Owens Corning (OC) 2009 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2009 Owens Corning earnings conference call. My name is Michael, and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Scott Deitz, Vice President, Investor Relations. You may proceed.

Good morning and thank you, Michael. Good morning everyone. Thank you for taking the time to join us for today's conference call in review of our business results for the third 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.

Earlier this morning we issued a news release and filed a 10-Q that detailed our results for the third quarter. For the purposes of our discussion we've prepared presentation slides that summarize our performance and our results for the third quarter of this year. We will refer to the slides during this call. You can access the slides at owenscorning.com; you will find a link on our home page and a link on the Investor Section of our website. This call and the 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 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 explanations 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 slide presentation today, we will begin on slide four. Slide four. Now opening remarks from our Chairman and CEO, Mike Thaman, followed by CFO, Duncan Palmer, and then our q-and-a session. Mike?

Thanks, Scott. Good morning everyone. Thank you for joining us today to discuss results for the third quarter of 2009.

I'm pleased to report that Owens Corning again demonstrated strong progress. We delivered adjusted earnings growth driven by another great quarter in Roofing and the return to profitability of our Composite segment. Through the first nine months of 2009, Owens Corning generated $275 million of adjusted EBIT, an improvement versus 2008, in a more difficult market. The diversity of our business portfolio served us well. Strong results in Roofing more than offset weak results in our other businesses.

We continue our focus on generating cash and maintaining a strong balance sheet. During the third quarter of this year, we generated $332 million in free cash flow, compared with $8 million during the same quarter last year. At our investor day on October 1st, we upgraded our free cash flow guidance to $250 million for the year. We now believe that free cash flow for full year 2009 could be as much as $300 million, based on our strong third quarter performance.

In review of the third quarter net sales totaled $1.3 billion, compared with $1.6 billion in the third quarter of 2008. Revenue was once again impacted by the prolonged weakness the US housing starts, and the year-over-year weakness in the global economy. We delivered third quarter 2009 adjusted earnings per share of $0.61, compared with $0.57 in the third quarter of 2008.

In prior quarterly calls, I've measured our performance against our objectives for the year. I will do the same today.

We said that we could continue our progress in creating an injury free workplace. Our commitment to safety remains unconditional. During the first nine months of this year, safety performance improved 8%, compared with our performance in 2008.

We said that strong Roofing momentum would carry into 2009 and it has. The Roofing business generated EBIT margins that have averaged 26% for the last four quarters.

We said weakness in our Composite segment would persist through the first half of 2009, and that this segment would return to profitability some time during the third quarter. I'm pleased to report that Composites not only returned to profitability during the third quarter, it achieved profitability for the full quarter. More on that in a moment.

We said this that the Insulation business would face a difficult market in 2009, it has, and it will likely carry into 2010. Although EBIT has improved sequentially each quarter during 2009, this business continues to operate at a loss, hindered by US housing starts that have shown only modest improvement. Starts remain historically very weak.

We said that we would reduce expenses by $160 million, and capital spending by $140 million versus 2008. We are on track on both goals.

We said that we would be profitable in our Composite and Building Material segments in 2009. In the last call I shared the Composites was unlikely to achieve this goal. Despite a profitable third quarter and a recovery plan that's on track, we continue to believe that Composites will not be profitable for 2009. In summary, I'm pleased to report that Owens Corning's portfolio of businesses continued to exceed expectations in 2009.

Now a review of each of our businesses. Our Roofing business had another excellent quarter. EBIT up $82 million compared with the third quarter of 2008. Higher selling prices, lower material costs, and the sustainable actions that we've taken to improve our costs and our product mix drove the improvement.

The Roofing business delivered a record quarter. We achieved this, despite the fact that third quarter 2009 Roofing sales were actually down $55 million compared with the same period in 2008, because of lower volumes associated with less storm activity and weaker new residential construction. Looking ahead, Roofing strategic priorities are clearly defined, innovate to fuel our customers' success, maintain effective margin discipline, be relentless about cost reductions, and capitalize on market growth, which we do expect in 2010.

Now, our Insulation business. Our experience is that our residential insulation demand lags residential housing starts by about three months, therefore, we typically see second quarter housing starts lead to residential insulation orders in our third quarter. Second quarter 2009 housing starts were 46% lower than those in the second quarter of 2008, according to the US Census Bureau. Third quarter 2009 sales of insulation were down 17% compared with last year.

While residential new construction is important to this business, it is clear from our revenue performance that our geographic diversity and multiple end markets are dampening the impact of new construction on insulation. The Insulation business includes operations in the US, Canada, Asia Pacific, and Latin America, and a market mix of residential, commercial, and industrial, and other markets. That said, weakness in many of these sectors has also become more pronounced during the past two quarters.

Capacity is and will continue to be curtailed in this business. During the third quarter of this year, we continue to operate our Glass Fiber Insulation business at only 50% of capacity. Going forward, our strategic priorities in the Insulation business include aggressively managing cost and capacity, positioning the business for recovery, creating value by leveraging energy trends, and delivering innovation through building science.

Now, on to our improving Composite segment. Composites returned to profitability during the third quarter, following two consecutive quarterly losses, resulting from the global demand collapse at the end of last year. In response to these very difficult market conditions, we took immediate recovery actions to reduce inventories and operating costs, while sharpening our focus on cash generation.

In the first quarter, we brought Composites production to levels well below demand and began to reduce inventories. In the second quarter, aggressive management of cost, working capital, and capital expenditures led to positive cash flow. For the third quarter, improving global demand and continued operational discipline returned the business to modest profitability. Importantly, we remain on track to restore our inventory balances to target levels by year end. This will allow us to restore production to meet market demand levels in 2010.

I'm pleased with our achievements in Composites. In 2009, we will have improved the balance sheet, lowered our break even point, restructured our Asian operations, and defended our market position. Our 2010 priorities for Composites support further improvement in financial performance.

We will remain focused on cost and efficiency, execute on our announced China expansions, capitalize on a differentiated product range, and leverage our downstream businesses. Our Composites recovery plan is on track. Returning this business to double digit EBIT margins remains our target.

In summary, we are pleased with our third quarter results, and our performance through the first nine months of the year. Owens Corning is performing in a difficult environment, and is well positioned to benefit from the global economic recovery. We remain focused on safety, winning with customers, generating cash, and positioning the Company for continued success in 2010.

Now, to provide a more detailed look at our quarterly performance and our financial position, here is CFO Duncan Palmer. Duncan?

Thanks Mike. Let's start on slide five and our key financial figures for the third 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 third quarter 2009 consolidated net sales of $1.3 billion, a 17% decrease compared to 2008. Despite the decrease in net sales, we experienced increased year-over-year earnings in the quarter, led by the excellent results in our Roofing business.

In addition to our earnings performance, we also dramatically improved our free cash flow generation. We delivered $332 million of free cash flow during the third quarter 2009, as compared to $8 million for same period in 2008. In a moment, I will review our reconciliation of items to get to adjusted EBIT.

As a reminder, when we look at period over period comparability, our primary measure is adjusted earnings before interest and tax, adjust EBIT. These items total $15 million in the third quarter of 2009, compared to $13 million during the same period in 2008. For the first three quarters items totaled $85 million in 2009, compared to $61 million in 2008. Given the market environment we are extremely proud that we have grown our third quarter adjusted EBIT from $126 million in 2008, to $135 million in 2009.

Adjusted earnings for this third quarter 2009 were $78 million, or $0.61 per diluted share, as compared to third quarter 2008 adjusted earnings of $73 million or $0.57 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 US housing market.

Marketing and administrative expenses decreased by $16 million in the third quarter, and by $71 million in the first nine months compared to 2008. Depreciation and amortization totaled $18 million in the third quarter. We estimate our depreciation and amortization will be approximately $320 million in 2009.

Our capital expenditure, excluding purchases of precious metal, through the first three quarters of 2009, totaled $147 million compared with $227 million in 2008. We are on track to meet our capital spending target of $225 million for the full year 2009, compared with $366 million in 2008. In addition, we have continued to take actions to decrease working capital during the third quarter, with the most significant results coming from inventory reductions in both Composites and Roofing. These actions have contributed $203 million to our cash generation for the third quarter 2009, a significant improvement over the $7 million of cash used relating to working capital in the third quarter of 2008.

Moving to slide six, you can see the reconciliation of our third quarter adjusted EBIT of $135 million to reported EBIT of $120 million. Integration of the Composites acquisition continues to deliver synergies well ahead of our original plans. In 2009 we are on track to achieve our synergy goal of $100 million in annual savings. While this is two years ahead of our original schedule, we will continue to pursue additional synergy opportunities. We incurred $7 million of integration costs in the third quarter associated with achieving these on going savings.

We are responding to the market environment to reset our cost structure across the Company. In 2009, we took further cost reduction actions including significant capacity curtailments, extending plants' down times, reducing head count, and delaying and cancelling capital projects. These actions will contribute more than $160 million in 2009, of which we expect at least half will be permanent reductions, where the cost will not return when we restart idol production capacity. We incurred charges of $4 million in the third quarter related to achieving these savings.

Next, as you see in prior quarters, we adjusted for the non-cash amortization of costs associated with the Employee Emergence Equity Program, a total of $5 million. These shares, which have a three year vesting schedule and will be amortized in the P&L through October 2009, were awarded to employees at the time of our emergence from Chapter 11 in 2006.

Now, if you move to slide seven, you will see an illustration of adjusted EBIT performance, comparing third 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 $9 million from the third quarter 2008 to third quarter 2009.

Our Roofing business delivered outstanding results in the quarter and sustained the momentum that began in the second quarter 2008. This improvement was partially offset by the Composite segment, which faced a weaker market as a result of the global economic slow down.

With that as background, turn to slide eight, and we will begin a more detailed review of our segments starting with Building Materials. In the third quarter Building Materials had net sales of $937 million, a 14% decrease over the third quarter 2008. Despite these lower sales, Building Materials delivered a significant improvement in EBIT of $156 million compared to EBIT of $92 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 overview of our Roofing business. In third quarter, this business maintained outstanding level of profitability despite lower sales. Roofing sales for the quarter decreased 9% from the third quarter 2008, due to lower demand from storm activity and new residential construction. We continue to see strong momentum in margins, which has sustained our excellent performance from the second quarter, when the business achieved $177 million of EBIT in the third quarter 2009, a tremendous improvement of 86% over the third quarter 2008.

We have taken significant actions since 2007 to improve the profitability of the Roofing business. We have achieved improvements in our production processes, including energy efficiencies and reductions in the raw material costs of our shingle formulation. We have also reduced over all manufacturing fixed costs. In addition, we have launched new product lines, improved our product mix, and grown our accessories business.

These programs had a significant impact on this business beginning in 2008. By the end of 2009 these programs will have delivered $100 million of improvement compared to 2007. In addition, the Roofing industry is attractive. We have seen stable selling prices since the fourth quarter 2008 that have enabled this business to deliver operating margins to well above low double digits. While it is very difficult at this time to establish a long term operating margin goal for this business, we certainly feel comfortable that we have demonstrated that we can deliver double digit operating margins.

Next, on to slide ten. Our Insulation business continues to feel the impact of the weak North American housing market. Third quarter net sales in this business were down 17% when compared to third quarter 2008. This decline was primarily due to a reduction in volume, as prices have remained stable since 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; however, we have experienced weakness in many of these markets during the last two quarters.

EBIT for this business was a loss of $9 million, due to the impact of lower demand and under utilization 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 Glass Fiber Insulation capacity continues to be curtailed. Despite sequential EBIT improvement for the quarter, this business will struggle to achieve and sustain profitability until demand improves.

This is a great business in 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 return to historical levels of performance when demand improves, as we know it will.

Next, slide 11 provides an overview of our Composites segment. Composites was profitable in the third quarter. This performance keeps us on track with the 2009 objectives that we have for this business. The third quarter EBIT of $2 million compares to $54 million for the same period in 2008, and this decrease was the result of lower sales volumes, including the impact of under utilization of our production capacity and lower selling.

In the second half of 2008, under favorable market conditions, we increased selling prices in many regions and products. In the first half of 2009, price levels declined in absolute terms, particularly in Europe, although price levels were higher at the beginning of 2009 than in the first half of 2008. In the third quarter, prices continued to decline, although at a slower rate. Price levels in the third quarter 2009 were lower than the third quarter of 2008, which accounted for about half of the decline in EBIT between the two periods.

In our previous calls, we noted that in 2009 we have seen 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 third quarter. We expect the branch will increase in demand to persist throughout 2009, but industry demand could be down by 20% in 2009 compared to 2008.

In our third quarter, we continued to produce significantly less than we sold. Also, during previous calls we said we would return our business to cash generation in the second quarter and profitability in the third quarter, and we have achieved both of these objectives. We continue to be in a position to reach our year end inventory goals, which will allow us to match production to demand in 2010.

Next, we have a few additional items to cover before returning to our q-and-a. Now, to slide 12. Throughout the year, we have further strengthened our balance sheet. We have $947 million available in our senior revolving credit facility as of the end of the quarter. In addition, we have $387 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. In connection with our bond offering in the second quarter, our credit ratings were reaffirmed with both S&P and Moody's. This month, S&P improved their outlook on our investment grade rating from negative to stable.

Now on slide 13. We have continued to focus on actions to maximize free cash flow in 2009, which resulted in generating $332 million of free cash flow in the third quarter. We will reduce costs by at least $160 million in our business during the year, and we are on target 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 Company's excellent performance for the quarter, have improved our confidence in the outlook for free cash flow. We now believe that free cash flow could be as much as $300 million in 2009. And with that Scott, back to you for q-and-a.

Thank you, Mike, and thank you Duncan. Michael, we are now ready to begin the q-and-a session.

(Operator Instructions) Your first question comes from the line of Ken Zener of Macquarie. You may proceed.

Good morning.

Good morning Ken.

Insulation delivered a significant margin lift quarter to quarter, when sales rose to about $340 million versus $280 million, averaging in the first half. Is that gain that we saw in margins largely tied to better absorption?

Ken, when you look at the Insulation performance in the third quarter, I think one of the things we talked about in the prepared remarks was we have seen the business improve sequentially. I think you are seeing two things going on there. One is, we have traditionally thought about this business as being a very new residential construction business, but in fact today, new residential construction only represents about 33% or 35% I guess on slide ten, 35% of the overall business.

So while we did see seasonality that was giving us positive leverage in the business and helping third quarter results, we are also seeing that the other pieces of the business, the commercial and industrial side of the business, our extruded polystyrene foam products, Latin America, Asia Pacific, the other pieces we report up through Insulation, have started to form a bit of a bedrock of performance that underpins our residential performance. I think we saw continued stable performance out of the non new construction piece, and then we saw positive leverage for the new construction piece, which is way why you are seeing what looks like a pretty good positive operating leverage in the quarter.

Okay. And as I'm looking at Composites, given that it obviously posted positive numbers, not just during the quarter, but margins but for the whole quarter. Has the strength you've seen since your Analyst Day led you guys to change, I think the growth that you talked about at your Analyst Day for 2010 of 8% to 10% in Composites?

No, it really hasn't. At Analyst Day we did a fairly detailed analysis of the overall Reinforcements market, and I think any of the investors who are listening have haven't gone out to our investor website to see those presentations. I think they are valuable and some high quality work. We are pretty proud of that.

What we showed on that day was we expected that overall 2009 demand would be down as much as 20% versus 2008, and that's a 2008 that included a pretty weak fourth quarter. So if you take it on kind of a fourth quarter to '08, to third quarter of '09 basis, we probably see more than a 20% decline during that four quarter period. We did expect a recovery going in to 2010. We don't expect that we are going to recover all the way back to 2008 levels for a couple of years here.

So I would say we are still comfortable believing that next year is maybe high single digits, maybe in a good case, maybe all the way to double digit in terms of demand growth. But the recovery we have seen in the last three or four months has not changed our midterm outlook for how quickly the market will grow back to 2008 demand levels.

Thank you very much.

Thanks, Ken.

Your next question comes from the line of Michael Rehaut of JPMorgan. You may proceed.

Hi thanks. Good morning everyone.

Good morning, Michael.

First question, just to go back to Composites for a second, and then I have a question on Roofing. You mentioned I think in the prepared remarks or in the press release that you continued to produce at a level below demand, and so you were able still to get back to a slight profit, despite being sub-optimal production even relative to today's suppressed demands. So the question, can you give us a sense of what margins would look like if you were to increase production to a level equal to today's demand, number one.

And number two, given an outlook for some level of growth in 2010, how far along to that double digit longer term goal do you expect to get to progress along as we look through next year?

Okay, I think that as you recognized in your question and as we recognized in our prepared remarks, we were pleased to get the business back to a positive operating margin in the third quarter. I know I went a little bit weak in the knees on the second quarter call, saying I wasn't totally sure we would get to that goal. At that time I think the business was committed and believed they would get there, and in fact, we did get there. So that was pleasing to be able to report good news today on that front.

We are still producing quite a bit below demand levels, so while demand has begun to come back, versus where we were in 2008, we are still well below 2008 levels. I think the overall number of 20% for the year is probably a reasonably good approximation for where we are today in that journey of demand recovery. We are still producing, though, in capacity utilization levels that probably in the 50% to 60% levels, so we still have a lot of our equipment turned off, and a lot of our operations turned off. We turned on a bit of capacity in the third quarter; I think we will turn on some more here in the fourth quarter, getting ready for 2009, and I would expect probably by the early second quarter of 2010, we will find ourselves in a position where our production is about equaling demand.

If you think about that in margin terms, in the third quarter of last year, or really three quarters year to date, which what we show you on slide 11, we had delivered double digit operating margin on a year to date basis last year as of the end of the third quarter. So we demonstrated at 2008 demand levels the ability to get the double digit margins; we are demonstrating today's demand levels the ability to go positive. So I think when we move back to, maybe a production level that's somewhere between where we are today and where we were in 2008, and a demand level that's somewhere between where we are today and where we were in 2008, I think it's a reasonable assumption to believe we will do better than where we are currently are, which is approximately break even, but that we probably wouldn't be able to get all the way back to the double digit number until we saw some additional recovery in volumes.

Okay. I appreciate that Mike. I know, kind of giving an exact number or rough estimate even can be challenging.

The second question on Roofing and Asphalt, obviously continued great margin performance there. As I look to the fourth quarter, just from a seasonal perspective, I would expect the margins to fall off as volume falls off. But aside from that, what I'm trying to get a sense of is the raw materials on the input side of the equation, with oil going from a low of $50.00, up to $75.00, $80.00, how does that change in terms of Asphalt and some of the other input prices that may or may not affect or impact margins as we look out into 2010?

You're absolutely right in terms of what will happen with seasonal demand as we head into the fourth quarter. The Roofing market is much stronger in the second and third quarters than it tends to be in the fourth quarter and the first quarter. We also know that our customers tend to buy a bit ahead of demands, so that we start to see some volumes build in the first quarter, as people get repaired for roofing season.

But as they get repaired for winter, volumes do drop off quite a bit more aggressively in the fourth quarter, so we are not expecting, as we head into the fourth quarter, that we will see much volume strength in the business. We've positioned our operations and our inventories consistent with that view. We have, as we said in today's prepared remarks, continued to see relatively stable pricing. I think with the recent run up in oil prices, on a regional basis, that has had some impact on asphalt prices, but generally asphalt prices also fall as you go in to the winter. So we have a little bit of headwind from oil prices going up, but we do have some tailwind from that fact that we are coming out of paving season, or we're coming out of the summer, when there tends to be more demand for asphalt.

So I don't think we feel that big inflation and asphalt is a theme today for our Roofing business. I think we feel like we can manage our input costs pretty effectively, and that with reasonable stability and pricing, that the key impact on margins would be volumes, and that we would feel that impact through the first half, through the last quarter of this year, maybe through the first quarter of next year, and with good fortune, enter the second half, or the middle of next year with again, very strong operating margins. So that's really the scenario we are planning for.

So thanks for that, Mike. And just to finish up on this, and I will get back into queue, to the extent that we were to see a revenue number and a volume number in 4Q '09, more similar to the level we saw in 1Q '09, everything else equal, I assume it would be fair to also look towards a low 20% type of margin, I believe you did 21.7%, and 1Q '09, is that again, I know you don't want to get in to quarter, segment by segment, margin forecasting, but is that a reasonable approach, everything else equal?

Yes I'm going to agree with you two ways, one is I don't want to get into segment by segment margin by margin forecasting. So, I will give you thumbs up on that one. I do think that directionally, the belief that as volume slows down we would see some compression of margins, even in an environment where asphalt pricing is not all that volatile and roofing prices is relatively stable. I think you've got that directionally right. The magnitude of the margin compression we would feel from that I think is something that we are not really going to give guidance on.

Thank you.

Thanks, Mike.

Your next question comes from the line of Ivy Zelman of Zelman and Associates. You may proceed.

Thank you. Good morning. Congratulations on a strong quarter. A lot of the questions I had on raw materials have been answered I think. Maybe we can talk a little bit about the Insulation business, as you pointed out Mike, with respect to mix, you obviously are getting the benefit from some of the other market strengths in the international area.

I know, one market in particular I'm interested just understanding what might the dynamics be in Australia. I understand that market is sold out, and actually maybe I'm not correct on that, but there's been some positive benefit to your Company, as you guys are are one of the largest producers that service that market. Can you help us understand what going on there, and is that a proxy for other markets in hope?

Well, it's a great insight Ivy, and you're right about Australia. What we've seen in Australia is a very affective stimulus package that was put in place by the Australian government. Whereas, their decision in terms of how to stimulate the economy, they just pretty definitively put a stake in the ground and said one of the things we are going to do is not only make the homes in Australia more energy efficient, we're actually going to insulate the homes in Australia. They went directly to a solution. They challenged the marketplace to respond.

We have a relationship in Australia, New Zealand, with a manufacturer there who is a licensee, and so we have been working very hard to support them in order to help them meet Australian market demand. The result of that has been we have been shipping product really from all of our global Insulation operations to Australia. That helped us the quarter. We think that will help us also a bit in the fourth quarter. Obviously, we don't think it's an enduring positive impact on margins, because once the stimulus period passes in Australia and the houses get insulated, demand levels will fall back to normal.

As a bridging it has helped us keep some of our assets hot; it's probably given us more absorption than it has margin, as you can imagine, by the time you pack insulation up in a container and your ship it halfway around the world and try to do that at competitive market prices, the big opportunity for us is to keep some of our assets operating, and for us to make some manufacturing margin on the product. And that helped a bit in the third quarter; we expect that would also help a bit in the fourth quarter, but I wouldn't say materially, it's kind of bending the curve or changing the trajectory of operating margins in Insulation.

Helpful, Mike. With respect to Insulation, more broadly speaking, you've been always good at helping us understand what your inputs that you are using for forecasting, and currently what are your expectations for housing starts in repair, remodel spending if you are using a forecast to help plan your business and your strategy going forward?

And then secondly, because you do service the nonresidential market, including industrial, commercial, maybe you could help us with what you are seeing more specifically with maybe some differences within the end markets that you are serving, where there might be strength in areas that you are either surprised by the strength or weakness has been most notable, and a little bit more detail within those segments, within those sectors that you are servicing please.

Okay. Let me start with new construction. I think most of the economists and analysts who are looking at the new construction market do believe that 2010 will be a better year than 2009. I think in general that makes sense to us.

If you look at when the financial crisis hit and the kind of falloff we saw in the second half of last year, housing starts dropped nearly 100,000 units a month for about six months running, from June of last year to the end of last year. We knew coming in to this year we were in an environment where we just gone through a very rapid decline, and that continued really into the first quarter of this year, before it feels to us like starts maybe stabilized in the summer of this year, but certainly have not recovered strongly.

If you kind of do a greater than less than analysis, we have a hard time seeing how the first half of next year could be a lot worse than what we saw for the first half of this year. And so we would expect that on a lag basis, we are going to have a very weak first half but not one that's getting worse, and that potentially by the second half of next year, we would actually start to see a little bit of improvement in the market. I think most of the economists that we follow probably have housing starts in the 700,000 plus level, which would be about 100,000 better than where they are right now.

I think likely if that scenario happens it will be because we do see some pretty good pickup kind of through the summer and into the second half of next year, which is not likely to have a big impact on us in 2010, but might give us some good momentum into 2011. So in terms of how we're planning the business, obviously we are very, very focused on cost, we're very focused on cash, we have a lot of capacity available and ready to turn on, but we're not not turning it on in advance of demand, and certainly if we saw some demand improvement, we would like to see our margins start to improve at the same time. So I think, we are not going to do anything differently if it's weaker than that. It's just a question of when we start taking action to try to respond to a strong marker. We're hoping that will happen in 2010.

On the Repair and Remodel side, similar analysis. We do think that there is re-roofing demand that's being deferred into the future, because people have concerns about the value of their home and the equity in their home. They also have pretty limited access to financings and credit, which would cause you to want to patch or repair a roof as opposed to replace it.

We don't think 2010 on those dimensions could really be worse than 2009, so we are hoping that this is the high watermark in terms of tight credit. We are hoping it's the most difficult environment in terms of falling home prices, and then maybe home prices have stabilized. We are hoping that unemployment would begin to stabilize, albeit at a very high level, of maybe 10%. And that if you add up those variables as you go through next year, people would start to feel more confident of investing in a fairly sizable capital project in their home, which is to replace their roof.

We do believe that reroof demand today is below equilibrium, and that there's going to be some need for the re-roof market to recover and come back to something that would be in equilibrium. Then in addition to that, we would potentially get a bit of an up from new construction, and then it's also been a relatively weak storm market, so on a more normal storm market basis you could potentially see a little bit stronger demand there. So we do think roofing demand for next year will be flat to up as we look at all those different variables.

Mike, can I interrupt for one second? Just on your Roofing comment, I think it would be helpful for people listening on the line to help us understand a little bit about the Roofing industry. I know you've explained it before, but given that you have such weak demand, and storms have been weak, along with the repair and remodel, deferring large projects, re-roofing, et cetera, explain to us how pricing can be stable right now. And realizing you've got four players that are very well positioned with strong balance sheets, is it a structural long-term change that we would expect that Roofing, despite weak volumes, can maintain much higher margins than what we saw historically, and certainly it seems to be the case right now. But what are some of the dynamics, if you can reiterate as you've explained it before, on what you see in the cards as it relates to this Roofing spectacular performance?

Thanks Ivy. We've tried to put a fair amount of information out there for our investors to talk about some of the changes we've seen in the Roofing market. And certainly over the last couple of decades, if you go back 20 years, what you've seen is a fairly significant consolidation among all of the manufacturers.

Today there are really four big national manufacturers that have a footprint that can service the market nationally. We feel we are well positioned among those manufacturers from cost perspective, and from an asset and a footprint perspective, and also from a brand perspective. So we like our position in the market, and we really think it's a very, very good market.

Generally, roofing prices have tried to be stable, I think that's tended to be the best market environment for our customers. A Roofing distributor would typically carry a fairly large product line and a fair amount of inventory in their warehouse, and a lot of price volatility can have lot of negative financial impact to a distributor who is carrying inventory. There is a desire as we talk to our customers to see the market trade with fairly stable prices.

What we saw last year was the runup in oil prices was a real catalyst that drove us to try to recover what we were seeing in terms of significant inflation in the marketplace in the form of price increases. We were able to do that; we were able to successfully maintain our position in the market, as well as recover the inflation that we saw due to oil price runups, and we were able to sustain our margin performance through the first half of '08, and then when we saw oil come off of its peaks and we saw asphalt prices decline, we have been able to maintain stable price environment for our products, which has allowed margins to widen out.

We've been very reluctant to project into the future that we know that these golden days for Roofing will sustain for ever. But at the same time, the dynamics that got us into the position that we are in today, which is margins that have widened out, fairly stable pricing, and a good cost environment based on our manufacturing footprint and our performance, at least for now, we see good momentum in the business that would allow us to believe in the near term we will continue to sustain that good operating margin performance.

Great, thank you.

Thanks, Ivy.

(Operator Instructions) Your next question comes from the line of Keith Hughes of SunTrust. You may proceed.

Thank you. You referred to inventories earlier in the call. Drilling into that a little bit more, particularly in Roofing and Insulation, where does your inventory stand versus prior year, and how do you feel about the channel at this point? And in the Insulation market, is your inventory different when we look at the different end user markets, whether renovation, residential, construction, and commercial?

Thanks Keith. This is Duncan. When we talked about, as you can see in the third quarter, a big contributor to our free cash flow was reduction over in working capital, which was about $200 million in the quarter. A significant contributor to that was reductions in inventory. We talked about Composites, we continue to produce less than demand, and that we were able to reduce inventory significantly there.

As we look at the seasonality of our businesses, we would say that Roofing I think was a contributor to lower inventory in the third quarter. That's typical for the way we schedule our production through the year, as we compare that to how we saw last year, I think that would be fairly much in line with what we would have seen in terms of inventory levels versus last year.

Insulation, which you asked about, that's fairly balanced in terms of our overall inventory. Inventory is not something which you want to keep a whole lot of in Insulation. It tends to be a relatively short cycle, and relatively little inventory in the channel, so that probably balanced, probably similar to what we would have seen last year. So I think it's something which we are managing, particularly in the businesses where we're producing less than we sell, such as Composites, and something while we'll continue to manage going forward, something which has been a great contributor to us in terms of cash flow this year.

You have an interesting program with Home Depot going on right now around Insulation. Is that product similar to what we would see in the new construction market, or is that new, different smaller sizes that would make it different production runs?

Keith this is Mike. The products that we sell to retail distribution channels versus that products that we would sell into new construction are slightly different. Typically though, they are made on the same lines, and we have the hot end of the asset and the fabrication end of the asset, we tend to have a very similar configuration, where we melt the glass, fiberize the glass and make the wool, and then down at the fabrication end of the line we have multiple packaging stations and flexible packaging equipment that allows us to take that product form and cut it and package it into different product forms for our different end use markets. So in terms of balancing production or establishing production plans, as we see shifts in demand between different channels, we are able to manage that pretty flexibly in our production environment.

Okay, thank you.

Your next question comes from the line of Garik Shmois of Longbow Research.

Thank you. Could you talk about pricing dynamics in the Composites business. The press release indicated that you continue to see pressure there. Can you talk about what you saw in the third quarter relative to second quarter, and your expectations going forward?

Okay, thanks Garik. A lot of what we are saying about Composites now is similar to some of the things that we actually said about Insulation a couple of years ago, in terms of looking at pricing on a sequential basis, and then also looking at pricing on a comparable basis to prior year. You have to understand the story of Composites pricing through '08. In the first part of '08, pricing was relatively stable, and then as the market began to peak really in the summer of '08, we actually started to get some pricing power and saw our prices improve in the third quarter and fourth quarter of last year. So as a manufacturer, we did have some ability to gain some price with our customers in the latter half of '08. We entered '09 therefore with a little bit higher prices than we entered '08.

But we also saw with the tremendous global slowdown and the big reversal in demand that we saw in the last 45 days of last year, that there was tremendous pressure on the market associated with big inventories and lack of demand opportunity, and we did see sequentially some price weakness in the first quarter and the second quarter, that caused our prices to decline through the first half of the year, although on a comparable basis versus prior year, our overall pricing level at the end of the first half was about flat with where we had been through the first half of '08. Now we are getting into tougher comps, so in the second half of '09 we're going to be comparing what we think is going to be a fairly stable price environment sequentially, to a price environment last year that was pretty favorable.

So we think for a couple of quarters here, we will probably show negative comps on pricing. That might persist into the early part of next year, but we think sequentially we'll probably have our most difficult price environment behind us, and that the market has moved to a state of equilibrium where pricing today feels a bit more stable than what we saw through the first 180 days of this year.

So you have to kind of work your way through the movie of what is going on in the market, but we do believe that from the fourth quarter of last year to maybe the end of the first half or the end of the third quarter of 2009, that the market has moved to more of a state of equilibrium and that we would expect sequentially to see pretty stable pricing from here.

Great, thank you for that. Can you talk about raw material costs in the Composites business? We understand that low fixed cost absorption and low utilization rates leading to challenging performance here in the first three quarters of the year in that business, but can you talk about what you have seen on the raw materials side, expectations going forward there?

I mean I think we've seen a fairly tame inflationary environment. Probably the most volatile raw material input that we have has been energy, and we are a big energy user, and in the US it's a combination of gas and electricity, and in that case even a lot of electricity is manufactured in natural gas electricity market. So we tend to be a natural gas derivative in our energy costs in North America. Around the world gas prices are a bit more pegged, and we also use some alternative sources of energy in the some of the developing countries where there is not good stable gas supply.

The outlook for energy has continued to be that in the spot market, through this year energy has been cheap. But the expectation is that natural gas will go back to being more expensive in the out years,. Generally for our planning purposes, we tend to use the forward curve. So our sense would be going into next year that we would see a fairly stable cost environment for energy, and that that wouldn't be a big theme in terms of how we are looking at margins for next year.

Great, thank you.

Thank you.

Your next question comes from Jim Barrett of CL King and Associates. You may proceed.

Good morning everyone.

Good morning, Jim.

Mike I have a question for you on Roofing, are your roof shingle prices in margins fairly consistent across the US or are there significant differences by region?

It's a good thing for you to point out Jim, which we often like to report out, which is we do talk about the business as being a national market ,but in fact the business operates as a set of very regional markets. And in large capacity, not just in terms of competitive envelope and where our capacity is located, but also our raw material costs are often very much correlated or dictated by where in the country we are manufacturing shingles, so it is kind of a [faster] cost business.

That said, I think today we would say what we are seeing is it's a high performing business in almost all geographies, so we have a very nice position with our footprint. We tend to have a local plant in most of the major markets, and we've invested in that footprint and in that network of plants, so that we have the flexibility to service local demand. So our factor costs, our freight costs, have pretty been well under control.

As we've talked about in terms of pricing and margins, we are in a good margin profile today, and so as a result, we like the business in almost every place we compete.

And then the one follow up, do you view it as a competitive advantage that you can forward buy asphalt? Can you stockpile that less expensively during the winter time than at least some of your competitors, how should we look at that?

Certainly the fact that we are vertically integrated in asphalt we believe is a strength in our business. If you think about our business, we are both vertically integrated in glass and asphalt, and so from a technology point of view and understanding asphalt technology, understanding glass technology, as well as a purchasing point of view, we think we have good information and good data to make smart decisions about how and when to buy our glass and our asphalt.

In terms of our ability to time the market, in effect, we do have storage, and so as a result we can take kind of a physical hedging position with asphalt by either having our tanks be relatively full or relatively empty. But that's measured in days or maybe a couple of months of capacity; it's not measured in our ability to really shift winter costs to the summer or summer costs to the winter. It's more our ability to maybe shift a little bit of cost from quarters in terms of when we buy.

The more important strategic issue for us is when to make shingles. If you do have some low cost asphalt, the shareholder value strategy is to make low cost shingles, and if you asphalt prices are going down, then the smart strategy is to run your operations at a fairly low level, awaiting lower cost asphalt and not to lay in expensive inventories. We tend therefore at this time of year, where we are coming off of the summer where we think asphalt prices are higher, to try to run our inventories fairly lean, and then as we get into the winter build inventories a bit as we have the opportunity to buy some low cost asphalt, try to sell those through in the first half of the year, and then for the remainder of the year, balance production to demand.

That's helpful, thanks.

Thank you Jim.

Your next question comes from the line of John Ball of Stifel Nicolaus. You may proceed.

Just a quick question on Roofing. You made the comment earlier that you expected it to be up in 2010. Was that strictly a volume comment, I would love your color on what pricing in Roofing may or may not do?

John the comment that we made in terms of where we think Roofing will go in 2010 was entirely related to demand. We look at the business in three demand segments; there is new construction piece, there is the classic reroof piece, which is my roof gets to be 20 years old and it either starts to leak or starts to look bad, or my neighbors start to replace their roofs, and so I decide to go ahead and do a re-roofing job. And then there's the storm related demand. Again, if you go to our investor presentation earlier this month, we laid out our outlook for Roofing demand and we broke it into those three categories.

We think because of what happened to home prices and home equity in the credit markets, that there was a lot of pressure on re-roofing demand this year, and we have seen that in our overall demands numbers. We know there is a lot of pressure on new construction demand, and this has not been a particularly strong year for violent weather or severe weather, and so most of the severe weather demand we saw this year was carryover from 2008, and some of the storms we saw in late 2008. So when we just roll all those variables forward we would expect to see reroof demand a bit stronger, new construction demand a bit stronger, and we wouldn't expect to see severe weather demand much weaker in aggregate.

As relates to margins, I think Duncan said it in his repaired comments, we said it a bunch of times at Investor Day, our goal is to sustain the momentum that we see in our operating margins. We definitely understand that delivering double digit operating margins in the business is a good goal. We had actually laid out how to get to double digit operating margins well before the business had approached anything resembling double digit, when we were low single or mid single digits. We feel very comfortable with the operational improvements and our ability to sustain margins in double digits. Any guidance beyond that, we'd like to just put a few more quarters behind us at this level of performance before we start estimating what we think long-term operating margins will be.

Yes, [that's what's]driving that margin, which I knew you'd probably stay away from as much as, if we assume oil is going to be higher next year versus this year and then asphalt follows, forgetting the seasonality that's in between now and then, just looking at the year-over-year, should we think there could be some inflation in pricing assuming the industry is diligent about raising prices with rising input, or would that be just too much of a guess?

I wouldn't want to speculate on what is going to happen in industry pricing. I'd look at recent history; clearly last year when we saw very volatile asphalt prices and significant asphalt inflation, that was a catalyst that did allow us to get our prices up in the market and did allow us to recover that cost from the marketplace. I don't see anything changed in the dynamic of the industry that I wouldn't feel some amount of confidence in our ability to recover inflation if we saw that kind of catalyst again.

Great, thank you.

Michael, I think we will take one more question and then we will go to our close.

Your next question comes from the line of Andrew Feinman of Iridian. You may proceed.

Thanks. You guys are doing a great job, and I think that it's clearly evidence that you're managing the Company better, and one of the things that jumps off the page to me is that you're spending less but you're safety performance has improved. To me that shows me that you guys are not just benefiting from better prices in the marketplace, you are benefiting from running the Company better.

My question is whether you can tell me if there is general typical seasonal pattern to general corporate expense, and whether that typical seasonal pattern is what we will see this year, or whether it's going be different this year? Obviously I'm trying to estimate what that number might be for the full year.

Thanks Andy. First of all, thanks for your supportive comments. Obviously it's been a while since we seen anything that resembles of what we believe is a normal market in almost any of our businesses. So, we have prided ourselves on trying to be fast and nimble and respond to the market.

I particularly appreciate your kind words regarding safety performance. We do talk about safety at the beginning of every meeting in our Company. It's exceedingly important to our employees, and it's something that on our investor calls, we've kind of kept that tradition up and said it's one of the first things we are going talk about with investors.

We do believe it's a measure of two important things. One is the Company's ability to care for it's employees, and the second is the Company's ability to execute. So when we look at our safety performance we see two things, one is are we doing a good job of getting out of bed every morning and making sure that we are creating a safe at work environment for our employees that expresses to our employees how important they are to us, and then secondly, can we execute that every single day. So our track record of safety performance is very important to us as a measuring stick in terms of our execution.

With regard to corporate expenses, I will give a high level comment, and then I don't know if Duncan can maybe put a little bit more color behind this. We see little bit of seasonality in corporate expenses, primarily related to some of our accruals. Some of our accruals just for external reporting reasons and internal measurement reasons, we tend to accrue through the cycle of the year, based on when we expect to see our earnings.

Some of the management incentive programs and employee incentive programs, which are tied to profitability and the achievement of profit goals, we would say those costs tend to flow through the year, more related to when we make money than the passage of the days or when we earn our revenue. So we have some small differences in when we do accruals related to the time of the year. You tend to see more changes in those accruals if we see a sudden or abrupt change in the performance of the business, where we conclude that the rate at which we're accruing is either too low or too high.

Most years we try to make sure that our accrual rate mirrors where we think the whole year will turn out, and if in fact our forecasts are pretty good and we're tracking consistent with where we expect to be, then those accruals tend to be pretty accurate. I would say this year, while it was very volatile early, we have been pretty happy with our ability to forecast our business since about March or April of the year, once we got the Composites Recovery Plan in place, and once we saw good roofing margins sustain themselves through the first quarter, I think our ability to forecast the business and guide to cash flow and some of the key metrics has been a little bit better.

So, I think this is a little less volatile year. I don't know, Duncan if you have anything you'd add to that.

I think that's right Mike. Also when we look at the things that (inaudible) through the other lines, one of the things probably to note year on year, that we've disclosed, but it's probably just worth noting as you compare, last year is what we actually filed with this year; we used to measure inventory on a LIFO basis, we now measure it on a FICO basis. So we used to have this LIFO charge or benefit that would go through the corporate line, and in 2009 that no longer is happening, so when we compare year-over-year we are cleaning that up, our comparisons exclude LIFO. But certainly, if you look at last year's numbers, you would have seen LIFO in them, that was typical as we went through that line item.

And the other thing of course, as we adjust out our numbers every quarter, things like the $5 million expense (inaudible) to the third quarters go to the post emergence equity, that goes away in October 2009, so that kind of item will disappear. As we tail down in terms of synergy cost that will also, the integration cost associated with the acquisition will disappear. Some of those other items will also get cleaned up going forward. There won't be as many of those.

So I think as we look forward some of the volatility maybe in the line item as well as general corporate expenses is probably worth noting, and noting that it is cleaning up and being a bit easier to understand being a bit more transparent.

Thank you.

Thank you Andy.

I would like to turn the call over to Mr. Scott Deitz for closing remarks.

Thank you Michael, and certainly thank everyone for joining us today. I will offer a reminder that our fourth quarter and full year 2009 results are scheduled to be announced on Wednesday, February 17th, 2010. Wednesday, February 17th, 2010. With that, I'll turn it over to Mike for a close.

Thanks, Scott. Thank you everyone for joining our call and your interest in our Company, and for many of you who are investors, your support of our Company. We were pleased with the quarter. In large part, we achieved the objectives that we set out for ourselves earlier in the year, and believe that we are on track for 2009. I think of note, if you look at the fact that on an adjusted EBIT basis, we are ahead of last year through the first nine months, we would consider that to be a pretty good accomplishment, given how challenging our markets have been, really across the board.

I think probably the highlight for the quarter for us was the cash flow generation. We had a pretty difficult cash position in the first half of the year; we used a lot of cash in the first quarter. We knew that we needed to get very focused on cash. We asked our team around the world to understand cash flow better and to make sure that we could drive against some aggressive goals.

We started the year with a goal of $200 million in free cash flow; we increased that a month ago to $250 million, and now with $332 million of free cash flow in the quarter, we feel comfortable saying that we believe cash flow for the full year could be as much as $300 million. Which really not only is demonstration of what we believe is good execution, but also puts us in a wonderful position in terms of net debt at year end to continue work on the refinancings and the credit ratings which we think are very important to our long-term.

Composites going positive in the quarter is a good check mark for us. Obviously we've talked a lot about the strength of our portfolio, and looked at the enduring value of these three great business franchises we have in Roofing, Insulation, and Composites. In terms of firing on all cylinders, it was a three cylinder engine that was firing on one through the first half of the year.

I think we're now seeing Composites return to profitability, and we probably have line on site on how 2010 could be a year that maybe we'd fire on two cylinders, with both Composites and Roofing contributing. And then hopefully, if we are actually seeing the bottom in the new construction market, we start to see some positive operating leverage in Insulation in 2010 that might get us into a period of time where all three of the businesses begin to fires as we move into the early part of the next decade.

We are working every day to make sure that we keep the business well positioned to succeed in that kind of environment. In the near term, we continue to be cautious with both capital and cost. We continue to make sure that we are doing things on the innovation side of the business to bring our customers new solutions that allow them to grow their business and make money.

We are defending our position in the marketplace to make sure that in this difficult period of time, that we have a position in the market that's fitting of our market leading position, and that that position is well defended and well earned. We think those are the things that are going to serve our shareholders well as we move in to 2010 and beyond.

I wouldn't necessarily say that we are excited to see 2009 be behind us, but we certainly are excited to finish out the year strong in the next couple of months and position ourselves well for 2010, and we're happy to have you join us three months from now as we report on our full year results, as Scott said, in early February. So, thanks again, and everyone and have a great day.

Thank you for your participation in today's conference, this concludes the presentation, you may now disconnect, have a good day