Owens Corning (OC) 2014 Q4 法說會逐字稿

Good day, everyone, and welcome to the Owens Corning Q4 and full- year 2014 earnings conference call.

(Operator Instructions)

Please also note that today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Thierry Denis, Vice President of Investor Relations. Sir, you may begin.

Thank you, Jamie, and good morning, everyone. Thank you for taking the time to join us for today's conference call in review of our business results for the fourth quarter and full year 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 yourselves to one question and one follow-up.

Earlier this morning, we issued a news release and filed a 10-K that detailed our financial results for the fourth quarter and full year. For the purposes of our discussion today, we've prepared presentation slides that summarize our performance and results for the fourth quarter and full year 2014. We will refer to these slides during this call.

You can access the earnings press release Form 10-K and the presentation slides at our website, owenscorning.com. Refer to the investors link on the bottom right side of our home page. A transcript and recording of this call and the supporting slides will be 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 the 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 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 effective quarter-to-quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share.

In the fourth quarter, we have utilized an effective tax rate of 30%, in line with our full year 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, 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 fourth quarter and full year 2014 results.

Owens Corning consolidated revenue for 2014 was $5.3 billion, flat with last year. Full-year adjusted EBIT was $412 million, compared to $416 million in 2013. Full-year adjusted earnings were $208 million, compared to $221 million in the prior year.

Fourth quarter revenue was $1.26 billion, compared to $1.28 billion one year ago. Adjusted EBIT for the quarter was $107 million, up from $96 million in 2013, and adjusted earnings for the quarter were $55 million, up from $52 million in the prior-year period.

I'm pleased that we've been able to grow EBIT in the fourth quarter and the second half, despite a negative comp in roofing for both periods. For the second half, Owens Corning grew EBIT by $24 million, overcoming a [$60] million year-on-year EBIT shortfall in roofing.

While our full-year results were effectively flat at the revenue and EBIT level, I believe we made significant progress in 2014. We're a better Company when all three businesses are making meaningful contributions to our financial results.

While roofing took a significant step back last year, it still contributed materially to income and cash flow. Both Insulation and Composites showed strong year-on-year improvement and also contributed materially to our financial results.

Based on the strength exhibited across our portfolio, we're pleased that our Board elected to increase our dividend payout by 6% to $0.17 per share.

Now, as I do every quarter, I'll review our performance as it relates to the expectations we set for the year. As is the case each year, we said we would continue to make progress toward our goal of creating an injury-free workplace. The Company continues to operate at a very high level of safety relative to industry benchmarks.

Owens Corning had 84% fewer injuries than the average manufacturing company when measured against the rates published by the US Department of Labor. Recorded injuries were higher in 2014 than the previous year, but our severity decreased dramatically, with the number of days lost due to injury down by 20% across the Company.

In the Insulation business, we said we would continue to realize the benefit from growth in US residential new construction, improved pricing, and operating leverage. Insulation achieved a profit of $108 million for the full year, fulfilling our previous guidance of $100 million of EBIT on 1 million lag US housing starts.

The Insulation business also improved EBIT for the 14th consecutive quarter, increasing full-year EBIT by $68 million. Over the last three years, Insulation has grown EBIT by an average of nearly $70 million, delivering operating leverage of 54%, above our guidance of 50% operating leverage through the recovery.

In Composites, we said we expected improved market conditions and pricing to drive EBIT growth, with improved manufacturing performance and higher volumes expected to offset higher rebuild costs and inflation. The business delivered its sixth consecutive quarter of EBIT improvement on positive price trends, volume growth, and strong manufacturing performance.

For the full year, EBIT improved by $51 million. Fourth-quarter revenue was in line with the prior year on favorable price, flat volumes of glass fiber, and unfavorable currency.

In roofing, we revised our outlook as the year progressed. Our goal for the second half was to restore our share of the market to historical levels and stabilize pricing. Roofing achieved a second-half market share objective through good execution.

In the fourth quarter, US asphalt shingle market declined mid-single digits with the full-year market down 4%. Owens Corning's market position was stable sequentially and in line with historical share levels on stable pricing.

In addition to these business results, I wanted to review other significant accomplishments that have strengthened our Company and positioned us well for 2015. In November of 2014, we eliminated the Building Materials group level of the organization and streamlined the Company into three business units to better align with markets and customers. The move will also reduce the complexity and cost of the organization, increase scope and accountability of jobs, and provide growth for employees.

Aon Hewitt named Owens Corning to its list of top companies for leaders in North America in 2014. We're honored to be recognized as a Company that excels at building and growing strong leaders. For the fifth year in a row, Owens Corning earned placements in the Dow Jones sustainability world index, in recognition of our sustainability initiatives and was named the number one company in the world's Building Products category for the second straight year.

With that, let me now turn to 2015. Our Insulation business should continue to benefit from growth in US residential new construction, improved pricing, and operating leverage. We continue to expect average operating leverage of 50% through [recovery] with 2015 below this guidance. In Composites, we expect 2015 EBIT improvements commensurate with 2014, partially offset by the negative impact of a stronger US dollar. Once again, the majority of our EBIT improvement should come from price.

The 2015 outlook for the roofing business will be largely determined by competitive pricing dynamics, the timing and value of asphalt cost deflation, and overall market demand. We expect asphalt cost deflation to start coming through our cost structure in the second quarter.

Our goal will be to utilize a better asphalt cost position to improve margins versus where we are beginning the year. The relationship of selling price to input costs through the year will be a significant determinant of how roofing performs relative to 2014.

In prior years, we provided full-year EBIT outlook for the Company on this call. This year, we intend to provide that outlook later in the year, once we have better visibility to the market demand and competitive dynamics in our roofing business.

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, Owens Corning is a better Company when all three businesses are making meaningful contributions to financial results. While roofing took a significant step back, it contributed materially to earnings and cash flow. Both Insulation and composite showed strong year-on-year improvement.

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

Today, we reported 2014 revenues of approximately $5.3 billion, essentially flat with 2013. Sales in our Insulation business grew by 6%, primarily on higher selling prices and stronger volumes. Sales in our Composites business were up 5%, primarily due to stronger volumes, higher selling prices, and favorable customer mix, partially offset by foreign currency translation in the fourth quarter. In our roofing business, sales were down 11%, resulting from lower volumes and lower 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 2014 was $412 million, compared to $416 million in 2013. Adjusted earnings for 2014 were $208 million, or $1.76 per diluted share, compared to $221 million, or $1.86 per diluted share in 2013.

Fourth quarter 2014 adjusted EBIT was $107 million, compared to $96 million in the fourth quarter of 2013. Adjusted earnings for the fourth quarter of 2014 were $55 million, or $0.47 per diluted share, compared to adjusted earnings of $52 million, or $0.44 per diluted share in the fourth quarter of 2013.

Our effective tax rate on adjusted earnings was 30%, which is at the top end of our previous guidance of 28% to 30%. Depreciation and amortization expense was $304 million for 2014, compared to $332 million in 2013.

Capital expenditures of $363 million in 2014 compared with $335 million in 2013. Capital expenditures in 2014 were in line with depreciation and amortization for the year, excluding construction costs associated with our new US nonwovens facilities.

Now, on slide 6, let me reconcile 2014 adjusted EBIT of $412 million to our reported EBIT of $392 million. As discussed in the first quarter, we have adjusted out $45 million related to the gain on sale of our Composites facility in Hongcho, China. In addition, we have adjusted out $36 million of restructuring charges, of which $27 million were related to previously announced actions and $9 million related to our November announcement of organizational changes made to streamline our Management structure and reduce costs.

We've also adjusted out $23 million of charges related to the sale of our European masonry products business and the final charges associated with our European asset restructuring. Finally, we've adjusted out $6 million in final costs related to the flood that occurred in October 2012 at our New Jersey roofing facility as a result of Hurricane Sandy.

Now, please turn to slide 7, where we provide a high-level review of our adjusted EBIT performance comparing the full year 2014 with 2013. Adjusted EBIT declined by $4 million. A $68 million improvement in our Insulation business, and a $51 million improvement in our Composites business were offset by $154 million decline in our roofing business. General corporate expenses were $31 million lower versus the prior year, primarily due to lower performance-based compensation.

With that review of the key financial results, I ask you to turn to slide 8, where we provide a more detailed review of our business results, beginning with our Insulation business. Insulation sales for the quarter of $490 million were up 5% from the same period a year ago, on stronger volumes, and improved pricing. The business delivered EBIT of $46 million in the fourth quarter compared to $39 million in the same period one year ago. Insulation has delivered 14 consecutive quarters of EBIT improvement on strong price realization, improved volumes, and manufacturing productivity.

For the full year, Insulation sales of $1.7 billion were up 6%, compared to 2013. EBIT for the full year of $108 million was $68 million higher than the previous year. In 2014, the business achieved our previously announced goal of $100 million or more of EBIT on 1 million lagged US housing starts, and delivered operating leverage of 65%.

In addition, over the last three years, Insulation has grown EBIT on average by almost $70 million per year, delivering average operating leverage of 54%, above our guidance of 50% through the recovery. In 2015, the Insulation business should continue to benefit from growth in US residential new construction, improved pricing, and operating leverage. Expectations for 2015 US housing starts range between 1.1 million and 1.2 million units. Market momentum is positive, and we would expect to deliver another strong year in 2015.

And while we expect to deliver revenue growth in the first quarter, first quarter 2015 EBIT is expected to be similar to last year based on the timing of income and expense items. Therefore, we would expect to see the majority of our EBIT improvement to take place after the first quarter. We continue to expect annual operating leverage of 50% through the recovery, although 2015 operating leverage is expected to track slightly below our goal.

Now, I'll ask you to turn your attention to slide 9 for a review of our Composites business. Sales in our Composites business for the quarter were $464 million, a slight increase compared to the same period in 2013. Higher volumes and improved selling prices were offset by the impact of foreign currency translation late in the quarter.

Full-year sales were $1.9 billion, a 5% increase, compared to the same period in 2013. Approximately half the increase was driven by higher sales volumes. The remaining increase was attributable to improved pricing and favorable customer mix, partially offset by the impact of foreign currency translation in the fourth quarter.

Selling prices continue to their sequential improvement for the sixth consecutive quarter. EBIT for the quarter was $53 million, compared to $36 million in the same period last year, primarily due to improved pricing and favorable customer mix. In Composites, this was our sixth consecutive quarter of year-over-year EBIT improvement.

EBIT for the full year of $149 million compared to $98 million in 2013, an improvement of more than 50%. In 2015, we expect global industrial production growth similar to 2014.

In 2014, the glass fiber market grew in excess of global industrial production. In 2015, we again expect growth in the glass fiber market. However, the rate of growth could be below global industrial production, based in part in weakness in applications that go into the upstream oil and gas sector.

For the full year, we would expect to deliver an EBIT improvement similar to 2014 before the impact of foreign currency translation and pricing is expected to be the primary driver of EBIT growth in 2015. At current spot rates, foreign currency translation would negatively impact revenue by about $150 million and EBIT by about $20 million.

In 2015, rebuild expense and costs associated with the startup of our new US nonwovens facility should roughly equal 2014 rebuild expenses. The timing of rebuild and startup activities will fall in the later two-thirds of the year. Thus, we would expect first quarter 2015 EBIT for Composites to be broadly in line with the fourth quarter of 2014.

Now, I ask you to turn to slide 10 for a review of our roofing business. Roofing sales for the quarter were $340 million, an 11% decrease compared with the same period a year ago, on lower volumes, and lower selling prices. In the fourth quarter, industry shipments declined by mid-single digits.

EBIT in the quarter was $32 million, down $23 million compared to the same period in 2013, on lower volumes and lower selling prices. Roofing sales for 2014 were $1.7 billion, an 11% decline compared to the prior period, driven largely by lower sales volumes.

In 2014, industry shipments declined by 4%. For the year, EBIT margins were 13%, down from 20% in 2013, primarily driven by lower selling prices and lower volumes. The roofing business achieved its commercial objective of restoring its historical market position in the second half of 2014. The progress that began in the third quarter was sustained with stable pricing and share in the fourth quarter.

So far in 2015, we have not seen the discounting in inventory build in the channel that characterized the first quarter of 2014. This is consistent with the view offered on our third-quarter call. Our ability to sustain pricing in the early part of the year is critical to improving roofing performance.

Over the last three years, the industry has shipped about 35% of its full-year demand in the first quarter. Given the lack of incentives we have seen so far in the quarter, we could see a more balanced shipment throughout the year. If first-quarter shipments were close to 25% of full-year demand, industry volumes could be down as much as 25% in the quarter.

You will recall that we trailed the market in the first quarter of 2014. Given our expectation to ship at our historic share position for all of 2015, we anticipate our first quarter 2015 volumes could be down more than 10%. We view asphalt deflation as a constructive way to improve our margins later in the year.

Crude prices began dropping in the fourth quarter and accelerated dramatically in the second half of the quarter. Based on historical data, asphalt pricing typically lags downward crude price movements by two to four months. In addition, it typically takes two to three months for our asphalt purchases to move through our manufacturing process and translate into out-the-door shingle sales.

Therefore, we expect to see some asphalt deflation benefit in our financial results in the second quarter with the bulk of the impact in the second half of 2015. This could translate into deflation of over $50 million in 2015, based on the current outlook for crude prices and a return to a more normal relationship between crude and asphalt prices.

Finally, as a result of the fewer expected shipments in the first quarter and the anticipated decline in asphalt costs, we deferred production in the fourth quarter of 2014 and in the first quarter of 2015. Lower production, combined with lower sales volumes, could produce first quarter 2015 margins in the mid-single digits.

Now, let me turn your attention to slide 11. In 2014, the Company continued its disciplined approach to balance sheet and capital management for the long-term benefits of investors. In the fourth quarter, we strengthened our balance sheet by issuing $400 million of 4.2% notes due in 2024.

The proceeds from the bond offering were primarily used to purchase a portion of other high-cost notes. The transaction extends our debt maturities and reduces our future interest expense. As a result of this tender offer, we incurred a fourth-quarter charge of $46 million associated with the extinguishment of debt.

The Board of Directors declared the Company's fifth quarterly dividend, which included a 6% increase based on the Company's positive financial outlook and cash generation. A dividend of $0.17 per common share will be paid on April 2 to holders of record as of March 13th, 2015.

During 2014, we also repurchased 900,000 shares of the Company's stock for $38 million, under a previously announced share repurchase program. Since 2008, we have repurchased 18.8 million shares for approximately $545 million at an average share price of $28.92. As of year end, 7.7 million shares remain available for repurchase under the Company's current authorization. As we balance our priorities for the future deployment of our free cash flow, both dividends and stock repurchases will be important mechanisms to return capital to shareholders.

With that review of 2014 results, I now ask you to turn to slide 12, where I review our outlook for 2015. Our current market outlook is for continued growth in US housing starts and moderate global industrial production growth. Expectations for 2015 US housing starts range between 1.1 and 1.2 million units. Insulation end-market demand and continued pricing actions should accelerate revenue growth in 2015 versus 2014, with operating leverage slightly below 50%.

In Composites, pricing is expected to be the primary driver of EBIT growth in 2015. We are positioned to deliver an EBIT improvement similar to 2014 before the impact of foreign currency translation, which at current spot rates represents a headwind of roughly $20 million. We will provide full-year EBIT guidance for the Company once we have further clarity on the roofing market, the timing and value of asphalt deflation, and related competitive dynamics.

Now, please turn to slide 13, where I provide other financial guidance for the year. We expect corporate expenses to be in the range of $120 million to $130 million, which is in line with 2014 guidance at the start of the year. The primary driver of year-on-year increase is higher incentive compensation associated with anticipated levels of performance.

Capital spending will be about $355 million, including approximately $55 million of spending associated with the construction of our new US nonwovens facility. Depreciation and amortization expense is expected to be about $310 million. Interest expense is expected to be about $110 million.

Our $2.2 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 2015 cash tax rate to be about 10% to 12% of adjusted pretax earnings. Our 2015 effective tax rate is expected to be approximately 30% to 32% of adjusted pretax earnings, slightly higher than our 2014 effective tax rate of 30% as the proportion of US-based earnings is expected to grow.

Thank you. I'll now hand the call back to Mike.

Thank you, Michael. As I noted at the outset of today's call, Owens Corning's a better Company when all three businesses are making meaningful contributions to our financial results. Both Insulation and Composites showed strong year-on-year improvement in 2014 and contributed materially to our performance. Roofing also contributed materially to both income and cash flow.

I am pleased that our Board of Directors elected to increase our quarterly dividend payout by 6% to $0.17 per share. We intend to provide full-year EBIT outlook once we have better visibility to the roofing market demand and competitive dynamics in that business. That should be later in the year.

With that, I'll turn the call over to Thierry to lead us in the question and answer session. Thierry?

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

(Operator Instructions)

Our first question comes from Garik Shmois from Longbow Research. Please go ahead with your question.

Thank you.

Just wondering if you could provide a little bit more color on your comments around the leverage in the installation business for 2015? In your comments that the leverage is expected to be slightly below the 50% run rate that we've seen so far in the recovery -- is this mainly related to the one-off costs you're seeing in the first quarter that's going to weigh down the leverage in the business? Or is there something else that we should be thinking about?

Garik, thanks for your question.

Both my guidance and Michael's guidance said that we continue to believe that 50% through the recovery is good guidance. We've been trending a little bit above that. Our cumulative operating leverage over the last three years is a bit above 50%. We've said we believe for 2015 that we'll be slightly below that 50%, but we'll continue to be at 50% through the recovery.

I think you pretty much nailed it. Last year in the first quarter, we did have some cost benefits related to better utilization of our assets. It gave us a little bit better cost absorption and some other things.

If you look at our sequentials last year, in the first quarter, we had a significant pickup from first quarter of 2013 to first quarter of 2014. That's actually given us a challenge in the first quarter comp. It's really nothing to do with the fundamentals of the cash, the cash cost performance of the business or the revenue side of the business, or volume side of the business. It's really timing of cost benefit.

I would report that we had a fairly sizable Insulation price increase scheduled for early January. I think that's absolutely critical to our year in Insulation. And achieving those objectives, is that we get off to a good start in terms of pricing. And at this point, 45 days into the quarter, we feel pretty good about the market dynamic in terms of both volumes and Insulation through the first quarter, as well as what we're seeing in pricing developing early in the quarter.

Okay. Thank you.

And then my follow-up question is on Composites. You indicated that you anticipate $50 million or so of EBIT improvement for 2015. That's coming through in pricing. Can you provide an outlook on how much of that pricing have you already secured through your annual contracts? And how much of that is still dependent on your ability to get pricing as the year progresses?

Thanks, Garik. It's Michael. I'll take that question.

The one thing I would like to point out is that in 2014, I think the Composites business had a really good year; made a lot of progress on a number of fronts, including getting price; and also the assets ran really well for the year. As you know, about half of our volumes are subject to annual negotiations. Those annual negotiations typically take place late in the fourth quarter and early in the first.

I think we've made pretty good progress so far. We're pleased with the progress. And we'd say that it's probably broadly in line with the progress that we had made last year at this time.

Our next question comes from George Staphos from Bank of America. Please go ahead with your question.

Thanks for taking my question, and thanks for all the details, guys. Good luck in the upcoming quarter.

I guess the question I had is on roofing, and recognizing that a lot of the water still has to flow under the bridge before you can provide more guidance. If we look back at historical precedents where you have both a likely shipment decline, but also a pretty sizable deflationary benefit that will come to you that will accrue to you later in the year, what have been past case studies in terms of promotional and pricing, and for that matter, volume dynamic? Then I had a follow-on.

Okay. This is Mike. Thanks for the question.

You know, probably the closest proxy we would have to the kind of environment we see in 2015 would have been what we saw in 2009, where we saw a big run-up in oil prices followed by a very rapid decline. So it's a bit different than the kind of environment we see today because it was a run-up followed by a decline as opposed to, we've been in persistently high oil prices now for three or four years followed by this decline.

In that cycle, we did take price up as we saw the oil price inflation in the first half of the year. Then as oil prices peaked and we started to see deflation, the manufacturer, Owens Corning, we kept prices relatively stable in the second half of 2009 and margins widened out. I think if you look at distribution economics, that makes a lot of sense.

It's difficult as a distributor if you're distributing a commodity that's deflating to make money because your inventories are constantly revaluing on the way down. Our sense would be, as we get into the selling season, as we get into the second quarter, which is when we think we'll actually begin to see some of this deflation -- we're not going to see much of it here in the first quarter -- that as a manufacturer, the opportunity for us is going to be to try to help our customers with a price environment that allows them to make some money on the inventories that they have and allows us to take some of this deflation and repair some of the margin issues that we encountered last year with the price cutting.

Now, it's a very different theory of the year than what we talked about 90 days ago. 90 days ago, we came into the year thinking that we wanted to have a fairly quiet incentive season in the first quarter, and then we wanted to see if we couldn't get price going into the second quarter. We expected, in that type of an environment, we might actually do reasonably high first-quarter volumes in advance of expectations of increasing prices.

I think the environment we're in today is, we're expecting not only quiet pricing environment in the first quarter, but a pretty quiet volume environment. I think Michael talked about that. Today our customers have a bit of a wait-and-see approach to buying shingles and that makes a lot of sense, because there's not a lot of downside to them waiting to see. But our view would be -- the best thing that could happen for us would be stable pricing coming into the second quarter, which allows us to try to capture some of this asphalt deflation and get it to margin.

Mike, thanks for the details on that. Maybe a related follow-on -- two-part; quickly though. Do you typically see customers destock at all? And so, if you're of the view that the cost of something is going to be coming down overall because the major commodity is declining, that's part of the manufacturing cost, do you wait and see? And, if so, how long? And if the answer's no, that'd be great.

And then if we just look at the percentage margin that you're guiding to mid-single digits in the first quarter, since pricing is stable, should we assume most of that is just lost operating leverage that's driving the lower margin? Thanks again.

Let me address both parts of your question. We definitely believe we are seeing and will see a destocking behavior. It's not destocking in the classic sense, in that I don't think the channel is driving inventory down. I think it's destocking relative to last year, where at this time of year, we saw pretty much channel inventories beginning to explode with some of the incentives that caused the industry to ship about 35% of all the shingles in the first quarter, when probably out-the-door sales in the marketplace due to weather are certainly less than 25% of the year.

So we would have seen a fairly significant inventory build last year. Our sense is that we would expect inventory to be relatively flat; that we would ship about what the market's selling. And that purchases would ramp up with out-the-door as we start to see spring come and people wanting to reroof their house. That is causing some of the margin pressure that we talked about here in the first quarter.

As you might imagine, as we saw oil prices coming down in the fourth quarter, we tried very hard to drive our inventories down and reduce our purchases of asphalt in the fourth quarter to get our tanks empty. As you can imagine, in the first quarter, since we're not yet seeing the asphalt price translate through into our purchases, we're being very cautious about producing new shingles, because our sense is those shingles could be high cost relative to the shingles we might produce 60 days from now. So we're cautious in our production, which I think is good news.

So it's a little bit of a complex story in that we're really saying, Hey, good news -- we don't think we'll sell very much in the first quarter; we're not going to make very much in the first quarter; and all of that could result in an environment where we'd have the opportunity, at the end of the quarter, on a year-to-go basis, a lot of product left to ship on a year-to-go basis, a lot of product yet to produce. The product that we ship -- hopefully it's stable prices; the product that we produce, hopefully have much better economics than what we currently have. And that would be a way to get the business back on track. And, hopefully, put up some decent comps relevant to 2014.

Thanks for all the details.

Stephen Kim from Barclays. Please go ahead with your question.

I just want to revisit the Insulation operating leverage question again. You had mentioned that you'd be running a little lower. I think you mentioned there was a tough comp in the year-ago 1Q. But if I recall the Insulation business also has an Australian component, if I'm not mistaken? I was just curious, is FX an issue at all in your guidance here for somewhat lower incrementals in that business? Or it really just all about the year-over-year comp in Insulation? Thanks.

Well, let me clarify your comments regarding our Insulation business outside of the US. We have a reasonably sizable Building Materials business, which is primarily Insulation in China, which does quite well. But the Chinese currency has been relatively stable versus the dollar. We also have a fairly sizable Insulation operation in Canada. We report our segmentation of the business as North America; and, in fact, the market operates somewhat as a North American market from a production point of view.

I think most of -- ourselves and our competitors operate our production networks as a North American network. The markets are a bit separated because little bit different products, little bit different building codes, different sales organizations, different customer base. We do nicely in Canada. It's a good market for us. We would have some translational loss on bringing Canadian profitability back to the US.

Our goal in the year would be to try to offset some of that with maybe a little bit of better pricing environment in Canada. Typically we see on the margin, US production coming into Canada. And, obviously, the economics of taking US production into Canada have gotten quite a bit less attractive here in January of 2015 than they were in January of 2014. We actually are a little bit long capacity in Canada, so we tend to be able to service the Canadian market with our Canadian production, and even have a bit of swing capacity as it comes into the US.

So our view would be that there should be a little bit of upward pressure on cost for our competitors as they service the Canadian market and maybe we get a little bit of cost benefit, bringing some Canadian product into the US.

Okay. Sorry. I misspoke about that, the Canada (inaudible). Sorry about that. Thanks for the color on that.

The next question I had is with respect to roofing. First of all -- just housekeeping item -- you mentioned[$50 million estimated benefit. I just want to make sure if that was an annualized figure or if that was going to be just the back half impact?

Then I thought you also said something about asphalt prices hadn't dropped yet and your tanks were still relatively empty. Wanted to make sure I heard that correctly. Was that a comment for today? Or year end? Or did I just mishear that? Thanks.

So Michael made the comment in his prepared remarks that we were expecting to see $50 million or more of asphalt cost deflation in 2015 based on a set of assumptions. Let me walk through that set of assumptions.

That is a 2015 benefit in the way we characterize this. The assumption is that it takes two to four months and it depends on geography, refiner, crude slate -- all the variables that go into the economics of the petrochemical industry. But we see about a two- to four-month lag from the time oil prices move to what we see in terms of the purchase price of roofers' asphalt or roofers' flux. And roofers' asphalt and roofers' flux tends to be a bit more premium product than what you'd see on some of the paving markets. If you're [seeding] paving prices, you get a good read-through of what may be happening with roofers' flux, but it's not the same product.

So the real shift in crude, where we saw the most dramatic drop, was probably from the middle of November to the middle of December. If you fast-forward that two to four months, that puts you from mid to late January to mid to late March. So we think we're in the window now where, across most of our facilities between now and the end of the quarter, we'd expect to see asphalt prices that are priced off of lower crude input costs that materialize for the refiners in the fourth quarter.

We then said, it typically takes two to three months from the time we bring asphalt into our tanks before we put that into production. We obviously keep a safety stock of asphalt because you don't want to run out of input materials in your operations. We're trying to manage to our minimums today. You then have a product line with a number of SKUs in it, so you have to sort it through your inventory in terms of what you ship.

It does take us two or three months to really work those economics through our supply chain, so we would expect to see low-cost asphalt into our shingles and shipped sometime in the second quarter. That would produce $50 million or more of deflation in 2015, provided that asphalt comes down on that curve and then it comes down to its historical relationship to crude oil, which is pretty much a parity-type relationship once we get into equilibrium.

Our next question comes from Adam Rudiger from Wells Fargo Securities.

Thank you.

Can you tell us where you ended the year in prices both for insulation and roofing on a year-over-year basis?

Sure. Let me take that one and then I'll --

I'm just trying to take into perspective the shingle, particularly for shingles -- if you're going to be down more than 10%, want to know what the beginning price was relative to a year ago, so we can triangulate and figure out where we think Q1 roofing revenues will be down.

Okay. Insulation prices are obviously higher at year end 2014 than they were at the beginning of the year. We did not have as much price in the price increase in the first part of 2014, but we did have good price realizations through the summer and we came out of the year with better pricing coming into January. So we will comp positively on price in January of 2015 in insulation, both due to the price we're carrying over out of 2014, as well as what I said in my prior comments to a previous question, of good realization on the January 1 price increase.

On the roofing side of the business, prices are definitely below where they were this time last year. If you recall our narrative from last year, we hung in there pretty tough in the first quarter and then had to adjust our pricing in the second quarter to the market reality. So, in fact, our prices declined through 2014. But we're really stable from late second quarter through the end of the year.

In the first quarter, you would see some channel mix and some other things that would affect our net average price. We tend to measure price by geography and by channel. As we look at price by geography and by channel, we expect pricing in the (inaudible) quarter to be relatively stable versus where we finished the fourth quarter.

Okay, and then the scenario you talked about earlier, about not producing and not selling a lot right now, but potentially having a lot more to produce and sell later in the year, and the impact on margins, I think, could be pretty interesting. That will only work, though, if others are doing the same thing.

Do you have any sense, when you chatter out there, on what your competitors are doing from a manufacturing perspective, if they are doing the same thing? Or are there others that are producing a bit more now?

I'm not really in a position to comment on what our competitors' doing. I think that the basic math -- if you're a roofing manufacturer of -- input materials drive your costs and trying to time your production to make sure that you're producing product at the time of the year when your input materials are most advantageous -- I would say that's, I think, a generally accepted conventional wisdom across the industry. So I don't think any of our competitors would have economics that would look different than ours, or any of our competitors necessarily have a philosophy different than ours. But I don't know, in fact, what they're doing.

Our next question comes from Mike Wood from Macquarie Securities Group. Please go ahead with your question.

This is actually Ryan Hunter on for Mike.

This first question is about Composites pricing. How much of that was just carry-over?

So as I said earlier and in my prepared remarks, six consecutive quarters of pricing improvement. So we're really pleased with that. So clearly, there will be some carry-over that comes into the new year. We haven't specifically quantified that. Then, as I said earlier, we're pleased with the progress that we've made thus far in our annual negotiations.

Thanks.

And then in terms of your Insulation sales, up 1% year-over-year -- was there a hangover from prebuy with this? And on your positive pricing comments, does this pertain to the fall increase? Or also some successful January price action?

I'm not sure I caught all of the question.

Our outlook for Insulation, really through the first half of the year, is driven off of the amount of price we carried over into the year, which is really from the summer increase, as well as our expectations that we'll have decent price realization of the first-quarter price increase, which was really a January 1 increase through to first quarter and then into the second quarter.

So it's those two pricing actions that are really affecting us. The January 1 price increase was announced in the fourth quarter, so you may be thinking there were two price increases out there. But it was a fourth-quarter price increase that was effective basically at year end.

Okay, great. That clears it up. Thank you.

Our next question comes from James Armstrong from Vertical Research Partners. Please go ahead with your question.

Good morning. Thanks for taking my question.

In relation to your Insulation business and the progression of inventories, given your housing starts estimates are you likely to keep inventories lower into the back half of this year versus what you did last year?

You know, that's something that we obviously spend a lot of time on in terms of our forecasting, is trying to determine the timing of inventory -- the timing of Insulation demand and then determining the production strategy that will give us the optimal economics. I think we talked in prior calls about the nature of glass melting assets; that leverage is very important in those assets. So if you get a smelter running, you want to keep it up and running and you want to run around the clock.

So typically, because we see better second-half demand than first half, it almost is conventional wisdom coming into the year that we're going to build inventories in the first half in order to keep our assets running and shift capacity effectively through inventory from the first half of the year to the second half of the year and then outship our capacity in the second half. So that's a fairly normal cycle.

Expectations of growth the following year start to play into that, because you need a certain amount of inventory each year. So that inventory's going to have to grow as we have a bigger business so that we can continue to meet demand in the second half of the following year.

I think we were working inventories down a bit in the second half of last year, mostly related to -- volumes were just a little bit on the low end of most of our estimates as we went through the year. So we started adjusting inventories in the back half. We've said current estimates for housing starts are between 1.1 million and 1.2 million. I think consensus is 1.160 million. We're setting our production plans at the low end of that range, giving ourselves some flexibility to be able to step up production in the second half to meet that. But even with that, we would build some inventory in the first half of the year in order to meet second-half demand.

Okay. That helps.

Then on Composites, how are you doing on getting to your goal of 75% of your facilities being low-cost?

That is a great question.

We've done a lot of work over the last four or five years on the Composites portfolio, both from a restructuring point of view, where we spent a fair amount of cash, but also putting in place new low-cost assets. And the business is essentially almost at a pivot point. As we sit here today, we're in striking distance of the 75% low delivered cost goal. If you take the closures that we announced in the third quarter, one in Japan, one in Canada, it actually puts us above that goal. We've made really good progress. We're pleased with what we've gotten accomplished and kind of see ourselves at a tipping point as we move forward.

And maybe I'll add a little bit of additional color on top of Michael's remarks.

I think you also are starting to see a bit of that benefit coming through on the capital side. And then I think you'll start to see that benefit coming through on the cash-restructuring side. So we have had a fairly sizable capital investments and cash restructuring costs in Composites over the last five years in order to achieve that position.

Our guidance this year on capital was around $350 million of capital, but includes a $50 million investment for a new nonwovens facility. In fact, if you exclude that growth investment, our overall underlying capital spending is below depreciation in our outlook for 2015. It's been a bit of time since you've been able to see us get to those kinds of levels of capital spending. And I think that, combined with much less cash-restructuring costs, gives us not only a better outlook for Composites' cost position, but certainly Composites' cash flow position.

And our next question comes from Keith Hughes from SunTrust. Please go ahead with your question.

During some of your comments on distributor channel inventories and others in this push forward of demand, is the industry facing a situation, if there was strong storms, or strong spring demand, could there be shortages in the market?

You know, that's a great question, Keith.

I would tell you, I've been around this industry for a long time. That's not an unusual condition, for there to be shortages when storms hit in the spring. It just hasn't been the reality of the market for the last three or four years because there have been these big incentives in the first quarter to push a lot of inventory out there. So I don't know that you'd see nationwide shortages, but given cautious inventory positions on the part of the distributors, if we were to see some big spring storm activity, I think you'd find some regions of the country with a storm activity that would be short inventory. Then depending on how the different manufacturers played it, you might find that the manufacturers take longer to respond with production to meet the needs of that market than they have historically.

One of the advantages we believe Owens Corning has is, we have a regional capability where we can make products that are combinable on the roof in multiple facilities; and we call that the regional shingle program. And that sounds like something that's fairly simple to do -- which is make a black shingle in two different facilities that looks alike on the roof. But it's actually quite complicated, and we have very good technology to allow us to achieve that.

So we would believe that if we were to see some shortages and a lot of demand, that it would not just be an issue of turning up one facility that's maybe closest to where there's shortage, but we would be able to use our regional model to turn up production in maybe a couple other facilities and have them come in and help and assist the facility that services that trade area.

So we look at that a lot. That's a lot of our planning. I would say we are not driving inventories down to bare bones because of that reality. You could be more aggressive than we're being because of the idea that we want to be able to support our customers and certainly support people who are affected by storm damage. We're going to be on the low end of what is a normal safe zone and I think you could see shortages if we saw stronger demand.

Okay. Second question, Composites benefit, I believe in the fourth quarter, from some type of settlement. Can you discuss what that is and how much it helped the core?

Sure, Keith. It's Michael.

It was a legal settlement in Japan, about $4 million.

Our next question comes from Philip Ng from Jefferies. Please go ahead with your question.

Good morning, guys.

Free cash flow for this year from a conversion standpoint was a little lighter than we would have thought. I would imagine part of that is some of the excess inventory in the channel, in your system. Do you expect working capital to be a source of cash? And how should we think about free cash flow conversion over the cycle?

Well, let me take a high-level comment about free cash flow and then I'll let Michael talk a bit about working capital.

One of the headwinds on free cash flow, because we tend to measure against adjusted earnings, is a lot of the restructuring costs that we've had in Composites, in fact, were cash. So the cash flow statement doesn't lie. If you have those costs and you adjust them out of EBIT and use that as the denominator, you're going to show a little bit weaker cash conversion. I think that's mostly behind us. So we're pretty optimistic with our tax position, that if we can get to levels of cash restructuring and adjustments that really would start to come out of the numbers, which we do think is, for the most part, behind us, that at least EBIT conversion to cash flow will become better.

And then I made some comments about CapEx, which then leaves you working capital. So I made comments about tax. You've got a decent tax position, EBIT translating through to free cash flow. And then where we are in working capital, I'll let Michael take that.

Thanks, Mike.

Working capital for 2014 was broadly in line with the previous year. As we look forward to 2015, while I won't give you specific guidance, it would be my expectation that on a finished goods perspective, we made some decent progress in two of our businesses, Composites and Insulation. We're going to be pretty aggressive with our suppliers as well this year. I would be disappointed that on the payables side if we didn't make some progress as well.

Okay. That's helpful.

On the corporate expense side, you guys are guiding a step up in 2015. What's driving that? Is that mostly pension expense? I would have figured it would be flat to down, perhaps, due to some of the streamlining you guys are doing at the Management level.

Good question. And maybe it wasn't clear in my prepared remarks.

But if you go back a year ago, we guided to about $120 million to $130 million of expense. That's what we're guiding this year as well. The biggest difference, year on year, was incentive compensation, and we're hopeful that incentive compensation comes back to more normal levels this year.

And related to the BMG group elimination of simplifications organization, we, in fact, do have a decent cost realization out of that. We would see about $8 million to $10 million lower cost as a result of that move. Most of that cost is reported up through the Insulation business and the Roofing business, so you wouldn't see that in the corporate number. It does give us a little bit of earnings relief in Roofing and Insulation, opportunity to invest in growth programs.

This is Thierry. I think we have time for one last round of questions.

Our next question comes from Dennis McGill from Zelman & Associates. Please go ahead with your question.

Thank you.

Mike, just on the asphalt assumptions that you laid out, what does that imply that the costs would be down in the fourth quarter year over year? And then, just based on the historical relationship, is there anything you can think of that would prevent that relationship from holding?

Let me take the second part of your question first and then I'll come back to the percent change.

Typically, the time -- if asphalt is going to not trade in sympathy with crude oil, that typically is in the summer and it has to do with paving, and whether the refiners are incentivized to make more paving asphalt and how much government money is going into infrastructure and paving.

Because we expect the bulk of the movement in asphalt prices to start to come at about the same time where paving demand would start to ramp up, we do think the refiners may have some options in terms of where they want to go with the bottom of the barrel or the heavier end of the barrel. And we may not trade all the way back to the historical relationship of roofers' asphalt to crude oil. So that's I think something we're watching.

I don't think that effect could ever be so large that we wouldn't expect to see fairly significant deflation over the course of the next two or three months, but it could mute the amount of inflation we see in terms of coming all the way down. I think if you look at fourth quarter versus fourth quarter, let's say -- let's say third quarter versus third quarter, that might be a little bit cleaner comparison -- I think if you took average crude oil price in the third quarter of 2014, you took the forward curve for crude oil in the third quarter of 2015, the ratio of those two numbers would be about our expectation of the percent decline that we'd expect to see in asphalt.

Okay. That's helpful.

And then just lastly on the Composites business -- a lot going on internationally as far as just uncertainty and slowdown in some of the regions. Can you walk through what you're seeing demand-wise across Europe and maybe China specifically?

So I would say our businesses outside of the US are broadly in line with expectation. Europe's fine. Obviously we have the facility in Russia, which is relatively small, which isn't a great environment. But we actually think we can actually turn that into an opportunity, given its pretty low cost. And China so far is fine.

And, ladies and gentlemen, at this time we have reached the end of the allotted time for the Q&A session. I would like to turn the conference call back over to Management for any closing remarks.

Thanks, Jamie. Thank you, everyone, for joining us to the call today. With that, I would like to hand it over to Mike for some final comments.

Well, thanks, Thierry.

First of all, we always appreciate your interest in our Company and thank you for all those good questions. Obviously, we tried in this call to be very helpful in giving you an understanding of some of the opportunities and also challenges we face going into 2015.

When we look at the year and look at the keys to success for 2015, I think a lot of the prerequisites for a successful 2015 in Insulation and Composites are in place. We feel like we have stable demand, expectations of housing growth in the United States, good pricing environment with decent comps here in the first quarter relative to the first quarter last year, relative to where we were through the middle of last year; predictable volumes that are giving us very good manufacturing performance.

And we'd expect to see the kind of momentum we've had in Insulation over the last couple of years continue through into 2015. We would expect to see the kind of momentum we saw in 2014 in Composites carry-through. I think Michael talked about the offset that we would expect to see to that momentum due to foreign exchange. Obviously, that's a bit of a headwind. It's a translation issue for us, though; it's not a strategic issue. We tend to make product in the geographies where we ship it and sell it. So our cost position and our asset base is well-positioned to serve the markets where we're competing.

The other side of the coin, in terms of getting off to a great start in roofing, is a bit more unconventional. We're seeing a great start in roofing this year; would sound and look like weak volumes and stable pricing, leaving us the opportunity on a year-to-go basis that, coming out of the first quarter, we would have deflating costs, the ability to expand our margins with good volumes for the remainder of the year. And then, depending on the amount of deflation we see, either the need for maybe some pricing through the second part of the year or through the mid part of the year to make up for some of the margin we lost last year; or potentially enough deflation that we could overcome the headwinds that were experienced in 2014 around price and get margins back to something that reminds us of the roofing business that we've come to love so much over the last couple years.

We think we've got our hands on the right levers in the business. We're off to the kind of start that would be consistent with producing a good year. But at the same time, I think we've tried to be very clear on this call that we have additional information that's going to need to play out in our roofing market over the next couple quarters before we feel comfortable giving full-year guidance.

That said, the Company's in great shape. We have a wonderful balance sheet, great cash flow generation capability, assets that are running at low costs, and markets that we expect to grow over the next couple years. So we're excited about the prospects for 2015 and beyond, and certainly very happy to see all three of our businesses contributing materially to our financial performance.

As I said earlier, and as Michael said, this is a better Company when all three of our businesses are performing at good levels. And we're on track to go from all three businesses performing at good levels to all three businesses performing at very good levels as we work through the next couple of years. We look forward to joining you again on our first-quarter call.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.