Owens Corning (OC) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2012 Owens Corning earnings conference call. My name is Allison, and I will be your operator for today.

At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

Now I would like to turn the call over to Mr. Thierry Denis, Director of Investor Relations. Please proceed, sir.

Thank you, Allison, and good morning, everyone. Thank you for taking the time to join us today for today's conference call and review of our business results for the second quarter of 2012. Joining us today are Mike Thaman, Owens Corning's Chairman and CEO, 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 [Form 10-Q] that detail our results for the quarter. For the purposes of our discussion today, we've prepared presentation slides that summarize our performance and results for the second quarter and first half of 2012. We will refer to these slides during this call. You can access the slides at OwensCorning.com. We have a link on the homepage and a link on the investors section of our website.

This call and the supporting slides will be recorded and available on the website for future reference. Please reference slide two before we begin, where 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.

This presentation and today's prepared remarks contain non-GAAP financial measures. Reconciliations of GAAP to non-GAAP are found within the financial tables of our earnings release.

Consistent with our historical practice, we have excluded items that we believe are unrepresentative of our ongoing operations to arrive at adjusted EBIT, our primary measure to look at period-over-period comparisons. We typically exclude significant nonrecurring items, such as the impact of the restructuring actions discussed in our most recent earnings call. We believe that adjusted EBIT is helpful to investors for comparing our results from period to period.

We adjust our effective tax rate to remove the effect of quarter-to-quarter fluctuations, which have the potential to be significant, in arriving at adjusted earnings and adjusted earnings per share. In the second quarter, we have utilized an effective tax rate of 25%, in line with our anticipated annual effective tax rate on adjusted earnings for 2012.

For those of you following along with our slide presentation, we will begin on slide four.

Now, opening remarks from our Chairman and CEO, Mike Thaman, who will be followed by CFO, Duncan Palmer. Mike will then provide comments on our outlook prior to the Q&A session. Mike.

Thanks, Thierry, and good morning, everyone. We appreciate you joining us today to discuss our second-quarter 2012 results. Owens Corning revenue was $1.4 billion in the second quarter, down 4% compared with the same period last year. Adjusted EBIT was $117 million, down from $135 million one year ago.

While we did demonstrate financial progress in the quarter, it was not sufficient to support our prior guidance. As we disclosed earlier today in our press release, we now anticipate full-year adjusted EBIT in the range of $360 million to $420 million. Substantially all of this reduction and the associated range is a result of our current outlook for our roofing business, which Duncan and I will discuss in our prepared comments.

As I do each quarter, let me review our performance against the commitments and outlook I have previously provided. We said we would continue to make progress towards our goal of creating an injury-free workplace. As of June 30, our year-to-date rate of injuries has increased 13% over our full-year 2011 performance. As you know, we've achieved 10 consecutive years of safety improvement, reducing the number of injuries in our Company by more than 90% during this period. Given this performance, the bar for continued improvement is extremely high. We know that we are up to the challenge and remain committed to the pursuit of our goal of zero injuries.

We said that we expected another great year for our Roofing business in 2012, reflecting some carryover of 2011's storm demand, improvement in the reroof market and modest improvement in new construction. Coming into the year, we had expected that carryover storm demand and an improving US housing market would allow us to get off to a fast start and deliver another year of 20% margins. While the business continues to operate at a high level of profitability, we now believe that the combination of first-quarter competitive intensity, persistently high asphalt costs and the volume weakness that we have begun to see in the last six to eight weeks will not allow us to sustain the margins that we have grown accustomed to over the last three years.

We said our Insulation business would significantly narrow losses in 2012. Insulation significantly narrowed its losses in the quarter to $16 million from $35 million one year ago on improved sales volume and excellent operating leverage. Through the first half of the year, the business reduced losses to $50 million, down from $85 million in 2011.

We expect to further improve the financial performance of our Insulation business in the second half of the year and to significantly narrow losses in 2012 as a result of higher volumes, continued cost leverage and announced price increases.

We said we would transform our Composites operation into a global network of low delivered cost assets, with a commitment to achieving significant progress against this goal this year. The restructuring of our European assets is on track, with all European consolidations and closures announced and on schedule. In addition, we are on track with the startup of new capacity in Mexico and Russia.

Finally, we showed good progress against our inventory reduction goals in the quarter, which will accelerate in the third quarter. As a result, we are moving to a cost position that will produce stronger financial performance in the second half of 2012, particularly in the fourth quarter.

On the basis of this progress, the business remains positioned to achieve double-digit margins in 2013.

We said that we would grow adjusted EBIT this year. As we announced this morning, we've revised our EBIT growth expectations for the year to a range of $360 million to $420 million due to the recent weakness in the roofing market and the impact on margins from higher asphalt costs.

Finally, we said 2012 would be a year of strong cash generation. We remain on course for strong cash flow this year. We continue to expect high levels of free cash conversion over the next five years, up to 100% of adjusted earnings on average. Based on our cash outlook and continued confidence in achieving our midterm earnings goals, we repurchased 2.6 million shares of common stock in the second quarter of 2012.

Now let's turn to a review of our business segments and our outlook, beginning with our Building Materials businesses. Roofing delivered $123 million of EBIT in the second quarter, down from $141 million one year ago, when the business benefited from strong storm volumes. As we reported last quarter, our April pricing actions were well executed. However, an announced June price increase was deferred to the third quarter. While market prices are up versus last year, persistent high asphalt costs and competitive intensity during the first quarter have led to margin compression relative to our first-half expectations.

Our current outlook is that second-half volumes will be weaker than those in the second half of 2011. We do not believe that we are positioned to grow EBIT in Roofing in 2012.

In July, we acquired the remaining non-controlling interest in Northern Elastomeric Incorporated, a manufacturer of self-adhered roofing and specialty underlayments. While this acquisition or investment is not financially material, we are pleased to be able to better serve our customers with innovative self-adhered roofing products and to expand our system of roofing products and high-performance accessories.

Overall, the Roofing business remains positioned for another strong year and we remain confident in our long-term expectations for margins of midteens or higher in this business.

Second-quarter Insulation revenues grew by 4% year-over-year, benefiting from a 23% increase in lagged US housing starts. Insulation narrowed its losses by $22 million in the second quarter compared to one year ago. And through the first half of the year, losses have been reduced by $35 million compared with the first half of 2011. First-half operating leverage was strong and provides nice momentum for continued improvement in the second half with seasonally stronger volumes.

We also benefited from price appreciation on both a sequential and year-over-year basis. With Insulation fundamentals continuing to improve, we remain focused on taking full advantage of this growth with strong execution in manufacturing, pricing and commercial initiatives.

Composites EBIT of $34 million improved on a sequential basis from $23 million in the first quarter of 2012. Volumes grew modestly in the second quarter, both sequentially and year-over-year, despite weakness in the global economy. In particular, we've continued to be impacted by weakness in Brazil and India, which are financially and strategically important to our business. First-half European demand was weak, but in line with expectations. Through the quarter, the outlook of our European customers grew more pessimistic, with little expectation of a second-half improvement.

Globally, the US market has been our bright spot, where we have experienced predictable demand and a strong competitive position.

I would like to take a few moments to provide an update on our overall asset strategy in Composites. The European restructuring is on schedule towards full implementation. We have announced all our intended actions and received all of the required approvals to fully execute our plans. We have benefited from getting started early this year and acting decisively in Europe.

We are underway with the successful startup of our melter in Mexico, which is on plan and receiving positive feedback from our customers. We expect to start up our Russian expansion in the third quarter. As for China, you may recall that last year we said we would be 12 to 18 months behind schedule in loading our facility there. This plant is now fully loaded, which is 12 months later than our original plan.

The result of our asset strategy in Composites is that we have added capacity in key product lines and geographies and will have low-cost assets on the ground to support our customers and accelerate the transition to the low delivered cost asset base that we discussed at our investor day. We are pleased with the progress that we are making with this transformation.

The Composites business has consumed substantial investments over the past 2.5 years, for new facilities in China, Mexico and Russia. At our current forecasted growth rate for global industrial production, we do not anticipate that we will need to invest in additional melters to meet market demand for at least two years.

Our composites agenda will focus on improving our margins, operating our assets well and migrating to a low-delivered cost network.

Our teams are prepared to respond to the market conditions we face and are focused on strong execution across our businesses in pricing, productivity and customer responsiveness. We remain confident in our ability to deliver improved second-half performance and strong cash generation for the year.

We continue to position our businesses to achieve our midterm profitability goals of $1 billion of EBITDA on a million annual US housing starts and continued global economic growth.

Duncan will now walk through the details of our segment performance and other key financial developments in the quarter, after which I will return with some closing comments prior to the Q&A session. Duncan.

Thanks, Mike, and good morning, everyone. As Mike noted earlier, our second-quarter results represent a significant improvement over first-quarter profitability. However, in the second quarter, we saw weaker Roofing performance than we had expected. As a result, we have revised our full-year adjusted EBIT expectation to a range of $360 million to $420 million, based on the outlook for Roofing in 2012.

Let's start on slide five, which summarizes our key financial data for the quarter. You will find more detailed financial information in the tables of today's news release and the Form 10-Q.

Today, we reported second-quarter 2012 consolidated net sales of $1.4 billion, down 4% compared with the same period a year ago. Our Insulation business grew 4% on improved demand. Net sales in our Roofing business were down 6% on lower sales volumes. And net sales in our Composites business were down 6% due primarily to foreign currency translation.

In a moment, I will review our reconciliation of items to get to adjusted EBIT. As Thierry noted at the beginning of the call, this is our primary measure to look at period-over-period comparisons. Adjusted EBIT for the second quarter of 2012 was $117 million compared to $135 million in the second quarter of 2011. Adjusted earnings for the second quarter of 2012 were $66 million or $0.54 per diluted share compared to $85 million or $0.68 per diluted share in 2011.

Depreciation and amortization expense for the quarter was $91 million, including accelerated depreciation related to the asset restructuring in Europe. Our capital expenditures for the quarter were $91 million. We expect that full-year capital spending will be approximately $340 million. This is about 10% higher than our depreciation and amortization for the year, excluding the impact of the asset restructuring in Europe.

Next, let me reconcile our second-quarter adjusted EBIT of $117 million to our reported EBIT of $85 million. Our European restructuring actions resulted in $32 million of charges in the second quarter. As we have previously disclosed, these actions will contribute to the transformation of our global Composites network to low delivered cost assets and position us to achieve double-digit EBIT margins in our Composites business in 2013.

We continue to anticipate incurring charges of approximately $130 million related to these actions in 2012 and through the first half of 2013.

Now please to turn to slide six, and I will review our adjusted EBIT performance comparing second quarter 2012 with the same period a year ago. Our Insulation business narrowed losses by $22 million on improved sales volumes, manufacturing productivity and improved capacity utilization. In our Roofing business, EBIT declined by $18 million, driven primarily by persistent higher asphalt costs and lower storm demand.

In our Composites segment, EBIT declined $21 million, as margins were negatively impacted by inflation, slightly lower selling prices and the impact of rebalancing supply and demand in our manufacturing network.

Overall, adjusted EBITDA for the Company declined $18 million. We have previously said that we expect corporate expenses in 2012 to be between $110 million and $120 million. We now expect corporate expenses to be approximately $100 million based on cost control actions and our reduced expectation for variable compensation expense.

With that review of the key financial highlights, I ask you to turn to slide seven, where we provide a more detailed review of our businesses, starting with Building Materials.

In the second quarter, Building Materials' net sales were $945 million, a 3% decline compared to the prior year, with higher sales in Insulation being more than offset by a decline in Roofing sales. Building Materials delivered $107 million in EBIT in the second quarter of 2012, a 4% increase compared with the same period in 2011.

The following two slides present the results in more detail by highlighting the two businesses within our Building Materials segment. Slide eight provides an overview of our Roofing business. Roofing net sales for the quarter were $605 million, a 6% decline compared with the same period a year ago. We experienced record storm demand in the second quarter of 2011, which resulted in a difficult comparison. EBIT in the quarter was $123 million, down $18 million compared to the same period in 2011, driven largely by higher asphalt costs and lower sales volumes.

At the beginning of the year, we said that we believe the underlying reroof and new construction markets would grow in 2012, driven by increased US housing activity, and that based on a return to more normal storm activity in 2012, the overall US Roofing shingle market would be down in the mid-single digits year-over-year. Based on what we have seen year to date, including weakness we have seen in shipments in recent weeks, we continue to expect the US Roofing shingle market to be down versus 2011 unless we see an active storm season in the second half of the year.

For the quarter, EBIT margins were down compared to 2011. While prices were higher than last year, higher asphalt costs caused margin compression during the quarter. We had expected to fully recover asphalt inflation. Although we saw oil prices weaken during the second quarter, asphalt prices have remained high during the spring and summer.

We executed well on our April price increase. However, our announced June price increase has been deferred to the third quarter due to competitive pressure. As a result, EBIT margins through the first half of the year have been about 17% compared to 19% last year. Although we expect that second-half margins will be stronger than the first half, we do not expect full-year margins to reach the 20% level we saw in 2011.

The business remains positioned for another year of strong financial performance, although not at the level of profitability we have seen in recent years.

Now slide nine provides a summary of our Insulation business. Net sales in Insulation of $340 million were up 4% from the same period a year ago, reflecting higher sales volumes as a result of a 23% increase in lagged US housing starts and strong commercial execution across the business. Volumes have improved significantly in the segments of our business that face US new construction; however, these segments have some of the lowest prices in our business, and so the impact of this growth on our overall revenue growth rate is somewhat muted.

The business narrowed losses to $16 million in the second quarter from $38 million one year ago. Increased sales provided incremental margin across our Insulation business. In addition, increase production drove higher capacity utilization. Manufacturing costs were lower on improved productivity. We have initiated pricing actions across several of our markets, which we believe will benefit our second-half performance.

In the second quarter, operating leverage, measured as the ratio of incremental EBIT to incremental sales year-over-year, was in excess of 100%, and year-to-date operating leverage is over 60%. We have previously said that the business could produce about $100 million of EBIT at one million annual US housing starts on about 50% average operating leverage compared to 2011 levels. As we said on our first-quarter call, when our operating leverage was below 50%, and this quarter, when our operating leverage is over 100%, our operating leverage guidance is a medium-term point-to-point estimate and will vary quarter-to-quarter driven by factors such as production timing. We remain confident in our ability to deliver on this goal.

As the US housing market continues to recover, we expect to see further sales growth. On the basis of improved volumes, continued cost reduction and pricing execution, we continue to believe that the Insulation business will significantly narrow losses in 2012. As I remind you on each of our quarterly calls, this is a great business in a well-structured industry. Owens Corning's pink insulation is a powerful and enduring brand. We are the clear market leader, well-positioned to return to historical performance levels when demand improves, as we know it will.

Now I will ask you to turn your attention to slide 10 for a review of our Composites business. Net sales in our Composites business for the second quarter of 2012 were $498 million, a 6% decrease compared to the same period in 2011. Second-quarter sales were unfavorably impacted by approximately $25 million in foreign currency translation and approximately $10 million relates to the second-quarter 2011 divestiture of our facility in Capivari, Brazil. Excluding the impact of these actions, sales grew over the same period in 2011, as stronger sales volumes in the quarter more than offset the impact of a low single-digit decline in selling prices.

The strength in volumes continues to be supported by a strong North American market. Consistent with our expectations, the European market was down year-over-year, although compared to the first quarter, our European shipments grew. We continued to see lower growth in the Brazilian and Indian markets based on weakness in those economies.

EBIT for the quarter was $34 million compared to $55 million in the same period last year due to year-over-year inflation, slightly lower selling prices and the impact of balancing supply and demand in our manufacturing network. We reduced finished goods inventory by more than $20 million in the quarter and started up our new facility in Mexico.

We believe prices have stabilized during the second quarter. Year-over-year inflation was largely driven by higher energy costs in certain parts of the world. In the US, natural gas prices continue to provide a cost benefit to our operations. We continue to monitor closely the energy price environment around the world.

We still expect the global glass reinforcements market to grow in 2012. In this environment, we continue to expect stronger financial performance in the second half of the year. The third quarter will be impacted by our supply actions taken to reduce finished goods inventory further by about $40 million and by startup costs associated with our asset expansions in Mexico and in Russia.

By year-end, we expect to have positioned our European business to be more competitive, to have significantly increased the percentage of our assets that are low delivered cost, and to benefit from improved manufacturing economics across our network. Our goal is to have reduced finished goods inventories by about $70 million in a market that is continuing to grow, with stable pricing. On a growing revenue base, we are confident that our Composites business will achieve double-digit margins in 2013.

Let me now turn your attention to slide 11. Our $2.2 billion US tax NOL will significantly offset cash taxes for some time to come. In 2012, our advantaged tax position is expected to deliver significant cash taxes savings, and our cash taxes paid in 2012 will be about $30 million. As a result of successful tax planning initiatives, we continue to expect our effective tax rate to be about 25% for the full year. Our long-term effective tax rate is still expected to be in the range of 25% to 28%.

During the second quarter, we repurchased 2.6 million shares of the Company's common stock for $76 million; 11.1 million shares remain available for repurchase. These share buybacks represent a return of capital to our shareholders and reflect our strong outlook for growth in earnings and free cash flow generation.

Thank you. I will now turn the call back over to Mike.

Thank you, Duncan. While we were disappointed to revise our guidance today, we have also reported continued progress on building the performance of Owens Corning for the future in our markets and our execution. We are seeing the beginnings of a US housing recovery and have started to demonstrate the impact that can have on our Insulation results.

We are executing our plan in Composites well and are positioning this business to return to profit growth next year on lower costs and positive operating leverage. And we continue to anticipate strong financial performance in our Roofing business.

Before I turn it back to Thierry, I would like to make a correction on one misstatement I made in my script. I characterized second-quarter last year operating losses in Insulation as $35 million. In fact, they're $38 million. So Duncan got that right a couple times in his comments, but I didn't want there to be any confusion on that before we entered the Q&A.

With that, I will turn it back to Thierry, and we will go into the Q&A.

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

(Operator Instructions) Michael Rehaut, JPMorgan.

Thanks. Good morning, everyone. The first question I had was on the Roofing segment. Certainly you've said for some time that you expect on a longer-term basis margins to be at least midteens. But I think for 2012, we were still thinking, as I believe you were, of 20% or better.

Can you go into more detail on your comments around competitive intensity in the first quarter that has continued into the second quarter and I presume you expect would continue into the back half of the year? What is driving that? Are you actually seeing pricing slip from first-quarter levels? That is my first question.

Okay, great. This is Mike. We talked about this on the first-quarter call, and maybe I will go back and kind of reiterate some of those points and then roll it forward. What we saw in the first quarter this year, which was I think unusual relative to what we've seen over the last two or three years, was a pretty aggressive buying season, with all of the manufacturers and certainly Owens Corning, in order to stay competitive, offering discounts on purchases of shingles in the first quarter.

The results of that was that the early April price increase had the net effect of not only taking those buys out of the market, but also increasing the invoice price of the shingles. So we really had a fairly dramatic increase in the price of shingles early in the second quarter, which gave customers a big incentive to want to bring in a lot of inventory in the first quarter. And I think we characterized our first-quarter volumes as being quite strong, and I think even on the call said we probably would have been happy to have a little bit less volume in the first quarter because we knew we were selling at somewhat lower margins than we would sell on a year-to-go basis.

I think we've seen a little bit of a carryover effect of that phenomenon in that so much low-cost inventory was loaded into the channels that there is discrepancies today in the market in terms of some customers are working off of replenishment costs in terms of the inventories they are buying; some customers still have low-cost inventory from the first quarter. And I think it has made things a little bit more difficult on our customers in terms of how they are managing pricing in the market.

So what we've seen in the second quarter is that not only was kind of an issue for the manufacturer, like Owens Corning, in the first quarter, but now it has created some pricing discipline issues in the second quarter in the market for our customers, in that people are working off of different inventory levels and different costs of inventory.

That didn't have a big impact on the early second-quarter price increase. I think we had good execution around that. I think today -- we had had a price increase announced for June, which we have deferred into the third quarter. We are still pretty optimistic that we will continue to make progress on pricing and that we will recover some of the asphalt costs which we've seen through the summer and continue to sustain good margins.

Really the issue we see now on Roofing is we are just going to run out of time in terms of having enough volume in the second half of the year to be able to have good enough margins and strong enough margins to make up for some of the lag that we put into the first half of the year. So we have a bit of a margin run rate and volume on a year-to-go basis are kind of the two things that are causing us to bring our guidance down.

Okay, so I appreciate that color, Mike. Just to clarify, before I hit my second question -- I don't want to -- but the part of the question I also asked was did you see any price slippage in the 2Q? It doesn't appear to be that -- to be the case. I just wanted to confirm that.

We saw -- I mean, second-quarter prices were very nicely higher than first-quarter prices, and second-quarter prices we've also reported are higher than they were in the second quarter of last year.

Okay, thanks. And then in terms of Insulation, very solid progress there, as you've been expecting. I believe you had previously talked about the second half -- and correct me if I'm wrong -- but the second half being roughly breakeven. Is that still the case? Maybe you could talk about also the success of pricing. How much was that a factor in 2Q relative to 1Q?

Yes, let me talk about the second half. We have not given specific guidance on the second half. Actually, last year in the second half we had said that our goal in the second half of last year was to be breakeven. And then we -- as we got into the second half of last year, the market was not as strong, and we were about breakeven in the fourth quarter. But we did not overall achieve breakeven in the second half of last year.

Given our comps in the first half of this year and that the second half of the year is always relatively stronger than the first half due to seasonality, I think we would expect to see similar levels of improvement in the second half of the year of what we've seen in the first half. So we should comp positively off of last year when our losses were not very deep. So as a result, we are looking forward to a pretty good second half.

As it relates to pricing, this is a little bit -- I'll maybe take a minute now to talk through this issue. We have seen price improvement in most all of our segments, if you look sequentially back to the first quarter and also if you look back to prior year.

What we are seeing today is the fastest-growing segment for us is the US new construction segment, which tends to be the lowest-price segment. I think Duncan talked about that in his comment. So if you look at top-line growth in the first half, total top-line in the first half is about in line with the amount of volume growth you would expect, so it doesn't show a lot of pricing. We have some mix in these numbers, though, so where we are seeing the growth tends to be lower price. And as a result, the price isn't coming through into the top line, but it is coming through segment by segment.

And just the degree of magnitude of that price in some of the segments?

We haven't disclosed on that.

All right. Thank you very much.

Stephen Kim, Barclays.

Thanks very much, guys. Two quick questions here. The first one relates to -- I was hoping you could provide a divisional breakdown or insight into your marketing and admin expenses and also your inventory this quarter. You had very low marketing and admin, relatively higher inventory. I was curious if you could ascribe those levels a little bit -- or changes in those levels, either year on year or sequentially, to divisions.

Let me make a few comments on that and then I will let Duncan maybe emphasize a few of my points. Related to inventory, I think one of the achievements we talked about on the second-quarter call is we did begin to make progress against our Composites inventory. And we had inventory reduction which you wouldn't see in our aggregated numbers, but you would see if we disclose segment numbers. We have had inventory reduction in Composites in the second quarter. And in fact, we expect that inventory reduction to accelerate in the third quarter.

So utilization levels are going to continue to be under pressure in Composites as we drive for inventory reduction rather than production rates through the third quarter. Our goal is to have most of that behind us as we enter into the fourth quarter, so we should start to have a little bit better operating leverage in the fourth, and I expressed a little more optimism about fourth-quarter results in composites than third.

We built a little bit of inventory in the Building Materials side. Last year, we were actually a bit deficient in inventory in Roofing. We have had a very strong storm demand in the first half, and pretty much had shipped out all the inventory we were capable of shipping and were kind of down to mixing stock. This year, I think we have a more balanced inventory. We are not particularly concerned about our inventory levels, but we are comping versus some very low inventory levels last year.

On the G&A side, I will let Duncan make some comments on G&A. I will give a macro comment, which is generally our expense control and expense discipline has really been unchanged for about the last three or four years. We have been managing the business -- all of Owens Corning -- to flat headcount and to flat G&A and really trying to reinvest in places we see growth opportunities, and give productivity and cost reductions in some of the businesses that are a little bit more challenged. Duncan, any additional comments on G&A?

I think Mike really covered it. Stephen, as you know, we don't break out SG&A by business segment, and I don't think there is any particular theme there, other than the overall theme that Mike mentioned, which we are both being very disciplined on a headcount point of view. Obviously, I mentioned on the call that we've reduced our outlook for corporate expenses certainly this year, from $110 million to $120 million to more like $100 million. Part of that is we do expect versus our prior guidance to see lower variable compensation expense this year. We are also taking some cost actions across our businesses, but also in corporate, to be disciplined on the cost side. And we expect to see some savings out of versus what we had previously guided to.

On the inventory side, I think Mike was pretty clear. Across our businesses, we are taking a lot of actions in Composites, which impacted the second quarter. We expect to also reduce finished goods inventory in the rest of the year as well and have some pretty decent finished goods inventory there.

On the Roofing side, last year probably we were running probably a little light in inventory by the end of second quarter. And so probably this year we would expect to be running a little heavier. And asphalt is obviously higher, so that would generally mean that our inventory is a bit more expensive.

And in Insulation, we are in a growing market, so we are also running production in the second half probably a little higher than we ran it in the first half, which is, as I said, one of the reasons probably why our operating leverage is also better in the second quarter.

So generally speaking, I think that all talks about kind of the features you talked about. Sorry we don't break out those numbers in segment level, but those are probably the major themes.

Great. That's very helpful. So I take from your comments that the marketing expenses wasn't really such a big deal, which is good to hear. It sounds like it is more lasting reductions in the marketing and admin, which will help us going forward.

My second question relates to Composites. I was curious if you could comment on what is underlying your outlook for next year, specifically in the realm of price? We know you have been taking a lot of actions related to costs, and it sounds like that is well underway. But there has been some commentary in the past about how the Composites business has negotiated contracts which tend to be somewhat more lasting in nature, maybe more like annual type in negotiations. My sense was that a lot of those negotiations tend to happen around the Fall.

I was wondering if you could provide a little color as to -- is fall a relatively important season for you in terms of price setting in terms of what sets the stage for the next 12 months? And if so, if there is any of that, how is the pricing outlook looking right now on the spot market?

Let me start with just our overall optimism for why we are more bullish on 2013 results in Composites. We disclosed today in Duncan's comments that our goal is to take out about $70 million worth of inventory. And it is not a terribly difficult calculation to get back to that, in the range of about a half a month's or maybe a little bit more production in the business.

So obviously, if we are producing 11.5 months' worth of production for 12 months' worth of sales this year, on an annualized basis next year, if we are able to match production to sales, we are going to get improved utilizations and get improved operating leverage. If we can get some growth next year, 3% or 4% growth, that will give us additional operating leverage in Composites, and we will be doing that on lower-cost assets with high-cost assets out of our network.

So improving operating leverage, getting production matched to demand, a little bit of demand growth and getting low-cost assets up and running and eliminating those startup costs all annualize well as we go into 2013.

We have expressed a bit more optimism about the outlook for Composites pricing. We lost some price last year in the fall, and we talked about that on our fourth-quarter call and also on our first-quarter call. The fourth quarter or late third quarter tends to be an important time for Composites in terms of setting price expectations into the coming year.

You know, the big thing that is probably helping us in the near term is demand has been relatively stable now for 12 months, and companies like Owens Corning are taking action to address inventory issues that were created when the markets slowed down last year.

I think the second thing we are seeing, obviously, is the US dollar has strengthened against most of the currencies of the world. It might seem counterintuitive that that is good for Owens Corning, but if you think about the cover bid in most parts of the world is coming from a Chinese exporter, as the Chinese currency has tracked the US dollar, while it hasn't strengthened against the dollar, it has strengthened against the rupee in India, it has strengthened against the real, it has strengthened against the euro.

So we would expect that some of that would put pressure on Chinese exporters that we would be able to see better pricing environment in most of the non-US markets. And in the US market we have very low-cost assets and a great competitive position. So if there is a place where we don't need as much relief from Chinese competition, it might be the US where we believe we've got a better asset base and a stronger market position.

So all in all, we are not counting on a lot of price improvement in composites as we look to our outlook. We are not thinking that prices will continue in a downtrend through the second half, though. We are expecting that we are in a stable to upward moving price environment, depending on the region of the world and the product line.

That is very helpful. Thank you very much.

Will Randow, Citi.

Good morning. Just a question in terms of what is the optimal level of debt leverage, and do you think about that from a debt to EBITDA perspective? And given that, how much dry powder or cash do you think you have to repurchase shares here?

Okay. Let me make a few comments, and then I will turn that one to Duncan also. Let's start with we are an investment-grade company. We have an investment grade credit rating from two of the three rating agencies, and that is important to us. So we see operating within parameter to keep us investment-grade is an important part of our overall financial strategy.

At this point in the market, at this point in the cycle, we would be looking at probably debt to EBITDA as being a key variable for us. As we go through the cycle, as you get into better times and hopefully we do see a return back to housing starts in the mid millions and a better roofing market and a robust market that supports much higher levels of EBITDA for our business, I don't know that you would necessarily expect to see overall debt level to go up with that.

So we tend to look at our debt and our leverage through the cycle. And that is consistent with our philosophy of keeping long maturities and managing our balance sheet for predictability of repayments and predictability of liquidity.

In terms of near-term liquidity, I'd let Duncan talk a little bit about what our near-term liquidity situation looks like.

Thanks, Mike. So we talked on the call about a couple of things. As we look out into sort of the medium term, we think our free cash flow conversion of adjusted earnings through to free cash flow over the next five years will average about 100%, and that is pretty good. So we do expect to have, particularly in the context of a recovering US housing cycle, quite a lot of free cash flow disposable.

In the sort of more short term, so you compare this year to last year, we talked about this year being a strong free cash flow year. One of the reasons for that is that we will be -- last year we used cash for working capital. This year we see that as a source of cash, so quite a big swing there. We talked specifically about the cash flow, where we are going to throw off out of finished goods inventory in Composites, and have specific line of sight to that. So that is one thing that goes into that.

We will be contributing quite a lot less into the pension this year from a cash flow point of view than we did last year. So I think that is another contributor to that. And obviously, our cash tax position continues to be a very valuable asset for us, and we don't expect to spend much more than about $30 million of cash taxes this year, as indeed we did last year.

So there is a lot of elements that support our free cash flow conversion, both in terms of the short term and the long term. Most of our free cash flow does show up in the second half of the year. That is kind of the seasonality of our business and our working capital cycle.

Mike talked a little bit about new capacity in Composites over the next couple years. We have said that we do expect CapEx and depreciation to be in the sort of range of CapEx being about 110% of depreciation, certainly this year and sort of over the next few years. And so there will be a lot of free cash flow that will provide us for availability of liquidity and of cash flow to return capital to shareholders and also to look at ways of using our cash flow, such as value-adding M&A.

Thanks for that. I don't mean to beat a dead horse, but regarding Roofing margins, I guess how should we think about those tracking in the third and fourth quarter? I understand you have a competitor bringing on capacity later this year. In addition, I understand historically you've achieved about five percentage points of margin expansion from taking material out of the shingle and new production lines. But have competitors caught up with your technology?

The question around how to think about second-half operating margins in Roofing, we think the biggest impact on operating margins in the second half from where we are right now will likely be the effects of volume and absorption. So we think we are just looking at weaker volumes in the second half than what we had in the first, and weaker volumes for the full year 2012 than what we saw in 2011, which is consistent with what we have been saying through the year, and that we are coming out of the second quarter with a margin profile that is very attractive. 20% margins in the second quarter are something we are happy with, but not margins that are high enough that will allow us to sustain the level of EBIT and the level of operating margins that we produced last year.

So we are expecting that operating margins for the full year will be less than 20%, and that is kind of building on where we are year-to-date in terms of the progress going forward.

There is a -- IKO is bringing a facility on in the Southeast in the fourth quarter. We've talked about that on other calls. This is -- it's a big market. We hope a growing market. We are comping negatively this year because of the amount of storms that we had in 2011. But generally, we would expect in 2013, 2014 that you would see growth in new construction, that as home prices have now begun to stabilize, as the equity in homes has stopped falling, that you'd start to see more reroof demand going with existing home sales, and that we would see generally a growing market in new homes and reroof for Roofing. And that growth in the market would help the market absorb some new capacity.

A new facility like the one that IKO is putting in in the Southeast probably represents 2% or 3% of the overall capacity of the industry, based on our estimates. We don't think this creates a significant capacity overhang. IKO is an existing participant in the market also, so they have as much interest in seeing to it that that capacity comes up into the market in an effective way as the other participants in the market would. So we don't shrug that off, but we don't think that is a big game-changer in terms of our outlook for how the industry will perform through the second half or how it will perform -- how our business will perform in 2013.

And have competitors caught up with their new production lines in terms of the technology you think you have?

You know, we do a lot of competitive testing of our competitors' products, as I imagine they do of ours. And so we know the ingredients basis and our estimates of the cost basis of what goes into a shingle. We've said at on investor day and in other conferences, we think there are some places in the market where we are maybe at parity with leading technology. And then there are other places of the market where we think those of us with leading materials technology and shingle design are a bit ahead of some of the others. I would say we still believe that is true.

So while there are some shingles in the market that we believe utilize some of the same material science and technology that we are utilizing to produce a low-cost shingle, there are other shingles in the market that we believe are still significantly higher cost than the shingle we produce. And as a result, that does give us some natural margin benefit that we can take to the bottom line.

Okay. Thanks for that, guys.

Joshua Pollard, Goldman Sachs.

Thank you for taking my question. I wanted to ask about Composites capacity utilization for both yourselves and for the industry, and where you guys are expecting that to be in 2013. I sort of always look at this business as your margins and your capacity utilization go hand in hand. So as you guys talk about that, could you talk just a little bit about the third quarter? You said that you had some higher inventories you are trying to get rid of, so should we see margins come down in 3Q as well? Thank you.

Yes, our capacity utilization today is really being influenced by our decision to get our inventories reduced. So I kind of quantified some numbers earlier in my comments, where I said our overall inventory reduction goal might be the equivalent of about 15 days of inventory or thereabouts, which is about a half a month of production.

The bulk of that inventory is going to come out in the second and third quarter, so in effect, we are going to take basically a half month of production out in about six months. So as a result, that is going to be a pretty aggressive rate of inventory reduction and would have an overall impact on our capacity utilization of depressing utilization.

When we bring that back on, obviously we get a lot of leverage. We look into 2013 and 2014 and believe that we can load our facilities at comfortable but attractive rates of utilization without adding any additional capacity. So when I kind of detailed our asset strategy in my prepared comments, we think we are going to get a little bit of a capital holiday here in terms of needing to build new melters and still be able to get leverage, because we can move to comfortable utilization levels but attractive utilization levels, which we've always characterized in Composites as being kind of high 80s, low 90s. Much above the low 90s and you get into geographic mix, product mix type issues.

We think generally most of our competitors are also focused on trying to get inventories and utilizations into a sustainable level where they can make money, too. It is a little bit harder to see exactly how that is evolving with our competitors in China, although we did disclose and review in our investor day that in terms of capacity expansions among our competitors in China, our best scoring of that is, since the financial crisis in 2008, the rate of capacity expansion in China is less than the rate of market growth in China, and that in fact, the number of tons available for export in China is on the decline. So that is going to contribute to utilization in China as we work through time, but we have not talked about a specific level of utilization for our competitors in China.

Okay, so could you put just numbers around where you are today versus that 80s, low 90s that your goal is for 2013 and 2014?

Well, because of the curtailments that we are currently undergoing, we are well below the high 80s, low 90s type utilization. But that is largely self-inflicted. We are doing that in order to make sure we get the inventories to where they need to be.

We will have the Russia melter come up. We have a big turnaround or rebuild in a facility in Texas, which is one of our biggest, lowest-cost facilities, in the second half of the year, which will also help us in terms of inventory reductions. We will get a couple plants out of Europe, which will then help us in terms of utilization. And then with inventories out, we will bring production back up to sales levels. And when we bring production back up to sales levels with the European facilities out, then we will be into that kind of high 80s, low 90s type utilization.

Okay. I would ask for a number, but I will move on to my next question. Should you all think about moving off of housing starts as the key factor for your guidance? It seems that over the last two years, you guys have been head-faked by the housing market, as have the rest of us. But one of the things that is interesting is that just this quarter, you actually saw some acceleration in housing starts. And not just yourselves, but a lot of your friends in the business have missed their -- at least the Street (inaudible) expecting it to tie with housing starts. Is there another factor in your business that you guys are thinking about utilizing to better estimate for outlook on your business?

Yes, I would say that we think housing starts is an important macro for us, but certainly not the only macro, and that in fact most of our guidance related to housing starts is very specific to our Insulation business. So while housing starts have an impact on our Roofing business and also can have an impact on our Composites business, because some of the Composites production goes into the construction market, the big factor that drives the performance of our Insulation business is growth in new construction and its impact on capacity utilization and its impact on pricing, which is highly correlated to housing starts.

So in terms of -- to use your term -- head fakes, if you look at the first half of this year, we disclosed that lagged housing starts are up about 23%. Our Insulation business in total in the first half grew from $616 million to $671 million, which is about 9% growth. We've said that the overall new construction market is about 39% or 38% of our overall Insulation business. That is US and Canada. You can make an estimate for Canada; maybe the US is in the low 30s or around 30. So if 23% of our Insulation -- if 30% of our Insulation business is growing at 23%, that would produce 7% or 8% top-line, which is pretty well in line with what we've seen in the first half.

So we think there is pretty good correlation there based on what we've given you in slide nine on the pie chart and how we segment out where revenue comes from in Insulation and then how that would drive the overall business. Ultimately, it should drive utilization, it should drive pricing, it should drive volume, and in a more normal market, we would expect that new construction to be upwards of 60% or even as high as 65% of our overall Insulation mix.

So today, it looks like a very low number just because housing, while improving, is still incredibly distressed versus historical levels.

I guess the other part of that, Mike, is it seems like the housing start links to your volume are coming together very nicely. But I think what a lot of investors are confused by right now is it seems like the pricing component doesn't match up as well as housing starts. You made the comment about in Insulation, you've got sort of lower mix on new construction. Not sure if that is the same case in the Roofing business. But really I want to hope to understand how new housing starts versus repair and remodel affects your pricing and margins.

We are very focused on, as we see improvements in demand and we see improvements in our utilization, also seeing improvements in the price of our product in the classic residential new construction and remodel market. So that is an important focus of ours. And I think that is an accelerant to our outlook. So as we get into an environment where we are seeing both operating leverage and positive price, you are going to see a further acceleration of the performance of Insulation.

All right. Thank you, guys.

Allison, we have time for one more question at this point.

Ken Zener, KeyBanc.

Good morning. Can you hear me?

I can hear you, yes.

Thank you, Mike. This is going to be a follow-up on the prior question, because I think you guys have actually laid out some of the data pretty well in your pie charts. That shows new sales are up 24%.

So if I take that pie chart -- and I think we've talked about this in the past -- where the $900 million of non-US new business you guys said was profitable throughout the cycle at your analyst day. That is saying that would be roughly $10 EBIT. That generates a rather large loss for the new side.

And I think where people get confused -- and I think since you guys have presented the data, it would be nice if you could tie it off in a public format -- your new business is at a far deeper EBIT than I think a lot of people appreciate. Could you give us a sense of how you think the operating leverage will be that new side, which basically on your pie chart is up 24% year over year, versus the other three businesses in the Insulation.

I think the point you are making -- so let me just step back for a second and make sure we kind of lay out the context and the question adequately. We lay out a four-slice pie chart on slide nine of our investor presentation, where we break the market into international, US and Canadian commercial and industrial, US and Canadian residential repair and remodel and then US and Canadian new residential construction.

Generally, your characterization is correct, based on what we've said, which is we've said our international business, which is Latin America, a little bit of business in Europe, some things over in Asia, has been profitable through the downturn in the Insulation business and has helped us. The Canadian and commercial -- the commercial and industrial business tends to be a little bit more specified and engineered type products, so we don't see as much pricing volatility there. We've seen some negative operating leverage from utilization. Some of those markets are a little bit weaker. But that has been a pretty good business for us.

The residential repair and remodel business tends to be manufactured on a lot of the same assets that we manufacture new construction on. So that business would have suffered a bit from the utilization issues associated with the new construction products. That is classic pink fiberglass bats, some of which are going into new construction, some of which are going into repair and remodel, where we've had real leverage issues and utilization type issues in our facilities.

So I would say that portion of the business, residential new construction being most impacted, because that tends to be both the most price-competitive and utilization-sensitive. And then the repair and remodel, maybe a little bit more attractive in terms of pricing, but suffering from the same utilization type issues that we would see in new construction. That is the piece of the business that is going to need to see the most progress in terms of volumes and the most progress in terms of pricing.

Because we think that is fairly well-correlated to housing starts, when we talk about growth in those segments, if you think about housing starts over a four- or five-year period of time, maybe going from 600,000, maybe back to a more normal 1.5 million, which would be our average over the last 40 years, you are talking about that segment growing at 2.5 times growth. So a doubling plus another half a doubling to go from 600,000 to 1.5 million. So we are talking about profound growth rates if that were to happen over the next four or five years, and as a result, we would expect to see lots of leverage both in terms of operating performance and pricing at some point in that cycle.

We are focused on both those issues right now. And I think the first-half performance demonstrates our ability to make progress, albeit at still low levels of profitability, and in the case of that business, negative profitability. At some point, we get enough utilization of price to get all of this positive.

Okay, Mike. And then the Composites, I think the numbers you put out here are very much appreciated. So if you are doing $70 million of inventory correction at call it 30% operating leverage, that is $20 million incremental. What was the headwind associated with the Mexico, Russia start-up plant and the Amarillo, I assume changeover, that are occurring in 2012 for the Mexico, Russia and the Amarillo that won't be there by definition in 2013? Because $70 million in inventory correction is about 3.5% of sales.

And then can you clarify the last -- I saw on the Roofing -- because I think there is some -- I am a little confused. Versus your prior estimate of millions of squares being down -- I would say 5 million, from 122 to 117, is this more of the manufacture issue because of the prebuy as opposed to the end market falling roughly 10% in the second quarter? Because it seems as though the demand isn't falling as much as it was just overproduction. Thank you very much.

There were kind of two questions buried in there, so I will try to take them apart and at least address each of them a bit. We said Roofing volumes through the first half are about flat with last year. So if we have an overall outlook for the year that the roofing market will be down slightly, kind of lower mid-single digits, just the math of that would say it is going to have to be down more than that in the second half in order to compensate for the fact that it was flat or maybe a little bit better than flat in the first half.

Because we sold so many shingles at low margins in the first quarter, it is very difficult to recover because it is a bit of a zero-sum game. The inventory -- the ability to shift inventories and buy inventories in the first quarter, these are not perishable. Obviously, these are 30-year, 40-year, lifetime shingles. Our customers are capable of buying them, storing them and putting them on roofs throughout the year. So if we sell them out in the first quarter, you've lost an opportunity to sell that shingle then in the second, third or fourth quarter.

We haven't really changed our outlook for the overall performance of the roofing market. And as a result of some of the trends that we've seen on margins through the first half of the year, we are just not positioned in the right place relative to last year to be able to kind of comp well with the Roofing business last year and therefore had to take our guidance down.

On the Composites side, you had asked a little bit about startup costs. We tend to not disclose on those costs specifically. They can be material to a quarter. They are not necessarily super material to a full year. We do have a lot of startups this year, so it will give us the positive comp year over year. I guess I would characterize it as think about a startup as a couple months, maybe 60 days of production, where initially we are operating 20% or 30% away from where we would like to be, and by the end of those 60 days, we are operating where we would like to be. So kind of a learning curve type approach.

So while it is very material to that facility, can be material to a region in a quarter, in terms of the overall business, I think it is just one of the themes that gives us optimism for next year.

Thank you.

Very good. Thank you, everyone, for joining us for today's call. With that, I will turn it back to Mike for a few closing remarks.

Thanks, Thierry. When we looked at the year as the year started, we kind of had two thought processes around this year. Our first thought process was we wanted to see enough improvement in Insulation that we had earnings improvement that could fund a year of correction in Composites, and that in fact Insulation plus Composites in total could kind of comp flat versus 2011, and position both businesses then for strong leverage going into 2013.

I think that agenda is largely on track. So if you look through our comments on today's call, look through our numbers, in fact Insulation improvement in the second quarter pretty much offset dollar for dollar Composites' year-over-year comp negative. And we think we've got both of those businesses in a position where they can together produce a decent year, and then next year we can see both those businesses show really good progress.

We also thought this year, with some momentum coming out of the fourth quarter, with some storm carryover and with a decent margin structure, that Roofing could comp flat or even a bit better than 2011. I think what we've said today on this call is we've seen some things through the first six months of this year and recent trends on volumes that we would say we just don't think there is enough margin rate and volume on a year-to-go basis to get to that guidance. And as a result, we have brought our guidance down, and we've put I think a fairly healthy range out there that is reflective of the uncertainty that we have in terms of our ability to really forecast the margins and the volumes for the Roofing business on a year-to-go basis.

I think all of that in total, though, is a good news story if you look at our outlook into the midterm. We said that we wanted to see the US housing recovery have a positive impact on Insulation. I think we are beginning to show that. We said that we wanted to execute a plan in Composites that positions the business to return to profit growth next year, and I think we are beginning to demonstrate that. And we've continued to say that we think the Roofing business is an outstanding financial performer, and while it is maybe a bit below our expectations for this year, the type of performance we are describing for Roofing is still outstanding performance for our Company.

So we continue to be focused in the near term on delivering good operating results and strong cash flows, and we continue to be focused in the midterm on making sure that we do the things in our business to improve their competitiveness and get to some of the lofty goals that we've laid out when we get to one million starts and continued economic growth, and we think those are well within our reach. We appreciate your interest in our Company, and we look forward to talking to you again about our business on the third-quarter call. Thanks.

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