Owens Corning (OC) 2007 Q1 法說會逐字稿

Good day ladies, and gentlemen, and welcome to the first quarter 2007 Owens Corning earnings conference call. My name is Lisa, and I will 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, Vice President, Investor Relations. Please proceed, sir.

Thank you, Lisa. Good morning, everyone. We're pleased that you've taken the time to participate in today's Owens Corning conference call in review of our business results for the first quarter of 2007. Today's call follows distribution of a news release earlier today that detailed our performance and results for Q1 2007. Joining us today are Dave Brown, Owens Corning's President and Chief Executive Officer; and Mike Thaman, Chairman of the Board and Chief Financial Officer. Following our brief presentation this morning, we will open this one-hour conference call to your questions. As in the past, we will keep questions to analysts and investors. We ask that you limit yourselves to one question and a single follow-up question so that we can hear from as many investors as possible. Again, one question, one follow-up. Once we have given everyone an opportunity to ask their question, if time allows, we will certainly cycle through the process one more time.

Those of you who have participated in our recent conference calls know that we have typically opened with rather detailed opening remarks by both Dave and Mike. Given that most of you now understand the company and our business dynamics quite well, we will shorten somewhat our opening remarks so that we can focus on your questions, maximizing the information sharing during the Q&A portion of the call. To that end, you will find it helpful to have the financial tables from today's news release nearby, as both Dave and Mike are likely to reference information found in those tables. Also of interest, you will note that in our news release and in today's conference call, we no longer use the phrase "income from operations" or "IFO" in outlining our business results. We now use the phrase "earnings before interest and taxes" or "EBIT" in the reporting and description of our results. Although IFO and EBIT are clearly synonymous, we believe that EBIT is more common amongst analysts and investors. We hope that you find this change in terms helpful.

Before we begin, I of course remind that you 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 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 limitations in such forward-looking statements. We don't undertake any duty to update or revise our forward-looking statements. And we ask that you understand that certain data included within this presentation contains non-GAAP financial measures. For example, 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 within our earnings release and they are also available on our website. Now, it is my pleasure to turn today's call over to Owens Corning's President and CEO, Dave Brown.

Thanks, Scott. Good morning, everyone. Thanks for joining us today. As always, we appreciate your interest in Owens Corning. During the past few months, we have travelled from coast to coast to tell the Owens Corning story. We have met with hundreds of investors who have come to understand our story quite well. I understand that many of you are on our call today. We do extend a message of thanks to those research analysts who have initiated published coverage of Owens Corning. We know how challenging it can be to begin coverage of a company like ours. We appreciate the time you've dedicated to understanding our story, communicating it, and sharing your point of view. We anticipate that there is more coverage on the way. So all of you, investors and analysts alike, we say thank you. In the next few minutes, I will provide a summary of our results for the quarter, review a few of the headline events, discuss some special items regarding the market dynamics we see, and then turn the call over to Mike, who will guide you through items affecting comparability, our financials, and performance by segment. We will close our comments with a look forward and then turn to your questions.

Earlier this morning, we reported consolidated net sales and operating results for the first quarter of 2007. Net sales for that period were $1.324 billion, down 17% from 2006 first quarter sales of $1.601 billion. These year-over-year results are consistent with our expectations, especially given the rapid decline in housing starts that began in the third quarter of last year. Earnings per diluted share for the first quarter of 2007 were $0.01. However, excluding the comparability items which include the cost incurred to close our HOMExperts service line that Mike will detail in a moment, adjusted earnings per diluted share for the first quarter of 2007 were $0.14. Gross margin as a percentage of consolidated sales was down by 2 percentage points, moving to 14.6% during Q1 '07, compared to 16.8% in Q1 2006. The decline was due to lower sales volume and slightly lower prices in building materials, and was impacted by the HOMExperts' closure. Marketing and administrative expenses totaled $136 million during the first quarter compared with $131 million during the same period in 2006. This is impacted by approximately $11 million in transaction costs incurred during the first quarter of this year associated with the proposed composites joint venture with Saint-Gobain. Excluding these costs, we showed good cost control during the quarter.

Underlying and driving the general year-over-year downturn in our consolidated financial results is the well chronicled downturn in U.S. housing starts. The comparative decline in year-over-year housing starts is significant. Statistics from a recent U.S. Census Bureau survey show that Q1 2007 housing starts were at a 1.47 million seasonally adjusted annual rate, down 30.6% from the 2.12 million level in Q1 2006. Most recent forecasts from the National Association of Home Builders, which is based on data from the Consensus (sic) Bureau survey, shows an estimated annual rate of 1.42 million starts in Q2 2007, compared with housing starts at 1.87 million in Q2 2006. NAHB is now forecasting a 19.2% decline in starts for the whole year -- from 1.8 million in 2006, to 1.45 million in 2007, moving to 1.52 million in 2008. Within this context, we remind you that we estimate that in 2006, 36% of our sales were driven by housing starts in the United States and Canada, and during that same period, 60% of our insulating systems segment revenue resulted from U.S. and Canada housing starts. It is important to note that Canada has not seen the double digit housing start downturn that we've experienced in the United States.

We further add that Owens Corning insulating system sales results typically lag housing starts by about 90 days. Put another way, the insulation we are selling and shipping into this market segment is likely for a home that was begun in early February. To round out the Q1 2006 to Q1 2007 sales comparisons, we should also point out that during Q1 2006, our results -- especially in roofing and asphalt -- were lifted by continuing strong demand due to the devastating damage caused in parts of the southeast United States by the hurricanes of 2004 and 2005. Demand created by these storms has largely been served and there were no comparable storms in 2006.

In my nearly 30 years with Owens Corning, I've seen cyclical downturns before, as has almost everyone on our senior leadership team. Most recently, we saw a slowdown in the early part of this decade. Before that, we endured market weakness in the early 90s. Current demand weakness for some of the building materials we produce brought on by weakness in the housing start market is like no other we've seen before. This downturn is not driven by economic weakness in the U.S. or a typical recession. Unemployment is low, consumer confidence is reasonable, and mortgage rates are low. Simply put, it seems there are just too many newly-constructed homes that sit unsold, to say nothing of the existing home market that faces the challenges of declining values with too many for-sale signs. Until the housing inventories are brought down to a point of better balance, we join others in anticipating that the sales of many of our building products will see year-over-year weakness, at least until the fourth quarter of 2007, perhaps beyond. We've learned from the cyclical downturns of the past. And while we have faced into the headwind of slowing markets during the past six months, we have not and will not sit idly by, waiting for the cyclical fortunes of the market to improve, as we know they will.

Within the insulation segment, we are leading initiatives to create improved demand. Most of you are already familiar with our R's On Us initiative, whereby we are working to stimulate demand by moving the market to higher R values in insulation. Building more energy-efficient homes is good for insulation contractors and distributors, is good for builders, is good for new home buyers and is good for the environment. We've also amplified our efforts to strengthen building codes across America while working on a state by state basis to encourage full enforcement of existing codes. We are driving noise control solutions in homes through more insulation in interior walls, and we are working to leverage the opportunities associated with higher energy costs. Within our roofing and asphalt segment, we have reduced our shingle inventories to more normal levels, and we continue to be delighted with the ongoing rollout of our new laminate shingle called Durations, which features the market-changing SureNail technology. We know that our roofing and asphalt business is a good one, and it will see better times soon.

Our composite solutions business continues to grow and to improve its contribution to our profitability. There is a global business benefiting from global GDP expansion. We're benefiting from stronger demand, improved productivity, price improvements, and our second quarter of 2006 acquisition in Japan. Progress is being made in our proposed glass reinforcements global joint venture with Saint-Gobain, as we continue to work towards completion of regulatory reviews and revenues in the United States and Europe. We remain committed to this joint venture and are targeting the close of this venture in the second half of 2007. The strategic review of our Fabwel business that is part of our Composite Solutions business is also well under way. Completion of this review is expected by mid year.

In our other building materials and services business, we continue to be pleased with the progress seen in our manufactured stone veneer business that produces the well known product line Cultured Stone. Our franchising business, featuring the Owens Corning Basement Finishing System and value-added sunrooms called SunSuites continues to make good progress. As previously announced, we exited our HOMExperts service line in the first quarter, as we are focusing our services efforts on our proven franchise business model. In the siding solutions business, our volumes were weak during Q1 2007, but margins were better because of the strategic actions we took in this segment. In February, we announced a strategic review of our siding solutions business, which includes Norandex/Reynolds distribution. That review is well under way, with expectations that it will be complete by mid year.

Before turning to Mike, a brief update on two other important matters. First, as you may recall, in February we announced a share buyback program authorized by the Board of Directors that allows for the company to repurchase up to 5% of Owens Corning common stock. The company did not repurchase any shares during the first quarter. Second, just a few weeks ago, I announced my planned retirement from Owens Corning by the end of 2007. I'm very pleased that Mike was selected to succeed me upon my retirement. There is no person better suited than Mike to carry this company forward. With that background, I now turn the call over to Mike for a deeper review of our financial results and our segment performance.

Thanks, Dave. Good morning, everyone. I will walk you through the first quarter 2007 financial highlights, followed by a more detailed review of our business segment results for the quarter. I remind you that when reviewing our performance with the Board of Directors and employees, we provide both reported and adjusted results. The calculated adjusted earnings before interest and taxes, we exclude certain items from net earnings in reported EBIT. These exclusions, for the sake of comparability, include items associated with the company's chapter 11 proceedings as well as restructuring and other activities. We make these adjustments for the purpose of improved comparability of results over time, and these reported and adjusted EBIT results are reflected in our earnings per diluted share.

If you turn to Table 2 in the financials associated with the news release, called reconciliation schedules, you will see that adjustments to remove items affecting comparability amounted to charges of $28 million in the first quarter of this year, compared with a credit of $1 million during the same time in 2006. For the first quarter 2007, we produced revenue of $1.324 billion and earnings before interest and taxes of $33 million, compared with $115 million of EBIT during the first quarter of 2006. Excluding the items affecting comparability, adjusted EBIT for the first quarter 2007 was $61 million, compared with $114 million one year ago. Earnings per diluted share for this year's first quarter were $0.01. Excluding comparability items, adjusted earnings per diluted share for the first quarter 2007 were $0.14. Given that Owens Corning was in asbestos-related Chapter 11 through October 2006, it is not meaningful to compare EPS results of the predecessor company with the successor company that was created upon our emergence. We will begin those quarter over quarter and year-over-year EPS comparisons in 2008.

Again, if you turn to Table 2 in today's news release, I will detail for you $28 million in adjustments made during the first quarter of this year that affect comparability. The adjustments associated with our Chapter 11 reorganization totaled $3 million and were principally legal costs associated with our reorganization. Given the finality of our case, with the establishment of the 524(g) trust, we anticipate that these Chapter 11 related expenses will continue to decline in the coming quarters. You will see that we reversed $2 million in 2006 restructuring costs, reflecting a accounting adjustment for a revision of the estimate of the reserve associated with anticipated employee benefits costs. Also reflected in our first quarter adjustments is the continued amortization of our employee emergence equity program. Shares associated with this program went to all employees of Owens Corning upon our emergence from chapter 11. These shares have a three year vesting and will continue to be amortized in the P&L until October of 2009. These are noncash expenses that don't relate to operations. Therefore, we included a $8 million adjustment in our reconciliation. With the progress of our proposed joint venture with Saint-Gobain, we have included JV transaction costs of $11 million in the reconciliation adjustments for the first quarter of 2007. These costs were primarily legal and advisor fees associated with working towards completion of the JV.

During our 2006 year-end results conference call this past February, we foreshadowed Q1 costs associated with the decision to exit our HOMExperts service line. While we originally estimated that these costs would be $10 million, actual costs totaled $8 million. We believe the costs associated with exiting this business are now behind us. Apart from the closure of HOMExperts, many of you may recall that during our last conference call, we highlighted additional organizational changes that were made to improve our performance. We closed our Jessup, Maryland roofing facility and sold our Fort Lauderdale asphalt facility. We restructured our sidings solutions business, which included some branch consolidations, and exited certain product lines with the sale of our Olive Branch facility. These moves, which were intended to position the company for growth in 2007, have proven to be beneficial.

Before moving on to a review of our results by business segment, I will summarize a few other items of note. Depreciation and amortization during the first quarter of 2007 was $77 million, which includes $8 million of D&A, resulting from the adoption of fresh-start accounting upon our emergence from bankruptcy in October, 2006. This compares to D&A of $60 million in Q1 2006. We estimate that D&A for 2007 will total approximately $300 million, compared with $278 million in 2006. This estimate is above our forecast last quarter of $280 million to $290 million because of a revised estimate for the impact of asset revaluation as a part of fresh-start accounting. At the end of the first quarter 2007, the company had $2.063 billion of short and long-term debt, compared to $2.736 billion at the end of 2006. Our debt at the end of 2006 included a note payable to the 524(g) trust of $1.39 billion on January 4, 2007, a portion of which was funded by borrowing $600 million under the company's delayed draws senior term loan facility. We finished the quarter with cash on hand of $93 million, down from a level of $1.36 billion at the end of Q1 2006, a significant part of which was cash used to fund our emergence. It should be noted that Owens Corning traditional cash cycle features a working capital build in the first half of the year in preparation for the seasonal improvements in construction in the second half of the year. We estimate that our effective tax rate for 2007 will be 36.5%. We believe that we will pay cash taxes of about 10 to 15% of pre-tax income for the next five to seven years, because of our federal tax net operating loss of $2.8 billion resulting from our distribution of cash and stock to fund the 524(g) trust. Now, a brief discussion of our four segments.

First, insulating systems. Sales for the first quarter this year were down nearly 20% compared with the same period one year ago. Certainly not unexpected, given the continuing weakness of the U.S. housing and remodeling markets. Earnings, at $53 million, were down 57% compared with the first quarter of 2006. Volumes were down and we saw slightly lower prices during the period. Given the steep market downturn, we have been pleased with the relative stability of selling prices. During the quarter, we did incur costs associated with changes in product mix, idle facility costs resulting from market-driven production curtailments and increases in material and labor costs. We have taken selective production downtime in some of our insulation plants and we will continue to manage our capacity utilization based on demand for our products. The adoption of fresh-start accounting increased depreciation and amortization costs by about $11 million during the quarter in this segment, negatively impacting EBIT. Looking ahead, our insulation business will continue to reflect the weakness of the housing market. In all of our product categories, we are working to boost demand and to leverage the sale of products not as sensitive to starts.

Next, I would like to turn to composite solutions. We are very pleased with the progress being made within this segment. Year-over-year, sales were up 8%, reaching $403 million during Q1 2007, compared with $373 million during the same quarter of 2006. Sales and composites are benefiting from our second quarter 2006 acquisition in Japan of Asahi Glass Company Limited. Stronger demand for composites in North America and Europe has added to the improvement. Earnings before interest and taxes for the first three months of the year were $26 million, up 86% compared with Q1 2006. Improved demand, productivity gains, and lower SG&A costs offset inflation. EBIT for this segment in Q1 2006 included $6 million in expenses resulting from downtime associated with the expansion and repair of our Taloja, India facility and $8 million of gains from the sale of metal. Going forward, we expect continued improvements in global demand for our composite products, and further expect the composites will measurably improve its contribution to Owens Corning profitability. Last week, we temporarily withdrew our European Union regulatory review application of our proposed joint composites venture with Saint-Gobain. This step was taken to better align timetables for regulatory reviews in Europe and the U.S. Previously, our guidance was that we expected the JV to be final in mid 2007. Given the current status in the regulatory review process, particularly in the U.S., our best estimate today is a targeted opening of the JV sometime during the second half of 2007. Be assured our resolve and determination to complete this transaction into the value creation opportunity we see has never been stronger.

Now, roofing and asphalt. As we expected, sales in this segment were down significantly. Q1 2007 sales totaled $306 million, down 34% from $461 million a year ago. Driving this decline is the absence of storm-related demand that was so prevalent during the first quarter of 2006, and lower volumes related to new residential construction. This segment lost $8 million in EBIT during Q1 '07, compared to a Q1 2006 record EBIT of $29 million. This loss was in line with our expectations, and represents progress sequentially from Q4 2006. We anticipate the sales in EBIT performance in our roofing and asphalt business will show improvement as we move through 2007. We will see continued gains during the current quarter and we expect the results in the second half of 2007 will show measurable improvement. Our smallest segment, other building materials and services, saw sales decline 21% to $232 million in Q1 2007, from $295 million in the same quarter 2006. Volumes were lower in the siding solutions business, and sales declined due to the closure of the HOMExperts service line. EBIT loss in this segment totaled $1 million, an improvement from the Q1 2006 loss of $3 million. The improvement was driven by increased earnings in our manufactured stone veneer business and the exit from HOMExperts. Given the volume weakness, we are pleased with our outlook for improvement in this segment. With that overview, I will turn the call back to Dave for final comments.

Thanks, Mike. Before we begin the question-and-answer session, I will update our guidance for the year. During our conference call in February, we said that based on the NAHB forecast at the time -- average annual housing starts of 1.54 million in 2007 -- we estimated that our adjusted earnings before interest and taxes would exceed $415 million in 2007, not including the ongoing strategic reviews and transactions. Acknowledging the current and anticipated weakness in housing starts, and the uncertainty associated with the forecast from NAHB of 1.45 million starts in 2007, we are reaffirming and standing by our previous estimate that Owens Corning's adjusted earnings before interest and taxes will exceed $415 million in 2007. At this point in time, given the visibility we have for the rest of the year, we have no reason to either lower or raise our prior forecast. Even with an increase in estimated depreciation and amortization for 2007 to $300 million, we still feel comfortable with our estimate of adjusted EBIT in excess of $415 million for 2007. Our ability to stand by this forecast speaks to expectations of relatively good performance of our insulating systems business in a challenging market. It further speaks to the growth momentum we've seen in our composites business and the anticipated second half improvements in our roofing and asphalt results, improvements we've made in our other building materials and services business, the underlying strength of our overall business mix. This estimate does not include the impact of the proposed Owens Corning joint venture with Saint-Gobain, or other previously-announced reviews. This forecast will be updated and communicated quarterly or sooner if there is a material change in our estimated outlook. Now, Scott, we are ready for questions and discussions.

Thanks, Dave. Lisa, we are now ready to poll the audience and we're ready to begin the Q&A session.

Thank you. (OPERATOR INSTRUCTIONS) The first question comes from the line of Jim Barrett with CL King Associates. Please proceed.

Good morning, everyone.

Good morning, Jim.

Dave, or Mike, could you talk about the insulation segment? I understand what happened with new housing starts. Can you talk about your remodeling and your retrofitting, what level of demand you're seeing in those sectors?

Well, most of the decline that we've seen, as you can imagine, has been tied to the new residential construction. About 60% of our insulation business is tied to new construction, so that would be the big driver. I think we have seen good demand because of the higher prices of energy. Through our retail big boxes, we've had some good promotional efforts, and I would say reasonable demand there, but I think the real issue with the insulation business is tied to new construction, more so than the remodeling part of the business.

So Dave, you would broadly say that the non-new housing part of insulation is growing to a modest degree? Or flat?

I would say flat to modest growth.

Thank you very much.

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

Good morning. I wondered if you could give us the magnitude of the vinyl siding and distribution revenues and EBIT as well as Fabwel in the period so we can get an idea of how to look at those businesses, since they're under strategic review?

I think what we've advised previously is if you take a look at the other building materials segment, which we report consolidated sales there -- we would say about 65 to 70% of those sales would be generated by our sidings business, including our our Norandex/Reynolds distribution business.

That would still apply in the first quarter? That ratio, 65 to 70%?

Let me ask Mike to give you a point of view of on that.

Mary, this is Mike. That ratio probably went up a little bit in the first quarter because we did disclose today that part of the downturn in revenue in the first quarter was associated with the shutdown of our HOMExperts business. We have shrunk the revenue base of other building materials and services somewhat. So it may be trending a little bit towards the high end of Dave's range.

Like 70%?

That is a good estimate.

And what would be the EBIT associated with that, so we can kind of strip that out?

Mary, we have not disclosed the individual business lines inside of the building materials services in terms of EBIT. That is something that as we get further into the strategic review -- as we give a forward-looking point of view on what we want to do with that business and how we want to create value out of that business, obviously we we're going to have to recast that segment a bit.

And for Fabwel, would I take the annual number? Because you indicated it was about 10% for the annual segment for composite and that was about $156 million. Is there some seasonality associated with that business where the first quarter might be weaker? And then we would use -- instead of 25% of that number, we would use 22%? Is that a fair number?

Well, without getting really into a more finite guidance on that, I mean we have said it is about 10%. I think what we've seen in the first quarter is the composites business has generally been fairly strong, the glass reinforcements portion of composites. Fabwel's business continues to be weak, primarily related to weak recreational vehicle sales, so I think Fabwel will probably be trending below the 10% estimate.

Got it for the first quarter -- but I was sort of looking at last year's annual number, taking that $156 million, and using -- instead of 25% of that number, like 22%. It sounds like directionally I'm on the right track, it is just I was trying to pin down that magnitude.

I think directionally, you're in the right direction, but we're not comfortable disclosing specifically revenue numbers for Fabwel.

Okay. Then also on the insulation side of the business, can you give us an idea of pricing? And also Masco yesterday indicated that they might be seeing an early indication that there could be a bottoming in the housing market, and they talked about that they were seeing orders that were flat to actually modestly up in their installation business. Now they wouldn't discuss if they were seeing it in insulation specifically. So I was wondering if you could give us any clarity on that? And if we should use, based on the housing starts numbers forecasted for the second quarter, year-over-year, that looks like a 24% decline -- if we should use something like that in terms of what the decline would be in Q2.

Okay. Several questions there. The first one, relative to pricing and insulation, we have seen some modest price decline in our insulation business since the first of the year. But given the magnitude of the housing decline, I would call it very modest, frankly.

Is it 1 to 2%?

We're not really giving that kind of guidance. I guess as far as I could go would be modest.

Okay.

It is good to hear that Masco is seeing that their business is picking up. We picked up that earlier when we talked to them. We also listened into their call. They are one step closer to the market than we are so maybe they got a couple of weeks jump on us seeing that. I don't know if we've seen our business pick up like that, but it was good news that Masco is starting to see that out in the marketplace one house at a time. Relative to our broader perspective on housing starts, I think Mike has a good perspective on that.

Thanks, Dave. I think in Dave's opening comments he talked a little bit how we are looking at housing, and in these calls we've tend to rely on NAHB numbers, although we look at a broad census of housing economists. And it does appear that the marketplace has gotten a bit more pessimistic than the last time we were on the phone. I think when we talked a couple of months ago, most of the economists were in the 1.5 million to 1.6 million range. It appears now that they're mostly in the 1.4 million to 1.5 million in terms of outlooks for starts. And it does appear that people got more pessimistic about '08. So we do believe that we're in for maybe a longer period of time here, with a weak housing market. And a bit slower recovery than we maybe hoped for as we came into the year. The one thing we are banking on that we would like our investors to understand is we do have a built-in positive trend in the second half related to seasonality. If you look at how starts lay out through the year, about half of the housing starts are typically done in the first half of the year, and about half are done in the second half. But our business, because we lag the market by about 90 days, we end up seeing fourth quarter of last year and first quarter of this year starts in the first half of our fiscal year. And then we see second and third quarter starts in the second half of our fiscal year. By lagging those starts through typically on a seasonality basis, you would see about 45% of the starts in the first half, and 55% of the starts in the second. So we are expecting to see some improvements in our volumes sequentially through the year in insulation, as we get into peak construction season and as the lag effect starts to affect our business. I guess I would reiterate what Dave said -- we were placed to hear Masco on their call yesterday saying that they are starting to see some signs of stability or maybe even uptick in the market. Through time, as that works its way back up the chain to us, that's good news for us.

Right. But it is also too soon. They did caveat that commentary in that it may not really be an indication and clearly you guys are close to the market in certain respects. And so with the guidance that you have for the year, is it fair to say that even though the NAHB previously, like when we go back to the fourth quarter call, there was more optimism and now there is more pessimism, but you guys were already prepared for more -- a weaker outlook, which is turning out to be? Is that fair to say?

Well, I think obviously, when we put our business plans together and we do our guidance, we try to make sure that we have some contingencies built in on how we're going to respond to different market conditions. The weakening in the forecast is really coming more on the tail end of the year. I think NAHB and some of the other economists are getting more pessimistic about the amount of uptick we will see in the third and fourth quarter. At this point, we would see that having probably more impact on '08 than on '07, because some of that weakness will lag into '08. Our big unknown would be -- have we found bottom, and to the next couple of quarters, second and third quarter, show some stability versus where we are now. I think for our full-year guidance for '07, that would be a more important variable for us than how much it upticks at the end of this year. Obviously the uptick at the end of this year is going to have an impact on our outlook for '08 when we get that.

Thank you.

Thanks, Mary.

Your next question comes from the line of Kenneth Zener with Merrill Lynch. Please proceed.

Hi, this is Phil [Jonworth] on for Ken.

Hi, Phil.

How are you doing?

Good.

Just wondering how would you characterize the industry at this point in the cycle in regard to cutting back on capacity just amid weakening demand and also in terms of chasing volume by discounting. And how do you think the industry's response so far compares with previous cycles?

Well, I think, first of all, I can speak to what Owens Corning has done. I think we have taken some decisive action to curtail capacity, really late last year when we saw the housing market decline. One of the advantages we have is we can see backwards 90 days, when the housing starts start declining, we get a 90-day window before our product is going to ship, so we kind of get a nice look at that ahead of time. So we got a little bit ahead of this. One of the first things we did is we postponed a capacity addition, or our greenfield plant that we had planned in Cordele, Georgia -- that is on hold. We also shut down cold two lines in Canada, in our Candiac facility. Our plan is to keep those down for the balance of the year. We are also able to adjust inventory over the holiday season, take some curtailment. So I think we kind of came into the slowdown kind of ahead of the curve. So it is kind of the actions we took. The other thing that we've seen is that this is kind of a unique turndown. Over the years we've seen a lot of cyclical turndowns that turn down slowly. This one was really more like a reverse hockey stick. All of a sudden, we woke up one day and the housing kind of stopped in the third or fourth quarter. And I think the industry saw that, and I know we saw that, and said that the best thing to do was really balance our capacity versus trying to claw down the incremental truck by truck kind of process relative to supply capacity and pricing. So I think we took some decisive actions, it appears to us, while we don't know for sure that many in the industry did the same thing.

Got it. And then are you able to quantify the benefit that you're getting from your insulation promotion, such as R's On Us and also promoting energy efficiency?

We are able to track that. We do not really give those numbers publicly. We have seen an uptick in the sales in R15 and R21 which would be directly associated with the R's On Us program. I would say candidly it has not made a significant difference in our business to date. We do plan on continuing that program. We've announced it through -- I believe it's either September or October at the current level and we are committed to that process longer term. We really think that especially in the environment in the world today, you only get one chance to put insulation in a wall in new construction and you ought to put as much in there as you can from day one. We know that is good for us and the industry, but we also know it is good for the builder, the contractor, the home owner, for the next 30 years. So we are committed to that program. We have had some modest uptake because of it. But I can candidly say it really hasn't had a significant impact on our top line or bottom line.

Great. And then in the composite business real quick -- of the 6.5% sales increase, are you able to break out how much of that was due to favorable currency translation versus how much was organic growth in local currency?

We're thinking about that. Forgive us a second. I am going to ask Mike to comment on that.

I don't have those numbers in front of me. My sense would be that the mix of the business has stayed relatively constant, and we have talked about that in our shareholder presentation where we talk about the amount of the business that is international. A little bit less than half that business comes from outside the U.S. So I would expect there is probably a point or two that is driven by currency, but I don't think it is a dramatic driver of the growth. We will take a look at that, and be prepared to talk about that on our next call.

Okay. Thanks, guys.

We will actually ask Scott to call you back directly on that, if that's okay.

Sure thing.

Okay.

The next question comes from the line of Ian Zaffino with Oppenheimer. Please proceed.

Good morning.

Good morning.

As far as the production cuts and the curtailments, was that exclusively insulation or was it elsewhere? And then a couple of follow-ups, thanks.

I think I have already addressed insulation. If you agree with that, I will move on to roofing. If you recall, we've only built inventory through September of last year, in anticipation of what we expected to be a record demand season caused by hurricanes. It was projected by all of the experts to be one of the most devastating storm years in history, and as you recall, it turned out to not really have any named storms that hit land. So we went into the fourth quarter with high levels of inventory. Once we got past the hurricane season, we saw that product was not going to be needed on the near term. So we took significant curtailment in the fourth quarter, actually closed a plant and mothballed it through 2007, and we have really exited the year with inventory levels at about what we wanted to be going into the year. Because of that, we were able to start up pretty much at full production on January 1, and we continued to run at those levels. Having said that, there is probably was a period of time in the first quarter where there was excess inventory in the pipeline, in our customers warehouses. We don't think that our competition was quite as aggressive as we were, curtailing capacity in the fourth quarter, and we have kind of seen that all work through the first quarter. So the simple answer is we did take significant curtailment, but it was really done last year. And that is behind us, as we move into 2007.

Okay. And then the inventory increase quarter over quarter is a seasonal buildup or is there anything else going on there?

I can take that one. We saw really two places where inventories built. One would be in insulation. One would be in roofing. On the roofing side, we intended to build our inventories through the first quarter, and that really builds on Dave's last comment. We had worked very lard to get our roofing inventories down by year end, and really did feel that the right production strategy for us was to produce in the first quarter, try to put some inventory into our books at fairly low manufacturing costs, and then have that inventory available when we get into peak re-roofing season which is really starting around now. On the insulation side, I would say that business is probably a little bit weaker than we expected in the first quarter. And that maybe the impact of R's On Us was not as significant in terms of our ability to make and ship product. So our inventories at the end of the first quarter were a little bit higher than we would like them. We're taking action today to get our inventories back in line, based on our outlook for the year.

Okay. And then final question is -- I know you guys did a great job of breaking out the exposure you guys have to the residential side. From a sales line, can you give us an idea of what it is on a profit line as well?

We haven't given specific guidance on that. In individual analyst presentations, or when we meet with investors, the one thing we do walk through is that our insulation segment, which has been historically more than half of our EBIT, is the business segment that is most dependent on residential new construction. So it is 60% of its revenue has derived historically from residential new construction in North America, and it has been a large profit driver. So without breaking it out, I think we have given pretty clear guidance that the residential new construction market is very important to underpinning insulation, which is a key profit driver of the company.

All right. Thank you very much.

Thank you.

The next question comes from the line of Craig Rosenblum with Millbrook Capital. Please proceed.

Good morning. Can you discuss the decline in corporate expense to $9 million and if that is a sustainable level for the rest of the year?

Sure. I would be happy to do that. If you compare to prior year, there was a fairly significant reduction in corporate expense. That was really related to two things. One is a fresh-start impact associated with our pension. We did have some pension losses that we had been amortizing through the P&L historically. At fresh-start, we kind of mark your pension to market which caused us -- we had corrected those losses during the period of our bankruptcy by making some pension contributions but we had not taken those through the P&L. We're still amortizing losses. That is about $15 million of the delta between last year and this year. And that will continue. There is also about a $9 million impact last year in our corporate expenses which was a one-time mark-to-market hit associated with some hedge accounting on natural gas. After Hurricane Katrina, which takes you all the way back to '05, we had some natural gas hedges go ineffective in the first quarter of last year, and as a result, we had to mark them to market in the first quarter. Those costs would have been spread through the year, because it was gas that we consumed and it was really a hedge. We just lost hedge accounting. So that $9 million which was an impact in the first quarter of 2006 was really not recurring in the first quarter but would have been spread through the year. Those are the two biggest impacts, and I think you can look at both of those in terms of how sustainable those changes are.

Thank you.

Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Richard [Kasnov] from Blue Bay. Please proceed.

Hi, my question's just been asked.

Okay. Thank you.

Lisa, I think he said his question was already asked so we can move on to the next.

Yes, sir. Your next question comes from the line of [Anton Kowalski] with Canyon Capital. Please proceed.

Hey, guys.

Hi, Anton, how are you?

Good. Good morning. I am just looking at EBIT for the segments here and I know that other building materials and services, that's negative, but you guys are looking at the strategic alternatives for that business. But the roofing and asphalt business is now kind of negative EBIT. How should we look at that going forward and what was the cause of that in this quarter?

Well, you're correct, the first quarter was EBIT. The first quarter EBIT was negative. It was pretty much as we expected, based on the comments I made earlier about the lack of demand and working through our inventory build. What we did see within the quarter was improvement, kind of month over month, so we think on a run rate, we're going into the peak season starting in April, and in much more positive way, we think we got a lot of that behind us. We also expect that the run rate will continue to improve throughout the year, and on a comparable basis, if you recall, we had a record first half last year. We will have tough comps against that the first half of this year. And then we fell off significantly the second half of '06, and we think that the second half of '07 will actually look more like the first half of '06. So I think you are going to see as we go through the year that '07 in fact will be a mirror image of '06, and we expect improvement in the sales and EBIT line as we go forward through the balance of the year.

Are there cost levers as well that you guys can kind of pull to lower the cost in that business?

One of the significant things about making roofing is the cost of asphalt. And what we find is that the alternative use for asphalt is for paving. And that's where the most of the asphalt goes, especially in the summertime. And as the demand for paving increases in the summer, typically historically the price would go up. So our ability to actually make shingles in the first quarter, build inventory in the first quarter, which is what we're doing -- actually allows us to get ahead of that curve. And I think that is one of the tactical moves we made in the last 12 month to really build inventory earlier in the year, and make less product during the summer when asphalt prices are high. And if in fact the storms do materialize, it kind of allows us to keep our powder dry, bring lines back up in the middle of the summer to meet that demand. So it is kind of a new thinking that we think will pay off in a significant way in '07.

Great. Thanks a lot.

Sure.

The next question comes from the line of David MacGregor with longbow research. Please proceed.

Good morning. This is actually Garik Shmois in for David. Quick question on insulation pricing. You mentioned that prices have come up modestly at the beginning of the year. Can you remind us of the typical pricing patterns? Do you try to get price increases in the beginning of the year? And if so, is there a chance to get an increase as we go through the second half of the year and if volumes rebound?

Okay. For the last three to four years, Owens Corning has had a philosophy that we would announce price increases once a year, we would announce them 45 days or so ahead of January 1, and our philosophy would be that the amount of the price increase would be enough to offset our inflation that we had absorbed for the previous time frame. So one price increase, January 1, at an amount to be determined, typically associated with our cost of inflation. That was very successful for three or four years in a row. Fourth quarter of last year, Owens Corning announced the price increase for January 1 in a similar fashion as to we had the previous three years. Based on the dynamics in the industry at that time and inability of our customers to pass along those price increases to their customers, we decided to rescind that price increase. We announced to the industry that we were postponing it. But we did say that if times change, if conditions change, we reserve the right to come back at a later date in '07 and consider another price increases. That's kind of where we are today. At this point, we have not announced an additional price increase for 2007.

Okay. Thank you very much.

The next question comes from the line of Heather McPherson with T. Rowe Price. Please proceed.

Hi, two questions. First was there any reason that you were restricted -- was there any reason that you didn't buy stock back in the quarter? Were you restricted related to some of the stuff going on with Saint-Gobain during the quarter? Or did you have any thoughts you wanted to share on why there was no buyback this quarter?

Sure. A couple of things on that. One is we announced the stock buyback fairly late in the first quarter -- when we announced that was at the time of our fourth quarter earnings call, which I believe was in early March. So at the time, we put that program in place, we were already fairly deep into the quarter. The second thing that I would point out is our cash cycle, as a company, is we use cash in the first half, and then we generate all of our cash in the second half of the year. So we are still in a portion of the year where we use cash, which is not to say that we will not buy back shares in the first half. It is just to say that we do not at this point have cash that we're accumulating on our balance sheet from our operations. And so we felt that given the way our stock traded over the last the last period of time, and our need to borrow against future cash flows to buy back stock, that at this point it wasn't the right thing for us to do on behalf of our shareholders. We are still committed to completing that program. And I think as we get further into the year, and see the business develop and how housing develops, our level of aggressiveness and our outlook to the stock price will inform how we go forward with that program.

Can you just tell me what your expectation is for '07 and '08 in terms of pension contributions?

I am going to make an estimate and I've got some folks here with me who can help me clarify this to make sure I get it right because I don't want to swag a number. I think in terms of pension contributions, we're expecting an '07 contribution of about $100 million -- a little bit over $100 million -- and that's a contribution that we expect to make quarterly. Our normal pension costs, which we run through our P&L, is quite a bit less than that. It is in the $30 million to $40 million range. So we have a significant cash use compared to what we would put through the P&L. I know that over the course of the next couple of years, the amount of the pension contribution reduces. I think next year, our pension contribution's in the $50 million to $100 million range. It will be coming down. And then as we amortize the remaining loss, or the remaining underfunding deficit that is in our pension, you will see that come down to our normal cost over the next five or six years.

Okay. Thank you.

Okay. Thanks.

The next question comes from the line of Michael Lucas with Appaloosa Management. Please proceed.

I just want to try to clarify some things. You basically said you think some of the sub will pick up in the second half of the year, something like '06 was. But when I look at '05 housing starts and then running like 1.7 million at the end and I look at how the numbers were in '06, right now we're feeling in the first quarter -- I would assume since the 90-day lag would be the fourth quarter of '06, which is basically 1.5 million housing starts or 1.559 million. That number seems to be trending down and even national association of realtors, I'm reading it, they have Q3, Q4 -- 1.466 million, 1.491 million. Now, that is nothing like what happened in '05. Why would you think that business would pick up relative to those numbers? If it follows the same pattern, I would assume you would be down. I'm trying to understand your projection relative -- you said are you basing it on National Association of Realtors and I have that in my hand and I'm just trying to understand the dynamic.

Let me make sure I'm clear. I think the answer -- the question that I answered was relative to our roofing business. I commented that I expected it to pick up through the year. And the reason for that is roofing is only about 20% tied to new construction. 80% tied to re-roofing and remodeling. So we wouldn't necessarily look for the NAHB numbers that you just recited to us, to be the drivers of that, because it is relatively small portion of the business. The seasonal nature of the business -- you're not going to do a lot of re-roofing in the north in January through April, so it is a seasonal business. It is tied to remodeling and reconstruction. And then any impact of storms would typically come in the third quarter, which would kind of be on top of the normal demand. I don't know if that addresses your question or not but --

It kind of does but because in the past we have seen a lot of variability in your revenue lines when housing starts were a lot lower and let's say you take 10 years as opposed to five years and it doesn't completely explain it. If it is only 20% of it, doesn't really explain what happened in the past when you have had lower housing starts.

Let me try it this way. I tried to talk a little bit about seasonality and I think it is an important part of understanding our outlook. And when you quote housing start numbers like 1.5 million for the fourth quarter, what really happens in that 1.559 million is a certain number of holes dug in the ground, and then the Census Bureau makes an estimate based on weather and other things. What's the right way to annualize that number to get a seasonally adjusted number -- and if I give an example, let's say we had a year where housing starts were 1.6 million and they were actually on a seasonally adjusted basis 1.6 million in every quarter, that wouldn't mean you had 400,000 actual holes in the ground in each of those four quarters. In effect what you would have is something closer to 320,000 holes in the ground in the first quarter and then you would have to have 450,000 holes in the ground in the second and third quarter and the balance would have to be in the fourth quarter something like 360,000 holes in the ground. So you would have more activity on an absolute basis in the second and the third quarter, in order to produce a seasonally adjusted number that was equivalent to what was produced in the first and fourth quarter, unless absolute activity. So when we look at housing starts, we would be looking at the same numbers you're looking at. If you take the fourth quarter '06 and first quarter '07 and maybe average that out to maybe a 1.5 million starts, 1.550 million fourth quarter and 1.475 million first quarter this year, we would be looking at on a seasonally adjusted basis 1.5 million starts impacting the first half of our year on a lag and then we would probably be looking at 1.45 million starts for the second half of the year based on second and third quarter forecasts. The second and third quarter forecasts of 1.45 million starts is significantly more absolute activity than 1.5 million starts would be in the fourth quarter and the first quarter. Did that make sense?

Kind of. I mean to be honest with you, we're flip-flopping from absolute to relative and all I can basically understand from my perspective is that in '06, the first quarter 2.1 million starts, and the second one was 1.8 million, 1.7 million, trending down and the trend keeps going down yet we're going to pick up somehow. That's where I'm go confused. The trend is going down but our revenues are stable to go up. That's confusing.

Maybe -- let's be clear that when we say we think revenue's going to pick up, we're talking about revenues sequentially. So we're not talking about third quarter '06 versus third quarter '07. We're saying we think our business is going to pick up in the third and fourth quarter relative to where it is in the first and second quarter, because it is that absolute level of activity in any individual quarter that drives our revenue base, not the seasonally adjusted numbers.

On the insulating business, what did you say was for -- one last question -- for the new construction and home improvement.

Based on 2006 we estimated that our insulations systems business was about 60% new construction, about 10% international, and the balance was reinsulation and remodel.

Okay. Thank you.

Thanks.

This concludes the question-and-answer session of today's conference. I would now like to turn the presentation back over to Mr. Scott Deitz.

Thanks, Lisa. At this point, I would like to toss it to Dave for a closing comment or two.

I would just like to thank everybody again it for taking the time again to join us this morning. We greatly appreciate your interest in our company and our business. And kind of a high level, the message we tried to convey today was that we are particularly pleased with our results in the first quarter. They were in line with our expectations. We feel good about the fact that we are able to reconfirm our guidance that our EBIT will be at a minimum of $415 million in 2007. We think that is a testament to our business mix and the aggressive actions that we took in the fourth quarter and the first quarter of this year. And to Mike's comments that he just made, although we recognize that housing may be a little slow and coming back, we think that independent of that, our business can pick up through the balance of the year due to the seasonal nature of our business.

So with, that I just will add two more comments. A couple of important events and dates that I would like to remind you of. As many of you know, we will be holding an Investor Day in New York on Wednesday, May 16. Unfortunately we've already reached our in-person limit, but fortunately we will be broadcasting this live through the Internet. If you would like more information on that, you can find it at www.OwensCorning.com. And we are looking forward to talking to you in about 90 days when we announce our second quarter 2007 results. The official date is Wednesday, August 1 with the investor call at 11:00 A.M., Eastern Daylight Time on that same day. And between now and then, travel safely. Thanks for joining us, and have a great day.