Owens Corning (OC) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Owens Corning earnings conference call. My name is Lisa and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Lisa, and of course, good morning to everyone. We're pleased that you've taken the time to join Owens Corning's fourth quarter and 2006 year-end results conference call. Joining us today are Dave Brown, Owens Corning's President and Chief Executive Officer, and Mike Thaman, Chairman and Chief Financial Officer, and Steve Krull, Senior Vice President and General Counsel.

Following our brief presentation, we'll 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 take questions from as many people as possible today.

During Mike Thaman's remarks, he will refer specifically to financial tables distributed with our news release today so I encourage you to have today's statement of income, in particular, schedule nearby as Mike will address that table during his remarks.

Before we begin, I'd like to remind you today that the presentation may include forward-looking statements based on our current expectations and assumptions about our business. These statements are subject to risks and uncertainties and our actual results could differ materially. Please refer to the cautionary statements and risk factors identified in our most recent Form 10-K and Form 10-Q for a more detailed explanation of the inherent limitations in such forward-looking statements. We do not undertake any duty to update or revise forward-looking statements.

We ask that you understand that certain data included within this presentation contains non-GAAP financial measures. Some of today's prepared remarks will exclude items that affect comparability. Those excluded items are captured in our GAAP to non-GAAP reconciliations found at the end of our earnings release and are also available on our website.

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

Thanks, Scott, and thanks to those who have taken the time to participate in this call. We appreciate your interest in Owens Corning. During our call today, I'll briefly review the significant events of the fiscal fourth quarter of 2006 and the important events of the year. I'll provide a snapshot of financial results for the full year and the fourth quarter. My sense is that by now many of you have seen our very detailed news release. I'll update you on ongoing Company initiatives and highlight others announced earlier today in that release. Chairman and CFO, Mike Thaman, will then guide you through additional fiscal fourth quarter and fiscal 2006 financial results and provide related insights. And of course, we look forward to your questions and our discussion.

Many terrific things have happened since our third quarter 2006 financial report and conference call. We emerged from asbestos-related Chapter 11. We issued new Owens Corning shares and the Company is now listed and actively traded on the New York Stock Exchange. Mike Scott and I also spent considerable time traveling from coast to coast to re-introduce Owens Corning to investors and analysts. As anticipated, in early January, we made our final distribution of stock and cash to the core established 524(g) Trust that will now handle any and all Owens Corning asbestos claims. I'm especially pleased that our asbestos liability is permanently behind us.

Early this morning, we reported consolidated net sales and operating results for the fiscal fourth quarter and all of 2006. The year was marked by strong performance during the first three quarters lifted by the strength of the U.S. new home construction market and temporary demand for building materials, in part due to hurricanes in 2004 and 2005. In total, results for fiscal 2006 and the fiscal fourth quarter of 2006 were in line with our expectations. We reported 2006 consolidated net sales of $6.461 billion, a 2% increase compared with 2005. For the fourth quarter, consolidated net sales were $1.477 billion, which represents a 14% decline compared with record quarterly sales of the prior year.

Reported income from operations was $433 million for fiscal 2006, compared to a loss of $3.743 billion in 2005. Fiscal 2006 adjusted income from operations improved to $569 million compared to $544 million in 2005, a year-over-year improvement of 4.6%. Mike will reconcile these numbers in his portion of the call. During the third-quarter conference call, we expressed confidence that adjusted income from operations would exceed 2005 results. We're pleased to report that our performance was fully consistent with that guidance.

Now let's move on to current and future events. We've made significant progress in our proposed joint venture with Saint-Gobain which would merge Owens Corning's reinforcement business and Saint-Gobain's reinforcements and composites business which is part of the Saint-Gobain entity known as Vetrotex. Yesterday we signed a joint venture agreement with Saint-Gobain that moves us one step further toward completing that deal. You'll recall that in July of 2006, we first announced that we were in discussions to merge these organizations into a joint venture with Owens Corning holding 60% and Saint-Gobain 40%. This joint venture is anticipated to have worldwide revenues of about $1.8 billion and employ 10,000 people. This is a joint venture that because of the way it is structured has shared risks and shared opportunities for the JV partners. Then after a minimum of four years, Owens Corning will have the option to buy Saint-Gobain's stake in the joint venture. The new venture will be known as OCV Reinforcements. We await feedback from various competition authorities and then will guide you to expected synergies which we believe will be significant. This transaction will serve customers with improved technology, an expanded product range and a strengthened presence in developed and emerging markets. The joint venture also achieves benefits in purchasing and procurement, operations, research and development, administration, and coordinated management of assets around the world. History may view this venture to be the single most transformational business move that we've made in our first 70 years. This will amplify Composite Solutions as a global core business at Owens Corning, balance our portfolio of businesses and products, and deliver value to customers and shareholders.

Now to announcements made earlier today. Our performance within the Other Building Materials and Services segment is not up to our standards. As a result, during the fourth quarter, we exited our HOMExperts business. This business provided pre and post home closing construction services to builders and contractors. While a difficult decision because of the 800 employees it affected, it was the right thing to do for our Company. Strategically we'll focus more on our growing and very successful Owens Corning franchise model which features basement finishing systems and our recently introduced composite sunrooms known as sun suites.

Earlier today, we also announced that we're exploring strategic alternatives for Owens Corning's Siding Solutions business, which is parts of our Other Building Materials and Services segment. Our Siding Solutions business included our vinyl siding production and our managed rentals distribution businesses.

And we are also -- and we also are exploring strategic alternatives for our Fabwel unit which is part of our Composite Solutions segment. Fabwel is the leading producer and fabricator of composite components and side walls for recreational vehicles and cargo trailers.

Also this morning, we announced that our Board of Directors has approved a share buy-back program under which the Company is authorized to repurchase up to 5% of Owens Corning's common stock. At current prices, this would represent an investment of about $200 million. Investors, customers, and employees frequently ask what we intend to do with Owens Corning's free cash flow. Clearly, this stock buy-back program reflects our commitment to great value and return to shareholders. As we plan the general use of cash, we intend to invest our existing organization, when appropriate, to enhance the products we provide to customers while delivering appropriate return on our investment. We'll explore strategically appropriate acquisition opportunities consistent with our core businesses and in a way that is consistent with long-term shareholder interest.

In closing, 2006 was a historic year at Owens Corning. 2007 is likely to be both challenging and rewarding. Now it's my pleasure to turn our conversation over to our Chairman and CFO, Mike Thaman.

Thank you, Dave. Today I'll walk through additional fiscal 2006 financial highlights and also the headlines for the fiscal fourth quarter of 2006. I'll review the performance of our business segments by year and by quarter, providing necessary color to help you understand our performance and our outlook. For the fourth quarter today, we're reporting $1.477 billion of revenue, and a loss from operations of $9 million. I'm going to take a moment to reconcile the $9 million loss from operations to our adjusted income from operations for purposes of comparability. We have enhanced the tables that we've included with our press release to help you follow along with the information that I'm going to review. At the bottom of the income statement that is associated with our press release, you will see that we have reconciled a $9 million loss from operations to an adjusted income from operations for the quarter of $143 million. The items affecting comparability include $27 million of Chapter 11-related reorganization costs, a $44 million impact related to a writeup of profit and inventory due to Fresh Start Accounting that is subsequently expensed in the quarter, a $21 million valuation of our in-process research and development as required under Fresh Start, which was then expensed in the quarter consistent with accounting policy, restructuring activities of $45 million, and other costs of $15 million.

Allow me to detail some of the items that are in the restructuring activities of $45 million. Most notably were costs associated with the decision to shut down our home experts business, including the cost of employee severance, exiting customer contracts, as well as winding down operations. We also had costs in the quarter associated with our roofing and asphalt business to improve our cost position and prepare for improved performance in 2007.

Specifically, we had costs associated with closing our Jessup, Maryland, roofing facility, discontinuing operations in a portion of our Detroit asphalt facility, exiting certain out-of-the-money contracts on the asphalt side of the business, severance costs associated with marketing and administrative cost reduction, as well as a gain in the quarter associated with the sale of our Fort Lauderdale asphalt facility which did offset some of the expenses in the restructuring activities line.

Further, we had costs in the quarter associated with restructuring our Siding Solutions business which included some branch consolidations and the ongoing cost of exiting the Owens Corning product lines that were previously supported by the Olive Branch facility which we divested earlier this year. With today's announcements of our decision to pursue strategic alternatives for this business, we clearly felt that positioning the business for profit growth and improvement in 2007 was an opportunity that we should pursue in the fourth quarter.

In addition, as I previously discussed, we had $15 million of other adjustments in the quarter. Notably in that line was the cost of continued support of the OCV transaction of $9 million as well as the beginning of the amortization of our employee emergence equity program of $6 million.

For the full year, we are reporting today results of $6.461 billion of revenue, and income from operations of $433 million. Again, I would refer you to the tables in our press release to see the reconciliation from the $433 million of income from operations to the $569 million adjusted income from operations which we will use as the basis of comparison to prior year. Among those line items, you will see our final provision for asbestos litigation, which was accrued in the first three quarters of the year. This item was a $13 million credit. You will see Chapter 11-related reorganization items of $55 million, which includes the first three quarters of the year as well as what we disclosed in the fourth quarter. The impact of the inventory writeup and the in-process research and development charge was all in the fourth quarter, as has been previously discussed.

You can see for the year we had $55 million of restructuring activities, $10 million more than what we incurred in the fourth quarter. Specifically, those were the $10 million of restructuring charges that we disclosed in the third quarter related to the composites business.

We also had $45 million of gains on the sale of alloys that had had been previously disclosed, and finally, you can see that the other line is $19 million for the full year, $4 million more than the $15 million we disclosed for the fourth quarter, which is comprised of the OCV transaction costs which had been previously disclosed in the third quarter.

We have made an effort to enhance the tabular disclosure of our results with the press release to make sure you're able to follow along with that analysis. I hope you found that this enhanced disclosure was useful.

We are in good shape with respect to all of our Fresh Start Accounting requirements. You will note that our financial tables in the release today included Predecessor and Successor Company financials to comply with our reporting requirements. We have also consolidated those results into fiscal year and fiscal fourth quarter results to enhance comparability. As disclosed in our release, we do have some additional tax work to do before we file our 10-K.

Before I move into the balance sheet and the segments, I would offer that we do expect there will be some costs in 2007 that we will reconcile out of the numbers to get to an adjusted income from operations on a go-forward basis. Specifically, we expect that we will have some additional expenses in the first quarter associated with the shutdown of the HOMExperts business. I would estimate those expenses to be approximately $10 million.

We anticipate that we will have some ongoing Chapter 11-related reorganization costs, which are primarily Owens Corning's legal costs associated with resolving some of the final unsecured creditors' claims which were provisioned for in our emergence but are still being negotiated and resolved.

We anticipate that between now and the closing of the OCV transaction, which we have said we expect in mid-year, we will have some ongoing costs associated with bringing that transaction to fruition.

Upon completion of those programs, the remaining item that we would reconcile out of income from operations will be the ongoing amortization of the employee equity program. Those shares, which went to all employees of Owens Corning at emergence, have a three-year vesting and will be amortized through our P&L for the remainder of the program until October of 2009. In that they are non-cash and don't relate to operations, we believe that they are most accurately excluded from comparable results. We estimate that this expense will be approximately $30 million per year.

We had another good year of cash generation. We finished the year with cash on hand of $1.089 billion, the majority of which was earmarked for January distribution to the 524(g) Trust to complete with finality the funding of that trust. The timely distribution to the trust totaled approximately $1.4 billion, including some interest from the effective date of the planned reorganization through the payment date.

Also I should take a moment to remind you that we transferred 28.2 million Owens Corning shares to the trust in January. As Dave mentioned, our funding obligations to the trust have now been completely fulfilled.

With that stock distribution, our total number of shares outstanding on a fully diluted basis is 130.8 million. You will see that we ended 2006 with $1.3 billion of long-term debt. To fund the January distribution to the 524(g) Trust, we borrowed an additional $600 million from a five-year bank term loan arranged last year thereby bringing our total debt to $1.9 billion.

Now a discussion of our four segments. Our segment reporting excludes the impact of the income adjustments which I previously discussed. Let's start with Insulating Systems. Reflecting the slowing market dynamics, financial performance of Insulating Systems weakened during the fourth quarter. Overall they had a strong 2006. For the year, sales were $2.097 billion, up 6% compared with 2005. During the fourth quarter, 2006, sales were $527 million, compared with $563 million during the same period in 2005. For the year, Owens Corning insulation volumes were flat despite a reported 5% reduction in lag U.S. housing starts. Compared with 2005, our 2006 volumes were stronger during the first half, weaker during the second half, with fourth quarter revenues down 6% compared with the same period one year ago. Volume declines during the fourth quarter negatively impacted manufacturing productivity. Insulation pricing was stable at levels higher than one year ago and when combined with improved manufacturing productivity for the year, more than offset the impact of inflation.

Income from operations in the fiscal fourth quarter of 2006 declined 16% to $107 million compared with the fourth quarter of 2005. For the full year, income from operations in this segment was $467 million, up a solid 10% from 2005, lifted by the strength of the housing and remodeling market, robust demand in the commercial and industrial markets, improved productivity within our plants, and improved pricing that helped offset higher costs.

During the fourth quarter, we took steps to adjust operations in response to a softening housing market. We have now curtailed all production at our Candiac, Quebec, Canada, insulation facility for at least the remainder of 2007 and in December, we slowed production at some of our other insulation facilities. We've delayed construction of our new white density insulation facility in Cordial, Georgia. Construction will not resume at this facility until we see market demand strengthen.

We will be -- continue to be disciplined in our approach to production to meet the needs of customers. Consistent with recent practices at Owens Corning, we announced a price increase in the fourth quarter of 2006 effective January 1, 2007. However, given the weaker market conditions that our customers are facing, we have previously announced that we are delaying that price increase until later this year.

During the fourth quarter, we accelerated our marketing initiatives to boost insulation use, recognizing that energy conservation is of ever growing importance. These initiatives include focusing on rising energy costs in the U.S. Energy Policy Act, promoting state building codes upgrades and proper compliance, and advancing noise control solutions through insulation for new home buyers. We our most innovative upgrade initiative is a recently introduced a program called R's on Us. The R's on Us program is an example of our long-term strategy to maximize the thermal efficiency of residential and commercial buildings. Effective January 1, 2007 through at least September 30, Owens Corning is offering customers our best performing fiberglass wall insulation at substantial savings. Our intent is to encourage increased energy efficiency while offering contractors and home buyers a compelling value on insulation upgrades. Upgrading the market from R13 insulation to more energy efficient R15 and from R19 to R21 is the right thing to do.

Now let's move on to our Roofing and Asphalt segment. Sales totaled $1.723 billion, down 5% compared with 2005. During the fourth quarter, sales dipped to $304 million, compared with $492 million in Q4, 2005. Full-year roofing volumes were down 15% compared with last year. During third quarter 2006, volumes began to decline in this segment, asphalt prices increased, and we were unable to offset the inflationary pressures with improved pricing. Fourth quarter 2006 revenues were down 38% compared with last year. These declines are the fallout of a weaker housing and less storm-related demand in 2006 compared with the prior year when we had both strong housing and strong storm demand.

Asphalt volumes were also down during 2006. However, improved pricing combined with broader productivity to offset inflation led to improved performance in this business. In fiscal 2006, our income from operations in Roofing and Asphalt was $72 million compared with $139 million in 2005, a 48% decline. For the fiscal fourth quarter of 2006, income from operations was a loss of $25 million compared with income of $34 million in the very strong fourth quarter of '05.

In many ways, we faced a unique challenge in the summer of 2006. Housing starts began a steep decline during the second and third quarters of this year while our inventories were being built in line with our recent experience of significant third quarter hurricane activity. In addition, asphalt prices reached historic highs during this time. In support of expected demand and customer expectations, inventory grew at Owens Corning and throughout the North American industry. Clearly, this dynamic led to a build of high cost inventory that had significant impact on our fourth quarter performance. In response to this supply and demand imbalance, we chose to dramatically curtail our operations in the quarter to achieve aggressive year-end inventory targets and best position the business for success in 2007.

In addition, we closed our Jessup, Maryland, Roofing and Asphalt facility to reflect longer term supply and demand expectations.

Going forward,our Roofing and Asphalt business is structurally sound. Our inventories have been reduced to more appropriate levels, and our plan going forward reflects lessons learned in 2006.

Let me turn to our third segment, Other Building Materials and Services. Dave has already reviewed with you our disappointment in the performance of this segment, and he's reviewed our exit from the HOMExperts business in this segment and our strategic review of alternatives for our Siding Solutions business. The total revenue for this segment in 2006 was $1.26 billion, compared with $1.234 billion in 2005, a 2% year-over-year increase. Fourth quarter sales totaled $288 million compared with $325 million in 2005. The increase in 2006 net sales was primarily the result of volume growth in North America manufactured stone veneer products and the impact of our European manufactured stone veneer products acquisition in the third quarter of 2006, partially offset by lower volumes in vinyl siding products. We are pleased with the improved performance of our stone veneer organization.

Income from operations for this segment in fiscal 2006 was $13 million, a 24% decrease from the 2005 level of $17 million. The decrease was due in part to losses in our HOMExperts construction services business from which we exited in the fourth quarter and volume declines in vinyl siding products, partially offset by increased volume and production efficiencies in manufactured stone veneer products which we sell under the brand name Cultured Stone.

We believe that we have taken the necessary actions to address the under-performance within this segment. Going forward we see an opportunity for major improvement in the contribution and quality of earnings from this segment.

The final segment I'd like to detail is Composite Solutions. In 2006, Composite showed revenue growth of 4.3%, moving revenue to $1.56 billion compared $1.495 billion in 2005. Composites had a very nice fourth quarter with revenue of $383 million compared with $373 million during the same period in 2005. The increase in sales was principally due to the Japanese acquisition during the second quarter.

Income from operations for Composites was $159 million in 2006, compared with $139 million in 2005. Excluding the impact of gains on the sale of alloy, income from operations was $114 million in 2006 as compared to $131 million in 2005. However, the performance in this segment built momentum throughout the year. During fiscal fourth quarter 2006, income from operations was $49 million compared with $45 million the prior year, up 9%. I would note that last year's $45 million included a $7 million alloy gain. Excluding this gain, income grew 29% in the quarter.

We are pleased to report that volumes in our Composites reinforcements business have increased consistently quarter over quarter throughout 2006, up 5% compared with '05. Global markets remained strong during the year with pricing momentum in the fourth quarter. The Composites organization established strong momentum at the end of the year, and they are well positioned to benefit from strong global demand as well as the recent acquisition in Japan, the expansion and full-year operation of both our Indian facility and our Brazilian facility. We are pleased with the development of our Composites organization.

A final note. Within segment reporting in the tables released today, you will see the general corporate expense declined by $71 million compared with 2005. The bulk of this improvement is tied to performance-based compensation. At Owens Corning, a significant part of compensation for all salaried employees is based on financial targets established at the beginning of each year. With the steep drop in housing starts in the second half of 2006, it became challenging to achieve the financial objectives we established at the beginning of the year, compared with the 2005 when we surpassed our targets. Any variances from our planned performance-based compensation are held at the corporate level because we have one performance plan for the Company which is based on consolidated results, and we don't want to distort the segment reporting or comparisons.

In closing, simply a reminder that upon emergence and subsequent distribution of continued stock and cash to the 524(g) Trust in January, Owens Corning generated a significant U.S. federal tax net operating loss of approximately $2.8 billion. Based on current estimates, the Company believes its cash taxes will be about 10% to 15% of pre-tax income for the next five to seven years.

With that I'd like to turn the call back to Dave for final comments.

Thanks, Mike. Many people, including some of you on the call today, have asked us for our best forecast for the year ahead. Given the challenges and risks associated with doing so in the current housing start market, we have decided to provide both qualitative and quantitative guidance that we hope you find helpful. Based on estimates of the National Association of Home Builders, the slowdown in new home starts is expected to carry well into mid-2007. This continuing market weakness will be reflected in the first quarter results which is seasonally our weakest quarter. As a result, consolidated first quarter 2007 adjusted income from operations will fall short of both the first and fourth quarters of 2006.

In 2007, we anticipate the performance of our Insulating Systems business will track reported housing starts. Demand creation initiatives will continue in this segment, including our special R's on Us promotion, noise control solutions for homes and businesses, and continuing to work to promote compliance and upgrades of building codes on a state-by-state basis.

The performance of the Roofing and Asphalt business in 2007 is expected to reflect moderate inflation of asphalt prices compared with 2006. More specifically, Roofing and Asphalt financial results for the first half of this year are expected to be less than those reported in the first half of 2006 when our sales were up significantly because of the carryover of higher demand due to the hurricanes of 2004 and 2005. Within this segment, we've completed market testing and have begun the national rollout of our new and innovative Duration Series roofing shingle with SureNail technology that features a fast install, extra-wide nailing zone and improved wind performance.

Given the recent closure of the HOMExtras business, continued growth of the manufactured stone veneer business and the strategic review of the Owens Corning Siding Solutions business, noticeable improvements in our returns are expected in the Other Building Materials and Services segment.

Continued improvement in revenue and profitability of our Composite Solutions business is expected in 2007. The opening of the proposed joint venture with Saint-Gobain's Vetrotex is expected to occur in mid-2007, which should provide a performance boost in this core Owens Corning segment.

Current forecasts, not including the proposed Owens Corning Vetrotex joint venture or other strategic organization changes, project 2007 adjusted income from operations to exceed $415 million. This forecast will be updated and communicated quarterly. Understanding the risks associated with such distant guidance, we hope this helps you understand our current view of 2007.

Before I turn it back to Scott for our question-and-answer period, I remind you that first quarter 2007 results are currently scheduled to be announced on Wednesday, May 2, 2007. Scott?

Thank you, Dave, and thank you, Mike. Lisa, I think we're now ready to poll our listeners for questions so we can pause now to do that.

Thank you, sir. [OPERATOR INSTRUCTIONS] Your first question comes from the line of David MacGregor with Longbow Research.

Yes, good morning, gentlemen.

Good morning.

Good morning.

I wonder, you talked a little bit about the inflation in your asphalt, raw material costs. I wonder if you just could walk us through the individual segments and talk about your outlook for your principal raw materials through 2007.

That's a great question, David. I think Mike is probably best prepared to answer that so let me turn this over to Mike.

Okay. Thanks, David. Let me start kind of with the headline. We expect that in 2007 we'll experience less inflation than what we've seen over the last couple years based on our current outlook. The most significant line items on our inflation would be asphalt, which you've touched on, and then also energy costs.

I'll start with energy costs first. Obviously, you know, natural gas and electricity have been somewhat volatile through the winter but we do think the outlook for '07 is that our energy costs will not be up dramatically versus where they were in '06.

We have formed a somewhat different view on asphalt, really probably as a result of last year. We think the seasonality of asphalt has increased pretty dramatically, and that asphalt costs in the winter are now structurally much more attractive than asphalt costs in the summer. So a part of managing inflation for asphalt has been our decision this year to operate our roofing business a bit differently. It's our intention to run our roofing assets pretty strongly in the first four or five months of the year, and then slow down a bit in the summer when asphalt costs are high to match our production's demand levels. That's quite a bit different than how we've operated in the past where typically as demand was building in the summer, we really ramped up our production. We don't think that's the right way to operate in the environment we're in so we do think asphalt could be as expensive, if not more expensive, in 2007 than it was in 2006 but we think we've taken some actions to mitigate that cost.

Our other big raw material input historically has been PVC associated with our siding business. PVC prices are a bit weaker now, but obviously we don't have as much go-forward perspective on that based on our decision today to evaluate strategic alternatives for that business.

David, just one thing I would add to that. I think Mike did a nice job of kind of referencing the impact of increased energy costs on our business. But I think one of the things that makes Owens Corning unique is that the products we produce, i.e., building insulation and foam insulation, actually solve the world's energy problems as the price of oil goes up. So on one hand, our costs do go up because we do use a significant amount of energy in our process but we have a unique benefit. Actually the product we make grows in demand at the same time so it's kind of an interesting position we find ourselves in.

Okay. So I mean, you mentioned there's a headline that you're going to see much less cost inflation in '07 than you did in '06. I'm just wondering as you develop your 415 number for adjusted income in '07, are we talking about 1% to 2% all in raw material cost inflation or bigger numbers than that? Is there any way we can quantify that?

You know, we have not -- we've not historically released our inflation numbers. What I would say is we do think we will still have inflation in '07, not deflation. We do expect that it will be less than what we experienced in '06 and '05.

Okay. Then I guess the other question I had was just regarding the Roofing and Asphalt segment, and I'm still relatively new to Owens Corning, but it just looked like an awful lot of operating leverage there. 38% decline in revenues and a $25 million loss swinging from a nice profit in the prior quarter. Is all that just pure operating leverage or was there other things going on in that number that -- distinct and separate from an operating leverage?

Well, 2006 in the roofing business was a very, very unusual year. I don't think we've ever seen a year quite like that.

Right.

The first half of the year had very strong demand because of the continuing storm-related demand in the southeast and housing was strong in the first half, as you'll recall.

Right.

So we were -- the industry was really pretty much sold out at that period of time. Believe it or not, we were actually shipping product from our Portland plant to Florida. That was the kind of demand that we saw in the marketplace. So if you take a look at the last two or three years, the industry was significantly short of being able to meet our customers' needs in the southeast so I know that Owens Corning and our customer base really went into the fall season with significant inventory levels. As you'll recall, I think last year was predicted by all the weather forecasters to be a year of significance with storms, and it turned out we really had no major hurricanes of any kind to land in the United States. So we came into the fourth quarter with a significant amount of inventory that we needed to move through. At the same time, we saw the price of asphalt continue to escalate through the season. So you kind of had this perfect storm in late third quarter, fourth quarter of '06. And what we decided to do was take decisive actions, take production capacity out in a significant way, allow the inventory to move through the system, and position us for a better first quarter.

Okay. And the curtailments in the fourth quarter in the Roofing and Asphalt business, are those plants back in operation for the first quarter or should we expect a similar type of economics in the first quarter?

Dave, maybe let me take that. What happened in the quarter is -- is we made a decision to really dramatically curtail our operations to the extent that really in December, our roofing plants barely ran. When you do that, you no longer absorb your fixed costs into inventory. You just take them directly to the P&L.

Right.

So the amount of negative leverage you're seeing in the P&L is really accentuated by three things. One is very, very weak volumes, obviously. The second is fairly high cost inventory coming through the P&L. And the third is all of our fixed costs going directly to the P&L in the quarter. What we accomplished by doing that, we hope, is we came into the first quarter with much less expensive inventory than we would have had had we run in the fourth quarter and tried to absorb all those costs into inventories. So we've tried to position ourselves that on a cost basis we're coming into the year in reasonably good shape. From a volume point of view, we do think it's going to take a little bit more time for the industry to work its way through all the inventory issues so it's going to take a while for volumes to really build back.

Okay. Good. Thanks very much. That's helpful.

Thank you.

The next question comes from the line of Margaret Whelan with UBS. Please proceed. Ms. Whelan, please proceed.

Hi, guys. Can you hear me?

Yes. Hi, Margaret.

Hi. Good morning, sorry about that. I'm on my cell phone today, and welcome back. Congratulations on re-emerging.

Thank you.

Just a couple of questions. The first one I guess is in terms of modeling, you've given us an '07 annual guidance and that's helpful and I'm thinking you probably don't want to give us too many specifics on a quarterly basis but maybe you can give us a sense for the seasonality of the business or your current backlog or the backlog maybe by business segment, just so we have some sense of how to factor in seasonality to our forecasts.

Well, seasonally, our business would be about 40% first half, 60% second half, maybe 45%, 55%, something like that on a top-line basis, and the profit would typically drive through that way. If you take a look at '06, it was kind of just the opposite. We had a strong first half and a weaker second half. We would think in the first half we would continue to see some of that weakness, through the first quarter for sure, tied to new housing starts. But we would think, assuming the NAHB is right and we have a soft landing in housing and things kind of pick up later in the year, we would think that our profitability would pick up, as well.

One of the things we feel good about, though, is some of the other strategic things we've done. I don't think we can really underestimate how excited we are about the OCV transaction. It really gives us a global footprint. It really positions us in new markets around the world. It gets us in China, gets us in Russia. Gets us in -- in rapidly growing markets, and market segments. I think that's something -- we've already seen the benefit of in the fourth quarter. And I think we'll kind of be a little counter-cyclical to what people might expect of Owens Corning based on our history.

So as we factor the acquisition in, what percent of your business now is to the U.S. housing market?

It's about 36% today would be U.S. new construction.

Okay, good so the counter-cyclicality will help. Just a follow-up to that then. I know you had planned a price increase which you're delaying now until when exactly and what's the magnitude of the increase?

I'm sorry. Could you repeat that.

Yes. I know that you had planned to institute a price increase that has now been delayed because business is weak. But do you have a date on when it has been delayed to?

Yes. Our original announcement was a price increase on January 1, delayed to a date to be determined, so we do not have a specific date in mind at this time.

Okay, and then do you have a sense for probably not given the answer, but do you have the magnitude of the price increase you're expecting?

We've got some material discussions going on, but we've not decided that either.

Okay. This is the last question on that. Of the margin erosion in '06, what percent of that was due to commodities, everything else being equal?

And when you say commodities, you're talking about inflation?

Yes, the inflation in the commodities, if I'm correct, your operating margin was down by 200 basis points, 160. What percent of that was directly relevant to the commodity inflation just so that we have a sense for tracking it, if commodities ease.

Do you have a good number on that, Mike?

Well, we haven't -- I mean it's somewhat linked to the first question in terms of how much inflation has come through our P&L and we haven't really given clear guidance on that. Let me see if I can put a little color around it. We definitely do feel comfortable saying that in 2006, the pricing in aggregate did not keep up with the inflation that we saw so we did see margin pressure that came from inflation in excess of pricing. I think in terms of order of magnitude, it's pretty similar to what you see in terms of the gross margin decline so it explains a fair amount of that change in gross margin year over year.

Okay. That's helpful. I'll follow up with you on that. And the last question from me in terms of the use of the cash is -- is now the right time to be buying in your equity or are you seeing a pipeline of deals that are interesting to you?

Well, you know, we were excited to make the announcement today about the share repurchase program. Obviously with -- with the strategic review of two businesses, that could potentially lead to some improved cash outlook for us. We still think even in a down year, which we're certainly signaling today that we'll generate good cash flow this year. So going out and supporting our equity seems like the right thing to do and consistent with what others in our sector have been doing. We don't at this point have any specific programs or projects that we would announce from an acquisition point of view. Probably the single biggest and most exciting acquisition we could imagine is what we're doing with OCV. It's just not a use of cash until we complete the buyout of Saint-Gobain shares which won't be for another four, five years so at least at this point strategically, we're doing the one key thing we would love to go get done and that's the progress we announced yesterday. It's just not a use of cash in the near term.

Okay. Thank you, guys. We'll see you next week.

Thank you, Margaret.

Ladies and gentlemen, please ask one question and one follow-up question. And your next question comes from the line of Dax Eckerson with Deephaven Capital. Please proceed.

Hi, gentlemen. Hello. Just a quick question regarding the Other Business Materials and Services segments and specifically the Siding Solutions portion of that segment. What -- what percent of the revenue of that segment comes from the Siding Solutions business?

It's 65%, 70%, in that range.

Okay. Great. And then what percent of that business comes from the stone veneer business?

Dax, we don't break out the other pieces, but the balance of what's in that segment would be the revenue we get from our franchising operation which is our core service offering and then what we do with Culture Stone.

Okay, great. And then regarding the strategic review of that business and presuming there could be some cash generation potentially as a result of the chosen alternatives from that review, would that cash be used potentially to support the buy-back program or potentially enhance the buy-back program?

Yes. The buy-back program is going to be funded by ongoing cash generation and the potential proceeds of any divestiture.

Okay. Great. Thank you very much. Take care.

Thank you, Dax.

Thanks, Dax.

Your next question comes from the line of Mary Gilbert with Imperial Capital. Please proceed.

Yes. Actually, I wonder if you could talk about OCV. I'm really intrigued with the Composite segment and wondered if we would see a more accelerated growth rate with the combination and also could you quantify what kind of synergies could be realized in the combination? And could you also talk about the competitive landscape and any proprietary products that you guys have that sort of give you guys the leading edge in the business?

Well, thanks for that question. We share your excitement with the potential of OCV. There's four or five different questions in there so maybe I'll pick off a couple and leave a couple for Mike. First of all, one of the things we like about the -- the OCV joint venture is it brings the top two producers of composites worldwide together, and it really allows us to take advantage of our technology, of our global reach, of our research and development, of our customer relations, our access to market.

Another thing we like about is the fact that the global composite business for long periods of time has grown about 1% to 2% faster than global GDP so this is a consistently rapidly growing market around the world.

Another thing that we like about the JV is it gives us access to a couple of rapidly growing markets that we've not been able to penetrate the last couple of years. One would be China, and one would be Russia. Vetrotex is already in those markets so the joint venture will have a strong foothold going forward, as well.

Basically what this business is is we sell fibers and fabrics and mats into reinforced plastics. And they go into end-use markets such as automotive, marine, telecommunications, wind energy. It would go into fiberglass shingles as the base mat. It would potential go into newly evolving markets like glass-based gypsum board. We think there are as many as 50,000 different applications for these glass fibers around the world, and what we've found over the years, as economies grow and GDP grows in any given part of the world, these particular products are substituted for other things like steel, wood, paper, in a very rapid fashion. So that's kind of a -- a very quick snapshot of the business. I'll ask Mike to add some color on top of that.

Well, Mary, you had also asked to talk a bit -- ask us to talk a bit about synergies and also competitive dynamic in the market. It is a very, very competitive market. And the transaction that we're -- which we signed yesterday in terms of the joint venture agreement is really quite a complex transaction between us and Saint-Gobain that is subject to a complete regulatory and competition review. We have not yet completed the competition review in either North America or in Europe. And as a result of that, pending feedback from the competition authorities, we're not in a position to release any kind of forward-looking business plan-type numbers, so we have not yet quantified synergies. In today's call, though, Dave did try to lay out that we see both market-based synergies that the two companies really do have this stable of the best technology in the composites industry and on a customer-facing basis, we think we've got interesting and new things that we can do in the marketplace that should accelerate growth. And then obviously when you line out two companies that are in -- in almost identical businesses on a global basis, you're going to see purchasing and operational and cost reduction-type synergies. So we have teams working jointly now. The signing of the joint venture agreement yesterday does allow those teams now to go to the next level of integration planning. And we think probably in the next couple months, as we get further down in the regulatory approval, we'll be in a position to share a business plan with our investors.

Mike, could you talk about the growth prospects, particularly with China and Russia? And also could we get an idea of what the business mix looks like even on OC's side of the business in terms of the 50,000 applications? Are there some general sales mix, where we can get an idea of what markets -- how it sort of breaks out between the types of products that you have, whether it's fibers, fabrics, the reinforced mats, and that sort of thing?

Sure. Remind me again the first part of your question.

The first part of my question was about the growth prospects in China and Russia.

Right. Yes. We have been -- we have been conducting business, Owens Corning has, in both China and Russia, although we've been doing a fairly unnatural thing which is we have been exporting from developed parts of the world into China and Russia. We've been looking hard at trying to invest capital and put plants on the ground in those locations. And candidly, while we like the growth prospects of the business, the return on capital equation for the Composites business has been pretty challenging for us. What we get with the joint venture is a real acceleration of our strategy and trying to move to developed countries. Saint-Gobain has made the investments in both Russia and China. As a result of that, they are on the ground in those markets so we'll be able to combine what we've been doing in terms of market development there with their core presence in those markets so it really does accelerate what we're trying to accomplish.

We also are both in India, we're both in Brazil. We both have extensive operations through the remainder of Asia so -- and we actually have a joint venture together in Mexico. So there's another part of the footprint of the joint venture where we have great commonality in terms of our market presence.

The overall breakdown by end market, we have an investor presentation that's out on our website that maybe I'd refer you to. We broke down the 2005 revenue by end market, but we did it more geographically. We say this market's about 40% international, 40% North American commercial and industrial, and then it's about 5% U.S. and Canadian new construction, and about 14% U.S. and Canadian repair and remodel. The portion of the business which is new construction and repair and remodel is really a breakout of the portion of our business that serves the roofing industry in North America. We're probably much more heavily weighted toward the roofing industry in North America than Vetrotex would be. Vetrotex's historical stronghold has been Europe. We have historically been stronger in the U.S. so I think this transaction will diversify our mix away from North America, toward developing countries, and away from North America into residential construction.

Mary, I might just add one thing that might be of interest. In the manufacturing process, there's really two key steps. One is the melting of the batch. The second is forming of the fibers and packaging them. And over the years, Owens Corning has really become the global leader in the -- in the melting process. We think we have world-class technology in melting what we call the batch or basically the sand. And [Certaintied] took a different approach. They really focused on the back end of the process and are world-class in the forming of the fibers and the packaging of the fibers. About three years ago, we put together a 50/50 manufacturing joint venture in Mexico to see if we could actually marry those two technologies and end up with a world-class platform. We are very, very pleased with the outcome of that manufacturing joint venture. It was one of the reasons that caused us to continue to have bigger and broader discussions around a global relationship with Saint-Gobain so we have been doing this on a technological basis for some period of time and that gives us a lot of confidence on the synergies that we'll be able to bring to the marketplace.

If I could just clarify one thing Dave said. He -- he called them Certaintied. Certaintied is the building material segment of Saint-Gobain. Of course, this is a joint venture with Vetrotex.

Thank you, Mike.

Okay. What I wondered also is could you give us an idea of the global market position that you estimate that you would have and who are some of the other major competitors would be on a go-forward basis? I wanted to get an idea of the market profile.

We believe that today Owens Corning would be number one, and Saint-Gobain would be number two. PPG and Johns Manville would be three and four. We're not sure exactly what order that would be. So we -- and then there would be some regional players that would map out maybe another 10% or so, something like that.

Okay.

But there's basically four major players, worldwide global players, OC, Saint-Gobain, PPG, Manville, and then some people in China, as well. And --

As recent the growth and capacity in the industry has typically been with Chinese producers.

Okay. Great. Thank you very much.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of [Richard Kasnov] with [Blue Ray.] Please proceed.

Yes. Good afternoon. On the Fabwel division that you're considering strategic alternatives for, can you give us some indication of the sales that that business generates?

We really don't break it out at that level to be able to give you that kind of detailed information.

We report it through Composites.

Yes.

And it's a fairly immaterial portion of the Composites segment. I think 10%'s not a bad estimate.

Okay, and just as a follow-up to that in terms of the possibility of both Fabwel and the Siding Solution operations, can you give us some color as to how profitable they are on an income from operations or EBITDA level?

Sure. I'm not going to quantify the profitability, although of course in the process we're going to put together a whole review of the business and hire banks and others to help us work our way through our options. Both of those businesses as recent have been competing in fairly difficult markets. The siding market really probably peaked about a decade ago, and over the course of the last 10 years has, in general vinyl siding, has been losing some market share in the exterior cladding market. We've seen siding, the industry, going through some consolidation over the last three or four years. We think that's probably the right trend. We didn't necessarily see ourselves as a consolidator in that business. So as a result, that's why we concluded that the best way to improve our financial performance, create value for our shareholders, was to look for some other alternatives that would create more value.

Fabwel's a similar story in an entirely different market. Fabwel primarily serves the recreational vehicle market with some additional activity in manufactured housing. That market was quite strong in the kind of '04-'05 timeframe when FEMA and some others were buying a lot of units to go down into the Katrina area and other parts of the southeast. Because of high gasoline prices and a falloff of that demand, we've seen the market go through a pretty significant correction over the course of the last year. Again, we've seen consolidation in that industry. We think there are consolidators out there looking to grow in that space. The long-term demographics for recreational vehicles are outstanding and we really have a leading franchise in that business so we feel like the financial performance is obviously a key determinant of how we get value from those businesses, but we also feel the fact that we have strong franchises in markets that have been going through some consolidation gives us an opportunity to maybe get additional value beyond what we could have gotten by operating those businesses ourselves.

Okay. Great. And two other quick questions if I may. First is, can you give us what your pro forma debt figure was post the final payments to the asbestos trust? And secondly, I think in your projections that you provided with the -- I guess the disclosure statements, there was a one-off pension -- cash pension top-off payment I think you were going to make in 2007. I just wonder whether you still intended to make that payment this year.

Let me start with the pro forma debt numbers. We disclosed today in my comments that we had $1.3 billion of debt, and then we borrowed an additional $600 million from a term bank note which put us at $1.9 billion after the distribution to the trust. Now if you do the puts and takes and take our year-end cash balance, add an additional $600 million to that, which is the cash proceeds from the drawdown of the bank note, and then subtract out the $1.4 billion that we put into the trust, it left us in -- in kind of the day after that distribution to the trust with a cash balance of a little bit over $200 million. So in effect, our net debt position at that moment was $1.9 billion of funded debt with about $200 million to $250 million of cash on our balance sheet. We say in our Plan of Organization that we wanted to emerge with cash on our balance sheet that was earmarked for our pension payment in 2007. That pension payment is a little bit over $100 million. It will be made throughout the year, and we do expect to make that this year.

Great. Thank you very much.

Lisa, perhaps we can have one more question if we can, before we close, please.

Yes, sir. And the last question comes from the line of [Greg Spuccelli] with Highline Capital. Please proceed, sir.

Yes, hi. Are you guys far enough in your negotiations with OCV Reinforcements that you can provide a range of value for the put and the call with Saint-Gobain?

Greg, let me give a little bit of background. We are not in a position to disclose that. But I do want to talk, make sure that everyone understands the put and the call mechanism. In the transaction, what is contemplated is a 60/40 joint venture, somewhat of a limited life joint venture, where at the end of four to five years, depending on different circumstances, there will be rights for them to put and for us to call. The one thing we have said about that is both of those put-call arrangements are based on the operating performance of the joint venture. So we are comfortable that on the upside, we would pay more for the business, but that we would be getting a great business with great performance and that if for some reason our outlook for the industry and our outlook for the performance of the business wasn't good, that that risk is shared with Saint-Gobain. So that's about as far as we've been willing to go in terms of our disclosure at this point. I think when we get to final definitive documents, we will have a lot more ability to disclose all the specifics around how those mechanisms work.

Thank a lot.

Thanks, Greg.

Lisa, with that, I think we'll thank everyone and if I may, I'll turn it to Dave Brown for final comments.

Okay. Thanks, Scott. Thanks, Mike. Just in closing, I'd like to summarize the message that we were trying to convey to the marketplace today through our press releases and through our earnings call and those messages that I'd like to leave you with are the following. Owens Corning has taken aggressive, strategic action in the past 90 days to strengthen and balance the Company's portfolio of businesses, to properly grow the Company, and improve shareholder values.

Second, given our strong balance sheet and cash-generating strength, experienced management team, portfolio of businesses, powerful brand and long-term loyal customer relationships, Owens Corning is positioned to successfully navigate the current cycle.

Third, the OCV composites joint venture will strengthen Owens Corning's global footprint and transform the Company's position in the high-tech, ever-growing composites marketplace, and fourth, through its portfolio of energy-saving products, Owens Corning is ideally positioned to leverage a never-ending, long-term efficiency opportunity that lies in front of us.

So with that, thanks again for your interest. I look forward to speaking with you again either in person or no later than Wednesday, May 2, at our next earnings call. Have a great week. Thank you.

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