Owens Corning (OC) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Owens Cornings earnings conference call. I will be your operator for today. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, today's conference is being recorded for replay purposes. I would now like to hand the presentation over to Mr. Darrel Penner, Investor Relations. Please proceed, Sir.

Thank you, Marisol. 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 first quarter 2010. 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 yourself to one question and one follow-up.

Earlier this morning, we issued a news release and filed 10Q that detailed our results for the quarter. For the purposes of our discussion today, we prepared presentation slides that summarize our performance and our results for the first quarter. We will refer to the slides during this call. You can access the slides at owensconcerning.com. We have a link on our web page and a link on the Investor Section of our website. This call and supporting slides will be recorded and available on our website for future reference.

Before we begin, we offer a couple of reminders. First, today's presentation will include forward-looking statements based on 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 identify in our SEC filings for more detailed explanation of the inherent limitations of such forward-looking statements. 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. And now, opening remarks from our Chairman and Chief Executive Officer, Mike Thaman, followed by our Chief Financial Officer, Duncan Palmer and then Q and A session. Mike.

Thank you, Darrel. Good morning, everyone. Thank you for joining us today to discuss results for the first quarter. Owens Cornings is off to a strong start in 2010. We had an outstanding first quarter and are confident that we will achieve as much as $450 million in adjusted EBIT this year. This is $100 million higher than our previous guidance and equates to about $2 of adjusted earnings per share.

Total revenue in the first quarter increased 18% to $1.3 billion, compared with $1.1 billion in the first quarter of 2009. This increase was led by revenue growth in both composites and roofing. We delivered adjusted EBIT of $97 million in the first quarter, a threefold increase compared with the same period a year ago.

Our markets are still operating well below their potential. Yet, in the first quarter, we demonstrated leverage in our composite segment, we continued momentum in our roofing business, and we narrowed our losses in the insulation business. Duncan will provide more detail on the quarter. So I will move to a review of how Owens Cornings is performing against the expectations we framed for 2010.

We said that we would continue our progress in creating a injury free work place. During the first quarter, our focus on safety resulted in a 20% reduction in injuries compared with 2009. We said that we would drive improved profitability and composites this year. We are well on our way. Operating leverage improved significantly during the quarter, generating $49 million increase in EBIT and operating margins of 7%.

We said that sustained roofing margins in excess of 20% is an achievable goal for this year. We are target to reach this goal, generating operating margins in roofing of 24% in the first quarter compared with 22% last year. I'll provide additional comments on roofing margins later in the call.

We said that we would work to narrow losses in the insulation business and we did. Despite a 19% reduction in lag US housing starts, we trimmed our losses in the first quarter. Insulation remains a great business and a well structured industry. Overall, I'm extremely pleased with what we have accomplished. Composites has turned around. Momentum and roofing continues and insulation is poised to capitalize on the market recovery when it takes place.

Now I will turn to our segments and outlook starting with composites. In prior calls, I provided an overview of the aggressive actions that we've taken to return this segment to profitability. Let me recap. At the end of 2008, global and industrial demand collapsed. In response, we curtailed capacity in the first quarter of 2009 to produce less than we were selling. And we put tight controls in place on working capital and capital expenditure. By taking these actions, we were able to generate cash in the second quarter of 2009. As demand improved, we maintained our tight controls and we became profitable in the third quarter. By the end of 2009, we had aligned our inventories with sales volumes and positioned the business for the strong first quarter that we report today.

We have continued to evaluate our global manufacturing network in composites to respond to current and future market demand. I'll detail three developments. First, we took a charge in the quarter related to improving our cost position in Europe. Based on demand, we decided not to invest in restarting a manufacturing line at our composites plant in Alcala, Spain. We've curtailed this line in 2009. Accelerated depreciation and severance related to this action makes up a substantial position of the charge.

Second, we have decided to invest in expanding manufacturing capacity at our existing composites facility in Russia. We had previously announced this expansion but it was deferred until market conditions improved. Now that demand has increased, we're moving forward with this investment to help us serve our growing customer base in this market.

Finally, construction of our composites plant in China continues. We expect this project to be completed by year end. It will strengthen our presence in this important region and is expected to improve our cost position and profitability in 2011 within the composite segment.

On our last call, I said that demand for composites in 2010 would increase as much as 25% over 2009 levels. We continue to bring production online to meet demand, which has resulted in improved operating leverage. Despite improvements in the market, we do not expect to return to 2008 demand levels this year. Composites will also continue to benefit from selling prices that increased in the first quarter of this year compared with the fourth quarter of 2009.

Now let's move onto our building materials segment. The roofing business had another fantastic quarter. This segment improved EBIT to $128 million, which is nearly $30 million higher than the same period a year ago. We believe the roofing business benefited from some volume upside due to customers restocking their inventories, which had declined to low levels at the end of last year. Customers also bought ahead of our first quarter price increase.

In the quarter, volume gains in roofing drove our revenue growth. We do not expect this volume growth to persist through the year absent additional storm-related demand. With higher asphalt costs this year, we expect margins through the summer to be lower than a year ago. Overall, we expect roofing margins in 2010 to be below 2009 levels but in excess of 20%.

I'm proud of the accomplishments of our roofing business. We continue to innovate and support of our customers. We continue to be relentless in driving cost reductions and we continue to capitalize on market growth while maintaining margin discipline.

Now to our insulation business. As anticipated, this business was not profitable in the quarter. This is not surprising as the first quarter is seasonally weak. In addition, demand for residential insulation is driven by lagged new housing starts, which were the worst on record for a first quarter, down 19% from last year. In strong housing years, insulation used in new residential construction in the US and Canada represents more than half of our insulation revenue. In the first quarter of 2010, we estimate that new construction represented only 1/3 of our revenue.

Insulation business did benefit from stronger volumes and markets outside of US residential construction. As a reminder, our insulation business maintains a geographic product and channel mix that provides market diversification beyond just new residential construction.

Analysts are forecasting that housing starts will be about 700,000 units in 2010. In an improving but still weak housing market, we expect to continue to narrow our losses in this business but do not expect to return to profitability this year.

Clearly, Owens Corning had an outstanding first quarter that has positioned us well to achieve our goals. The need for energy efficiency in homes and buildings is growing around the world. Global industrial production is expected to increase. Owens Corning is prepared to benefit as our markets continue to return to their potential. We are positioned to grow and to win with our customers. I will now turn to Chief Financial Officer, Duncan Palmer for a more detailed look at our performance, our financial position, and our guidance. Duncan.

Thanks, Mike. Let's start on slide five where we show our key financial data for the first quarter 2010. You will find more detailed financial information in the tables of today's news release and the form 10Q that was filed earlier. Today we reported first quarter 2010 consolidated net sales of $1.265 billion, an 18% increase compared to 2009. This was led by strong revenue growth in composites and roofing. In a moment, I will review our reconciliation of items to get to adjusted earning before interest and taxes. adjusted EBIT. As a reminder, when we look at period over period comparability, our primary measure is adjusted EBIT.

Adjusted EBIT for the first quarter 2010 was $97 million, up from $32 million in the first quarter 2009. We are extremely pleased with these results, which continue to demonstrate the strength of our business portfolio and our ability to execute in the midst of end markets that have not reached their full potential. Adjusted earnings for the first quarter of 2010 were $53 million or $0.42 per diluted share as compared to first quarter 2009 adjusted earnings of $5 million or $0.04 per dilute shared. Depreciation and amortization expense totaled $80 million for the first quarter. This is consistent with our guidance that full year 2010 depreciation and amortization expense will be about $325 million. Our capital expenditures for the quarter excluding purchases of precious metal totaled $56 million. We anticipate that 2010 capital expenditures will be lower than depreciation and amortization expense for the year.

We continue to focus on cash generation. Due to the seasonality of our business, our operations use cash during the first quarter of the year. However, our improved results and continued discipline and managing working capital allowed us to limit cash used by operations to $27 million and improvement in excess of $250 million over the same period in 2009. Our net debt was $1.7 billion at the end of the first quarter 2010.

Moving to slide six, you can see the reconciliation of our first quarter adjustment EBIT of $97 million to reported EBIT of $83 million. As Mike discussed in his remarks in the first quarter of 2010, we took actions to address our cost position in Europe. The most significant of these was a decision not to invest in restarting a line in Alcala, Spain that was previously curtailed in 2009. We reconciled $13 million in charges in the first quarter as a result of these actions and expect to incur an additional $24 million as we complete these actions during 2010 and 2011. We are investing in the expansion of our existing manufacturing facility in Russia to serve that growing market. We continue to evaluate our global network in the composite segment to ensure that we have the appropriate capacity to respond to current and future market demand.

Next on slide seven, you will see adjusted EBIT performance comparing first quarter 2010 with same period in 2009 based on business contribution. Each of the businesses in our portfolio showed improvement year-over-year. Our composite segment demonstrated significant operating leverage and improved operating margins to 7%. Our roofing business delivered record first quarter EBIT. Our insulation business narrowed its losses despite weaker market conditions in the United States.

While corporate and other costs were higher, overall EBIT increased by $65 million. And based on the Company's performance and strong improvement in our stock price over the past four quarters, our expectations for incentive based compensation including long-term stock-based compensation has increased. We now expect general corporate expenses to be between $80 million and $90 million in 2010.

With that as back ground turn to slide eight and we will begin a more detailed review of our segments starting with building materials. In the first quarter, building materials had net sales of $847 million an 11% increase over the first quarter of 2009. Driven by roofing's outstanding performance, building materials delivered $34 million more EBIT in the first quarter 2010 as compared to 2009. The following two slides present these results in more detail by highlighting the key businesses within the building materials segment, the roofing business, and the insulation business. First, slide nine provides an over view of our roofing business. Roofing sales for the quarter increased 16% from first quarter 2009 due to increased demand as customers restocked their inventories and purchased in advance of our announced price increase. The margin momentum that began in the fourth quarter of 2008 continued throughout the first quarter of 2010. Roofing achieved EBIT margins of 24% in the quarter, delivering $128 million of EBIT.

We have taken actions over the past two years to improve the profitability of the roofing business. We have achieved improvements in our production processes, reduced overall manufactured fixed cost and improved our mix. These programs will continue to drive profitability in this business and we believe that operating margins will be in excess of 20% for 2010. Although volumes in the first quarter were stronger than in 2009, we do not expect volumes for the rest of the year to show much growth over the same period of last year absent additional storm activity.

Given our outlook for price and raw material inflation, we expect margins during the second and third quarters to below 2009 levels. We expect the fourth quarter volumes to be seasonally weak. As a result, we anticipate that overall margins for the year will be lower than 2009 levels but above 20%.

Next, onto slide ten. The geographic and market portfolio of our insulation business provides diversification to markets beyond new residential construction in the United States. Higher sales volumes outside of the United States drove the increase in sales for the business. Despite 19% lower lagged US housing starts, first quarter net sales were 4% higher than first quarter 2009. The insulation business narrowed its losses from the first quarter 2009 as a result of increased demand. Despite this, demand continues to be at extremely low levels, which resulted in the business losing $35 million in the first quarter 2010.

In response to the prolonged weakness in demand, our glass fiber utilization was about 50% in the first quarter 2010. We expect this business to narrow its losses from 2009 but it will struggle to achieve and sustain profitability until demand improves.

As I remind you on each of our quarterly calls, 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 composite segment. Composite sales in the first quarter 2010 were 34% higher than the same period in 2009. This dramatic increase was primarily the result of increased shipment in our reinforcements business as demand continued the sequential improvement that began in the first quarter 2009. In addition, selling prices across most of our markets rose in the first quarter 2010, but were generally still below those seen in the first quarter 2009.

In the first quarter 2010, composites achieved 7% operating margins and delivered $31 million in EBIT, a $49 million improvement over the same period in 2009 driven by increased operating leverage. We were able to improve reinforcements capacity utilization to 83% during the quarter due to increases in global demand. The increase in capacity utilization along with cost reductions achieved last year has greatly improved our operating leverage and further position the business to return to double-digit margins.

We have a few additional items to cover. Now to slide 12. We have maintained a strong balance sheet. We had $948 million available in our senior revolving credit facility as of the end of the quarter in addition we have $463 million of cash on hand. We are confident the refinancing of our bank facilities will be completed well before the end of the year. As part of this refinancing, we expect that our cash will be applied to repay the $600 million bank term loan. We have an investment grade rating with a stable outlook from both S&P and Fitch and in March 2010, Moodies improved its outlook on our Company from Ba1 negative to Ba1 stable.

Finally on slide 13, we are extremely please with our performance during the first quarter. These strong results have given us confidence that our adjusted EBIT for 2010 could be as much as $450 million, an increase of $100 million over prior guidance. This equates to about $2 of adjusted earnings per share. So with that, Darrel, back to you for Q&A.

Thank you, Duncan. Marisol, we are ready to begin the Q&A session.

Thank you, Sir. (Operator Instructions) Our first question comes from the line of Ken Zener from Macquarie Capital. Please proceed.

Good morning.

Good morning, Ken.

Two question here. One is going to be on roofing and one on composites. For roofing, how much did your stock of raw asphalt enable you to benefit from price introductions you had in roofing relative to the underlying inflation we saw in the (inaudible) cost of inflation? Do you have a month or two in your inventory already, pre bought?

Well, Ken, if we talked about it in prior calls, we bring inventory of asphalt into our tanks and typically carry weeks or even in excess of a month of inventory in our tanks and carry finished good inventory we ship to our customers. I think what we talked about on this call and as a result of that, often times our costs lag, asphalt cost increase as we experience them. They lag into our P&L. I think what we're seeing in this quarter is we actually did see some restocking on the part of our customers and pre priced buying. So, we probably cleared through inventories a little bit faster in the first quarter than we anticipated. I would say going into the next quarter, we're probably that positioned raw material costs increases come through our P&L a bit faster in the second quarter. I hope you conclude from our comments that we feel pricing is fairly stable and asphalt prices may be a bit increase from last year, we still have outlook to very strong margins in the second or third quarter.

Yes, that was very solid results. And then in the composites that was up quite a bit. How would you break that up between restocking in the channel for simply true end demand and could you comment on perhaps the different markets, obviously auto was very strong. I think wind is flat. Roofing looks flat. If you could add some color there. Thank you.

Great Ken. I would be happy to do that. I think if you look at the fourth quarter versus the first quarter, so roll forward the business sequentially as opposed to comparing to first quarter last year when our markets were in a fair amount of distress, we actually didn't show dramatic growth from the fourth quarter 2009 into the first quarter of 2010. So, whatever restocking effect we're seeing, it's probably relatively constant over the last six months. So we do know there's some restocking going on but we wouldn't think it's any more pronounced stocking say in the first quarters than what we saw late last year. We can look at our own businesses internally, though, and know that certainly the effect we saw in roofing was some of our roofing distributors pulling some inventories from us, caused us to ramp up production in the first quarter to replenish our own inventories, which caused us to put some demands on our composite division.

So, we know some of the restocking that we have seen in our building materials business is having a positive impact on our composites business. That said, we feel pretty comfortable that global industrial production around the world is continuing to improve, not at remarkable rates, but good month-on-month improvement. And I think in today's call we said we think overall demand this year could be up as much as 25% versus last year. I think if you break that by halves, that's going to be much more pronounce in the first half where we're comping against markets that were in significant distress and probably much weaker in terms of the rate of growth in the second half where our markets last year were beginning to recover and we were beginning to see our customers restock.

Thank you.

Thanks.

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

Thanks. Good morning, everyone.

Good morning, Mike.

First question, I was wondering if you could just give us a sense of the pricing momentum that you saw sequentially across your different businesses in the first quarter and how you see that continuing to play out. If there's some incremental positive momentum that you still expect to play through into the second quarter. And particularly as it relates to roofing. You kind of said that, you're looking into 2Q, you're going to get more of the higher raw material costs and pricing is a bit more stable. We also recall that you had timed a price increase of your own. So, net-net, sequentially should we expect market compression, or do you feel the compressing you've got in roofing the price increase that you scheduled and announced, how do you feel that's taking in the market?

Okay. Thanks. Let me start with the first part of your question and just go across all of the businesses. And then I'll put a special focus on roofing. If you look at composites, I think we did disclose in our Q that prices in first quarter were below 2009 levels but they did improve sequentially versus the fourth quarter of 2009. So we saw some improvement from last quarter. We're still below where we were when we entered 2009 last year. We're obviously working very hard today to try to restore pricing back to what we think are more reasonable levels. We did lose some price, particularly in the third quarter of last year, as kind of the crisis was bottoming. And probably we lost more price in Europe than in some other parts of the world. So, we disclosed on that and are focused on trying to get prices back to what we think are more reasonable levels.

Given the nature of that business, some of our business is contracted. Some is in long-cycle projects and other things. It's not like our building materials business, which tend to be more distribution-driven, where you raise price to distribution and then they carry prices into the market. We try to go customer by customer and composites and work pricing with each of our customers. But, I can assure you our teams around the world are working on that issue and we do think that's one of our objectives for this year, to improve pricing. I don't know that we would want a strong outlook for composites based on a big up tick in pricing. We will look for some continued improvement quarter on quarter as our really our measure of success in composites this year.

In Insulation, pricing has been relatively stable. I think the good news is it is relatively stable. The bad news is that it is relatively stable because we're down around everyone's cost and there's not a lot further to go down in terms of taking insulation prices down based on profitability of the business. So we found stability maybe for the wrong reasons. And hopefully as we start to see some recovery in that market, and we see a pickup in demand, that will give us some opportunity to at a minimum, further stabilize price but maybe begin to rehabilitate pricing in insulation.

Obviously, if you look at our numbers and our best estimates of where we think the other players in the market is, we're all really hurting right now based on where pricing is in that market. And we would like to get that business back to profitability as quickly as possible, although we don't believe that's going to happen this year.

In roofing, I think you got the gist of what we're saying about roofing, which is this time last year, raw material inflation was relatively tame. We're not in an environment today where we're seeing a wild run up in inflation. But this is the time of year where our input costs do begin to go up. Our best estimate, as we head into the second and third quarter, some pricing activity, which will allow us to keep prices stable and maybe cause prices to improve a bit through the second and third quarter. But our expectations are that we would see some margin compression as we see some raw material cost inflation. Still great margins but we don't believe we're going to comp positively with either our second quarter or third quarter operating margins last year, which were in the low 30s. I think you got the gist of that in the nature of your question. I just reiterate the comments you made.

Great, thanks very much for that detailed response. One last question, just as we look at insulating systems and you expect the losses to narrow. Can you give us any visibility on sort of dollar cost improvement goals? And I guess if I can kind of throw in another one, also on the roofing, I'm sorry, on the composite side, if you can share with us any type of view in terms of the savings from next year, when the China plant opens?

Okay, great. Let me talk a little bit about insulation and maybe I'll have Duncan address the composites question. On the Insulation side, I think the team's done a good job on buttoning down our costs. At the same time, we think there are mistake that could be made at this point in the cycle of cutting back some of our market development and product development and innovation costs. We obviously are playing this business for the long term. We are big believers in demographic trends and long-term housing. We're big believers in energy-efficiency trends and need for more energy-efficient construction.

We believe we need to be in the lead, marketing those ideas, leading on public policy regarding those ideas, making sure that we keep the healthiest possible marketplace for the long term. So we do continue to invest and spend money in activities that we believe strengthen and build our market leading position in that business while at the same time trying to cut back on the discretionary cost that can impact near-term performance.

The last time the business made money, we were at about 900,000 units in the year for new construction on a lagged basis that year had unit construction single, multi, well above 900,000 because we were kind of that was in the 2007 go into 2008 time frame where the market was coming down. We said on prior calls that if we could be profitable again at 900,000 units as we come off the trough, that's a pretty reasonable goal for us to try to achieve that break even because likely coming off the trough, we're going to hit that level on weaker housing or weaker pricing. We've tried to look ahead and say when this market gets back to about 1 million, you should expect to see the business improve fairly dramatically but in the meantime, it's a challenge for us at this level of demand, even with some small improvements in housing. We just don't have enough demand in order to leverage our costs. Duncan, you want to talk about composites and the China investment?

Yes, Mike. So, the China investments, as you know is a plant where we will have a world-class cost structure and the reinforcements plant that we build. The project will be complete by year end and it will have an impact on our business in 2011. One of the initial things that will happen is we will be able to service demand that we have in China with existing customers by production that will be producing locally and will not have any longer to have to import into China, which is what we have to do.

So, clearly there will be a saving for us there. I think that will be an important thing for us and obviously, we will have a good cost structure there. Something else you have noticed, Mike and I talked about, we continue to look at network in composites and made a couple of decisions we talked about. One was to improve in Europe by taking an un-utilized facility that we had in Spain and some other actions that not restarting that line that we could tell last year. We took some charges associated with that to improve our cost structure going forward in Europe. We've also decided to go back to the decision we made about our Russian facility, which we announced a couple years ago that we would expand that facility. We have gone back to that. We were exercising capital discipline during 2009 had deferred that investment.

Now we have come back to that and decided again to expand that facility in Russia, which again looks like an attractive market. That's an expansion. So, overall what you can see we're doing is balancing, making sure we have the right capacity and right places and right cost structures that will serve those markets going forward and we continue to look at the network from an overall point of view going forward.

Just to make sure I understand. Earlier I believe, Mike, you talked about the 900,000 as the last break-even going into the cycle and am I mistaken in remembering that you said that given a lower cost structure or some of the adjustments that the new break-even should be at a lower level of starts?

Mike, I don't think we've said that in the past. I think what we said is it's going to be base on the nature of the rebound and the nature of the recovery. We think the next time we pass through 900,000 starts, unless we can restore pricing in the near term, we're probably going to enter that market with lower prices than the last time we were at a 900,000 unit market.

So, as a result, it will be a bit of a race between how much cost we have taken out in order to try to improve our cost position versus where pricing stands at that level of volume to determine whether or not we get to break even. We're too far away from that right now to really make that call but we have felt relatively comfortable as we talk to investors that as a milestone on the horizon, we did make money the last time they were 900,000 units. We'd love to find a way that when we get to that kind of market, we would be better than break even again.

Okay, thank you.

Thanks, Mike.

(Operator Instructions) Our next question comes from the line of Joshua Pollard from Goldman Sachs. Please proceed.

Good morning. Based on my math, you guys finished the quarter somewhere in the 90% range on capacity utilization and composites. I was wondering if you guys would agree with that math. And then, what level of capacity utilization were you at the last time you guys hit your normalized, which you consider normalized margins of 10% in that business?

Okay, Joshua, in Duncan's prepared markets, we disclosed our capacity utilization and we said that in the first quarter capacity utilization was 83% versus full year estimate of capacity utilization of in 2009 of about 60%. So, I think your estimate of where we were in the first quarter might be a bit high relative to where we think we are.

The question was where you ended the quarter.

Oh, where we ended the quarter. I don't believe that we disclosed on that. So, you're reasonably correct to assume that through the quarter we are bringing some capacity on. So there was some acceleration of utilization through the quarter but we haven't said where we ended the quarter. If you go back to the first three quarters of 2008, which was the last time we were at double-digit operating margins, we were right around 90%. It depend on regions of the world and product lines. We had some areas of the world where our utilization was a bit tighter than that. And then we had some places where there was slack but a broad average we were probably 90% or in the low 90s in term of capacity utilization in the top of the last cycle.

Okay, that's very helpful. And my other question is on insulation. You've seen industries or other building products segment, roughly similar market structures and end-market structures raise prices. Are you considering a price raise in your insulation business today?

Joshua, that's a great question. We have been watching very carefully what is happen in the world of building materials related to pricing. There has been some activity in the first quarter in some other commodities where there have been some increases announced. I would say our teams are monitoring that very very carefully. And that generally to get pricing, you will need aggressive action on the part of both the manufacturers and customer base in order to be able to move pricing. I think as we look at the market, if we believe we had a set of circumstances where, as a manufacturer, we saw clearer on how the customer base could support our desire to improve pricing based on their ability to drive pricing, we would like to move the business. But at this time we have nothing to announce in terms of where we believe insulation pricing will be.

That's a very, very quick follow up to that is as you look have often cited that you lag housing starts in your insulation business. Housing starts of call it 20% on a all in basis, or 40% on a single-family basis. Are you starting to see that type of improvement as you work through March and even into April? Thanks for taking my call.

Thanks, Joshua. We're not seeing that yet in the first quarter. So, if you go back on our, we typically work on a 90-day lag. So, we would say that houses that were insulated in the first quarter with the housing starts that we saw in November October, November, and December. And that was a pretty dismal data set, pretty poor numbers compared to last year, the first quarter was 19% weaker in terms of lacked housing starts. So, we were in a very weak quarter.

We're hopeful that some of the more positive data we saw, particularly in February and March, we would begin to see late in our second quarter. So we would hope we would begin to see some up tick in demand in the new construction side of our business in the May-June time frame into a 90-day lag. And then we would also be hopeful that through the second quarter we start to see reasonable housing start numbers. As you know, and I think everyone on this call knows, tremendous uncertainty as the first time home buyer credit get pulled out of the market, as some of the financial support from mortgages gets pulled out of the market, it's hard to say how we think housing is going to progress from this point. We're focused on taking care of the demand we can get our hand around now, trying to narrow the losses in the insulation business and putting ourselves in a position to react in a better market. Which we know is out there someplace,. We just we don't know when it's going to come.

Our next question comes from the line of Garik Shmois with Longbow Research. Please proceed.

Thank you for taking my question this morning. First off, if we could dig a little bit more on roofing inventories. I was wondering if you can discuss what you're seeing down on the distributor level and if you think the restocking has more legs or if it was a first quarter story. And a follow up to after this, if you could talk about perhaps any sequential change in roofing demand as coming out of the first quarter into the second quarter. Just what you are seeing. What kind of momentum as far as volumes go?

Okay, thanks. Well, first of all, if you go back to our fourth quarter call in February, I do think in that call we talked about we thought fourth quarter volumes in roofing were a little bit weaker than maybe we had expected. And that one of our theories of that time was that our customer base didn't really feel a lot of urgency, the need to finish with a lot of inventory in their warehouses or a lot of inventory on their balance sheets. And that I think we maybe foreshadowed that hopefully we would see some restocking in the first quarter. You never know whether that is going to happen til in fact it happens and we think it did happen. So, we were gratified in the quarter to catch up a little bit of the volume that we were missing in the fourth. To see a little bit stronger volume in the first.

The overall business that's kind of out the door for our distributors, we don't think is materially different what they experienced in 2009. I mean, their business is divided into the standard reroof market, the new construction market, and then weather-related or storm-related demand. We don't forecast on storms. We don't see the dynamic that causes the reroof market to up tick strongly. We kind of know where the new construction markets are so we think roofing demand out the door, distributors pretty stable. It's this time of year when the snow melts and we get a little better roofing weather that we start to get a better sense of what's real demand out the door of the distributor. So we're forecasting a year where we think their business is about flat versus 2009 because they maybe liquidated some inventory at the year end 2009. Maybe we sell a little more this year. We think it was mostly a first quarter event.

Okay, thanks for that. One question on insulation, seems like international markets continue to do well in the first quarter. Looks like some of the government programs internationally are running out. Can you talk about what you saw in the first quarter? Your expectations on your non-US insulation business.

Yes, appreciate that question. We had talked a fair amount of the second half of 2009 about Australia's stimulus and fair amount of production in both the US-Mexico-China that we were exporting to Australia. We think that's largely behind us. So that's really mostly a 2009 story. That may create some demand for us this year but we don't think it will be material.

The bigger news, really, in the quarter is we continued to see a little bit better performance out of our businesses, outside the US. Canada's pretty good. Latin America had a pretty good quarter. Asia-Pacific, I think, has been starting to show some good performance both in term of top line and also profitability. So, we do make money outside of the US in a number of our insulation businesses and in a number of our building materials businesses. They're not growing tremendously fast. And I think our challenge is probably to figure out how to get product lines and building practice in those markets that maybe give us better growth. But our overall performance in some of those markets is reasonably good and has helped void and support what has been a very weak US market for us particularly on the new construction side.

Okay, thanks.

Thank you, Garik.

Our next question comes from the line of Dennis McGill from Philman and Associates. Please proceed.

Good morning, guys.

Good morning, Dennis.

Good morning. My first question, I was hoping to push a limit bit on the roofing pricing because what I hear you say with the pre-buy activity, if I'm a distributor and pulling forward some of my orders, it's under the expectation that pricing will in the channel. And our research certainly indicates most of the price announcements have held and there are others out there. We would see pricing as a positive when we think about it sequentially first to second quarter and probably second to third quarter. So, when you talk about margins, I think you touched on this a little bit but didn't totally address it. Relative to the first quarter, are you seeing enough of an increase in asphalt costs to overwhelm those price increases to where you would see sequential deterioration in margin? Or can you hold margin in that general range of the first quarter based on some of the pricing activities out there?

Yes, I appreciate the question, Dennis. I think we've been pretty careful on these calls not to get into quarterly margin guidance for roofing. So, I'll pull back to the broad guidance I think we're giving on roofing, which is for the full year, we feel comfortable now saying we don't think margins will be as high as 2009 but think they will be in excess of 20. So, we said that in my prepared markets. We said we do not believe margins in the second and third quarter will be as strong as they were in 2009 when they were in the low 30s. But obviously we're seeing the full year going to be between 20% where we finished 2009.

They are still going to have to be very good and profitable margins in those quarters. The fourth quarter a bit of a challenge to forecast but even as we do the sensitivities on the fourth quarter, we feel comfortable with overall guidance of better than 20 but maybe not as good as last year. Obviously if they're not going to be as good as last year given that we beaten the first, they are going to have to do a couple quarters out there where we're going to lag behind. And we would expect that certainly through the stronger part of the year in the second and third quarter, we'll have very healthy margins but not as strong as last year.

Is it fair to assume the pricing on a sequential basis is positive in the second quarter?

I think it's fair to assume that our raw material cost inflation is going to be positive on a sequential basis and that the price environment will be satisfactory to allow us to achieve good margins.

Okay. That's fair enough. On the composite side, In the first quarter realized you get some benefit from the inventory build and obviously they comp against last year, should we think about the leverage benefit any differently as we move forward. to some degree. In other words, just realizing the 7% margins are very strong relative to what you guided as a goal of double digit margins. So, do we rethink the timing of getting back to double digits based of what we've seen in the first quarter? Or does the leverage play into that to some degree?

It's a very good question, Dennis, and I think we tried to be very open and transparent on allowing our investors to see where we think volume is and where we think production is. Because all though last year and I think really candidly in the second half of last year particularly in the fourth quarter, I think there was some disappointment from investors, that we didn't show more leverage in the fourth quarter because of the fact that we were starting to show reasonable levels of demand but we had kept production so pinned down because we wanted to get to our working capital goals there was no opportunity for leverage. We really did open the throttle here in the first quarter. And I think by keeping production pinned down through the end of 2009 and bringing some production back on late fourth quarter, which we talked about in our prior call, we got a lot of leverage in the first quarter. So we really now brought production all the way back to good level of demand and now we're really producing to meet the demand that we see in the market.

As a result of that, I think the leverage on the go forward basis is going to be more driven by just volume rather than just volume and production. So, whereas in prior quarters we were deleveraging based on volume and production, this quarter we got leverage from volume and production. I think as we roll forward now, the leverage is going to come from volume as our production ramps and stays tracks with volume. So this is probably the big leverage quarter. And we feel comfortable getting back to 7% operating margins was a great stride forward and a great stake in the ground and we just like to continue to build from here.

Okay, that's very helpful. Thanks and good luck, guys.

Thank you, Dennis.

Our next question comes from the line of Herb Hardt with Monness, Crespi, Hardt. Please proceed.

Good morning. I have two questions. One is, can you tell us how much of the insulation business is outside the US? And secondly, I think we were a little surprised at the cost on the insulation side, not coming down more. You have been very effective on other divisions and I recognize volumes haven't picked up much. And yet, is there something about the structure of that business that doesn't allow you to get the cost out a little more than you have?

Herb, I'll take the cost question and then let Duncan talk about the business mix outside of North America. On the cost side in insulation, there's a lot of things go inside any business. And really our core fiberglass insulation business in the US has become a small enough portion of the business that in a lot of cases scenes that going on around and outside the business are driving your view of our cost structure. I think the team has done a good job on getting after fixed cost structure. But in the quarter, one of the things we have been dealing with is we have had to do a wholesale conversion in our phone business from our prior blowing agent to a non--ozone depleting greener blowing agent. It's been a wonderful product launch for us. We now have a much more sustainable product. Obviously, when you go and do that though, you're working through inventories. You are working through new production processes, you're working through new raw materials and getting your plants to working as new standards.

We think we're coming along our learning curves but when you are in a business that is losing money and has weak volumes, any of those cost head winds really do end up creating a lot of friction in terms of trying to get any of the good news through to the bottom line. I think some of the things we've seen operationally and some of the operational challenges we have, as you get down to very low levels of demand and very low levels of operation, even small changes in cost performance tend to put a little bit of gravel in the gears and in terms of being able to trying to get leverage. So, we were pleased to get some positive leverage in the quarter. And obviously we are looking for it to be a year of positive leverage even though we expect a fairly weak overall demand cycle in 2010. But the quarter obviously didn't get a lot of leverage and we don't think it's a cost issue. We think it's just a lot of stories inside there.

Okay. Thank you.

Duncan, did you want to talk outside North America?

Yes, Mike. We actually disclosed that certainly the first quarter, our international business outside of North America insulation, is roughly about 16% of our revenue. We also disclosed that some of those business were actually some of our growth in the top line. And those business really comprise the business we have in the Asia Pacific, which obviously within the (inaudible) of China where we sell insulation and also foam related products. And also in Latin America, where we have a business focused heavily on Mexico, also Latin America more generally so. Those are businesses that comprise of international businesses in insulation that have a good performance in the first quarter in terms of (inaudible).

Thank you.

Our next question comes from the line of Jack Kasprzak with BB&T Capital Markets. Please proceed.

Thanks, good morning.

Good morning.

Hi Mike. Some of my questions have been asked. But I want to ask as well, with the $100 million of EBIT improvement in your guidance, I mean, what, could you characterize where the upside versus your expectation is coming from versus where you offered the initial guidance in February?

Sure. I think primarily it's more timing than anything. As we looked at the year, coming into the year, we expected to get operating leverage and composites. We thought that maybe would take a couple of quarters and we got ahead of our expectations where we were 90 days or 100 days ago to today. I think the team and the marketplace and the market dynamics have gotten us ahead of the curve in terms of how much operating performance and leverage we've been able to get in that business. So I think that's been an up tick.

I also would say every forth quarter call we talk about roofing and roofing margins and very weak seasonal demand late fourth quarter and early first quarter as being the period of time where we would expect that margin weakness is the biggest risk in roofing. That's kind of the biggest period of time where the market is fraught with risk. Most of the distributors don't have a lot of business. Most of the manufacturers don't have a lot of business. You can get into an environment where every order is being price and negotiated over.

Obviously, it continues to be a very competitive market. And we see good competition for every order that's out there. But we got through the winter months with relatively stable prices. We got this little positive tailwind in terms of volumes in the first quarter. So, I would say roofing got off to a bit of a stronger start than we expected. The combination of those two put us in a position of being able to upgrade guidance. And I don't think it goes to our change in the belief in the core operating capability of our businesses.

We've always believed that the businesses we had can operate at these kind of levels. I think it more goes to the timing with which our markets begin to return back to their potential and therefore as a result, our business' ability to get back to their potential.

Great. Thanks for the color and congrats on the quarter.

Thanks, Jack.

Our next question comes from the line of Keith Johnson from Morgan Keegan.

Good morning. Thanks for taking my question. Just a couple of ones on sequential changes, maybe on composites for clarification purposes. What was the average utilization rate you guys had in the fourth quarter of 2009?

Duncan, you want to handle that one?

It was about 70%. So, we disclosed it for the whole year of 2009 it was about 60%. We brought some facilities back up, towards the back end of the year, particularly in the fourth quarter. On average during the fourth quarter, it was running around 70%.

Okay.

And ran about 83% in reinforcements in the first quarter.

Okay. So just in my mind trying to equate 13% sequential improvement with the significant improvement we saw in the operating margin line. Were there any other factors in the first quarter that helped the margins, foreign exchange, those type of things, we should think about as we any about as we model forward for the rest of the year?

Yes, a couple of things, we said, looking at price, we talked about price being sequentially better first quarter than fourth quarter overall in our business. And we did say that price in the fourth quarter had kind of stabilized and begin to turn the corner from the decline we saw earlier in 2009. So I think price was a factor in that. I think, as Mike said, that is something we continue to focus on as our markets kind of continue to recover. Utilization and therefore operate, a big factor. We took costs out over 2009 and actually also in 2008, we have taken costs out, too.

It's been retaining those cost reductions and seeing those come through and our operating leverage is a factor. And one thing if you remember in the fourth quarter, we had said that there was some start up costs associated with bringing some of that capacity back online in the fourth quarter. That level of start-up cost did not repeat in the first quarters. Also had an impact on a quarter-over-quarter kind of leverage you saw.

What were the start-up cost in the fourth quarter?

We disclosed we had some start up costs associated with bringing capacity online in the fourth quarter, which have made a difference to fourth quarter results. We didn't specifically give a number but it had been and given that was a roughly break-even quarterly, slightly positive quarter. It was material in the context of that kind of number.

Okay. What was the foreign exchange in the first quarter of 2010?

There was a foreign exchange benefit in terms of the sales line. I think it was a benefit year-on-year. I don't think, we didn't disclose anything on benefit on the EBIT line.

Okay.

It only benefited revenue.

Okay so didn't hit EBIT. Okay. And final question, just sequentially look like you had a nice dropoff in interest expense from $30 million down to $26 million. Didn't know what the driver was there? Looked like your debt position didn't change substantially fourth quarter to first quarter. Wasn't quite sure what was driving that decline?

We disclosed actually in the fourth quarter that we did execute an interest rate swap against some of our fix rate debt bringing it to floating. So that had a benefit in terms of our interest expense from the fourth quarter to the first quarter.

Ok. Great, thanks a lot, and good luck.

Marisol, it looks like we have time for one more question.

And our next question comes from the line of Keith Hughes from SunTrust. Please proceed.

Thank you. Just real quickly, you talk in the prepared comments on the European capacity within composites adding in Russia, not opening up Spain. What does that do to your total capacity within the European market. And is the outlook there any different for composite you find in the other parts of the world at this point?

Thanks. Great question. Let me start with the second part of your question first and then come back to the first part.

We said all throughout last year that when we really saw the big dropoff in global industrial demand, we saw it coming pretty equal pieces across Asia, Europe, and North America or the Americas. We also said throughout last year that we certainly were seeing Asia recovering most quickly and getting back to kind of 2008 levels much more quickly than Americas or Western Europe. We have disclosed that we have seen the Americas recover a bit more quickly than we have seen Europe recover.

So, it's probably lagging in terms of recovery. I would say that we have a growth outlook for Europe from where it is today but that growth outlook is probably more cautious than maybe our growth outlook is for the Americas and certainly more cautious than our growth outlook for Asia. As a result of that we're trying to keep our production capacity pretty well balanced in Europe. One of the things that you've rightfully seen in the announcements we have put into the release today is that our decision to not start in Spain and to try to improve our cost position and balance our capacity to demand and then our decision to invest in Russia, we are offsetting some of the capacity locked in Spain with some additional capacity in Russia. But Russia is an existing operation so it's not a green field.

We're going into an existing operation where we have an old melter that needs to be rebuilt. And we are going to refurbish that melter and put in something that is more state of the art. And we'll get some of the amount of capacity increase. But it's not going to be significant capacity increase for the region of Europe. In totality, our overall philosophy. And I think this goes to prior question to, is to try to keep capacity and demand pretty well balanced by region so were aren't really at the whim of foreign exchange and getting cost mismatches with pricing. So, having the European asset base, having the Asia asset base with the investment in China and then having the North America asset base, all configured to be able to serve their local market at low cost is where we continue to drive our composite business.

Thank you.

Very good. Thank you for joining us for today's call. With that I will turn it back over to Chairman and Chief Executive Officer, Mike Thaman for a few closing remarks.

Well, thanks Darrel. We certainly appreciate all of the investors interest in our Company and all the good questions and dialog. I'll go back to where we started today. Which is we think today we are announcing really an outstanding first quarter. We think we gotten the year off to a strong start and we're obviously pleased to be able to upgrade our guidance by an additional $100 million to adjusted EBIT of $450 million in earnings per share in the $2 per share range. I think this really speaks to hopefully something you've been hearing from us as we've talked with investors over the course of the last couple of years. Which is we think we have an outstanding portfolio of businesses. And while our markets have in their own way gone through periods of operating below potential, we continue to build and invest in businesses to make them the strongest possible market leading businesses they can be.

As you look in 2010, I think you're going to see a portfolio of Owens Corning that is dramatically improved from 2009. In 2009, it was really a roofing story. I think in 2010 we're building too much of a roofing and composite story. And our goal is to see this housing recovery come where one day we can get on the call and talk about a roofing composite and insulation story. We're confident that day will come. We think that creates a great long term out look for our Company.

But our near term outlook is also quite strong and quite good. So, we feel good where we are right now. We feel great about our balance sheet. We think we're operating pretty well around the world. Our teams are focused on trying to build our customer base and build our capabilities. And we're just happy to be off to a great start. Look forward to talking to you again in three months as we discuss the second quarter. Thanks for a great call.

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