Owens Corning (OC) Q2 2008 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Second Quarter Owens Corning Earnings Conference Call. My name is Carmen. I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer towards the end of this conference. [Operator Instructions]. As a reminder, ladies and gentleman, this conference is being recorded for replay purposes. I would now like to turn this presentation over to your host for today's call, Mr. Scott Deitz, Vice President-Investor Relations. Please proceed.

Thank you, Carmen. 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 second quarter of 2008. Joining us today are Mike Thaman, Owens Corning's Chairman and Chief Executive Officer; and Duncan Palmer, our Chief Financial Officer. Following our presentation this morning, we will open this one hour call to your questions. Please limit yourselves to one question and one follow-up, so we can answer as many of your questions as possible during the time we have together. Earlier this morning, we issued a news release and followed that with a filing of our Form 10-Q, both of which detail our results. In addition, we've posted presentation slides that we will refer to during this conversation. For those who of you participating via the internet or if you are near your computer, you can access the slides at owenscorning.com. There, you will find the link to the slides on our homepage. There is also a link on the Investor Section of our website. This call and the supporting slides will be our archived, and available on our website going forward. And please remember this call is being recorded. But before we begin, just a few reminders, today's presentation will include forward-looking statements based on our current expectations and assumptions about our business. These statements are subject to risks and uncertainties, and our actual results could differ materially. Please refer to the cautionary statements and risk factors identified in our SEC filings for a more detailed explanation of the inherent limitations of such forward-looking statements. We ask that you understand that certain data included within this presentation contains non-GAAP financial measures. Today's prepared remarks will exclude items that affect comparability. Those excluded items are captured in our GAAP to non-GAAP reconciliations found within the financial tables of our earnings release and our quarter two 10-Q. For those of you following along with our slide presentation, we will now begin on slide 4. Now, I'm pleased to introduce Chairman and CEO, Mike Thaman, who will be followed by CFO, Duncan Palmer.

Thanks, Scott. Good morning, everyone. Earlier today, we reported second quarter results for 2008. I'm pleased with our performance. Results for the quarter demonstrate the strength of our business portfolio, as well as, our ability to execute in the face of inflationary headwinds and continued weakness in the U.S. housing market. For the second quarter, sales were $1.6 billion, up 23% compared with the same quarter last year. Revenue for the first six months was up 22% over the first half of 2007. Adjusted EBIT during the quarter was $77 million, compared with $92 million last year. For the first six months in 2008, adjusted EBIT reached to $131 million, down from a $151 million during the first half of '07. The composite segment has had a positive impact on our results. However, it has not been enough to fully overcome the commodity inflation that we've experienced or to overcome the continued demand and selling price weakness in the U.S. residential insulation market. During the past six months, we laid out many of our goals for 2008. I would like to review our performance against these objectives. We said that composites margins would approach double-digits for 2008. They were 11% in the second quarter, supporting that goal. We said the composites business would service as a platform for global growth. Yesterday, we announced the significant capacity expansion at our facility in Russia. We said that our Insulation business will be profitable in 2008. It is on track to achieve profitability for the full year. We said that our Roofing and Asphalt business would return to profitability during the second quarter. It did, with a $54 million EBIT turnaround compared with the first quarter of this year. We said that we will maintain a strong balance sheet and buyback stock when we thought the time was right. We did so, buying back more than 1 million shares during the quarter, while maintaining our net debt at comfortable levels. We said that we would improve our safety performance on the road to a zero injury workplace. Year-to-date, we have reduced our rate of workplace injuries by 45% compared with 2007. Given the strength of our year-to-date performance, I am pleased to increase our outlook for the year, to at least $265 million of adjusted EBIT, an increase of 10% from our prior guidance. Now, we will review each of our businesses. Continued growth in our composite business highlighted the quarter. For the first half of 2008, composites represented 44% of Owens Corning's total reportable segment sales. Sales in this business during the second quarter were up 70%, compared with the second quarter of last year. EBIT margins continued to show improvement, reaching 11% during the second quarter compared with 7% during the same quarter, last year. Well, we may see some seasonal weakness in our EBIT margins in this segment during the third quarter; we continued to be comfortable that margins will approach double-digit for the full year. We are capitalizing on our expanded global presence, especially in emerging markets. We are pleased to have announced the expansion of our glass fiber manufacturing facility in Russia, which will come online at the end of 2009. This investment in our plant in [indiscernible] allows us to benefit from strong market demand in Russia, Europe and the Middle East. The glass fiber we produce there will serve growing global markets like wind energy, infrastructure and construction. During the past quarter, investors in the financial media began to recognize the value of our position in the wind energy market. Today, about 10% of our revenue in composites results from wind energy sales. It is a fast growing market. Wind energy generates just over 1% of the world's electricity. Wind energy in terms of megawatts generated is expected to grow at an average of greater than 15% annually over the next decade. The mono glass fiber in each window blade is significant. There are about 18 tons of fiber glass in each window, 6 tons per blade. Wind is an immediate and long-term growth opportunity for Owens Corning. Shifting to our Building Materials Group, our Insulation business continues to face a very difficult market in the U.S. For the quarter, insulations sales were down 6% compared with the second quarter of last year. EBIT margins were 2% compared with 10% during the comparable period in 2007. Volumes were down and prices on certain products continued to be under pressure. We experienced significant inflation in our raw material energy, labor and delivery costs. Given escalating inflations, we announced price increases, our first since 2006 across a wide range of installation products both residential and commercial. Now, onto Roofing and Asphalt, I'm really pleased with the work of our team and I congratulate them. They are doing the right things from productivity to price to innovation. Despite the continued weakness in residential construction and home repair and remodel, our Roofing and Asphalt business delivered strong performance. Productivity improved in our plans. We are seeing the margin improvements that we expected. Our duration shingle with SureNail Technology is a market success. Our results benefited from higher selling prices required to off set raw material cost inflation. We also saw strong related demand for our shingles throughout the quarter that had carried momentum into the third quarter. The impact of the housing downturn has been greater than we have anticipated in our other builder materials and services segment. We have taken, and we'll continue to take further actions to improve the profitability and cash performance of this segment. Before turning to Duncan for a more detailed review of our performance, I'll provide a look ahead for the remainder of the year. I'm pleased with the progress we've made during the first half of the year and integrating the acquired composites business, and growing that business to create immediate value for our shareholders. The strength of our business portfolio is offsetting some of the domestic weakness we see in the U.S. housing market. Our global composites growth has transformed Owens Corning, and positioned the company for powerful performance. In composites, our focus during the second half of the year will be on continued successful integration of acquired assets as we execute against targeted synergies and worked to overcome raw material and energy inflation. Our global composites organisation excels in creating and making innovative glass fibre products that are one step ahead of our customers' needs in mature and emerging markets. Matching innovation with our customers' evolving needs is a formula for growth. There is little doubt that use of glass fibre composites will continue to replace traditional materials like steel, aluminum and wood as a lightweight, non-corrosive and affordable alternative. The opportunities in this business have few limits. As noted earlier, we expect our insulating systems business to be profitable in 2008. We will continue to manage our insulation capacity and cost structure to stay in balance with market demand. We expect to increase our re-insulation sales by more than 10% compared with 2007. We will continue to communicate the vital role that insulation plays in saving energy and preventing Greenhouse gas emissions. 60 million homes in the U.S. are under insulated. Buildings consume 40% of our energy and account for almost 45% of our Greenhouse gas emissions. This is a significant market opportunity for Owens Corning. Energy costs and the environment are issues about time, Owens Corning offers real world right now solutions. In our Roofing and Asphalt business we will work to sustain the gains we achieved in the second quarter. Additional steps are being taken to further reduce our costs to support pricing in the marketplace and to drive value for our customer to improve our financial performance. In summery, Owens Corning is delivering results. Our focus is continued growth, winning with our customers, maintaining a strong balance sheet and the consisting creation of shareholder value. With that, Duncan, will further review our performance during the quarter, and touch on other financial items of interest. Then we'll turn to your questions. Duncan?

Thanks Mike. Let's start on slide 5, where we detailed key financial figures for the second quarter of 2008. You will find more detailed financial information in the financial tables of today's news release and the Form 10-Q. Today, we reported second quarter 2008 consolidated net sales of $1.6 billion, a 23% increase compared to 2007. This growth was driven by two of our business segments. Composites delivered increased sales as a result of the company's acquisition and strong global demand for glass fiber reinforcements. Owens Corning Roofing and Asphalt segment delivered increased sales during the quarter as a result of price increase we put in place to offset raw material cost inflations and storm related demand for roofing products. Second quarter net earnings totalled $31 million and diluted earnings per share were $0.24, this compares to net earnings to $29 million and diluted earnings per share of $0.22 for the same period in 2007. As a reminder, when we look at period-over-period comparability, our primary measure is adjusted earnings before interest and tax, adjusted EBIT. In just a moment I'll review our reconciliation of items affecting comparability to get to the adjusted EBIT. These items totalled $13 million in the second quarter of 2008, compared to $16 million during the same period in 2007. Our adjusted EBIT for the second quarter of 2008 was $77 million compared to $92 million in 2007. Adjusted earnings for the second quarter of 2008 were $33 million or $0.25 per diluted share, compared to $41 million or $0.31 per diluted share in 2007. In the second quarter, marketing and administrative expenses increased by $29 million, but fell flat as a percent of sales compared to 2007. The increase was attributable to operating required composite business in 2008 and increased transaction and integration costs related to the acquisition. Depreciation and amortization totalled $79 million for the second quarter. We currently estimate our depreciation and amortization will total approximately $315 million in 2008. Our capital expenditures totalled $73 million in the second quarter, excluding purchases of precious metal. Net debts decreased to less than $2 billion at the end of the quarter. Cash requirements for seasonal increases and working capital, capital spending and share repurchases will offset by divestiture proceeds. The improvement in second quarter 2008 adjusted EBIT, versus the first quarter 2008, with the results of increases in Roofing and Asphalt and composite solutions. Partially offsetting theses increases would decline in insulating systems, other building materials and services and incorporate. Now, if you move to slide six, you will see an illustration of adjusted EBIT performance, comparing second quarter 2008 with first quarter 2008 results based on the business segment contribution. We've provided this to show how our business segments have evolved over the year. The $27 million increase in corporate expenses was primarily a result of increased performance based compensation expense, foreign exchange effect and a $9 million increase in charges of other inventories using the LIFO accounting method. The increase in charges for LIFO was largely due to escalating Asphalt costs. The $54 million improvement in Roofing and Asphalt EBIT was due to price increases put in place to offset raw materials cost inflation and increased roofing product demand related to storm activity in the United States. We are pleased with the $7million growth in composites solutions EBIT during the second quarter. Performance improved, despite the divesture of Battice and Birkeland in the quarter. As you may recall, the first quarter included the full quarter operation results related to the Battice and Birkeland operations, while the second quarter only increased for the month of April. The $9 million decline in the insulating systems business was primarily related to lower selling prices and increased energy and delivery costs. Moving to slide seven, you can see the detail associated with the reconciliation of our second quarter 2008 adjusted EBIT of $77 million to reported EBIT of $64 million. We provide this as a better measure of our current operating results. As part of the integration of our composites acquisition, we have an ongoing program to improve our efficiency in the use of precious metals as production tooling, which enables us to reduce some metal lease obligations. This program is ahead of schedule and we were able to sell excess precious metal freed up from our combined operations during the quarter, and to use the proceeds to purchase other precious metal to retire some of our these portfolio. During the quarter, Owens Corning's sold precious metal that resulted in the net gain of $22 million. As part of the investments to combine the acquired Saint-Gobain business with our composite solutions operations, we are on track to achieve at least $30 million of savings in 2008. We incurred $20 million of integration and transaction cost in the second quarter associated with the achieving these savings. Next, as you have seen in prior quarters, we adjusted for the non-cash amortization of costs associated with the Employee Emergence Equity Program, a total of $7 million. You will recall that shares of company stocks were awarded to employees at the time of our emergence from chapter 11 in 2006. These shares have a three year vesting, and will be amortized in the P&L until October 2009. We have also included a $4 million adjustment associated with the ongoing completion of our $100 million cost reduction program announced last year to drive 2008 results. Also, as we have discussed in the first quarter call, we viewed the cost of leasing precious metals used in production tooling to be a balancing cost. As a result, the $2 million expense in the second quarter has been excluded from adjusted EBIT, but has been included in our calculations of adjusted earnings per share. With that as background, turn to slide eight, and we will begin a more detailed review of our business segments, starting with composites. Year-over-year net sales in composites were up over 70%, approximately three quarters of the growth in sales was driven by the composite acquisition, net of the divestiture. Composite is serving us well in the midst of market weakness in U.S. building materials. We estimate sales in the second quarter outside the U.S. and Canada was approaching three quarters of total composite revenues. Second quarter EBIT was $71 million compared to $26 million in the second quarter of 2007, up 173%. EBIT, as a percent of sales was 11%. During the third quarter, we may see some weaknesses in EBIT margins consistent with seasonality, especially in Europe as well as facilities shut down temporarily for plants furnace rebuilds. We are comfortable with our guidance that composites will approach double-digit EBIT margins in 2008 as a whole. Next, onto slide nine our insulation systems business. According the senses bureau, U.S. seasonally adjusted annualized housing stocks have been approximately 1 million units year-to-date, a 30% reduction from the same period, last year. Our Insulation business is clearly feeling the impact of the decline in new housing stocks, fewer existing homes being sold, highest mortgage credit markets and further declines in home values. Net sales in this segment were $413 million in 2008, down 6% compared with 2007. About one half of this decline was due to a reduction in sales volumes and product mix. The remainder was due to lower sales prices as a result of competitive pressures. The insulation business remained profitable in the very weak U.S. housing market. EBIT for the second quarter of 2008 was $7 million compared with $42 million in 2007. We continued to expect that the Insulation business will be profitable in 2008. Next, slide 10 provides an overview of our Roofing and Asphalt business. Sales are $475 million in the second quarter of 2008 increased 15% from the same period in 2007, primarily related to price increases to partially offset the impact of inflation in raw materials, primarily Asphalt, and delivery costs. In second quarter 2008, our Roofing and Asphalt segment earnings, before interest and taxes were $37 million, a 28% improvement over the second quarter of 2007. The improved profitability over the second quarter of 2007 was due to increased manufacturing productivity resulting from higher capacity utilizations, supported by increased storm related demand. Next, are the Building Material and Services on slide 11. This segment is comprised of our masonry products business and our construction service business. Second quarter 2008 sales of $69 million, were down 21% compared with 2007, primarily due to declines in our masonry products business resulting from continued weakness in new construction and repair and remodeling. The decline in product volumes and increase idle facility cost in masonry products resulted in a second quarter loss in the overall segment to $5 million, compared to a profit of $7 million in 2007. Moving to slide 12 and 13, a couple of other items before turning to our Q&A. We repurchased slightly more than 1 million shares for approximately $24 million in the second quarter. After the June purchases, we have approximately 5.5 million shares remaining under the announced share buyback program. We are increasing our capital expenditure estimates of $325 million to approximately $350 million for the full year, excluding precious metals. The increased capital will be targeted to achieve growth and synergies in the composites business, as well as, to accelerate energy reduction programs in all of our operations. Now, some guidance regarding 2008 taxes. We expect that our overall cash taxes paid in 2008 will be less than the $40 million paid in 2007. Our 2008 effective tax rate for our U.S. operations will be about 35%, and our effective tax rate for our non-U.S. operations will be less than 25%. The blended average of these may vary significantly quartet-to-quarter, as the mix of business varies across the world. Given the rapid inflation in energy over the past year, we have decided to provide some additional information regarding our energy purchases. As we have discussed in the past, energy is an important component of our cost structure. Natural gas and electricity associated with our manufacturing operations represents about 10% of our overall cost of sales. In 2008, natural gas represents approximately 60% of this spent. At current utilization levels, the composite solution segment represents approximately 60% of the spent with our insulation system segment representing majority of the rest. We mitigate some of the volatility related to energy costs by hedging a portion of our exposure, with a primary focus on the next six months. Given the challenges in the Building Materials markets, we continue to be pleased with the strength of our balance sheet. We estimate net debt will be at or below last year's UN level. Our liquidity positions remain strong with $121 millions of cash on hand and $748 million of unused committed credit lines available at the end of the second quarter. We have access to more than sufficient funds for our investment plans; share repurchases; and corporate financing requirements. With that Scotts back to you for Q&A.

Thank you, Duncan. And thank you Mike. Carmen, we are now ready to begin the Q&A session if you would like to invite callers to join us. Question And Answer

[Operator Instructions]. And the first question comes from the line Ivy Zelman from Zelman Associates. Please proceed.

Good morning, guys.

Good morning, Ivy.

Very impressive results in this marketplace and definitely I'm sure you are happy. One of the things that I wanted to focus into on is the concern we have about the non-res slowing and kind of your thoughts on the impact that will have on your business over the next 12 to 18 months, and may be ways to mitigate the expectation of that slowing? And then just secondly your EBIT margins were up like in the first half at 10.2 for composites realizing on the seasonality involved. If you can kind of give us an expectation is that sustainable into the second half and what your expectation specifically is for that business segment?

Okay.Well, first of all, thanks for your kind words. We are very happy with the quarter. And saw a lot of progress in the things that we had our eye on and trying to progress. So, it's nice to be recognized for that. Regarding the non-res particularly as it relates to insulation, we don't do much in terms of non-res on the roofing side or another building materials and services. So that will be primarily an insulation exposure. Our business plans are built, believing that we will begin to see some slowdown on the commercial and industrial side of the business. So, that's a pretty good segment for us and is relatively stable. And we are making reasonable profits here today. So, we don't think it will slowdown dramatically. This is similar to what we've seen in res. I mean, we've res come off almost 60% from its peak. But we are prepared for the slowdown. So, our guidance that says we will continue to make money this year I think incorporates our belief that we still will see some additional slowdown in commercial and industrial this year. On the composite side, I think Duncan's comments, he talked a bit about we do expect that media margins will weaken a little bit in the third quarter. Obviously, the business is so much more non-US today than it ever has been historically. So this is a little bit different seasonality pattern for our composites business then you get from looking at historical numbers. But with our significant exposure to Europe in particular, and Europe typically being fairly weak, particularly in August, we will expect to see composites be a bit weaker related to the market in the third quarter. And then we will also expect because of some of the things we are doing in capital programs that will have a couple of a very important low cost facility going for capital programs and things which are just timing issues, that will come back up, lower costs and better facilities when we are done. So, given that, we are still comfortable saying we think margins will approach double-digits for the year. Obviously, on a year-to-date basis we're there. I think we want to see, where the economy is in the U.S. and Europe, how strong demand is before we really declare that we're going to get all the way to that goal of double-digit this year. Certainly the momentum we saw in the business in the second quarter gives us a lot of compliments. We feel great about the business.

Hey, great Mike. One more sneak it in, housing starts, what's your expectations for this year and next that you are assuming into business place?

We had said coming into the year that we though starts to be kind of somewhere shy of a million. I don't think we have a really kind of pin do it number, but at the time we first talk about our guidance for the year, we thought kind of $952 million range. I think that's still above where we are. I mean year-to-date start to been about a million. There were a little bit weaker in the second quarter. So, we would expect that the full year will probably come in less than a million, and I think that's pretty consisting with consensus. I mean just a note, I think since consensus started keeping records, that's the first time housing starts were been less than a million if this impact happens since 1959 when they started publishing these numbers. So, it's bad out there. The consensus seems to be that we're going to continue to see this for another year. And we might even see a second consecutive year less than a million. We are certainly building our business plans as we go into our planning season here in the fall or not counting on the big market turnaround or to drive performance. And I think some of the things you saw through this year in terms of cost performance productivity, trying to drive innovation, being out with our customers and build their business, give them new ideas to make money would be the way you'd see progress in our business next year as supposed to counting on, the macro markets somehow moving our business forward. So, we'll be positioned better for market gets stronger, faster that we can take advantage of that but we're not counting on that.

Great. Thank you very much.

Thanks Ivy.

Your next question comes from the line of Keith Hughes from SunTrust. Please proceed.

Thank you. A following up from the last question, given the international focus of composites, have you... and just some negative news there as well. Have you seen any change and the sales pattern there in the last 3 to 4 months? And as a follow-up could you kind of breakout besides the windmills, what other are the bigger pieces now in the current mix of the composites segment?

Well. Thanks for your question, Keith. I don't think at least in terms of what we've seen so far in our order book, we've really seen any weakening or change in the pattern of orders. I think it's fair to say that there is a little bit less confidence, particularly in the U.S. and Europe related to the some of the economic news. But I wouldn't say we yet seen that translate into to weakening in our business. I think one of the reasons that's true is there are couple of core segments in this business where the confidence is very, very strong and in some capacities kind of cyclical to some of the bad news. So, with high energy costs with high oil prices which is putting pressure on economies recently developed world, wind energy is getting more competitive when we are seeing the wind guys get more excited and more confident than ever before. So, that portion of our business would be one, where we see lot of strength. We are certainly seeing a lot strength in some of the oil economies and particularly Russia. I think... you saw our investments today that we are expanding the facilities that we bought in [indiscernible]. The Russian government has committed to a trillion dollars of infrastructure investments in the coming years and we are trying to invest ahead of that and make sure that we have capacity on the ground in Russia to service that demand. And we'll continue to see strong demand for pipe and infrastructure type of products associated with Middle East and also associated with oil industries. So, we got a couple of... kind of cyclical place whereas oil prices go up. We are in economies are benefited from that; we are in applications that benefit from that. And then I think some of the more mature applications like automotive and transportation applications were probably feel some pressures. So, on balance, I think still feel very good about the demand profile.

Thank you.

And the next question comes from the line of Keith Johnson from Morgan Keegan. Please proceed.

Good morning.

Good morning, Keith.

Just a quick question. Could you give us a little bit of color of how much of an impact, the inflationary environment has had kind on a year-over-year basis in your operations?

Well, let me kick that off and there maybe Duncan can lever of some of the comments he made. We did try to be a bit more... had a bit more disclosure in this call, regarding our overall energy costs. So, I will let him talk a little bit about that. I think beyond that, the other specific place, I would like to maybe make a mention would be, our other big inflation item is typically asphalt and the roofing business. So let me speak to that and then I'll let Duncan to speak to energy. On the roofing side of the business, we've seen a really rapid run up in asphalt costs, and despite the fact that there is going to lot of pricing action in the marketplace, we actually did not recover all raw material cost inflations in the second quarter with the pricing action. So, our pricing has been favorable and that we've been able to go out and try to recover our asphalt cost and our raw material cost. But in fact in the second quarter we weren't able to do. And we are still lagging behind a bit. And I think that makes the second quarter performance over roofing business, all that much more impressive. We did last year and in effect had a negative variance of price to inflation. And all the benefits that you see coming through in that business has been on the cost side and the productivity side and the mix side. So, while the storms have helped bolster weak demand and pricing has helped us offset some of the raw material costs, really [ph] our roofing is been excellent execution on the cost side and really good execution in the market in terms of mix and innovation. As we look into the third quarter, if oil continues to stay off the top, we may be see some release in asphalt inflations and that point of pricing actions may actually fully catch up with inflation. Our good cost programs will continue to stay in. And we think some of the strong related volume in the first of the year gives a carryover. So, we think the position for roofing heading into the third quarter is very stable and we have good momentum in that business. So, that's kind of special item related to Owens Corning, which is our asphalt associated with roofing. I'll now let Duncan make a few comments about energy more general.

Thanks Mike. We talked in some of my comments today about our overall gas and power usage. And we disclose that these are running at about 10% of our overall cost of sales. In terms of what we are using that for a lot of deposits is in areas where we melt glass, we use gas and power in those operations. At the moment, current utilization levels on a... I say current utilizations levels of the insulation is running low utilization levels and maybe a start phase run out one, but about 60% of our overall energy, gas and powers is being used in composites and about most of the rest of the insulations. As we appreciate that composite usages both in the U.S. but also heavily outside the U.S. So, we are exposed to gas and power markets not just as a U.S. matter but also as a global matter. And so that were the kind of way in which prices get set and when there were market prices and what I linked to obviously depending on what geographies they are in. But overall, we had a program of usage of gas and power across the world, across mainly melting business. It's about times and our cost of sales. We do hedge some of our exposure, ready to take some of the volatility out of our spend. We're not trying to necessarily pick price, we don't think we have any particular set of crystal bowl where we can guess prices better than market. We're all trying to take some volatility out. We tend to focus mainly on the next six months in terms of how we take that volatility out in terms of hedging. So, we do have a hedging program there. But overall we'll also seen this quarter that we have announced our insulation price increase and one other things that price increase aims to cover in some of the inflation we've seen in energy costs.

Okay. Just a real quick follow-up, when we take a look at your updated 2008 guidance, what type of inflationary environment did you kind off carry forward for the rest of the year in that guidance?

I think that it's a little business specific. I think in the assumptions of that improved guidance would be that we continue to have success, recovering raw material cost inflation on the roofing side of the business in the marketplace. Now we continue to show progress against that. And that we would continue to see energy at elevated levels, similar to what we've seen as of recent, not a big collapse in energy prices, but also not another big run up in energy prices, may be like we've seen in last 90 days.

Okay. Alright, thanks a lot.

Thanks.

Your next question comes from line of Garik Shmois from Longbow Research. Please proceed.

Hi. Nice quarter gentlemen.

ThanksGarik.

Just wondering if you could talk a little bit more about your guidance, let's see your increase it, but it looks like it's flattish to slightly up in the second half of the year relative to the first half of the year. Is it really some of the composite seasonality offsetting, the seasonality of your insulation in roofing business leading to relatively flattish sequential improvement or can you just walk us through that a little bit more?

Well, it is a little different profile for Owens Coring than I thing may be you have seen historically. Historically, Owens Corning typically had a strongest second half and we would produce more operating earnings in the back half of the year than we did in the first half of the year. And now it's primarily related to how the new construction cycle works and the fact we were comparable lagged in new constructions. So, if you go back to a very robust housing market where really the insulation business has for lot of years been the driver of our performance, we would tend to see better demand in the third and fourth quarter of the year than we saw in the first and the second because insulation tends to go to house on about a 90 day lag. And in absolute basis, second and third quarter housing starts are typically stronger than fourth and first quarter just because of the weather in the Northern part of the United States. I think what we've seen this issue in the guidance we've given is... the guidance is approximately a doubling of the first half. So, if you take our first half year-to-date and double it, you come in pretty closer to 265 number, we talked about today. Obviously, a part of that is because insulations is not the driver of our business this year. We think it will be in the future. It will be one of the drivers of our business in the future. But in the housing environment we are in today, with a very weak kind of level starts in the second quarter with anticipated not a lot of improvement in the third, the number of houses we have out there insulated in the second half of the year is not going to give us a big uptick in insulations, with insulation going a bit sideways composites has been more of a four quarter earner and roofing is already been kind of second quarter third quarter business. So, it will have a weak first or weak four but it tends to have pretty equal halves. So, we're looking at the businesses and insulation will not give us the big uptick in the second half but has historically given us. Composites will show us a lot of earnings power through our four quarters. Roofing will certainly contain momentum and continue momentum into the third. The fourth quarter is always a little bit of relative to-date and then obviously in less material segment of the building materials and services, we have some work to do to get a contributing. So, we wouldn't expect to see a lot of big built and gains in the second half, which typically come from insulation.

Great. Thanks for that. And just a real quick question, is it possible parcel out the storm related demand in the roofing segment as a percent of the total?

No. There... I mean obviously everyone in the industry as we forecast our capacity and we forecast our production needs, we're making estimates to what we think the underlying level of demand is from new construction with the underlying levels of demand is for re-roof. And then how much is the strong demand adding on top of that in terms of our forecast for the market. We would have expected the second quarter market to be down from the second quarter of '07 just because of the things are going on the mortgage market, the lack of resell activity, lack of home equity loans and things. And in fact the second quarter of 2008 looks like it was pretty flat, with the second quarter 2007 in terms of market demand. So, our conclusion from that would be, that whatever weakness we saw, related to re-roof in new construction was offset by strong related demand but it's pretty hard to make an exact estimate of what that would be.

Fair enough. Thanks.

Alright, thanks.

The next question comes from line of Jack Kasprzak from BB&T Capital Markets. Please proceed.

Thanks. Good morning, everyone.

Good morning, Jack.

Good morning. Congratulations on the quarter, very nice.

Thank you.

I had a question on corporate G&A, which was in Q2 much higher than Q1. And I was curious of anything unusual in there and what we see the back half return more to a more normal level.

I'm going to ask Duncan to handle that question. Duncan?

Yes. Thanks Mike. I'd mentioned in some of our remarks, the quarter-on-quarter, quarter one this year to quarter two this year, there was a moving corporate, $27 million and it was kind of combination of three main items, one was an increase in our accrual for performance based pay. Obviously, we're doing well this year, and so we are sort of make sure our accrual is inline with that. So that's one thing that you'll see. Secondly, we took an accrual for kind of inventory into the LIFO method, typically as we see to the asphalt prices rise, charge for LIFO over the year will be higher. And so as we've seen asphalt prices rise significantly, we have increased our charge for LIFO during quarter two. And thirdly, there were some foreign currency transactional effects between the two quarters in terms of making a sort of a difference to inside that number which we got in corporate rather than inside the businesses. So those were three main items in that sector. In terms of outlook for the rest of the year, I think it would be reasonable to assume that return to more normal levels, what in fact as matter of fact that of course would be what happens to material price inflation, particularly asphalt. And how performance goes, that will make a difference to our ongoing pay accrual.

Okay, great. And secondly with regard to roofing and asphalt your comments, of course their sales were up 15% on higher selling prices. But you mentioned storm related demand, where volumes up in the quarter and roofing at all?

Volumes were up a very small amount. I mean... I think most accurately you would characterize it as a flat quarter in terms of volume.

Okay, great. Thanks a lot.

Okay. Thanks.

The next question comes from the line of Mary Gilbert from Imperial Capital. Please proceed.

Yes. I wondered if... a couple things, one, you have the gain on metals. That was included in the $71 million operating income, correct?

We did not include the gain on metals in our adjusted EBIT.

Okay. So, I guess I was talking about the... for the segment for composites solutions. So if am looking at the $71 million of operating income, does that include the gain?

No.

It does not?

Does not, Mary.

That's good.

Let's back up on that. Just to make sure that all the people on the call understand that. One of the things as we got into these more material alloy leases or metals leases, then what Owens Corning has had historically, is we've been pretty clear from the outset when we did the Vetrotex acquisition, that we really see that as a financing decision, not an operating decision. So the results we're trying to produce in the segment are truly operating results. And we have pulled basically all the metals activities both the gains on the sales as well as the leasing activity up into the corporate books. So we reconciled that, that's all in the corporate numbers and what we try to produce in the composite segment are basically the true operating cash flows with the acid base there.

That's fantastic. Okay, great. That's helpful. Could you talk about Chinese competition in composites? How that's affecting OC and what about plans to expand in that region?

Okay. Well thank you Marry. We have continued to see formidable competition in China. We have seen aggressive expansions from Chinese producers. This is not a new theme. I mean this is something that the business has been working on and dealing with really over the last decade. And I think kind of with more urgency probably more last five or six years. And I think in a large regard underpins the logic of why we wanted to do the Vetrotex acquisition and give the business globalize more quickly. We have seen some good positives in the last year probably, in terms of... I guess I would describe it as leveling the playing field with the Chinese competition. Certainly, there is inflation in China today at higher rates than what we made to saw over the last five years. The currency is coming in more in the line with maybe what's a truer value at least relative to the dollar. And I think that's helping our North American business. Some of the export credits that some of the producers have been receiving in China have been taken away. So, it's taking a little bit of the some of the export incentives out of the marketplace. And at least it is rumored that we are going to begin to see true energy costs, start to appear in the Chinese markets. So that would increase cost of production. Not to mention that a lot of the precious metals that you use for production have gotten more expensive and so the capital cost of putting these facilities in has continued escalating. We think that is a global market. So, we've seen some things that are helping, get the playing field may be a bit more level than it had been over the last decade. But we still think there is very strong and formidable competition on China in the ground for servicing the Chinese market. And I think over the long-term servicing China, but in the near term also exporting outside of China. We had said back in November when we announced the Vetrotex acquisitions that kind of the first two priorities of the ongoing synergies in the integration worked done were to looking in expansion opportunities in Russia and then to look expansion opportunities in China. Obviously, last night and then on today's call, we announced what we are doing in Russia. We are working hard to look what we would like to do in Asia and how that impacts our investments strategy in China and how it impacts basically our configuration of the remainder of that region. I think that's work yet to be done and I think we will have an announcement on that when we are ready.

Okay. Another thing is, you were able to... you did put forth price increase inflation. One, I wanted to find out the magnitude of that increase. And then is that sufficient to offset the cost increases you're expecting? And in second of all, since composites is the biggest user of energy, what's happening there with regard to pricing and your ability to pass on the inflationary pressures that you experiencing there?

Okay. On the insulation side of the business, we had announced price increases across kind of all of... many of the product lines. We are really talking about fiber glass when we talk about the price increases. If you look at the foam side of our business that business has been pretty effective over the course of last two years at getting price increases to offset its key raw material which is probably starring. So, leaving aside kind of the suitable place [ph] earnings side of our business which has been fairly stable in terms of pricing and raw materials, really is the fiber glass side of the business where our energy consumption and the cost of our energy has putting pressure on margin. In that side of the business, we have price increases that are in the 6% to 10% range depending on the product line. Most of those were very late second quarter, in terms of their timing. So we are working on them right now. They would go a ways, towards helping us offset some of the energy cost inflation that we've seen over the course of the last two years but in no capacity it would get us anywhere back to steady state in terms of offsetting the inflation we've seen over the last couple of years. On the composite side of the business, we have been able to get prices in some segment. Due to the nature of the business, some parts of the business are contracted through to kind of end user projects. So, if you think about the wind energy business, people are going to launch some visibility to availability of glass and some understanding of where pricing is going to be. There are other markets inside composites that characterize more kind of stock market type pricing. And so where we've seen opportunity to take price we have, our estimate is that in aggregate composites has may become short of offsetting inflation but has had gotten some positive price and is been able to make progress against the inflation on instinct.

Okay, great. That's most helpful. Thank you.

Thank you, Mary.

The next question comes from the line of Jim Barrett from CL King & Associates. Please proceed.

Good morning everyone.

Good morning, Jim.

Mike, to follow-up on your comment about composite, it appears based upon the slide presentation and even without Vetrotex, the company experienced a very strong increase in the composite earnings. Beyond the pricing which you've already touched upon, could you give us an update and you touched upon the Chinese dynamics as well but are you sensing any underlying change in the level of competitions, the overall price environment. What in fact has drove the margin improvement? How much of it was external versus internal?

It's really difficult for me to kind of put the GE [ph] back in the bottle and say what with the performance of the business be if we had not gone the Vetrotex acquisition. So obviously we think that's a homerun acquisition. And as we put the two business together, I mean we've been able to integrate so quickly, that from where we see, we really see it as on global business today. It's very hard for me to separate out and say what is the contribution of the Owens Corning heritage assets, what's the contribution of the Vetrotex heritage assets. It really is a global composite business. I think if you can do the math and take kind of high single-digit operating performance, I guess we said 7% in the second quarter last year, so, mid-to-high single digit. And you try to do a walk in a $2.5 billion business and how you get from 7% to 11%, one other thing you'd expect to see is a pretty dramatic impact of the synergy work we're doing. And we have set up to know that we expect at least $30 million of synergies in 2008. I think we've said we're feeling good about where we are versus those plans and that we're generally ahead of all the plans that we've laid out. So that would certainly give you a couple of points, right off the top. And then I think you would see some of the things you unable to do in terms of mix, some of the things you weren't able to do in terms of mix, some of the things you weren't able to in terms of productivity and some of the things you weren't able to in terms of price probably making up the balance. So, I think as an across the board performance, good work in each one of the markets, taking advantage of places where volume growth, place to our strength and place to our profitability I think wind is one of those. And getting the work done it really on the synergy side and despite the fact that our SG&A is up in total, we are giving leverage against our SG&A because of the fact that we did the acquisitions and our SG&A as a percent of total for the entire company is down. And I think that's indicative of the kind of synergies and leverage we are getting with composite acquisition.

Okay. As a follow-up, is a roughly some in terms of the organic tonnage being shift in that business twice global GDP or should we use something a little more or little less?

Jim, we said one and a half to two times global GDP.

Okay.

I think that's our efforts to go back and look over 5 and 10 year periods of time and practice something. So, I would say I'm continued to be comfortable with that guidance. But I would also just caution any of the investors on the call to the extend some one updates fourth quarter GDP forecast for Western Europe, I don't think it would be sensible to multiply that in terms of one and a half and say that's the new volume forecast for composites. And we work with our customers in terms of their inventory positions, our inventory positions, various used applications. But over 1, 2, 3, 5 years that's always been a good estimate as one and half to two times Global GDP.

Okay. Thank you very much.

Thank you, Jim.

Our next question comes from the line of Nitin Dahiya from Lehman Brothers. Please proceed.

Good morning.

Good morning, Nitin.

When you look at roofing the numbers obviously very good in the last quarter, and when you're looking at July, have you ever see some signs that asphalt is again going up very sharply? And how much success are you having in taking incremental pricing, and specifically are you seeing a push back or any demand response to the ever higher prices on shingle side?

Well, I think we talked about roofing pricing, turn on the call, let me try to hit the highlights of that. We have turn asphalt prices very difficult to forecast. They trade-off more than just crude oil prices, so there is lot of variables that go in crack spreads, gas demand, what the later in demands are, what is the demand for paying [ph], and what is our competition for us will look like typically in the summer, we do see asphalt prices go up relative to crude. And historically in the winter we've seen asphalt prices decline relative to crude. So, if you are looking for a broad kind of rule of thumb asphalt as a percent of crude oil prices tends to be higher in the summer and cheaper in the winter, and we built our operating model to kind of take advantage of that and get some positive carry on the asphalt we're producing in the summer, producing in the winter and selling in the summer. We have felt pretty good about the industry dynamic. I think if you have been on this call for the last six or sever quarters, at least for six or seven quarters here we had story about the roofing industry and either the absence of storms or the integration JFL or the inventory positions out in the marketplace, all of which had made it very difficult I think for us to find a price level in the industry that we thought we can support. I think at this point the industry feels like as relatively stable. Our inventories are in a reasonable good position. It feels like distributions inventories are on a reasonable good position. People are buying what they need and obviously on a value proposition basis and asphalt shingle to great value propositions provided you are buying at cost competitively versus competing asphalt shingles. So, there is no real problem with asphalt shingle pricing provided we don't get along with our value to our customers and that's where we are focused. But we feel pretty good doing in the third quarter that we continue to manage that issue.

Fair enough. And looking at the acquisition and divestiture now that you are kind of through the last leg of that, when you look at your business mix today, do you see there some GAAP or some non-core businesses that might require you are balancing over the next 12 to 18 months?

We feel good about the businesses we are in today. I think you probably heard us say on this call when we divested our signing business and when we divested fab low and then we bought Vetrotex. The challenge we give ourselves everyday is are we the best owner of the business. And do we have a game plan on how to make that business create shareholder value for our shareholders. Certainly, if you look at the second quarter results, the kind of recovery we saw on roofing was critical plus I think to the able to feel really good about making our internal plans and our internal expectations of that business come through into reported financials, which is always the measure that we look at. Certainly composites, we think are creating tremendous value for our shareholders. In insulation is a great industry structure in a great, great market with the premier franchise. So, I think those three it's a very, very easy answer. In other building materials and services, obviously the second quarter results weren't where we want them to be. We've taken a harder look at those businesses. We've got good game plans and are continuing to develop better game plans. And how to make them better, we have not operated those businesses through this kind of downturn before and I would tell you I think on particularly the masonry product side of the business, the impact of the downturn in new construction and where downturn regionally and the impact this had of housing affordability has created a much more difficult demand environment than we expected. So, I will still give this reasonably good marks in terms of execution on the cost insulation side. We didn't get the market right. We are not getting more conservative estimates of the market. We are asking the business to get it right, or relatives to those new conservative estimates. Having said that I think we'll see some weakness persists there through this year, but we do think we can get that business position to be profitable. And we do think we can get a position to make a lot of money in an upturn.

Okay. For existing all the businesses are pretty much where you want them to be in terms of looking ahead. And from acquisition point of views any complementary lines that you thinking it's kind of just make sense for you to go and get them?

I think we demonstrated with the Vetrotex acquisition and then when see some thing that creates a shareholder value; we are willing to go do it even if it's upside. And we think we've got the kind of balance sheet today that we've saw the right thing even there was some size. It instead created a lot of shareholder value, we're doing the step up do it. But obviously we've got nothing that we are prepaid to or willing to talk about in this call.

Thank so much.

Carmen, as we approach the top of the hour, let's just do one more question please.

And the final question comes from the line of Daniel Calasso [ph] from Lion Capital. Please proceed.

Hi. You had a healthy increase in revenue like 23% and a significant EBITDA decline as well which I guess is consistent with company with a lot of residential and commercial construction exposure. A couple of long-terms understandable or non organic factors during those figures, I just wanted to understand the scope; first is the benefit of your composites acquisition to revenues and EBITDA. And second is benefit to storm related demand to roofing and asphalt. Can you comment on what the percentage revenue increased would have been excluding these items or kind of broad brush basis at least and how much less EBITDA would have been if you would exclude them as well? Thank you.

Okay. Well, thanks for your question Daniel. I think related to again trying to exclude the Vetrotex acquisition from the company. From where we sit, we don't see a good logic in trying to do that, in that. We bought it, we integrate it, it's ours and it's who we are today. So, the composite business we have today is a bigger and more substantial and much more global composites business than what we had a year ago. We see growth opportunities around the world as evidenced by our investment in Russia. And some of the conversations we've had on this call. And we continue to think from a volume point of view. We're participating in a market that in total will grow at 1.5 to 2 times global GDP organically with some segments like wind energy that could grow high double-digits for the coming decade. So, we see pockets where there are growth opportunities in big double-digits. And we see the overall business, certainly growing kind of in the mid-singles. Related to roofing, I think on this call we did say that volumes versus the second quarter of '07 were basically flat. We do think the overall roofing industry today is operating below long-term trend line in terms of demand even with the storms and the spring. So there is going to be a need at some point in the next two or three years for that industry to return back to some type of steady state associated with the repairs of roofs and the re-roofing demand that needs to get done. It is a repair and re-roof business. It's not a discretionary purchase. It can get delayed. But ultimately people will place that roofs and just based on the demographics of roofs, we think we are below trend line there. And then in insulation, we think in residential construction we can be as much as 50% below trend line. We are 50% below. So there is an opportunity for as much as 100% growth in residential construction as we get back to what we believe is the long term demographic need from $7 million and $7.50 housing starts in our country. So, depending on how long we stay low that might impact how quickly we return to that kind of a macro. But the spring is getting coiled today as we operate it 950,000 or million housing starts, there is more people than in our country. And each month is goes buying here because we buy that we operated that level. We are creating built in demand that's going to cause of recovery to be that much deeper. So, trying to estimate organic growth in a cyclical and seasonal... or in a cyclical context for residential construction is pretty difficult. We do know which direction it goes which is virtually straight up at some point in next 3 or 4 years. And on a global basis where composites we've stand by the 1.5 to 2 times global GDP in a macro.

Okay. Thank you. Can you just has regards to EBIT in roofing and asphalt with $37 million. You have said volumes were probably about flat there and how much of that $37 million was strong related demand in the third quarter or rather in the second quarter?

Well, what we have said on the call is I think our last year number is please correct me, Duncan if I'm wrong was 29 at line for roofing. So, we've said we had $8 million for improvement for the quarter and we've said that $8 million from improvement was fundamentally driven by productivity and cost, and their volumes were flat and pricing did not recover inflation. If we had not seen some stimulated demand, volumes would have been done marginally, and that probably hurt results some. But we still think of the progress we've made from the quarter to the second quarter, was really driven by our own execution it wasn't driven by storms.

Okay. Thanks very much.

Thank you.

Carmen. If we can, we'll warp up the Q&A with that. And I want to thank everybody who has been on the line. And turn it to Mike Thaman, our CEO for any final comments he might have.

Well, thanks Scott and thanks everyone for joining our call today. Let me just summarize a few key points from today's call. First, I would say we are satisfied with our progress. And we are certainly pleased to able to improve our guidance per earnings for the year. We take a lot of proud in being able to do that. I think in this quarter, you really saw the strength of the business portfolio of Owens Corning, not just the building momentum in composites, which has offset some of the weakness we've seen in building material, but the big quarter from roofing inside of buildings materials group, which balance some of the weakness we've seen in the new construction side. So, the balance of our business and the strength of our portfolio, both came from two ways in the quarter. The composites acquisition is absolutely surpassing our expectations. It's ahead of virtually all of our key acquisition milestones. We really couldn't be happier with what we've done there. And I think the evidence of that is our excitement about stepping up and expanding that platform acquisitions in Russia, and getting ourselves a nice position in Russia with the [indiscernible] investments, and positioning ourselves for growth in Russia and Eastern Europe. This was something that was in our division at the time of the acquisition. We wanted to get some of the blocking and tackling done. And now we are moving into some of the expansion modes where we think we can create additional and significant shareholder value. Despite a really tough construction market, we believe we are performing well. We continued to have an outlook to a strong balance sheet and cash flow. And we think we have everything in place that we need to support global growth and also increased shareholder value. So, with that I'll conclude. I'll tell you we look-forward to seeing and speaking with you again on October 29th for our third quarter call. Thank you again for your interest in our company. And please have a nice day.

This concludes the presentation for today. Ladies and gentlemen, you may now disconnect. Have a wonderful week.