Owens Corning (OC) 2013 Q3 法說會逐字稿

Good morning and welcome to the third-quarter 2013 Owens Corning earnings conference call. All participants will be in listen-only mode.

(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, Andrew, and good morning, everyone. We appreciate you taking the time to join us for today's conference call to review our business results for the third quarter of 2013. Joining us today are Mike Thaman, Owens Corning 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 press release and filed a Form 10-Q that detailed our financial results for the first quarter. For the purposes of our discussion today, we have prepared presentation slides that summarize our performance and results for the quarter. We will refer to these slides during this call.

You can access the earnings press release, Form 10-Q, and slides on the investor section of our website. A transcript and recording of this call and supporting slides will be available on OwensCorning.com for future reference.

Please review slide 2 before we begin, where we offer a couple of reminders. First, today's presentation and remarks includes forward looking statements based on our current forecasts and estimates of future performance.

Actual results may differ materially from those projected in such statements. Additional information about the risks, uncertainties and factors that could cause these material differences can be found in today's press release, as well as in our 2012 Form 10-K and third-quarter 2013 Form 10-Q.

This presentation and today's remarks contain non-GAAP financial measures. Reconciliations of non-GAAP financial measures to the most comparable GAAP measures may be found within the financial tables of our earnings release on OwensCorning.com.

Adjusted EBIT is our primary measure of period-over-period comparisons, and we believe it is a meaningful measure for investors to compare our results from period to period. Consistent with our historical practice, we have excluded non-recurring items, and items that we believe are not representative of our ongoing operations, when calculated to adjusted EBIT.

We adjust our effective tax rate to remove the effect of quarter-to-quarter situations which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share. In the third quarter, we have utilized an effective tax rate of 30% and Michael will explain our updated guidance in his prepared remarks.

For those of you following along with our slide presentation, we will now move to slide 4. Now, our Chairman and CEO, Mike Thaman, will make some opening remarks, followed by remarks to our CFO, Michael McMurray. Mike Thaman 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 third-quarter results.

Owens Corning delivered improved year-on-year performance in each of our businesses generating positive momentum for the remainder of the year. Our roofing business sustained strong margin performance, the insulation business delivered its best quarter in six years, and is profitable year-to-date, and composites improved EBIT by $10 million compared to last year.

The Company delivered $119 million in adjusted EBIT, an increase of $38 million from the third quarter of last year. Consolidated revenue for the third quarter was $1.32 billion, compared to $1.28 billion in the same period of 2012, and adjusted earnings were $63 million, an increase of $23 million from the same period last year.

Based on our year-to-date performance, we have maintained our outlook of at least $100 million of adjusted EBIT growth in 2013. At the start of the year, we discussed a number of expectations for improved performance across our businesses. Let me review them now, starting with safety.

As is the case each quarter, we said that we would continue to make progress towards our goal of creating an injury-free workplace. We've had a 6% improvement in recordable injuries year-to-date, versus the comparable period last year. We remain focused on an injury-free workplace and are committed to achieving a 12th consecutive year of safety improvement in 2013.

In roofing, we said that we would improve margins and see better pricing. In the quarter, we delivered 20% margins, a 2-point increase year-over-year, sustaining the margin improvement that we reported in the first half of the year.

In the insulation business, we said the continued improvement in the US housing market would translate to a return to profitability for the business in 2013. In the third quarter, EBIT was $18 million, an improvement of $15 million year-over-year. The insulation business delivered its best quarter in six years, and will achieve full-year profit in 2013.

In composites, we expected to improve financial performance as the year progressed, by demonstrating operating leverage in a stable price environment. While composites improved third-quarter EBIT by $10 million compared with last year, on a sequential basis, EBIT was down $11 million. I'll provide more details on composites performance later in my remarks.

I would also like to review a few other important items in the quarter. First, an agreement was reached with the local government in Hangzhou, China, to close and sell our facility in exchange for approximately $70 million. This action is consistent with our strategy to reduce our capital intensity in China, while continuing to meet the needs of this important market.

Second, Owens Corning repurchased 1.4 million shares of its common stock for $54 million in the quarter. As of September 30, 8.6 million shares remained available for repurchase under the Company's current reauthorization.

Finally, for the fourth year in a row, Owens Corning has earned placement in the Dow Jones Sustainability World Index. In recognition of our sustainability performance, this year, Owens Corning was named the industry leader for the building product category.

Now, I would like to further discuss the performance of our businesses, as well as our outlook for the remainder of the year, beginning with roofing. Roofing margins continue to be strong. Revenues were flat compared with last year. While industry shipments were up in the third quarter, our volume performance in the quarter trailed the market, giving back our outperformance of the first half. On a year-to-date basis, however, our volumes have largely tracked the overall market.

In the quarter, our volumes were particularly impacted by geographical variation in demand. The coastal markets compared positively year on year, where we tend to have market share below our national average.

Regions in the center of the country compared more negatively for the quarter, where we tend to have market share above our national average. For the full year, we expect improved margins over 2012 on strong price realization, despite the fact that energy shipments are expected to be down mid single digits.

In the insulation business, another quarter of financial progress has resulted in year-to-date profitability. Operating leverage, adjusted for the Thermafiber acquisition, was approximately 40% for the quarter and it's 45% year-to-date. The business has delivered about $50 million in year-on-year price improvements. This represents progress, although prices still remain below historical levels.

The integration of our Thermafiber mineral wool business, which we acquired late in the second quarter, is going very well. Our customers are taking advantage of our ability to provide products in specialized high-temperature construction applications.

The insulation business will achieve full-year profitability for 2013. Our expectations included continued growth in the US residential new construction, improved capacity utilization, and higher prices.

In composites, benefits from our asset repositioning and favorable production rates were tempered in the third quarter by the cost of rebuilding our furnace in South Korea, and manufacturing challenges. Late in the quarter, we saw a marked improvement and increased efficiencies in our manufacturing network, and believe that this will positively impact financial results as we close out the year.

Our earlier outlook for improvement in composites was based on assumptions of lower production costs and stronger volumes. We now expect full year EBIT to be flat, due to lower than anticipated IP growth, lower than expected North American roofing demand, and the impact of manufacturing challenges on our third-quarter financial performance.

Year-to-date, prices are flat compared to last year; however, sequentially, prices have increased in each of the last two quarters. For Owens Corning, adjusted EBIT has improved by $79 million year-to-date, and we are positioned to achieve at least $100 million of adjusted EBIT growth for the year.

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

Michael?

Thanks, Mike, and good morning everyone.

As Mike mentioned earlier, our year-to-date results support our outlook of at least $100 million of adjusted EBIT growth in 2013. Before I discuss our quarterly results in more detail, today we reported on an important transaction in our composites business, that was executed this quarter. We reached an agreement to close and sell our composite glass reinforcement facility in Hangzhou, China, in exchange for proceeds of approximately $70 million from the local government. The facility will be closed in late 2013 and the land will return to the Hangzhou authorities during the first half of 2014.

The closure will result in a capacity reduction of about 40,000 tons for Owens Corning. To replace this capacity, we will leverage our previously announced supply lines with Jinniu. This represents a creative and capital-efficient solution that enables us to maintain our market position in this growing region, lowers our cost position, and reduces our capital footprint.

We received $17 million in the third quarter, and expect the remaining cash proceeds to be received over the next two to three quarters. The sale will result in a gain of approximately $30 million to $40 million, when the transaction closes in 2014, which we will adjust out of our results.

Now, let's start on slide 5, which summarizes our key financial data the quarter. You will find more detailed financial information in the tables of today's press release, in the Form 10-Q.

Today, we reported third-quarter 2013 consolidated net sales of $1.3 billion, up 3% compared to the same period in 2012. In our roofing business, net sales were flat compared with the same period of 2012, as slightly higher selling prices offset the impact of slightly weaker volumes in the quarter.

Net sales of our insulation business were up 12% on stronger volumes, higher selling prices, and the acquisition of Thermafiber, that closed in the second quarter. Lastly, net sales in our composites business were down slightly, due primarily to the impact of foreign exchange translation. In a moment, I'll review our reconciliation of items to get to adjusted EBIT, our primary measure to look at period-to-period comparisons.

Adjusted EBIT for the third quarter of 2013 was $119 million, compared to $81 million in the same period one year ago. Adjusted earnings for the third quarter 2013 were $63 million, or $0.53 per diluted share, compared to $40 million or $0.34 per diluted share in 2012. We have used an effective tax rate of 30% on adjusted earnings results for the quarter. I will discuss our updated tax guidance later in my prepared remarks.

Depreciation and amortization expense for the quarter was $78 million, including $2 million of accelerated depreciation related to our asset repositioning in Europe. Depreciation and amortization was $11 million lower than the third quarter of 2012, which included $14 million of accelerated depreciation related to our asset repositioning in Europe. Our capital expenditures for the quarter were $74 million.

Next, please turn to slide 6, where we reconcile our third-quarter adjusted EBIT of $119 million to reported EBIT of $106 million. We've adjusted out $2 million of net losses related to the flood that occurred in October 2012 at our New Jersey roofing facility, as a result of Hurricane Sandy.

The net loss included the impact of an $11 million insurance recovery received during the quarter. As we noted on recent calls, the facility is insured for property damage and business interruption losses, and as a result, we believe that the overall financial impact will be minimal. However, the timing of recoveries has resulted in expenses being taken in periods before the insurance proceeds are received, which is why we are adjusting the impact of this event out of our results.

In the third quarter of 2013, we have reached full operating capacity at this facility. We are pleased with the speed and the efficiency of our roofing team in bringing this plant back online. In addition, we have adjusted out $5 million of expenses related to our previously-announced 2012 restructuring actions. Finally, we've adjusted out $6 million of severance costs associated with the closure of our composite facility in Hangzhou, China, that I discussed in my earlier remarks.

Now, please turn to slide 7, where we provide a high level review of our adjusted EBIT performance, comparing the third quarter of 2013 to the same period one year ago. Adjusted EBIT improved $38 million. Each of our businesses improved EBIT performance versus last year.

Our insulation business improved by $15 million, our ninth consecutive quarter of year-over-year performance improvement. Our roofing business improved by $13 million, on higher pricing and lower manufacturing costs, and our composites business improved by $10 million. General corporate expenses were flat versus the prior year

With that review of key financial highlights, I ask you to turn to slide 8, where we provide a more detailed review of our business results, starting with building materials. For the third quarter, building materials net sales were $902 million, a 5% increase compared to the prior year. Building materials delivered $114 million in EBIT, up 86 million from the same period in 2012.

Slide 9 provides an overview of our roofing business. Roofing net sales for the quarter were $471 million, flat compared with the same period a year ago. EBIT in the quarter was $96 million, up $13 million compared to the same period in 2012. The business achieved 20% EBIT margins on flat year-over-year revenues.

Volume trailed the market in the quarter, but has largely tracked the market on a year-to-date basis. In the third quarter, we estimate that industry shipments were up midteens year-over-year, driven by strong volume growth in Western and Atlantic coast states, partially offset by volume weakness in the center of the country.

The roofing industry is a regional business, and manufacturer share position can vary significantly region by region. In general, Owens Corning has a stronger share position in the Central regions of the US, and weaker share positions out West and on the Atlantic coast.

Our national market share on a year-to-date basis is down slightly, although we have maintained our share position, when adjusting for geographic mix. Year-to-date, we estimate that the industry shipments are down mid single digits versus last year. Based on year-to-date volumes, we expect full-year 2013 industry shipments to follow this trend, primarily due to lower storm volumes.

Despite current market conditions, we have continued to deliver quarterly year-over-year margin improvement, and expect to improve full year margins over 2012 on strong pricing and manufacturing performance. Year-to-date EBIT margins remain strong at 21%, a 4-point improvement over the same period in 2012.

As we look to the fourth quarter, we expect that EBIT margins will be lower than rates seen during the first three quarters of 2013 on seasonally weak demand. This is a trend consistent with what we have seen in the fourth quarter margin over the last decade, due to seasonality in both sales and production levels. We anticipate contribution margins in the fourth quarter will continue to be attractive, and capable of sustaining strong annualized EBIT margins.

Now, slide 10 provides a summary of our insulation business. Net sales for the quarter at insulation of $431 million were up 12% over the same period last year on stronger volumes, improved pricing, and the acquisition of Thermafiber.

The business delivered $18 million in EBIT, compared to $3 million in EBIT in 2012. Our strong third-quarter performance has lifted our year-to-date EBIT performance to a profit, which is a significant milestone for this business.

As I stated on our last call, our insulation business has turned to profitability on a trailing four quarter basis at about 800,000 lagged US housing starts. The last time we were at breakeven was in 2008, at just over 1 million lagged starts on generally high prices. Our team has done a great job of lowering our breakeven through strong cost management and manufacturing performance.

Operating leverage in the third quarter was approximately 40%, excluding the impact of our second-quarter acquisition of Thermafiber. On a year-to-date basis, operating leverage is approximately 45%, excluding Thermafiber.

Throughout the year, we've invested in product quality, our manufacturing network, and the Owens Corning Pink brands. These investments have been a bit of a head wind for operating leverage this year. US new construction insulation volumes are healthy, and have continued to track the growth trends in new residential starts.

In addition, the business has continued to demonstrate strong price realization in the quarter. On a year-to-date basis, the business has delivered about $50 million of year-on-year price improvement. As the US housing market continues to recover, we expect to see further sales growth with improved pricing, as industry capacity utilization tightens. The pricing actions that we have taken and the improved volume leverage in manufacturing performance we have demonstrated year-over-year, we remain confident in our guidance of double digit revenue growth and a profitable full year 2013.

Now, I'll ask you to turn your attention to slide 11 for a review of our composite business. Net sales in our composites business for the quarter were $453 million, a 1% decrease compared to the same period in 2012. The decline in revenue was driven primarily by the impact of foreign exchange translation.

For the quarter, overall volumes were down slightly versus our expectations on lower than anticipated IP growth, and weakness in North American roofing demand. Our third-quarter pricing actions delivered positive sequential results, and we are encouraged by recent trends.

EBIT for the quarter was $21 million, compared to $11 million in the same period last year, on lower plant start-up and maintenance costs, and improved capacity utilization. EBIT results declined sequentially as a result of planned maintenance costs, challenging manufacturing performance at a few facilities, and lower volumes.

I'm pleased to report that manufacturing challenges that impacted our third-quarter performance have been largely resolved. And now we expect full year composites results to be consistent with last year.

With that review of our third-quarter performance, I now ask you to turn to slide 12 where we will review our other financial guidance for 2013. We have revised our outlook for capital spending to be about $350 million, down from $380 million, primarily as a result of higher repair versus replacement cost associated with the rebuild of our New Jersey roofing facility.

The overall cost of this rebuild is consistent with our original estimates, however, we had originally anticipated more costs to be classified as capital versus expense. Excluding the capital costs of this rebuild, capital spending is still expected to be roughly in line with depreciation and amortization, of about $315 million.

We now expect corporate expenses to be about $105 million, down from our previous guidance of about $120 million. The primary driver of this decrease is reduced variable incentive compensation.

As a result of the geographic mix of our earnings year-to-date, and our outlook for the remainder of the year, we have revised our outlook of our full-year effective tax rate on adjusted earnings to be about 30%. Our $2.1 billion US tax NOL will significantly offset cash taxes for some time to come.

Our expectation for cash taxes remain unchanged at about 10% to 12% or $30 million. Even with significant year-over-year earnings growth, our cash taxes have remained flat to 2012 as a result of our NOL position, and successful tax planning initiatives.

During the third quarter, we repurchased 1.4 million shares of the Company's common stock for $54 million. These share buybacks represent a return to capital to our shareholders, and reflect our strong outlook for growth in earnings and free cash flow generation.

In summary, we delivered improved performance in each of our businesses in the third quarter compared to last year, and although early in the year there were expectations that a more rapid acceleration of construction activity and a better roofing market, we remain confident that we will deliver at least $100 million of adjusted EBIT improvement in 2013.

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, all three of our businesses improved performance over 2012, and we're positioned to finish the year strong. Our year has not been without challenges. We've had some unexpected market headwinds, notably a declining roofing market, and an overall weaker global economy. In addition, we've had some execution challenges, specifically in the third-quarter composite manufacturing performance.

However, we are very pleased with our overall progress in 2013. The continued execution of our Management actions, including price realization in insulation, margin management in roofing, and cost reductions in our production network, and price realization in composites will provide a significant step forward in the financial performance of our Company for 2013 and into 2014.

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. Andrew we're ready to begin the Q & A session.

(Operator Instructions)

The first question comes from George Staphos of Bank of America Merrill Lynch.

Two questions here. First, can you recall when the last time you saw such a divergent trend in your market share in roofing was, and what caused it? What gives you confidence that's the regional factors and not some relative difference in pricing and promotion?

And the second question I had, what was the incremental impact of the investment that you made on product quality, manufacturing network, et cetera, within insulation and will that all reverse next year? Thanks.

Sure, thanks, George. Let me start by talking about roofing. I would tell you, you know I guess I've been with the Company now 21 years, so I've been around the analysis of our results for a long time.

This was really the first quarter that we dug into state by state shipment data and state by state market share data at the level we did. Because we saw some trends in the quarter that did surprise us in terms of the size of the volume swings that we saw in some parts of the country.

So at least in my history, I would say this is probably the biggest change in the overall geographic mix of the market, and I think this is a bit of an outgrowth of the change we've seen in the overall market over the course of the last four or five years, where we are seeing more inventory put into the market early in the year, and then we're seeing distribution customers primarily manage that inventory through the Summer.

So that end use market dynamics are starting to have an impact on regional demand and regional shipment characteristics. So I wouldn't say that our theory is not that we saw the end use market shift as dramatically as we maybe saw it in our books, but that because of inventory effects, we saw the order pattern of our customer shift.

And certainly on the coasts, up in the Northeast, where there's a lot of Sandy rebuilding and then the new construction markets down in Southeastern Florida, and along the West Coast which is a little bit more new construction driven generally for asphalt shingles, those are markets that are a little bit below national average for our share, and as you come off the coast of that tends to be a little bit above national average for our share.

A lot of those markets saw a lot of storm activity in 2011 and 2012. As we've gone back and done some detailed analysis of those markets, there does appear to be a bit of a storm hangover effect where if you had a lot of storm activity in a year that does pull forward some reroof demand, maybe for the year or two that follows, where some of the roofs that might have gotten done in 2012 or 2013 got pulled forward because of insurance claims.

So we can explain most of the variation we've seen in the markets as being a normal evolution of what we have seen in storms and what we have seen in new construction. We can also explain it based on inventories that we saw year-to-date, so we took pretty good comfort when we looked at all our year-to-date numbers, that on a region by region basis and nationally, we think we sustained our position in the market.

Because you can have some regional changes, our market share is down just a touch this year, but on a regional basis, our market share is pretty much where we expected it to be. But it all showed up in the third quarter, and we were feeling pretty good that we were ahead of the market through the first half, and then here in the third, we took that out performance and reverted it back to the overall market. The thing we're most proud of though is our margin performance obviously through all three quarters has been outstanding.

We got the year off to a great start in the first quarter, managed our margins very successfully through the second and the third. So when we look at year-to-date numbers for roofing, we're nothing but pleased.

And probably the only point of disappointment would be we came into the year thinking the overall roofing market should be about flat for the full year, down mid single digits year-to-date, and we think it will be probably down mid single digits for the full year. So the overall market opportunity is less than what we might have expected when we came into the year, but we've overcome that headwind with better margin performance.

Your second question which was really a question about the investments we've made in insulation and product quality in the operational network, I'm going to come at that question a little bit differently, and just talk for a second about operating leverage and then I'll work my way back to that. I think Michael made in his comments, and I said in my comments, that excluding the Thermafiber acquisition, that our operating leverage in the quarter was about 40%.

If you read our 10-Q, we said about a third of the growth in insulation in the quarter came from Thermafiber, we grew the business about $50 million. So $16 million or $17 million of that was Thermafiber.

When we disclosed that acquisition, not a significant acquisition in terms of what we paid for the business, it's about a 10% EBIT business. So if you pull the EBIT of that business out, you pull the revenue of that business out, you can see that revenue growth in the organic underlying business was closer to $33 million, $34 million and the overall EBIT growth was more in the $15 million range if you pull out some EBIT for Thermafiber.

So year-to-date we're about 45% when you make that adjustment, in the quarter we're about 40% when you make that adjustment, we think it's a fair adjustment, because obviously when we gave that guidance, we didn't contemplate how acquisitions would play into that. If you actually back up to last year and do that same analysis, over the last seven quarters, our operating leverage is about 51%.

So we've always said that operating leverage would bounce up and down a little bit quarter by quarter, and some of that is because some of the investments that we're making right now in terms of product quality, and in a couple cases bringing on some capacity that causes some one-time costs. But for the most part, we're really happy with our operating leverage.

I wouldn't say that there's a lot of benefit from our perspective or even from our investors' perspective trying to quantify some of those quarter on quarter investments, because there's some of the noise that's always going to exist in this overarching operating leverage target we have set.

But I think we're right on track in insulation, when you look at the 50% operating leverage goal, we're right on that number over seven quarters and if you listen to Michael's remarks, we had said that at 800,000 lagged starts in the second quarter, the business was breakeven on an LTM basis. It's now making money LTM.

It's now making money year-to-date, as we start progressing our way back towards a more constructive construction market. So we're very enthusiastic with all of the underlying trends we see in our roofing business, our insulation business, and feel very good about the progress we reported here in the third quarter.

Thank you for the comments.

Stephen Kim of Barclays. Please go ahead.

I just wanted to follow-up on the previous question. With respect to the roofing business, if we could take the revenue, thanks for your comments. You were talking about the fact that the regional analysis this quarter was something that you hadn't really undertaken as extensively before, but that it was basically indicating that you had held share.

I guess I'm curious, if over the next six months or so, you learned differently that perhaps you see some evidence that you had lost some share, I was wondering what are you prepared to do in terms of your pricing? Is your general sense that you're prepared to rein in pricing in order to recover some share, or hold share? Or if you could just sort of comment about your overall views for how you balance share or perceived share with your pricing strategy, that would be helpful.

Well thanks, Stephen. A great question because I think that a little bit how we talk about the business here in the quarter is instructive in how we think about the business, also in terms of pricing. Which is for reporting purposes, we obviously report the business as though it's one big national market.

We report pricing and margins as though it operates as one big national market and in fact, you do see some pretty significant variations region by region and even in local markets, not just in terms of market share among the industry participants, but also price levels in individual markets, and also margin performance in markets. So it is possible, as you said, that if we saw share trends that we didn't like and we thought that the root cause of those share trends was pricing competitiveness, that we in fact might need to respond.

I think the way we would think about that is, it wouldn't be a national response, and that the market doesn't really operate as a national market, but it's possible that you could find some geographies where we felt to defend our position in the marketplace, we needed to either adjust the pricing on one or more of our products. And I think that's the other real benefit of our product lines which is really our showcase product is our Duration shingle, which is quite an engineered shingle that's preferred by reroof contractors, it has real benefits to the reroof contractor in terms of how its installed.

It has real benefits to the homeowner, in terms of its aesthetics, and also in terms of warranties so we have real value built into that product. And I wouldn't necessarily feel like if we had a region or a market where price competitiveness was an issue, that it would necessarily impact the price levels of that product. It might impact some of the products that go into new construction which tend to be where there has been more price competition.

So we're now talking about some percent of some percent of some percent of the market, where if we needed to adjust pricing, we would do that in order to support our share position. So we think that's all manageable and those are all the things that happen every single day in the business.

So what I would describe to you as a look forward on how we might think about pricing in the business, it's things that our team have been doing every day for the last 10 months of the year, in terms of how we got to the results we reported today. So on a year-to-date basis we've had all those same margin management, price management, market share management challenges, and the net of that, the result has been great margins and sustaining our position in the market. And I think going forward I would expect our team to be able to manage all those dynamics on a market by market basis, and produce great margins, and sustain our market position in the market.

So I think there's nothing about the future that feels any different about the past. If anything, having come through the winter discounting last year, where the winter discounting, in our view, worked for us in a much better way, we were able to offer much milder discounts as a result of the fact we didn't see a big change in asphalt prices.

We were able to ship our product in the first quarter at very good margins. We're certainly heading into the winter setting that goal for our team, that we would like them to manage the winter discounting in a way that we sustain our position in the marketplace, but that we still come into next year with good margins and position our customers with good inventories setting into the Spring selling season.

Great, thanks, that would be great. Appreciate that. The second question relates to your insulation business.

Actually the builders that we speak with have been talking about and reacting to the fact that demand sort of slowed over the Summer, and there's a concurrent call right now with a builder who indicated that October volume trends were slower than September. And this is, I think, in general something that we're hearing more and more about, in general, the idea that margins at the home builder side are starting to see a crest forming in 2014.

And in that environment, I was curious -- or against that backdrop, I was curious if you could comment on whether you think you're seeing any growing resistance or slackening in your ability to achieve positive pricing trajectories in insulation, or if you believe that is not really something that you're perceiving in the marketplace? Thanks.

Sure. Let me first start by talking a little bit about what we think the overall market for housing is.

Certainly, we read all of the reports that you produce and that others produce, and it does seem like the market has gone through a little bit of a flat spot here. It's not that its gone into decline, but that rate of growth we maybe saw through the first six months of the year has slowed down a bit.

Our internal analysis of that would suggest that makes a fair amount of sense, given that we saw a pretty rapid and sudden rise in mortgage rates, that the rate of change of mortgage rates in a very short period of time would cause a little bit of a shock effect on the market, where some buyers were maybe eager to come in the market would take a pause and really evaluate their financial situation and their decision about buying a house. That said, when we look at the fundamentals of the market, home prices have continued to go up, mortgage rates on a historical basis are still very, very low.

Housing starts have been extremely low, for a five or six year period of time. All the demographics are showing an increasing rate of household formation, and rents are going up in most major markets. So when you have that stew of activity in the marketplace, it certainly says that this is a pause in an [exonerable] rise of housing activity, which is what's really important to us.

I think in that environment, with increased housing activity as a manufacturer, our facilities are getting more loaded, we're still not at margin rates that are acceptable to us, so certainly our stance would be if we have manufacturing operations that aren't producing margins, before we would go and add a lot more production into our network, we would like to see better margins, which is why our focus has been on price management. Certainly, we would bring capacity on to meet growth in demand, so we have the ability to go do that, but we need to see better margins.

The builders have been getting a lot of price so I think the overall cost of an insulation package as a share of the value of new construction, I don't have this number in front of me, but I'm guessing over the last 15 years, insulation package has been cut in half as a percent of the total cost of a house. So from a value point of view, us and our contractor customers are providing tremendous value to the builder, and tremendous value to the homeowner in a product that saves energy for the life of the entire house. Today, at prices that are low compared to history and certainly low compared to the price of the houses.

I think if you add on top of that what's happening with building codes, when we talked about this in the past, but there continue to be positive developments in the recommendations of the IECC in terms of the implementation of building codes that causes houses to become more and more energy efficient and therefore good value insulation packages to become more and more valuable to the builder. We certainly think that we're still in a very valuable place in the product we provide, and the value proposition with which we provide it. So I wouldn't expect that in terms of the value we provide, that there would be much pushback on what we do on insulation.

It's a competitive market. I think the pushback would be if our product was priced uncompetitively, and the builder had better options, we know that builders will go to how they can build the house with the best possible value. But as long as we're priced competitively, and we're working hard to provide that builder great value, we think that we should be able to restore pricing back to something that looks more like historical prices on a nominal and real basis.

Great. Thanks for that.

The next question comes from Michael Rehaut of JPMorgan.

My first question has to do with, well both of my questions have to do with composites actually. You mentioned that you're encouraged by the pricing actions in the third quarter, but at the same time, there was a little bit of weakness, I believe you said in North America, in addition to global IP.

So I was just hoping to get a little bit more granularity if possible in terms of the pricing trends that you saw during the quarter, in particular in North America, but perhaps you could take us across Europe and Asia as well, to the extent possible. Just trying to get a sense of the direction of pricing and if that should be a tail wind, along with the resolution of some of the manufacturing issues that you saw in the third quarter?

Sure. Happy to talk about that. Let me first talk about your North American question, because it may be that my prepared remarks were inartfully written.

But the objective of our comments regarding the North American market, in particular the North American roofing market was really a volume comment. So we thought coming into the year, obviously, we thought that the roofing market in total would be flat. We're now calling that market down mid-single digits.

That's an important market to Owens Corning as a roofing manufacturer, it's also a very important market to our composites business, particularly in North America where we're the leading supplier of glass and mat to that market. So we've had to adjust our expectations for volume related to that vertical in North America, which is a really good vertical for us, on the composite side. That's not a price comment, so from a pricing point of view, that has not impacted our outlook on pricing, nor has it affected our near term pricing.

We reported today on the call that we had sequential price improvements from the first quarter to the second, and then again from the second quarter to the third. I would say that's pretty much in every region of the world.

Now when we talk about materiality, we didn't, I don't think, telegraph today that we're yet getting material levels of price that are going to bridge that gap back from where we are today at 5% EBIT margins, back to where we were just a year and a half ago. In both 2011 and 2010, the business produced EBIT margins of around 10%, but we do think that a couple quarters of sequential pricing is a really important leading indicator, and the fact that we're getting that in almost every region of the world is a very important leading indicator of our overall theory for the business.

Which is for Owens Corning, when we see long periods of reduced investment in capacity by us and our competitors, when we see periods of demand growth where utilizations industry-wide are improving, we have seen for Owens Corning, that has produced positive pricing cycles, and has produced the ability for us to improve the margins of the business. That's certainly our theory of composites today, and then over the next couple years, we're working our way towards trying to create one of those pricing cycles for our Company.

I think over the last couple quarters we've at least seen early indications that continue to support that thesis, so that's a lot of work for us to do, for the remainder of this year. I think most of you are aware we do have contract negotiations with a fairly sizeable portion of our customer base in the fourth quarter.

How that supports improved pricing within those contracts, and how that supports improved pricing in 2014 is the next chapter of the book for us to write. But we're optimistic, based on what we seen in the last couple quarters, that the trend is in the right direction for our business, and that eventually price will be a big lever for us getting back to double-digit EBIT margins that we demonstrated in 2010 and 2011.

Oh, great. And I guess the second question, also in composites with the agreement to close and sell the facility in Hangzhou, if you just give us a sense, if it's possible. Just a little history on this particular facility, if this was the one that I believe opened up a couple years ago, and there was a disruption in the win market and the expectations in terms of profitability for this particular facility, if it was a drag on profitability in 2012 or 2013? And you also mentioned a partnership to continue to serve the facility, how that would potentially flow through the income statement?

Sure, happy to talk about that, and first of all, I really appreciate you asking that question, because to the extent there's any confusion about that, this gives me an opportunity to clear it up. The facility we built and commissioned three or four years ago is in Yuhang, which is actually quite close to Hangzhou, so the confusion there is real, but that facility which is a greenfield site is operating exceedingly well today. We think that's probably one of the low cost facilities anywhere in the world.

We have found a good market for the production of that facility, which does include some improvement in the wind market in China, but is very much now diversified across all of the performance markets of China. And we've been very happy with the performance of that plant, that it's fully loaded and performing at very high levels, relative to any of the other plants in the world.

The Hangzhou facility was a facility that was owned by Vetrotex at the time of the acquisition. It's really a legacy composites facility in China, so it has been around for awhile. The reason why the municipality approached us is, it's really now moved into the city proper, so I think at the time it was built, it was way out in a rural area, and as the City of Hangzhou has grown, its now engulfed our facility. And as a part of the economic development plan for the town, I say should city, these are all cities much bigger than some of the cities we have here in the US, they came to us and said they would like to revert the land back to them.

It was a sub scale relatively high cost facility. It did support our market share position in China, but I would say it was not materially contributing to financial results in China. We obviously were nervous about the ability to strike a deal that allowed us to recover some of our capital, and also put us in a position where we could maybe make the investments that will allow us to sustain our market share position.

I think the team was very clever and creative. We worked with Jinniu, who was a local manufacturer. They had some desire to try to drive their cost position down.

They came to us looking at our Advantex technology and asked for a license. We reported in the second quarter that we agreed to license them and help them build a melter, in exchange for an off take agreement. In effect, that off take agreement provides us about the same amount of volume in China as we were producing in Hangzhou, but we can do it at a lower cost, we can defend our market share position in China and actually recycle some of this capital that had been in the Hangzhou facility back into the Corporation.

So it's really a winner for us all around, and I think as Jinniu's facility comes up and we start putting that product into the market, as the facility at Hangzhou reverts back to the municipal government, you'll see some margin expansion in our business in China, which obviously we don't report that segment specifically.

I would just comment quickly, so that people aren't confused, we announced a separate transaction with Taishan in the second quarter, where they are going to make a specialty product that we had been manufacturing in Europe, and we're expecting a similar type of transition next year, which is that facility in Europe, which was a part of our European restructuring will get to the end of its furnace life here, some time in the next couple quarters. When we get to the end of the furnace life for that facility, it will then be shutdown. Taishan will pick up the production of that facility at lower cost.

We have an off take agreement to take that product back to the market that we're currently serving, and we're going to work with Taishan to try to develop the market for that product in China. So we've done a couple transactions here that give us the ability to defend our position in the market, reduce our capital base in composites, and reduce our cost base all at the same time, and this is one of those that came through the financials this quarter, so it made sense for us to report on that in more detail, but the doesn't have anything to do with our facility in Yuhang, which is operating very well at a very low cost today.

Great, thank you.

The next question comes from Mike Wood of Macquarie. Please go ahead.

In insulation, excluding the acquisition, it looks like you overall had relatively flattish volume growth. Can you give us a sense of the sales volume trends by your major categories, such as your North American housing, C&I, and Canadian businesses? And ultimately was there in hindsight a pre-buy hangover ahead of that June price increase that you felt in that North American housing related businesses?

Yes, Mike it's a great question because in fact, when I went through the operating leverage reconciliation, you could look at the quarter, and either you look at the insulation top line and say growth was pretty good, but they didn't get the leverage. Or when you adjust out Thermafiber, I think you look at the quarter and say for the quarter and year-to-date, leverage is pretty good. But the top line growth maybe isn't as aggressive as what we would have expected.

And you've hit the nail right on the head which is when you go by segments, the commercial and industrial markets are obviously growing quite a bit more slowly than US residential construction. The two markets that had been a helper for us over the course of the last two or three years, which was Canada and Asia, where we had seen decent growth, we aren't really seeing growth now outside of the US.

Canada had some stimulus in housing starts and some incentives and other things that caused starts year-over-year to decline. Our business in Asia still doing very well but some of the credit tightening and other things has definitely affected our rate of volume growth, so our non-US geographies, haven't really contributed this year.

Our commercial and industrial business has contributed to growth, but is not contributing at the rate of US residential. So in US res, which we also include reinsulation, some of the products we sell at retail and lumber yards, not just pure new construction, we are seeing that 20% growth that you'd expect to see, based on where housing starts are.

So when we take the pieces of the business apart, in management reporting, we feel very good about where we see growth in the US res market, we feel good about what we're seeing in terms of operating leverage, we feel good about what we see in terms of sequential pricing. We feel great about being profitable year-to-date, we feel really good about the best quarter in six years, and we really think we're starting to see an insulation business that will become a big theme in the financial performance of our Company, and certainly in the outlook to our stock price.

Got it and then in terms of, broadly speaking, the pre-buy that you've seen in both roofing and insulation, how are you thinking about managing differently going forward, when you have an upcoming price increase in insulation, winter discounting and roofing? Thank you.

Yes, I think there are different businesses but I think pre-buying is a fact of life when you're in a business that has inventory positions, and customers who take inventory positions, and also when a lot of your management focus is on trying to manage and execute price increases well, you don't want to do that at the expense of your customers. You want to do that in a way that your customers have the ability to make margin and improve their performance, as a result.

Insulation and roofing work very differently, though, which is insulation is a very bulky product, difficult to store, so what we've seen historically is a pre-buy in insulation of a week or two tends to be a fair amount of pre-buy, and we would potentially expect to see pre-buy. We have a November price increase in the insulation, in our insulation business, here coming up in the fourth quarter, which we put in place to make sure that our contractors had good price visibility on how to price business in new construction for next year. We would expect that we would see some purchases in the quarter that would wash out in the quarter, and then maybe some purchases in the quarter that would carry inventory positions in the next year in insulation, but I wouldn't say that's going to be a material theme.

Roofing is very different, because you can store the product outside, so storage costs of roofing, it's designed to be out in the weather, so we've seen a much different dynamic there, and we think that dynamic will continue. And that probably what manages that dynamic on our behalf and our customers' behalf is if the price swings are less dramatic, and we do hear from our distribution customers this year that there's been some margin compression out their door. And we certainly believe as many of them do, that the overhang of very low cost inventories being put into the market early in the year are making it harder and harder for our distribution customers to manage pricing through the year.

So creating these really big overhangs in the market in the first quarter hasn't been helping the manufacturer like Owens Corning. We don't think it's helping our customers either, so the sanity of what we saw last year of trying to give a little bit smaller discounts, put more reasonable inventory positions into the business early in the year and manage pricing through the first half of the year to allow them to earn margin on the product they buy from us is the right way for that industry -- for us to operate with our customers.

Andrew, this is Thierry. We have time for one more round of questions.

Okay, that question will come from Ken Zener of KeyBanc Capital markets.

I wonder if you guys could expand on insulation. You obviously gave very good disclosure in your Q when you talk about insulation EBIT being up $15 million and $48 million year-to-date, which seems to overlay pretty close to the $15 million and $50 million benefit you guys got from pricing in insulation.

Mike you talked about Canada, commercial markets, Asia. But to the extent all of the EBIT expansion was on price with the volume gains offset by inflation mix or SG&A, as you highlighted, did you expect to get volume gains at this point of the cycle? Because my impression was that price is more of a later cycle EBIT catalyst, but it appears to be the sole catalyst.

Yes, thanks, Ken. Let me talk for a second about price, and then maybe talk about how we see the evolution of leverage in the insulation business, and where we are, what inning we're in, in that evolution.

One of the things that's a little bit, it's not misleading in our disclosure because it's accurate, but it can be a little bit misleading in terms of how you would want to do the analysis is, we reported through the first half of the year that last year, through the first half, we have seen insulation prices were about flat. We reported some price gains in the second and third quarter, as we finished out the year.

In fact, through the first half of last year, we seen a little bit of price weakness earlier in the year that we had recovered in the second quarter. So we had flattish overall price in the first half.

So our comps this year, when we looked at year on year comparison of price, we showed that we had gotten a lot of price versus the first half of last year, but sequentially, most of that price we picked up first in the third quarter last year with a price increase then, and then we picked up some more price sequentially with our price increase in the first quarter of this year. Now we picked up price again sequentially with our price increase through the Summer, which has given us some gains here in the third quarter.

And again, with the November price increase, with some success in that increase, we probably expect to pick up price sequentially as we head into the beginning part of next year, so we're not going to necessarily show smooth price progression, we're going to show some sequential price after each price increase, as we get a little bit of a rhythm and success in price increases. I would say that when we looked at the recovery of the insulation business, we were losing about $100 million, at 600,000 starts we said we thought we could make $100 million at about 1 million starts. And we didn't see any reason when we got back to a 1.5 million starts that we would be anywhere besides our normal historical margin rates of 15% or better, which is what we had for 25 years.

I think we're right on track with that curve. I think early on, we thought we would get a lot of manufacturing operating leverage, because we had a number of melters that were operating at less than 100%, so our marginal economics of putting more production into our melters was pretty good. And we knew that in the early innings, some recovery in housing would give us some additional volume that we could manufacture at marginal economics on melters, who were already running.

We then got to a stage where we needed to start turning on some capacity to support demand growth, and it was really in that stage, which is the stage we're in where, it was our expectation we were going to need to see higher prices in order to give us the incentives to really want to pass it on, because in fact our margin rates in the US residential construction market have been negative. We've been pretty clear about that.

So, in fact growing volumes in that segment, if it's not marginal manufacturing economics as you grow volumes, there's no calories at all in that growth because the margin rate is actually negative. So we've now gotten to a point where the margins in US residential construction are at least neutral, and as a result, as we get some price, the marginal price falls through, even though the volume is being supported by some additional production.

We would expect as we get into the next stage of this recovery, that we would get the positive margins in US residential construction. And so in fact, we get a little bit better operating leverage in our facilities, we actually make positive margin on the volume we ship, and we would start to get price falling through to the bottom line.

But it's hard for us to see with negative margins why we wouldn't get into a period here where we would get some price recovery and that would fall through. But right now, the volume we ship is still not particularly profitable, and so it's not giving us a lot of leverage, and we don't have marginal manufacturing economics anymore. Most of our hot melters are fully utilized.

Appreciate that. Roofing. The comments you just made a few questions ago, can you talk about inventories?

Since you did such a regional analysis, how you think it is if there was pre-buying, if there was too much as we move into year-end, when seasonally there's some sequential price. Historically all else being equal, seasonal weakness in pricing. Can you talk about inventory levels and you seem to comment on some distributors trying to move their inventory, putting little pressure on price related to, for whatever reason. Could you expand on that and clarify the inventory as you see it? Thank you.

Yes, we comment on that, I would tell you we're not the authorities on this, and we don't have great visibility to it. So we tend to do a mass balance equation. We look at industry shipments, we look at our estimate of how big we think the overall end use market was, and if we think introduce shipments are in balance or out of balance with the overall end use market, then inventory was either created or depleted.

I think this year, our overall sense nationally, and I'll talk about it nationally, where we say the market is down mid single digits, is if manufacturer shipments were down mid single digits, that would probably pretty much mirror distributor and retail and lumber yard shipments into the market. So the end use market was probably down about mid single digits, the distributors bought about that same amount, and as a result, year-end inventories would be about in balance with where they were last year. So on a regional basis it's probably some markets that are ahead of that position, there is some markets that are behind that position, but our current guidance assumes that if the market is down mid single digits, that basically is both end use estimate as well as shipment estimate, and those two numbers are about in balance.

As we look into next year, that puts storm demand at a pretty low level relative to history. It puts new construction demand in a position where we would expect it to continue to grow with new construction, and it actually puts reroof demand for this year, having declined a bit versus 2012, and so we would expect now that some of these storms in the center of the country are a little bit further in history, that maybe we start to see recovery there.

So our initial thoughts for next year is it's reasonable to expect that both new construction and reroof market would increase next year, and then in fact, storms are probably at least comping flat to maybe some improvement. So if we can get through the fourth quarter here with good margins, if we can have the right inventory position with our customers, the thing that would really make us feel good about roofing is actually having great margins in a growing market, which may be the environment we find ourselves in next year.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Thierry Denis for any closing remarks.

Okay, very good. Thank you, Andrew. Thank you all for your participation to the call today.

Our next quarterly earnings call is scheduled for February 12 of next year, when we will report on full-year 2013 results. And in the meantime, I'd like to take this opportunity to remind you that we will be holding an Investor Day in our Toledo, Ohio headquarter location on November 8, and I look forward to seeing many of you here. Now, I'll turn it back over to Mike for a few closing remarks.

Thanks, Thierry, and thanks, everyone for your interest in our Company and for your very good questions. Obviously, we're pleased with a lot of things that are going on in the business.

If you look at our guidance originally for the year, our guidance was $100 million of EBIT improvement, with upside being determined by the rate of recovery of the US construction markets, and its impact on our margins. I think today, in our guidance, we backed off a little bit on some of the upside statements, and said, look, we think we'll get the $100 million of EBIT improvement or more, but we're 10 months through the year. So I think it's a little easier for us to see that maybe the roofing market isn't going to give us the tailwind we're looking for, and in fact is maybe a bit of a headwind in aggregate.

US new construction has been great. Its not quite galloping ahead at this moment, but we continue to be very confident in it. So it maybe could given us a little more of a push than it has given, but we've been very happy with how that's played out.

And obviously global industrial production has been downgraded through the year, and that has been one of the themes that's hurt our composites demand profile. So some of the things that could have helped us produce some significant upside to that number, which were market-based, didn't come to pass, but some of the execution things that we needed to do, in order to get to that guidance, we feel very good about our performance.

So margin management in our roofing business has been very good year-to-date. Price management and production management in our insulation business has been very good year-to-date. Price Management and price realization and composites is starting to show some early signs of progress, and despite a little bit of our commentary of disappointment in the third quarter, in terms of manufacturing performance in composites.

We are seeing better performance in our manufacturing network, and we're seeing creative deals like the Jinniu deal and the Taishan deal, which is giving us some ability to continue to support our market position without needing to put capital into that business. And in fact in this quarter, finding a way to actually recycle some capital out of that business while continuing to lower our costs.

So from a Management agenda point of view, I feel like we're right on track this year in what we needed to execute. I would have loved to have seen a little bit stronger markets, but the market themes that we talked about for this year, we think our market themes support next year, again. So we would expect to see some better roofing markets next year. We would expect to see continued growth in new construction, and in fact we would expect to see industrial production improving a little bit from what we saw in 2013.

So we're continuing to work every day to get the businesses positioned for a more positive macro environment, that allows us to accelerate earnings growth. But relative to our history we're feeling very good about the fact that $100 million of EBIT growth or more this year represents a very nice step forward for the Company financially, with more to come.

So thanks for your interest in our Company, and we look forward to seeing many of you at Investor Day here next month. Have a safe week, bye-bye.

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