James Hardie warns of reputational hit from US supply woes

James Hardie has warned of reputational damage from a series of supply disruptions over the past year that has seen it cede market share to rivals and left builders short of its product in the key US market, and which it is yet to fully resolve.

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“[This year] was a miss for us … you’ve got to learn from it,” long-term chief executive of the company, Lou Gries, told analysts on Thursday.

“There is fatigue out there … it’s kind of our reputational damage.”

The maker of particle board was too aggressive in seeking to restart idled plants in the US, he said, as it sought to capture the rising level of housing stats in the US, which involved commissioning 700 million square feet of additional output, citing “a big challenge of start-ups in California and Florida”.

The public admission comes as James Hardie is planning to recommence additional plants in the year ahead – in South Carolina and another unit in Florida – as it invests in new facilities in Arizona and Alabama, which are to start up over the next few years.

The production problems have also exposed a series of internal issues with ageing, dirty and dark plants, which has forced the company to lift maintenance spending by $US15 million a year to improve safety, a program that could take up to five years to complete, it said.

“We got in a very tight supply situation,” Gries told analysts. “We had miscalculated the capacity that was needed and the amount of time to bring it up and we were forced to bring up 700 million square feet of capacity in one year … the effort was good but we were [never] going to do that well. That has driven our bottom-line problems during the year.”

The production problems would have hit earnings hard, but for lower asbestos claims, which resulted in a $US38.6 million ($52 million) “favourable movement in the actuarial adjustment” by its advisers, it said. As a result, the group net profit rose to $US276.5 million, from $US244.4 million, for the year to March. Earnings a share for the year hit US62??, up from US55??.

The profit topped forecasts, which ranged from $US245 million to $255 million.

A US28?? a share final dividend has been declared.

The production difficulties soured investor sentiment with the shares sold heavily, shedding 7.8 per cent to $19.90, the days low and below $20 for the firsts time since March.

In the year to March 31, asbestos claims fell to 577 from 625 the prior year, as the average amount paid out per claim declined from $US327,000 to $US248,000, which was 31 per cent below actuarial estimates, it said. Part of the reason for the decline was a lower number of large mesothelioma claims, coupled with lower average claim sizes for non-large mesothelioma claims.

James Hardie’s production problems led to inventories of stock being run down, exposing it to shortages in keeping up with builder demand in the US, it said. It has also raised prices 3 per cent in the US, with some demand “pulled forward” into the March quarter, to avoid the rise, which put further pressure on stock levels, Mr Gries said.

So far this financial year “orders are soft”, he said. “How much is the price increase, how much is dampening on [supplier] allocation is hard to know.”

For fiscal 2018, James Hardie is planning to commission 300 million square feet of capacity.

“If we want to grow at the rate we want to, we need to start-up 300 million square feet every year.”

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