Owens Corning (OC) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2006 Owens Corning Earnings Conference call. My name is Lisa, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to Mr. Scott Deitz, Vice President of Investor Relations. Please proceed, sir.

Lisa, thanks very much. Good morning, everyone. We're pleased that you've taken the time to participate in Owens Corning's Third Quarter 2006 Conference Call.

Joining us today on the call are Dave Brown, Owens Corning Chief Executive Officer; Mike Thaman, Chairman and Chief Financial Officer; and Steve Krull, our Senior Vice President and General Counsel.

Following our brief presentation, we will open the one-hour call for questions. We will limit questions today to analysts and investors. We ask that Q&A participants limit themselves to one question and a single follow-up, so that we can make sure to take as many questions as possible from the interested participants.

Before we begin, I'd like to remind you that today's presentation may include forward-looking statements based on our current expectations and assumptions about our business. These statements are subject to risks and uncertainties. Our actual results could differ materially because of risk factors we may discuss today, as well as those identified in our most recent Form 10-K and Form 10-Q.

We don't undertake any duty to update or revise forward-looking statements. Also, we ask that you understand that certain data included within this presentation considers non-GAAP financial measures. Non-GAAP measures used throughout this presentation are EBITDA, or income lost before interest, taxes, depreciation, and amortization, and adjusted income from operations.

Although we believe that the non-GAAP financial measures presented enhance investors' understanding of our business and performance, these non-GAAP measures should not be considered an alternative to GAAP. Our earnings release contains a reconciliation of these non-GAAP measures to GAAP.

Now, it's my pleasure to turn the call over to Owens Corning's CEO, Dave Brown.

Thanks, Scott, and thanks to all the participants on the call. We appreciate your interest in Owens Corning at this very exciting time in our history.

Today's call will be a bit different than future quarterly and year-end results calls. Many of you want to know more about Owens Corning and our approach to business, so we're going to talk about that in some detail today.

During the brief time we are together, I'll provide a summary of our third quarter performance. I'll update you on a few initiatives that we are particularly excited about. Chairman and CFO, Mike Thaman, will then walk you through details of the financial results we announced today, including our nine-months year-to-date results. And, of course, we'll be happy to take your questions.

As most of you know, during the past six years, we successfully operated Owens Corning while being in Chapter 11. It's been a complicated and sometimes challenging journey, but we're close to completing this long process. With Bankruptcy Court and U.S. District Court approvals of our plan of reorganization complete, we are now eagerly awaiting the end of the required 30-day appeal period, which expires next week.

Throughout the Chapter 11 restructuring process, we had six very clear objectives -- first, to fairly compensate people who were harmed because of exposure to asbestos-containing products that we produced more than 30 years ago; second, to treat all creditors fairly and equitably; third, to permanently resolve all Owens Corning asbestos liabilities; fourth, to manage the process in a way that was invisible to our customers; fifth, to emerge as a stronger company than when we filed; and sixth, to position Owens Corning to participate in the capital markets upon emergence. I'm pleased to report we achieved each of those important objectives.

Let me share a few thoughts in that regard. A 524g trust will be created and funded to fairly compensate affected individuals. Our asbestos liability will be permanently behind us.

We maintained or increased market share across business segments, increased sales, and strengthened our financial performance. From 2002 through 2005, we reduced employee injuries by 70%, increased sales at a compound annual growth rate of 9% to $6.3 billion, reduced SG&A as a percent of sales from 11% to 9%, increased EBITDA at a compound annual growth rate of 15% to $775 million, improved return on net assets from 10% to 17%, invested $1.1 billion into existing operations and growth opportunities, and we've funded $480 million into our various global pension plans.

We are also very pleased to have received investment grade credit ratings from both Moody's and Standard & Poors in July of this year. We expect to emerge from Chapter 11 on or about October 31 and plan to list Owens Corning stock on the New York Stock Exchange under the ticker symbol OC.

I'd now like to set the foundation for your understanding of today's Owens Corning. We are a company with global operations. We are a leader in building material systems and high performance glass composites. We are best known for PINK fiberglass home insulation. Our building products portfolio include insulation, roofing and asphalt, residential noise control solutions, basement finishing systems, vinyl siding, and manufactured stone veneer. Our products also include glass fiber composite materials for automotive, consumer goods, electronics, heavy transportation, marine recreation, telecommunications, and wind energy applications.

We report our business results in four segments. In the Building Materials category are insulating systems, roofing and asphalts, and other build materials and service. In the Composites category is our Composite Solutions business.

With 20,000 employees in 26 countries, we reported sales in 2005 of $6.3 billion. For more than 50 years we've been listed on the Fortune 500, and we're please to report that in 2006, we are on Fortune magazine's Most Admired Company List in the Building Materials category.

As you know, earlier this morning, we reported consolidated net sales and operating results for the third quarter and the first nine months of 2006. The quarter was inline with our expectations. We reported consolidated net sales of $1.661 billion during the third quarter, compared with $1.618 billion in the third quarter of 2005, for a 2.7% increase. However, increases in energy, transportation, and raw material costs pressured our gross margins during the quarter.

In September of this year, we began to feel the first impact of the softening U.S. housing market, which we believe will also affect our fourth quarter results. Our third quarter results were also influenced by below trend line storm-related demand, which directly impacted the results of our roofing and asphalt segment.

We also made two significant Owens Corning growth announcements during the third quarter. In July, we announced and completed the acquisition of Modulo, a market-leading producer and distributor of manufactured stone veneer and floor products based in Paris. This acquisition expands Owens Corning's presence throughout Europe. It's a perfect fit, consistent with our growth strategy.

And also in July, we announced our intent to merge the Glass Reinforcements business of Owens Corning and Saint-Gobain's. While a definitive agreement has not yet been reached, the combination of these two businesses would establish a global company in reinforcements and composite fabrics. Customers would benefit from improved technology, expanded product range, and geographic reach. This combination would create a focused, efficient business, with world-class technology and products.

We're in the process of negotiating definitive transaction documents, with hopes that the transaction would close sometime during the first half of 2007.

Now a few words about our competitive strengths and business strategy. Owens Corning is a leader. We believe that we maintain a leading market share in the businesses in which we operate. These market-leading businesses provide opportunities for further growth.

We have strong and recognizable brands that differentiate Owens Corning in the marketplace. They include our familiar Owens Corning logo, the color pink, and the Pink Panther character.

Owens Corning has developed and maintained extensive and long-standing customer relationships by providing solid customer service and by delivering the right products to the right channels at the right price.

Our business mix reduces our exposure to any single end-use market. The three reportable segments, comprising our Building Materials product category, sell products primarily throughout the U.S. and Canada, while our Glass Fiber Reinforcements business sells product on a more global basis.

In 2005 and for the first nine months of 2006, U.S. and Canada new residential constructions represented about 36% of our sales. U.S. and Canada residential repair and remodeling represented another 24%, and U.S. and Canada commercial and industrial represented about 18%. We classify 12% of our sales as international.

Earlier I mentioned our strong financial position. Any mention of our strong balance sheet and our recent investment grade credit ratings should include discussion of our historically strong cash flow from operations. As an indicator of this strength, from 2000 through 2005, we improve our EBITDA by approximately 53%. And as a result of deductions associated with our funding of the asbestos trust, we expect to pay little, if any, U.S. Federal Income Taxes for the near to medium-term.

We believe our asset base is cost competitive, so we've continued to make maintenance and capital investments since filing for Chapter 11.

A particular note, I must say that I am proud of the management team at Owens Corning. The executive team, which averages more than 16 years of experience at Owens Corning, has a proven track record. We've seen markets weaken before, and we know how to respond. The vast majority of our employees have also been with Owens Corning for many years and have the experience needed to perform in any environment.

Our fundamental business approach is a results-oriented strategy that has seven key components. First, we will develop and maintain market-leading businesses by leveraging our brand reputation and our manufacturing and distribution assets. Second, we'll improve productivity. We will focus on waste elimination to drive productivity, to increase efficiency, to improve margins, and to fuel profitability.

Third, we will pursue growth initiatives. We intend to explore acquisitions of companies in complementary lines of businesses, markets, and locations around the world. Fourth, we will we continue the Owens Corning focus on providing solutions through innovation. New product innovation will be important to the growth and success of our Company. Fifth, we will leverage the energy efficiency opportunities. Demand for our products that lead to lower energy costs will continue to grow around the world, in both developed and emerging markets.

Sixth, we will promote environmental and product stewardship. We will maintain a strong product stewardship function to ensure that the products we sell are safe and perform as intended. And seventh, we will continue to emphasize unconditional commitment to safety. This is an organization-wide imperative. A safe workplace improves our manufacturing process, reduces our costs, enhances our relationships with current and future employees, and delivers value to the customers and shareholders.

In closing, this is a very exciting time at Owens Corning. And now for a more detailed view of the third quarter and first nine months of 2006, it's my pleasure to call on our Chairman and CFO, Mike Thaman.

Thank you, Dave. It's a pleasure to welcome all of you to our earnings call in advance of our emergence from bankruptcy. I'd like to walk you through the financial highlights of the quarter, take a deeper dive into our business segment performance, and then discuss our outlook for the fourth quarter.

Overall, we had a successful third quarter and first nine months, during which we demonstrated progress in our business compared with 2005. For the third quarter, we delivered $1.661 billion of revenue versus a prior year of $1.618 billion. This represents 2.7% growth over the prior year. For the first nine months, we recorded $4.984 billion in revenue versus the prior year period of $4.610 billion representing 8.1% growth.

For the third quarter, our gross margin came in at $292 million versus a prior year of $303 million. Our gross margin was down slightly on a dollar basis due to cost inflation that came through operations which was not fully recovered in price. This contributed to the approximately one point reduction in gross margin percentage from the prior year.

For the first nine months, gross margins are down about a point. This is primarily the impact of material cost inflation being absorbed in the P&L. We have had, on a nine-month basis, reasonably good recovery of our cost inflation through price. However, we have not been able to recover our margin rates, and we've, therefore, seen some dilution in our gross margins.

In the third quarter, SG&A came in at about 8.2% of sales as a result of a reduction in costs of approximately $7 million. We've been please with our ability to maintain strong cost control at the SG&A line and have delivered continued productivity there. For the first nine months of 2006, SG&A spending in dollar terms was flat compared to the prior year period. However, as a percentage of sales, SG&A declined to 8.2% in the first nine months from 8.9% of sales in 2005.

When communicating the operating performance of the company to our Board of Directors and employees, management excludes certain items, including those related to the Company's Chapter 11 proceedings, asbestos liabilities, restructuring, and other activities, so as to improve comparability over time. In the third quarter of 2006, such items amounted to a net credit of $5 million of additional income compared with a net charge of $7 million during the same period of 2005.

After excluding items affecting comparability, adjusted income from operations for the third quarter was $154 million compared with $146 million in 2005. Adjusted income from operations for the first nine months stands at $426 million compared to $395 million for the comparable period last year.

As it relates to the balance sheet, I would point out that we had another good quarter of cash generation. We finished the quarter with cash on hand of $1.464 billion versus a prior year of $1.213. This cash balance is consistent with the forecast that was disclosed in our plan of reorganization related to emergence.

Before I get to the segments, I'll give a brief update on our financing as it relates to emergence. As you know, we were successful in syndicating a bank credit agreement during the summer and expect to complement that with the issuance of long-term bonds to take advantage of the current favorable interest rate environment. We feel that we are on track to emerge with $1.8 billion in new financing at cost-effective credit rates and a strong balance sheet.

Let me now turn to a brief discussion of our four segments. I will start with Insulating Systems.

Insulating Systems continued to operate at a high level in the third quarter. Insulating Systems manufactures and sells a variety of products for residential and commercial insulation applications. Our most notable product line is PINK fiberglass insulation batts, sold through distribution channel and directly to insulation contractors. We also sell blown in insulation for attic applications, as well as PINK foam board products sold under the Foamular brand name.

We manufacture fiberglass insulation media to be sold to manufactures of flexible duct systems. Flexible duct systems are a growing application for the replacement of sheet metal in both residential and commercial construction. Owens Corning's product line of industrial products in the Insulation Systems segment includes metal building insulation, as well as heavy density fiberglass pipe insulation products.

We estimate that approximately 60% of the revenue in our Insulation business is derived from the new residential market in the United States and Canada, that approximately 13% of the revenue comes repair and remodeling markets, 19% of the revenue is driven by commercial and industrial end uses in both the U.S. and Canada. And finally, about 8% of the revenue in this segment comes from international markets, most notably China and Mexico.

In terms of financial performance for the third quarter, sales in this segment were $529 million, up 5.4% versus the prior year. The increase in revenue was largely driven by a continuation of the favorable pricing environment. Income from operations in the third quarter increased 17.9% to $125 million compared to $106 million in the prior year. This performance was driven by both the favorable pricing environment and improved productivity, which helped offset cost inflation.

The second segment that I would like to speak to is Roofing and Asphalt, which is primarily comprised of the manufacture and sale of fiberglass asphalt shingles for residential uses. We have an extensive national network of roofing plants, servicing multiple channels of distribution, including retailers, roofing-oriented distributors, and lumberyards. Our products go into both residential re-roofing applications, as well as residential new construction.

In addition to the manufacture of shingles, we are also a significant processor of asphalt for roofing applications, both for our own use and also for commercial sale in the industry. We sell processed asphalt to other manufactures of residential roofing, as well as selling asphalt into commercial roofing applications in both packaged and bulk form.

In terms of the revenue drivers for Roofing and Asphalt, we estimate that two-thirds of the revenue comes from the residential repair and remodeling market in the United States and Canada. 21% of the revenue comes from shingle sales into new residential constructions in those two same markets. The balance of the revenue, 12%, comes from commercial and industrial markets in the United States and Canada, primarily in the form of asphalt sales.

Sales for the quarter in Roofing and Asphalt were $458 million, a 1.1% increase over $453 million in the third quarter of 2005. The increase in revenue was primarily the result of higher pricing, which has been implemented over the course of the past year to recover a significant run-up in asphalt prices, which we've experienced throughout 2006. These price increases offset volume declines for the quarter.

Our income from operations for the quarter was $20 million, a 52% decline from $42 million in the prior period. As I mentioned, the third quarter of 2005 was heavily influenced by strong demand from the record hurricane activity that struck the southeastern United States in both 2004 and 2005, creating a very strong roofing market at this time last year. By comparison, in our third quarter, we saw a weakening of demand associated with reduced storm activity for the year, coupled with significant increases in asphalt prices that affected margins.

As we move forward in the fourth quarter, we do expect the weakness in the roofing and asphalt margins to persist. We are taking strong action in the quarter to reduce our inventories and reposition the business for 2007. As a result, we would expect results in the fourth quarter for Roofing and Asphalt to continue to decline versus the prior year and also sequentially with the third quarter results.

In addition, given the fewer than expected storms this season and current trends, we believe that the first half of 2007 will be a somewhat challenging start when compared to the first half of 2006.

Now, let me turn to our third segment, Other Building Materials and Services. Within this segment, we have a portfolio of business and product offerings that are designed to extend Owens Corning's building material franchise in North America.

Let me give you a brief description of the five areas of significant activity within this segment. First, we are a market-leading manufacturer of stone veneer products, which we market and sell under the Cultured Stone brand name. Second, we are a large manufacturer of vinyl siding products, which we sell primarily through our company-owned distribution and also through independent distribution and retail segments.

Third, we distribute vinyl siding, windows, and other exterior building materials through our Norandex/Reynolds network of distribution centers. Fourth, we have a franchise offering within this segment for the sale and installation of the Owens Corning basement finishing system. We have recently launched a second franchise offering for Owens Corning, a sunroom system called Sunsuites. Finally, we are developing a service business under the brand name HOMExperts, providing contracting services for new construction, as well as services to our retail partners and direct to homeowners.

We estimate that slightly more than 50% of the revenue for Other Building Materials and Services comes from the new construction markets in the United States and Canada. The balance of the revenue is driven by the repair and remodeling market.

The total revenue of this segment for the third quarter was $328 million, representing a 3.8% decrease from the prior year. The decline was primarily related to reduced volume in vinyl siding and some declines in revenue associated with our contracting services business for new construction. This was partially offset by growth in manufactured stone veneer products.

Income from operations in the third quarter decreased to $8 million compared to $14 million in the prior year period. This decline was primarily related to weaker margins and volumes in our vinyl siding and construction services business. This was partially offset by improved volume in our manufactured stone veneer products.

As we look ahead, we believe that we have taken strong actions in the quarter to effectively reposition our vinyl siding business for improved performance. In the quarter, we sold one of our four vinyl siding manufacturing facilities to focus our operations specifically on the production of products for our company-owned distribution. In addition, due to our ability to utilize our Norandex/Reynolds distribution operations as a key service platform, we were pleased to be able to gain significant volume with Home Depot in the quarter and provide them with the level of service that all of our customers have come to expect from Owens Corning.

Also in this segment, we do expect continued volume growth and operating performance from our Cultured Stone business, which should contribute to improved revenue and earnings performance.

The final segment that I would like to detail is our Composite Solutions business. Composite Solutions is a global business. We make a full line of fiberglass reinforcement products to be used in combination with resin and plastic systems for the creation of fiberglass reinforced end-use applications. We sell glass in continuous strand form and chopped form. We have the ability to process our glass into mats, in a process that is similar to papermaking, and to weave our glass into fabrics.

These products are translated into a variety of end-use applications by our customers. The key end-use applications for composites on a global basis would be automotive, marine, corrosion, consumer electronics, roofing, and most recently we have seen rapid growth in the wind energy market in the form of windmill blades.

Composites is a business that very much mirrors the global economy in terms of its overall growth and diversity of demand. We estimate that approximately 40% of our revenue is derived from the U.S. and Canadian commercial and industrial markets, and slightly over 41% of our revenue is derived from international markets, including Latin America, Europe, and Asia.

We estimate that approximately 5% of Composites revenue goes into new residential construction in the U.S., primarily through the provision of glass reinforcing mats to the asphalt shingle markets, and that the balance of the revenue, approximately 14%, goes into U.S. and Canadian repair and remodeling markets, also associated with the asphalt shingle market.

For the third quarter, Composites showed revenue growth of 5.9%, finishing the third quarter at $393 million compared to $371 million in the prior year period. The primary driver of the increase in sales was the acquisition of the Asahi Glass operation in Japan, a transaction we completed earlier this year.

Composites income from operations for the third quarter was $45 million, a 45% increase over the prior period $31 million. During the third quarter, we recorded a one-time gain associated with the repositioning of metals used in the production process for composites. Excluding that one-time gain, adjusted income from operations was $35 million in the third quarter versus the prior year period of $31 million, representing growth of 13%.

Also included in the quarter was a gain on an insurance recovery. This gain may skew comparability of [this] versus the third quarter of 2005. We've included the gain in adjusted income from operations in order to enhance comparability across the full year and on a last 12 months basis. We experienced losses from the flood associated with this gain in both the first half of 2006 and the last half of 2005, which we also took against earnings.

Moving into the fourth quarter, we continue to feel that the demand for composites on a global basis remains solid and that our outlook related to demand in this segment continues to be positive. As we have previously disclosed, first half performance in this segment was impacted by the flood in our Taloja, India facility, as well as the shutdown of our Brazilian operation for a major capital program, although, those operations were back online in the third quarter, and the business showed improvement through the quarter. As a result, we feel that we should see continued progress in Composites in the fourth quarter this year.

I would like to discuss our outlook for Owens Corning for the remainder of the year. We announced in today's press release that we continue to feel confidents that full-year results for Owens Corning on an adjusted income from operations basis should exceed last year's overall result of $544 million.

To give some additional color related to that outlook, I'd like to walk you through some of our assumptions behind those numbers. While we believe the Insulation business is heading into a period of weakening demand associated with the slowdown in housing, the fourth quarter is traditionally a strong quarter for this business segment, and we believe it will continue to perform in the upcoming quarter. Quarterly, if we see a more precipitous drop-off in volume than we currently anticipate, this could negatively impact our outlook for this segment.

We have modest expectations for our Roofing and Asphalt business in the fourth quarter, related to both weak demand, as well as high asphalt prices compressing margins. Our outlook does not include any adverse effects of an additional spike in oil or asphalt prices, which would further compress margins. We assume that the actions we are taking in the quarter, including curtailments across many of our facilities and the idling of production at our Jessup, Maryland manufacturing facility, will be sufficient to correct our inventory and position the business to be more competitive.

As I previously shared with you, we are encouraged in our outlook for Other Building Materials and Services, as well as our Composite Solutions segment, for the upcoming quarter, in terms of their ability to make progress versus the third quarter.

As a note, the outlook that we have provided does not take into account the fresh start accounting adjustments, which we will be required to make as a part of our emergence from bankruptcy later this month. We will provide a full reconciliation of those adjustments as a part of our fourth quarter earnings announcement.

With that, I'll turn it back to Scott for the completion of our call today.

Dave and Mike, thanks very much for that helpful update. Lisa, I think we're now ready to begin the Q&A session, if you'd like to poll the participants.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line [Joel George Shirpsey] from [Shirpsey Asset Management]. Please proceed.

Good morning, gentlemen. A quick question on the adjusted operating figures for the quarter. I was curious. I see that -- you describe it, but I'm wondering if it includes the add-backs of pension and other employee benefits that you have on your cash flow statement.

I'm going to ask Mike to take that, if he would. Mike?

No, our accounting for pension benefits and other items for the balance sheet has not changed in the quarter.

But the adjusted operating income does not add those back?

It does not.

Thank you.

Thank you.

Your next question comes from the line of [Andrew Hahn] with [VNY Capital]. Please proceed.

Hi, guys. Congratulations on the bankruptcy success.

Thank you. Thanks for calling in.

Sure. Just a quick question -- as part of your disclosure statement, you guys had disclosed your EBITDA, this pro forma EBITDA, for the year of 865. 2007, I think it was around 925. Can you just give us -- I mean, should we still be looking at that as guidance for the year? Or can you give us some sort of reconciliation for that in terms of how your operating income number measures up to that figure relative to '06. And I guess, as you look at the '07, should we -- how much reliance should we put on the 925 for '07?

Okay, to put that in context, we submitted that plan as part of our plan of reorganization several years ago. And as part of that plan, we made some very clear assumptions as to what kind of market environment we would be participating in that would generate those kind of returns. And as you recall, it would say that our assumptions were that through '05, '06, '07, that economic environment, and in particular housing starts, would remain at the same level as at the beginning of the plan.

And as you know, those assumptions have turned out not to be correct. So we would stand by the original -- we would stand by the numbers given the assumptions, but since the assumptions have changed, that would change our outlook going forward. And maybe Mike can put a little more color on that comment.

I think the only thing I could add to Dave's comment -- because I think he captured very, very clearly what we were trying to accomplish inside the disclosure statement -- is that some of the guidance we're giving today in terms of talking about [expressing] confidence that the year would finish ahead of last year on an adjusted income from operations basis. Last year's result is about $55 or $60 million less than the $600 million which we had had in the disclosure statement. So if we're north of that number in our guidance, obviously we fall somewhere between where we were before and last year's result.

Okay. All right, great. Congratulations, guys.

Thank you.

Thanks.

Your next question comes from the line of [Karen Evehart] with [Lehman Brothers]. Please proceed.

Hi. I have two questions. One is can you help on the gains on the sale of the metals business? You said that was $7 million, and in the release it says $10. So just help me reconcile that. And then also, I know you have capacity expansion plans in place. Have there been any adjustments to those plans given the softer market?

I want to ask Mike to take question one, and then I'll take question two.

Okay.

Hi, Karen. How are you?

Good.

In adjusting the Composites numbers for the quarter, I did actually adjust $10 million out of the income from operations. So if I said $7, I misspoke.

Okay. Okay, thank you.

The actual number for the quarter is $10 and that was the numbers in the composite [inaudible].

Okay.

As it relates to capacity, we'll talk a little about the things that we've announced. Obviously we talked today about the curtailments or the item [technical interference] in our Brookefield -- I'm sorry, in our Jessup, Maryland manufacturing facility, which is outside of Baltimore. We had previously also [technical interference] that we had taken down. It's what we call our swing line in our insulation facility outside of Montreal. That is typically the last manufacturing line we'd bring onto line in our Insulation business when demand gets strong, and then when we anticipate the weakening of demand, it's often the first line that we would curtail. So we've taken that action.

We also -- plus about the fact we've sold one of our vinyl siding facilities in anticipation of the current market conditions, also the potential for weakening conditions there. So we've taken some major actions, but obviously on a day-to-day basis, we're also looking at whatever curtailments and adjustments we need to make to keep our inventory and operating performance where we want it.

And have you made any changes in the capital spending, because it looks -- and your capital spending expectation's, I think, at a 350 number for next year?

We're still hanging at the 350 number as we speak. We do have the ability to move that up or down as circumstances require. That's the number we're going into the year with, as we want to continue to invest in our business.

Okay, thank you.

You know --

One more thing, did you ask a question about expansions?

Yes.

I don't think we've addressed that yet.

No.

Let me do that. Are you referring to our announced expansion at our [technical interference] greenfield plant in Cordele, Georgia?

Yes.

As you know, we announced that a couple of years ago. We started the construction of the project. About 30 days or so ago, we have put that project on hold --

Okay. Okay.

-- proceeding with that. One thing that we like is that at this point -- at any point in time, we're about 18 months away from running in that capacity back up. So if we see the market turn back up, we think we'll be in front of that and be able to take care of our [supplemental] demand. As we said, we'll need the capacity at that time.

Okay, that's helpful. Thank you.

Thank you.

Your next question comes from the line of [Tom McKay] with [Fithlow and Partners]. Please proceed.

Please proceed, sir.

Hello?

Yes, Mr. Tom McKay, please proceed.

I'm sorry. This is Ana [inaudible] speaking for Tom McKay. What percent of new stock is owned by major shareholders after their rights offering?

Could you repeat that one more time? And then I'm going to ask our General Counsel, Steve Krull, to answer it.

Okay. I'm wondering what percent of new stock is owned by major shareholders after the rights offering?

That data's not yet been made public. However, we will, as part of our emergence, be required to file a -- that's one registration statement which will need to be filed prior to the effective date of our plan, which, as Dave mentioned, is on or about the 31st. And within that document, it will lay out who the selling shareholders are and will give investors a pretty good idea of the share ownership in our company. But as of today, that's not been made public.

Okay, thank you very much.

Thank you.

Your next question comes from the line of [Mark Mullins] with [Stanfield Capital]. Please proceed.

Hi. You should be generating quite a significant amount of free cash flow going forward. Would you be looking to returning it to the shareholders or will it all go to growth and debt repayment?

Well, first of all, you're right. This company has [inaudible] generated a lot of cash, and we expect that to continue for the foreseeable future. Once we have that cash, we have several different options. We can reinvest in our core businesses. We can take a look at acquisitions. Whatever we do, we want to make sure we maintain our investment grade credit rating. That's very important to us.

But once we get beyond those things, then what we do with our cash relative to stock buybacks or dividends, would really be determined at that time by our Board of Directors. And we've not had those discussions yet, but the good news is that we have a lot of cash. We've got a lot of opportunities to decide what to do with it. So we feel really good about that.

All right, thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of [Brad Sechati] within [Highness Capital]. Please proceed.

Yes, hi, Craig Strickland. If you guys have already answered this, I apologize. We had some operator difficulties. In your guidance for the full year, are you assuming any one-time gains for metals and composites in the fourth quarter?

I think I'm gonna ask Mike to take that one.

No, we're not. We have been reconciling those gains out of our adjusted income from operations, and so the guidance that we're giving is kind of apples-to-apples with adjusted income from operations. The 2005 number, which we spoke to, did include a gain on metals sales in the fourth quarter of last year. We've adjusted that out of the comparable period from last year, as well as this year.

So as I look back to the fourth quarter of '05, I should take out a gain? Or you've already taken that out when you speak to the 544 number?

Well, in our public filings, we had disclosed that we had about $7 million of gains in the fourth quarter last year, and we've taken that out of the number we talked about today, the 454.

Okay, thank you.

I mean, I'm sorry, 544.

Your next question comes from the line of [Shannon O'Mara] with [Plymouth]. Please proceed.

Hi. You talked about potential acquisitions of complementary businesses, can you give us an idea of what you would consider as a complementary business, and is that U.S., international?

Well, one we could point to directly would be Modulo, which is a cultured stone product that we just acquired with locations in Europe. As you know, we're the leading supplier of manufactured stone veneer in the United States. We expanded that capacity to China about a year ago, and now we've expanded that production capacity into Europe. So we are really becoming a global leader in manufactured stone veneer.

If you take a look at some other things we've done in the past, we acquired a 100% position in [Vegil Segris]. We were a minority joint venture partner there for many years. That gave us access into the Mexican market, not only for insulation, but for composite materials. We also just recently acquired Asahi in Japan, which gives us a major additional presence in the Asia Pacific market. There are geographical additions. There are production line additions, product line extensions. It would really be all of those.

It's going to be consistent with expanding the footprint of our core businesses. I don't think you're going to see Owens Corning get into the refrigerator business or something like that tomorrow. Anything, I think, would be pretty closely tied to the core of what we do and would expand usually what's a product line extensions or geographical growth. Does that answer your question?

Yes, that's great. Thanks.

Thank you.

Your nest question comes from the line of [Chris Blake] with [Scotty Capital]. Please proceed.

Good morning, gentlemen.

Morning.

Morning.

A quick question for you on your insulation side -- I was wondering if you could give us an indication -- I know you indicated your sales were up roughly 5.4% for that division. I was wondering if you could give us some color on the pricing and volume mix between the -- on that number?

I'm sorry. I didn't understand your question. Could you try it again?

I'm sorry. The sales increase in your insulation segment and systems was up roughly 5%. I was wondering if you could give us the mix between pricing and volume on that figure?

We really don't break it down in that way. I'm sorry.

Okay. And you also mentioned in that division, your fourth quarter is traditionally your stronger period. I was just wondering if you could indicate why that is when you indicated that September you're starting to see some weakness?

It's typically because that's when our retail business kicks in. If you think about being a consumer yourself, you kind of want to get through the hot days of summer, because you may not want to go up into your attic to do re-insulating. You get a couple of cool fall days, and all of the sudden you start thinking about your energy bills, and that's when our retail business really kicks up -- kicks in. So that's kind of a shift from the new construction kind of slowing down and the retail do-it-yourselfer kind of picking up. So that's why the fourth quarter is typically pretty strong.

Maybe if I can add another point on that. Even in the new construction market, our insulation products typically go into the home 90 to 120 days after the start. So as you look at the progress of housing start numbers through the year, on a seasonally adjusted basis, we've obviously seen a fairly dramatic slowdown in housing starts over the last six or seven months.

On an actually kind of holes in the ground basis, there were still a reasonable number of starts through the beginning of the summer, which seasonally adjusted to a low number but created a fair amount of construction activity. That's the activity that we were seeing through the middle and first part of the quarter. As we saw a more pronounced slowdown in the second part of the summer, I think those are the housing starts that will come for our fourth quarter, even though we've seen a slowdown, typically construction activity on a non-seasonally adjusted basis is still much stronger in the summer. And that's what we tend to see in the fourth.

Okay, that's great. And just lastly, do you think the closures you mentioned with Jessup, Maryland and the facility outside Montreal, will that be -- what kind of assumptions in terms of the housing start declines will be built into those plant closures?

Well, our assumption for next year is consistent with the NAHP forecast of 1.62 million housing starts for next year. That's the base case that we use every year when we build our plan is the NAHP number, and then we put together contingency plans to either build above that or below that. So the number we would have factored into all of our assumptions would be that number.

Okay, that's great. Thank you.

Your next question comes from the line [Adriana Conemore] with Hartford Investment Management. Please proceed.

I was just wondering, can you discuss the hurdle rates for your acquisitions and if you could break down CapEx between maintenance, cost savings, and expansion?

Yes. I'm going to ask Mike to take that again.

This is Mike. I'd be happy to handle that. I think as Dave described our acquisition policy, we tend to look for things where we have very clear line of sight of how it's going to fit into our business and very clear line of sight into how we can create synergies and value by doing the acquisition. So each of the transactions he detailed, whether it was the Asahi transaction or the Modulo transaction, fit that criteria.

We, internally, at least over the last six years while we've been in bankruptcy, have been using an 11% cost to capital for the business. I think as we emerge and have the ability to have our access to the capital markets renewed, we'll obviously go back from time to time and take a look at that. So that's about what we had seen as our cost to capital at the time we filed, and we didn't have a good basis to change that over the last five or six years.

So when we evaluate any transaction, we would certainly expect it to cover cost to capital. And we would expect it to have clear line of sight to both growth and cost-based synergies as a way of contributing shareholder value and contributing value to Corning.

Regarding guidance on capital investment, I think, looking at the numbers, you'd see over the last three years we have spent about $350 million a year. Let me talk about how we talk about that internally. We run on about $250 million a year of depreciation and amortization. Typically we ask the businesses to spend in the existing operations at a rate about equivalent to D&A and at a maintenance level which is below D&A. so we would think that we can maintain our assets at a discount to historical depreciation and amortization. We do want our businesses, though, to be aggressive about funding productivity programs, obviously funding programs that improve safety performance or environmental performance, and we would ask them to put that capital to good use, to not just maintain the operations but improve the performance of the operations.

We typically believe we can get that done at a level of depreciation and in a tight period or a tough period at a discount of depreciation, we then challenge our businesses to generate growth ideas and investment ideas that will create growth and performance for the company. We've been successful over the last two, three years finding around $100 million of capital. We'd like to put it to work inside our businesses related to growth. That will be certainly the way we will look at going into next year, is that we will continue to look at good ideas that we can fund for growth.

However, given some of the uncertainty in the market, I think you would find that we're going to continue to be cautious and make sure that the ideas are good. And I think, as Dave said, really ensure that we have enough visibility to our cash flows, enough visibility to our balance sheet, that any decisions we would make around investment did not jeopardize our investment grade credit rating. We worked too hard over the course of the last six years to emerge with this kind of strength in our balance sheets, to push that in jeopardy.

Can you discuss working capital needs as a percent of sales? You had said earlier that in your roofing you're a little bit over inventory, just given the slower demand this year. So on an ongoing basis, what do you think for every dollar of sales that you generate how much you will need in working capital and what are the opportunities to reduce that?

Yes, maybe I can follow on with that conversation. We think we've managed our working capital pretty effectively over the last three or four years. I think if you look at our revenue growth and you look at our inventory levels and receivable levels offset by payables, that our inventory has -- I mean, our working capital has performed reasonably well over the last couple of years. We think we should be able to sustain those rates. Obviously there's some amount of seasonality, so we tend to look at that quarterly.

It's a difficult answer. It's a difficult question for us to answer in general, but as we look at each of the individual businesses and the company in aggregate, we think our historical trends should be relatively predictive of the future.

And one last question. I hope you don't mind. Just how you compensate your division heads -- does it really vary from division to division?

We have a basic pay philosophy that we want to pay all our people at the 65th percentile of our comparative groups. And the way we get there is that we put 50% -- we want to get it to 50% percentile for base pay, and the 75th percentile for incentive pay, which puts a large portion of an individual's total compensation at risk. So it's 50% at base, 75% on an incentive basis, adding out to be 65.

And we have found that to be very, very successful the last three or four years. I think it's one of the reasons our performance has been so strong. People really understand that if they make an individual contribution, they can make a difference, not only for the Company, but for themselves and their family. So it is a merit-based program, competitive in the marketplace at the 65th percentile, but skewed dramatically towards a pay-at-risk program.

Is it tied to return on invested capital, profits, sales?

It's tied to income from operations, cash flow, and we have a longer-term incentive program that's tied to a return on net assets. We also have all 20,000 of our employees, as of three or four years ago, are on the identical program -- the same metrics, the same pay-at-risk, and we think that that's been a very successful program as well.

Thank you.

Lisa, I think we have time for two more brief questions.

Please start. Your question comes from the line of [David Sotnick] with Barclays. Please proceed.

Hi, guys. I'm really trying to -- I'd like to hear what the current initiatives are in terms of in both the base products in insulation and then roofing or just generally what pricing initiatives are sort of currently on the table and just the pricing churns that you expect in the fourth quarter.

Maybe I can handle that question. I talked in our comments about the things that we think we can do on the cost side to improve our business. I think it's probably equally important. We talk about where we think we can spend money in order to improve the performance of our business. We do have aggressive marketing programs in place in both Insulation and Roofing and Asphalts. And they're very, very targeted to try to improve the performance of our business in those segments where we think we can make a difference.

Obviously on the Insulation side, we think the big opportunity is to market and sell energy efficiency. Energy costs are high by historical standards. Business or opportunity in both the re-insulation markets, through our retail channels, to increase awareness and excitement around re-insulation activities. And we're working hard at that and working hard with our partners to make that happen.

And the other thing is this is an opportunity with some available capacity to work down channels with the homebuilders and give incentives and promotions and marketing programs to get them to use more insulation products and build more energy efficient homes. And I think you would find Owens Corning is taking the lead on that and that we think that's an important part of improving the business for the short-term and the long-term. It will both give us near-term product upgrades and volumes, if successful, but then also, we think that once the industry goes to higher levels of energy efficiency and a higher performance standard, that it's likely to stay there, that it's in effect a little bit sticky on the way up.

On the Roofing side, we have talked a bit, in some of our public disclosures and also in some of the presentations we have been making with potential investors, about a new product we're launching called SureNail. SureNail is a product that improves your ability to install roofing and to install roofing in a way that you get better performance and a quicker and easier installation. We have been working with contractors to really fine-tune that product and make it exactly what the contractor base is looking for.

We've received nice feedback from our contractors in our test market, and we do intend to plan and put money into our budgets for next year to roll that product out on a more national basis and try to improve contractor loyalty and contractor preference for our product, which we think is very, very important for us to continue to grow in the re-roof market and also make sure that we've got strong brand preference on the part of the contractor as they go in and sell to homeowners.

Maybe I can just say that a different way. I believe in Insulation and Roofing you said versus last year's third quarter you were up, from a pricing standpoint. Is there any way you can characterize whether the fourth quarter versus fourth quarter last year will also be up from a pricing standpoint?

Well, on the roofing side, I think we would certainly expect pricing to continue to be up in the fourth quarter versus last year, just because we've seen so much cost inflation in terms of asphalt that on an annualized basis, the industry has been in catch-up all year long. So as you compare back to the fourth quarter of last year, the asphalt-induced price increases, we think are going to show positive comps on the price side in Roofing and Asphalt. We do think -- at least at this point it feels to us like the worst of the asphalt inflation is behind us. And so relative to the third quarter, we may either see flat asphalt pricing or a little bit of relief, which could have some impact on pricing, but we don't forecast price at that level.

On the Insulation side, we're working very hard right now to make sure that we do a good job working with our customers on the price side. We have seen price increases through the year again, so compared to prior year we would expect that we're entering the quarter with some momentum, but obviously as we look at weakening demand, one of our concerns for the quarter or looking into next year is that we would start to see some price competition on the Insulation side of the business.

Okay. Great, thank you.

Your next question comes from the line Bob Ryan with Banc of America Securities. Please proceed.

Hi. Thank you. I got on the call a little bit late, so maybe you've addressed, but going forward, how should I think about your tax position -- what your NOL will be and what sort of benefit you expect that to give you on an annual basis?

That is a great question and one that we're glad you -- even though you're a little bit late, we're glad that you asked. As part of the plan of reorganization, Owens Corning will emerge with a substantial NOL, and we think that that's important as you take a look at the overall valuation of the Company and how that really works. I'm going to ask Mike to kind of give you the technical detail as to how it works and what the amount looks like.

Thanks, Dave. The NOL position is created by the funding of the asbestos trust, and in effect, that creates a loss for us that will then shelter future earnings. On a nameplate basis, we've estimated that our NOL will be in excess of $2 billion at emergence. We've been out in the market this week on a bond offering, and in talking to some of the prospective bondholders, we have made an estimate that on a net present value basis, we think the NOL could be as much as $670 million of value, and on a post-emergence basis, we expect to have a little over 130 million shares outstanding. So we've been estimating that that could have as much value as $5 a share on our when emerged or post-emergence stock.

Okay, and some of the other manufactures who are coming out of bankruptcy, when they created their liability trusts, actually realized or expect to realize a tax refund. Will there be a component of that in the tax attributes you've recognized on emergence?

No, we are not in a carryback position, so we're not in a position where we can take the NOL and carry it back and get refunds. Ours is all on a go-forward perspective basis.

Got it. And finally, the adjusted operating income figure that you talked about as your expectation that 2006 will likely be up year-over-year, do you have the figure you used for 2005 for comparability sake?

In our release today, and then also in the dialog, we talked about a number of $544 million.

544?

That would be our comp for last year versus where we see this year.

Okay, and what was on that basis? What's the 3Q year-to-date figure? Is that also in the release?

It is in the release

Perfect. Okay, thanks very much.

Thank you.

Bye.

This ends the question-and-answer portion of the conference. I would now like to turn the presentation over to Mr. Dave Brown for final remarks.

Thank you, and thanks everyone for those great questions. We appreciate them. When we started the meeting about an hour ago, I mentioned that this is a very exciting time in the history of Owens Corning and hopefully, during this brief discussion, we've been able to convey our excitement and optimism about the future of our Company.

I'd just like to let you know how proud I am of our employees. We've got 20,000 people pulling in the same direction for the last six years. I wish you could just meet a few of them so you could see how excited they are about the countdown to the end of the month. I'd like to share with you how confident and proud I am of my team. I think I've got the best team in the industry, and we work together as one. And I've got a lot of confidence in what this team will be able to do. And I'm proud of what we've been able to accomplish.

One of the things that we've done that I think's made a difference is that we consider our employees owners of the future of our Company, and as a tangible evidence of that, upon emergence, each of our employees will, in fact, become shareholders. They will be granted 100 shares of Owens Corning stock in the new company, and I can tell you that that's gotten them very excited, really committed as owners of the future of our Company, and as proud equity holders, as many of you are as well.

So that's a little bit of the excitement that we feel here are Owens Corning. And I'd just like to thank you one more time for you interest, and I look forward to talking with you again in about 90 days.

Have a safe week. Take care.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.