage up. What's the CapEx spend so far on the supply chain -- the Fly Ash and what's the end value going to be in terms of total investment?

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Michael Kane, Boral Limited - CEO, MD & Director [26]

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So I've got David in the room -- CapEx. So let's start with Montour. What was the capital on the reclamation?

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [27]

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So I think, I can cover what was in the first half. So we, obviously, finished the Montour reclaim. We talked about the total investment to that was around USD 7 million. So now that has been fully spent. We also talked about the 170 railcars that's invested to support the floating storage and that was around USD 12 million to USD 13 million. And again, that was in the first half results as well. There's some other storage facilities in terms of the terminal down at Dallas and some other small ones in Boston. And they're also included in that capital spend. So I'll hand over to David to talk about more the future storage and capital requirements.

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David Mariner, Boral Limited - President & CEO of Boral Industries Inc [28]

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Thanks, Ros. And, Simon, the only other thing I'd add to what Ros said was -- is the CapEx associated with storage as we move forward is not what I'm going to call substantial. We're looking at a variety of different things that are all, I would say, under $10 million on each -- probably at the maximum each and any individual one. But we've got no substantial assets that we're looking forward to increased storage from a capital...

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Simon Thackray, CLSA Limited, Research Division - Research Analyst [29]

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That's helpful, David. And so just in terms of this importing, presumably into California from Mexico, is that the way to interpret it? What's the status of this import terminal or import facility? And is this tied to the 2 new Mexican utility contracts that you've picked up?

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David Mariner, Boral Limited - President & CEO of Boral Industries Inc [30]

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So we're looking at a variety of options on the imports. Currently, today, we're bringing it from Texas into -- or from Mexico into Texas. And we're investigating all seaports across the U.S., whether it's California, the Northeast, the Southeast. Obviously, Texas, we're already doing. And the infrastructure associated with that can come in a variety of ways. There is infrastructure already existing that we can tap into and lease. You can build large infrastructure to make that happen. And we're not in a position today to signal one way or the other. But we're going to do it in the most capital effective way because imports -- it can come and go when you don't want to invest an enormous amount in anyone's spot and be beholden to that infrastructure.

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Simon Thackray, CLSA Limited, Research Division - Research Analyst [31]

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Sure. And so when we observe the imports of Fly Ash, particularly coming into Florida, where there are substantial investment in the infrastructure already made there by a number of the majors, is that having an impact at all and any competition anywhere through the Southeast or through sort of South Central areas in the amount because the volumes have gone up dramatically we've noticed on Fly Ash import?

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David Mariner, Boral Limited - President & CEO of Boral Industries Inc [32]

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We haven't seen in the Florida market in terms of Fly Ash. Cement is starting to come in a little bit more, but from a Fly Ash perspective, to get anything of substantial volumes, you're talking full ships and you need some place to take that. And therefore, the smaller players in Florida can bring in small volumes. But anything of substantial amounts you need the network in order to move it through. So we haven't seen that play out yet around that.

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Simon Thackray, CLSA Limited, Research Division - Research Analyst [33]

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Okay. And nothing from the majors playing in that space?

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David Mariner, Boral Limited - President & CEO of Boral Industries Inc [34]

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If we're one of the majors than our peers that we know about, we have not seen anything substantial...

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Simon Thackray, CLSA Limited, Research Division - Research Analyst [35]

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I meant the cement -- I meant more the cement majors, whether they're bringing in their own ash. That's all. I'll move on. Just very quickly, just one notice -- I'd noticed in terms of the construction for the outlook. The Meridian JV synergies of $25 million within 4 years by FY '21. I've just gone from the financial condition slide on 30. Is there any update to that?

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

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Simon that -- it's Ros here. Yes, that's progressing. I think last time we talked about the synergies. We're on track for the 7 to 9. And we're still on track for that. There's been a lot of synergy work done in terms of rationalization of the plants as well as the distribution center and taking headcount out. So really, the focus going forward is to look at growing the revenue, being able to remanufacture some of the product that was made at the close plants and really building out the third-party distribution with some of our direct centers being close. So we're on track, and pleasingly for the first half, we do see a small improvement in the Meridian joint venture. But there's a lot more still to be achieved there.

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Simon Thackray, CLSA Limited, Research Division - Research Analyst [37]

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And then I've just got one final one, just to wrap up, which is just really about the discussions you're, Mike, with Knauf are obviously more friendly than they've been for little while, if I can use that phrase. But you also talk about the intensive competition within Asia and presumably the Australia as well. I just want to understand whether that competition itself is coming from Knauf within the region. Because we're certainly hearing about rebating pricing in Australia being very sharp. So despite the 6% to 7% price rise we talked about before, there's quite significant rebating going on pricing in Australia and we expect that they will be fairly sharp in Asia as well. So can you talk about their actual competitive behavior vis-à-vis your own?

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Michael Kane, Boral Limited - CEO, MD & Director [38]

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So, clearly, Knauf is an aggressive competitor, there's no question. We've seen an impact of them opening up the first gypsum plant in the Philippines, where we've enjoyed 50% market share for quite some time. That's had an initial impact on us there. They have a very strong position in China versus our position in China. They're quite considerably larger than us there. But in these other markets, excluding Australia, we're considerably more sizable in our market position than they are, and so they're less of a factor. But they're good competitor and they're a strong competitor and we think the combination of the 2 companies will make the JV even stronger. In Australia, we're confident that we're holding on to our market share and in the face of the fact that they've brought on their Bundaberg plant, we still haven't -- it's clear that they're gaining capacity utilization of that plant. But we think that the bulk of the impact is on the other competitors and less so on us.

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Simon Thackray, CLSA Limited, Research Division - Research Analyst [39]

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So you haven't seen it in price expectation falling short?

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Michael Kane, Boral Limited - CEO, MD & Director [40]

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Tony -- I've got Tony sit in the room. Do you want to talk about price? He normally doesn't like to talk about price, but let's ask him.

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Tony Charnock, USG Boral Building Products Pte Limited - SVP of Asia Pacific [41]

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No, I think we said officially that prices are probably in line with expectations than last year, so it's -- inevitably you see some pricing impacts, in particular parts of the market. But broadly pricing is holding up at this point in time.

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Michael Kane, Boral Limited - CEO, MD & Director [42]

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Thank you.

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Operator [43]

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Your next question is from Andrew Scott from Morgan Stanley. Please ask.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [44]

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Just I also want to focus on the Mexico and Fly Ash importing. We know freight and transport very quickly sort of erode margins in the Fly Ash industry. So just interested if the buy price or the royalty arrangement makes any allowance for that. And I guess, essentially, is profitability similar for the imported tonnes as it is for your domestically gathered tonnes?

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Michael Kane, Boral Limited - CEO, MD & Director [45]

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David?

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David Mariner, Boral Limited - President & CEO of Boral Industries Inc [46]

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Hey, Andrew. Where we sit today -- we're only importing a few truckloads right now. And so when we look at the amount of volume that's coming in from Mexico across the border via truck, the freight component of that is substantial. And so therefore, you're exactly right, the profitability of that is lower than our overall profitability of Fly Ash that comes through. At the same time, we're looking at building out with our Mexican partner's infrastructure to start provide it by rail, which will improve that. And then on top of that, obviously, the pricing in the region reflects scarcity. So therefore, margins will continue to rise on that front as well. But when we step back and we look at imports in total, as we build out that volume we're taking the freight component into account and we'll make our decisions and move forward as we can underpin whatever volume comes in with additional -- with margins that we need. And so the pricing comes into play, obviously, freight comes into play, and the revenue and the cost component -- I'll call it the raw material costs component of that, which you can translate to royalties, all comes into play. So there's a lot of different levers that we take into account as we move forward, and we're on the front end of that right now.

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Michael Kane, Boral Limited - CEO, MD & Director [47]

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So just so you understand, our entire contemplation of Mexican imports is by rail, that's the endgame. The trucking that we're doing now is simply to get the product into the market, get it approved by the DOT, make sure that it's acceptable to the customers, and it can -- that we can blend it with our current production. That's the proving up exercise of the quality of the ash. The -- but in order for this to work, rail is the only option that makes sense out of Mexico.

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [48]

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Surprisingly, I think, David, the royalty rights of these contracts is actually very attractive, I mean, good for us, that is, compared to the royalties...

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Michael Kane, Boral Limited - CEO, MD & Director [49]

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As they all do in these things, they started out very attractive…

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [50]

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Yes.

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Michael Kane, Boral Limited - CEO, MD & Director [51]

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But eventually they get a little more difficult. The good news is that the price is moving apace. And so the price of Fly Ash, it's really been extraordinary and it's accelerating, which is what's going to be necessary in order to be able to justify continued imports both by water and by rail into the U.S. as well as to justify the mining exercise in landfills. So we need to continue to push the price of Fly Ash and I think the good news is, if you look at the average price of cement, it's moving roughly 2% a year in North America and we're clearly on distancing that.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [52]

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On that point, Mike, 13% average price of -- price increase of Fly Ash this year. What can we expect for the next 12 months?

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Michael Kane, Boral Limited - CEO, MD & Director [53]

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Geez, you want to talk to me? Or do you want to ask David that one? I think you might get 2 slightly different numbers. I expect continued double-digit price increases in Fly Ash.

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David Mariner, Boral Limited - President & CEO of Boral Industries Inc [54]

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I'll confirm. We're going to continue on the same pace that we're on until the market tells us otherwise.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [55]

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And last one, just with Montour, obviously, we're just proving it up now. Does the -- do the economic stack up as you thought, I mean, which was similar to a traditionally reclaimed -- traditionally captured Fly Ash? And are there any other reclamation projects that you're considering?

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David Mariner, Boral Limited - President & CEO of Boral Industries Inc [56]

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In terms of the economics, as we move through this, I'm going to call it this first year. We opened the facility and then winter came in, so we're still working through winter mining of Fly Ash, so the rollout or the commissioning of that is -- has been as expected from a cost perspective. So that's been as we had hoped for. And in terms of are we considering more, yes.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [57]

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How many are you looking at right now?

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David Mariner, Boral Limited - President & CEO of Boral Industries Inc [58]

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We're looking at a handful -- 4 to 5 in different areas. They all progress at different timelines. So we've got no definitive statements to make where and when at this point in time.

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Operator [59]

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Your next question is from Daniel Kang from Citigroup.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [60]

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Just got a couple of questions for me. Firstly, just a broader question on the Australian housing cycle. Interested in your thoughts, Mike, on how you see this cycle compared to the 2012 downturn, which saw EBIT fall by about 40%, per my calculations. And how you think borrower is better positioned for this current cycle? And secondly, it's on your balance sheet. You've obviously sold U.S. Block in Denver. Are you considering any further asset sales?

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

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So we have a few things that we'd like to sell and whether we get to sell them all is an interesting question. But we're not done. There are some assets that are in the queue. We don't identify those until we actually have something to talk about. Secondly, the housing market. Historically, the low is about 130,000 in Australia, the average used to be about 150,000 and the peak used to be 180,000. I think we've blown through all those numbers and those are no longer representative of what I think you can expect going forward. And so I think the forecast that we give a lot of credibility to suggest that the trough may be as high as 170,000 starts in this next cycle. And -- at which point, I think -- and that's in the next 2 years to 3 years, in which case, I think it can start to turn back up again. The demand for detached housing is still strong. The correction in the price of housing may give some more life to detached housing movement, but we'll have to see. I think there was a variety of factors that sort of compressed the housing market and bought it back from 232,000 or 236,000 starts. But these were numbers that were unprecedentedly high and so to get down to where it is now -- and roughly 200,000 starts or 199,000 starts is still historically an all-time high for the housing market. You would know that by reading the newspapers certainly over the last 3 to 4 years. Clearly -- borrowing market has cooled off. That was driven by a variety of factors that really don't impact the housing -- the detached housing market. So, I think housing in Australia is not -- it's not in collapse, and I don't expect it to collapse. I expect it to moderate downward over the next couple of years and then I expect it to stabilize and possibly return.

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Operator [62]

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Your next question is from Lee Power from Deutsche Bank.

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Lee Power, Deutsche Bank AG, Research Division - Associate Analyst [63]

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Mike, just firstly on USG. Do you say that the Australasian Plasterboard acquisition is being dependent on an agreement around expanded Asian JV or you see them 2 separate kind of processes?

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Michael Kane, Boral Limited - CEO, MD & Director [64]

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I think the whole package has to be acceptable to do anything, so we're not pulling the Australia business out of the current JV if we don't do a deal with Knauf.

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Lee Power, Deutsche Bank AG, Research Division - Associate Analyst [65]

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Okay. And then maybe just touching on pricing -- I mean given your comments around resi and delaying infrastructure, how sticky do you think the announced April price increases will be?

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Michael Kane, Boral Limited - CEO, MD & Director [66]

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And you're talking about in USG Boral or are you talking about in...

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Lee Power, Deutsche Bank AG, Research Division - Associate Analyst [67]

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No, it is in Australia.

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Michael Kane, Boral Limited - CEO, MD & Director [68]

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Well, I think that's maybe even more influenced by the infrastructure market than the housing market. And -- because I think the impact of the housing decline in multifamily has already been felt substantially by the Australia business. And so I think that the -- there's a definite shortage in certain markets in the quarry space as far as -- that's for construction aggs. And then there's an abundance of road base and fill coming out of these infrastructure projects that are challenging our ability to deal with it and the entire industry's ability to deal with it. One thing it's done is it's degraded the pricing expectations for our aggregates business because roughly, I guess, 40% to 45% way of our aggregate volume is in that category of fill and road base. And that price has been smashed by the fact that they keep building, digging these tunnels and unearthing a lot of material that has to be disposed of. At the same time, on the other side of the equation, the more typical construction aggs are in short supply in a lot of places and we struggle to keep up. Wayne, do you want to comment on that?

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Wayne Manners, Boral Limited - Executive General Manager for Western Australia [69]

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Thank you very much. So reflecting Mike's comment, we need to remember that in the first half like-for-like, Concrete had a 3.4% increase in pricing, which given the market convictions and everything else, was exceptionally good outcome, reflects the work that's been done in commercial excellence by our teams and our sales training. Mike is quite right that in the road base market with the tunneling stuff going on, the low value products in our quarries are being challenged. But we do see a lot of pent-up demand from the delays in major projects growth in commercial. And other infrastructure projects as well coming through that will give us the opportunity to continue that great work in our commercial excellence, in our pricing projects.

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Lee Power, Deutsche Bank AG, Research Division - Associate Analyst [70]

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And then maybe just a final question for David Mariner. The additional mobile storage tonnes and the progress on the imports and reclamation, does that -- I mean, what you're chasing in the first half? Is that in line with your targets? Are you slipping? Are you ahead of target?

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David Mariner, Boral Limited - President & CEO of Boral Industries Inc [71]

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I think we're pretty much right in line with our targets in terms of what we've been able to pull through in the first half. So I'm not concerned right now. Or to put it a different way, we're not disposing of any Fly Ash right now because we don't have a place to put it from a strategic perspective. I mean, as we look forward and we add more sources or we bring in more sources, then we'll determine where the next logical place is to put, I call it, fixed space storage. And we're constantly on the lookout for either old assets or some slightly used assets around the mobile storage so that way we can take advantage of some less expensive acquisition costs.

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Lee Power, Deutsche Bank AG, Research Division - Associate Analyst [72]

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So you're still comfortable with the 1.5 million to 2 million tonne for your target.

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David Mariner, Boral Limited - President & CEO of Boral Industries Inc [73]

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That still holds.

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Operator [74]

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

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Keith Chau, Evans & Partners Pty. Ltd., Research Division - Former Senior Research Analyst [75]

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Mike, I just want to go back to one of your comments earlier today. I think -- you can correct me if I'm wrong, but I think you had indicated that the volumes in Australia related to residential were falling faster than the pickup in the infrastructure at least currently. So I'm just wondering on the outlook for the second half, is it realistic to assume that we get some sort of volume growth, particularly for Concrete? And secondly, is the outlook premised on a catch-up of some of the delays in major project work? And if so, can you give us an update on how you've seen major projects progress over the last trading update, please?

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Michael Kane, Boral Limited - CEO, MD & Director [76]

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Well, I'm going to let Wayne answer that.

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Wayne Manners, Boral Limited - Executive General Manager for Western Australia [77]

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Thank you for the question. So with respect to major projects in the first half or the second half, we saw some delays in both, particularly in Queensland and New South Wales, both Concrete and Asphalt projects. Projects tend to have a strong history of being delayed at the start and still expected to hit the end date. There's a number of projects, number of works that are coming online. We know our schedule, so they're coming online in the second half. Even the site that we're looking at here at Deer Park which is ready to go, precast Concrete going into the -- our clients precast panels for Melbourne Metro. None of that was in the first half. We've got West Melbourne Concrete plant up and running. Ormeau quarry's work commissioning now, so that'll be on in the second half, Toowoomba Asphalt plant. So a number of projects and number of plants coming on line in the second half. But we're confident that volume will come through on the schedules that we have. We can control what we can control. We're confident of that. We don't control the client's schedule. But at the stage, the schedule will show a lot of extra work coming on the second half from major projects.

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Keith Chau, Evans & Partners Pty. Ltd., Research Division - Former Senior Research Analyst [78]

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And then very simplistically, the implication of that is that volumes in the second half of FY '19 should be higher than last year?

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Wayne Manners, Boral Limited - Executive General Manager for Western Australia [79]

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I don't have a data in what the second half volumes were for last year. But certainly relative to the first half, it should be stronger.

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Operator [80]

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Your next question is from James Brennan-Chong from UBS.

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James Brennan-Chong, UBS Investment Bank, Research Division - Associate Director and Mining Associate Analyst [81]

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Just an extension to Lee's question earlier about some of the pricing strategy for cementitious materials in Australia. Given the outlook for housing activity over the next 6 to 12 months, I'm just wondering, one, what is your pricing strategy for cementitious materials; and two, how does that strategy change in a weakening housing outlook?

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Michael Kane, Boral Limited - CEO, MD & Director [82]

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Ross, let me hand you.

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Ross T. Harper, Boral Limited - Group President of Operations [83]

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Look, I think to follow on from Wayne's response, if we look at our commercial excellence initiative, which -- a component of that is strategic pricing and a strategic pricing road map. So it takes into consideration a lot of boundary conditions, new entrants, the competitive dynamics, demand, et cetera. So, we certainly have a strategic pricing plan. If you look at the net realized outcomes we've had in Cement, sort of consistent with Concrete, they've been better than they have been in prior years. And I think that that speaks to the commercial excellence commitment that we've made, the investment we've made, and the skills that we've developed and disciplines we've developed now in total sales force. So I think we would expect to be pushing hard on price still with the 1st of April price increase. And as you know, we've had sort of 2 cycles in the year, I think the October price increase, if nothing else prepares us very well for a strong net realized price outcome in April. But we'll have to wait and see.

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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [84]

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And just to add, in terms of residential, it really is not very big part in terms of exposure to Australia construction materials. You will note in the slides, I mean, our exposure there is really around 20%. So even residential does come off more than expected. Obviously, the impact is less for us now given that really we're only 20% exposed, with a lot more exposure to nonresidential as well as the infrastructure.

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Operator [85]

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We don't have any other questions over the phone. Presenters, please continue.

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Michael Kane, Boral Limited - CEO, MD & Director [86]

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Okay. Unless there's no other questions in the room, I'll thank you very much.

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Operator [87]

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Ladies and gentlemen, that does conclude our call for today. Thank you for participating. You may all disconnect.