Owens Corning (OC) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the second quarter 2009 Owens Corning earnings conference call. I be be your coordinator for today. All participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). This conference is being recorded for replay purposes. I would like to turn the presentation over to your host for today's call Mr. Scott Deitz, Investor Relations. Please proceed.

Thank you Lacy. Good morning everyone. Thank you for taking the time to join us for today's conference call, in a review of our business results for the second quarter of 2009. Joining us today are Mike Thaman, Owens Corning 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. Earlier this morning we issued a news release and filed a 10-Q that detailed our results for the second quarter of this year. For the purposes of our discussion today, we prepared presentation slides that summarize our performance and our results for the second quarter of this year. We will refer to the slides during the call. You can access the slides at Owens Corning.com. There you will find a link on the home page and a link on the investor section of that website. This call and supporting slides will be recorded and available on our website for future reference.

Before we begin we offer a couple of reminders, first today's presentation will include forward-looking statements based on current forecasts, and estimates for 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. For those of you following along with our presentation we will begin on slide four, now opening remarks from our Chairman and CEO, Mike Thaman, followed by CFO Duncan Palmer and then our Q&A session. Mike.

Good morning everyone. Thank you for joining us to discuss results for the second quarter 2009. I'm pleased to report that Owens Corning delivered an outstanding second quarter on the continued strength of our Roofing business and the execution of our cost reduction programs. We produced a 58% year-over-year increase in adjusted earnings per share, a great result considering the weakness of the global economy. During our first quarter call, we said we would generate 150 million of free cash flow in 2009, based on our performance during the first half of the year we now believe that 200 million is achievable in 2009. Which means we expect to generate at least $377 million in free cash flow during the second half of this year, an excellent result. We are also on track to surpass our cost reduction goal of $160 million and are on track to reduce capital spending by $140 million. All told we will reduce costs and cut capital spending by combined total of $300 million in 2009.

In review of the second quarter, the rapid downturn in the global economy and the prolonged weakness in the US construction market continued to challenge our market opportunity. Revenue totaled $1.2 billion coupled paired with $1.6 billion in the second quarter 2008. We delivered adjusted earnings per share of $0.49 in the second quarter, an increase of 58% from our $0.31 performance in the second quarter 2008. We also strengthened our balance sheet during the quarter reduced debt and maintained significant liquidity. During the quarter we executed a bond offering, I am pleased with the outcome. We issued $350 million of ten year bonds that further strengthened liquidity and in particular our maturity profile. Duncan will provide more insights to this and also our second quarter results in his remarks.

At the beginning of the year, we framed our outlook and expectations for the year, we said that we would continue our progress in creating an injury free workplace. During the first six months of this year our safety performances has improved another 15 % over our performance in 2008. Our goal continued to be to establish a injury free workplace. We said weakness in the Composite segment would persist through the first half, it has. Our recovery plan for the business is on track, I will outline our progress in a moment. We said Roofing momentum would carry in to 2009, it most certainly has. In a US market with weak demand for asphalt shingle revenue was up compared with second quarter of 2008. We achieved record Roofing earnings. EBIT margins in the Roofing business reached 34% during the second quarter this year. Our Roofing EBIT is a particularly strong driver of cash flow due to advantageous tax position in the US. We said the Insulation business would face a difficult market in 2009, it has. We expect that that will continue throughout the year. We are currently operating this business at 50% of capacity. We said we would be profitable in our Composites and Building Material segments in 2009. Clearly our outstanding Roofing performance has all but assured the attainment of this goal for our Building Material segment. For our Composite segment, we did show optimism about achieving this goal in our last call. It now appears that the cumulative impact of first half volume weakness and the cost absorption impact of our aggressive capacity curtailments will make this goal unattainable.

In summary, the Owens Corning portfolio is exceeding our expectations in 2009. Now let's review each of our segments with a look to what we see ahead. First, our Building Materials segment. It was another terrific quarter for our Roofing business. Sales were up 14%, and EBIT up $145 million compared with the second quarter of 2008. In the quarter, our Roofing business produced $182 million of EBIT. We have sustained the gains in this business and we are performing at exceptional levels. During the past 12 months this business has generated EBIT margins of 21%. Underpinning this performance are enduring enhancements to our competitive position including cost productivity, marketing mix, and shingle design and materials technology. While demand has been weak in 2009 versus historical norms our national scope and our strong share position have allowed us to benefit from regional market strength in southeast and Texas and most recently the Denver area.

Our Insulation business was unprofitable for the third consecutive quarter, while US housing starts and prices have recently begun to show some signs of a bottom, our business continues to suffer from very poor market conditions. This is particularly true for the residential construction market in the US, and now Canada. while other markets for Insulation such as the North American commercial and industrial as well as Latin America and China markets are also week, our overall financial performance in these markets has been stable. We will continue do take a disciplined approach to capacity and cost management in our Insulation business. The business is positioned to return to profitability quickly when the market recovers.

Now on to our Composite segment. For the second consecutive quarter Composites lost money on the EBIT line. The business continues to be pressured by the global economic slow down. Sales were down 41% compared with the second quarter 2008. Inventory in the supply chain continues to be elevated. We do believe that customer inventories have begun to come down and we have brought our inventories down even faster than we previously expected.

In April, we discussed our plan to drive improvement in the Composite segment. First we said we needed to get our production below demand and to begin to reduce our inventories. Last quarter on the call we told you that we achieved this milestone. Second, we said through aggressive management of cost, capital expenditures, and working capital we would generate positive cash flow sometime in the second quarter. I am pleased to report this was achieved. Third, we said that based on expectations for demand growth and stable prices, we will return to profitability sometime in the third quarter of 2009. On the positive side demand has continued to improve sequentially since December. We also been successful at establishing and sustaining unprecedented levels of inventory reduction as well as unprecedented levels of manufacturing curtailment; however, our production levels have put more pressure on our P&L than originally envisioned and has potentially delay our return to profitability to outside the third quarter. Fourth, we said we would restore inventory balances to target levels by year end. Our strong efforts on manufacturing curtailment and inventory liquidation will allow us to achieve this goal. Finally, we expect to enter 2010 positioned to restore production and utilization to more acceptable levels and get back on track to restore operating margins to our double-digit goal. We remain committed to this important milestone. We are confident in the Composite segment. We continue to invest in this global business to serve our customers in every region of the world.

In summary, Owens Corning had a great quarter. Our strong cash performance, $149 million of free cash flow for the quarter, is evidence that we are performing across the organization. We set aggressive financial goals for the balance of the year and we are leading our operations to position Owens Corning for continued to success in 2009 and into 2010. Now here is Duncan to provide a detailed look at our quarterly performance and financial position then we will turn to your questions. Duncan.

Thanks, Mike. Let's start on slide five, where we detail key financial figures for the second quarter 2009. You will find more detailed financial information in the table of today's news release and Form 10-Q that was filed earlier. Today we reported second quarter 2009 consolidated net sales of $1.2 billion a 23% decrease compared to 2008. The quarter was highlighted by strong Roofing sales that were up 14% compared with the second quarter 2008. Continuing the momentum begun in the second quarter last year. As a reminder, when we look at period over period comparability our primary measure is adjusted earnings before interest and tax, adjusted EBIT. In a moment I will review our reconciliation of items to get to adjusted EBIT. These items totaled $20 million in the second quarter 2009 compared to $13 million during the same period in 2008. First half, these items totaled $17 million in 2009 compared to $48 million in 2008. Given the market environment, we are extremely proud that we have grown our second quarter adjusted EBIT from $87 million in 2008 to $108 million in 2009. Adjusted earnings for the second quarter 2009 was $62 million or $0.49 per diluted share as compared to second quarter 2008 adjusted earnings of $14 million or $0.31 per diluted share.

Results for the quarter continue to demonstrate the strength of our business portfolio and our ability to execute in the midst of the weak global economic environment and the continued decline in the US housing market. Marketing and administrative expenses decreased by $37 million in the second quarter and by $55 million in the first six months compared to 2008. As part of this reduction, our cost actions have decreased our operating costs by $40 million so far in 2009 and we are ahead in achieving overall cost reduction goal of $160 million for the year, which includes operating and manufacturing costs.

Depreciation and amortization totaled $74 million in the second quarter. We currently estimate our depreciation and amortization will be approximately $320 million in 2009, this is less than prior guidance of $340 million due to impact of actions we have taken to curtail production and reduce capital expenditure. Our first half capital expenditures totaled $95 million compared to $147 million in 2008. We expect they will be about $225 million for the full year 2009, compared with $366 million in 2008, excluding purchases of precious metal. In addition, we have taken actions to reduce working capital which resulted in $69 million of cash generation for the second quarter, a significant improvement over the $103 million of cash used related to working capital in the second quarter of 2008. Free cash flow generation for the quarter was $149 million. As a result, net debt was reduced to $2.16 billion at the end of the quarter.

Moving to slide six, you can see the detail associated with the reconciliation of our second quarter adjusted EBIT of $108 million to reported EBIT of $88 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. Beginning in 2009, we have taken various cost reduction actions including significant capacity curtailments, extending planned down times, reducing headcount, and delaying and canceling capital projects. These actions will contribute to cost reductions of at least $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. Given the results of our actions, we are ahead of expectations in achieving these savings. We incurred charges of $11 million in the second quarter relating to achieving these savings and expect to incur an additional $8 million of charges during the second half of 2009.

The integration of the Composite 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 $8 million of integration costs in the second quarter associated with achieving these on going 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 will be amortization in the P&L until October 2009 were awarded to employee as at the time of our emergence from Chapter 11 in 2006. In the second quarter 2009, we had gains on sales of assets and other items that resulted in the $5 million gain.

Now if you move to slide seven, you will see an illustration of adjusted EBIT performance comparing second quarter 2009 with the same period in 2008 based on business contribution. This illustrates how our portfolio performance has improved year-over-year. Adjusted EBIT increased $21 million from the second quarter 2008 to second quarter 2009. Our Roofing business delivered record results in the quarter and sustained the momentum that began in the second quarter 2008. This improvement was offset by both the Insulation and Composite businesses which face weaker demand in their respective markets.

With that as background, turn to slide eight and we will begin a detailed review of segments starting with Building Materials. In the second quarter, Building Materials had net sales of $865 million, a 9% decrease over the second quarter 2008. Despite lower sales, Building Materials delivered a significant improvement in EBIT of $143 million compared to EBIT of $39 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 nine, provides an overview of our Roofing business. In the second quarter this business achieved a new level of performance despite lower sales volumes. Roofing net sales for the quarter improved 14% from second quarter 2008. Selling prices rose during the first three quarters 2008 to recover material costs particularly asphalt. Since the fourth quarter of 2008, prices have remained relatively stable and unit margins have improved. The business achieved $182 million of EBIT in the second quarter 2009. This represents a tremendous improvement from last year.

We have taken actions since 2007 to improve the profitability of our business. We have achieved improvements in our production process including energy efficiencies and reduction in the raw material cost of shingle formulation. We have also reduced overall manufacturing fixed costs. In addition, we have launched new product lines, improved mix, and grown our accessories business. These programs had a significant impact on 2008. In 2009, these programs will deliver $100 million of improvement compared to 2007. In addition, the Roofing industry is attractive. We seen stable selling prices since the fourth quarter 2008, 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.

Next on to slide ten, our Insulation business. Our Insulation business continues to feel the impact of the weak North American housing market. second quarter net sales in the business were down 31% when compared to second quarter 2008. This decline was primarily due to a reduction in volume 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 in large part to our diversified portfolio of markets and geographies, although we have experienced weakness in many of these markets in the second quarter 2009. EBIT for this business was a loss of $28 million, due to impact of lower demand on our sales and underutilization of our production capacity. In response to the prolonged weakness in demand, we have taken actions to reduce active production capacity and to align our cost structure with market demand. As a result, about half of our fiber glass insulation capacity is now curtailed. The improved cost structure resulting from these actions as well as the business' resilient portfolio have contributed to Insulation increasing EBIT from the second quarter 2009 over the first quarter 2009 on lower housing starts. Even with these actions, this business will struggle to achieve profitability until demand improves. This is a great business in a well-structured industry. Owens Corning Pink Fiber Glass Insulation is a powerful and enduring brand. We are the clear market leader, well positioned to return to historical levels of performance when demand improves as we know it will.

Next slide 11 provides an overview of Composite segment. Composites net sales decreased 41% in the second quarter 2009 as compared to the same period in 2008. Approximately, 2/3 of this decrease was a result of lower sales volumes caused by the global economic slow down 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 unfavorable currency variance from translating sales denominated in foreign currency into US dollars. Second quarter EBIT for the business was negative $19 million compared to positive $71 million for the same period in 2008. Substantially all of this decrease was the result of lower sales volumes including the impact of underutilization of our product capacity. This impact more than offset the operating costs we taken out of the business through cost reduction programs as well as synergies we achieved through the integration of 2007 acquisition.

In our first quarter call, we noted that we began to see a favorable trend in Reinforcements demand after experiencing volumes down by as much as 45% in December 2008. This favorable trend in demand for Reinforcements has continued throughout the second quarter. We expect a gradual increase in demand to persist throughout 2009, but industry demand could be down by as much as 20% in 2009, compared to 2008. We have curtailed about 50% of our global reinforcements production capacity and as a result we had a significant decrease in inventory during the second quarter 2009. Also during the the first quarter call, we said we would return our business to cash generation in the second quarter, which we achieved. By year end, we expect to have reached our inventory goals in this business, which will allow us to begin to bring operations back on-line for 2010.

Next, we have a few additional items to cover before turning to our Q&A.

Now to slide 12. We have further strengthened our balance sheet. In the second quarter we took advantage of improving credit markets to issue $350 million of 9% senior notes maturing in 2019, and used the proceeds to reduce amounts outstanding under our senior revolving credit facility. This issuance significantly improved liquidity and the debt maturity profile of the Company. In addition, as part of this bond offering our credit ratings were reaffirmed with both S&P and Moody's. We have no material debt maturities coming due until the fourth quarter of 2011. We have $889 million available in our senior revolving credit facility as of the end of the quarter. In addition, we have $110 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 and capital investment plans.

Now on slide 13. We have continued to focus on actions to maximize free cash flow in 2009 and in the second quarter we generated $149 million of free cash flow. We will reduce costs by $160 million in our business during the year and expect to reduce capital expenditures by $140 million from 2008 levels. We expect that cash taxes in 2009 will be less than 2008 when overall cash taxes paid were $33 million. These measures, along with the Company's extremely robust performance for the quarter have improved our confidence in the outlook for free cash flow, we believe that we will achieve free cash flow of at least $200 million in 2009, which will reduce our net debt at the end of the year to less than 1.8 billion.

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

Thank you Duncan. Thank you, Mike. Lacy we are now ready to begin the Q&A session.

(Operator Instructions). Our first question will come from the line of Dennis McGill with Zelman and Associates.

Good morning.

Good morning, Dennis.

Quickly on the last slide, cost reduction 160 million for the year, can you break that down roughly segment how you think that will flow through the three major segments.

This is Mike. We broke it down a bit in terms of what we think will be in the operating expense side versus the manufacturing side. Up to now we have not given guidance on how it is spread across the individual segments. I think suffice to say that on the operating expense side of the business we have been focused on really getting the operating expenses driven down across the entire business both the Building material side, the Composite side as well as Corporate. You see that coming through the numbers.

On the Manufacturing side we have continued to be aggressive in Insulation, we have been aggressive for three years running so the rate of change of cost in the Insulation business slowed down a bit in terms of amount of costs we can take out. We have been much more aggressive on the Composite side which is where we saw the biggest reversal in the last six months and I think there is an outside contribution in terms of cost reduction coming from Composites. Then on the Roofing side, volumes have been weak, there has been some curtailment activity and cost reductions on Roofing. I wouldn't think that you would see a huge contribution to the overall cost reduction program coming from Roofing manufacturing costs.

Okay. On the Roofing segment as you mentioned, volumes I would imagine down more in Q2 than Q1 pricing stable recently. Can you help us bridge the jump in sequential profitability from Q1 to Q2, between raw material costs and cost actions and anything else that might be going in to that?

Sure. I think your assessment which is that we probably saw volumes a little weaker in Q2, '09, is a true statement versus Q2, '08. If you look back to the second quarter last year, volumes were a little stronger because we had storm activity particularly in the southeast last year that was starting to come through our books. If you look at the second quarter '09 versus the first quarter '09, volumes did build in the second quarter. Volumes were relatively good sequentially in the first quarter due to the Hurricane Ike at the end of last year and activity we had at year end. We did build in to second quarter related to seasonality and then also a little bit of storm activity near the end of the quarter, in the Denver area which I talked about in my comments. Volume growth that certainly contributed sequentially to the improvement from the first quarter to the second quarter. We did start to see asphalt costs going up in the second quarter, that didn't really come through our books in the second quarter, we are starting to see that more in the cost structure late second then we will see that coming into the third quarter. So we had some benefit from continued price stability and a tame asphalt environment combined with volume build from the first quarter to the second.

Our next question will come from the line of Ken Zener with Macquarie Capital.

Good morning. In Composites if you can talk about impact there has been from price changes or tax rebates coming out of China over the last three months?

Let me talk quickly about what we seeing in terms of pricing, then I will throw to it Duncan if you have anything on tax rebates. I wouldn't have anything in that area. I'll look over to him to see if there is anything we would comment there. On the pricing side, on Composites, prices have been relatively stable. Despite a very aggressively slow down on the marketplace, in the last up cycle, prices never really got elevated. A lot of our improvement in Composites performance for the 2004, 5, 6 7, 8 time frame was related to operating leverage we were getting in our business, productivity, cost reductions associated with synergies. It was not a price led improvement into the performance of the business. We would say versus historical standards even last year when the results in Composites were strong prices were pretty low versus historical standards or previous cycles. It's given us some confidence into the downturn that it wasn't going to be big price event, it was a volume event. That's what we are seeing coming through our numbers. Duncan I don't know if you can comment on the tax side.

Question relates to the Chinese tax rebate side. I think historically from a context of the question, historically, Chinese competition received rebates in past years. They lost some of those rebates during last year we seen no change in that tax situation over second or first quarter.

Okay. Also in Composites can you talk about the spread of regional profitability. Europe is a big piece but relative to the margins we are seeing on the in the segment basis, is that fairly even across Europe, Asia, the US or how does the profit or the product mix that you guys sell impact profitability? Thank you

Thanks, Ken. I think we talked in the past about we have a very strong global footprint and a strong global market share position. In that capacity as the undisputed global leader in this industry, we have historically had stronger positions in North America and western Europe, with the position we established with a combination of our business with Vetrotex. Today, I think the North American or the Americas and western Europe are probably a bit weaker than other parts of the world so our operating leverage there has been actually more negative because of our strong position there. We are continuing to see probably a better position and a stable position in Brazil, in India, and China. We have very very good positions in Brazil and India. Doing quite well there. In China the market position is pretty good.

Our position in the market is that we are not as strong a player in the Chinese market as we are in other parts of the world. That's what we talked about wanting to improve our investment in China, that is driven by trying to improve our manufacturing cost position and putting ourselves positioned to be able to service our local customers cost affectively, so I think once we get investment in place in China that will give us better positive operating leverage in the business than we have today, but right now we don't have a lot of leverage in China which is probable the one bright spot in Composites.

Our next question will come from the line of Michael Rehaut with JPMorgan. Please proceed.

This is Ray Huang for Mike. First question on the Roofing, the margins obviously very strong. Press release you talked about how the price increases accounted for substantially the EBIT improvement in the quarter. Given the price increases, anniversary here in the back half, what does that imply for margins in the second half of the year, 20% range or do you think it's going to come down more. Secondly, in terms of normalized margin for the segment, historically you talked about 8 to 9% range. Given all the productivity achievements over the last year, where do you see that normalized margin over the next couple years.

Thanks for the question. Your observation that the business performed at high levels also in the second half of last year and that in effect we are getting in to tougher comps in to this year is correct. Obviously what we are comparing is exceptional performance to what began to be exceptional performance last year, we anticipate that our Roofing business will carry strong amounts from the second quarter into the third quarter and run to the finish line and have an outstanding and exceptional year.

If you go back to the investor presentation which we had shared with investors and talked about in this call, in the past we did make a call back in the '07 time frame when the business was operating at low single-digit margins that we thought we could improve the business to around 10% operating margins, we thought it would be a good goal to get to double-digit operating margins. At the time we did that, that was internal analysis based on things we knew we were going to do to rationalize our asset base, to change our production footprint, to improve cost and head count and our position in the marketplace and market mix. Those actions that we envisioned at that time, the source of the improvement, are largely in place and executed and are certainly contributing to the performance that we see in the numbers in the second quarter.

The great unknown of course in that time in 2007, was what would be the impact of a big change in the industry dynamic, associated with GAF's acquisition of Elk. We had always felt that the overall level of profitability of our business was below potential and that there was an opportunity for these businesses and in particular our business to perform at a much higher level. What we have seen as the Roofing industry has moved into what is really a good industry structure, is that the business has been able to perform well above the goals that we set.

As we sit here now, we don't see what would cause Roofing margins to kind of trace back to kind of that high single-digit or double-digit rate. Although we could be wrong about that obviously but we don't see dynamic or pressure that causes us to worry about rapidly falling operating margins or operating margins turning back to what we have seen at historical levels. At the same time, operating margins in the second quarter here of 34%, relative to history are obviously outsized and we don't necessarily want to go on the hook to say we know how to keep the levels of operating margins to sustain. If we could keep margins through the year somewhere near that four quarters of 21%, we seen over the last four quarters, that's a good benchmark for us in the near-term in terms of looking at how the business operated over a very good year which is the third and fourth quarter last year, the first and second quarter of this year. That's somewhere kind of in the split the difference between the , current operating margins and four quarter actual is somewhere in that middle and I think we would look at that kind of operating margin and say that's a good near-term

That's helpful. Given Insulation and capacity down 50% right now, what level of housing starts do you think you need in order to kind of turn back to profitability or like a break-even level?

We did comment in particular in today's call about the residential construction market as compared to some of the other markets we report out through Insulation, which is our commercial industrial markets, as well as we report out of Latin America and the Americas business through there and China business in Building Materials in Asia. We are really seeing pronounced weakness specifically in residential and it's been in the US residential market and in Canada. The challenge in our Insulation segment while broad spread in terms of market demand, the profitability challenge really is much more focused on the residential business than any other place. So you are correct in asking about how will housing starts, come back and pick up and under pin the performance of the Insulation business. The last time we were profitable in the business for full year was 2008, 2008 overall single and multifamily starts this the US were around 900,000. Starts in Canada, I don't have that number in from of me, around couple of hundred thousand in Canada. Canada probably a fair amount weaker than that, if you back to the environment of 900,000, Canada around 200,000, we demonstrated profitability of that level in the past. I think that would probably be the best indicator of what we have of when we get back to profitability in the future.

Thanks, guys.

Next question come from the line of John Baugh with Stifel Nicolaus.

Good morning. Just drilling down on the Roofing again. What is the current input raw material picture if you can relate that sequentially the first quarter year-over-year, then relate that if we assume pricing is going to stay stable, relate that to your expectation for the remainder of the year and how that affects the EBIT margin.

It's hard to imagine it's only a year ago that oil prices were peaking $140 a barrel. We were in the environment that we were in last summer, that was really the period of time where I think as a Roofing manufacturer, we felt we were really staring down the barrel of a very very difficult market dynamic for us, which was prices had not been strong in the industry through 2007 and the early part of 2008, we were facing dramatic run ups in our raw material costs with asphalt being a key derivative of crude oil. There was a fair amount of pricing activity through the second and third quarter of last year to recover the run up in asphalt costs, the real run up lags for us. Because you have to look at when oil goes up and when the asphalt comes out of the refinery and we bring it to our operations and then to the shingles and we sell them in to market. We saw very elevated levels of asphalt costs through the end of last year. We started to get a bit of relief in the earlier part of this year, partly related to oil prices falling in the latter half of last year, as well as seasonality typically our asphalt is a little bit less expensive in the winter than the summer.

Then I think predictably we began to see asphalt costs begin to creep up through the second quarter and that will start coming through the results here late in the second quarter what we produced but we will start to see increased asphalt costs coming through the results in the third quarter and trail in to the fourth quarter depending on how long the winter summer driving season and paving season and other things that drive seasonality would be. So it's a long winded way of saying that oil is not way up at the elevated levels we saw last summer, one of the reasons we have seen margins widen out based on pricing environment. But that we are seeing asphalt coming through the business at higher levels than earlier part of this year, we are trying to deal with that in a responsible way.

Mike to follow up on that you said your goal was 10% couple of years ago you done that internally, now we are at 34% so we got a 24% improvement. How much of that if you had to guess, is the structural improvement versus coming back in the balance with pricing and asphalt. In other words, is this 20 to 25% EBIT margin an appropriate target assuming asphalt and pricing are more or less normalized whatever that is?

I mean given how much operating margins have really moved in the last, call it 16 quarters, if you -- both on the down side and the upside. We were performing at relative, near that high single-digit level in 2005. Then we saw some degradation of results in six and a collapse of results in seven, which is when we set the internal goal of getting back to the double-digit operating margins, now we have seen them be volatile on the upside. It's pretty hard for us today to set a long-term operating margin goal for business. We know how we created the line of sites to the double-digit operating margin goal and feel that's all kinds of good to go on executed things that our team has gone and gotten done. We also know that the dynamic that's been helping us get to the operating margin over the last four quarters of 21% is a real change in the structure of the industry, its really for a player market in a lot of ways as structure is attractive if not more attractive than what we seen historically in Insulation.

Historically in Insulation we seen operating margins through time at the 15 to 20% level. We are not shocked by these levels of operating margins, we would be cautious it's hard for us to forecast long-term where our operating margins are going to go because they have been so volatility, but in the near-term we see that the momentum can continue I guess whey would say for the foreseeable future. We don't see the dynamic that should cause operating margins to get a lot more difficult materializing the market right now. So we feel good about the business at least through the run out at the end of the year.

Thanks for that color.

Our next question will come from the line of Keith Hughes with SunTrust. Please proceed.

Two questions. Both on Roofing, of course. I seen in past years you have had a advantage with the asphalt piece of the Roofing business getting some extra margin due to your market share in terms of processing that asphalt, number one, was that play in the quarter and number two, what kind of magnitude were volumes down in Roofing in the second quarter?

Let me talk about asphalt and Duncan will talk about volumes for Roofing for the quarter. On the asphalt side, we've always seen our ability to process asphalt as much more of an asset utilization and asset turn in play than really being an important and material contributor to the overall results of the business. We operate asphalt facilities at almost all our Roofing plants. As you crank up the through put of those, you get leverage and productivity. Through time what we have seen is the industry has begun to kind of consolidate or reduce the number of asphalt facilities that are out there, and as a result you can put yourself in a position to process asphalt not just for your own facility but for some of our competitors Roofing plants. It's a pretty transparent price market so if you don't stay price competitive there, our customers on the asphalt side have options and can move the business, that's not a place where typically we look to be driving a lot of margin or widening of margins it's more important that we get productivity out of our asphalt and utilize our assets to get productivity for us and external customers. On the volume side, I will let Duncan give color on where we see Roofing volumes in year to date and in the second half.

We saw improvement in shingle volumes in the second quarter versus the first quarter, for example if you look back at the first quarter on a relative basis that was a reasonably strong quarter we have seen some carry on volume from late last year particularly related to Hurricane Ike which caused a lot of damage in the Texas area and actually up through the Midwest so it was a improvement in volume in the second quarter. On a more historical perspective the kind of volumes that we are seeing in shingles this year versus historical levels is quite weak. We actually disclosed on previous investor presentations and long-term trend data on shingles you see substantial declines since the peak of the housing cycle in terms of demand reductions from 2005 to 2006 through 2007 to 2008. And despite the fact we saw strength in some storm related volume, in the latter part of last year, this year we foresee to be a relative weak demand for shingles as a whole.

While we did see improvement in the second quarter, seasonally we expect to see the third quarter to be one of the more activity quarters during a typical year, depending on where storm demand comes out both hailstorm-related and hurricane-related that could be higher or lower. Typically we would expect the fourth quarter to be a relatively weak volume in terms of overall shingle demand, again, with uncertainty driven by what kind of late storm activity, particularly hurricanes we might see. That would kind of give you flavor of how the year is shaping from a shingle demand point of view.

(inaudible) You talked about cost saving initiatives, things like that, if you had to point to one thing internally you done in Roofing that helped show the good results in the second quarter what would that be?

This is Mike. It's important we talk for a second about the dynamic of the Roofing business as compared to say Composites or Insulation. In our Roofing business we really do process some very expensive raw materials and the primary driver of our cost position is our raw material position not capacity utilization or asset utilization as it would be in Composites or Insulation, so when we look at Composites or Insulation the decision to turn off melters and curtail capacity comes with significant consequence to P&L and balance sheet on how we manage those decisions. With Roofing the decision to synchronize production to demand is a straight forward decision. We have the ability to run our lines, to turn them off for shift activities, to turn them off for a week at a time or a day at a time unlike hot assets like glass assets. Internally, when we look at managing volumes, managing margin rates, managing pricing, and capacity, and inventory levels it's a different equation for us than it would be on the Composite or Insulation side. We came into the year with fairly modest expectations of overall market demand.

We calibrated that, therefore, based on our position in the market to what our expectations would be in terms of what we need to produce in order to meet market demand and we are producing against that plan and to date, that has not had a significant absorption consequence to us on the cost side and by keeping inventory in balance and supporting the value of our inventory and our customers inventory through a stable pricing environment we have been able to widen out margins and improve the margins of the business.

Next question is from Garik Shmois with Longbow Research.

First question, on Composite, can you talk about what you are seeing in your backlog. Last year, you said some products demand was down 30 to 60% or so. Can you talk about how that looked as you moved through the second quarter maybe where you stand right now?

Sure. It's a pretty short cycle business. It's kind of a tough business to manage off of the backlog. We tend to manage it off of trend which is why the massive reversal in trend in the fourth quarter of last year was so difficult for us to deal with because the business had been trending very, very stable and all the sudden backed up on itself really from early late August, early September maybe in Europe to early November backed up around the world. We saw in two steps but it was a slow, slow kind of decline in Europe that really accelerated and then a rapid and sudden decline in the rest of the world that didn't start until the last couple months of the fourth quarter. We have been looking at trend obviously carefully because that's a key performance indicator for us, in Duncan's comments and mine we have seen demand improving sequentially, we did say that the market was down 45% in the fourth quarter last year versus where trend had been and forecasting for the full year this year the overall market would be down 20% versus prior year. We will get in to a positive comp in the fourth quarter but to be down 20% for the year we need to trend up each month and each quarter to carry our way back to something that gets more representative of what we think our use demand is, but still well through the first nine months of 2008. We will exit the year with far more momentum than we entered the year. We expect the fourth quarter volumes will show strengthening on trend line from the third, which has shown strengthening from second, which shown strengthening from first, but still expect to exit this year well below the trend established in the first three quarters of 2008.

Just quick follow-up question on your free cash flow guidance want to clarify was it really just the impact of Roofing outperforming in the second quarter leading you to update your free cash flow guidance or you seeing something in the second half of the year that is giving you more confidence about performance?

This is Duncan. I will respond to that. I think in terms of overall free cash flow if you recall we guided in the last quarter that we saw 150 was achievable, this time indicating we see $200 million as achievable. There are two or three factors that really go into that. One is obviously both our confidence in the level of Roofing performance we are seeing, also be positive for us. In terms of how we see the quarter and remainder of the year, but also as you look at our businesses and Composite business we taken substantial action to make sure we are producing below the level of sales to make sure inventories are coming down. Particularly in Composites we have seen considerable success in doing that in the second quarter, which returnd that business to overall cash flow positive during the quarter. We would foresee that continuing through the the third quarter and into the fourth quarter so we generate really substantial amounts of cash flow. We also see from a typically, from a cash flow cycle point of view, third and fourth quarter being more positive than the first two. All those items together really indicate to us that our free cash flow for the year is what we have seen increasing and one in which our confidence increased. Both items are positive drivers for us.

Would you say they are fairly equally weighted as far as the $50 million increase?

I'm not sure we have done a sort of analysis at that level of sort of precision, I would say both are significant contributors to the free cash flow for the year as we look out for the next two quarters we see the second two quarters should generate $377 million of free cash flow. Both the Roofing business and the reduction in inventory across our businesses will both be very large contributors to the free cash flow for the remainder of the year.

Next question will come from the line of Jim Barrett with CL King and Associates. Please proceed.

Good morning everyone. Duncan, to follow up on the prior question, given the fact your cash flow, your expectations are increasing this year, what was the reasoning or how important was it to raise the $350 million in senior notes in June and does that suggest anything about your view for your markets in 2010, 2011 for cash flow generation in that period?

Thank you for that question. I think as we look to term our refinancing position for our $1 billion senior revolving credit facility and also our term note which is due in the fourth quarter 2011, and we looked at our our forecast for business but more particularly what is going on in the credit markets we saw substantial improvements in credit markets in the US during the early part of the second quarter and later part of the second quarter. Due to the general uncertainty in the outlook in credit markets over the future, we thought it was both prudent in terms of our refinancing but also good opportunity for us in terms of where the pricing on our own ability to issue new debt had got to, that's a prudent thing for us to do, to issue some bonds in terms of extending out maturity profile out to 2019, and also in terms of bringing cash in to the company enabled us to pay down the revolving credit facility. It was much less driven by our point of view on internal cash flow. It's gotten more confident and a stronger outlook but much more driven by uncertainty and overall credit markets and making sure we were being responsive to the markets and take advantage of the improvements we have seen.

That's helpful. Mike, given what appears to be at least some up tick in asphalt cost at the end of second quarter, would you envision -- can that industry the Roofing shingle industry sustain further price increases, do you have further pricing flexibility if that asphalt goes up moderately from here?

Jim really good question. I think foremost in our thought process now as we think about pricing and Roofing is obviously, our business is operating at high levels we are pleased with the performance of our business. We want to make sure that we are doing things that are supporting the marketplace and supporting our customers. I don't know that we would say a tremendous priority for us right now is that we need to get prices up necessarily because we are seeing a lot of inflation but it is a priority for us that we continue to defend the value of our inventories and the value of our customers inventories because this is an inventory intensive business. And our distributors really -- our distribution and our distribution channels it's very very important to them that we don't put them in a position of deflationary marketplace where the inventories that they own are getting devalued every day in the market. When we talk to customers and think about the marketplace the pricing discipline we are trying to exhibit is give our customers stability through the year and some stability in the value of their inventories so that everybody has the opportunity to make a reasonable margin on their inventory.

That's helpful, thank you very much.

Thanks.

Next question will come from the line of Mary Gilbert with Imperial Capital.

Went we are look at Composites by the end of the fourth quarter what would be the run rate growth we would be seeing, for example for the year we will be down 20% year-over-year but what will be the actual run rate in the fourth quarter, do you think? Kind of what you are seeing.

Thanks Mary, we obviously don't want to give volume forecasts on a quarter by quarter basis but I can kind of walk you through the dynamic of the market and help you think about that, if you assume the prior trends was call it 100, then in the fourth quarter of last year we saw drop by around 45% we were more like 55 or 60. Capping for the full year this year we think the market in total will be down 80%. Then we would be 20% off of that four quarter sum which I guess I'm doing the math in my mind if you assume on index basis last year was 355 and we are saying we will be 20% off of that, then that same index of 100 plus 100 plus 100 plus 55, is going to produce a result this year that's 20% less. It's going to materialize differently obviously in the first quarter coming off of the 55 in the fourth, second quarter better, third quarter better and then into the fourth, I think probably a smooth growth rate that kind of gets those numbers to add up is probably as good a guess as we have.

Okay. All right.

I hope that made some sense.

I will follow up later. Then just going back to the Roofing I wanted to confirm on the profit margin there is. It sounds to me like the 10% reflects the initiatives that you conducted and that the additional I don't know if I got this right but the additional 24% reflects the tolerance for pricing in the market because of the fact that it's a concentrated market in terms of the players that are in it. Is that fair to say?

I think that's fair to say. I guess in this call I want to make sure we don't hinge too much off of the second quarter margins specifically because it is also a seasonal business. There is more Roofing activity in the summer than the winter. Parts of the country where it snows in the winter you can't get on roofs, there is reasons, weather related and seasonal related reasons, why our second and third quarter volumes in Roofing are typically quite a bit better than our fourth and first quarter volumes. When you get in to a good dynamic at the operating margin level we would expect to see operating margins be appreciably stronger in the second and third quarter than they in the fourth and first based on volume, I hope no one on the call is trying to extrapolate off of the second quarter operating margin to get an outlook, we talked on the call by about the four quarter rolling, LTM operating margins of 21%. The last four quarters have been good periods for Roofing that's a strong benchmark to take the four quarters look at the operating margins and challenge ourselves to try to sustain at that level.

I would say most of the difference between the double-digit operating margin call we made a couple of years ago, we thought it was a bold call we were operating 4%, the business was kind of really struggling along, we can get it to ten, I think we had good solid well thought out execution plans in the business to go get that done that we gotten done. Most of upside that you would see from there to the dynamic we are seeing today, at a LTM operating margins at 21% driven by better industry dynamic and more discipline on managing a weak volume too strong operating margin which we think is the appropriate way to manage the business in this environment.

Thank you.

Lacy, I think we have time for one more brief question. And I offer an apology to those who haven't had a chance to ask their question but certainly give us a call this afternoon offline. One more question then we will go to a wrap.

Final question will come from Jason [Hope] with [Voyant] Advisors.

Thanks for taking my question. I was wondering if I could get clarification on what caused the decline in expectations for depreciation and amortization. I think that would be stable, no major acquisitions of any kind from a quarter ago when you said it was going to be higher.

This is Duncan, we said on the last call we thought it would be $340 million for the year. This call $320 million for the year. What is diving the actions we have been taking in terms of curtailing production capacity, and also reducing capital expenditures and delaying and deferring in some cases cancelling projects as we looked forward and looked at the depreciation against active asset and new capital coming in to the business then we took further actions during the quarter and proceed further actions through the actions and the schedule that are active during the year, the depreciation associated with the plants are seeing less than we foreseen at the end of the first quarter. So it is being driven by the actions we are taking on a capital side and on the active capacity side, particularly in the Composites business.

I saw a new disclosure in your new 10-Q on the mark-to-market of some of your debt positions. Was there any gain recognize mark-to-market your debt in the quarter?

We are not marking-to-market our debt. There are no gains associated with marking to market our debt. If you have a follow-up question on that, you could let us know that would be great. There is no mark-to-market our debt or gains there of and going through EBIT in the quarter.

I will call you later, thanks.

Okay.

Ladies and gentlemen, this concludes the question and answer period for today. I would like to turn the call back over to Mr. Scott Deitz for closing remarks.

Thank you, Lacy. I'll turn it over to Mike for closing.

I would like to thank everyone for your interest in our company. It's always exciting for our team and I think energizing for our people to know that we have got an investor group out there that is as interested and engaged in the performance of our company as the folks who joined us for this call. I appreciate your ongoing interest. I think if I was going to write a headline for the quarter, its easy to want to write a headline that says our Roofing business had a terrific quarter but, in fact, I think the right headline for the quarter is that Owens Corning had an outstanding quarter. On this call you heard us talk about cash flow in a fair amount of detail, you heard us give guidance for the remainder of the year, with cash flow on a fair amount of detail. The reason being because that's where we have the entire company now focused on in terms of execution, we know we have to get our cost structure right. We have to get our balance sheet right.

We need to make sure we get our businesses positioned to have positive operating leverage when our markets recover as we assured we know that they will. I think the team is doing a wonderful job of doing that, the fact we have been able to advance our agenda in Roofing at warp speed and get the business to the kind of operating performance that we now see has been additive to our story and financial performance and put us in a position that we can have businesses like Composites and Insulation to go that much faster in making sure they make the right cash decisions that will benefit our shareholders for the long-term. Even if in the near-term in those businesses is it having consequence to profitability and ability to produce positive earnings results. We do know that the long-term the steps we taking are going to position those businesses to have the cost structure and capacity position to give them the positive operating leverage when the markets pick back up. We talk about on every call, we are proud of our safety performance.

That continues to be a very important objective for our company, we continue to ask investors to look at that as a important measure of this management team's ability to execute and take care of our people and keep our people engaged in the business of Owens Corning. We have a strong agenda for the remainder of the year, you will see us working through the finish line. Making sure we get done everything we can get done in '09 related to our inventory position, our capital spending positions, and our cost positions to get all of our portfolio in a strengthened position and ready to perform as our markets pick up. Thank you for your interest and we look forward to talking to you again at the end of our third quarter. Have a great

Lacy, thanks to everyone for joining us that wraps up the call.

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