Owens Corning (OC) 2014 Q3 法說會逐字稿

Good morning and welcome to the Q3 2014 Owens Corning earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

I would now like to turn the conference over to Thierry Denis. Please go ahead.

Thank you, Kate, and good morning, everyone.

We appreciate you taking the time to join us for today's conference call and review of our business results for the third quarter of 2014. Joining us today are Mike Thaman, Owens Corning's Chairman and CEO, and Michael McMurray, Chief Financial Officer.

Following our presentation this morning, we will open this one-hour call to your questions. Please limit yourself to one question and one follow-up.

Earlier this morning, we issued a news release and filed a Form 10-Q that detailed our results for the third quarter. For the purposes of our discussion today, we've prepared presentation slides that summarize our performance and results for the quarter. We will refer to these slides during the call.

You can access the slides at our website, OwensCorning.com. We have a link on our homepage and a link on the Investors 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. The calculations 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 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 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 third 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, and good morning, everyone. We appreciate you joining us today to discuss our third-quarter results.

Overall, Owens Corning reported positive progress in the quarter. Momentum continued in our insulation and composites businesses, and our roofing business, through good execution, achieved its commercial objective of regaining its historical market position.

Owens Corning third-quarter revenue was $1.38 billion, up slightly over the same period a year ago. Adjusted earnings of $74 million are up from $66 million one year ago, and adjusted EBIT of $132 million for the quarter is up from $119 million last year.

Throughout 2014, we discussed a number of expectations for sustained or improved performance across our businesses for the year. Let me review our performance against those expectations, 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 work place. Owens Corning continues to perform at a very high level of safety performance, with a recordable incident rate of 0.53 for the nine months ended September 30, 2014; this is comparable with the rate in the same period in 2013. As we reported last quarter, the severity of our injuries continues to decrease, and our goal is to achieve and maintain injury-free workplaces across our global network.

In insulation, we said we should continue to realize the benefit from growth in US residential new construction, improve pricing and operating leverage. Insulation delivered its 13th consecutive quarter of EBIT improvement, earning $43 million for the quarter, a $25-million increase year on year, driven by improved pricing, higher volumes, and good manufacturing performance.

In composites, we said we expect improved market conditions and pricing to drive EBIT growth, with improved manufacturing performance and higher volumes expected to offset higher rebuild costs and inflation. Third-quarter composites EBIT was $32 million, an $11-million improvement year over year on positive price trends and volume growth. Strong manufacturing performance offset higher third-quarter rebuild expenses.

In the quarter, we took the final steps necessary to achieve the business' goal of 75% low delivered costs assets, by taking the decision to reduce high cost capacity in Japan and Canada and avoid the capital expenditures associated with rebuilds in the next couple of years. At our last investor day, we reviewed our composites objectives, which include cost leadership, price realization, product leadership and capital efficiency. Our year-to-date progress and improved outlook support our view that we are well on plan for meeting these objectives.

In roofing, we entered the year with expectations well above our current outlook. On our last call, we said that the roofing market would be flat to slightly down for the year, and our second-half goal was to restore our share of the market to historical levels.

Revenue in the roofing business grew $3 million, with year-over-year EBIT down by $38 million. Third-quarter roofing volumes grew about 7%, while overall industry shipments showed a low single-digit decline.

Our market position has improved sequentially since the first quarter, and we have reached our commercial objective of returning to our historical market position. We expect to sustain our third-quarter position through the fourth quarter.

Margins declined 8% on lower pricing driven by competitive conditions. Prices stabilized late in the quarter, but remain significantly below last year.

I have one additional achievement from the quarter before I turn my comments to our outlook. For the fifth year in a row, Owens Corning earned placement in the Dow Jones Sustainability World Index in recognition of its sustainability initiatives, and was named the industry leader for the World Building Products Group for the second straight year.

Now let me review our expectations for the remainder of 2014. We've said that the insulation business would generate 50% operating leverage through the recovery. We been tracking this guidance well over the past four years.

We also have given guidance that the business will produce $100 million more of EBIT at 1 million US housing starts. For 2014, the business is expected to generate a full-year results, consistent with both these guidances.

The composites business continues to benefit from stable global economic growth, improved operating performance, and pricing. Today we expect to generate about $40 million in total EBIT growth, driven by about $30 million of price, and additional strong cost performance.

While we were pleased with our roofing execution in the quarter, we were disappointed that the overall market shipments were down. We now anticipate that the second-half and full-year market will be down compared to last year, and that fourth-quarter market shipments will also be slightly down compared to last year. Operating margins in 2014 are expected to be below our guidance of average margins of mid-teens or better.

For the Company, we had previously guided full-year adjusted EBIT to growth versus 2013. Continued weakness of roofing shipments in the second half has created $15 million of downside risk versus last year's adjusted EBIT performance of $416 million.

At our investor day last November, we discussed three market-leading businesses, with sound strategies to maximize value to our shareholders. We remain committed to the strategies.

Since the third-quarter 2013, the insulation and composites businesses have grown revenue and earnings, producing strong operating leverage.

The roofing business also remains an attractive one for Owens Corning. Obviously, the volume performance and now the margin performance of this business have been quite volatile and difficult for us to forecast. That said, the fundamentals that support our business guidance of average margins of mid-teens or better are unchanged.

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

Thank you, Mike, and good morning, everyone.

As Mike mentioned earlier, we are pleased with our continued progress in our insulation and composites business, and the execution and recovery plan in roofing. Now let's start on slide 5, which summarizes our key financial data for the quarter. You will find more detailed financial information in the tables of today's press release and the Form 10-Q.

We reported third-quarter 2014 consolidated net sales of $1.4 billion, up 5% compared with sales reported for the same period in 2013. In our roofing business, net sales were flat, as higher sales volumes were offset by lower selling prices. Net sales in our insulation business were up 5 percent, primarily on higher sales volumes and increased selling prices. Lastly, net sales in our composites business were up 8%, due primarily to higher sales volumes and increased selling prices.

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 2014 was $132 million, compared to $119 million in the same period one year ago. Adjusted earnings for the third quarter 2014 were $74 million, or $0.63 per diluted share, compared to $66 million, or $0.56 per diluted share in 2013.

Depreciation and amortization expense for the quarter was $75 million and in line with our prior year. Our capital expenditures for the quarter were $91 million, including the net effect of outlook purchases and sales.

Now on slide 6, let me reconcile our 2014 third-quarter adjusted EBIT of $132 million to our reported EBIT of $107 million. In the third quarter, we took action in our composites business to avoid future capital expenditures and closed two melters, one in Japan and one in Canada. Both of these melters were high cost and scheduled for rebuild in 2015.

We expect to recognize charges of about $30 million associated with these actions between 2014 and 2015, including $21 million this quarter. I will provide further details on these actions later in my prepared remarks. We have also adjusted out $4 million of charges related to our European asset restructuring, which is now essentially complete.

Now please turn to slide 7, and I will provide a high-level review of our adjusted EBIT performance, comparing the third quarter of 2014 to the same period one year ago. Adjusted EBIT increased $13 million. The $25-million improvement in our insulation business and $11 million improvement in our composites business were more than offset by a $38-million decline in our roofing business. General corporate expenses were $15 million lower versus the prior year, due to a reduction in performance-based compensation, strong cost controls, and gains related to a favorable energy contract in Brazil.

Let me take a moment to talk a bit further on the energy contract in Brazil. During the quarter, it was determined that the contract did not qualify for hedge accounting. This resulted in a $6-million gain for the third quarter, as the contract was marked to market. It is expected that this gain will fully reverse in the fourth quarter through the expiration of the contract. In addition, there was additional $3 million of profit related to power sales back to the grid that occurred throughout the third quarter, as the facility was down for a melter rebuild.

With that review of key financial highlights, I ask you to turn to slide 8 where we prove a more detailed review of our businesses, starting with building materials. For the third quarter, building materials net sales were $928 million, a 3% increase compared to the prior year. Building materials delivered $101 million in EBIT, down $13 million from the same period in 2013.

Slide 9 provides an overview of our roofing business: roofing net sales for the quarter were $474 million, flat compared with the same period a year ago. EBIT in the quarter was $58 million, down $38 million compared to the same period in 2013. The 8-point decline in EBIT margins was primarily driven by lower selling prices, which more than offset the impact of favorable volume.

As I mentioned earlier in the call, we were pleased with the continued sequential improvement of our overall share placement during the quarter, although difficult market conditions persisted. Our continue commercial actions in the third quarter have returned us to our historical market position. Although pricing tracked significantly below the prior year, I'm pleased to report selling prices stabilized late in the quarter.

In the third quarter, the market weakness we experienced in the first half continued and volumes were down low single digits. We previously expected the second-half roofing market to be slightly higher to flat compared to the prior year. Given the performance on a year-to-date basis, we now expect the roofing market to be down in the fourth quarter and full year.

Our goal for the second half of 2014 was to restore our historical share placement consistent with the full-year 2013. In the third quarter, our volumes grew 7% versus the prior year, restoring our historical share placement in the market. As a reminder, in 2013 we were a bit weaker than the market in the third quarter and a bit stronger in the fourth quarter.

Looking forward, we would expect our share placement in the fourth quarter to track more consistent with the third quarter of 2014 than the average for the full year of 2013. As a result, we would expect to trail the market in the fourth quarter.

Now, slide 10 provides a summary of our insulation business. For the quarter, revenues in insulation of $454 million were up 5% over the same period one year ago on higher sales volumes and increased selling prices. The business delivered EBIT of $43 million in the third quarter, compared to $18 million in the same period one year ago, primarily on lower manufacturing cost, increased selling prices, and higher sales volumes. This was our 13th consecutive quarter of EBIT improvement in our insulation business.

The insulation business delivered strong operating leverage for the third quarter, driven by solid manufacturing performance, tight cost controls, and higher selling prices. As we have discussed on previous calls, it is our goal 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.

In the third quarter, volume growth slightly trailed our previous expectation. Growth in the quarter got off to a slow start and was tempered by the mix of US multi-family versus single-family housing starts, as well as flat market conditions outside of the US. Although volumes trailed expectations, they continued to strengthen as the quarter progressed.

We typically build inventories in the front half of the year to support seasonal demand in the second half of the year. Given the weaker volumes in the third quarter, we will likely curtail production in the fourth quarter to meet year-end working capital goals. As a result, we would anticipate higher manufacturing costs in the fourth quarter and operating leverage below 50%, though we continue to expect operating leverage greater than 50% for the full year.

Looking forward, we continue to expect the insulation business to benefit from growth in US residential new construction, improved pricing, and strong operating leverage. Now I ask you to turn your attention to slide 11 for a review of our composites business.

Net sales in our composites business for the quarter were $489 million, an 8% increase compared to the same period in 2013. The increase in revenue was driven by higher sales volumes, increased selling prices, and favorable customer mix. Selling prices continued their sequential improvement for the fifth consecutive quarter.

EBIT for the quarter was $32 million compared to $21 million in the same period last year, due primarily to improved selling prices and higher sales volumes. Continued strong manufacturing performance helped to offset higher expenses associated with plant rebuilds. In composites, this was our fifth consecutive quarter of year-over-year EBIT improvement, driven primarily by improved operating performance, pricing, and higher volumes.

For the year, we continue to expect moderate global industrial production growth. Based on our strong year-to-date performance, we expect that full-year EBIT improvement for the business will now be around $40 million, largely driven by improved pricing. Strong manufacturing performance and volume growth are now expected to more than offset higher expenses associated with plant rebuilds and inflation.

As a reminder, we said that plant rebuild expenses in the second half were expected to be about $20 million higher than in the same period one year ago. About two thirds of these higher costs occurred in the third quarter. We expect the momentum we've established in the first three quarters will continue to offset these headwinds in the fourth quarter.

As I mentioned earlier in my prepared remarks, we have taken the decision to avoid future capital expenditures and close two high-cost melters, one in Japan and one in Canada. The closure of these two melters represent the final steps in our multi-year plan for the composites business to achieve its 75% low delivered cost goal.

The actions and investments to achieve this goal have been significant; they included an expensive restructuring of high-cost assets in Europe and the successful sale and closure of a high-cost facility in China. We also constructed several new low-cost production lines and entered into creative alliances with China-based manufacturers. The actions we have taken and the capacity-tightening environment we are currently experiencing position this business to continue the momentum we have established over the past five quarters.

Now let me turn your attention to slide 12. In September, our Board of Directors approved our third quarterly dividend payment to be made on November 4, 2014. The dividend represents added value to our shareholders, and demonstrates confidence in our earnings and free cash flow outlook.

As a September 30, 2014, 7.7 million shares remain available for repurchase under the Company's current authorization. Year to date, we have purchased 900,000 shares and did not repurchase any in the third quarter. As we balance our priorities for future deployment of our free cash flow, both dividends and stock repurchases will be important mechanisms to return capital to our shareholders.

With that review of third-quarter results, I now ask you to turn to slide 13, where I will review our guidance for 2014. We had previously guided that we expected to grow adjusted EBIT versus 2013. Continued weakness in second-half roofing market shipments now creates a downside risk of $15 million versus last year's adjusted EBIT of $416 million.

We expect corporate expenses to be about $80 million. This represents $20 million to $30 million cost reduction versus our previous guidance, due to lower performance-based compensation and strong cost controls.

Capital spending for 2014 is expected to be about $370 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 now be about 10% of adjusted pretax earnings. Our 2014 adjusted effective tax rate is expected to be approximately 28% to 30% of adjusted pretax earnings.

Thank you, and I'll now turn the call back to Mike.

Thank you, Michael.

As I noted at the start of the call, I believe that we reported positive progress for the quarter, consistent with the strategic goals we laid out for the Company. I'm as disappointed as anybody with our roofing results this year and their overall impact in OC's financial results for 2014. We came into the year expecting earnings growth, and now expect relatively flat earnings, but we are a better Company today than we were a year ago.

Insulation and composites are another year further along in demonstrating their earnings power and value. We are establishing a good track record in these businesses. Roofing is having a down year, but it is certainly poised for real upside, if we can recover pricing and margin performance. The best OC is one where all businesses are performing at a high level, and I believe that we're closer today than we've been in a long time.

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

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

Thank you.

(Operator Instructions)

George Staphos, Bank of America.

Hello, everyone, good morning. Thanks for taking my question and thanks for all the details.

I guess my first question is this, and it's on roofing: if prices decline throughout the quarter and then stabilize late in the quarter, would that suggest that fourth-quarter margins are likely to be down at least as much as the third quarter versus third-quarter variances? So down at least 8 percentage points versus a year ago?

And then on insulation, given the fact that you are taking curtailments, that would suggest, that the incremental profit progress you've been seeing would slow in the fourth quarter. But you would still expect fourth-quarter insulation EBIT improvement. Would you care to comment on that as well? Thank you, guys.

George, thanks for your questions. Let me take the insulation question, and I'll turn the roofing question over to Michael, on the progression of roofing prices through the quarter and fourth-quarter outlook.

With respect to insulation, I think you've got it just right, based on what we tried to say in our prepared remarks, which is the timing of operating leverage in insulation is obviously something that is not smooth, and it's dependent upon when we're building inventories, when we're depleting inventories, what levels of utilization we're running.

Michael, in his remarks, said that third-quarter volumes got off a little bit more slowly than we expected and actually built through the quarter. So we were pretty happy with the run rate of the business late in the third, and I would say generally that's continued in what we've seen early in the fourth quarter. But it left a little bit of a demand gap in our outlook for the year, so we're going to have to take a bit of curtailment in the fourth quarter in order to get our year-end inventories where we would like them to be and manage the working capital and cash targets.

That will not be so sizable that I wouldn't expect that we would go backwards on earnings in the fourth quarter. So I think you should expect earnings growth for the quarter. Obviously, great performance for the year, and as Michael, said 50% operating leverage or better for the full year. So those are the key things we said about insulation.

I'll let Michael make a few comments about the progression of roofing prices and margins.

Thanks, Mike, and thanks, George.

Yes, so I think the good news is that pricing did stabilize late in the third quarter. And we would expect that trend to continue as we move into the fourth quarter. And then, quite frankly, there was a September price increase that was out, and we've actually made a little bit of progress in some geographies.

Now, one thing that I point you to is, that if you go back over a number of years and look at the progression of third-quarter margins to fourth-quarter margins, they typically go down, because the level of production in the fourth quarter typically is the less for the entire year. Therefore, we get the least amount of production leverage. So what I'd encourage you to do is go back and look at the last three or four years and understand the function of how they drop down quarter over quarter. But the good news is that pricing has stabilized, and contribution margins, as we move from the third quarter into the fourth quarter, have stabilized as well.

Michael, I appreciate that.

Would it be fair to say that you're looking at mid single digit-type margins in roofing in the fourth quarter? I realize that might be a finer point than you would like, but I figured I'd give it a try.

Yes, it's probably a finer point than we would like.

Okay. Thank you, guys. I'll turn it over.

Kathryn Thompson, Thompson Research Group.

Hello; thanks for taking my questions today.

First question primarily focuses on composites, and it's two-fold. Of the $21 million charge for the decision not to rebuild two composite plants, will this impact 2015, or will it impact 2014?

Then as a follow-up, you had previously had outlined roughly $20 million of cost for rebuilds that were going to hit in the second half of 2014, two-thirds of it hitting in Q3, the balance in Q4. Is that still on track?

I'm going to let Michael handle those questions. Michael?

Yes, so I think the important thing, Kathryn, is that the two are unrelated. Let me first talk about the decision that we took in the third quarter related to the two high-cost melters, one of which is in Japan and one of which is in Canada.

These melters were scheduled for rebuild not this year but next year. And as I said in my prepared remarks, these are the final steps of a multi-year plan that we've been on to achieve our 75% low-delivered cost goal. The charges associated with those two melters over 2014 and 2015 will total about $30 million, of which $21 million we took in the third quarter. So that's the decision we took around the two sub-scale melters.

Moving back to rebuild activity that we have going on this year -- so we have a number of melters that are being rebuilt. Taking you back to the previous quarters, we said that rebuild activity is on the order of 2x. Rebuild expense for the full year will be up roughly $30 million year on year. On the last call, we said that in the second half of the year, it would have about $20 million of cost, and then what I said in my prepared remarks today, of that $20 million, roughly two-thirds happened in the third quarter. The balance will happen in the fourth quarter.

I'm pleased to say that both melters -- the rebuilds are complete. They've been lit and they are in startup mode, and the rebuilds have gone according to plan.

That's helpful. And so the $30 million total charges and that $21 million that hit in the current quarter, I assume, will the balance of that hit in Q4, or will it be more of a 2015 event?

So it will be a little bit of accelerated depreciation in the fourth quarter, and then accelerated depreciation over the balance of 2015 and any other miscellaneous charges.

Okay; great.

The second question, the extremely low corporate expense in the quarter -- I know you went through a laundry list of items in the prepared commentary. But you've been averaging in a $20 million to $30 million range. Could you clarify that $1 million for corporate expense?

Yes, Kathryn, this is Mike. Just a few comments on corporate, and then maybe Michael would have something to add.

Obviously, we brought down our estimate for corporate pretty significantly since the beginning of the year, and that's really been driven by two main factors. One is, we've reined in some spending and given tighter spending targets, and have actually reduced spending in the corporate areas year on year.

And then the second is, we run our performance-based compensation accrual through Corporate, so when we get off of our business plan and get off of our guidance, it reduces the size of our bonus pools and therefore reduces the amount of money that's in the corporate expense budget. If you look at the four quarters of the year, we were around $30 million in the first quarter, $20 million in the second quarter. We're about effectively $0 in the third quarter, and then we've guided to $80 million for the full year. So you can do the math to see on how that plays through for the remainder of the year.

We have said -- and we were very clear about -- there was a $6 million mark-to-market that was a positive in the third quarter that will be a negative in the fourth, so it's going to be a push to corporate expense. So I think if you work your way through those numbers, what you really see is the first quarter accrual is a lot higher than the other three quarters, and the third quarter is lower.

And primarily, that's the impact of, we were still accruing at a high level for performance-based compensation in the first, and we reversed out some of those accruals in the third. So we tried to be as transparent as we could be on that. I think it distorts the quarter a touch, but the way we're handling accounting at the corporate level, I think gives you better comparability for the businesses.

Okay; that's helpful. Thank you very much.

Michael Rehaut, JPMorgan.

Thanks; good morning everyone.

The first question I had was on the composites rebuild. And just wanted to confirm, it sounds like the decision not to go ahead with the rebuild of those furnaces -- as you are saying, it's part of the plan to get to 75% of low-cost. But just wanted to confirm that, perhaps from a timing perspective, that, that decision, it sounds like it was irrespective of any type of global demand trends. I.e., perhaps a little bit below trend line global GDP growth in the last year or two. I'm trying to get a sense if it's the maybe slightly softer-than-expected demand trends globally had anything to do with that decision?

Michael, thanks for the question.

Really, this is not a demand-driven decision for us at all; it's very much of a low-cost capacity-driven decision for us, and really trying to save capital when you come to these moments of decision, which is rebuilding a melter. So on a cash-cost basis, most melters make profit during the life of the melter, and then when you get to the end of the melter, you have to rebuild the melter and then put all the capital back in.

We had been looking at our Canadian asset and our Japanese asset, and they were quite high-cost. We've been working over the last three or four years, as Michael said, to add in some low-cost capacity into our global network. We did a facility Mexico; we did a facility in China; we did an expansion in Russia. All of that is operating today and is very low-cost, and it's given us some flexibility to meet our market-share goals and to meet our customers' demand requirements while taking out high-cost assets. So this has been a four- or five-year plan of evolving and migrating our asset base from some of our sub-scale high-cost melters into the really scale low-cost stuff.

The stuff that's in rebuild now -- if you look at what we have in 2014, it's a big melter in Europe that's very cost-effective. It's our melter in Brazil, which is very cost-effective. As we look into 2015, our rebuild is primarily going to be big scale, low-cost North American capacity. So we are now starting to be able to put our capital where we have the best cost position and where we have the most profitability. And unfortunately, it's caused us to have to back out of some other geographies where we did not see the cost position that we needed to succeed.

Okay. Thank you, Mike. And then on roofing, two questions if I could sneak them in.

One, just following up on an earlier question on 4Q margins versus 3Q, you had given that pricing you said stabilized during the quarter, but towards the end of the quarter, which would imply maybe pricing slipping throughout most of the quarter and ending at the lower end of that range. Combined with normal seasonality in 4Q, I would presume it is safe to say that there would be another sequential decline in gross margin -- I'm sorry, in EBIT margins in roofing for 4Q.

And then separately, thinking about it longer-term, I think you reiterated your view that this is a business that could do mid-teens or better. Just wanted to get a sense of what drives that confidence, because even at low double-digit margins, I think you've commented in the past that, that's still a pretty good level of profitability.

Trying to get my arms around if that profitability is decent in the low double-digit range, why the industry would allow for, from a competitive standpoint, allow for something greater than that?

Okay, let me take the first part of your question, and then I'll address the second part of your question.

The first part of your question related to sequential margins from third quarter to fourth quarter. I think if you look at history, typically fourth-quarter margins have been a bit weaker than third-quarter margins, and I think that's a reasonable expectation again this year. So we're not looking at fourth quarter and believing that we will comp margins positively in roofing.

I think in prior years, you have maybe seen a bigger drop off in margins than what we would be expecting this year. So we're going to be somewhere between maybe what history would suggest and where we were in the third quarter. I think that's largely driven by a couple things: one is, we've been very good in expense control this year, so I think we're going to have some expense reductions and other things that we had put through the business earlier in the year will continue to help us in the fourth, and that will come through in margins.

I think the second issue is the nature of some of the pricing deals that we have with our customers. There are year-end rebates and other things. And then, when we're having a bad year where our volumes are down, some of those gates and rebates are not met. And as a result, we have rebate accruals and other things that would come back a little bit in the fourth quarter that would help a bit.

So I think we're going to be somewhere between what you might have seen historically and where we were in the third, but it might be over-cooking it a little bit to think that we're going to drop as much as what we've seen over the last couple of years, unless we see some adverse movement in the market situation or the competitive situation.

As it relates to reiterating our guidance that we thought we could average mid-teen margins or better, you -- and many of you have been at our investor day's where we went through that analysis the first couple of times, and it was really driven off of a very detailed competitive analysis. We went through a detailed benchmarking of our business in the late 2000s and 2010. We found about $150 million of what we thought were proprietary cost improvements, shingle redesign, product-line upgrades where we were able to get mix improvements in our product; some things we did from a sourcing point of view, some things we did in terms of rationalizing some fixed assets and shutting down some facilities, which we think improved the structural margins of our business by about 7 or 8 points versus where we had been historically.

So historically, our business had been mid to high single digits. We felt that we had added 7 or 8 points of real margin to our business through good execution and things that either our competitive had already done -- so in some cases we were catching up -- or things that our competitors couldn't do. So in some cases, we were getting proprietary improvement versus our competition, which would've caused us to believe that the sustainable margins we had seen historically of the mid to high single digits were now mid teens-type margins.

We've looked at this year every way you possibly can, in terms of our own performance: what we think is happening competitively, where our prices are relative to our competitors, where our costs are relative to our competitors. And we don't see any fundamental change in that analysis that led us to that conclusion. So we think of business is well-positioned, based on the product lines we have and how we are able to price relative to our competitors and where our cost position is and where our costs are relative to our competitors, that we should be able to average mid-teens or better margins over a period of time.

We're obviously not going to do that this year. We're obviously well above that if you take the last three, four, five years. It's a harder call to make when you are below that guidance than it is when you are above that guidance.

But as you can see with the pricing dynamic that we've had this year, if we have some constructive pricing for Owens Corning in the first part of next year, that would do a lot to rehabilitate our margins and get us back on track. And that's certainly how we're looking into next year is trying to figure out how we can get our business off to a faster start next year, improve our margins early in the year, and then have a much better year.

Thanks. And one last quick one: what set of factors would have to come together to drive the realization of the [total] $15 million downside in full-year EBIT versus $13 million?

The downside, really, we see is on the roofing volume side. So we came into the second half of the year coming out of our second-quarter call believing that the full-year might be flat, maybe a little bit down. But since it was down through the first half, we were expecting the second half to be up, maybe not enough up to offset the first half, but certainly up.

We were disappointed that our shipments were okay in the third quarter, but overall industry shipments were, in fact, down. We've now had three consecutive quarters of down shipments.

The rate at which we're trailing last year has continued to decline, we so were down more in the first quarter than the second; down more in the second than the third in terms of industry shipments. So we think, best-case, fourth-quarter industry shipments maybe track last year, or are maybe slightly down. And that loss of volume between the third and fourth quarter industry shipments at our current market share puts some volume weakness into our outlook. And that's really the single driver of the downside.

We don't see anything today versus where we were 90 days ago on composites or insulation performance. We really don't see anything today versus where we are 90 days ago in terms of our market share in roofing or where we expected margins to be. The big issues is just what's the market opportunities for us in terms of what's going to get shipped this year.

Mike Wood, Macquarie Capital.

Thank you.

Can you give us some color in terms of what drove the share gains versus the market commentary you'd given for roofing volumes in the quarter? Whether it's geographic retail, the price cuts that you'd made? And should we be expecting OC to gain share in the fourth quarter as the price cuts came through late in the third quarter?

Yes, it was a lot of really good work and hard work by our commercial team, and I think they executed very well in the third quarter. But at a very high level, I think the explanation is relatively simple, which is, our pricing in the first quarter and probably first half of the second quarter wasn't where we needed to be competitively. And when we got back into the market and priced our shingles where we've historically been competitively, we got back to our historical market share position. I think that's evidence that our customers like buying and selling our shingles. Contractors like working with our shingles, and homeowners think they look great on your house.

The fundamentals that drive long-term market share -- which is people who want to do business with you and believe that they can make money buying your product -- those fundamentals hadn't changed in the first half, with the exception of we got a little bit out of the market in terms of pricing. And I think now we're back at market pricing or at competitive pricing that allows us to enjoy our market share.

We're expecting our share to be relatively flat in the fourth quarter versus the third. Michael tried to go through this in his prepared remarks; it's a little tricky, in that we think our third-quarter market share was right on where we wanted to be versus overall share last year, overall share in the second half of last year. So we came in where we were hoping to be.

Last year in the third quarter, our share was actually a little bit below average. Last year in the fourth quarter, our share was a little bit above average, so in fact our out-performance in the third quarter was not a share gain versus history; it was just a positive comp to last year's third-quarter share. We would expect we will comp negatively to last year's fourth-quarter share, but that the overall second half will comp right on last year's second half and that the overall second half this year will comp right on last year's overall full year.

Great, and then in terms of the corporate expense color, thank you for all the indications you'd given on the call. But looking into 2015, should we think about that level tracking alongside sales growth? Can you frame what certain triggers may be to help us model that into next year?

Well, typically our corporate guidance -- and I don't want to give a definitive number right now -- but our corporate guidance at the beginning of the year has typically been more in the 120 range. And that is targeted at a full bonus payout in our performance-based compensation programs associated with our business plans.

So obviously we go into next year with business plans that we intend to deliver against, and therefore we'd be accruing against having performance-based compensation back in the corporate expense line. So that will be a bit of a headwind. It's a well-designed program; I think it's shareholder-friendly. When the business is not doing well, our corporate expenses come down, because our performance-based compensation goes down. And then at the beginning of any given year, we're going to have to earn back the bonus pool in order to grow earnings. It's consistent with how it's been in the last three or four years.

Stephen Kim, Barclays.

Thanks very much, guys. Wanted to ask about, first, the composites segment. You indicated, I think, that you were looking for a more favorable pricing outlook. I think you said this year $30 million, I think, out of a $40-million improvement, if I remember correctly.

Was curious as to whether the pricing outlook in general incorporates any positive impact from fixed-cost contracts, which I know tend to get renegotiated around this time of year? Or if actually that comment is before you've seen any potential benefit from renegotiating contracts up?

Thanks, Stephen; it's Michael. I'll take that question.

And maybe just to back us up to the beginning of the year -- so, at the beginning of the year, we expected to improve our composites business financial performance on the order of about $20 million to $30 million, which we said was going to be largely driven by pricing. On our call last quarter, we upgraded that to the high end, so let's call it $30 million. And then on this call, we've upgraded our outlook for the composites business to be about $40 million year on year, largely driven by pricing, but we're also seeing some benefit from excellent manufacturing execution as well.

And then, from a pricing perspective -- again, five consecutive quarters of progress. You're right, we have about 50% of our volumes are in fixed price contracts. Those contracts tend to get negotiated in the fourth quarter of every year. I think it is probably a little bit too early to give any flavor around what we expect, although I would say that we expect to make progress.

Great, that's very helpful. I appreciate that.

Second question relates to the insulation segment, which -- thanks for your comments about how the incrementals are going to move in 4Q and results for the year; that's helpful. I think you attributed the fact that you're going to see a lower incremental in the fourth quarter than you had in the third quarter to, I guess, an implication there was inventory build. Because you said you're going to have some curtailments in 4Q.

Just generally, it would seem to me that inventory -- it would be tough to store insulation. The stuff is very difficult to -- it just takes up a tremendous amount of room and whatnot. I was curious, how big of a deal was that? And to the degree there was any inventory build, was it intentional or was it a reflection of some softness in the market on the demand side that happened? So if you could give a little flavor about this curtailment that affects the incremental, that would be interesting. Thanks

Thank you, Stephen.

Certainly your observation that insulation is big and bulky and difficult to store is one that is a constant topic of our internal reviews when we talk about inventory levels in our insulation business.

It is our natural rhythm of the year to produce more insulation in the first half of the year than we sell, and to sell more insulation in the second half of the year than we produce. And that really has to do with the seasonality of demand and an effort to get better fixed-asset capital productivity and better returns on capital. So what we effectively do with inventory is, we shift capacity from the first half of the year to the second half of the year.

The alternative manufacturing strategy would be to build capacity above your average demand and build capacity to your peak demand, which would mean that in the first half of the year, you would have a pretty sizable portion of your capacity curtailed, the second half of the year you would run full out. We do that math all the time, and it is more cost-effective and more capital-effective and produces better returns to actually shift capacity from the first half to the second half and exercise your fixed assets harder.

Now, obviously when we do that, we have to make a lot of assumptions about the progression of housing starts and other things and how that will affect second half [and] demand. We have a lot of levers that we can pull to make annual adjustments, and we tend to manage the year-end working capital targets in both of our building materials businesses, because that tends to be the seasonality of the business, from the beginning of winter to the end of winter.

So we were a little bit ahead of ourselves, really for two reasons: one is our manufacturing performance has been outstanding, so the team is producing at record levels in virtually all of our facilities which is helping us on the cost side. Our demand was a little bit lighter, as Michael said, somewhat related to the mix of single-family/multifamily. We probably had the starts numbers pretty close, but it was a little more multi-family rich, so we didn't see quite as much demand pick up. That's been a little bit better late in the quarter, late in the third and early fourth. So we feel pretty good about our outlook between now and year-end, but we're going to have to take a little bit of curtailment in order to get our inventory back.

Alex Rygiel, FBR.

Thank you.

With regards to the roofing margins in 2015, can you go into some detail on some actions that could be taken over the next few months to attempt to drive margins higher in that business?

Sure Alex, this is Mike.

Obviously, probably the most critical time of year for establishing a really great year of performance in roofing is from the middle of December probably through the middle of May. That tends to be the time of year where a lot of decisions get made that have big impacts on volume and pricing and the timing of volume and pricing for the following year. So in our history, we have given incentives in the first quarter to encourage distributors to bring in inventories of our product.

I've said on a number of calls I think going back two or three years, as a manufacturer we saw three good reasons to do that. One is, typically this time of year, asphalt costs are a little less expensive because of paving demand. The second reason, historically, has been that we won't run our assets as strongly in the winter as we normally did in the summer, because of end-use market demand being shut off by bad weather. And then the third reason is you want your customers to have some inventory when the snow breaks and spring comes, because that's the beginning of roofing season. And that's very hard for us to forecast, and we'd rather have some inventory forward-deployed.

A couple years ago, in 2012, when we had, had a challenging year in terms of margins, we were pretty explicit in talking about the fact that, for the most part, we were not seeing that those three variables were driving good decisions for us around winter discounting. So we haven't typically seen nearly as much asphalt cost relief in the winter as what we might've seen, say, five or 10 years ago.

Obviously, the way the first-quarter incentives have been structured by us as a manufacturer -- we've encouraged our distribution partners to purchase well beyond their first-quarter needs. And actually, I would say I've created some speculation in the market or speculative buying behaviors in the market, where people are buying in the first quarter on expectations that they can carry low-cost inventory deep into the year. And then, obviously, the third reason is still a valid reason: we would like our distributors to have product out there at the beginning of the season.

Right now asphalt costs are above where they were last year. Even though we'd seen oil come down, we expect to maybe get a little bit of relief from the inflation we're seeing. That might be something that would help us avoid further margin deterioration, as we head later into the year with lower volumes. But we do not expect to have a really inexpensive asphalt environment in the first quarter.

So as we sit here today, we would love to see an environment where we can avoid the incentives in the first quarter and continue to price our products where they are today, at least earlier in the year. And then if there's spring pricing activity where we're able to raise prices because volumes start to get a little bit better, that would be the path back to better margins. But obviously, based on this year, we're very cautious about ensuring that we are listening to the market very carefully and are staying competitive.

And secondly, regarding your share repurchase initiative, it sounded like Michael's comments would suggest that the Board believes it's maybe a share buyback is a little higher priority today than maybe three to six months ago. Is that the case? And how aggressive could the Company become in the next three to six months?

Early in the year, we came into the year expecting good results and good earnings growth, and early in the year we both had declared a dividend and were buying back some shares. I think as we got into the middle part of the year and realized we were going to have a big gap in our roofing performance -- and roofing is a huge cash generator for our Company, because it's primarily US-based earnings, not a terribly capital intensive business, and we have the really nice NOL position in the US. So pretty much roofing need that flows through to cash flow.

We changed our cash flow expectations for the year based on our roofing outlook, looked at the shares we had bought, looked at the dividend we had declared, looked at some of our goals for our balance sheet in terms of debt, and some of our key ratios, and got a little bit more cautious in the second half of the year in terms of share repurchases. I think we continue to believe that share repurchases are a good thing for us to do with excess capital. And that if we can't find great investment opportunities, we would get more aggressive with investment capital -- with share repurchase.

We're getting into a period in composites, in particular, where there's multi-year restructuring program that we've had in place is coming more to an end, and the capital call for that business over the next five years is probably quite a bit different in terms of what we need for investments to get to low-cost capacity. What we need for investments in restructuring should start to wane, and as a result, we have better visibility to -- I think better free cash flow performance in composites, better visibility to good free cash flow performance in insulation, as we see continued recovery in housing. If we can get roofing margins to recover, we would obviously have immediate visibility to better cash flow performance in roofing. So those would be some of the variables that would go into the Board's discussion and Management's thought process around share repurchase.

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

Garik Shmois, Longbow Research.

Thank you.

I'm just wondering if you could talk about some of the revenue trends in composites by geography? And specifically, if you could break out by region just directionally, how revenue has progressed during the quarter? And maybe touch upon if you've seen any changes in revenue trends, particularly given some of the macro concerns coming out of Europe and some of the deceleration, at least from the data points, out of Asia?

Hello, Garik, it's Michael. I'll take it, and then I'll see if Mike wants to fall in with any other color as well.

As you saw in our reported results, we had decent revenue gains year on year, decent volume gains year on year. As I think about the big three regions -- first, probably North America in particular was probably strongest, followed by Europe. So we've made nice progress in Europe year on year. Some of the developing economies like Brazil have probably been a bit more tepid this year versus maybe original expectations, but I think all in all, we're pleased with progress that we've made.

Strongest in North America, followed by Europe. I think clearly, we've got Europe and other parts of the globe on our radar screen, but so far things have remained stable.

Maybe the one thing I would add: we've seen Asia relatively stable, particularly China, but also India has been pretty good. Europe -- we're cautious, obviously, based on the things you read. We have seen much better performance in Europe than maybe what the economic statistics or the newspaper would say, and we probably have a couple trends that will help us in Europe. So we have always had a Europe for Europe strategy. We've really worked on our cost position over there. Now as you see the euro declining, it's becoming a less attractive export target for some manufacturing outside of Europe based on exchange rate.

So while we may anticipate a bit more of a challenge-demand environment in Europe if things truly do slow down, we think European assets are pretty well loaded, not just for us but also for our competition. And we expect that it's going to be a little bit less attractive export market for some of our China-based competitors. So all in all, we'd hope to maybe thread that needle a little bit, where if Europe went a little bit soft, the other dynamics with the exchange rate and some other things might give us the support in Europe that we'd continue what has been really a great turnaround and what we anticipate will be very good performance in Europe for our business.

Okay, makes sense. Thanks for that.

And then quickly on insulation, good price momentum in the quarter. Just wondering if you can help us understand how much of a benefit was there from the June price increase? Or was most of the price benefit related to actions that you secured late in 2013?

And then maybe if you can comment around your expectations, maybe initially, for pricing next year, given that some of the insulation manufacturers have announced sizable increases?

Yes. Our price momentum on a comparable basis is actually slowing down a little bit right now. So this has been an area of focus for us, and I think we been able to have really good cost performance and really good manufacturing performance to cover some of the price that maybe we expected to have at this point in the year and we didn't have.

That primarily relates back to the January price increase we reported on both our fourth-quarter call and then our first-quarter call, that we were not as successful at the early first-quarter price increase as we had hoped to be. Obviously, terrible weather. We had seen a slowdown in housing a little bit through the third quarter of last year; that was coming through in the lag starts when mortgage rates bumped in the middle of 2013. The market environment wasn't as robust. Our customers were not busy, builders were not busy, and we found it very difficult to pass price in the beginning part of the year. We were more successful midyear, as we thought is appropriate. And so as a result, we're now comping to last year, with only one price increase in our numbers, not two.

There has been announced a sizable price increase for the beginning part of next year by Owens Corning, and also by some of the other players in the industry. We think that it's obviously getting to the point in the construction cycle where we need to work hard to get insulation back to what we consider to be fair pricing. If you look at the last decade, insulation prices basically are unchanged on nominal terms for over a decade. In real terms, insulation prices have come down quite tremendously with inflation. And the value of the insulation package in the home as a percent of the total cost of the home continues to decline.

It's not that we are somehow trying to push insulation pricing to unseen levels historically. We're trying to get back to levels that allow us to have reinvestment economics and are something more consistent with the value of the product in the home. If we get off to a good start next year, I think that will help all of next year. Obviously, if we don't have a good price performance early in the year, that's going to become more of a challenge for us as we go into 2015.

Okay. Makes sense. Thanks for your help.

I think this concludes the Q&A portion of the call. Thank you, everyone, for joining us on today's call. And with that, I'd like to turn it back over to Mike Thaman for some closing comments.

First of all, I always want to thank everyone who's on the call for your continued interest and support of Owens Corning. I said in my earlier comments that I'm as disappointed as anybody with the roofing results that we've seen this year, and in particular, the overall impact on our financial results. I actually look at our overall execution scorecard for the year, and I see very high marks virtually everywhere on our execution scorecard, with the notable exception of roofing prices and roofing margins. So we've really had one variable that we've been managing across the entire Company that I think has cast a bit of a cloud across the entire performance of the business.

Our goal in these calls is to try to balance out that perspective and make sure people really do see the great things that are happening inside our insulation business, the great things that are happening inside our composites business, and also that people continue to have confidence in what a great business roofing is, and that our efforts to get roofing performing at very high levels we believe ultimately will go rewarded.

Owens Corning is a better Company when we have all three of our businesses performing at very high levels. We've come through a period in the last five years where we've produced some results that we're very proud of, but they were very much dependent upon roofing and roofing only. I think as we look at Owens Corning going forward, we're expecting to deliver broad and strong performance across all three of our businesses, and that, that's going to give us a little bit better diversification of where our earnings and cash flow come from, and I think also give our investors better ability to have visibility and see where value creation comes from inside Owens Corning.

We're pretty happy with the progress we've made strategically. We're happy with the strength that we're seeing to emerge in all three of our businesses. We're happy with the way the Owens Corning team is executing, and obviously job one in our to-do list is to translate that into earnings growth in the coming years.

Thanks for joining us on the call. We look forward to talking with you on the fourth-quarter call.

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