A reminder yesterday of the damage the US housing slowdown and subprime mortgage mess continues to do Australian companies operating in America.
Building materials group, James Hardie NV said first half earnings fell 12% after a 32% drop in the second quarter because of the crisis and slump in US housing.
And with US housing starts tipped to fall when the latest figures are released this week, Hardie's management made clear that it was not expecting a rebound soon.
US analysts reckon US new home starts will fall to an annual rate of 1.171 million when the October figures reported, and that's the forecast (within a few thousand) that Hardie's management have adopted for the next year or so.
It said net operating profit, excluding provisions for asbestos compensation, was $US115.1 million (or $A130.12 million) in the first half of the 2008 year, down from $US131 million in the previous corresponding half year.
For the second quarter, net operating profit was $US46.5 million ($52.57 million), excluding provisions, down 32% from the previous corresponding three months.
Including asbestos provisions, the first half net operating profit was $US58.2 million ($65.8 million), up 3% while the September quarter's net operating profit was $US19.1 million, down from $US21.1 million.
A higher tax bill was a factor in the lower second quarter net profit. But a look at what the company' calls its gross profit shows an 11.% fall in the second quarter, against a 2% fall for the full six months, indicating a second quarter worsening in performance.
Besides the building gloom, Hardie also has the impact of the stronger Australian dollar to contend with in translating earnings from the US to Australia. It clipped earnings in the half, especially the second three months.
It was a realistic assessment from Hardie of the outlook for US housing: one more realistic than that being retailed by US brokers and bankers who continue to pitch the story of 'the worst is over'.
Hardie said the outlook for residential construction activity in North America was for some further weakness through to at least the end of this fiscal year.
"There is still a large backlog of new houses for sale and indicators of future activity, such as housing permits and builder confidence, all suggest that a recovery is not likely in the near term," chief executive Louis Gries said in a statement to the ASX.
"The business is now being set on the basis that new housing starts will be at an annual rate of 1.1 million, down from the earlier assumption of 1.3 million starts."
James Hardie said is was continuing to focus on increasing demand for fibre cement and growing market share.
It had re-shaped its production profile with the suspension of production from a smaller, older plant in the North East. Hardie's nine other plants can meet demand, especially in the growth states (or former growth states) in the south west, California and in Florida.
But the company warned that cost pressures remain a concern and will continue to press margins in the next six months.
Hardie said that full year earnings, excluding asbestos-compensation costs, are forecast at the ''bottom end'' of analyst expectations between $US187 million and $US233 million in the 12 months ending March 30, 2008.
James Hardie shares rose 32 cents, or 5% to $A6.62 cutting the year's fall to just over 31%.
That was because investors reckoned the bad news 'was in the market'. But that's what they have been saying for most of the year as the Aussie dollar has strengthened and the US housing slump intensified.
With the US economy sliding towards stagnation in the first half of next year, it's likely that any rebound will be slow, painfully weak and not in housing for a bit longer than Hardie management believe.
US economists are wondering how a $US1-2 trillion cut in home lending in 2005 will translate into higher sales and activity for companies like Hardie.
Hardie agreed in December, 2005 to set up a new fund to compensate victims of its asbestos products, ending a two-year fight with unions and victims.
A NSW government inquiry had found the company under-funded an existing compensation fund, and raised questions about its move to register in the Netherlands in 2001.
A number of legal actions over the scandal are pending, including action from the securities regulator, ASIC.
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