Owens Corning (OC) 2013 Q1 法說會逐字稿

Good morning and welcome to the Owens Corning, First Quarter earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Thierry Denis, Director of Investor Relations. Please go ahead.

Thank you, Emily and good morning everyone. We appreciate you taking the time to join us for today's conference call, in review of our business results for the First Quarter of 2013. Joining us today are Mike Thaman, Owens Corning's Chairman and CEO, and Michael McMurray, 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 a Form 10-Q that detailed our results for the First Quarter. For the purposes of our discussion today we've prepared presentation slides that summarize our performance and results for the quarter. We will refer to these slides during the call. You can access the slides at our website, www.OwensCorning.com. We have a link on our homepage, and a link on the investor section of our website. This call and the supporting slides will be recorded and available on our website for future reference.

Please reference Slide 2 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 Risk Factors identified in our SEC filings, for a more detailed explanation of the inherent interpretations 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 exclude significant non-recurring items such as the impact of restructuring actions discussed in recent earnings calls. 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 affect of quarter to quarter fixturations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share. In the first quarter we have utilized an effective tax rate of 26.5%, the midpoint of our anticipated annual effective tax rate range on adjusted earnings for 2013.

Before we begin the call, I would like to point out the change to format of our presentation. Each quarter we feature a chart in each of our business slides depicting revenue percentages by end markets. The purpose of these charts is to provide investors with an estimate of the exporter of each business to the end market. We will continue to provide this information, however going forward we will update it on an annual basis. As we review the process required to produce this information, we determine that the calculations are better suited for annual updates. We will continue to comment on the key drivers of our revenue performance during quarterly earnings calls.

Now for those of you following along with our slide presentation, we will begin on Slide 4. And now opening remarks from our Chairman and CEO, Mike Thaman, who will be followed by CFO, Michael McMurray. Mike will then provide some closing comments prior to the Q&A session. Mike?

Thank you, Thierry, and good morning everyone. We appreciate you joining us today to discuss our First Quarter results. Owens Corning delivered a strong First Quarter, driven by performance in roofing, we reported $77 million in adjusted EBIT, up $34 million from last year. Consolidated revenue for the First Quarter was $1.3 billion, flat with the First Quarter of 2012, and adjusted earnings were $35 million, up from $11 million last year. I said on our last call that I was pleased with how we have closed out 2012, and that I expected Owens Corning to get off to a good start in 2013. I'm satisfied with our overall progress in the quarter.

During our February call, we discussed a number of expectations for improved performance across our business in 2013. Let me review them now, starting with safety. As is the case every quarter, we said that we would continue to make progress towards our goal of creating an injury free workplace. This was an area of disappointment in the First Quarter. In the quarter, our total number of recordable injuries increased to 26, compared to 15 in the same period last year. We experienced a very difficult February, but safety performance in March and April has been much improved. We remain focused on creating an injury free workplace, and are committed to achieving a 12th consecutive year of safety improvement in 2013.

In roofing, we said that our main near term focus was to start the year with better margins, and more disciplined in our winter buy programs. Building on our good margin management in the Fourth Quarter of 2012, roofing grew margins to 20% for the quarter, a 6 point increase over the First Quarter of 2012. Roofing delivered $119 million of EBIT, a $36 million increase over the same period last year. We are pleased that effective price execution fueled First Quarter profitability, supporting this objective. In insulation we said the outlook for continued improvement in the US housing starts would translate into a return to profitability in 2013. The improving US housing market and strong outlook underpin our belief that we will be able to build on the performance improvement we saw in 2012, and deliver full year profitability for insulation this year.

Due to the seasonal nature of this business, the First Quarter was not yet profitable, however, we narrowed quarterly losses in the business by $13 million, compared to the same period one year ago. Insulation prices have improved across the business, with sequential price performance being good, and we've announced an additional price increase that will be effective in the Second Quarter. We said composite's financial performance would improve as the year progresses, as we demonstrate operating leverage in a stable price environment. In composites, net sales of $459 million were down from $476 million in the First Quarter of 2012, due to product mix and currency, and First Quarter EBIT of $9 million was down from $23 million last year, on lower production and inflation which we anticipated. We completed the asset ramp up in composites during the First Quarter. We are now positioned to achieve operating leverage that supports improved year-over-year margins for the business in 2013.

Now I'd like to take a moment to discuss our outlook for the year, in each of our businesses beginning with roofing. We expect the overall roofing market opportunity to be at or above 2012 levels. While storm volumes are inherently difficult to forecast, strength in new construction and the ongoing recovery in re-roof demand, should offset any potential negative comp from storm demand. Our First Quarter performance represents a great start to the year. We ended the Second Quarter with dramatically better margin rates than last year. However, sequential margin improvement from the First Quarter to the second is not expected to be as significant as it was in 2012, due to the lower levels of First Quarter discounting this year. With new prices taking effect this quarter, and the ongoing recovery in the US housing market, we remain confident in achieving year-over-year margin improvement in 2013.

In the insulation business, we anticipate continued growth in US residential new construction, better capacity utilization and improved pricing. First Quarter price performance was strong. The successful execution of our Second Quarter price increase could provide further price acceleration in the second half of the year, when volumes are seasonally strongest. We still have a long way to go to return this business to our historical volumes, price, and return levels, but we are happy with our recent progress, and optimistic that a sustained housing recovery will provide us with the market conditions to achieve that goal. Despite flat overall revenue performance in the First Quarter, we expect double digit revenue growth for insulation in 2013. Mike will provide some further comments on First Quarter volumes and outlook in his remarks.

In composites, our asset repositioning and First Quarter asset ramp up, have positioned our plants to increase operating leverage and to begin realizing the full benefits of lower manufacturing costs, that will yield improved margins over last year. We anticipate accelerating growth in industrial production as the year progresses and will continue to look for opportunities to support our margins in this business with improved pricing.

On our call in February I reviewed three key indicators for the business. We came into the year looking for $60 million in operating leverage, offset by about $30 million in inflation, and flat nominal pricing. At the end of the First Quarter, we are still tracking well with the leverage and inflation guidance. We were required to respond to a couple of specific competitive pricing situations that impacted the quarter by $3 million, and would impact the full year by about $10 million.

Despite these challenges, the overall market pricing was broadly stable, with positive price trends in some developing economies that suffered particularly weak pricing last year. Of particular note, Jushi and Tieshan both announced price increases in China late in the quarter. We have announced a price increase in China. We are hopeful that a positive price trend in China can create momentum for price improvements in Europe and the US, in the second half of this year. Given current trends, we believe that flat nominal pricing may still be achievable for 2013.

For Owens Corning, the strength of an improving housing market in the US and modest global growth, will drive overall improvement of at least $100 million in EBIT. We expect all three businesses to show improvement in 2013, and we expect that the rate of the US housing recovery and its impact on margin performance in our building materials businesses, will largely determine the upside to our guidance.

With that, I'll now turn it over to Michael, who will further review details of our business and corporate performance. I'll then return to recap and open it up for questions. Michael?

Thanks, Mike, and good morning, everyone. As Mike mentioned earlier, our strong First Quarter performance supports our outlook that we will deliver EBIT improvement of at least $100 million in 2013, with potential upside based on the rate of the US housing recovery and its impact on building materials margins. In the First Quarter our roofing business delivered 20% EBIT margins, through effective price execution. Our insulation business demonstrated strong price performance in the quarter, and is on track for full year profitability in 2013. Finally, the ramp up of our assets in composites business is complete, and we are positioned to deliver positive operating leverage for the balance of 2013.

Now let's start on Slide 5 which summarizes our key financial data for the quarter. You'll find more detailed financial information in today's tables of the news release and Form 10-Q. Today we reported First Quarter 2013 consolidated net sales of $1.3 billion, which were flat compared with the same period in 2012. In our roofing business, net sales were up 3% over the prior year on an improved pricing environment, while sales were off slightly. Net sales in our insulation business were essentially flat, as the impact of improved pricing environment was primarily offset by the timing of price increases announced in 2012, and weakness in some of the international markets that we serve. Lastly, net sales in our composites business were down 4%, due primarily to unfavorable product mix and the impact of foreign exchange translation.

In a moment, I'll review our reconciliation of items to get to adjusted EBITDA, our primary measure to look at period to period comparisons. Adjusted EBIT for the First Quarter of 2013 was $77 million, compared to $43 million in the same period one year ago. Adjusted earnings for the First Quarter of 2013 were $35 million, or $0.29 per diluted share, compared to $11 million or $0.09 per diluted share in 2012. Depreciation and amortization expense for the quarter was $78 million, including $3 million of accelerated depreciation related to our asset repositioning in Europe. Depreciation and amortization was $11 million lower than the First Quarter of 2012, which included $18 million of accelerated depreciation related to our asset restructuring in Europe. Our capital expenditures for the quarter were $45 million.

Next, let me reconcile our First Quarter adjusted EBIT of $77 million to our recorded EBIT of $57 million. We've adjusted out $11 million of costs related to the flood that occurred in October 2012 in our New Jersey roofing facility as a result of Hurricane Sandy. As we noted in our Fourth Quarter call, the incident was insured and we believe that the overall financial impact will be minimal. We are well underway with the rebuilding of our facility, which is anticipated to be completed later this year. In addition, we've adjusted out $9 million related to our previously announced 2012 restructuring actions.

Now please turn to Slide 6 and I'll provide a high level review of our adjusted EBIT performance, comparing the First Quarter of 2013 to the same period one year ago. Adjusted EBIT improved $34 million. The $36 million improvement in our roofing business, and the $13 million improvement in our insulation business were partially offset by a decline in our composite EBIT of $14 million. General corporate expenses were relatively flat versus the prior year. With that review of the key financial highlights, I ask you to turn to Slide 7, where we provide a more detailed review of our businesses, starting with building materials.

For the First Quarter, building materials net sales were $937 million, a 2% increase compared to the prior year. Building materials delivered $98 million in EBIT, up $49 million from the same period in 2012. Slide 8 provides an overview of our roofing business. Roofing net sales for the quarter were $607 million, a 3% increase compared with the same period a year ago. EBIT in the quarter was $119 million, up $36 million compared to the same period in 2012. Despite smaller winter incentives this year, we saw similar buying patterns in the First Quarter of 2013 versus 2012. Distribution likely built inventories in the First Quarter in anticipation of higher prices in the Second Quarter and the start of the roofing season, which is typically strongest in the second and third quarters. Unlike last year, where First Quarter margins were depressed, EBIT margins for the First Quarter were 20% up 6 points year-over-year. We significantly improved price execution in the First Quarter, which is a key milestone for us to deliver on the goals we have laid out for 2013.

As we move into the Second Quarter, we expect to benefit from the First Quarter winter incentives, and our price increase that has gone into effect for the quarter. The sequential improvement from the First Quarter to the Second Quarter of 2013, is not expected to be as strong as last year due to deeper levels of discounting we experienced in 2012. As we look forward to the remainder of 2013, there is potential for negative storm comparison, as 2012 storm volumes were above the historical average. The outlook for US housing supports improvement, and the new residential construction market and modest growth in re-roof demand, which together should offset any potential negative comparison from storm demand. Based on our outlook for the market, we maintain our expectation of improved financial performance in our roofing business for 2013.

Now Slide 9 provides a summary of our insulation business. Net sales for the quarter at insulation of $330 million were essentially flat with the same period last year. The business narrowed losses from $34 million last year to $21 million for the First Quarter of 2013, on strong price execution. The business demonstrated strong sequential price improvement in the First Quarter, and we have announced additional pricing action effective in early June, although pricing still remains significantly below historical levels. Price execution contributed to a 5% increase in revenue across the business, offsetting the impact of improved pricing was lower sales volumes across some of our insulation businesses, particularly in markets outside of the United States. Within our insulation business, we operate across several end markets which have different demand drivers and other factors that can impact our sales volume on a quarter to quarter basis. In reviewing our First Quarter sales performance, we evaluated and have taken into consideration the timing of price increases, channel mix, the mix between single and multi-family, the length of the lag, growth in markets outside of the US, and the potential effects of weather.

Our assessment is that overall market demand and our respective share are tracking inline with our expectations. US new residential construction volumes are healthy, and are largely consistent with growth trends in new US housing starts. In addition, volumes built throughout the First Quarter, and we are off to a strong start in April. All this supports our view that we can achieve double digit revenue growth for the full year in our insulation business. As the US housing market continues to recover, we expect to see further sales growth with improved pricing, as industry capacity utilization tightens. With the pricing actions we have taken, and the improved manufacturing performance we have demonstrated year-over-year, we remain confident in our guidance to return to profitability for the full year 2013.

Now, I ask you to turn your attention to Slide 10 for a review of our composites business. Net sales in our composites business for the quarter were $459 million, a 4% decrease compared to the same period in 2012. The decline in revenue was about equally driven by unfavorable product mix, and an impact of foreign exchange translation. Slightly lower selling prices were offset by a small increase in overall glass fiber volumes. EBIT for the quarter was $9 million, compared to $23 million in the same period last year. Roughly half the decline in EBIT was due to lower production levels compared to the same period last year, with the remaining decline being the result of inflation and slightly lower selling prices.

In the fourth quarter call, we said that First Quarter, 2013 results would comp negatively to 2012 and that full year 2013 would comp positively to the full year 2012. As we have moved into the Second Quarter, we expect material sequential improvement driven by stronger productivity, improved leverage, and growth in sales volumes. Specifically, we expect Second Quarter performance to comp broadly inline with last year, and that the second half will comp positively year-over-year. As we look to the full year, we continue to expect that the benefits of our asset transformation, increased utilization of our low cost asset base, and modest growth in global reinforcements demand will result in improved margin in 2013, compared to 2012.

With that review of our First Quarter performance I now ask you to turn to Slide 11 where we will review our financial guidance for 2013. We continue to expect that capital spending will be about $380 million. Reported capital spending will include the rebuild of our New Jersey roofing facility, damaged during hurricane Sandy, which will be recovered through insurance proceeds. As a result, normalized capital spending is expected to be roughly in line with depreciation and amortization of about $315 million. We expect corporate expenses to be about $120 million. Our $2.3 billion US tax [rate] will significantly offset cash taxes for some time to come. In 2013, we expect our effective tax rate on adjusted pretax earnings to be 25% to 28%, and our cash tax rate to be 10% to 12%. We have used this midpoint in our effective tax rate guidance as the pro forma rate to calculate our adjusted EPS as disclosed in table three of our earnings release.

10 million shares remain available for repurchase under the Company's stock repurchase program. As we balance our priorities for the deployment of our free cash flow, stock repurchases will continue to be an important mechanism to return capital to shareholders. Thank you, and I'll now hand the call back to Mike.

Thank you, Michael. As I noted at the outset of today's call' Owens Corning is off to a strong start to 2013. We are delivering on the plans we outlined for the year, and establishing momentum for continued progress through the year. This performance reaffirms our confidence in our full year outlook, for margin improvement in each of our businesses. Our broader outlook for at least $100 million in adjusted EBITDA improvement, and potential upside to this guidance as the US housing market and global economies recover. With that, I'd like to turn the call over to Thierry, who will lead us in the question and answer session. Thierry?

Thank you, Mike. Emily we're now ready to begin the Q & A session.

(Operator Instructions)

Stephen Kim, Barclays.

Hi guys, great quarter. This is John and Steve. Just wanted to touch base on roofing first. Volumes were down or sorry sales were down modestly or up modestly in the quarter. Our sense is that pricing was up mid to high single digits so I'm just trying to get a better idea of where volumes were in the quarter. You had indicated that there was similar buying in 1Q '13 to 1Q '12 so just wanted to maybe get a little more granularity on where volumes were in the quarter?

Yes, great question. Obviously we were very, very pleased with the roofing results for the First Quarter. One of our key objectives coming into the quarter obviously was to manage the buys a little bit more effectively than we have in the past. And I think the objectives we set out really starting I think with the third quarter call and then in the fourth quarter call on trying to set buys that gave our customers an incentive to stock in some inventory and be positioned for the start of the re-roof market. But not to over do it, and to make sure that with low capital or low cost money in the market today, we didn't give away our margins in order to achieve that goal.

I think you can look at the First Quarter and feel like we really did make progress on that. That said, I think the combination of the buys as well as a lot of confidence in the late March, early April price increase caused distribution to want to buy ahead of the price increase and bring inventories in the First Quarter. We think that pattern is pretty similar to what we saw last year so last year we said we shipped about 30% of the year in the First Quarter, on a flat overall market this year, I would say we probably believe we did about the same thing here in the First Quarter. Our volumes were down slightly. When we look at that we look at geographic mix, channel mix, some other variables in terms of our overall performance. Our sense is maybe the market shipped a few more squares in the First Quarter we maybe shipped a few less, but we're comfortable that we sustained our position in the market. We're not really going to over react to any of that data, so our sense is we're in good shape in terms of the position we had in the market here in the First Quarter. That margins are in good shape and that there's a fair amount of confidence around this price increase for early April which is why we saw a lot of volumes in the First Quarter.

Great. Thanks guys. Then just moving to insulation really quickly. So insulation, just trying to get an idea to the extent that volumes were down in the First Quarter, because just given what we've seen in new home construction, you would expect it to see probably a bit better top line in the insulation segment, so I was just wondering if you could maybe give some color on that?

Yes, sure. I think it's certainly a very legitimate question and a place we focused a lot of our time in looking at the quarter making sure that we're comfortable with the progression of the insulation business, and I think you heard in my comments and in Michael's comments in fact we are and feel like we had, a representative quarter on volume and a very, very good quarter on price. Some of the things that go into that, first if you look at the chart that we produce on revenue by end market, for 2012, we think that residential new construction in the US and Canada is about 37% of the overall business. Canada was pretty good last year, so probably the US piece of that is 30% or less, so when we see very strong improvement in US construction, we're still at a point today because the market's relatively depressed that we're only impacting 30% of the overall mix in the insulation segment. When you go outside of that segment, when you come outside of that market, Canada was a bit weaker.

We think that was the housing market there is slowing down a bit, and also they had a real Winter this year and I think last year had next to no Winter. We saw a little bit slower performance in some of our other geographies and some of our other channels which we think is generally economic related, and also somewhat weather related. We know that we got an interesting comp last year because we had a very, very early Spring. We had timing of price increases that probably confounded the quarter so last year, pricing kind of drove volume into the First Quarter. This year, a late 2012 price increase probably pulled volume out of the quarter, so that hurt our comparability. So we went through all of that analysis and took a look and said is there anything that causes us to believe that, that core recovery market for us, which is US residential new construction, that somehow we're not tracking with that or we're not going to see the benefits of that. And we feel very confident looking at the trends in our volumes, the fact that they've built pretty much week on week, month on month since the beginning of the year that we're seeing kind of volume ramp you'd expect to see.

And I think the guidance we gave today, both Michael and I in our comments talked about double digit overall revenue growth for insulation for the full year. Which obviously means we're going to need to accelerate because we were flat in the First Quarter. I think the headline for insulation in the First Quarter is a very strong price performance. That's going to help us a lot when the volumes come is to be selling at better prices.

Great, thanks.

Ken Zener, KeyBanc.

Mike, I wonder if you could address, in roofing, to us it appears a lot of the margin gained sequentially was tied to volume so better fixed cost absorption. We've been looking at or thinking about gross margins in this business to isolate the seasonality, and it looks to us as though in fact gross margins historically doesn't go up unless you have rising asphalt costs, kind of quarter to quarter. Could you if possible maybe comment on that, how critical rising asphalt costs are quarter to quarter in order to enable you to achieve sequential price gains?

Sure, Ken, let me talk to your first point, and then I'll address your second. On your first point, you said that you thought maybe better volumes in the First Quarter were giving us a little bit better absorption helping margins, and in fact our volumes were effectively flat from the First Quarter of 2013 to the First Quarter of 2012. So all of the margin improvement that we're showing in the First Quarter is really the spread between sale prices and input costs, which we think is very, very good news and largely that spread or margin derived from the fact that the Winter discounts or the Winter incentive this year were much more conservative than what we had provided last year. I think last year we characterized them as being double digit. This year, we I think on the Fourth Quarter call said we thought they would be mid single digits. Really the difference between the level of discount last year and the level of discount this year is what drove the improved margins in the First Quarter.

We're real happy to sell shingles in the First Quarter provided we do it at good margins, so I think last year it wasn't so much the volume in the First Quarter that bothered us, it's that we had sold a lot of our annual volume in the First Quarter at very, very low margins. I think this year we sold a good amount of volume in the First Quarter, we sold it at representatively good margins. As you look at how pricing works, I think I'll partially agree with your supposition that rising asphalt costs can be a catalyst for improved pricing, but so can demand and end use market dynamics, so as we came into the Second Quarter I think everyone begins to see asphalt costs come up. As you come off of Winter lows, and some opportunity to buy a lower cost asphalt so even today in a fairly stable oil price environment, asphalt costs are going to push our economics a bit, and we feel fairly confident that the April 1 price increase that's out there is a good price increase and will help us cover cost inflation and help us continue to manage our margins.

I think as you go beyond that, we've had some years where we saw very rapid oil price inflation and asphalt cost inflation, and that in fact did create an impetus for further pricing actions. We would hope that this year what we would see is stronger re-roof demand and stronger end market demand which just created more pull from customers needing more shingles, which might support further pricing action. So I think this year, unless we see a big change in oil prices, it will be the demand dynamics which should help pricing and it should help margin rates.

Thank you and then for composites, the mix issue that we're seeing given that it looks like recorded in your Q, volume was up 1%. Can you address why that's happening? Is it that you're getting less high quality industrial demand out of Europe? Is it that perhaps it's becoming a more commoditized product as the intellectual -- the product differential between the China and to say your product is compressing, because that seems -- the mix seems to have play in as much to the pricing side in terms of the margin pressure. Thank you.

Yes, I'd be happy to talk about that. First of all let me note that we really said it was both mix and foreign exchange, so we did have a foreign exchange headwind in the quarter. Not so much kind of our classic US, Euro exchange rate which has been a big driver of performance in the business, but it was some more of the developing countries, Brazil, India, a couple others where we saw some real weakening in the currency, so we had some translation that would have been translation on both top line and also those tend to be good markets for us, so there was some translation also at the EBIT line. The mix issue when we reconned out the numbers or talked about the quarter, we talked about mix as it related to reconning revenue.

We didn't really talk about mix as it relates to the reconciliation of the EBIT line, so the mix that we saw we have some markets where we have further fabrication steps where we add some additional value to the product. Doesn't necessarily have a big driver on our profitability. We tend to have higher costs in some of those markets, and higher prices in some of those markets, but it's not necessarily kind of sweeter mix for us at the EBIT line so it really was kind of a big driver of revenue. It was less of a driver of how we thought about the profitability of the business which is why we weren't fundamentally concerned about that. We didn't see really valuable markets for us get weaker. We just saw some higher priced higher cost markets for us get a little bit weaker.

That said, I spoke specifically to a couple instances in the quarter where we were a little disappointed with pricing. I think our outlook and our optimism was legitimate on the Fourth Quarter call when we said we thought flat nominal pricing was an achievable goal for the year. We're still saying we think that's achievable although we went about $3 million backwards in the quarter. Interestingly, it was a little different this quarter than what we've seen maybe over the last three or four years which is, some of the competitive intensity was actually in the US and Europe, and it was with some of our more traditional western European and US competitors, less with our Chinese competitors. We needed to adjust our market price in a couple of very specific instances to stay competitive, and felt like that was the right thing to do, so in specific competitive situations, we saw some negatives on the business that we would rather have avoided.

Positively though, I mentioned in my comments we have seen Jushi and Tieshan both announce price increases in China. We announced a price increase in China. Our view would be if the lowest end of the market, with the lowest prices and the poorest margins begins to come up, that, that will start to create a global environment where there may be some opportunity for us to make progress on pricing in some of the better markets where we do have decent margins but not acceptable margins. So we've seen some price trends in the quarter that caused us to continue to be confident, we can get some price this year. Unfortunately, I think the first bit of price we get this year is going to need to be -- to overcome some price loss we had in the First Quarter which was pretty small in the overall scheme of things, and get us back to our overall expectations for the year which was flat and nominal pricing so all-in-all, I would say it's a pretty balanced message on composites.

Volumes were decent. They continue to grow. Pricing was decent, a couple little bit of disappointments, but some positive trends and we're looking forward to maybe seeing some turn in that business. From an operations perspective, coming here in the second, and then in the second half maybe we start to see operations, some volumes and then hopefully some price which would probably have a bigger impact on giving us momentum into 2014.

Thank you.

George Staphos, Bank of America Merrill Lynch.

Mike, I didn't hear you mention a pricing change in roofing like you'd called out in insulation. If you had I missed it, if not if you could provide a bit more granularity in what you think your net pricing was in the quarter within roofing. That's question one. Question two would be certainly you'd have to be happy with the margins that you had in the First Quarter in roofing, 20% margin or so. What makes you comfortable that there's sufficient barriers to entry within the business, particularly in North America given it's not really a high capital intensity type of business rather it's more of a converting business, market share is one thing, but what would be the other things that make you feel like you can hold on to these margins given the barriers to entry. Thank you.

Sure. To your first question, I think we talked about pricing in two ways and I'll just summarize that. First of all was the impact of First Quarter discounting which was quite a bit less dramatic this year than it was prior year, which I think really drove most of the delta margin between First Quarter 2012 and First Quarter 2013. Secondly, we talked about an April 1 price increase which we feel comfortable is well supported by our customers and gives us an opportunity to recover some of the cost inflation we saw in the first part of this year. So we think both looking back on the quarter, and looking ahead to the second we're delivering relatively positive pricing news today, and then we're also delivering a relatively positive pricing outlook going into the Second Quarter. Related to barriers to entry, I'll give you an empirical answer first.

The single thing that gives me the most confidence about barriers to entry is this is a business -- sorry an industry that's gone from 30 competitors to 5 competitors over the course of the last 30 years, and we haven't seen anyone enter and we've seen 25 competitors exit. So it's been an industry that's been going through a very long and sustained consolidation, and I think that's because it's still a pretty hard business. You've got to have good technology, you've got to know how to make a shingle, you've got to be able to stand behind it for 30 or more years based on the warranties that we write, you have to have access to raw materials consistently. You have to have access to distribution. You need to have knowledgeable people who can work downstream and help contractors understand how to sell your products. You need to have the sophistication to be able to do business with a big box retailer like Lowes, and those are all things that we do in our business. So it's a pretty high mountain to climb to go from believing you can take a bunch of capital and build a roofing plant, to figuring out how you get it loaded at high margins and run it 12 months a year, and at least at this point we haven't really seen anyone try that over the course of the last three decades.

Thanks, I'll turn it over.

Mike Wood, Macquarie.

On the roofing segment, I'm curious to get your thoughts in terms of the pre buy that you said could account for 30% of the full year volume on a flat tape. Do you think that, that's more a lack of industry discipline in managing the pre buy this year, or do you think your competitors may have had different expectations for the full year roofing volumes?

You kind of asked two questions there. Let me go to the first one. I don't think it's a lack of discipline. Right now what we're seeing is cost of capitals are very, very low on the credit side so if you can borrow money very cheaply which most of our customers can, they are good credit worthy companies and they can get a 5% discount to buy shingles in the First Quarter, and it's also in advance of an April 1 price increase. The economics of borrowing some money or tapping your credit line to carry inventories in the First Quarter is going to make economic sense to distribution, and I think we've seen them act consistent with economics, and remember one of the things about roofing is it's designed to be stored outside. It lives its life on a roof so if you buy shingles you don't have to have tremendous warehousing capabilities or other things as long as you've got a yard, you've got a place where you can store some shingles.

The fact is we saw just as much volume this year in the First Quarter as we saw last year with dramatically lower discounts, which would suggest to me that even the level of discounting we provided in the First Quarter this year may be unnecessary to give our customers a proper incentive. So between the combination of the discounting and an April 1 price increase, which is an incentive for them to buy ahead of a price increase, we saw that with less incentives, it still made economic sense for our customers to bring in the same types of volumes they brought in last year. So we'll continue to evaluate what's the right mix of incentives and pre price buying, to advantage our customers and give them the ability to make money, but also make sure that we're selling our shingles at optimal margins. So in total, dramatically better performance this year by our business, and I think you probably see that across the industry.

Now in terms of total volumes we said that we think the market this year will be at or above 2012 levels in terms of total market opportunity. We had a pretty big storm year last year, so if you just say storms this year will be about average, we would expect storms to comp negatively. We would expect new construction to comp positively. That's pretty linear. That would about offset the reduction in storm demand if you bring storms back to average, so the growth in the market this year will either come from storms which are almost impossible for us to forecast, or it will come from the re-roof market coming back due to better existing home sales, better home prices, more equity in homes, more access to credit.

Now we're highly, highly confident at some point improving home prices, existing home sales, better access to credit, more equity in homes will drive re-roof demand. We've been pretty cautious about calling when that will happen, so we would say this year, we would expect maybe tepid growth in re-roof, and I think we'll change our view on that when we see something more than tepid growth. From an operational point of view, we have our assets well positioned, our inventory is well positioned. If we saw an uptick in the market due to either storms or re-roof demand we would be in a position to support our share in the market.

Okay and also you mentioned earlier in the call about some cost headwinds in the roofing segment. You'd previously mentioned refinery economics may lead to some higher asphalt inflation this year. Can you actually quantify what you're seeing to date?

Well, I think all the main themes we've talked about there on asphalt are still in place which is we've seen great consolidation among refineries because of the configuration of the refineries and their feed stock. For many of the refineries making asphalt has become a less attractive opportunity for them so in effect, asphalt continues to trend to having the economics of being a refined product, not of being a by-product. So we always used to be able to buy asphalt because refiners were stuck with it after they made all the products that they wanted to make. I think today, they look at their crack economics and they've got to be able to justify making asphalt at the bottom end of the barrel, so with oil prices stable and still elevated with winter going behind us and with summer paving season coming, we always see at this time of the year an uptick in our asphalt costs, and that would be the inflation we would expect to see this year.

Thank you.

Michael Rehaut, JPMorgan.

First question on composite. You mentioned that margins I believe should be up year-over-year in the Second Quarter, 2Q '13 versus 2Q '12, and in the second half also better year-over-year, but would you expect the second half to be better than 2Q's levels given your expectations maybe you kind of give a lot of pluses and minuses on the pricing side, but also relative to your expectations for demand?

Yes, what Michael said in his prepared remarks was we expected that the Second Quarter would comp more in line with the Second Quarter of last year. So I don't think we guided to kind of margin expansion in the Second Quarter but clearly since we came in well below in the First Quarter, I think that's an expression of confidence that you'll start to see the business turn the quarter in the second, and then really because we think the business will improve for the full year it's kind of just mapped. Obviously, since we were behind in the First Quarter, we'll kind of be in line with last year in the Second Quarter we're going to have to beat in the second half and build some momentum going into 2014. We have not given any guidance or broken out any point of view on the second half in terms of how that would break by quarter.

Okay, I appreciate that, and then also on the roofing segment, with the April 1 price increase, I believe we've heard that and perhaps you can just confirm or comment on this, different things about the success or lack thereof of the February price increase, if that indeed went through. I was hoping you could give us some color on that, and also the degree of magnitude that you're expecting in terms of percentage price increase for roofing effective April 1, and what potential realization rate you'd get from that?

Well I want to make sure we kind of don't confuse matters. There was pricing announced earlier in the year, some of which was announced that it would take place or be effective in February, but in fact to the way kind of your First Quarter buys work is we negotiate with our distribution customers in terms of quantities and volumes of product. In our case, volumes and quantity of product that they would buy in the First Quarter, and that we would ship in the First Quarter as we try to be very disciplined about not letting volumes and pricing in the First Quarter carryover into the second. So those price negotiations or the structure of the market kind of cause you to do business in the First Quarter at specific negotiated prices, so in effect that February price increase is the April price increase. Which is once we get out of shipments for the winter buy, then effectively you go to new pricing and that's the pricing that we're seeing in early April.

And we've expressed a fair amount of confidence in the effectiveness of that price. Now that's the way it worked in our case. I think different competitors announced and executed their price increases in different ways, but that generally across the industry, our sense is Winter buys applied to volumes and shipments in the First Quarter, with First Quarter pricing and that whatever prices were announced in the First Quarter would take effect early in the Second Quarter. That's the way certainly we viewed pricing and we think that's consistent and has kept us competitive.

Okay, thank you.

Bob Wetenhall of RBC.

Hi, nice job on price execution this quarter.

Thank you.

Great stuff to see. I was hoping you guys could walk us through the path to double digit revenue growth and profitability in the insulation segment, and I was just trying to understand about your comments that there was some pre buy in the Fourth Quarter which moved volumes into Q4, and in the context of that do you expect to see that volume come back later in the year?

Yes, thanks, Bob it's Michael. Yes, as we said on the quarter itself, looking at it year on year and then both on some trends that we're seeing, we had two price increases that were announced in 2012. One that caused pull forward into last years First Quarter, and then a price increase late this year that caused pull forward late last year which impacted comparability for the First Quarter this year versus the First Quarter last year, predominantly in our US residential facing business. In addition, we've been impacted by weather, so if you recall last year was very, very warm in which we think was positive from a demand catalyst point of view, and then this Winter it tends to be very cold in a number of our markets, both here in the US but also Canada and then also actually China as well. So as we kind of dissect all that data, take a look at where we see starts as to where they are right now. As we look at where we see starts trending for the rest of the year, as we look at the demand that we saw in January, February, and then building threw March and April, actually gives us quite a degree of confidence around delivering double digit top line for insulation business in '13.

That's real helpful, thank you. Just quick follow-up on composites. When you're saying broadly inline for 2Q in second half, were you talking about either margins or absolute dollars on a year-over-year basis, and just follow-up, what was the dollar impact of negative FX? I know sales were off $17 million year-over-year due to mix and FX. If you could break those out that would be great? Thanks a lot.

Sure. In response to your first question we're really talking margin rate, but we've said that the volumes in the business are reasonably good, so I don't think we're expecting a giant change in revenue. It's much more important for us to get the operating leverage and start changing the amount of money we make on the volume we have, is really our key focal point in that business. If you look at FX, FX was probably half -- less than half of the impact on the top line in the First Quarter, and had really de minimis impact on EBIT in the quarter.

Got it. Thanks very much. Good luck.

Garik Shmois, Longbow Research.

First question is on insulation in the top line guidance that you have for the full year, the double digit. You mentioned that you have a 2Q price increase that's announced. How dependent are you on securing a meaningful portion of that price increase in order to hit your double digit top line guidance?

Well, Garik, we really do believe that the key theme in growing the top line in insulation is going to be improved volumes so the portion of our business which is residential new construction on the one hand I said earlier that it's probably the US portion of that is only about 30% of our overall volume mix. The flip side is we're now moving into our second consecutive year where that market should be growing 25% or more, so it helps a lot to have a third of the business growing at very, very strong double digit levels. We also did say though that we already have booked a fair amount of price here in the First Quarter, that price was the driver of EBIT improvement year-over-year, so clearly if you can have broad gains in pricing that you carry through the year, and you get volumes growing to underpin that, so when you add those two together I don't think terribly difficult to see how you can get the double digit revenue growth.

Okay thanks and then just one more point of clarification on the composites business, with respect to the $10 million impact on pricing that you saw in the First Quarter of the year. Just and how that's going to impact the full year. Just wondering if you could provide a little bit more clarification? Would you be able to recover that $10 million potentially upside to that $10 million if you can get nominal pricing flat for the full year, meaning the price increases that you have announced in China, if that carries through, through other geographies would the net impact be more than the $10 million that you're anticipating to lose from the First Quarter actions?

Yes, so first of all let me try to clarify. In the First Quarter we had an impact to the quarter on pricing of about $3 million which I would say was unanticipated when we talked about our outlook for the year so those were deals that were kind of getting done in the First Quarter for 2013 which were a little less favorable than we had expected. So we annualized that and said the $3 million we lost in the First Quarter at a price, would have a full year impact of about $10 million just because of the timing of shipments and how the adjustments work. So relative to nominal pricing, we thought we started the year at zero. We probably started the year at negative $10 million, so the first $10 million of positive price we get is going to fill the hole and then we'll dig our way back out of that hole and start pushing margins based on positive price realization. I would say we expected prices to be relatively stable this time of the year. They are.

We, in our competitive analysis, which we have shared at each of our Investor Days, we've seen over the last five years since the financial crisis, a tremendous reversal in the rate at which the players in this industry have been adding capacity. We think we've completed now this will be the fifth consecutive year with the amount of capacity added in the industry will trail demand growth. It takes about two years to add a melter so we have pretty good outlook for '14 and '15. We would say our expectation would be we've got two more years ahead of us where capacity will be added in the industry below demand growth. So we're seeing our utilizations improve because of our restructuring's and other things we're doing and improving our cost position, and we're also seeing that returns industry wide are not justifying or are not a catalyst for broad based capacity expansion by us or our competitors. So that's all a positive indicator that would say we should get into a positive pricing cycle here. The news that I shared on today's call which is that we saw both Jushi and Tieshan announce a price increase in China would be kind of one of those leading indicators that you would look for that would say that our competitive analysis is directionally correct, and that the way the industry needs to play out over the next 4, 8, 12 quarters that we've got our arms around that correctly.

I think the most difficult thing when you're in an inflection point and starting to move into a positive pricing cycle is actually calling the beginning of that and understanding what the curve is going to look like once you bottomed. I think what we're trying to say on today's call is we feel like we probably moved through the bottom here in the First Quarter and as long as we don't see some demand disruption or something unexpected in the global economy, if we can get good sequential growth in demand that continues to load the industries assets, with inflation in places like China, with very, very low margins and poor returns for virtually all of the industry participants, we would expect that we're going to be able to start driving pricing in the marketplace and improve our margins through pricing.

Thanks so much.

It's Thierry. We have time for one last round of questions.

Dennis McGill, Zelman & Associates.

I just want to clarify one thing on the insulation side make sure I'm thinking about it correctly. Isn't cold weather good for re-insulation demand?

Yes, I think that's fair. I would say late season cold weather helps us a lot less than early season cold weather so if it's October and suddenly it gets very, very cold people are looking ahead to five months of winter and saying maybe I should go down to the local Home Depot and buy some insulation and try to improve my house. When winter hangs around in March and April as it has here in Ohio, I think it just makes people grumpy, but I'm not sure it makes people insulate, so the return on investment when you've got winter ahead of you is very different than the return on investment when you're hoping winter will go away. So it probably helps some, I wouldn't be entirely dismissive, but we've certainly tended to see that a very early season cold snap, very cold weather in September or October is a much better catalyst for re-insulation sales than kind of this Winter we're having this year which just won't go away.

Okay, I think that makes sense and then just to clarify the retail business or the re-insulation business would be -- would have been down in the quarter versus last year?

Yes, we looked at the -- we kind of went through the different markets that we manage and obviously in retail you see a lot of different things that are also associated with inventory levels, and how we service stores, and when lumber yards and other retail channels outside of big box bring inventories in so there's a lot that we would put in that category called retail. But generally across most of the segments insulation was a little bit weaker in the First Quarter, largely for the things Michael was citing which is the timing of price increases and how it affected or maybe distorted volume shipments into individual quarters, and then secondly, probably the cold weather pushing some lag into the new construction market, pushing some lag into the timing of the construction season. Hopefully we'll have a very good report in the Second Quarter where we're kind of able to show the volume growth so that this looks like the aberration which we believe it is.

Okay, and then just quickly on price in roofing. If we just simplify kind of the analysis now that you're past the discounting period and you ignore the price increase that's announced for April, how would current pricing compare to pricing at this point last year?

Well I'm trying to think of what I could talk about that might help you with that question. We don't typically talk about specific price levels. We just tend to talk about price levels sequentially. I would say certainly pricing in the First Quarter was likely higher than it was in the First Quarter last year just because of the discounting. The level of price increase that we have in place for April 1 is pretty similar to the level of price increase we achieved last year on April 1. The big difference in the Second Quarter was last year we had both the benefit of a price increase and eliminating bigger discounts. This year we'll have the benefit of a price increase and eliminating smaller discounts, both of which will then be offset by some amount of inflation. So the sequential margins which have kind of almost always been very good from Q1 to Q2, and have almost always if you look at the last four years been pretty stable through Q2 and Q3, we feel good that we'll see sequential margin expansion from the first to the second just based on a little bit better pricing. And that unless we see something unusual that we should be able to sustain that at least through the third depending on how volumes play out for the year, which is why we think the full year we'll be able to compound margins versus what we had last year.

Just to clarify that, if you held price today and you didn't get anymore price for the rest of the year would annual pricing in '13 be higher than annual pricing in '12?

I imagine it would be. I would tell you I don't have something in front of me that would allow me to add that number up exactly and we don't typically as I said don't typically talk about absolute price levels, but I'm thinking more input costs and margin rates. So input costs I would say are relatively flat versus last year, and since our margin rates are higher that would imply higher overall average prices for full year.

Okay, got it. Thanks guys.

This concludes our question and answer session. I'd like to turn the conference back over to Mr. Denis for any closing remarks.

Well I'm going to step in here and make a few closing remarks. First of all as always we thank you for your interest in our company and for your active participation on the call. Obviously this was a call we have been looking forward to as we saw the way the quarter was playing out. I think we laid out a good agenda on the Fourth Quarter call and gave pretty clear visibility externally on what are the key execution metrics that we're going to measure ourselves against, and one of the things I emphasized as we came off the fourth quarter call was, it was really important to us that we get off to a fast start in 2013 and I think we have.

The big highlights for the quarter obviously are the roofing margins, insulation pricing, and then getting the composites ramp up done so that we can start talking about positive developments and composites as it relates to cost structure, as it relates to volumes, and hopefully as it relates to pricing later this year. So we feel like we're starting to see the cumulative impact of improving construction markets in North America really put some firepower into our building materials businesses. We think they are going to fuel the earnings growth for 2013. We also feel though we're making the kind of progress in composites that it's going to become a contributor for the business in 2014 and beyond, so we like the agenda. We like the execution. We're happy with the way our markets are developing, and we're looking forward to producing a great year. Thanks everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.