Owens Corning (OC) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Owens Corning First Quarter 2009 Earnings Conference Call. My name is Jen and I will be your coordinator for today. (OPERATOR INSTRUCTIONS) Please note that during the Q&A, the Company has requested that you limit yourself to one question and one follow-up question. (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 Dietz, Vice President, Investor Relations. Please proceed, sir.

Thank you, Jen. Good morning, everyone. Thank you for taking time to join us today for our conference call and review of our business results for the first quarter of 2009. Joining us today are Mike Thaman, Owens Corning's Chairman and Chief Executive Officer, and Duncan Palmer, Chief Financial Officer. Following our presentation this morning we will open this one-hour call to your questions. Please limit yourselves to one question and one follow-up so that we can answer as many of your questions as possible during the one-hour call.

Earlier this morning we issued a news release that detailed our results for the first quarter of this year. A Form 10-Q further detailing our results was also filed this morning. For the purposes of our discussion today, we have prepared presentation slides that summarize our performance and our results for the first quarter of this year. We will refer to the slides during this call.

For those of you listening to this call via the Internet or if you are on the telephone and near a computer, you can access the slides at Owenscorning.com. You'll find a link on our home page. There's also a link on the Investor section of our website. This call and the supporting slides will be archived and available on our website for future reference. And as a reminder, this call is being recorded.

Before we begin, we offer a couple of reminders. First, today's presentation will include forward-looking statements based on our current forecasts and estimates of future events. Second, these statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent limitations of such forward-looking statements.

We ask that you understand that this presentation and today's prepared remarks contain non-GAAP financial measures. Also note that GAAP to non-GAAP reconciliations are found within the financial tables of our earnings release and our Form 10-Q. For those of you following along with our slide presentation, we will begin on Slide 4.

Now, opening remarks from our Chairman and CEO, Mike Thaman, followed by CFO Duncan Palmer, and then your questions. Mike.

Thanks, Scott. Good morning, everyone. Thank you for joining us today. I'm pleased to report that the strong momentum we saw in our Roofing business beginning with the second quarter 2008 has continued into the first half of 2009. On the strength of Roofing performance, we produced a solid first quarter, which positions Owens Corning for strong free cash flow in 2009.

We are responding to the current economic environment to reset our cost structure and our capital spending levels. We're taking aggressive actions to reduce costs and to cut capital spending by a combined $300 million in 2009. These cost reductions, combined with Roofing profits that utilize our net operating loss, give us confidence that $150 million in free cash flow is achievable this year.

In review of the first quarter, revenue totaled $1.1 billion, compared with $1.4 billion in the first quarter of 2008. In the face of a much weaker global economy, and markets that were equally challenging, we delivered adjusted EBIT of $32 million in the first quarter of 2009, compared with $56 million in the same quarter of 2008.

During the first quarter of 2009, Owens Corning's resilient balance sheet continued to provide ample liquidity to meet our financial needs. We have plenty of headroom with respect to our financial covenants and have no significant debt maturities until the fourth quarter of 2011. Duncan will provide a more detailed reconciliation of our first quarter results in his comments.

On our fourth quarter call in February, we framed our outlook and expectations for 2009. I offer this review. We said that we would continue our progress in creating an injury-free workplace. During the first quarter of 2009, our focus on safety resulted in a 15% reduction in injuries compared with our performance in 2008.

We said that weakness in the Composite segment would persist through the first half of 2009, and it has. I will address our expectations for the Composite segment later in my comments.

We said the strong Roofing momentum would carry into 2009, and it did. The Roofing business has generated EBIT margins of about 15% during the past 12 months. This is a well-performing, structurally sound business in an industry that has benefited greatly from consolidation.

We said that the Insulation business would face a difficult market in 2009, and it has. Due to seasonality, we expected the first quarter would be quite weak, and it was.

We said that we would take aggressive actions to manage our cost structure and to size our business to the market. We have. We've continued to curtail manufacturing capacity and to delay capital projects. Today, more than 40% of our reinforcements capacity, and about 50% of our fiberglass insulation capacity, is curtailed. We've reduced the number of employees in the Company by 16% compared with year-end 2007.

We've said that we would be profitable in our Composites segment and our Building Materials segment in 2009. We believe that we are on target.

You will see, in our reported results, that we had charges related to additional cost reduction programs. The team was very aggressive in the first quarter to target and execute cost reductions that will yield $160 million in savings in 2009. We also replanned our capital expenditures, primarily in response to a weaker Composites outlook, and have lowered our estimate of CapEx to $225 million for 2009. This is $140 million less than our 2008 expenditure, and $50 million less than the guidance that we provided at the end of the last quarter. As I noted earlier, the costs and capital spending reductions already in progress are expected to total $300 million in 2009.

Now, I'll provide a review of each or our segments with a look to what we see ahead. First, our Building Materials segment. It was a great quarter for our Roofing business, with sales up 49%. EBIT improved by $116 million versus the first quarter of last year, and operating margins came in at 22%, continuing a strong trend in performance that started in the second quarter of last year. This is outstanding performance. And while it's on the up side of the 8 to 12% operating margin goal that we established for the business, we are not surprised by this level of performance.

I'd like to review the progress that we've made in Roofing since 2007. At that time, our business was suffering from a steep drop in hurricane-related and new construction demand, and also the market challenges posed by the acquisition integration work of GAF-Elk. We had operating margins in the low single digits and at that time, we felt comfortable that we should see improvement to high single digits or double-digit operating margins. We were comfortable taking this view because we knew we had a pipeline of product launches and productivity programs that would significantly improve the performance of our business.

We also saw an upside from the consolidation of the industry which could lead to a more profitable market and elevate our overall performance. The results that we are seeing today are the virtuous combination of good execution by our team and an industry that is responding well to a challenging market. The roofing industry is a competitive market, and we can't guarantee that the industry dynamic will stay this positive. But the impact of our strong execution will persist.

The Insulation business lost money during the quarter, typically a seasonally weak period. Demand for residential insulation in the US dropped further from already historic lows. Our Insulation business typically works on a 90-day lag to housing starts. In the first quarter of 2009, we were selling insulation to service starts from the fourth quarter of last year. Actual housing starts in the fourth quarter of 2008 were 153,000 units. This is down 44% compared with the actual units in the fourth quarter of 2007. Demand for commercial and industrial insulation was also weaker, but not to the extent of the weakness that we have seen in the US housing market.

Selling prices are stable in the Insulation business. We are managing capacity with discipline while reducing working capital and costs. We've established a lower level of fixed costs in our Insulation business. We've maintained our leading market share in Insulation and we're working hard to introduce innovations into the marketplace. Despite these efforts, the outlook for our Insulation business is continued weakness in 2009.

Our Composites segment endured a significant year-over-year decline in demand during the first quarter. Sales were down 48% because of the global economic slowdown and excess inventories. We have monitored the business carefully in the first four months of 2009 and have taken aggressive actions to match our operations to our current estimate of the 2009 market.

At the time of our last call, our comments on Composites outlook were based on an overall estimate of industry shipments that would decline about 10% versus 2008. This estimate was based on our analysis of history in this industry. We have seen improvement in volumes every month this year. However, our current volume trend is weaker than previous composites recoveries. We estimate now that the overall industry could be down as much as 20% versus 2008.

As a result, we've established the following expectations for the business. First, we will get production below demand levels and will begin to reduce our inventories. This was achieved in the first quarter. Second, through aggressive management of costs, capital expenditures, and working capital, we will begin to generate positive cash flow in the second quarter. Third, based on the current trajectory of demand growth and continued stable prices, we will return to profitability in the third quarter. Fourth, we will restore our inventory balances to target levels by year end so that we enter 2010 prepared to restore our operations to a more robust level.

Finally, we expect that we will be positioned, in 2010, to return to the double-digit operating margins that we demonstrated in 2008 through further synergy realization of cost reductions as well as stronger production levels to meet improved, but still relatively weak, demand.

We are obviously in very uncertain markets. Like other companies, we are monitoring our businesses carefully and adjusting our spending plans on a real-time basis. I believe that our first quarter results and our outlook for the year demonstrate the strength and breadth of our business franchises. While each of our major businesses is operating in the most challenging demand environment on our record, Owens Corning remains profitable and will generate healthy free cash flow.

Now, here's Duncan to provide a detailed look at our quarterly performance and our financial position. Then we'll turn to your questions. Duncan?

Thanks, Mike. Let's start on Slide 5, where we detail key financial figures for the first quarter of 2009. You will find more detailed financial information in the tables of today's news release and the Form 10-Q that was filed earlier.

Today, we reported first quarter 2009 consolidated net sales of $1.1 billion, a 21% decrease compared to 2008. The quarter was highlighted by strong Roofing sales that were up 49% compared with the first quarter 2008, continuing momentum begun in the second quarter of last year. Sales of Insulation were lower because of the continued weakness in the US housing market. Composite sales declined, primarily as a result of the global economic slowdown.

As a reminder, when we look at our period-over-period comparability, our primary measure is adjusted earnings before interest and tax, adjusted EBIT. In a moment, I'll review our reconciliation of items to get to adjusted EBIT. These items totaled $50 million in the first quarter 2009 compared to $35 million during the same period in 2008. Our adjusted EBIT for the first quarter 2009 was $32 million, compared with $56 million in the first quarter 2008. We were very pleased with these results, particularly given the weaker year-over-year global economic environment and the continued decline in the US housing market.

Adjusted earnings for the first quarter 2009 were $5 million, or $0.04 per diluted share, as compared to first quarter 2008 adjusted earnings of $15 million, or $0.11 per diluted share.

In the first quarter, marketing and administrative expenses decreased by $18 million. This reduction was due to savings from various cost reduction actions taken during 2008 and 2009 as well as reduced performance-based compensation expense and reduced acquisition, integration, and transaction costs.

Depreciation and amortization totaled $84 million for the first quarter. We currently estimate our depreciation and amortization will total approximately $340 million in 2009. This is a little lower than our prior guidance of $350 million, primarily due to reduced capital expenditures throughout 2009. Our capital expenditures totaled $40 million in the first quarter. As Mike said, we expect that they will be about $225 million for the full year 2009, excluding purchases of precious metal.

Net debt was $2.3 billion at the end of the quarter. We expect to reduce that debt to approximately $1.8 billion by the end of 2009.

Moving to Slide 6, you can see the detail associated with the reconciliation of our first quarter adjusted EBIT of $32 million to reported EBIT of a negative $18 million. We provide this analysis as a measure of our current operating results.

We are responding to the current environment to reset our cost structure across the Company. In the second half of 2008, and through the first quarter of 2009, we have taken various cost-reduction actions, including significant capacity curtailments, extending plant down times, reducing headcount, and delaying projects. These actions will contribute to cost reductions of about $160 million in 2009, of which we expect at least half will be permanent reductions, where the costs will not return when we restart idle production capacity.

We expect to have $46 million of charges in 2009 related to achieving these savings, of which we incurred $30 million in the first quarter.

The integration of the Composites acquisition continues to deliver synergies well ahead of our original plans. In 2009, we expect to deliver a total of $75 million in synergies, up from the $50 million we realized in 2008. We incurred $6 million of integration costs in the first quarter associated with achieving these ongoing savings.

Next, as you have seen in prior quarters, we adjusted for the non-cash amortization of costs associated with the employee emergence equity program, a total of $6 million. These shares, which have a three-year vesting schedule and which will be amortized in the P&L until October 2009, were awarded to employees at the time of our emergence from Chapter 11 in 2006.

Now, if you move to Slide 7, you will see an illustration of adjusted EBIT's performance, comparing first quarter 2009 with the same quarter in 2008 based on business contribution. We illustrate to show how our businesses have evolved year over year.

Adjust EBITs declined $24 million from the first quarter 2008 to first quarter 2009. Our Roofing business continued to deliver outstanding results in the quarter and maintained the significant momentum that began in 2008. This improvement was offset by both Insulation and Composite businesses, which faced weaker demand in their respective markets.

With that as background, turn to Slide 8 and we will begin a more detailed review of our segments, starting with Building Materials. In the first quarter, Building Materials had net sales of $766 million, a 5% increase over the first quarter 2008. Building Materials delivered a significant turnaround in EBIT of $53 million, compared to a negative EBIT of $4 million in 2008. The following two slides discuss these results in more detail by highlighting the key businesses within the Building Materials segment, the Roofing business, and the Insulation business.

First, Slide 9 provides an overview of our Roofing business. In the first quarter, this business continued its outstanding performance. Roofing net sales for the quarter improved nearly 50% from the first quarter 2008 as higher selling prices recovered prior increases in raw material costs, particularly asphalt. The business delivered $99 million of EBIT in the third quarter 2009, a record quarter for this business. This milestone also represents a tremendous turnaround from last year's negative EBIT of $17 million.

As Mike outlined in his earlier remarks, we have taken significant action since 2007 to improve the profitability of our business. We have achieved improvements in our production processes, including energy efficiencies and reduction in the raw material costs of our shingle design. We have also reduced overall manufacturing fixed costs. In addition, we have launched new product lines, improved our mix, and grown our accessories business. These programs had a significant impact on 2008. By the end of 2009, these programs are expected to have delivered $100 million of improvement compared to 2007.

In addition, the roofing industry is attractive and we have demonstrated that our business can deliver operating margins well above 10%. We believe that this business will continue to see strong operating margins for the rest of 2009 and beyond. With this level of performance, Roofing has established itself as a strong business within our portfolio with enduring value.

Next, on to Slide 10 -- our Insulation business. Our Insulation business continues to feel the impact of the 11 consecutive quarters of progressively declining US housing starts. First quarter net sales in this business were down 24% compared with first quarter 2008. This decline was primarily due to a reduction in volumes as prices have remained stable since the second half of 2008. The decline in insulation net sales was less severe than the decline in US housing starts due to our diversified portfolio of markets and geographies.

The Insulation business lost money in the first quarter. The first quarter is seasonally weak, as demand is driven by actual fourth quarter housing starts, which are lower than the seasonally adjusted number. EBIT was a loss of $39 million due to the impact of lower demand on our sales and underutilization of our production capacity.

In response to the prolonged weakness in demand, we continue to take actions to reduce active production capacity and to align our cost structure with market demand. As a result of these actions, about 50% of our fiberglass insulation capacity is now curtailed. Despite these actions, this business will struggle to achieve profitability until demand improves. This is a great business and a well-structured industry. Owens Corning's pink fiberglass insulation is a powerful and enduring brand. We are the clear market leader, well positioned to returned to historical levels of performance when demand improves, as we know it will.

Next, Slide 11 provides an overview of our Composites segment. Composites net sales decreased 48% in the first quarter 2009 as compared to the same period in 2008. Approximately two-thirds of this decrease was the result of lower sales volumes, caused by the global economic slowdown that began in the fourth quarter of 2008. The remainder of the decrease was due to the May 2008 divestiture of two plants in Europe and an unfavorable currency variance of $41 million from translating sales denominated in foreign currencies into US dollars.

First quarter EBIT for the business was negative $18 million, compared to a positive $64 million for the same period of 2008. Substantially all of this decrease was the result of lower sales volumes, including the impact of underutilization of our production capacity.

In our fourth quarter call, we indicated that December reinforcement volumes were down by as much as 45% compared to the trend established in the first three quarters of 2008. We have seen demand increase every month in the first quarter. However, we are currently experiencing sales volumes down by about 35%. These trends were broadly consistent across our different products and geographic regions.

We expect that industry demand could be down as much as 20% in 2009 compared to 2008. As Mike mentioned, we have curtailed more than 40% of our global reinforcements production capacity and, as a result, we are now producing less than we sell each month. We expect the gradual increase in demand to persist throughout 2009. We will continue to produce at a lower level to return our business to cash generation in the second quarter; then, we expect our business will return to profitability in the third quarter.

Next, we have a few additional items to cover before turning to our Q&A. On Slide 12, in the first quarter 2009, the Company changed its method of accounting for inventories held by our US companies from the LIFO method to the FIFO method. In addition to conforming the Company's worldwide inventories to a consistent costing method, we believe that it provides better matching of the Company's expenses with its revenues. This change in accounting principle has been applied retrospectively to all prior periods we present -- which, in the first quarter of 2008, resulted in an EBIT increase of $2 million in Corporate. Our reported business results have historically been based on the FIFO inventory costing method, and so there is no change to prior periods for these.

Next, you will see a description of both our cash tax position as well as reported tax expense. We expect that cash taxes in 2009 will be less than 2008, with overall cash taxes paid with $33 million. In addition, we estimate that our long-term effective tax rate will be 25%, based on a blend of our US and non-US operations. Therefore, to improve comparability of our adjusted results, we apply this 25% tax rate to pre-tax earnings to arrive at adjusted earnings.

Now, to Slide 13. We have a resilient balance sheet. We have no material debt maturities coming due until the fourth quarter of 2011 and we have $428 million available in our revolving credit facility as of the end of the quarter. In addition, we have $90 million of cash on hand. We expect that the cash we have on hand, coupled with future cash flows from operations and other available sources of funds, will provide ample liquidity to allow us to meet our cash requirements, capital investment plans, and to endure significant additional market volatility.

In addition, this month Standard and Poor's Ratings Services published an updated credit profile on the Company affirming our investment grade corporate credit rating.

We have taken significant actions to maximize our cash flow in 2009. We are driving $160 million of costs out of the business during the year, and we are reducing capital expenditures by $140 million from 2008 levels. These measures, along with the strong performance of our Roofing business, have improved our confidence in the outlook for free cash flow. We believe that free cash flow of $150 million is achievable in 2009.

With that, Scott, back to you for Q&A.

Thank you, Duncan, and thank you, Mike. Jen, we're now ready to go to the Q&A session.

Thank you, gentlemen. (OPERATOR INSTRUCTIONS) As a reminder, the Company requests that you limit yourself to one question and one follow-up question. Please stand by for your first question. The first question is from Ken Zener with Macquarie Capital.

Good morning.

Morning, Ken.

I'm wondering -- given the free cash flow guidance that you highlighted, meaning the $340 million D&A and $225 million in CapEx, the gap there, where it hit $150 million in free cash flow, kind of implies maybe $35 million net income. Could you talk about other factors that are influencing your free cash flow assumptions, such as working cap, cash uses like pensions, etc.?

Sure. Maybe I'll start this off, and then maybe I'll pass it over to Duncan. Obviously, one of the places we are investing cash today is in cost reductions. So we did have realization costs in the first quarter and we gave some guidance on realization costs. That will be a use of cash in the year. We do have a use of cash in terms of pensions as well as we talked about our cash taxes, which will maintain themselves at a relatively low level.

So I think the big captions, outside of CapEx, that would be users of cash would be those three. And then, obviously, we are looking at volumes this year where we'll be weaker on the top line and we would expect, therefore, that we get some working capital coming back the other way that would be an inflow of cash.

So the sources and the uses, I think you got the major elements of that. Duncan, I don't know if you want to talk to any of our specific guidance in any of those elements.

Thanks, Mike. I think you talked about most of the elements in your response. Cash tax, as I think we've guided, will be less than we spent in 2008, which was $33 million. Obviously, we have interest expense so that will be a material item. We talked about realization costs for the cost reduction actions in 2009. There's also some elements, as we talked about on the call, of costs associated with synergy acquisition from the Composites acquisition we did in 2007. We still can't treat synergies actively in 2009. Mike mention the pension; I think we've provided some guidance in the 10-K, but our contribution to the pension this year will be about $60 million. So I think you can-- those are the kind of major elements, I think.

Okay, good; just wanted to confirm that. And then, can you just comment on -- in Composites, I know one of your competitors who's reported kind of talked about inventories being low. If you could just kind of talk about that, relative to the reinforcement of the downstream business and if there's been any change in actions by Chinese producers relative to other regions. Thank you.

Ken, just to clarify -- one of our competitors reported that they believe industry inventories were low?

The language was that inventories are low, is my interpretation; yes.

Okay. I don't think I can comment directly on that. I can comment on what we think the industry dynamic that we're seeing out there is right now. In our prepared comments, we reflected on, really, the way we've been trying to plan the business. And if you look at our prior -- the investor presentation that we had put out about a month and a half ago -- we had given nearly 30 years' worth of composites industry data. And in that data, we showed that the most severe correction we had ever seen in the composites industry year over year was about 7%.

And on the basis of that data, as we came into the year, with the correction we had seen in the fourth quarter of last year, we had estimated that we thought we were looking at about a 10% down year. As we've looked at the rate of recovery, January over December, and then again February over January, and then March over February, and then now again, as we work our way through April, on the positive side we have seen demand recovering sequentially in each one of those months. And really, we've been seeing a recovery sequentially in most regions of the world and also in most of the product lines which tend to be matched to end use applications.

But we've also seen that it's recovering fairly slowly, suggesting that both the level of overall industrial activity and also the inventories that are in the channels-- that the industrial activity's relatively low, and that the inventories in the channel is relatively high for us to be able to sustain the industry today at levels that are probably 35% below where we saw a trend line last year.

So we're operating the industry, we believe, at a very low level. We believe our business has sustained its market share position so we've kind of defended our position in the market effectively. And that we are kind of balancing across the regions in a way that looks similar to the dynamic in the region.

But we see a number of months here were we will produce at low levels and see, we think, sequentially improvement in demand, but still at a fairly slow level -- kind of the proverbial L-shaped recovery to this very steep and severe downturn in the fourth quarter. And we've built our plans against that.

We think this is affecting all the industry participants. Probably in China, the more recurrent theme has been delaying capacity expansions. I think most of us-- we've talked about this on a number of calls. Most of you know that what we've seen in China as a prevailing theme is rapid expansions of competition, also rapid expansion of that market.

Generally we've seen some announcements from those competitors that they're slowing down the rate at which they intend to either bring up new capacity or build capacity. And then in Western Europe, Eastern Europe, and in the Americas, we're seeing more classical behavior of slowing down, rebuilds, and operating capacity back up from rebuilds, are going right on to curtailments in order to balance capacity. Our sense is we're doing about our fair share of that and the competition is doing a similar amount of curtailment in order to meet the market reality.

Appreciate that.

Thanks, Ken.

The next question is from Michael Rehaut with JP Morgan.

Hi, thanks. Good morning, everyone.

Good morning, Michael.

Michael Rehaut; First question, I guess, just to follow up on the Composites. You've outlined a lot of steps there. Recognize there that at current-- right now where we are is pretty challenging, but as you talked about getting back to a double-digit margin in 2010, I think initially, last quarter, you had talked about hoping to get back to that double-digit margin by the end of '09, or the back half of '09.

So I guess two questions, really, or two parts to this question -- because I'd like to press my luck and try to get another one in. What changed relative to your expectations from a couple of months ago? Is it primarily demand driven, or-- demand change, or was it more of just the fact that inventories have built up so much in the system?

And B, are there sort of specific actions outside of, perhaps, an expectation for a recovery in demand in 2010 that allows you to make the statement that you can get back to that double-digit margin over the next 12 months?

Sure. I mean, two very, very good questions. Let me start with the first one, kind of on what's changed since the last call. When we were on the fourth quarter call in February, we had effectively seen a significant decline in demand from the September-October timeframe into December. And in terms of recovery, we basically had one data point -- we had January -- in trying to estimate how we thought 2009 would play out relative to 2008. I think at that time, we were much more reliant on the prior 28 years of history to try to extrapolate from that data point to figure out, okay, what does that mean for 2009?

As we sit here today, we would say we have four data points. So we have January, February, March, and April, and the slope of the demand recovery line that we're seeing over these four months is in a pronounced way less robust than what we've typically seen in recoveries when composites have gone through a correction.

So our updated point of view on the business is really based on us trying to update and build some reasonably good forecasting models off of the data points that we're seeing. That is what's led us to, I think, a decidedly more sober outlook for 2009.

Having said that, we started this downturn, in Duncan's comments, at kind of 45% below the trend level that we had seen for through the first three quarters of last year. In his comments, we said today we're probably at 35% below that trend level, so we've maybe recovered 10 points in that four-month period of time. If that were to continue and you were to extrapolate that out, we would still be below the robust demand we've seen for the first three quarters of last year, but we would obviously be well above where we are today.

Given that we're operating our assets today at 60% or less utilization, by the end of this year, I think you'd see two good things happening going into next year. One is, demand, while still below that 2008 trend level, would be decidedly more robust than what we currently see.

And secondly, you'd get tremendous operating leverage as we went from operating 60% of our assets to now bringing additional capacity on board to service an industry that's now operating at a level that's quite a bit above the utilization that would be supported by that level of production.

All the while, we're obviously working on cost reductions -- fixed cost reductions and synergies -- which are building through this year but aren't really getting to the bottom line because of absorption issues. So as we go into next year, I think our confidence comes from believing that we'll be able to turn some assets back on, get the business back operating at a reasonable level of utilization, and, as a result, there'll be enough volume plus good cost work and decent utilization to get us back to the kind of operating margin performance that we expect from the business.

Okay; I appreciate that detailed answer. And then, just my second question, really more relating to Roofing. Obviously, that segment continues to really beat expectations handily. And kind of looking at the back half of '08, certainly those were the best results that you posted in a long time. And then you even beat that handily.

So just, I guess from a broader perspective, where we've, in the last I guess five years or so, in one of the better housing markets, you guys never really topped a double-digit margin. How are we supposed to think about this business over the next few years if-- let's say you had kind of a positive intersection of very strong storm-related demand in '08 and high raw material costs that you were able to pass through in pricing, and several things that really were able to get the margins up nicely. On a longer-term basis, how much do you think you can hold onto and, given the fact that we might be in a more soft demand environment, or if that storm-related demand kind of ebbs over the next few quarters, where do you see more of a steady state margin in that business?

Okay, thanks for the question. I think you laid out the right history, which is, if you look over the last five years, the business had a history for a period of time of producing operating margins kind of less than 5% and then a couple of good years in the kind of '05 timeframe where our margins got a little bit higher than single digits.

We would say you should think about the business in two pieces. How good a business does Owens Corning have? And then, how good an industry is the roofing industry? And I'll take those in pieces.

In terms of how good a business we have, back in 2007, when the market was going through some disarray and our operating margins were less than 5%, we began talking about our business as being a 10% operating margin business. And we did that not based on industry dynamics, we did that based on things that we believed we could get done in our business, and Duncan talked about those -- product line reformulations, marketing strategies, productivity programs, asset rationalizations, better commercial performance in the business.

And we have a line of sight on how we can take these businesses during that period of time -- at operating margins of less than five -- and get them to that 8 to 12% range that we disclosed in our investor presentation.

We also, at that time, started talking about the fact that it stands to reason that an industry that once had 20-plus competitors and was very, very fragmented had now consolidated down to four players comprising more than 90% of the market, and that the overall industry dynamic should be more positive. And we also, I think, plainly acknowledged that, based on history, there wasn't a good reason to believe that it would be. And in some regards this industry, in our view, had underperformed its potential as a manufacturer for a lot, a lot of years.

I think what we're seeing right now is our business executing very, very wall and performing much closer to its potential. And I think we're seeing an industry that is beginning to operate as a better-structured and more profitable industry.

I guess in terms of what that means in terms of guidance, we would still say today that we have line of sight to the 8 to 12% related to the actions we are taking in our business. That we would certainly expect there's no reason why industry dynamics don't create an upside to that guidance but that, candidly, we think an investor should expect multiple quarters in a row of data points for us to demonstrate that dynamic before we would move that guidance upward.

And I guess just a follow-up to that. Are you aware of any changes that have occurred recently, or that are about to occur, either by yourself or competitors, regarding capacity coming on or being taken off?

This is much more of a material conversion business, so your big cost in this business is neither assets nor utilization, it's the materials you convert into shingles. Generally, what the competition and Owens Corning does -- I'll speak for us -- what we do is we monitor our inventory levels and then we adjust to shift activity on a plant-by-plant basis based on our inventory levels.

So we know today that we're probably looking at a market that's as much as 25% below normalized demand and probably as much as 40% below the peak demand we saw in 2005. And our view is that inventories and other things are in reasonably good shape through the channel and through the business. It's a little bit easier business to correct that way, and it tends to be a business where people adjust up and down.

The problem tends to be in the winter when you get into seasonal demand weakness. It's certainly true that there was some reasonably good storm-related demand that helped carry us through last winter. As we head into the summer, we would expect that some seasonal strengthening of underlying demand should continue to keep the business pretty stable.

That's great; thank you.

Thank you.

Your next question is from Jack Kasprzak with BB&T Capital Markets.

Thanks. Good morning, everyone.

Good morning, Jack.

Hi. Mike, also with regard to Roofing, just to stay on that subject. You mentioned in your comments -- obviously a great quarter there -- but can't guarantee the positive dynamics will continue. Does that suggest that you're seeing something in the marketplace that gives you some cause for concern?

No, I wouldn't conclude that from our comments. In both our press release and in my opening comments, we were very clear to say that the strong performance that we saw in the latter half of last year has carried into the first half of this year. So we believe, as we sit here now, we've got at least reasonable line of sight through the first half, and we haven't seen anything in the dynamics that would cause us to be concerned.

And my understanding is that there was an early March price increase on roofing -- residential shingles, asphalt shingles -- in the marketplace. Is that true? Did it hold? Is it holding, I should say, and could you tell us how much it was?

There in fact was a March price increase. Typically, in this business asphalt prices tend to begin to increase as you move from the winter months to the summer months, primarily because of alternative demand associated with paving. I think as the stimulus bill moved through Congress and looked more and more like it was going to happen, the concern was kind of heightened in the industry, or at least inside Owens Corning, that a growth in government spending could put additional pressure on asphalt demand during the summer and that we could see a sizeable run-up in asphalt costs heading into the summer.

There was a price increase that was announced. We announced one in early March. Generally, price performance in the business has been good; we've been satisfied with where pricing is. And at least at this point, asphalt prices have maintained relative stability and we haven't seen sharp spikes associated with the Reinvestment and Recovery Act, although we would still go into the summer fairly cautious, thinking that there could be some fairly sizeable paving demand and that we would need to respond to that, potentially with further price actions.

Great. Okay, thanks; that's it for me.

Thank you.

Your next question is from Garik Shmois with Longbow Research.

Hi; thanks for taking my call. First question, on insulation prices. Mike, you mentioned they've been pretty stable here for the last couple of quarters, it looks like. Just with energy costs coming off and housing at these levels, how sustainable are prices at these levels?

Well, there's obviously a lot of pressure throughout the entire channel in the insulation market. I think builders are under a lot of pressure; obviously, the contractors are under a lot of pressure. It's putting a lot of pressure on the manufacturers. We're in uncharted territories in terms of our pricing model. So we felt pretty comfortable that we knew the path that insulation pricing would trace as the market began to soften about three years ago, and it followed that pattern for probably the first six, seven, eight quarters of the downturn. Since then, prices have been relatively stable, and I think what's implied by that -- and I don't know that we can offer hard data on this -- is that we are starting to get down to the cost of industry participants. Clearly looking at our numbers. I mean, our insulation business is now losing money.

We report a number of segments -- of business groups -- inside that business, which include some of our non-US operations. It includes our commercial and industrial business, it includes our foam business, it includes the insulation we sell through retail. So within that, there is a new construction, residential contractor business that's been under more pressure than some of those other businesses. So I think it's reasonable to conclude that the residential contractor section of what we're doing inside the Insulation business is under even more pressure that what we're seeing in the EBIT margins of Insulation in total.

So there's a growing belief, I guess, inside these offices that we must be down near cash costs for a number of industry participants, and that's one of the things that's giving some amount of price stability in the market. We would be hopeful that we would continue to see price stability, and that with some up-tick in demand, that we would then start to see some price recovery and some margin rehabilitation for the manufacturer.

Okay. And do you have a view on when that up-tick in demand could be? Maybe talk about your thoughts on second half of this year and 2010.

We've been very reluctant to forecast housing starts. I mean, most of the people who forecast housing starts over the last three years don't get to be on earnings calls anymore. (Chuckles) We look at the present and then we look at the broad dynamics of the marketplace. In a perverse way, the one real positive that we've seen is how much housing prices have come down. Most of the major affordability indexes, whether you look at house price versus income or whether you look at mortgage costs versus renting costs, would suggest that housing is starting to become a screaming buy.

The fact that people have lost a lot of money in housing, though, means they're going to act rationally. And until they're convinced housing prices have bottomed, it's very expensive to buy a house. Because the first thing that happens if you buy a house and it's depreciating, is you lose your equity in the house. So we're going to need to see pricing stabilize; that would be our first KPI on that. Once pricing stabilized, we would then expect to see a pretty significant increase in buyer demand. And then once there was an increase in buyer demand, I think you'd see builders want to get interested again in building houses.

So it's kind of a three-step problem and we'd have a hard time guessing when pricing bottoms because it certainly feels like the size of the correction will cause it to over-shoot historical affordability measures. And we just don't know far we need to over-shoot historical affordability measures before we start to see some up-tick in pricing.

Okay. Thank you very much.

The next question is from Dennis McGill with Zelman and Associates.

Thank you, guys.

Good morning, Dennis.

Good morning. My one question just has to do around the Insulation profitability. You talked about seasonality being a factor there, and obviously, fourth quarter starts kind of rolling through. And we're starting to see starts maybe stabilize or be less negative on a year-over-year basis.

But if you think about, as it pertains to your business, an absolute level of starts we're still going to see in the first quarter, starts are probably down 25% from where they were in the fourth quarter, which would imply that the seasonality could even get worse from an absolute unit standpoint. So trying to understand how that will play through in conjunction with what you've done on the cost side as we look out the next couple of quarters in that segment, specifically.

I would just kind of reaffirm your analysis of it, which is because we don't really-- you can't sell to seasonally adjusted starts; you can actually sell to actual units, or actual holes in the ground. The December numbers, while weak, it's also a weak first quarter. So the lag starts that we're looking at in the second quarter of the year are probably quite a bit weaker than we saw in the fourth quarter, and we're expecting another tough quarter in Insulation.

We would expect that, with potentially some up-tick in seasonally adjusted starts, albeit off of very low levels, in the second quarter and the third quarter that you would actually see seasonally adjusted starts start to recover, and therefore actual starts in the second and third quarter to be quite a bit more robust than what we've seen in the first quarter and what we expect to see in the second. And as a result, we would expect volumes in the second half of the year to feel quite a bit better than what we currently have.

So our view on insulation is certainly that they've got another tough quarter coming in the second, and then maybe we would start to see some up-tick, where a lot of our capacity reduction and cost reduction efforts would maybe start to come through and either offset losses or even get through to the bottom.

And those cost reduction efforts, as they pertain to the first quarter -- were a lot of those in place for the majority of the quarter, or done towards the end of the quarter?

Probably about halfway through the quarter, I think on average. We've been in a mode now for really a couple of years, starting late in '07, where on a month-by-month and quarter-by-quarter basis we look at demand levels and say, "Do we need to do more?" When we built our plans for '09 in October-November, we had one level of cost reductions and activity we were targeting for the first quarter.

As we saw Composites and Insulation unfold thought the fourth quarter, we were back at it in January and February looking at new targets and new cost reduction targets. So because we were doing a lot of that work in the latter part of last year, I'd expect that we saw some benefit in the first quarter. But also because we were back at it again in the first quarter, I'd expect to see some acceleration of cost reductions, also.

Okay. And then, just a quick follow-up question on the Composites business. Talking about volumes improving month over month the last several months, can you compare that to what normal seasonality would be? Is that a trend that you would normally see, or is it not really a seasonal business that we need to worry about?

Yes, it's not a particularly seasonal business. I mean, typically we see a tail-off in demand in August related to slower activity in Europe, so that's a fairly predictable change in seasonality. And then, we see normally a fair amount of volatility at year end as the manufacturers and some of the bigger customers try to position their balance sheets for year end in terms of how much inventory they want to be carrying.

So we would say that the toughest months to guess in that business typically are August and then late fourth quarter. And then, once you get into the middle of spring, running through the summer and into the fall, that you have fairly consistent months of demand. So the fact that we're seeing April a little bit stronger than March and March a little bit stronger than February is a good sign, and it's a sign of recovery, it's not a sign of seasonality.

Okay, perfect. Thanks again.

Thank you.

Your next question is from Jim Barrett with CL King and Associates.

Good morning, everyone.

Good morning, Jim.

Mike, you may have touched upon it implicitly, but what economic assumptions underpin the belief that in 2010 we'll see double-digit margins in Composites? It may vary by region, but could you discuss that?

We would probably be using numbers that are similar to kind of what the IMF just came out with, where they're showing global demand-- global GDP shrinking this year at kind of a 1-plus percent level and then going back positive again next year. At this time, really, because we've seen such a significant industry impact that's a bit divorced from what's happening in global industrial output, I think if global industrial output were just basically stable-- If it hits a bottom in '09 and then continues forward stable, most of our guidance for '10 would just be related to the composites industry getting back to a more normal level of activity related to a more stable level of industrial production.

I see. And then, a follow-up. How would you describe the pricing discipline in the industry in the key regions around the globe?

I think in Duncan's remarks, and maybe in my remarks, we said that pricing has been relatively stable. If you go back to last summer, the industry was in a position where in some products and some regions, there was undersupply. And so price had been-- it had been even a bit of a seller's market in that period of time.

We've obviously flipped over the other side. I think what you see, though, is that this is not an industry that typically has taken a lot of price on the up side when demand is good. And as a result, the best outcome for us would be if you didn't see a lot of price downside when demand is weak. We think stable pricing through the channels is really the way to work through the inventory position that we're in.

So we have so far seen stability. We know that we need to defend our position in the market, but we're certainly not out there looking to somehow aggressively use this opportunity to buy a bunch of market share.

Okay; thank you very much.

The next question is from Keith Hughes with Sun Trust.

My question's been answered; thank you.

Thanks, Keith.

In the interest of time, this will conclude our Q&A session. I'll hand the call back to Mr. Scott Deitz for any closing remarks.

Thank you, Jen, and thanks to everyone for your questions; good ones. Mike, why don't we turn to you for any final comments. I know there are a few folks in the queue that we didn't get to with questions and answers. We'll follow up after this call. Mike?

Well thanks, Scott. Clearly, we're pleased with the quarter we just produced. It is good to be able to report that we've sustained profitability on an adjusted EBIT basis. We feel good about being able to give our investors guidance on strong free cash flow.

We continue to feel stronger and stronger about our Roofing performance and both the sustainability of the actions that we've taken to improve the operating margins of that business as well as some of the industry dynamics that suggest we could have a period of good stability and profitability in Roofing that would sustain.

Obviously, we're working hard on the capital and cost side, and I would imagine there's very little we've said on this call that's not similar to what you're hearing from other companies -- managing your businesses closely, being very close to daily sales and weekly productions, making sure that you've got cost actions, capital actions, and working capital actions that are aligned to the reality of the marketplace, taking care of your balance sheet, and focusing on cash flow.

Those are the things that we are doing here. We continue to feel very, very comfortable that we've got three great business franchises. Our Insulation business is probably the most troubled for the longest period of time. We see the longest and slowest recovery, obviously, in new construction.

Right now, Roofing is the star of the portfolio and we think that will continue. But we expect a pretty strong and aggressive bounce-back from our Composites business once we're able to get back to some positive operating leverage that allows us to show our synergies through the financial statements.

I think you can expect that we will continue to focus on delivering the free cash flow number that we talked about in today's call. And as the year continues and we get a few more data points in terms of recovery, both on the housing side and the global economy related to composites, we'll be able to give more comfort in terms of how the next two quarters will play out.

So we look forward to having all of you join us on our next call, which will be some time in July; and that's posted on our website-- I'm sorry, early August. And that is posted out on our website. We appreciate your interest in our Company and your support as investors. Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation; you may now disconnect. Have a good day.