Owens Corning (OC) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter year end conference call. My name is Madge and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the call over to Mr. Scott Deitz. Please proceed.

Thank you, Madge, 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 fourth quarter and full year 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. We ask that you limit yourselves to one question and one follow-up.

Earlier this morning we issued a news release and filed a 10-K that detailed our results for the quarter and the year. For the purposes of our discussion today, we've prepared presentation slides that summarize our performance and our results for the fourth quarter and full year 2009. We will refer to the slides during this call. You can access the slides at OwensCorning.com. You'll find a link on our home page and a link within the investors 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 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 slide presentation, we will begin on slide four. Now we offer opening remarks from our Chairman and CEO, Mike Thaman, followed by CFO, Duncan Palmer and then on to our Q&A session. Mike?

Thank you, Scott. Good morning, everyone. Thank you for joining us today to discuss results for the fourth quarter and full year 2009.

Owens Corning completed a very successful year in 2009. The year was highlighted by record roofing performance and strong free cash flow. We achieved the goals we set for the year based on solid execution. Our progress and results in 2009 position us for adjusted earnings growth of 25% or more in 2010. We generated $335 million in free cash flow during the year. This performance was exceptional. Driven by outstanding results in our roofing business and significant reductions in working capital and capital expenditures.

Overall, demand for our products in 2009 were lower due to weakness in the US housing market and the global economy. 2009 net sales were $4.8 billion compared with $5.8 billion in 2008. Lower sales in composites and insulation led to the year-over-year decline. Adjusted EBIT was $308 million in 2009. Adjusted earnings were $145 million or $1.14 per adjusted diluted share, compared with $152 million or $1.17 per adjusted diluted share in 2008. We finished the year with net debt of $1.65 billion, compared with $1.98 billion at the end of 2008. We have ample liquidity to meet our financial obligations, to continue to access the capital markets on favorable terms and to begin to look ahead to growth. Our balance sheet is solid and worthy of its investment grade ratings. Duncan will provide a complete reconciliation for our fourth quarter and full-year results in his comments.

As we entered 2009, we said that we would achieve a number of important objectives during the year. I offer this assessment of our achievements. We said that we would continue our progress in creating an injury-free workplace. Our safety performance improved by 6%, the eighth consecutive year of improvement for our Company. We said that strong roofing momentum would carry in 2009. It did. We achieved full year operating margins in roofing of 28%. Roofing EBIT was a record. We said that weakness in our composite segment would persist through the first half of 2009 and that this segment would return to profitability in the second half. We're pleased that composites was profitable for the third quarter and remained profitable through the fourth. As importantly, we took decisive action to curtail our production and reduce our inventory to acceptable levels. As we enter 2010, we are restoring production levels to meet demand.

We said that the insulation business would face a difficult market and that the market weakness would carry into 2010. The business lost money in 2009. This is a great business, which prior to this year had an uninterrupted track record of profitability. Our 2009 performance clearly illustrates the depth and breadth of the current US housing downturn. We said that we would reduce operating expenses and capital expenditures by a combined $300 million. We achieved this objective. I'm pleased with what we accomplished in the face of weakness in the US housing market and the global economy. Our cost control was strong, our cash control was exceptional, greatly exceeding our expectations 12 months ago and we are positioned well entering 2010.

Now I'd like to turn to the businesses and our outlook. Our roofing business had a fantastic year. Roofing delivered record annual profits with EBIT improving to $530 million, up more than $300 million compared with 2008 which was our previous record. This performance is even more impressive considering that the industry volumes for asphalt shingles were down about 10% compared with 2008. Full-year operating margins in this business were 28%. While we anticipate that we are entering a less favorable environment for raw materials, we believe that sustaining margins in excess of 20% is an achievable goal for 2010. Our roofing team will continue to innovate in support of our customers, to be relentless in its cost reductions and to capitalize on our market growth.

Now our insulation business. A demand driver for this business is US residential housing starts. In years of strong housing, insulation used in Canada and US new residential construction can represent up to 60% of insulation revenue. In 2009 we estimate the new construction represented only a third of our revenue. US housing starts were down about 40% in 2009, compared with 2008, which was already a depressed market. Our experiences is that residential insulation demand lags residential housing starts by about three months.

Fourth quarter 2009 housing starts were 19% lower than the same quarter in 2008. Therefore, first quarter 2010 demand in our insulation business is expected to continue to be weak. For the full year, analysts estimate that starts will be about 700,000 units, up modestly compared with 2009. At such a low level of housing starts, our insulation business is likely to lose money again in 2010. Our insulation business objectives for 2010 are clear. We will work to narrow the losses we've seen during this prolonged housing downturn, we will continue to manage operational costs and capacity aggressively, ensuring that the business is positioned for the eventual recovery and we will focus on utilizing advanced building science to innovate products that save energy in homes and commercial buildings.

Now I'll move to our composite segment. In prior calls, I provided a chronology of the actions we took to return composites to profitability following the global demand collapse in the fourth quarter of 2008. We brought production levels well below demand and began to reduce inventories. We aggressively managed costs, working capital and capital expenditures. We were profitable for the second half of the year and we restored our inventory balances to target levels by year end as we said we would. Our composites recovery plan is on target. As a result of continued improvement in demand, we were able to restart some of our manufacturing operations in the fourth quarter, earlier than previously planned. These start ups had some negative impact on our margins in the quarter. Having those assets running to start the year will accelerate operating leverage for us in 2010.

Returning this business to double digit EBIT margins we saw in 2008 remains our priority. We expect to see solid profitability in composites in 2010 with improvement through the year. Construction of our previously announced reinforcements plant in China continues. This project strengthens our presence in this important region. This plant is expected to improve our cost position and profitability in 2011.

Based on our performance in 2009 and our outlook for 2010, we expect Owens Corning's performance to further improve. We believe our composites and building materials segments will both be profitable for the full year 2010. On the continued strength of our roofing business, our improving composites segment and narrowed losses in our insulation business, we expect adjusted earnings per share to grow 25% or more in 2010, which translates to $350 million or more in adjusted EBIT.

Now to provide a more detailed look at our performance, our financial position and our guidance, I'll turn to CFO Duncan Palmer. Duncan?

Thanks, Mike.

Let's start on slide five where we show our key financial data for fiscal 2009 and for the fourth quarter. You will find more detailed financial information in the tables of today's news release and the Form 10-K that was filed earlier. Today we reported 2009 consolidated net sales of $4.8 billion, an 18% decrease compared to 2008. For the fourth quarter, consolidated net sales were $1.2 billion, which was down slightly compared with the quarterly sales one year ago. Despite the decrease in net sales, we delivered $335 million of free cash flow in 2009, driven by record roofing performance and significant reductions in working capital and capital expenditures.

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, adjusted EBIT. Adjusted EBIT for 2009 was $308 million, down from $328 million in 2008. Results for the year 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. Adjusted earnings for 2009 were $145 million or $1.14 per diluted share. For the fourth quarter 2009, adjusted EBIT was $33 million compared to $59 million for the same period in 2008. Adjusted earnings for the fourth quarter of 2009 were $1 million or $0.01 per diluted share.

Consistent with our cost reduction actions during the year, marketing and administrative expenses decreased by $24 million in the fourth quarter and by $95 million for the year compared to 2008. Depreciation and amortization expense totaled $325 million for the year, which was in line with our guidance. We estimate our 2010 depreciation and amortization expense will be in line with 2009. Our capital expenditures for 2009 excluding purchases of precious metal totaled $232 million compared with $366 million in 2008. This is consistent with our guidance. We believe that 2010 capital expenditures will continue to be lower than depreciation and amortization. In addition, we took actions to decrease working capital during the year. And these actions contributed $134 million to our cash generation in 2009 and $176 million during the fourth quarter.

On slide six, we reconcile full year 2009 adjusted EBIT of $308 million to reported EBIT of $192 million. I will discuss the nature of these reconciling items on the next slide. Moving to slide seven, you can see the reconciliation of our fourth quarter adjusted EBIT of $33 million to reported EBIT of $2 million. The integration of the composites acquisition continues to deliver synergies well ahead of our original plans. In 2009 we achieved our synergy goal of $100 million. While this is two years ahead of our original schedule, we will continue to pursue additional synergy opportunities. We incurred $12 million of integration costs in the fourth quarter associated with achieving these ongoing savings.

We have continued to respond to the market environment and to reset our cost structure across the Company. During 2009, we took further cost reduction actions including significant capacity curtailments, extending planned down times, reducing head counts and delaying capital projects. We achieved our annual cost savings goal of $160 million in 2009 and we expect at least half of these annual savings will be permanent reductions where the costs will not return when we restart idle production capacity. We incurred charges of $8 million in the fourth quarter related to achieving these savings. Next, as you have seen in prior quarters, we adjusted for the costs associated with the employee emergence equity program, a total of $12 million. These shares, which were awarded to employees at the time of our emergence from chapter 11 in 2006 have now been fully amortized.

Next on slide eight, you will see an illustration of how the full year adjusted EBIT performance has evolved from 2008 to 2009 based on business contribution. Adjusted EBIT declined $20 million from 2008 to 2009. The roofing business sustained the momentum that began in the fourth quarter of 2008 and increased EBIT by $345 million. This was offset by the reduction in profitability of the composite segment, insulation business and other building materials business which faced weaker demand in their respective markets. General corporate expenses in 2009 were in line with 2008 and we expect these costs to be between $60 million and $70 million in 2010. Now, if you move to slide nine, you will see adjusted EBIT performance comparing fourth quarter 2009 with the same period in 2008, based on business contribution. Adjusted EBIT decreased $26 million from the fourth quarter 2008 to fourth quarter 2009. Our roofing business sustained the level of performance demonstrated in the fourth quarter of 2008 despite lower demand. This improvement was more than offset by a decline in the profitability of the composites segment which experienced lower year-over-year prices, higher manufacturing costs resulting from curtailments taken in 2009 and start-up costs associated with bringing production back online during the fourth quarter.

With that as background, turn to slide ten and we will begin a more detailed review of our segments starting with building materials. In the fourth quarter, building materials had net sales of $746 million, a 16% decrease over the fourth quarter of 2008. Despite these lower sales, building materials delivered comparable EBIT results between 2008 and 2009. 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 11 provides an overview of our roofing business. Roofing sales for the quarter decreased 38% from fourth quarter 2008 due to lower demand from storm activity and new residential construction. For the year, demand was down approximately 10% from 2008. Despite the lower demand, EBIT margin momentum continued throughout 2009. As a result, the business achieved a $345 million increase in EBIT in 2009 as compared to 2008. We expect the relatively weak demand we experienced in 2009 to persist into 2010.

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 and we have also reduced overall manufacturing fixed costs. In addition, we have launched new product lines, improved our mix and grown our accessories business. These programs had a significant impact on this business beginning in 2008 and we have delivered over $100 million of EBIT 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 full-year operating margins of 28% in 2009. As we enter 2010, we are seeing a less favorable raw material environment, notably rising asphalt costs. However, we do believe that sustaining operating margins in excess of 20% is an achievable goal for 2010.

Next on to slide 12. Our insulation business continues to feel the impact of the weak US housing market. Despite 32% lower lagged housing starts, fourth quarter net sales were in line with fourth quarter 2008. Our insulation business includes a diverse geographic and market portfolio which has helped moderate the impact of the decline in North American housing starts. In particular sales of insulation to Australia in response to that country's reinsulation initiative helped drive higher sales in the fourth quarter. Fourth quarter 2009 EBIT for this business was a loss of $9 million due to the impact of lower demand and underutilization of our production capacity. In response to the prolonged weakness and demand, we have taken actions to reduce active production capacity and to align our cost structure with market demand. As a result, our glass fiber capacity utilization was 60% in the fourth quarter. While these actions have positioned the business to perform well when the market recovers, we will struggle to achieve and sustain profitability in this business until demand improves. This is a great business in a well structured industry. Owens Corning's pink fiberglass insulation is a powerful and endearing 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 13 provides an overview of our composites segment. Composite sales in the fourth quarter were flat with the same period in 2008. Demand in our reinforcements business decreased by 45% in December 2008, but has increased each quarter throughout 2009 and ended the year stronger than the fourth quarter 2008. In addition, the gradual price declines that we experienced in the first nine months of 2009 particularly in Europe have stabilized and we began to see pricing improve in the fourth quarter. We continued to produce less than we sold during the fourth quarter which allowed us to reach our year end industry goals. In fact, we brought some production back on line during the fourth quarter. Capacity utilization rose from 55% in the third quarter to 70% in the fourth quarter. We expect to increase capacity utilization in 2010 so that overall production meets demand during the year. We believe that the actions we have taken in 2009 have positioned this business to continue its recovery towards double digit margins.

Next, we have a few additional items to cover before turning to our Q&A. Now to slide 14. Throughout the year, we have further strengthened our balance sheet. We have $946 million available in our senior revolving credit facility as of the end of the year. In addition, we have $564 million of cash on hand. We expect 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, to refinance our bank facilities and to sustain our capital investment plans. In connection with our bond offering in the second quarter, our credit ratings were reaffirmed by both S&P and Moody's. In October, S&P improved their outlook on our investment grade rating from negative to stable. Also, in December, Fitch ratings initiated coverage and assigned us an investment grade rating of triple B minus with a stable outlook.

On slide 15 we provide reconciliation between adjusted EBIT and free cash flow for 2009. This illustrates the significant sources and uses of cash throughout throughout the year. We have provided guidance for several of these items for 2010. Now on slide 16, we expect that we will deliver $350 million or more of adjusted EBIT in 2010. This guidance is in line with published consensus of $1.40 to $1.50 of adjusted EPS based on a 25% tax rate and interest expense in line with 2009. While we utilize a 25% tax rate to arrive at adjusted earnings, our cash tax paid for income taxes in 2010 will be less than $35 million reflecting our favorable cash tax position. Also, as we disclosed in our 10-K, we expect contributions to the Company's pension plans to be about $38 million in 2010.

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

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

Thank you, sir. (Operator Instructions) And your first question comes from the line of Michael Rehaut from JPMorgan. Please proceed.

Thanks. Good morning, everyone.

Good morning, Michael.

First question on the composites business, you had mentioned that with some starting up of capacity, that that did have a negative impact on 4Q profitability. I was wondering if you could give us a rough idea to quantify what that was and if those start-up costs -- certainly you're still expecting even with the start-up costs profitability to improve next year, but if you would continue to see those start-up costs next year as well and what might -- what those might be and then I have a second question.

Okay. Thanks, Michael. Yes. As we talked about on the call, what we saw in '09 is demand declined in the range of about 25% in our business throughout the year and we had to drop our production by almost 40% in order to get our inventory positions back to where we wanted them and, really, that situation persisted from a production point of view really fairly late into the fourth quarter. So if you can imagine our quarter, we were still producing primarily at fairly low levels, our shipments were a little bit better. We had fairly high cost inventories because we had been producing at low levels through the third quarter and the first part of the fourth quarter.

So we didn't have a particularly good cost position in our production heading into the quarter, so the bit of demand growth that we saw wasn't particularly accretive. Then on top of that, we did see that as demand picked up, we actually were going to overshoot our inventory targets which gave us an opportunity to bring production on that had really been scheduled for very late December and maybe into January. We started bringing some production on in November and the earlier parts of December. Because the business was so close to break even, those start-up costs which on an individual line basis aren't that significant, when you're starting up two or three lines, they're material on a business that's close to break even. So I don't want to overstate the size of the impact of the start-up costs. I don't think that's going to be a big theme for us coming into 2010.

The opportunity for us in 2010 is we see demand coming back probably two thirds of the way to where it was in 2008 and we're going to bring production back two thirds of the way to where it was in 2008 which will give us really both leverage on the top line, but also tremendous leverage in terms of production and manufacturing costs. We would expect you would begin to see that in the first quarter and that then as the year progresses, better demand and better production economics would cause us to improve results through the year. So that's really the shape of how the year finished out -- why the business from a profitability point of view went a little bit sideways in the fourth quarter. But I think we would say internally it met really all of our internal objectives in terms of working capital targets, cost and productivity targets, but most importantly we wanted to get the position ready to have some operating leverage in 2010 and I think we have that.

Great. Thanks for that recap, Mike. And I'll just ask my follow-up to that and my second question, the same thing. Just to finish off that idea on composites, you talked about getting back to double digit margins, also, though, talking about getting to those margins by the end of 2010. Is that still what you're guiding for or the goal?

And then, just the second question, on the roofing business, you had talked about despite your outlook for raw materials potentially to be higher, you think you can still do above 20% operating margins. If you could just give us -- elaborate on that a little bit and what that impact might be to profitability as you see it as I also understand that, you've said for a pass through on the asphalt pricing and just a little bit of color there.

Okay. First let me come back on the comments on composites, double digit operating margins. We've continued to say that that's our goal -- that getting the business to break even was an intermediate goal, getting the business to profitability is an intermediate goal, but that ultimately we see this as a business that will operate in double digit operating margins sustainably. We did not say in our prepared comments today that we thought that would happen in 2010. So I hope we didn't misspeak, but we didn't want to give the impression that we see that happening in 2010. As I said earlier, we're really only probably going to be back two thirds of the way to where we were in 2008 in terms of volume and production and really 2008 for the first three quarters was the last time we demonstrated double digit. So we think there's more to go in terms of production operating leverage and demand before we'd feel comfortable projecting that we'd get to that double digit target.

As it relates to roofing, if you comp the fourth quarter, our fourth quarter was pretty weak in terms of volume, which didn't come as a huge surprise to us. Last year in the fourth quarter, we were dealing with Hurricane Ike, which had come up, I think, in September or October, a fairly late season hurricane which had stimulated some demand. So we knew we were against a tough comp. We also know that with free supply in the industry, there wasn't a lot of incentive for customers to carry a lot of inventory at year end. Many of them knew they could replenish their stocks after the first of the year. So they were in a position where they could really slow down their purchases at year end. So we knew that we had a risk or a chance, that we would see pretty sizable reductions in demand in the fourth quarter and we did. We were pretty happy that given that, we still saw very good operating margins and actually operating margins that were six full points better than what we had in the fourth quarter of 2008.

So we entered the year with a pretty good margin profile. We did say and Duncan talked about the fact we are seeing asphalt prices climb. That does put pressure on our margins. I certainly wouldn't characterize our pricing ability in that market as a pass through of asphalt costs. We know that asphalt costs do affect our profitability and we in the past have worked hard to try to recover raw material costs in the pricing of our products.

But it continues to be a competitive market, there continues to be a lot of challenges in the marketplace to ensure that we can get price in the market, so part of our guidance downward on operating margins to 20% plus for the year would suggest that there's some risk we would see some compression, associated raw material costs that we wouldn't be able to achieve or that potentially from a timing point of view would give us some compression through the year. All in all, though, still an absolutely great performance as expected in 2010 from roofing.

Okay. Great. Thanks and look forward to seeing you a week from tomorrow.

Okay. Great. Thanks, Michael.

And your next question comes from the line of Dennis McGill from Zelman & Associates. Please proceed.

Good morning, guys.

Good morning, Dennis.

Thanks for the color on the composites in the fourth quarter. I guess I was hoping to maybe push you a little bit further because if we think about the third quarter, I know you guys were certainly pleased turning profitability there and I would have thought the trajectory through the quarter was maybe positively to potentially some stronger margins in the fourth. And yet you mentioned you don't want to overstate the size of the start-up costs, so how should we think about the momentum of the business excluding the costs heading into next year because I think obviously the double digit margins is several years away, but thinking about how quickly we could maybe get into a mid-single digit margin range. Is there anything that we need to be factoring in aside from the normal leverage in the business that might mitigate that in the near term?

Yes. It's a great question, Dennis, and I appreciate you asking it. One of the challenges we've had in communicating about the business is the change in demand was really a discontinuity on the way down. So in the fourth quarter last year, it dropped straight down and then it's been a continuous ramp which we've been very pleased with because sequentially the business has shown improved demand all through '09 and we're forecasting in '10 unless we get some different economic outlook that '10 would be likewise -- that we would continue to see sequential improvement in demand as the year progresses.

We really had two discontinuities, though, in terms of production. So when demand dropped the way it did, about middle late first quarter of '09 is when we really shut off a lot of our capacity and we went from running -- almost at the 90% level to running at about 50% level. We stayed down at that level for a very long period of time late into the fourth quarter and then to a certain extent, the way we're bringing production back on is a bit of discontinuity. It's not really a ramp. We hit our inventory targets hard and now we're bringing a fair amount of capacity back up all at the same time to meet the demand that we see in the market and match production to demand. So the impact of the operating leverage of bringing the capacity back online, we would expect will be pretty strong in 2010, which is why we have some confidence that the business should be solidly profitable in the year and should be improving through the year.

As I said in my earlier answer to Michael, we don't see that we're going to have demand or production levels all the way back to the '08 level, which would give us confidence saying we'd get to double digit this year. But we do see that demand in production will probably get two thirds of the way from where it was in '08 to where it was in '09. So we're going to make a fair amount of progress from the '09 trough back to the '08 levels and I think that would be what would give us confidence that we'll improve to decent operating margins in '10.

Okay. And then just running the math on that because you guys have some different numbers with the divestures, your commentary about getting two thirds of the way back, so you're looking for volumes could be up in the 15% to 20% range in 2010 if everything holds?

Yes. Actually the way the math works is when volumes drop 25%, then they improve 25%, but you're still only two thirds of the way back. If you think about it in absolute tons. If we dropped 25, I'm saying we would come back about 15. On a percentage basis, if you drop from 100 to 75, you can improve by 20% to 25%, you don't get back to 100. So from that 25% drop we saw, we'll get two thirds of the way back to where we were in '08.

Okay. Understood. Just focusing on insulation for a minute. What type of profit or, sorry, price versus raw material impact are you assuming in your guidance for next year, realizing there's some price increases in the channel and they appear to be at least marginally successful thus far. What's factored into your guidance from that standpoint?

Yes. We've seen a fairly stable price environment in insulation really over the last year and we've actually seen a fairly stable inflation environment. The good news or the bad news of that is when you look at the profitability of the business, we would imply from those numbers that for some of the toughest segments of the industry, some of the players may be down around cash costs, which is why we're not seeing pricing move a lot and in a low inflation environment, pricing has not moved a lot.

I think what we're seeing now, though, is for the first time ever, as we said in our call, insulation manufacturers are losing money, which is a very unnatural act for us. We're not accustomed to that at all. We would certainly like to see anything we can do to try to improve the profitability of the business in the near term, knowing that long-term profitability comes from real and sizable improvement in the housing market. I think we would generally look at 2010 as being another year of relatively stable pricing, relatively tame inflation and that most of our efforts to narrow losses would come from great execution and good cost side management, which is where our team is focused.

Okay. That's helpful. Thank you very much.

Thank you.

And your next question comes from the line of Ken Zener from Macquarie. Please proceed.

Good morning.

Good morning, Ken.

Roofing margins, which fell sequentially, obviously well above its historical rate. Did it surprise you the amount of decline relative to where you were going into the fourth quarter?

This is Duncan, yes, I'll take that question. I think when we look at roofing margins, throughout 2009, they continued along the momentum that we stopped building in the latter part of 2008. Obviously overall for the year, we saw in our pattern where we were seeing operating margins I think in the third quarter in the low 30s, in comparison to 21% in the fourth quarter. Typically, this business is a bit stronger in the second and third quarters than it is maybe in the first and fourth quarters and that's typically what we have seen in this business. But we're still very pleased with the operating margin performance we did see in the fourth quarter. It did represent a 6 point increase over the fourth quarter of 2008.

On the asphalt side, we alluded a little bit to the pricing environment we're seeing on the cost side in asphalt. That was probably increasing during the fourth quarter and into the first part of the year. We have seen reasonably tight asphalt environment. As Mike said, historically, certainly in 2008, we were able to recover asphalt price increases in the business fairly effectively, I think, in 2008. So that gives us some confidence, I think, that we will be able to sustain margins at or above 20% during 2010 as a whole.

Right. And I -- the reason I asked that is because it is your commentary of 20% plus seems a stark break from where you had said -- low teens and you'd have to prove it. Does this represent -- in the face of rising asphalt prices a higher base expectation for you in this business versus where you were just a couple of quarters ago?

I think what we've said is that in the long run -- I mean we've said this is a solidly double digit margin business. We still, I think, are confident that's the case. I think given the momentum we have seen in 2009, even in the face of quite weak demand in the fourth quarter to be able to sustain a margin at a higher level, I think what we're saying is point of view of 2010, we see that momentum continuing and we have some confidence that gives us -- some reason to give us confidence that certainly in 2010 we could see operating margins above 20%.

Right. But it seems like in the record -- near record low housing year, flattish volumes is what you're talking about, inflationary pressure, you're comfortable saying 20%, it seems to suggest a secular shift in your expectation for the business. Thank you.

Thanks, Ken.

And your next question comes from the line of Jack Kasprzak from BB&T Capital. Please proceed.

Thanks. Good morning, everyone.

Good morning, Jack.

I wanted to just circle back on roofing and make sure I understand the dynamic that you're seeing in the market. I think there's a 5% to 7% price increase out for asphalt shingles. Are you saying that that's not enough to cover where asphalt costs are or you think they're going to be in the spring -- or that you're just not confident in getting the price increase?

Jack, this is Mike. I think we're taking maybe a little broader gauge look at the question of roofing margins for 2010 beyond just the price increase that's out on the street right now. When we look at the year, what we're seeing is that refinery economics are continuing to change, refiners haven't been making that much money and it's putting pressure on all refined goods and in particular asphalt availability and also asphalt pricing. So we're seeing a bit more volatility in asphalt than we've seen in prior years.

Because of that, we think we're maybe going to have a year here in 2010 where the timing and impact of asphalt costs could be more pronounced than what we saw in '09. '09 it was relatively tame through the year and I think '09 was characterized as a year of stable pricing and stable costs. As we get into a year where there's inflationary pressure, there certainly has been evidence in the past that we see some margin compression on the way up. I don't think we're really trying to handicap the probability of achieving any individual price increase. I think we're really trying to set investors' expectations to say as we look at this year, maybe we don't have quite as positive a dynamic as we had heading into '09 and therefore we might see margin compression.

In terms of long-term margins, which is something we were talking about on the prior question, I don't think we've really changed or reguided on long-term margins beyond -- I think you've heard us in each of these quarterly calls get more and more bullish on double digit margins for our roofing business for sure and I think as quarters go by, we get more confident of sustaining above the prior guidance. We haven't come back and said what we think a good long-term margin performance for the business would be.

Do you think the bad winter that a lot of parts of the country are having is going to generate any increased roofing demand when we get into the spring? What's your view of roofing volume right now?

Well, that's a tough one for me to answer because I take a pledge with my team that I won't get on these calls and be a weather man. So.

Pretty bad winter, though.

It has been. We do know that you had a couple of things in this winter. One is it's been a pretty severe winter, particularly in parts of the south where typically you don't get a freeze thaw cycle. We also had a lot of rain on the west coast where there hasn't been of rain for a long time. Typically those two things cause people to discover that a roof that they've been repairing or limping along is actually leaking. I would say directionally those two probably have a positive impact on roofing demand. Pretty tough for us to make a meaningful estimate of how much of that would show up in our number.

Okay. And on the comment on composites, getting two thirds of the way back from where you were in '08 -- the delta from '08 to '09 was about $240 million of operating profit -- does that suggest that you think you can get two thirds of the way of $240 million in 2010, is that the translation more or less?

I guess I wasn't trying to be that specific. I think one of the things that's going to be a challenge in getting all of that operating profit back or getting two thirds of that operating profit back is we're doing if on a little bit weaker top line. So you've got to call back a little bit more volume to work your way up that curve because the business does have positive operating leverage.

But I guess more again in terms of broader -- in broader indications of our expectations, the business was operating around 10% in 2008 until we got to the fourth quarter. The business lost a little bit of money. I'd characterize it as just slightly below break even. We would certainly think that if we're able to ramp up our production levels two thirds of the way back to where they were in '08, demand were to come back two thirds of the way, that we should be able to move somewhere from marginally break even, but not profitable, back to some of the levels that we saw in '08 that you get somewhere between half to two thirds of the way there.

So I think the gist of your question is probably consistent with what we're trying to say. The specificity that I don't think we're prepared to guide that narrowly.

Okay. Fair enough. Thanks a lot.

Thanks.

And your next question comes from the line of Jim Barrett from CL King & Associates. Please proceed.

Good morning, everyone.

Good morning, Jim.

Mike, two related questions on composites. First, the Chinese becoming price aggressive in Europe, I understand the European commission has taken up the case against them. Have the Chinese responded to that by pricing more rationally in Europe? Could you give us an update on that?

Sure. I think what Jim refers to is the European Composites Manufacturing Association did bring an anti-dumping claim against the Chinese somewhere in the second half of 2009 and the European union in December announced that they were going to investigate that claim. So that's an ongoing investigation of whether or not there was dumping in Europe and I think, obviously, that's for the European union and the manufacturing association to sort out.

Clearly I think it's an indication of a couple of things. One is it's an indication that the market fell very dramatically at the end of '08 and that the competitive intensity around the world and particularly in Europe accelerated quite a bit. I think it's an indication that there may in some cases even be government intervention to try to defend some of the markets. I think what I would say as we enter '10 and we look at Chinese competition, we've never really believed that the right structure of the global composites industry is the -- all the glass in the world to be made in China and then exported around the world. We think matching regional supply and demand, being fairly close to your customers, making products that are appropriate for that market and doing it in low-cost countries in each region. So Mexico or Brazil for the Americas, Russia for Europe or Eastern Europe for Europe. Obviously China, India, those are good places for us to be manufacturing today and that's where I think you've seen us invest.

So, as the Chinese market has improved, I think that's taken some pressure hopefully off of the Chinese manufacturers in terms of them finding an outlet for their products and then as the rest of the markets improved, I think that's also helped some of the manufacturers like ourselves bring production back up to acceptable levels. So the general level of pressure in the market today is probably a bit different than what we were feeling in the first half of '09 right after the collapse.

Okay. And then on the follow-up is you're obviously adding capacity in China itself. I take it that's a function of the fact that you feel you can compete pricewise and in terms of technology with the Chinese in their own market?

Yes. For sure we are confident in our ability to compete with the Chinese in terms of technology and similarly situated when we get to similar factory costs and similar locations, we also have confidence in our ability to compete on the cost side. What we're doing in China, it is, in fact, a capacity add. But it doesn't really increase our capacity position or our market position in China that dramatically.

Today, actually, we are importing into China to meet some of the customer demand that we've been able to secure in the country and when we bring that facility up, what we're really going to be able to do is we're going to be able to in-country source some of the production that today is coming from other parts of the world. So when we look at that in terms of our economics, we see it as a fairly low risk investment in that facility is effectively already loaded and it's just going to be a significant cost opportunity for us to stop shipping and get to a low cost manufacturing platform. So we're very anxious to bring that facility online, more to support the position we already have in the Chinese market than to somehow go move into a new position in China.

Okay. Thank you very much.

Thank you, Jim.

And your next question comes from the line of Herb Hardt from Monness. Please proceed.

Good morning. You had mentioned in your comments that Australia was a contribution to the insulation business. Can you give us some sense of how much it was?

Yes. This is Duncan. I mentioned in my comments, if you look at our insulation business, quarter over quarter, fourth quarter over fourth quarter, you would have seen that the revenue line was essentially flat on that environment where housing starts have actually been falling. I think, one of the contributors to that was the product that we were supplying to Australia. The Australians have had a fairly aggressive stimulus action to stimulate reinsulation during 2009. The government has been sponsoring in Australia because of a lack of supply in Australia, we've been able to supply that both actually from China and also from some of our US facilities.

It was a factor in the quarter -- somewhat in the third quarter and also in the fourth quarter. I'm not sure I'd say it was -- it wasn't a huge amount of our revenue in the fourth quarter, but it was certainly material in the context of making up for some of the short fall that we had seen from lower US residential demand in the fourth quarter.

Do you expect it to continue?

I think it's something which is tailing off somewhat. I think it's a stimulus action that's limited in time and dollars in Australia is my understanding, so I think we would expect that to tail off in the early part of 2010.

Thank you.

Madge, I think we'll take one more question and then we'll go to closing remarks.

Okay, sir. Thank you. And your next question comes from the line of Joe Gagan from Atlantic credit. Please proceed.

Yes, I just have two questions. It says here, well, according to what I'm reading, that you had $368 million in EBIT, EBIT profits for 2009. Is that correct?

Joe, we reported adjusted EBIT today of $308 million and then in our presentation that accompanied today's comments, we have a reconciliation from that adjusted EBIT number to the EBIT number that is the GAAP number that's reported in our numbers which is a bit less due to the adjusting factors.

Okay. So it was $308 million and you're predicting $350 million for adjusted EBIT for 2010. Now, I know in 2009 all of the EBIT came from the profits from the roofing business. Do you expect any positive contributions from any of your other businesses besides roofing to EBIT in 2010?

Yes, we do. If you walk through the pieces of our analysis today on the call, we're certainly expecting composites to turn from losses to profitability throughout the year, so that bar in terms of contribution, we believe, will be a positive in 2010. We talked about narrowing our losses in insulation, so while we believe insulation will lose money in terms of contributing to EBIT and earnings growth, we are expecting that insulation will make some contribution this year and we certainly expect that roofing will continue to be an earnings engine for the Company. We forecasted or suggested that there may be a bit of margin compression that we would experience in 2010. Obviously that's not baked in the cake. Roofing is a very short cycle business. So we're managing that business every day.

But that may, in fact, end up being a bit of a negative bar in 2010, but we would still be able to grow overall earnings because of the turnaround in composites and the narrowing of the losses in insulation.

But as far as the turnaround in composites, you must have some idea in your head out of the $350 million, is that $50 million or $20 million or what's your rough approximation if you're offering that figure?

Yes, I think we've talked through -- actually, in fair detail today what the dynamics we see in the composites market are and bridging from what we saw the performance of the business in '08 to the performance you saw in '09 and then some expectations for '10. As a rule, we don't really give guidance by business and we typically don't give guidance by quarter either. We tend to give broad guidance for the Company to set investor expectations. I think it's reasonable for you to conclude that our internal plans, we have pretty good line of sight on how we would get the businesses to the guidance we've offered today.

The last question was this -- as far as the price increases for roofing, have those been announced and passed through or have they just been announced and it's the period where they haven't actually been passed through, where you're charging people higher amounts? Where specifically are you in that process?

Well, what I would say about roofing is -- roofing is a fairly complex distribution channel and it's also not one homogenous market nationally, it really operates as a bunch of regional markets. So while on these calls we talk about pricing in very simplified terms and we talk about operating margins in very simplified terms as a national business with national operating margins, I think it's reasonable for our investors to understand that it's actually a composition of a lot of different channels, a lot of different products in a lot of different geographies with a lot of different competitive dynamics.

I would characterize every price increase as a continued negotiation between the manufacturer and distribution for when and how pricing will be affected in the marketplace. The pricing that has been announced for February, I think, is in that classic negotiation of making sure that we don't harm our customers by trying to recover our material costs in the pricing of our product and we work with our customers to ensure that when we asked them to take a price increase from us, we position them to be able to get pricing in the market.

Yes, but what I've noticed is a lag between announced increases and actually they're charged. So you can't tell me whether you've actually charged the increases of 5% to 7% as of today, you can't tell me that?

Yes, we don't guide with that level of specificity in terms of roofing pricing.

Okay. All right. Thank you.

Thank you.

Madge, I think we have time for one more brief question if there's somebody in the queue that has a brief one.

You have no questions at this time, sir.

Okay. Very good. Thank you, Madge. And thank you for joining us for today's call. With that, I'll turn it to Mike Thaman who has a few closing remarks.

Well, thanks, Scott. First of all, I want to thank everyone who joined the call. We appreciate your interest in our Company and appreciate your interest in hearing our story and the quality of your questions.

As I said in my prepared remarks, we were very satisfied with our 2009 performance and we would certainly feel comfortable calling 2009 a great success for our Company. I can't underestimate both the dramatic improvement we saw in our roofing business as being the core earnings engine of the year, but also the fine work that was done across the entire Company in terms of driving cash flow and reducing our net debt position by over $300 million for the year.

When we came into the year, we believed that we might generate cash flow in the order of magnitude of maybe $100 million. As the year went by, we continued to increase that estimate based on strong performance on the working capital and cash side of the business as well as in roofing. In some regards, we got done probably two or three years worth of work on the cash side of the business in 2009 which really has positioned our balance sheet in a wonderful way for us to, I think, take the issue of near term liquidity off the table entirely, to really be able to access the capital markets, to get the maturity and structure of our debt that we would like and then finally for us to start really looking ahead to the future in terms of growth opportunities.

We think we have a wonderful portfolio of businesses. In 2009, I think our investors were able to see roofing performing at very high levels and composites and insulation suffering a bit based on market dynamics. What we'd expect you'd see in 2010 is roofing continuing to perform at a high level, composites coming on stream and then insulation, again, struggling a bit because of a very difficult market. We do think it's reasonable to conclude, though, that housing is demographics driven and that when we get back to a realistic housing market here in North America, that we will see utilization levels and demand for insulation products that restore it to the high levels of performance that we had seen really almost every year in its history up to about 2008 when we saw this dramatic decline in insulation.

So we feel very good about the portfolio and the actions we've taken. We continue to be focused on the cost side of the business, continue to be focused on building business with our customers, on helping our customers grow their business. That's what's given us the confidence to guide to what we think is strong earnings growth in 2010. It will be nice to work our way through the year with our investors and talk to you about our progress on earnings, but we certainly feel like a 25% growth in adjusted earnings per share is a nice benchmark to put out there and a nice goal for us to drive against in 2010.

We look forward to reporting our first quarter earnings on April 28, which is also a Wednesday and hope that all of you have an opportunity to join us for that call and, again, thank you for the support of your Company -- of our Company and your interest in our message. Have a nice day.

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