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James Hardie Q2 Earnings Lag Estimates

Nov, 15 2013





James Hardie Industries plc reported second-quarter fiscal 2014 (ended Sep 30, 2013) adjusted earnings of 12.7 cents per share, up 44% from the prior-year quarter’s earnings of 8.8 cents a share. The results were way behind the Zacks Consensus Estimate of 58 cents.

On a reported basis, earnings increased almost four-folds to 11.7 cents per share from 3 cents in the year-ago quarter. Earnings in the reported quarter include asbestos, ASIC expenses, New Zealand product liability expenses and tax adjustments.

Operational Updates

Revenues in the reported quarter increased 17% year over year to $392 million. The results marginally fell short of the Zacks Consensus Estimate of $396 million. The growth was mainly driven by enhanced sales volume and higher sales price in the USA and Europe Fibre Cement and the Asia Pacific Fibre Cement segments. The segments were aided by improved activity in both the new construction, as well as the repair and remodel markets.

Cost of sales rose 16% to $259 million from $223 million in the year-ago quarter. Gross profit improved 20% year over year to $133 million. Consequently, gross margin expanded 67 basis points (bps) to 33.9% year over year.

Selling, general and administrative expenses excluding New Zealand product liability expenses decreased 5% year over year to $53.8 million. Adjusted operating income (excluding asbestos, ASIC expenses and New Zealand product liability expenses) increased to $72.7 million from $51.6 million in the prior-year quarter. Operating margin was 18.5%, a 310 basis points expansion from the year-ago quarter.

Financial Update

The company recorded net operating cash flow of $175.4 million in the first half of fiscal 2014 against  cash usage of $7.8 million in the year ago comparable period, driven by amended tax assessment, decrease in contribution to AICF, higher earnings and favorable movements in working capital.

For the half year ended Sep 30, 2013, net capital expenditures climbed to $44 million from $25.4 million in the prior year. The increase in capital expenditures was primarily driven by the purchase of previously-leased land and buildings located at the Brisbane plant, as well as refurbishment of idled manufacturing assets at the California plant.

Outlook

James Hardie will benefit from the imminent recovery in the U.S. housing market. Anticipating the ongoing recovery, the company is investing in capacity expansions by re-commissioning idled facilities, as well as funding market and organizational development.

According to the National Association of Home Builders (NAHB), average monthly single family building permits were 59,000 for the five months ended 31 Aug 2013, an increase of 23%, and multi-family building permits were 29,500, an increase of 12%, related to the corresponding prior five-month period.

James Hardie forecasts EBIT margin for full-year 2014 to be above 20% in the USA and Europe Fibre Cement segment, led by improvement in the underlying market demand and financial performance. However, uncertainty in the U.S. operating environment will adversely impact the margin.

The operating environment in Australia is likely to remain subdued and the company is not anticipating any substantial increase in net sales. However, the New Zealand business is expected to deliver improved results supported by a stronger local housing market particularly in Auckland and Christchurch. The Philippines business continues to experience steady growth in the core market segment and is expected to deliver consistent earnings in the remainder of the year.

Based in Dublin, Ireland, James Hardie manufactures fibre cement products and systems for internal and external building construction applications in the United States, Australia, New Zealand and the Philippines. These products are used in a number of markets, including new residential construction, manufactured housing, repair and remodeling and a variety of commercial and industrial applications.

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