Owens Corning (OC) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Aaron and I will be your operator today. At this time I would like to welcome everyone to the Q1 2014 Owens Corning earnings conference call.

(Operator Instructions)

I would also like to remind that you today's conference call is being recorded, Wednesday, April 23, 2014. I would now like to turn the call over to Thierry Denis, Director of Investor Relations. Mr. Denis, you may begin.

Thank you, Aaron. 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 2014.

Joining us today are Mike Thaman, Owens Corning's Chairman and CEO, and Michael McMurray, Chief Financial Officer. Following our presentations 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 this call.

You can access the slides at our website, OwensCorning.com. We have a link on our home page 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 remarks will include forward-looking statements based on our current forecasts and estimates of future events. These statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially and we undertake no obligation to update these statements beyond what is required under applicable securities laws. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent risks and uncertainties affecting such forward-looking statements.

Second, this presentation and today's prepared remarks contain non-GAAP financial measures. Reconciliations of non-GAAP to 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 results from period-to-period. Consistent with our historical practice, we have excluded nonrecurring items and items that we believe are not representative of our ongoing operations when calculating adjusted EBIT.

We adjust our effective tax rate to remove the effect of quarter-to-quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share. In the first quarter, we have utilized an effective tax rate of 29%, in line with our anticipated annual effective tax rate on adjusted earnings for 2014.

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 comments on our outlook prior to the Q&A session. Mike?

Thank you, Thierry. Good morning, everyone. We appreciate you joining us today to discuss our first quarter results. We are pleased to report that our financial performance in the first quarter, especially in our insulation and composites businesses has helped us maintain the momentum we generated last year.

Our first quarter results were consistent with the first quarter of 2013, despite weaker than expected volumes in our roofing business, and challenging winter weather affecting insulation demand. The company earned $77 million in adjusted EBIT, consolidated revenue for the first quarter was $1.3 billion, and adjusted earnings were $35 million, all consistent with last year's performance.

At the outset of the year, we discussed a number of expectations for sustained or improved performance across our businesses in 2014. Let me review them now, starting with safety. As is the case each year, we said that we would continue to make progress toward our goal of creating an injury-free workplace.

We continued our progress in safety by improving our recordable injury total by 23% year-on-year. Our company's commitment to living safely was formally recognized on April 10, when the National Safety Council awarded Owens Corning its Green Cross for Safety Medal.

In roofing, we said that we will deliver another strong year in 2014, we had expected first quarter volumes to be down 10%, and full year volumes to show some growth. In fact, roofing volumes were weaker than expected in the quarter, and trailed the overall market. While the volume performance in the quarter puts our 2014 outlook for this business at some additional risk, we are maintaining our full-year view for the roofing market, and believe that we can make good progress in the coming quarters to recover volumes that we did not ship in the first quarter.

In insulation, we said that we should continue to realize the benefit from growth in US residential new construction, improved pricing, and operating leverage. Insulation delivered EBIT improvements of $22 million, primarily driven by better pricing. The business posted a profit for the first quarter. The first time since 2008. It was also the 11th consecutive quarter of EBIT improvement.

US residential construction volumes grew versus last year. However, we believe that volumes were impacted by weather conditions that delayed construction activity.

In composites, we said the company expects improving market conditions and pricing to drive EBIT growth year-on-year. Improved manufacturing performance and higher volumes are expected to offset higher rebuild expenses. First quarter composite EBIT was $27 million, an increase of $18 million, primarily driven by continued price improvement and improved operating performance. Execution of our 2014 furnace rebuild plan is underway and progressed well in the first quarter.

Another milestone I would like to note for the quarter is our gain related to the sale of our composites facility in Hangzhou, China. This is another significant achievement for our business in China. It also represents a further improvement of our cost position while generating cash.

Overall, Owens Corning had a good start to the year, which is a reflection of the underlying strength of our core glass businesses, and their position in the marketplace. We are confident any effects of the winter weather in North America should be temporary, and as the year progresses, all our businesses will perform well.

Now, let me summarize the expectations we have for the remainder of 2014. The insulation business should continue to benefit from growth in US residential new construction, improved pricing, and operating leverage. Pricing drove the bulk of our first quarter EBIT improvement.

With the spring season upon us, volume is expected to continue growing and we recently announced a price increase effective in June. A sustained housing recovery, and our recent pricing actions, underpin our confidence that we can deliver another year of improvement in this critical business and continue to restore our insulation prices to historical levels.

In composites, we continue to expect moderate global industrial production growth in 2014. Recovering market conditions are expected to drive price improvements of $20 million to $30 million, with pricing expected to be the primary driver of EBIT growth in 2014. Improved manufacturing performance and stronger volumes are expected to offset higher rebuild expenses.

In roofing, our full-year outlook for the market opportunity is unchanged from our initial expectations. We had estimated that our Q1 roofing volumes would be down about 10%. As the quarter progressed our volumes tracked weaker than this original estimate.

We believe the difficult weather conditions and obviously sell-through issues for our customers were having a more negative impact on shipments than we had originally thought. Our current estimate is that industry volumes were down mid single digits for the quarter.

Although we would normally have expected to lag the market in the first quarter, due to our mix of channels and geographies, our volumes trailed industry shipments by more than we expected. As the year progresses we would expect to regain this placement and that our shipments would track the market for the full year.

For Owens Corning, the full-year market outlook remains unchanged. We anticipate full-year adjusted EBIT of $500 million, based on the current outlook for an improving US housing market and moderate global growth.

Insulation and composites have started the year very much in line with these expectations and are increasingly looking like the great businesses we know them to be. The lower-than-expected roofing volumes have introduced some risk into our overall outlook for the year. We are confident our team is addressing that risk and will deliver another great year in roofing.

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

Thank you, Mike. And good morning, everyone.

As Mike mentioned earlier, we posted first quarter results that were in line with prior year as continued improvement in our insulation and composites businesses helped offset weaker than expected roofing volumes. We believe confidence in our execution throughout the remainder of the year combined with recovering markets will drive improved financial performance in 2014.

Now let's start on slide 5 which summarizes our key financial data for the first quarter. You will find more detailed financial information in the tables of today's news release and the Form 10-Q. Today we reported first quarter 2014 consolidated net sales of $1.3 billion, which were down slightly with sales reported for the same period in 2013.

In our roofing business, net sales were down 18% over the prior year on lower sales volumes. Net sales for our insulation business increased $25 million, primarily on higher selling prices. Lastly, net sales in our composites business were up 4%, due to higher selling prices, and higher sales volumes.

In a moment, I will review our reconciliation of items to get to adjusted EBIT, our primary measure to look at period-to-period comparisons. Adjusted EBIT for the first quarter of 2014 was $77 million, flat compared to the same period one year ago. Adjusted earnings for the first quarter of 2014 and 2013 were $35 million, or $0.29 per diluted share.

Depreciation and amortization expense for the quarter was $76 million. Depreciation and amortization was $2 million lower than the first quarter of 2013, which included $3 million of accelerated depreciation related to our asset restructuring in Europe. Our capital expenditures for the quarter were $51 million.

Now, on slide 6, let me reconcile 2014 first quarter adjusted EBIT of $77 million to our reported EBIT of $108 million. We have adjusted out $45 million related to the gain on sale of our composites facility in Hangzhou, China.

As stated in our third quarter 2013 call, this facility was sold in exchange for proceeds of approximately $70 million. We received our third installment payment of $21 million earlier in April, and in accordance with the contract and a final $14 million payment is forecasted to be received in the second half of this year.

Our previously announced supply off-take agreement with Jinniu will largely replace this capacity. In addition, our other supply arrangement with Taishan became operational in the quarter.

These supply agreements and the Hangzhou closure improve our capital efficiency while maintaining our global market position. When assessing future investments, including plant rebuild decisions, we will continue to look for opportunities to reduce cost, improve capital efficiency, and drive returns in our composites business.

In the first quarter of 2014, we also took actions to reduce personnel costs in our composite segment. As a result of these actions, we recognized a $12 million charge.

Lastly, we have also adjusted out $2 million of costs at our New Jersey roofing facility that was damaged as a result of Superstorm Sandy as discussed in previous calls. We expect to complete this project in the second quarter with an additional $5 million of expenses. As also of note, our first quarter earnings includes a $74 million tax benefit that we have adjusted out of our results that I will discuss in more detail later in the presentation.

Now, please turn to slide 7 where we provide a high level review of our adjusted EBIT performance, comparing first quarter of 2014 with the first quarter of 2013. Adjusted EBIT for the first quarter of 2014 was in line with adjusted EBIT for the first quarter of 2013.

Our insulation business improved by $22 million, and reported its 11th consecutive quarter of EBIT growth. Composites EBIT increased by $18 million on higher selling prices and improved operating performance. And our roofing business decreased by $39 million, primarily on lower sales volumes. 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 first quarter, building materials sales were $852 million, down 9% compared to the prior year primarily due to lower sales volumes in our roofing business. Building materials delivered $81 million of EBIT in the first quarter of 2014, down from $98 million for the same period in 2013.

Slide 9 provides an overview of our roofing business. Roofing sales for the quarter were $497 million, an 18% decrease compared to the same period a year ago. EBIT in the quarter was $80 million, down $39 million compared to the same period in 2013. The decline in revenue and EBIT were primarily driven by lower sales volumes.

EBIT margins for the quarter declined 3.5 points as a result of lower fixed cost leverage on lower volumes. Contribution margins remain stable and strong year-over-year as slightly higher selling prices offset inflation.

In the first quarter, we estimate that industry shipments were down mid single digits year-over-year, largely driven by harsh winter weather. In the quarter, we expected our volumes to be somewhat weaker than the market, due to our higher exposure to channels that generally replenish on a sell-through basis and therefore more adversely impacted by the weather.

Our volumes were weaker than the expectation that we had set out on the fourth quarter call, as we believe our business did not track the overall market within distribution in the second half of the quarter due to increased buy activity in certain markets that we did not match. We continue to expect the asphalt shingle market to grow in 2014, primarily driven by growth in construction activity and possibly some growth in re-roof.

Now, slide 10 provides a summary of our insulation business. Sales for the quarter in insulation of $355 million were up 8% for the same period a year ago, on higher selling prices, and the acquisition of Thermafiber.

The business delivered EBIT of $1 million in the first quarter compared to a loss of $21 million in the same period one year ago on relatively flat volumes. This was our 11th consecutive quarter of EBIT improvement in our insulation business driven largely by higher selling prices.

Operating leverage in the quarter was almost 90%, primarily driven by higher pricing in the quarter, with little benefit from top line demand growth. As we have discussed on previous calls, our goal is to deliver 50% operating leverage through the recovery. As we have experienced in previous quarters, our quarterly operating leverage results will be subject to volatility, due to the timing of pricing, shipments, production, and capacity actions.

Although we did not deliver volume growth for the quarter, our growth was limited by challenging weather conditions and its impact on construction activity. As the current consensus estimate for 2014 US housing starts has remained largely unchanged, at just under 1.1 million US starts, we expect volume growth to accelerate over the balance of the year. The current volume environment we are experiencing is healthy and is supportive of our recently announced price increase effective in June.

Now, I will ask you to turn your attention to slide 11 for a review of our composites business. Sales in our composites business for the first quarter were $477 million, a 4% increase compared to the same period in 2013. EBIT for the quarter was $27 million, compared to $9 million in the same period last year, due primarily to improved selling prices, and operating performance.

Prices continued their sequential improvement that started in the third quarter of 2013. In addition, we have announced further pricing actions in April across a number of markets, which should drive further benefits throughout the balance of 2014. For the year, we continue to expect moderate global industrial production growth.

With recovering market conditions, we expect to drive pricing improvements of $20 million to $30 million during the year, and as discussed on the fourth quarter call, improved manufacturing performance and volume growth are expected to offset -- be offset by higher expenses associated with plant rebuilds. The majority of these rebuilds expenses are expected to be taken in the second half of the year, with the heaviest expense in the third quarter.

Now, let me turn your attention to slide 12. On April 3, we made our first quarterly dividend payment in 14 years. These dividend payments represent added value to our shareholders, and demonstrate confidence in our earnings and cash flow outlook.

In the first quarter, we also repurchased 600,000 shares of the company's stock for $26 million, under a previously announced share repurchase program. As of March 31, 8 million shares remain available for repurchase under the company's current authorization. As we balance our priorities for the future deployment of free cash flow, both dividends and stock repurchases will be important mechanisms to return capital to shareholders.

With that review of our first quarter results, I now ask you to turn to slide 13, while I review our guidance for 2014. For the full-year 2014, the company continues to expect to deliver $500 million of adjusted EBIT based on the current outlook for an improving US housing market and moderate global growth. Weaker than anticipated roofing volumes in the first quarter does add additional risk to our outlook.

Now, please turn to slide 14 where I will provide other financial guidance for the year. We expect corporate expenses to be in the range of $120 million to $130 million.

Capital spending will be about $400 million, including approximately $65 million of spending associated with the construction of our new non-woven facility in Gastonia, North Carolina. Depreciation and amortization expense is expected to be about $315 million.

Our $2.1 billion US tax NOL will significantly offset cash taxes for some time to come. As a result of our tax NOL and other tax-planning initiatives, we expect our 2014 cash tax rate to be approximately 10% to 12% of adjusted pre-tax earnings. Our 2014 adjusted effective tax rate is expected to be approximately 28% to 30% of adjusted pre-tax earnings.

As discussed earlier, our first quarter earnings include $74 million of income related to two significant tax items that for comparability purposes we have adjusted out of our calculation of adjusted earnings per share. The first item relates to an uncertain tax position that was resolved in the first quarter with the conclusion of our IRS audit examination for the taxable years of 2008 through 2010. The planning associated with this item will provide cash tax benefits for some time to come.

The second item relates to the reversal of a valuation allowance recorded in previous years against certain European net tax deferred assets. The European valuation allowance reversal is significant as it demonstrates the progress that we have made in our European composites business since the recession began in 2009.

Thank you. And I will now hand the call back to Mike.

Thank you, Michael. As I noted at the outset of today's call, we're pleased to report that our financial performance in the first quarter of 2014, especially in our insulation and composites businesses, has helped us maintain the momentum we generated last year.

We are delivering on the strategies we outlined for the year, addressing the areas we know we must improve, and establishing momentum for continued progress this year. This progress, this performance, together with our current assessment of our markets, supports our full-year outlook for $500 million in adjusted EBIT.

With that, I would like to turn the call over to Thierry who will lead us in the question-and-answer session. Thierry?

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

(Operator Instructions)

George Staphos from Bank of America, Merrill Lynch.

It is actually Alex Wong sitting in for George. Thanks for taking the question. Can you talk about what was the driver of the operating cash flow being down about $100 million versus a year ago, our sense that it was driven by inventory, so maybe you can comment on your outlook for inventories given current market trends?

Good morning, Alex. I am going to turn that over to Michael and let him address that question.

Thanks, Mike. And thanks, Alex. You're right. If you look at working capital, year-on-year, it grew roughly about $100 million.

Now, I will remind you that typically in the first quarter itself, we consume a fair amount of working capital. In particular, in our two building materials businesses because they happen to be somewhat seasonal. In large part, due to the harsh winter weather, we built a little bit more inventory than usual in both of our building materials businesses.

Now, on the one hand, for our insulation business, given where we expect the full year to land from a starts perspective, given that on average, we expect to run our assets at high utilization for our hot capacity, that doesn't give us any concern at all. We are going to need that insulation volumes in the second and third quarters in particular.

Then for our roofing business, certainly built a little inventory there as well. But as you know, manufacturing economics in the fourth and first quarter tend to be pretty attractive, because some of our base costs tend to be a bit lower. So we took the point of view even though our out the door sales are a little bit less than we had anticipated, that from a financial perspective it made sense to build a little inventory in the first quarter that we have confidence that we are going to sell later in the year.

Great. Thanks for that. And just as a follow on, can you discuss what impact roofing's volume start to the year has on pricing and promotional strategies for the year?

Certainly. This is Mike. When we look at the normal pattern of the roofing year for us, the first quarter tends to be characterized by these winter buy programs where there is discounting given to some of the channels to get them to take in inventory positions and gain placement. Other channels, and particularly channels where we tend to be a little bit more over-represented, like the lumberyards or retail, have a harder time taking inventories and they tend to replenish on the basis of sell-throughs.

So part of our slower start to the year would have been channel mix where some of the channels where we do a little bit better had a harder time, or are unable to take inventories and as a result, deferred some of their purchases, and some of their sell-through we would expect until the second and third quarter, when we would expect better sell-through and therefore better replenishment. In the first quarter with some of the channels that do take inventory in, the buy activity to our sense was reasonably consistent with last year.

I think in Michael's comments he said our first quarter margin rates were good and basically flat versus last year, if you adjust for fixed cost absorptions. So we're coming out of the quarter with we think good margins.

We are looking into the second quarter where we have announced a price increase, and historically, at least over the last three or four years, the spring price increase has been very helpful for us as a manufacturer to recover expectations of asphalt cost inflation. It tends to be helpful to our distribution customers also, for them to move pricing in the market so that they can improve their margins through the summer.

So we think we're right now moving into a reasonably healthy volume environment and a reasonably healthy pricing environment on an out the door basis for our customers, and we've got some work to do obviously to get back to our placement position with some of those customers who take inventory. We think we can do that in an environment that is supportive of good volumes and supportive of constructive pricing, which is why we're relatively optimistic about margins and volumes for the year.

Michael Rehaut from JPMorgan.

Just I guess a couple of questions on composites, you had a nice quarter there, a nice year over year profit improvement, and your comments around the rebuilding expense, I mean essentially with that type of improvement in the first quarter, and still reiterating the full year expectation, would mathematically point to very moderate year over year improvement for the remaining quarters.

I just wanted to know if that is the right way to think about it, or are you just perhaps being a little conservative and if the first quarter maybe came in a little better-than-expected. Also, with the comments around 3Q being the heaviest expense in terms of the rebuild, it would almost point to that having operating profit being down year over year, wanted to know if I was thinking about that correctly.

Okay, I think Michael did give some useful comments in his prepared remarks regarding the timing of the rebuilds and he did say in his comments that it is our expectation that the rebuild expenses will be heavier in the second half, and probably peak in the third quarter. So as you look at the year, I think a lot of the forces that will shape the year, and particularly our comparability quarter on quarter, I think you nailed them in your question, which is in the first half of the year we are comping against what were our two much weaker quarters in the first half of last year. And so as a result we expected to get off on a comparable basis to a pretty fast start and get well ahead of last year in the first half and I think you have seen us do that in the first quarter.

We had decent results in the third quarter and then some acceleration in the fourth quarter of last year so those are going to be a little bit tougher comps. I think without the rebuilds we would expect the volume and pricing momentum that we're gaining to allow us to continue to comp positively.

I don't want to give specific guidance on a quarter-by-quarter basis, but obviously with that headwind coming in the second half of the year, and us having a little bit tougher comps in the second half, I think it is reasonable to think that if you see us getting a fair amount ahead in the first half consistent with our guidance. Then on the upside of that it is probably going to be driven by either a more robust demand environment, which maybe gives us a little bit more volume. Or a more robust demand environment and price environment which gives us a little bit more demand and also a little bit more constructive pricing in the second half.

So as we get later in the year, I think we will have a better understanding of where volumes and pricing are going. Which will give us a better sense of where we are versus the guidance we have given.

The big thing we want to make sure our investors see in the way we're shaping the year though, is we do believe we will actually have a bit more momentum in the business in the second half than maybe what our reported financials will show because of the rebuild expense. Which is really a source of our optimism for why we think 2014 is a year that really builds into 2015, and that really underpins the confidence I gave in my comments where I said we're really beginning to see the improvement in both composites and insulation that gets those business back performing at levels we like.

Great. And I appreciate that, Mike. And I guess just also on composites, the $12 million restructuring or severance charges, in terms of head count, would we expect -- I mean is it reasonable to expect kind of a similar ongoing cost savings from those actions? I mean there is typically you think about pay back periods in a one to two-year time frame, and is that also baked into your -- was that something that was originally anticipated in terms of your 2014 guidance outlook? Or is that something that might benefit the company in 2015?

I think your kind of high level estimate that that tends to be about a one for one, that each $1 of severance and restructuring expense tends to produce about $1 of fixed cost savings. I think that's a decent rule of thumb for Owens Corning in general and for our composites business specifically.

We did contemplate coming into the year that we had some cost actions that we felt we needed to take in the business. Mostly because of distance improvements and efficiencies that we have made in our manufacturing operations, just allowing us to reduce our head count a bit, and get the costs of the business a little bit lower, fixed costs a little bit lower, break-even.

We do -- it is included in our guidance. And having said that, we don't actually anticipate a significant amount of savings from these actions this year, really the actions will be taken through the year and then on an annual basis I think you will see much more of those savings in 2015.

Great, thank you.

Kathryn Thompson from Thompson Research Group.

First, on composites, could you give a little bit more color on pricing, particularly in Europe? Definitely getting better feedback from there. And maybe dig a little bit more into how this has changed versus last year. And then also touching again in the Chinese market and what you're seeing in terms of pricing trends today versus last year.

Happy to do that and thank you for the question. Michael said in his comments that this is -- the first quarter this year represents the third consecutive quarter that we've shown price improvement in composites.

Really, prices declined a bit in the first quarter last year. We actually reversed the decline and kind of got back to zero in the second quarter of last year, and then since then, we have been on the positive side of price.

So we're really now kind of coming up on a year where we've been in a more positive price environment than where we had been before. So we're starting to gain some confidence and track record on the pricing side in composites that our assessment of the marketplace, our assessment of our competitive position, and our need for price improvement in order to impact our margin is in fact the correct strategy for the business.

A lot of what we're seeing in the first quarter in composites would come from two things. It is the carry over effect of some of the pricing we gained in market-based pricing, in the second half of 2013, as well as the benefits that we got in our year end price negotiations on some of our contractual business. So we would expect both of those pieces of price improvement to carry through all three quarters of this year that remain.

In addition, we did have some price announcements by Owens Corning on a regional basis, on more kind of market pricing, so not contract pricing, but more of the day-to-day pricing. We had an announcement in the first quarter in China, India and Brazil, and are working hard in those areas of the world to try to affect pricing, and then recently have announced for both North America and Russia, price increases. So we are seeing the opportunity to try to move our pricing in the market as we think utilizations go up and demand supports better pricing.

You asked specifically about China, and we have seen some competitive activity in China that also has supported pricing at the very low end of the market. There are some applications in China where we typically don't have a lot of market share or compete in terms of a lot of volume, that are priced well below I guess what we would consider to be kind of a global average price.

We did see in the first quarter this year some price activities that suggested that part of the market is beginning to move up. In terms of where those prices are.

We tend to think of the market as, as those prices move up, that will start to influence the export economics of the Chinese producers, will start to impact the economics of them participating in other markets, as the low end becomes more attractive, we'd expect that to start to push up pricing in some of the other markets where we see Chinese competition. We are cautiously optimistic that step by step, we're starting to see the kind of price environment that supports very good returns in our composites business.

No negative pricing impact from the new Egypt plant in Europe?

No, we have seen some Egyptian volume coming out of the Jushi plant in Egypt. I think that is probably a bit of a headwind for Europe. I think a little bit of a tail wind in Europe has been that demand in Europe has been probably a little bit stronger through the second half of last year and the first half of this year than we had previously expected so Europe is in a little bit better shape and maybe a little bit better able to absorb some of that production.

The flip side is, Jushi, who is our competitor in both China and now with the plant in Egypt, we've seen actions in China in terms of inventory reductions and capacity curtailments that have balanced off a bit that capacity expansion in Egypt. So in total we don't actually see a lot of capacity expansion from that particular competitor in 2014.

Thanks. And my second question is on roofing. Obviously, Q1 was a tough time, but we did get some feedback that there was a more aggressive competitor in the market, as the quarter progressed. How do you balance remaining competitive, and when I say competitive, essentially maintaining your market share, but also at the same time maintaining margins, while attempting to push through a price increase in the market.

I mean it is a challenging balance. I mean I think you've summarized kind of how the mechanisms of the roofing market in the first quarter work, and our long-term view and our annual view is that our market share has been relatively stable over the last four or five years, and that our goal coming in each year is to pretty much move our volume position with the market.

So we have not been on an aggressive market share accumulation campaign, but we also certainly have no interest in allowing our position to be diminished in the market. So we run a balancing act of how do we make sure we're getting enough value for our product and protect our margins, while also making sure that we protect our position in the marketplace.

I think what you saw -- we have to look at this kind of charge by channel, we have to look at this geography by geography, so there is a lot of moving pieces in the business. We talked about that last year in the third quarter. And you saw a decent bounce back for us in the fourth quarter of last year.

Our view is that in the first quarter, if you ship too much volume at too low of a price, as we did in 2012, we think many of our competitors did in 2012, you can actually create an environment where there is just not enough volume left and there aren't enough levers left for you to try to get to your annual goals. We think as we sit here today, there might have been market conditions in the first quarter where we didn't meet pricing that might have allowed us to get some more volume.

As we now head into a market environment where there is better out the door sales, the price environment should be improving, there are some asphalt costs that are improving which should put some inflationary pressures on us as a manufacturer, which should incentivize us to try to get a better price environment. That we've got enough levers and enough things available to us to go back and recover our position in the marketplace through the next three quarters, while at the same time maintaining margins. But it is going to be the same kind of balancing act through the course of 2014 as it was through 2013 and we generally felt like we had a pretty good outcome last year.

Great. Thanks for answering my questions.

(Operator Instructions)

Operator, are there no questions in the queue? Because we had received information that there were additional questions out there.

We're just having a bit of a technical issue right now. So just hang on for a moment here.

Okay, thanks.

We will do our best here. I do apologize here. We will be just another moment and we will get this corrected here for you.

For those of you who are still on the call, this is the Management team, we have received word that there was a technical issue, that the queue is being reloaded and we're still here ready to answer the questions, so once we can get the telephonics worked out, we will get back to the Q&A.

Aaron, this is Thierry. Can you give us a feel for how much longer do you think this will take?

I am here right now so we're just going to go ahead and we will get this started back up here for you.

Okay, great. Thank you.

Philip Ng from Jefferies.

Can you give us a sense, or just quantify how roofing and insulation demand is tracking in April and what are you seeing from an order pattern standpoint in May?

Okay. Let me start with insulation. Clearly, as the weather changed through most of the country kind of the latter part of March and then into early April, we did see a change in our order book, and that is obviously a much shorter supply chain for us. So particularly in the residential side of the business, it is not uncommon for us to get an order on a Monday, ship it by the end of the week, and have it be going into a house the following week.

So getting a thaw and getting people back out on construction sites, we do think there was a longer lag between the timing of the housing start and when the insulation would have gone in.

Okay.

We typically estimate that at 90 days. But in fact that was probably longer which affected demand in the first quarter as well as the weather affected the timing of starts which pushed those out a bit and could affect overall starts for the year. So we definitely have seen a movement in our insulation book.

In the roofing side, I think that for the channels that we tend to replenish based on their sell-through, we have seen a progression from January, February, March, April. That makes good sense to us, that we would track their sales and therefore we're tracking our shipments to them.

On the distribution side, given the inventory that went in, in the first quarter under the winter buys, the first couple of weeks, or the month of April, tends to be pretty quiet for us and difficult to judge. And obviously, our teams are out there pretty aggressively right now trying to make sure that we understand where that market is and what volume opportunity that will create for us here in the second quarter.

Got you. That's very helpful. In terms of your guidance for the full year, you provide some good color on how you are thinking about demand. Within that guidance, are you baking in your incremental price increases for insulation, roofing and composites that you just talked about on this call?

If I was going to put broad color against our guidance, it steps all the way back to kind of what we said in the fourth quarter. We made a lot of progress in 2013 versus 2012, where roofing was a bit in a turn-around year. Roofing had not a great 2012, and therefore, had a big positive comp in 2013 that helped us with then composites maybe a little bit more sideways and then insulation comping positively.

Coming off of a good year in roofing in 2013, we really thought that the next leg of growth in earnings for us was going to be more roofing continuing to perform at a high level, with a lot of earnings growth not being driven by the composites recovery and pricing cycle and then the insulation operating leverage and pricing cycle. I certainly think that two of the three pieces of that guidance are clearly evidenced in our first quarter.

So we are seeing the insulation pricing cycle and operating leverage get that business back to profitability. We're still nowhere near where we want to be, or need to be in that business, but we have had 11 consecutive quarters of improvement and we're now making money every quarter and we certainly would expect that with better pricing and good volumes, that we would carry momentum through this year, that would help us get to the $500 million guidance we provided, as well as build momentum going into next year.

Okay.

Same thing in composites. Probably more of a positive first half comp story than second half. But momentum building because of some of the headwinds associated with our rebuilds, and depending on where volumes and pricing is in the second half, whether or not that creates upside or whether we see most of that upside in 2015, I think we are going to have to see the year progress.

We did say in our prepared remarks today that the start to the year in roofing creates some risk to our guidance related to that business, and therefore to our overall guidance. Not so much on the margin side, but on the volume side.

And then depending on how the next couple of quarters play out, as we try to make sure that our position in the market tracks the overall market, whether that has impact on the business outlook in terms of volume or margin is something we are going to see. But we certainly see enough positive factors today in terms of expectations of demand, how the harsh winter could have had an impact on roofs that need to be re-roofed, better economics in homes, so more people have more equity in their houses, some of the things that help new re-roof demand, some of the things that help new construction. We have got enough helps there that we certainly expect that the goals we set for roofing at the beginning of the year are still reasonable goals.

Okay. Thanks for the color.

All right. Thanks.

Keith Hughes from SunTrust.

Just back to composites on the rebuild. Will those be, your rebuilds, will those be done by the end of this calendar year? And what is your sense on the rebuilds in China, how much longer those are going to persist?

Our current plan is that the rebuild activity we laid out, which is about 20% of our productive capacity this year, being rebuilt, we characterized the business historically as about -- that melters would last about 10 years, so you would expect to rebuild about 10% of your capacity or 10% of your melters every year. So this is about twice the normal load level, which is why it stands out in terms of being an earnings issue. Otherwise, you tend to comp 10% every year and it is straight lines through the business.

We currently are planning to complete all the activity this year. We can affect the timing of rebuilds based on how the melter is currently operating, as the melter gets late in its life, it becomes more difficult to operate in terms of efficiencies. It also consumes more energy, because you need to do some things in order to cool it down, so the production economics tend to get a little bit worse the older a melter gets.

The flip side of that is we have very strong demand, sometimes we will limp a melter along a little bit longer than we had expected in our original plans because we see market opportunity and don't want to take that melter down. So we continue to monitor that based on what we have seen through the first quarter, our expectations is the rebuild plan we have for this year is the rebuild plan we will execute, and as a result that will mostly be in the rear view mirror for us by the end of 2014 and will give us a positive comp in 2015.

As it relates to China, we don't have any competitive analysis that would cause us to believe that the rebuild cycle for our competitors and the rebuild impact on the business for our competitors is any different than what we experience, that as their melters get probably into that 8 to 12-year time cycle, they are going to need to be rebuilt similar to ours. We know when capacity was built in China. We know therefore when the melters hit that kind of magic period of time of 10 years plus or minus, where they are going to need a rebuild.

And it is really just kind of a straight aging of the portfolio, that we know there was dramatic capacity expansion in China, kind of in the 2003 to 2009 time frame, which is now entering into the 2013 to 2019 time windows. So we expect that the theme of capacity lost in China related to rebuilds, capital use in China related to rebuilds, and therefore more pressure on cash flow and more pressure on capital formation for capacity expansion, that that is with us not really for the next couple of years. But that's going to be with us really through the latter part of the decade of the 2010s.

Your rebuild activity at Owens Corning in 2015, will it be incrementally lower than that 10% number?

No, not lower than the 10% number. So it will be incrementally lower than 2014 but we will return back to a more normal level of rebuild in 2015.

Okay, thank you.

Will Randow from Citi.

This is actually Scott Schrier in for Will today. I wanted to ask again a little bit more on the insulation, and given your strong year over year performance in 1Q 2014, I was assuming that some of that would be attributed to an increase in spec inventory on the builders. And then with that being said, given the new home sales print number, that came out today, and particularly we got new housing starts that came out last week. How does that impact your outlook for insulation and the acceleration going through as we get into April and May?

Okay, well, we kind of have two things we're working our way through in insulation from the demand side. So let me kind of frame those two issues for you. One is the housing starts that have been announced, the stuff that was announced in the fourth quarter of last year, and what we have announced in -- what has been announced by the industry in the first quarter this year, we tend to model our business by taking those housing starts, lagging them forward 90 days and saying that's about when we would expect to see the demand.

And in the first quarter, our demand numbers didn't track exactly with a 90 day lag off of the fourth quarter housing starts. And we think that is pretty explainable by weather. It is within the range of the amount of short fall that some extension of that cycle would explain why our volume growth in the first quarter wasn't quite as robust.

So we would say some of those houses that were announced as housing starts in the fourth quarter last year are still out there waiting to be insulated in the second quarter, which will give us a bit of a demand kick, where that demand was deferred or delayed out of the first quarter into the second. But is already on the ground, as a housing start.

We also know that the housing start numbers in the first quarter probably weren't quite as robust as maybe what some of the estimates had been coming into the year. And that that will impact the amount of second quarter volume we see and that would be modeled into our guidance.

Our general view on housing is that we obviously read everything that is written, most of the economists and analysts who study housing continue to believe that we're going to see good growth in new construction through the balance of 2014. We would expect, not necessarily an acceleration of new construction to make up for a little bit of the weakness in the first quarter, but that the growth in housing, new construction through 2014, is going to come off of a starting point of where the industry was kind of in the January, February, March, time line, which puts us on a parallel line, which is a little bit below where the initial forecasts were at the beginning of the year.

We obviously are benefiting from code adoption, we've talked about that in the past. So we do see increasing demand per unit, and some of those things are also helping us terms of our demand forecasting. So we look at the whole picture of housing and feel pretty comfortable with where it is.

I would say probably one last optimistic note maybe for us would be obviously we are much more new construction volume driven than new construction price driven in terms of the price of the home. We did see a little bit of a slowdown in home price appreciation, which addresses hopefully some of the potentially growing affordability issues in housing. And if we can keep housing affordable, there is enough demand out there we think from a demographics and household formation to give us a nice long cycle of new construction and benefit in our insulation business for a good period here.

Great. That's really helpful. And then I wanted to switch over and talk about the cash flow. So I know it was touched upon before, how you had a build-up in inventory and use of cash. Does that impact how you're looking at share repurchases going forward in the second quarter?

No, I wouldn't say it does. I mean we have talked in the past that forever and a day Owens Corning has kind of used cash in the first half and then generated all of our free cash flow in the second half, both in terms of recovering the cash we invested in the business in the first half, plus the free cash flow generation. So we see generally a very big shift in our balance sheet as we move through the summer, as the seasonality, particularly in our building materials business works its way through.

I think during some pretty choppy days, 2009, 2010, when housing was still falling, when the financial markets were kind of bubbling around a bit, when our operating results were not quite as strong, we looked at some of our credit statistics, et cetera, and felt like we wanted to be disciplined in our share repurchase, and try to time that up with the actual availability of free cash flow. I think now that we have seen, coming out of the end of last year, better operating results, I think our credit statistics are better, certainly more confidence in our composites business, more confidence in our insulation business, so that we're not quite as dependent on just roofing profitability for a balance sheet management point of view.

We have shown a little bit more willingness even in the times of the year that are cash lean to use the balance sheet a bit to buy shares if we think the share price that we can buy those at is a good number. And as we look at, not so much 2014, but as we look through 2014 to 2015, 2016, and imagine an Owens Corning with very strong insulation results, strong composites results, and still great roofing results. It is not hard for us at these kind of share prices to say we can maybe do some things for our investors if we buy some shares out of our cash flow for the year, even if the time we buy them is not necessarily free cash flow coming out of the business.

Hi, Aaron, this is Thierry. We have time for one more set of questions.

Stephen Kim from Barclays.

Let me ask a question on roofing and then a question on insulation. I know that there has been a lot said on roofing and you've talked about the importance of channel mix and indicated that the risk to your guidance is really more on the volume side than the margin. I just wanted to put that against what we understand happened in 1Q, which is that the, in the states where you have plants, it seems to us that roofing industry shipments were down about 5.5% and your inventories were up $100 million sequentially which I am going to assume is mostly roofing because it is hard to store large quantities of insulation.

And we've also heard, I think it was mentioned that one of your bigger competitors outsold industry volumes by getting more aggressive on price in the quarter. So I'm just trying to understand, I want to make sure that we're hearing this correctly, that the share you obviously lost in the first quarter, that your goal is not necessarily to gain that back through promotional activity, if that's what's necessary, but rather that you believe this is simply an issue of timing related to the channels which you are dominant in. And so it is really not an issue of promotional actions that is creating the risk in the outlook for this year. Is that correct?

Let me try to frame the issue, or the opportunity from where we sit. I think, I largely agree with your comments but I don't want to blanket agree with your comments because I'm not sure that they're exactly what we've said.

What we have said is that the industry was down kind of mid single digits for the quarter, our revenue was down about 18%, so clearly there was a significant difference between the volumes we shipped and the volumes shipped in the industry. We think about half of that is pure timing based on the channels in which we participate, that some of the channels that replenish as they sell through couldn't take product in the first quarter.

We know who those customers are. We know how their business works. We are expecting that their business will pick up as we work our way through the remainder of the year. And as their business picks up we will catch up some of shipments that they weren't able to take from us in the first quarter because they were not selling out the door but that there is nothing in the marketplace that would cause us to believe that their out the door sales are going to be dramatically different than our expectations at the beginning of the year.

The other half we would say based on our estimate was probably related to promotional activity and some of our competitors being more aggressive. At this time of the year that is really just inventory placements. What really over the long term determines market share is what homeowners want to buy, what contractors want to buy, what builders want to buy, and what products end up going on roofs.

We don't see anything in the first quarter that causes us to believe that our products aren't any more desired in the end use market, that our customers are any less motivated to want to sell our products. Now we are going to have to get the economics right, that they can buy and resell our product and make money.

And if there are some very specific geographies or very specific instances where we're not in the right spot to be able to do that, then obviously that is going to be a sales issue for us to address and figure out. But broadly we think that the volume miss in the first quarter in those channels can be made up through the year, through good salesmanship and then also just more out the door sales.

Okay. Thank you for that. And then the second question relates to insulation incrementals, ex-Thermafiber.

So you mentioned you had 90% incrementals in the quarter. But if we adjust the numbers for roughly $17 million in price, and $13 million in sales from Thermafiber, I'm going to assume maybe $1 million to $2 million in profit from Thermafiber, that this means that your EBIT improved about $3 million to $4 million on a $5 million decline in volume.

So there was either some kind of a temporary benefit from something or you had significant improvement in efficiency which might be longer lasting, am I thinking about that right? And can you help me understand maybe where the very strong results operationally came from?

Well, Michael tried to speak to that issue in his prepared remarks and it is a very important issue for us, and we try to take this on when our operating leverage is lower than 50%. And then also make sure that we take it on when our operating leverage is above 50%.

You're in fact correct, which is if you adjust out Thermafiber revenue the overall growth of the insulation segment or the insulation business would be less than what we'd posted. And as a result, since Thermafiber is not producing that kind of operating leverage because it is basically a highly utilized profitable asset today, our operating leverage would be even higher than the 90% or 85% operating leverage we reported today, approaching 100%.

We had a lot of nice price. I think we disclosed that pretty clearly in our 10-Q. I would tell you most of that price, or a lot of that price was carried over. The first quarter price environment because demand was a little bit weak was a little bit choppier.

So as we move forward here into the second quarter with the price increase we have announced we do want to get back on path, on improving pricing in the marketplace for ourselves and for our customers. But what we did see is on the operational side, some cost improvements, but also you get into issues associated with the timing of when we turn assets on and off, inventory builds, how cost gets absorbed into inventory. Michael talked a little bit about the fact that we did have an inventory build in insulation in the first quarter which would have absorbed some costs in that would have helped us on operating leverage.

So I wouldn't read too much into the first quarter operating leverage besides it's consistent with our view through this cycle that we should be able to produce 50% operating leverage. I guess said differently, that likely means there will be another quarter some place along the line where we don't have all those good guys and maybe our operating leverage will drop a little bit below 50%. But our goal in total is still intact and we've delivered nicely against that guidance.

Great. Thanks very much, Mike.

And there are no further questions in the queue. And this concludes today's conference call. You may now disconnect.

Aaron.

Yes.

This is Thierry, we would like to close the call with a few remarks from Mike Thaman.

Okay. Certainly, go right ahead.

Okay, hopefully everyone is still on the call. I apologize for the blank spot we had in the call where we had some telephone issues, obviously we will come out of this meeting immediately and go look for corrective action to make sure that doesn't happen on our next call, but I'm sure we're appreciative of all of your patience on sticking with us and appreciate all of the good questions.

I think we, in our prepared remarks and then also in the Q&A, had an opportunity to give you a good summary of how we feel about the quarter. Obviously, the highlights of the quarter for us would be the continued progress we are seeing in insulation and composites. I characterize it as we're increasingly beginning to see those two businesses develop into the kinds of performers we know they can be.

Insulation obviously is coming out of four or five years of very challenging losses into a year of profitability in 2013, now into a first quarter of profitability in 2014, which certainly speaks to continued improvement through the year. And we have big expectations for what that business can do through a new construction recovery here in the US.

Composites obviously having some challenges, late in 2012 coming into the first half of 2013, showing some positive signs in the second half of 2013, and now I think following through on that with good pricing and good results and good operating leverage in that business. So those two businesses now giving us confidence through 2014 and beyond that we really have a great outlook for the improvement of our big glass businesses.

Roofing obviously, a little bit choppier message for the quarter in that we're very happy with our margin performance, trailed the market a bit from a volume point of view. Left ourselves on a year-to-go basis I think a fair amount of time and opportunity to use the levers at our disposal to get that business absolutely back on track on where we measure to which is tracking the market in terms of volumes and producing great margins.

With that as our outlook we feel confident that $500 million of adjusted EBIT which was our guidance for the year continues to be a good target for the company and we look forward to talking to you on our second quarter call and giving you an update on the progress we made. Thanks again for your patience with today's call and we look forward to talking to you again soon.

Okay. And this concludes today's call. You may now disconnect.