Owens Corning (OC) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2007 Owens Corning earnings conference call. My name is Lisa, and I will be your coordinator for today. (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 of Investor Relations and Corporate Communications. 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 the review of our business results for the second quarter of 2007.

Joining us today are Dave Brown, Owens Corning President and Chief Executive Officer; and Mike Thaman, Chairman of the Board and Chief Financial Officer. And you'll recall that Mike has been selected to succeed Dave as CEO upon Dave's retirement sometime later this year.

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 during the call to analysts and investors. And we ask that you limit yourselves to one question and a single follow-up, so that we can field questions from as many analysts and investors as possible. Once we've given everyone an opportunity to ask their question, if time allows, we will certainly cycle through the queue one more time.

As we begin the call, we ask that you reach for the financial tables we released today, as both Dave and Mike are likely to make reference to those tables.

Before we begin, I remind you that today's presentation will include forward-looking statements based on our current expectations and assumptions about our businesses. 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 2006 Form 10-K and our first quarter 2007 Form 10-Q for a more detailed explanation of the inherent limitations in such forward-looking statements.

And we ask that you understand that certain data included within today's 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 the financial tables of our earnings release.

Now it is my pleasure to introduce Owens Corning's President and CEO, Dave Brown.

Good morning, and thanks for joining us today. We hope you find the following hour to be informative. For the next few minutes, I will provide a snapshot of our results for the second quarter of this year, discuss our broad strategy going forward and review a few events that occurred subsequent to the end of the second quarter. I will then turn the call over to Mike, who will guide you through our performance by business segment, including the related financial items. Mike will also review in greater detail our recently announced definitive agreement with Saint-Gobain regarding the purchase of certain composite and reinforcement assets and the divestiture of our siding solutions business. Then we will turn to your questions.

By now, you have likely read the second-quarter earnings announcement we made this morning. I will provide a brief recap.

We reported consolidated net sales of operating results for the second quarter of 2007. Net sales for that period were $1.53 billion compared with $1.72 billion in the second quarter of 2006. This 11% decline directly reflects the continuing weakness in new residential construction in the United States and its impact on our building materials business.

For the first six months of this year, sales trailed last year, down 14% in the first half of 2007.

Earnings per diluted share for the second quarter of 2007 were $0.22 on a base of 131.1 million diluted shares outstanding. Excluding $30 million in items affecting comparability, $20 million after tax, which Mike will detail, adjusted earnings per diluted share for the second quarter of 2007 were $0.37. This compares with reported earnings per share during the first quarter of this year of $0.01 and adjusted earnings per share of $0.14.

Gross margin as a percentage of consolidated sales was 16% during the second quarter of 2007 compared to 17.2% in the same period in 2006. We're reasonably pleased with this performance, given that two-thirds of the decline was due to cost associated with strategic business reviews during the quarter. For the first six months of 2007, gross margins were 15.4% compared with 17% during the first half of 2006.

Marketing and administrative expenses totaled $146 million during the second quarter, a 4.3% increase compared with $140 million during the same period in 2006. These expenses as a percent of consolidated net sales were 9.5 compared with 8.1% in the second quarter of 2006. The increase includes about $7 million in transaction costs associate with the previously announced joint venture with Saint-Gobain, which has now transitioned to an outright acquisition expected to close before the end of the year.

Looking back at the past 12 months in U.S. housing starts and our related business performance, we've seen a textbook example of supply and demand economics tied to market cyclicality and its impact on our financial results. One year ago, housing starts were beginning to come off near-record-high levels. Our installation business operated at capacity, and we reported strong business results.

Just 12 months later, reported housing starts in the U.S. have dropped 26%, and capacity utilization in our installation plants have come down consistent with this decline in demand.

We're often asked if this housing cycle is like those seen in the past. In many ways, the answer is no. The macroeconomic environment around this building materials downturn is different. The U.S. economy is rather healthy, so it is not in a recession. Interest rates are still rather low. Consumer confidence is sound. Employment is good, and the economy is growing at a reasonable pace.

In contrast, past cyclical pressures on our building materials business were driven by macroeconomic decline and nationwide recession. Of note, this downturn has also developed faster than ever before and has different drivers, including the recent concern about U.S. credit markets and their impact on the housing market.

Simply put, there are too many existing and new houses on the market, leading to a steep decline in new home construction, and therefore, less demand for building materials. And while the troubled U.S. housing market has certainly influenced our financial performance, so far, the impact on our overall business results has not been as severe as we've seen in the past. Although under increasing pressure, selling prices for our building materials have held up reasonably well. We have also adjusted our operations to the softening market for insulation faster than ever before, while continuing our demand creation initiatives. We've learned from past cycles, and we're learning from this one as well.

That leads me to talk about what we're doing strategically to ensure that our portfolio of businesses, products, and markets is balanced, so that we consistently performed regardless of housing cycle or the macroeconomic environment in any region of the world. Owens Corning insulations business is a leader and a great business.

In the 12 months of 2006, our insulation business represented 32% of our revenue, with adjusted EBIT margins of over 20%. Last year, 60% of our insulating systems revenue was driven by housing starts in the U.S. and Canada.

As seen during the past decade, the profitable upside of this exposure in a healthy housing market is clear. In a cyclical downturn, the challenges are equally evident. We're taking steps to overcome those challenges.

Strategically, we intend to further grow our insulation business in a way that meets the needs of residential and commercial customers. We'll help contractors, retailers, and consumers better understand the energy-saving and environmental value of insulating the more than 60 million under-insulated homes in United States, while working to increase the amount of insulation in new residential and commercial buildings. And we will look to expand the geographic footprint of our insulation business to those commercial and residential markets beyond North America.

Strategically, we believe there is shareholder and customer value in further growing our insulation business globally. However, we also believe that there is value to be found in growing our composites presence around the world.

Last week, we were pleased to announce a definitive agreement to acquire Saint-Gobain's global reinforcement and composites business for $640 million. This transaction further establishes Owens Corning's presence in fast-growing international markets. It is an essential step to improving our financial performance in a global composites market that is growing at about 5% annually. With this acquisition, we are immediately more global, and positioned to grow our presence in emerging markets that are not reliant on housing starts.

Going forward, we anticipate that as a result of this acquisition, 23% of Owens Corning's business will be international, an increase from 13% last year. We also project that 22% of our revenue will likely come from commercial and industrial markets compared with 18% last year.

We estimate that about 29% of our revenue will result from housing starts in the United States and Canada, a decline from 37% in 2006. Repair and remodeling in the United States and Canada is expected to account for 26% of our business compared with 32% in 2006. In short, we estimate that each of the four markets we serve will represent about one-quarter of our business revenue.

As a result of the composites acquisition, our revenue sources will be more balanced and more global than at any time in our 70-year history. This composites acquisition is transformational for Owens Corning.

Strategic actions toward improved performance also drives our roofing and asphalt segments. We're pleased that our new Duration series shingle with SureNail technology continues to successfully roll out in the United States. We believe this is a game-changing shingle product that is reshaping contractor and homeowner expectations for performance and appearance. As this rollout continues, we expect that you will soon see the value of the product represented in the sales, margins, and profits of our roofing and asphalt segment.

Now, an update -- in February, we announced the strategic review of our siding solutions business, which is part of our other building materials and services segment, and our Fabwell unit, which is a small part of our composites organization.

On July 17, we announced a definitive agreement to sell our siding solutions business to Saint-Gobain for $371 million. The sale is expected to close by the end of the third quarter of this year, while the strategic review of our Fabwell unit continues.

In closing, these are challenging times for companies selling into the building materials markets. However, while the housing market has certainly come under pressure during the past nine months, producing and selling building materials into the U.S. housing market is a very good business. Long-term forecasts for demographic and household formation trends are promising. There's no doubt in our minds that the current downtrend is only temporary. Demand for building materials will return to better times, and our expanded composites business positions us to grow around the world.

With that, I turn the call over to Mike for additional details and insights.

Thank you, Dave. Good morning, everyone. This morning, I will provide a brief review of our financials for the second quarter of the year, a summary of the performance of our business segments, and a review of our recent strategic move. I will also update you on our expectations regarding Owens Corning adjusted EBIT performance for the remainder of the year.

To calculate what we call adjusted net earnings and adjusted EBIT, we exclude certain items from reported net earnings and reported EBIT. We make these adjustments simply for the purpose of improved comparability of results over time. This is helpful to our Board of Directors and our employees, and hopefully to you, our investors, in understanding our business performance.

The items we exclude in these comparisons are items associated with our prior Chapter 11 proceedings as well as restructuring and other activities.

If you turn to table two in the press release, which has reconciliation schedules, you will see that adjustments to remove comparability items amounted to a pretax charge of $30 million in the second quarter of this year compared with a credit of $10 million during the same period in 2006.

As we did during the first quarter, we have adjusted for costs associated with the previously announced composites transaction with Saint-Gobain. We've included transaction costs totaling $7 million in our reconciliation adjustments for the second quarter. These costs are primarily legal and adviser fees.

You will also see in table two that we recorded $1 million of income to true-up the second quarter this year associated with the exit from our HOMExperts service line during the first quarter of this year.

During the second quarter, we also recorded an intangible asset impairment of our Fabwell unit. This impairment was taken in connection with the strategic review of this business. The Fabwell impairment charge is $10 million. This charge is included in the line referred to as losses from strategic reviews. Also included in this line item is $2 million in transaction costs associated with the sale of our siding solutions business.

During the second quarter of the year, we continued to amortize our employee emergence equity program. You will recall that shares associated with this program were awarded to all employees of Owens Corning upon emergence from Chapter 11 last year. These shares feature a three-year vesting, and will continue to be amortized in the P&L until October 2009. These are non-cash expenses that don't relate to operations. Therefore, we include a $12 million adjustments in our reconciliation.

Before reviewing our segments, a few other items of interest -- depreciation and amortization during the first half of 2007 totaled $158 million, which includes $16 million of depreciation and amortization resulting from the adoption of Fresh Start Accounting upon our emergence from bankruptcy in October of '06. We currently estimate that D&A will total approximately $310 million in 2007. As we previously said, we believe CapEx spend at about 80% of D&A is required to keep our existing operations cost-competitive.

At the end of the second quarter, the Company had $2.1 billion of short- and long-term debt, with cash on hand of $135 million. We are comfortable with this level of debt, given our financial performance. It is consistent with maintaining a strong balance sheet and an investment-grade credit profile.

Moody's and Standard & Poor's recently affirmed our investment-grade credit ratings. Moody's has changed their outlook to negative, given the weak housing market.

As in the past, the first half of the year represented a period of working capital build. With the construction season well underway, we now enter a period of favorable cash flow that will continue through the end of 2007.

Regarding the Owens Corning tax rate, our estimate is that the effective rate for 2007 will be 34%. Given our federal tax operating loss of $2.8 billion resulting from the distribution of cash and stock to settle our prior Chapter 11 case, we have estimated that our cash taxes would be about 10 to 15% of pretax income in 2007.

It's worth noting, however, that a preliminary analysis of the acquisition of the Saint-Gobain composites assets should result in a further reduction in our cash tax rate to a range of 5 to 10%. We will continue to guide you on this matter.

We are also pleased to report that we favorably resolved negotiations with the IRS concerning differences in interest computations applicable to a prior tax settlement. The IRS substantively agree with Owens Corning's interest calculations, and accordingly, reduced their interest claim by approximately $38 million. This decrease was recorded as a reduction to long-term debt on the consolidated balance sheet. This favorable resolution, combined with the payoff of the IRS note related to the interest claim and the tax settlement, will result in a reduction of approximately $4 million in our 2007 annual interest expense.

Now a review of our segments. For the second quarter this year, insulating systems sales of $441 million were down 15% compared with same period one year ago. EBIT totaled $42 million for the quarter, which includes the negative impact of approximately $11 million of increased costs associated with Fresh Start Accounting, compared with $112 million during the second quarter of '06. EBIT as a percent of sales was 9.5% compared with 21.6% at the end of the second quarter 2006.

During the period, volumes weakened compared with one year ago, as the downturn in residential housing starts continued. We saw an acceleration of selling and price declines during the second quarter in the new construction market as a result of lower manufacturing capacity utilization and continued cost take-out pressures facing builders. We expect this price pressure will continue will continue through 2007.

Also during the quarter, we continued to incur costs associated with the idling and slowing of production facilities to keep supply in better balance with demand.

We're pleased with actions that our insulation teams have taken to reduce cost to offset the decline in demand, and we will continue to pursue demand creation opportunities. We will be disciplined, creative, and focused on near- and long-term performance within this segment.

Next, our composite solutions segment. We continue to be pleased with the performance of this business and the global strategic growth opportunities that glass fiber composites brings us. Composite sales for the second quarter were $425 million, up 3.4% compared with the same period in 2006.

As anticipated, global demand for composites products continues to grow. Sales were lifted by improved year-over-year pricing, added volumes from our facility in Japan, and the translation of sales in foreign currencies into U.S. dollars. For the first six months of the year, sales were up nearly 6% compared with the first half of 2006.

EBIT for the second quarter of 2007 in the composites segment was $28 million compared with $51 million in the second quarter of '06. Adjusting for the quarterly gain on the metals recorded last year, EBIT for the second quarter of 2007 was up 16.8% year over year.

As you'll recall, during the second quarter 2006, a $27 million gain was recorded associated with the metals transactions, which impacts comparability to 2007.

Our recent announcement of a definitive agreement to acquire Saint-Gobain's composites assets is grounded in a solid Owens Corning global growth strategy. Financially, the acquisition will be accretive to our results in 2008.

Let me now offer a few highlights of the anticipated financial impact. We will fund the $640 million transaction through a combination of divestiture proceeds, cash on hand, cash flow from operations, and borrowing under our existing credit facility. We're confident that this transaction is consistent with our investment-grade profile.

Pro forma sales based on the combined 2006 results of our composite sales and the operations to be acquired from Saint-Gobain, minus sales from the three plants in Belgium, Norway, and Pennsylvania that we plan to sell in order to address regulatory concerns related to the transaction, would total approximately $2.2 billion. Owens Corning's composite solutions sales totaled $1.6 billion in 2006.

We project that the to-be-acquired business will generate EBITDA in excess of $100 million for full year 2007. The business currently leases certain metals used in its production tooling. At recent market prices, the leased metals would be valued at approximately $320 million. This projected forecast for our financial performance does not include the cost associated with the leasing of the metals.

In last week's announcements, we said that we expect to meet metal needs for the acquired business from a variety of sources, including continued leasing, outright purchase, usage of existing Owens Corning tooling, other productivity measures, or through some combination of the above. We chose to disclose the information about the leased metals so that you will have full line-of-sight to the possible range in price of the acquisition.

Given our announced plans to sell the composites facilities in Europe and Pennsylvania, we do plan to consider the transfer of metals at those facilities to the newly acquired plants, or, in turn, we could use proceeds from the sales of those facilities, with metals included in the sales price, toward the purchase of metals to meet the needs of our acquired plants.

While the analysis to determine the most appropriate way to meet our metals needs is rather complex, it is clear that we have a number of good options and combinations from which to choose.

We anticipate annual pretax cost synergies associated with this acquisition to be more than $100 million, realized by the fourth full year after the close of the transaction, with the majority of the synergies achieved during the first three years. Synergies will come primarily from -- reduced operating cost, improved energy efficiency and furnaces, sourcing, and optimization of the production network.

The synergy opportunities in this transaction are exciting. We will share manufacturing technology and production best practices, combining two of the best glass melting operations in the world. We will reduce costs, and we plan to reduce our environmental footprint, consistent with our companywide commitment to sustainability. Further, we will strengthen the business infrastructure in Asia, Europe and the Americas. Our global and regional approach to this business combination will ensure that we are responsive to customers and their markets.

Now let's turn to roofing and asphalt. Net sales for the second quarter of 2007 were $414 million compared with $501 million in 2006, a quarter that was still feeling some lift from the storms of 2004 and 2005.

However, in addition to this comparison, we ask that you also compare the performance of second quarter 2007 to the first quarter of '07. First quarter 2007 sales were $306 million, and the segment lost $8 million in EBIT.

We're pleased to report that the improvements we anticipated in this segment are coming to fruition. Second-quarter 2007 EBIT was $29 million, a $39 million turnaround from this year's first quarter. We anticipate that the favorable trends seen in this segment will continue into the second half of this year.

In our other building materials and service segment, net sales totaled $303 million, down 12.4% compared with the second quarter of 2006. The decrease was the result of lower volumes in our siding solutions business and lower sales resulting from our exit of the HOMExperts service line during the first quarter of this year.

Despite the lower sales, EBIT doubled to $17 million, $9 million higher than reported in the same period last year. The increase was driven in part by improvements in productivity in our manufactured stone veneer business combined with the elimination of losses from the HOMExperts service line.

Recently, we announced the sale of our siding solutions business for $371 million to Saint-Gobain. We believe this is a sound and timely strategic decision that will allow us to profitably deploy capital around the world in ways that will further enhance our profitability and overall financial performance.

Before turning to your questions, we will update our 2007 adjusted EBIT forecast that we first announced in February of this year and later reaffirmed in May. You will recall that we said that, based on the February National Association of Home Builders forecast of average annual housing starts of 1.4 million in 2007, and later lowered to 1.45 million when we reaffirmed our forecast, we estimated that our adjusted EBIT in 2007 should exceed $415 million, not including the impact of the proposed Owens Corning/Saint-Gobain composites transaction or the other strategic actions.

Today, we once again reaffirm our forecast. Owens Corning 2007 adjusted EBIT should exceed $415 million. We do so acknowledging the July NAHB forecast for housing starts in 2007 is now 1.425 million.

This reaffirmation does not include the impact of the anticipated composites acquisition, the sales of our siding solutions business, or the strategic review of review of our Fabwell unit. We will more fully quantify the impact of those transactions on our adjusted EBIT forecast when we announce our third-quarter results on Thursday morning, November 1.

We continue to expect relatively good performance from our insulating systems business through the remainder of the year, despite the headwind it faces in the current housing market. We are pleased with the anticipated as-is growth of our composites business through the year. And we believe that as our roofing and asphalt segment gains continue, we also will see continued performance improvements in our other building materials and services segment. At this point in time, we see no reason to change our prior forecast.

One final item before your questions -- in February of this year, we announced a share buyback program authorized by the Board of Directors that allows the Company to repurchase up to 5% of Owens Corning's common stock. The Company chose not to repurchase any shares during the first half of 2007.

Now, Scott, I believe we're ready for questions and discussion.

Okay, Lisa. Let's begin the Q&A process -- if you want to build the queue and open the lines.

(Operator Instructions). Kenneth Zener, Merrill Lynch.

I've got two just broad questions about Saint-Gobain, trying to understand that business, and then just trying to look at your roofing. But the Saint-Gobain -- I know you guys are acquiring roughly 500,000 tons. Pro forma, you will have about 1.3 million tons. Because there's so much assets associated with these precious metals, what is the volume that you guys are selling off in those three plants?

I'm going to ask Mike to take the first question on Saint-Gobain, and then we'll wait for your second question on roofing.

Ken, we haven't given pro forma disclosure on the divestitures in Huntington, Pennsylvania; Battice, Belgium; or Birkeland in terms of capacity. I think probably the best way to estimate that would be as you walk through the 2006 pro forma numbers, you can see that we have disclosed that the composite solutions business did about $1.6 billion in 2006, and then a pro forma basis by consolidating the Saint-Gobain business net of those divestitures, we would have added about $600 million in revenue to $2.2 billion. This is a bit less than what we disclosed we were acquiring in terms of revenue by buying the Saint-Gobain business, which was in excess of $900 million.

Right, so it sounds like a portion of these $320 million benefits will just come from internal metals, which could be actually at a lower cost than what would be required in the current mark-to-market -- i.e., it could benefit your margins.

And I guess that's related to my question, which is out of that $100 million cost-saving, how much that is actually related to perhaps lower expensing due to your lower cost bases in these metals?

Ken, none of the synergies that we've disclosed -- the $100 million dollars is related to kind of either accounting or cost basis associated with metals. I think the point you made, which is it's possible that we could fill a sizable portion of the gap on leased metals if we were to retain the metal that's currently in Battice, Belgium and Huntington, is a reasonably good conclusion.

Obviously, as we take those assets to market, the issue is going to be on the buyer side, what strategy for operations do they feel most comfortable with? And we would expect either we would report more significant divestiture proceeds for those assets if we were to divest them with metal, which would give us the basis to then go back and acquire some of the metal we need to run our operation; or, if we were in fact to divest them without the metal required for the tooling, and that was something that the buyer need to do, that would free up some metal for us to then redeploy internally.

So that really is the balancing item. And we're not trying to be overly coy on this issue. It's just as we move forward and as we work out those divestitures and determine how it is the buyer wants to proceed with us on those divestitures, and then we look at internal productivity measures and how we load the assets, we think we're going to have an opportunity to redeploy some metal.

We disclose the $320 million really to say at the outside, if the only option we had available to us today was to go out in the market and buy the metal, that's in effect the amount of cash impact that could have on the business.

Right, and that obviously didn't deter you, because that would move the enterprise value up to about 960 from the 640 reported.

Yes, and we certainly wouldn't necessarily suggest you look at the deal that way. But even if you looked at the deal that way, the multiple that we paid for the business is relatively in line with the way the company trades -- the difference being we're actually buying an asset here that we think we can improve by $100 million a year pretax.

Thank you for that explanation. And then roofing, just to follow up here -- you guys had talked about in the first quarter where it was negative 2% margin -- you are expecting a "measurable improvement" occurring in the second half.

Second quarter is 900 basis points improvement. Is that your kind of run rate into the second half or a little higher? And what internally led it to be such a [beat] or surprise to the upside relative to your comments of measurable improvement?

Well, if you recall, the roofing business has been a sound business for Owens Corning for a substantial period of time. And we're confident that it will continue to be that way in the future.

The last six months have been kind of interesting and unusual. The fourth quarter of last year, the industry came into that quarter with a substantial amount of inventory, anticipating some storm demand that never came about. So Owens Corning took substantial curtailments in the fourth quarter to really move our inventory in the right direction.

That allowed us to come up to first of the year really at full production and started rebuilding our inventory. Even having done that, the first quarter was not a good quarter for us in our roofing business.

So what we anticipated and what we're starting to see is continued progress through the year. The first quarter was a tough quarter. We thought there was substantial improvement in the second quarter. We would expect that to continue kind of incrementally through the balance of the year. And probably on a 12-month basis going forward starting in the second half of this year, you would see more normal operating margins back in the roofing business.

Ian Zaffino, Oppenheimer Funds.

I know you talked about your capacity utilization in the insulation business. Can you tell us what volumes did and what pricing did as the volumes move in sync with that capacity utilization?

Yes, first of all, on the volumes, I would say in large part, yes, the volumes were down and we took out some substantial capacity. I can't speak for the rest of the industry, but we have shut down two lines in Canada and a line in Kansas City. And we have decided to not move forward with additional capacity expansions in Georgia.

Relative to pricing, what we have said about that was in the first quarter, we had modest price declines. We did expect given the capacity utilization in the industry for those declines to accelerate in the second quarter. And that did happen in line with our expectations.

So we have seen significant reductions in capacity and capacity utilization, and some increase in the decline of pricing in the second quarter versus the first quarter.

Okay, so if that's the case, then why are net sales in the insulation systems business only down 15%?

I'm going to ask Mike to give you some flavor behind that.

Let me try to put a context around this. I think we've talked about the lag factor associated with our insulation business, and that the insulation business lags housing starts, or that portion of the business that's new-construction-related lags housing starts by about 90 days.

The actual number of starts -- holes in the ground in the fourth quarter of 2006 was 360,000. So we would have expected to see demand levels in the first quarter of this year consistent with about 360,000 lag starts.

The actual number of starts in the first quarter of '07 was 324,000 starts, which is the demand level we would have expected to see in the second quarter of this year. So in fact, we came into the second quarter expecting to see on a lagged basis about a 10% downturn in volume just related to overall levels of housing activity.

Now, there's more that goes into the calculation in terms of geographic mix and types of homes. But in big, broad numbers, those lagged starts caused us to come into the quarter expecting to see that kind of downturn. And in fact, we did.

The thing I would add on top of that is we have talked about the fact that the overall forecast for the year has been reducing the number of housing starts as we move through the year. So we started the year believing starts to be kind of 1.540 million. Now we are more at 1.425 million based on NAHB.

As a result of that, we operated our insulation business in the second quarter in a way that we actually managed our inventories quite tightly in the second quarter. So in what was a weak volume quarter, and we knew was going to be a weak volume quarter, we also made sure that we kind of overshot on capacity corrections, which really impacted our utilization, our absorption, and our productivity.

So we think we got some things done in the second quarter that caused us to be more optimistic about the second half. We would expect based on lagged starts that the number of holes in the ground that need to be insulated in the third quarter could be up as much as 25% if you look at kind of the current forecast for April, May, June, and how that will roll into our business in July, August, September. And then on top of that, we believe that we will be able to raise our production levels because we won't be in inventory reduction mode during this period of time.

So that's really, I think -- when you look at our guidance and try to figure out how you go from this second quarter to better performance in the insulation business, I think you have to look at lagged starts and then also look at how we operated relative to inventories.

Okay. And then the final question would be right now, or pro forma for the JV -- or not JV, but pro forma for the acquisition, you're looking at about 55% linked U.S. and Canadian remodeling and housing. What is that on the profitability line?

The last kind of set of times we went through these numbers, we would have done that on a historical basis. And if you go back and look at 2006, when we were at 70% related to residential construction in North America, and our insulation business was really the main profit driver of our business in kind of the '05/'06 timeline -- if you back-calculated where our earnings came from, you would have seen that a sizable portion of our earnings during that period of time was coming from the new construction market, just because of its linkage to insulation.

I think as we rework the portfolio, we still like insulation's exposure to new construction. We like the demographics there. We think the macrotrends are related to energy, and related to household formation suggests that there's going to be a big insulation business out here over the next decade. I wouldn't necessarily want to give guidance on what we think it's going to be over the next year or two, as that is something we're currently working through.

But at the same time, by reducing our overall dependence on residential construction through our exit of the vinyl siding business, which was a business that we don't see kind of good macrotrends for, and getting ourselves more exposure to the global commercial and industrial markets through the composites acquisition, where we do see great macrotrends, we would expect through time that the balance of earnings in our portfolio would be more balanced related to residential construction in North America and global commercial and industrial -- but that through time, we would actually get there not because insulation earnings have declined, but because the earnings associated with composites and other parts of our portfolio have improved.

Mary Gilbert, Imperial Capital.

I wondered if you could talk about the revenue growth in composites after excluding the composite mats business that serves roofing, and if you could also talk about the dynamics in composites in the quarter, and the expectations for the year, and of course with the combination with Saint-Gobain's business?

I think when we look at the first half, we said that composites was up about 6% on the revenue line. And I think you rightly point out that one of the sizable businesses for us in composites, at least in North America, is related to construction. And the way it is related to construction is we make glass that goes into mats that goes into the roofing market. I'm recalling this off of the top of my head, and I'm going to let Scott correct me if I've got this wrong, but I think our 2006 estimate of that was that about 19% of our overall composites revenue was associated with residential construction in North America, broken out between new construction and residential.

And so as you can imagine, based on the roofing numbers which we've disclose, that portion of the composites business has been down relatively significantly, and has therefore had a negative impact on our overall growth rate.

So if you adjust for those types of numbers -- and I think the actual number is 17%; I apologize -- I said 19. It's about 4% new construction, 13% repair and remodel.

So if you take 17% of the composites business and put a negative growth rate on that associated with much weaker roofing markets, and then you look at the 6% growth rate in that context, I think you can see we have pretty healthy growth in composites in the first half.

Yes, and could you talk about the second quarter in particular, because composite solutions was up 3.4%, whereas I think in the first quarter, it was up 8%. And then you noted that you had some pricing benefit in the second quarter. And so that's why I wondered -- just looking at the second quarter alone, if we stripped out the composite mats, what was the growth rate -- was it closer to 8%; was it closer to 6%?

Yes, I think even if you pull out the mats, we would have said we saw a little bit of a slowdown in composites in the second quarter in the U.S. So we have continued to see pretty strong markets in Europe and Asia. And generally, if there is softness to the global economy, excluding the roofing impact on composites, it would have been a bit of a slowdown in the U.S.

So if the conclusion you were to draw is that in the second quarter, composites growth did slow down a bit versus the first quarter, we did see that, although we think overall, we're still looking at a very healthy growth market.

I would add I think that's one of the things that really excites us about the Vetrotex transaction is with Vetrotex now retaining the Wichita Falls, Texas facility as a part of the transaction, what we're actually getting in the transaction is no glass melting assets in North America. We are getting some fabrics assets, but what we're really doing in that acquisition is building out dramatically our global footprint, and getting much more exposure to both developing country and Eastern European growth, which is, we think, a much stronger growth profile over the next three or four years.

So if that's the case, when we're looking at the 5% global growth -- and historically, you've always grown at 2% above that -- then does that sort of suggest that the growth rate should be above 7%, really, going forward on an annual basis?

I don't know that we have said that we believe we will always grow 2 points above the historical growth rate of the reinforcements business.

We have characterized the growth of reinforcements globally two ways. We have said it grows at about 1.5 to 2 times global GDP. So if you peg global GDP at, say, 3 or 3.5, that would put the market growth rate in the 5 to 7% range.

We've also said that it grows -- the market grows at about 2 points above global GDP, which would peg you again at about 5.5% grow global growth.

So we're pretty comfortable saying we think that market grows through time probably in the 5 to 7% range. We would expect through time, unless we have good exposure to the right geographies or the right end-use markets, that our overall growth rate would be about the same as the markets.

Okay. But then you are going to get a higher share of those growing markets. And then could you also talk about what's going on with Windstrand? Because that is in qualification production -- and will that be rolling out, do you think, widely next year in 2008?

We still are in the qualification process. As you know, that takes some period of time. And we are actually in those trials right now, and that process continues.

Jim Barrett, CL King & Associates.

Mike, could you talk about the composite business again? And what is your expectation for capital expenditures in that going forward, given your acquisitions and your current capacity utilization of the plants you have and you will be acquiring?

I think that's a great question. We don't -- let me talk about it in kind of a macro sense, and then I will try to give a little bit of flavor on that.

I would say historically, we've looked very hard at any transaction or investment we've made at an EBITDA level, but also on kind of on a free cash flow basis after capital expenditure. And that's one of the things certainly in our evaluation of the Vetrotex acquisition we also did.

The reason why we talked about this transaction in terms of EBITDA is because we really now have created a very sizable fleet of glass melters around the world. And the operating cash flows of the business at the EBITDA line, both our business and their business, created an opportunity for us to put the right capital in the right places so that we can get growth in the right spots in the world.

So we do see that we're going to be able to make the operating cash flows portable around the world, to get the capital investment in the business where it needs to be.

I think in the near-term, to achieve some synergies, you might see some acceleration of capital spending in the composites business above our historical levels. We did talk about one of the key synergies being energy reduction.

We do know from our joint venture together with Saint-Gobain in Mexico, which we call Project Violet, that our glass melting technology is significantly lower cost and uses less energy. We think that is one of the single biggest synergies we can bring to bear on this transaction, which would be to bring some of our glass melting technology to their business.

But we do see also the ability as we deploy that capital to create capacity expansions in places in the world where we see long-term growth, and potentially disinvest or reduce our capital base in some of the parts of the world where we see less growth.

So I think you'll see a short-term acceleration. And I think over the longer term, we would expect that the 80% kind of number that we have used historically versus capital spending would apply to composites as well as to the rest of the portfolio.

And how would you generally characterize the condition of the plants you are acquiring?

We have characterized them as being in good condition. We, as a part of the joint venture, had a chance to go out and do due diligence on every one of their facilities as they did on ours.

I think -- we talked about this -- glass melters last anywhere from seven to 10 years. As you can imagine, the ones that are brand-new look really good. The ones that are 10 years old look like they need to be replaced.

So they have a fleet of melters that are probably average to new in terms of age. They have done some fairly sizable investments in some of their bigger melters over the last couple of years.

So some key places in the world where we would need and went to see good assets, we have them. And then there are some other places in the world where there are going to need to be some either investments to rebuild or redeployment of capital.

Good. And then finally, Mike, could you talk about the margins at the business you are acquiring within composites? How does it compare to your current composite business on a trailing basis?

Well, the $100 million plus of EBITDA -- and we do really mean $100 million plus. We don't want to give an exact forecast, but we do think their business, which we are acquiring, will do better than $100 million in 2007 -- on a revenue base between $900 million and $1 billion puts their EBITDA margin rate at very low double digits, right around 10%, a little north of there.

Our business has historically been a bit better than that. We think partly, that's product mix; partly, that's efficiency and productivity type issues. So we see a combination of reasons why that's true.

We would expect that by adding $100 million of synergies into their revenue base, which is -- or into the combined revenue base, which is in effect close to a 5-point uptick in EBIT margin rate, you would see not just accretion to their EBIT margin rate, but to the combined businesses' EBIT margin rate above what we've done historically.

And then, would you expect the synergies to occur relatively evenly over the three- to four-year time-frame?

Well, we are reluctant to give a lot of timing on that right now. I think we're now in the next stage of really doing our integration planning.

The operating expense synergies, we think, we'll get fastest. And I think we have line-of-sight to getting a good chunk of those in 2008.

Some of the others that are related to capital spending and network optimization, we still have some capital planning to do in order to figure out how quickly we get them.

I think what we said today, where we said the majority of the $100 million of synergies would occur in the first three years, is probably as far as we're willing to go at this time.

David MacGregor, Longbow Research.

This is Garik Shmois in for David. I just have a question on Duration. Can you give us an update as to where it's been rolled out so far and what your outlook is for nationwide ramp up?

The plan is to get it rolled out nationally by the end of this year. I would say at this point, we're complete in the Northeast and across the Midwest. And about a month ago, we started out down in the Southeast.

So a rough estimate would be today, we are probably 40% of the way there, with the completion date by the end of the year to be nationally.

Okay. And what kind of margins are you seeing on Duration relative to the roofing business?

Well, I can tell you that we have been able to price it at a premium to our existing product line. There is some additional cost to produce the product, but it's more than offset by the premium price that we're getting in the marketplace. So I do think as the product line transitions to the Durations product line, we will see some improvement in our overall margins.

Okay. And can you talk just a little bit about roofing pricing over the last quarter and what you're seeing here throughout the rest of the year?

We have seen some pressure because of the asphalt costs. And really what we try and do as a strategy is kind of recapture our inflation in the marketplace. There is an industrywide price increase that's announced for August 1 that we think is going to go through at this point. If you take a look at our margins, I think it's kind of indicative of the relationship between asphalt cost and price.

But I don't think you've seen significant changes in price and/or margins in that business year to date.

[Anton Kowalski], Canyon Capital.

I was looking at the cash flow statement. And you guys had said that you are entering a period of favorable cash flow. I know working capital was pretty negative in the six months thus far -- wondering what is going on there, and if you kind of expect to be cash flow positive this year -- and if we're going to -- what part of the cash flow is going to tick that up in the next two quarters here?

Okay, let me talk a little bit about cash flow. Given the seasonality of our business and -- I fear I sound like a broken record on this. But we do work off of lagged housing starts. And construction season across the entire country tend to be biased towards kind of the April to October time-frame. And because we lag off of that, we see much better business demand for our business in kind of the June to late November/early December time-frame.

So as a result of that, what you tend to see in our business is as we move our way through the first half of the year, we're building inventories and building receivables. And then, as we get the second half of the year, we are liquidating inventory. And then at the end of the year, our business actually tends to go pretty weak in the last month of the year. And we liquidate a fair amount of receivables.

I think if you look at our working capital performance over the last three or four years, you would see that it's fairly stable as a percent of sales. So in a flat sales year or a down sales year, we would be somewhere to flat to liquidating working capital. So when we look at our overall outlook for cash flow at the operations line, kind of excluding the impact of transactions -- the Saint-Gobain acquisition or the siding divestitures -- if you just look at cash flow from operations, given our tax situation, we would see our operating cash flow as being fairly close to EBIT, with depreciation added back; with some discounted amount of CapEx -- and we have said about 80% of depreciation to maintain existing assets; and then depending on what revenue does in this kind of the year, about a flat working capital performance, because we aren't seeing a lot of revenue growth, and that that would be the base operating cash flow.

So given our guidance on adjusted EBIT and our guidance on depreciation and CapEx, we would expect to experience healthy operating cash flows this year, which is, I think, a part of our thought process around how you pay for the acquisition of Vetrotex.

[Craig Rosenbloom], Millbrook Capital.

Why did you guys decide not to buy back stock during the quarter?

Well, when we take a look at our cash, we start with the knowledge that we are a substantial positive cash generator on a go-forward basis. So that's good news.

We then take a look at the priorities of how we would use that cash. The first thing we want to do is reinvest in our core businesses. As we've talked in the past, a lot of our melters life out over seven to 10 years. So it's important to reinvest in our core assets, and that's where dollar one goes, is to making sure that we are continuing to produce a quality product safely.

Beyond that, we take a look at, I would say, small to medium-size acquisitions. The Saint-Gobain acquisition would fall into that category. If we can find a way to deploy cash around the world to generate positive returns, that would typically be step number two.

Step number three would be to consider stock buybacks. We have announced that we have authority to do that. We decided in the first half not to take that step, but that still is an option if we choose to, going forward. And the fourth option would be some kind of way just to directly give cash back to our shareholders, possibly through a dividend.

So those are the different options. Those are the obvious options that a lot of people would have. But that's kind of how we prioritize them in our minds.

Yes, and I'm just curious why you decided not to buy back stock during the quarter. Was it a pricing issue? Was it some of the other options you had, or was it the strategic activity that was going on?

I would say through the first half of the quarter, we were pretty satisfied with our stock price. I think every company would like to see their stock price higher. But when our stock was trading in the 34, 35 range, that felt like the market was recognizing the things we were doing in our business.

Obviously, the selloff that we've experienced in the last 30 days, which we think is more macro-related with some bad news on housing, etc., and credit has not made us happy.

The flipside, though, is that it was really during that period of time when we would have been looking at our stock price and saying the weakness in our stock doesn't make sense to us, that we also got into really serious negotiations with Saint-Gobain about the idea of deploying some of the divestiture proceeds and operating cash flow to the acquisition of the Vetrotex.

As we sit here today, we feel fairly confident that we're buying that business at least as well in terms of valuation as we could buy back our own stock. And if we were to buy our stock, we don't have the opportunity for $100 million of synergies that we had with that acquisition.

So from a shareholder point-of-view, we would hope you would agree with us that deploying a dollar of capital towards Vetrotex is really getting us a business that looks like the Owens Corning you owned, maybe even more cheaply. And we're getting an upside in terms of $100 million of synergies. So we just think that's a better use at this time.

Ladies and gentlemen, this concludes the question-and-answer session of the presentation. I would now like to turn the conference back over to Mr. Scott Deitz for final remarks.

Lisa, is there anybody else in the queue?

Yes, sir.

Why don't we take a couple more questions, since we started a little late, if that's possible?

Keith Johnson, Morgan Keegan.

I was really looking for just a little bit of color on the trends, maybe particularly in insulation and the roofing and asphalt kind of building -- or vinyl siding. As you came through the quarter, were you guys seeing much sell through from your customers into the end markets? Or do you think there may have been some inventory accumulation in the channels as you came through the second quarter?

I guess it would be product-line-specific. If you started with roofing, I know that the manufacturers, especially Owens Corning, had a substantial amount of inventory through the fourth quarter for sure, and I think industrywide, through the first quarter. You could also expect that our distributors and customers would have had a fair amount of inventory in the first half.

So I would think at this point in time that that inventory has worked its way through the system in large part, and there's not a lot of inventory in our customers' yards, and the sellthrough would actually be picking up as we go forward.

Relative to insulation, especially at the contractor level, that's a very short-cycle business. Our customers hold very little inventory, maybe only a week at a time. So I think you'll see real-time adjustments in sellthrough with our insulation business just because of the nature of the warehousing space and the short cycle that manufacturers are on.

So I guess in summary in both of those two, I think that there's not a lot of inventory in the pipeline. And I think the sellthrough should actually accelerate going forward, especially because as Mike talked, due to the seasonality of our business, our business is expected to pick up from a demand point of view in the second half. I don't know if that really answers your question or not, but that -- help me if that answers your question.

That does help. How have trends been as you -- any change in trends or slowdown as you come into July?

Well, seasonally, our business picks up -- second quarter is typically our slowest quarter, especially in the insulation business, because we're insulating homes that came out of the ground in the first quarter. So we would expect our third quarter and our fourth quarter into October, for sure, just to continue to pick up on a steady basis.

Okay, just last question, just clarifying -- in the other building services, you say one of the year-over-year improvements was the lack of the HOMExpert business line in that segment. Could you quantify how much that was in the second quarter? And if you could give any guidance on what that kind of business affected the second half of '06, that would be helpful.

Keith, we haven't really broken out that particular segment. On a full year basis, it is a contributor in terms of profit improvement. But in any given quarter, it's not all that material to the improvement that were reporting.

So what we would say in that segment is we're getting some benefit from the shutdown of the HOMExperts service line. We have seen reasonably good performance out of our siding business despite the fact it is operating in an environment of weaker revenue, but I would not say it's contributing materially in terms of improvement.

The improvement that we're seeing is our service business itself is delivering some good results. We have lost -- the losses associated with HOMExperts. And then our Cultured Stone business, which is our manufactured stone veneer business, has really operated quite a bit better this year. And with a slowdown in demand, we think we've gotten our house in order very much there, and are delivering better manufacturing performance. So we are starting to get some earnings leverage out of that business. So I think it's a combination of all that.

Lisa, I think we can take one more question, please.

Jack Kasprzak, BB&T Capital Markets.

I wanted to ask now with the siding business -- the sale announced, what should we think about in terms of normalized margins in the other building materials segment?

Well, I think we have published kind of the broad numbers for other building materials. And I think the numbers were in the 5% range for (multiple speakers)

Historically? Yes, historically, the business has performed in the 2 to 3% range.

Right. And the siding business is largely a distribution business. And that would actually be the 2 to 3% kind of business is the distribution business.

So without giving you concrete numbers, you can expect those margins to improve, because the 2% to 3% business, which was a substantial portion of the business, is now no longer in the equation.

Okay. And the $100 million of pro forma EBITDA that you mentioned from the acquisition -- what is the D&A component of that, if you can tell us?

One of the challenges we have in talking about that is we're going to have to go through purchase accounting on that. So we have not really taken a hard look at when we bring those numbers onto our books what we're going to see in terms of EBIT and what we're going to see in terms of depreciation and amortization. And a lot of it will be how we attribute the purchase price back to the assets that we bought.

I think -- suffice it to say, we have historically seen that the Vetrotex business has lower EBITDA margin rates than our business, and also has lowered EBIT rates than our business. But I wouldn't also want to leave the impression that the business doesn't make any positive EBIT.

So there's a substantial portion of that EBITDA which on their books is EBIT. And then when we go through purchase accounting, I think we'll be in a better position to talk about what we think it's going to look like on our books.

Okay, fair enough. And I also wanted to ask -- it looks like on the purchase, the purchase price, you will be able to fund it largely with the proceeds from the siding business and cash on hand with fairly little incremental borrowing. Do you agree with that? And what is your interest rate on your credit line?

Well, timing aside, we would agree with your first statement. So based on when we get the proceeds from siding, how things work out on the Fabwell strategic review, and then what happens with some of these assets that we're required to divest as associated with the regulatory approvals -- we would expect obviously siding is going to go first. We've announced that. We'd hope to be able to announce something here at Fabwell in the near-term, or else move in a different direction in terms of our evaluation of that business. We think the divestitures associated with Belgium, Norway, and Pennsylvania may take a bit longer.

But if you look at that time flow, our operating cash flows plus those divestiture proceeds largely fund the acquisition. We would need to spend a little bit of time maybe on our revolver just because of timing issues. Currently, our incremental borrowings under our revolver are at 75 basis points over LIBOR.

Okay, great. Lastly, can you give us some guidance on corporate G&A? Is the quarterly number that you reported this quarter more or less a good number for modeling purposes?

Yes, it's probably a good model for number for modeling purposes. I think on a go-forward basis -- we talked about this in the fourth quarter. We have a very aggressive, pay-for-performance type environment at Owens Corning. So how our corporate performance plays out has a significant impact on how bonus pools fund for our employees. And we have a pay system where all of our salaried employees are on a bonus that's linked to the performance of the Company.

So as we get further into the year, depending on where we come in against some of the goals that we've established, that could have some impact on corporate G&A. But the basic spending on corporate G&A that you're seeing in the second quarter as a steady-state number is probably not a bad estimate.

I would now like to turn the presentation back over to Mr. Scott Deitz.

Lisa, thank you for guiding us through today's call. And thank you to all of the participants. At this point, I will turn it over to Dave Brown for any final comments he might have.

I'd just like to thank you as well for joining us today. I would like to leave you with the following few thoughts.

First of all, we are pleased with the progress of our business in a very difficult housing market. Secondly, results for the second quarter were in line with our expectations, which allowed us to reaffirm our EBIT guidance for 2007. We feel good about that.

The recently announced strategic actions we feel really position the Company for long-term growth. And we're particularly excited about the acquisition of Saint-Gobain and their composites business because it provides significant opportunities for our shareholders, our customers, our employees. And we think that's really a transformational move for our Company.

So thanks again for joining us. Have a great day.

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