Owens Corning (OC) Q1 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2010 Owens Corning Earnings Conference Call. My name is Marisol, and I will be your operator for today. [Operator Instructions] I will now like to hand the presentation over to Mr. Darrel Penner, Investor Relations.

Thank you, Marisol. Good morning, everyone. Thank you for taking the time to join us for today's conference call and review of our business results for the first quarter 2010. Joining us today are Mike Thaman, Owens Corning Chairman and Chief Executive Officer; and Duncan Palmer, Chief Financial Officer. Following our presentation this morning, we will open this one-hour call to your questions. Please limit yourself to one question and one follow-up. Earlier this morning, we issued a news release and filed a 10-Q that detailed our results for the quarter. For the purposes of our discussion today, we've prepared presentation slides that summarize our performance and our results for the first quarter. We will refer to the slides during this call. You can access the slides at owenscorning.com. We have a link on our homepage and a link on the Investors section of our website. This call and the supporting slides will be recorded and available on our website for future reference. Before we begin, we offer a couple of reminders. First, today's presentation will include forward-looking statements based on our current forecasts and estimates of future events. Second, these statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent limitations of such forward-looking statements. This presentation and today's prepared remarks contain non-GAAP financial measures. Also note that GAAP to non-GAAP reconciliations are found within the financial tables of our earnings release. 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, followed by CFO, Duncan Palmer, and then our Q&A session. Mike?

Thank you, Darrel. Good morning, everyone. Thank you for joining us today to discuss results for the first quarter. Owens Corning's off to a strong start in 2010. We had an outstanding first quarter and are confident that we will achieve as much as $450 million in adjusted EBIT this year. This is $100 million higher than our previous guidance and equates to about $2 of adjusted earnings per share. Total revenue in the first quarter increased 18% to $1.3 billion compared with $1.1 billion in the first quarter of 2009. This increase was led by revenue growth in both Composites and Roofing. We delivered adjusted EBIT of $97 million in the first quarter, a threefold increase compared with the same period a year ago. Our markets are still operating well below their potential. Yet, in the first quarter, we demonstrated leverage in our Composites segment, we continued momentum in our Roofing business and we narrowed our losses in the Insulation business. Duncan will provide more detail on the quarter, so I'll move now to a review of how Owens Corning is performing against the expectations we framed for 2010. We said that we would continue our progress in creating an injury-free workplace. During the first quarter, our focus on safety resulted in a 20% reduction in injuries compared with 2009. We said that we would drive improved profitability in Composites this year. We are well on our way. Operating leverage improved significantly during the quarter, generating a $49 million increase in EBIT and operating margins of 7%. We said that sustaining Roofing margins in excess of 20% is an achievable goal for this year. We are on target to reach this goal, generating operating margins in Roofing of 24% in the first quarter compared with 22% a year ago. I'll provide additional comments on Roofing margins later on the call. We said that we would work to narrow losses in the Insulation business, and we did. Despite a 19% reduction in the lagged U.S. housing starts, we trimmed our losses in the first quarter. Insulation remains a great business in a well-structured industry. Overall, I'm extremely pleased of what we've accomplished. Composites has turned around. Momentum in Roofing continues, and Insulation is poised to capitalize on the market recovery when it takes place. Now I'll turn to our segments and our outlook, starting with Composites. In prior calls, I provided an overview of the aggressive actions we've taken to return this segment to profitability. Let me recap. At the end of the 2008, global industrial demand collapsed. In response, we curtailed capacity in the first quarter of 2009 to produce less than we were selling. And we put tight controls in place on working capital and capital expenditure. By taking these actions, we were able to generate cash in the second quarter of 2009. As demand improved, we maintained our tight controls, and we became profitable in the third quarter. By the end of 2009, we aligned our inventories with sales volumes and have positioned the business for the strong first quarter that we reported today. We've continued to evaluate our global manufacturing network in Composites to respond to current and future market demand. I'll detail three developments. First, we took a charge in the quarter related to improving our cost position in Europe. Based on demand, we decided not to invest in restarting a manufacturing line at our Composites plant in Alcala, Spain. We've curtailed this line in 2009. Accelerated depreciation and severance related to this action make up a substantial portion of the charge. Second, we have decided to invest in expanding manufacturing capacity at our existing Composites facility in Russia. We've previously announced this expansion, but it was deferred until market conditions improve. Now that demand has increased, we're moving forward with this investment to help us serve our growing customer base in this market. Finally, construction of our Composites plant in China continues. We expect this project to be completed by year end. It will strengthen our presence in this important region and is expected to improve our cost position and profitability in 2011 within the Composites segment. On our last call, I said that demand for Composites in 2010 would increase as much as 25% over 2009 levels. We continue to bring production on line to meet demand, which has resulted in improved operating leverage. Despite improvements in the market, we do not expect to return to 2008 demand levels this year. Composites will also continue to benefit from selling prices than increase in the first quarter of this year compared with the fourth quarter of 2009. Now let's move on to our Building Materials segment. The Roofing business had another fantastic quarter. This segment improved EBIT to $128 million, which is nearly $30 million higher than the same period a year ago. We believe that the Roofing business benefited from some volume outside due to customers restocking their inventories, which had declined to low levels at the end of last year. Customers also bought ahead of our first quarter price increase. In the quarter, volume gains in Roofing drove our revenue growth. We do not expect this volume growth to persist through the year, absent additional storm-related demand. With higher asphalt cost this year, we expect margins in this summer to be lower than a year ago. Overall, we expect Roofing margins in 2010 to be below 2009 levels, but in excess of 20%. I'm proud of the accomplishments of our Roofing business. We continue to innovate in support of our customers. We continue to be relentless in driving cost reductions, and we continue to capitalize our market growth while maintaining margin discipline. Now to our Insulation business. As anticipated, this business was not profitable in the quarter. This is not surprising as the first quarter is seasonally weak. In addition, demand for residential insulation is driven by lagged new housing starts, which were the worst on record for our first quarter, down 19% from last year. In strong housing years, Insulation used in new residential construction in the U.S. and Canada represents more than half of our Insulation revenue. In the first quarter 2010, we estimate that new construction represented only 1/3 of our revenue. The Insulation business did benefit from stronger volumes and market outside the U.S. residential construction. As a reminder, our Insulation business maintains a geographic, product and channel mix that provides market diversification beyond just new residential construction. Analysts are forecasting that housing starts will be about 700,000 units in 2010. In an improving, but still weak housing market, we expect to continue to narrow our losses in this business. But we do not expect to return to profitability this year. Clearly, Owens Corning had an outstanding first quarter that has positioned us well to achieve our goals. The need for energy efficiency in homes and buildings is growing around the world. Global industrial production is expected to increase. Owens Corning has prepared to benefit as our markets continue to return to their potential. We are positioned to grow and to win with our customers. I will now turn to CFO, Duncan Palmer, for a more detailed look at our performance, our financial position and our guidance. Duncan?

Thanks, Mike. Let's start on Slide 5, where we show our key financial data for the first quarter 2010. You will find more detailed financial information in the tables of today's news release and the Form 10-Q that was filed earlier. Today, we reported first quarter 2010 consolidated net sales of $1.265 billion, an 18% increase compared to 2009. This was led by strong revenue growth in Composites and Roofing. In a moment, I will review our reconciliation of items to get to adjusted earnings before interest and taxes, adjusted EBIT. As a reminder, when we look at period-over-period comparability, our primary measure is adjusted EBIT. Adjusted EBIT for the first quarter 2010 was $97 million, up from $32 million in the first quarter 2009. We are extremely pleased with these results, which continue to demonstrate the strength of our business portfolio and our ability to execute in the midst of end markets that have not reached their full potential. Adjusted earnings for the first quarter 2010 were $53 million or $0.42 per diluted share as compared to first quarter 2009, adjusted earnings of $5 million or $0.04 per diluted share. Depreciation and amortization expense totaled $80 million for the first quarter. This is consistent with our guidance that full year 2010 depreciation and amortization expense will be about $325 million. Our capital expenditures for the quarter, excluding purchases of precious metal, totaled $56 million. We anticipate that 2010 capital expenditures will be lower than depreciation and amortization expense for the year. We continue to focus on cash generation. Due to the seasonality of our business, our operations use cash during the first quarter of the year. However, our improved results and continued discipline in managing working capital allowed us to limit cash used by operations to $27 million, an improvement in excess of $250 million over the same period in 2009. Our net debt was $1.7 billion at the end of the first quarter 2010. Moving to Slide 6. You can see the reconciliation of our first quarter adjusted EBIT of $97 million to reported EBIT of $83 million. As Mike discussed in his remarks, in the first quarter 2010, we took actions to address our cost position in Europe. The most significant of these was the decision not to invest in restarting a line in Alcala, Spain, that was previously curtailed in 2009. We recorded $13 million in charges in the first quarter, as a result of these actions and expect to incur an additional $24 million, as we complete these actions during 2010 and 2011. We are investing in the expansion of our existing manufacturing facility in Russia to serve that growing market. We continue to evaluate our global network in the Composites segment to ensure that we have the appropriate capacity to respond to current and future market demand. Next on Slide 7, you will see adjusted EBIT performance comparing first quarter 2010 with the same period in 2009 based on business contribution. Each of the businesses in that portfolio showed improvement year-over-year. Our Composites segment demonstrated significant operating leverage and improved operating margins to 7%. Our Roofing business delivered record first quarter EBIT. Our Insulation business narrowed its losses despite weaker market conditions in the United States. While Corporate and Other Costs were higher, overall adjusted EBIT increased by $65 million. And based on the company's performance and strong improvements in our stock price over the past four quarters, our expectations for incentive-based compensation, including long-term stock-based compensation has increased. We now expect the general corporate expenses to be between $80 million and $90 million in 2010. With that as background, turn to Slide 8, and we will begin a more detailed review of our segments, starting with Building Materials. In the first quarter, Building Materials had net sales of $847 million, an 11% increase over the first quarter 2009. Driven by Roofing's outstanding performance, Building Materials delivered $34 million more EBIT in the first quarter 2010 as compared to 2009. The following two slides present these results in more detail by highlighting the key businesses within the Building Materials segment, the Roofing business and the Insulation business. First, Slide 9 provides an overview of our Roofing business. Roofing sales for the quarter increased 16% from first quarter 2009 due to increased demand as customers restock their inventories and purchase in advance of our announced price increase. The margin momentum that began in the fourth quarter of 2008 continued throughout the first quarter of 2010. Roofing achieved EBIT margins of 24% in the quarter, delivering $128 million of EBIT. We have taken actions over the past two years to improve the profitability of the Roofing business. We have achieved improvements in our production processes, produced overall manufacturing fixed costs and improved our mix. These programs will continue to drive profitability in this business, and we believe that operating margins will be in excess of 20% for 2010. Although volumes in the first quarter was stronger than in 2009, we do not expect volumes for the rest of the year to show much growth over the same period last year, absent additional storm activity. Given our outlook for price and raw material inflation, we expect margins during the second and third quarters to be below 2009 levels. We expect the fourth quarter volumes to be seasonally weak. As a result, we anticipate overall margins for the year will be lower than 2009 levels, but above 20%. Next on to Slide 10. The geographic end market portfolio of our Insulation business provides diversification to markets beyond new residential construction in the United States. Higher sales volumes outside of the United States drove the increase in sales for the business. Despite 19% lower lagged U.S. housing starts, first quarter net sales were 4% higher than first quarter 2009. The Insulation business narrowed its losses from the first quarter 2009 as a result of increased demand. Despite this, demand continues to be at extremely low levels, which resulted in the business losing $35 million in the first quarter 2010. In response to the prolonged weakness in demand, our glass fiber utilization was about 50% in the first quarter 2010. We expect this business to narrow its losses from 2009, but it will struggle to achieve and sustain profitability until demand improves. As I remind you on each of our quarterly calls, this is a great business in a well-structured industry. Owens Corning's PINK FIBERGLAS Insulation is a powerful and enduring brand. We are the clear market leader, well positioned to return to historical levels of performance when demand improves, as we know it well. Next, Slide 11 provides an overview of our Composites segment. Composite sales in the first quarter 2010 were 34% higher than the same period in 2009. This dramatic increase was primarily the result of increased shipments in our Reinforcements business as demand continued the sequential improvement that began in the first quarter 2009. In addition, selling prices across most of our markets rose in the first quarter 2010, but were generally still below those seen in the first quarter 2009. In the first quarter 2010, Composites achieved 7% operating margins and delevered 31% in EBIT, a $49 million improvement over the same period in 2009, driven by increased operating leverage. We were able to improve Reinforcements capacity utilization to 83% during the quarter due to increases in global demand. The increase in capacity utilization, along with the cost reductions achieved last year, has greatly improved our operating leverage and further positioned the business to return to double-digit margins. We have a few additional items to cover. So now to Slide 12. We have maintained a strong balance sheet. We had $948 million available on our senior revolving credit facility as of the end of the quarter. And in addition, we had $463 million of cash on hand. We are confident that the refinancing of our bank facilities will be completed well before the end of the year. And as part of this refinancing, we expect that our cash would be applied to repay the $600 million bank term loan. We have an investment grade rating for the stable outlook from both S&P and Fitch, and in March 2010 Moody's improved its outlook on our company from Ba1 negative to Ba1 stable. Finally on Slide 13. We are extremely pleased with our performance during the first quarter. These strong results have given us confidence that our adjusted EBIT for 2010 could be as much as $450 million, an increase of $100 million of our prior guidance. This equates to about $2 of adjusted earnings per share. So with that, Darrel, back to you for Q&A.

Thank you, Duncan. Marisol, we are now ready to begin the Q&A session.

[Operator Instructions] And our first question comes from the line of Kenneth Zener from Macquarie Capital.

Two questions here. One is going to be on Roofing and then one on Composites. For Roofing, how much did your stock of raw asphalt enable you to benefit from pricing reductions you had in Roofing relative to the underlying inflation we saw in the input cost of inflation? So do you guys have a month or two in your inventory already? Pre-bought?

Well, Ken, we talked about in prior calls, we bring inventory of asphalt into our tanks and typically carry weeks or even in excess of a month of inventory our tanks. And then we also carry finished goods inventory in our warehouses that we ship to our customers. I think what we talked about on this call and as a result of that, oftentimes, our cost lag. Asphalt cost increases as we experience them, they lag into our P&L. I think what we're saying in this quarter is we actually did see some restocking on the part of our customers and also some pre-price buying. So we probably cleared through inventories a little bit faster in the first quarter than we anticipated. So I would say going into the second quarter, we're probably positioned that raw material cost increases would come through our P&L a bit faster in the second quarter. I hope that you would conclude from our comments that we feel that pricing is fairly stable and that while asphalt prices might be a bit increased from where they were last year, we still have outlook to very strong margins in the second and third quarter.

And then in the Composites, that was up quite a bit, 34%. How would you break that up between restocking in the channel for simply true end demand? And could you comment on perhaps the different markets? Obviously, auto was very strong, I think, one does expect it to be flat? Roofing looks like it's flat, if you could just add some color there.

I think if you look at the fourth quarter versus the first quarter, so kind of roll forward the business sequentially, as opposed to comparing to first quarter last year, when our markets were in a fair amount of distress. We actually didn't show dramatic growth from the fourth quarter of 2009 until the fourth quarter of 2010. So whatever restocking effect we're seeing is probably relatively constant over the last six months. So we do know that there's some restocking going on, but we wouldn't think it's a more pronounced restocking, say here in the first quarter than what we saw late last year. We can look at our own businesses internally, though, and know that certainly the effect we saw in Roofing, with some of our Roofing distributors polling some inventories from us in the quarter cost us to ramp up some production in the first quarter to replenish our own inventories, which cost us to put some demands in our Composites division. So we know some of the restocking that we've seen in our own Building Materials business is having a positive impact on our Composites business. That said, we feel pretty comfortable that global industrial production around the world is continuing to improve, not at remarkable rates, but good month-on-month improvement. And I think in today's call, we said that we do think overall. Demand this year could be up as much as 25% versus last year. I think if you break that by halves, that's going to be much more pronounced in the first half, where we're comping against markets that were in significant distress and probably much weaker in terms of the rate of growth in the second half where our markets last year were beginning to recover and we were beginning to see our customers restock.

And our next question comes from the line from Michael Rehaut of JPMorgan. Michael Rehaut - JP Morgan Chase & Co: I was wondering if you could just give us a sense of the pricing momentum that you saw sequentially across your different businesses in the first quarter, and how you see that continuing to play out if there's some incremental positive momentum that is still -- you still expect to play through into the second quarter? And particularly as it relates to Roofing, you kind of said that you're looking into 2Q, you're going to get more of the higher raw material costs and pricing is a bit more stable. We also recall that you had timed a price increase of your own. So net, net, sequentially, should we expect any margin compression or do you feel that the pricing that you've got in Roofing -- the price increases that you scheduled and announced, how do you feel that's taking in the market?

Let me start kind of with the first part of your question and just go across all the businesses and then I'll put a special focus on Roofing. If you look at Composites, I think we did disclose in our Q that prices in the first quarter were below first quarter 2009 levels. But they did improve sequentially versus the fourth quarter of 2009. So we saw some improvement from last quarter. We're still below where we were when we entered 2009 last year. We're obviously working very hard today to try to restore pricing back to what we think are more reasonable levels. We did lose some price, particularly in the third quarter of last year as kind of the crisis was bottoming. And probably, we lost more price in Europe than in some other parts of the world. So we've disclosed on that, and we're focused on trying to get prices back to what we think are more reasonable levels. Given the nature of that business, some of our businesses contracted. Some of it is in long cycle projects and other things. It's not like our Building Materials businesses, which tend to be more distribution driven, where you raise price to distribution and then they carry pricing to the market. We tend to kind of go customer by customer in Composites and work pricing with each of our customers. But I can assure you, our teams around the world are working on that issue, and we do think that, that's one of our objectives for this year as to improve pricing. I don't know that we would want a strong outlook for Composites based on a big uptick in pricing. I think we're going to look for some continued improvement in pricing quarter-on-quarter, as really our measure of success in Composites this year. In Insulation, pricing's been relatively stable. I think the good news is it's relatively stable. The bad news is it's probably relatively stable because we're down around everybody's cost. And there's not a lot further to go down in terms of taking Insulation prices down based on the profitability of the business. So we found stability, maybe for the wrong reasons. And hopefully, as we start to see some recovery in that market and we see a pickup in demand, that will give us some opportunity, at a minimum further stabilize price, but maybe begin to rehabilitate pricing in Insulation. Obviously, if you look at our numbers and our best estimates at where we think the other players in the market is, we're all really hurting right now based on where pricing is in that market. And we would like to get that business back to profitability as quickly as possible. Although we don't believe that's going to happen this year. In Roofing, I think you got the gist of what we're saying about Roofing, which is this time last year, raw material inflation was relatively tame. We're not in an environment today where we're seeing kind of a wild run-up in inflation. But this is the time of year where typically our input costs do begin to go up. Our best estimate as we head into the second and third quarter is there'll be some pricing activity, which will allow us to keep prices stable, and maybe cost prices to improve a bit through the second and third quarter. But our expectation is we would see some margin compression as we see some raw material cost inflation. Still great margins, but we don't believe that we're going to comp positively with either our second quarter or third quarter operating margins last year, which were in the low 30s. So I think you got the gist of that in the nature of your question, I just reiterate the comments you made. Michael Rehaut - JP Morgan Chase & Co: Just as we look at insulating systems, and you expect the losses to narrow. Can you give us any visibility on sort of dollar cost improvement goals? And I guess, if I can kind of throw in another one, also on the Composites side, if you can show us if there's any type of view in terms of the savings from next year when the China plant opens?

Let me talk a little bit about Insulation, and then maybe I'll have Duncan address the Composites question. On the Insulation side, I think the team has done a good job on buttoning down our costs. At the same time, we think there are mistakes that could be made at this point in the cycle of cutting back some of our market development and product development and innovation costs. We, obviously, are playing this business for the long term. We are big believers in demographic trends and long-term housing. We're big believers in energy efficiency trends and the need for more energy-efficient construction. We believe we need to be in the lead. Marketing those ideas, leading on public policy regarding those ideas, making sure that we keep the healthiest possible marketplace for the long term. So we do continue to invest and spend money in activities that we believe strengthen and build our market-leading position in that business, while at the same time, trying to cut back on the discretionary cost that can impact near-term performance. The last time the business made money, we were at about 900,000 units in the year for new construction. On a lagged basis, that year had unit construction single multi that was well above 900,000 because we were kind of -- that was in the 2007 going into the 2008 time frame where the market was coming down. We said on prior calls that if we could be profitable again and 900,000 units as we come off of the trough, that's a pretty reasonable goal for us to try to again achieve that breakeven. Because likely coming out of the trough, we're going to hit that level on weaker lagged housing or else going to hit that level on weaker pricing. So we try to look ahead and say, "When this market gets back to about $1 million, you should expect to see the business improve fairly dramatically." But in the meantime, it's a challenge for us at this level of demand, even with some small improvements in housing. We just don't have enough demand in order to leverage our costs. Duncan, you want to talk a little about Composites in the China investment?

Yes, Mike. The China investments, as you know, is a plant that we're building that where we will have a world-class cost structure in the Reinforcements plant that we build. The project will be complete by the year end and will start having an impact on our business in 2011. One of the initial things that will happen there is, we'll be able to service demands that we have in China with existing customers by production that we'll be producing locally, and we will not have any longer have to import into China, which is currently what we have to do. So clearly, there'll be a saving for us there. I think that will be an important thing for us, and obviously, we'll have a good cost structure there. Something else you have noticed in the quarter as we talked about, what Mike and I talked about, we continue to look on that work overall in Composites. We made a couple of decisions that we talked about on the call. One was to improve our cost structure in Europe by taking the unutilized facility that we had in Spain and some other actions that not restarting that line that we could tell last year. We took some charges associated with that level, improved our cost structure going forward in Europe. We've also decided to go back to the decision we made about our Russian facility, which we announced, I think, a couple of years ago that we would expand that facility. We've come back to that. We were exercising capital discipline. I think during 2009, we had deferred that investment, and now we've come back to that and undecided again to expand that facility in Russia, which again looks like a very attractive market. So that's an expansion. So overall, what you can see we're doing is balancing, making sure we have the right capacity in the right places, the right cost structures that will serve those markets going forward. And we continue to look at the network from an overall point of view going forward. Michael Rehaut - JP Morgan Chase & Co: Just to make sure I understand, earlier, I believe, Mike, you talked about the 900,000 as the last breakeven going into the cycle. And am I mistaken in remembering that you said that given a lower cost structure or some of the adjustments that the new breakeven should be at a lower level of starts?

Mike, I don't think we've said that in the past. I think what we said is this is really going to be based on the nature of the rebound and the nature of the recovery. We think the next time we pass through 900,000 starts, unless we can somehow restore pricing here in the near-term, we're probably going to end in that market with the lower prices than we had the last time we were in the 900,000 unit market. So as a result, it's going to be a bit of a race between how much costs we've taken out in order to try to improve our cost position versus where pricing stands at that level of volume to determine whether or not we get the breakeven. We're too far away from that right to really make that call. But we have felt relatively comfortable as we talk to investors that as a milestone out there on the horizon, we did make money. The last time there were 900,000 units, we'd love to find a way that when we get to that kind of market, we would be better than break-even again.

[Operator Instructions] Our next question comes from the line of Joshua Pollard from Goldman Sachs.

Based on my math, you guys finished the quarter at somewhere in the 90% range on capacity utilization in Composites. I was wondering if you guys would agree with that math. And then what level of capacity utilization where you at the last time you guys hit your normalized, or you guys consider normalized margins? I'll call it 10% in that business?

Josh, actually, in Duncan's prepared remarks, we disclosed on capacity utilization. And we said that in the first quarter, capacity utilization was 83% versus the full year estimate of capacity utilization in 2009 of about 60%. So I think your estimate of where we were in the first quarter might be a bit high relative to where we think we are.

But the question was where you ended the quarter?

Where we ended the quarter? I don't believe we disclosed on that. So you're reasonably correct to assume that through the quarter we're bringing some capacity on. So there was some acceleration of utilization through the quarter. But we haven't said where we ended the quarter. If you go back to the first three quarters of 2008, which was the last time we were at double-digit operating margins, we were right around 90%. It depends on regions of the world and product lines. We had some areas of the world where our utilization was a bit tighter than that. And then we had some places where there was some more slack. But I would say as a broad average, we were probably 90 or maybe in the very low 90s in terms of capacity utilization in the top of the last cycle.

My other question is on Insulation. You've seen industries or other parts of the Building Products segment, roughly similar market structures and end-market exposures raise prices. Are you considering a price raise in your Insulation business today?

Joshua, that's a great question. I mean, we've obviously been watching very carefully what's going on in the overall world of Building Materials related to pricing. There has been some activity in the first quarter in some other commodities where there have been some price increases announced. I would say our teams are monitoring that very, very carefully. And that generally, to get pricing, you're going to need aggressive action on the part of both the manufacturers and our customer base in order to be able to move pricing. I think as we look at the market, if we believe we had a set of circumstances where, as a manufacturer, we saw clear on how the customer base could support our desired improved pricing based on their ability to drive pricing, we would like to move pricing in the Insulation business. But at this time, we don't have anything to announce in terms of where we believe Insulation pricing will be.

Just a very, very quick follow-up to that is as you look -- you guys have often cited that you lag housing starts in your Insulation business. Housing starts up, call it, 20% on an all-in basis, I'll call it 40% on a single-family basis. Are you starting to see that type of improvement as you work through March and even into April?

We're not seeing that yet in the first quarter. So if you go back -- we typically work on a 90-day lag. So we would say the houses that were insulated in the first quarter were the housing starts that we saw in October, November and December. And [indiscernible] was a pretty dismal data set, pretty poor numbers. Compared to last year, the first quarter was 19% weaker in terms of lag housing starts. So we were in a very weak quarter. We're hopeful that some of the more positive data we saw, particularly in February and March, we would begin to see late in our second quarter. So we would hope that we would begin to see some uptick in demand in the new construction side of our business in kind of the May, June timeframe as we get into a 90-day lag. And then we would also be a hopeful to the second quarter. We start to see reasonable housing start numbers. As you know, and I think everyone on this call knows, there's tremendous uncertainty as the first time homebuyer credit gets pulled out of the market and some of the financial supports from mortgages gets pulled out of the market. It's really hard to say how we think housing is going to progress from this point. We're focused on taking care of the demand that we can get our hands around now, trying to narrow the losses in the Insulation business and putting ourselves into the position to react to about our market, which we know that there's some place, we just don't know when it's going to come.

Our next question comes from the line of Garik Shmois from Longbow Research.

Just first off, if we could dig in a little bit more on Roofing inventories. I was wondering if you could discuss that and what you're seeing down on the distributor level? And if you think the restocking has any more legs to it or if it really just was a first quarter story? And just a follow-up to that, if you could just talk about perhaps any sequential change in Roofing demand as kind of coming out of the first quarter into the second quarter, just what you're seeing, what kind of momentum in that business as far as the volumes go?

Well, first of all, Garik, if you go back to our fourth quarter call, which was in February, I do think in that call we talked a little bit about what we thought fourth quarter volumes in Roofing were a little bit weaker than maybe we had expected. And then one of our theories at that time was that our customer base didn't really feel a lot of urgency to need to finish the year with a lot of inventories in their warehouses or a lot of inventory on their balance sheet, and that I think we may be foreshadowed that hopefully we would see some restocking in the first quarter. So you never know whether that's going happen until in fact it happens, and we think it did happen. So we were gratified in the quarter to maybe catch up a little bit of the volume that we felt we're missing in the fourth to see a little bit stronger volume in the first. The overall business that's kind of out the door for our distributors, we don't think it's materially different than what they experienced in 2009. Their business is divided into the standard Re-Roof market, the New Construction market and then weather-related or storm-related demand. We only forecast on storms. We don't see the dynamics that cause the re-roof market to uptick strongly. We kind of know where the New Construction markets are. So we think Roofing demand, out the door, the distributor's pretty stable. It's this time of the year though when the snow melts and we get a little bit better roofing weather that we start to get a better sense of what's real demand out the door to the distributors. So we're forecasting the year where we think their business is about flat versus 2009 because they may be liquidated some inventories at year end '09. Maybe we sell a little bit more this year. We think that was mostly a first quarter event.

Just one quick question on Insulation. It seems like international markets continue to do well in the first quarter. It looks like some of the government programs internationally are running out. Can you just talk about what you saw in the first quarter? And your expectations for your non-U.S. Insulation business?

We had talked a fair amount of the second half of '09 about Australia's stimulus and a fair amount of production in U.S., Mexico, China that we were exporting to Australia. We think that's largely behind us. So that's really mostly a 2009 story. That might create some demand for us this year, but we don't think it's going to be material. The bigger news really in the quarter is, we've continued to see a little bit better performance out of our businesses outside the U.S. Canada's pretty good. Latin America had a pretty good quarter. Asia Pacific, I think, has been starting to show some good performance both in terms of top line and also profitability. So we do make money outside of the U.S. in a number of our Insulation businesses and a number of Building Materials businesses. They're not growing tremendously fast. And I think, our challenge is probably to figure out how to get product lines and building practices in those markets that maybe give us better growth. But our overall performance in some of those markets is reasonably good and it's helped buoyed and support what has been a very weak U.S. market for us, particularly on the New Construction side.

Our next question comes from the line of Dennis McGill from Zelman & Associates. Dennis McGill - Zelman & Associates: My first question, Michael, I was just hoping to maybe push a little bit on the Roofing pricing because what I hear you say on one side with the pre-buy activity, if I'm a distributor and I'm pulling forward some of my orders, it's under the expectation that pricing's going to hold in the channel and our research circle indicates that most of the price announcements have held and there's others that are out there. So we would see pricing as a positive when we think about it sequentially, first quarter to second quarter, and probably second quarter to third quarter. So when you talk about margins, I think you touched on this a little bit but didn't totally address it, relative to the first quarter, are you seeing enough of an increase and ask for our cost to overwhelm those price increases to where you'd see sequential deterioration in margin? Or can you hold margin in that general range of the first quarter based on some of the pricing activities that are out there?

I think we've been pretty careful on these calls not to get into kind of quarterly margin guidance for Roofing. So I'll pull back to the broad guidance I think we're giving on Roofing, which is, for the full year, we feel comfortable now saying that we don't think margins will be as high as '09. But we do think there will be an excess of 20. So we said that in my prepared remarks. We did say that we do not believe margins in the second and third quarter will be as strong as they were in 2009 when they were in the low 30s. But obviously, if we're saying the full year is going to be somewhere between 20% and where we finished '09, they're still going to have be very good and profitable margins in those quarters. The fourth quarter is always a little bit of a challenge for us to forecast. But even as we do the sensitivities in the fourth quarter, we feel comfortable with our overall guidance of better than 20, but maybe not as good as last year. Obviously, if they're not going to be as good as last year, given that we've beaten the first, they're going to have a couple of quarters out there where we're going to lag behind and we would expect that certainly through the stronger part of the year, in the second and third quarter, we'll have a very, very healthy margins but not as strong as last year. Dennis McGill - Zelman & Associates: Is it fair to assume that pricing on a sequential basis is positive in the second quarter?

I think it's fair to assume that our raw material cost inflation is going to be positive on a sequential basis, and that the price environment will be satisfactory to allow us to achieve good margins. Dennis McGill - Zelman & Associates: On the Composites side, in the first quarter, realizing you get some benefits on the inventory build, and obviously the comp against last year, should we think about the leverage benefit any differently as we move forward? In other words, just realizing that 7% margin is very strong relative to what you sort of guided as a goal of double-digit margin. So do we rethink sort of the timing of getting back to double digit is based on what we've seen in the first quarter? Or does the leverage play into that to some degree?

Yes, it's a very good question, Dennis. And I think we tried to be very open and transparent on allowing our investors to see where we think volume is and where we think production is. Because all through last year, and I think really, candidly, in the second half of the last year, particularly the fourth quarter, I think there were some disappointed from investors that we didn't show more leverage in the fourth quarter because of the fact that we were starting to show reasonable levels of demand. But we had kept production so pinned down because we want to get to our working capital goals, but there was no opportunity for leverage. We really did open the throttle here in the first quarter. And I think by keeping production pinned down through the end of '09 and then bringing some production back on kind of late fourth quarter, which we talked about on our prior call, we got a lot of leverage in the first quarter. So we really now brought production all the way back to good levels of demand, and now we're really producing to meet the demand that we see in the market. As a result of that, I think the leverage on a go-forward basis is going to be more driven by just volume rather than just volume and production. So whereas in prior quarters, we were deleveraging based on both volume and production. This quarter, we got leverage from volume and production. I think as we go forward now, the leverage is going to come more just from volume as our production ramps and stays track with volume. So this is probably the big leverage quarter, and we feel comfortable that getting back to 7% operating margins was a great stride forward and a great stake on the ground that we just have to continue to build from here.

Our next question comes from the line of Herb Hardt from Monness.

I have two questions. One is, can you tell us how much of the Insulation business is outside the U.S.? And secondly, I think we were a little surprised at the cost on the Insulation side not coming down more. You've been very effective in other divisions, and I recognize volumes haven't picked up much, and yet -- is there something with the structure of that business that just doesn't allow you to get the cost out a little more than you have?

Herb, I'll take the cost question and then I'll let Duncan talk a little bit about the business mix outside of North America. On the cost side in Insulation, I mean there's a lot of things that go inside any business. And really, our core Fiberglass Insulation business in the U.S. has become a small enough portion of the business that in a lot of cases, themes that are going on around and outside that business are driving year view of our cost structure. So I think the team has done a good job on getting after fixed cost structure. But in the quarter, one of the things that we've been dealing with is we have had to do a wholesale conversion in our Foam business from our prior blowing agent to a new non-ozone depleting greener blowing agent. It's been a wonderful product launch for us. We now have a much more sustainable product. Obviously, when you go and do that, though, you're working through inventories, you're working through new production processes, you're working through new raw materials and getting your plans to working as new standards. We think we're coming right along our learning curves, but when you're in a business that is losing money and has weak volumes, any of those kinds that cause headwinds really do and upgrade a lot of friction in terms of trying to get any of the good news through to the bottom line. So I think some of the things we've seen operationally and some of the operational challenges we have, as you get down to very low levels of demand and very low levels of operation even small changes in cost performance, tend to put a little bit of a gravel in the years in terms of being able to try to get a leverage. So we were pleased to get some positive leverage in the quarter, and obviously, we're looking forward to be a year, a positive leverage even though we expect a fairly weak overall demand cycle in 2010. But the quarter obviously didn't get a lot of leverage, and we don't think it's a cost issue. We just think there's a lot of stories inside there. Duncan, you want to talk about outside North America?

Yes, Mike. We actually disclosed that certainly, the first quarter, our International businesses by which remained the business outside of North America, Insulation was at about 16% of our revenue. And we also disclosed that those businesses, I'd say, drove some growth in this outline. And this business is really comprised of the business we have in the Asia Pacific, which obviously, is a considerable presence also. Within the agencies [ph] in China, where we sell Insulation and also some related products, and also Latin America where we have a business that's focused heavily in Mexico but also Latin America more generally. So those are businesses that comprise our International business in Insulation, and it had a good performance in the first quarter in terms of growth [ph].

And our next question comes from the line of John Kasprzak from BB&T Capital Markets. John Kasprzak - BB&T Capital Markets: I guess I wanted to ask as well with $100 million of EBIT improvement in your guidance, could you characterize where the upside versus your expectations is coming from, versus when you've offered the initial guidance in February?

Sure. I think primarily it's more timing than anything. I mean, as we looked at the year, coming into the year, we expected to get operating leverage in Composites. We thought maybe that would take a couple of quarters. And we got ahead of our expectations from where we were 90 days ago or 100 days ago to today. I think that team and also the marketplace and the market dynamics have gotten us ahead of the curve in terms of how much operating performance and leverage we've been able to get in that business. So I think that's been an uptick. I also would say that every fourth quarter call, we talk about Roofing and Roofing margins and very weak seasonal demand in the late fourth quarter and kind of early first quarter as being the period of time where we would expect that margin weakness is the biggest risk in Roofing. That's kind of the period of time where the market is most fraught with risk. Most of the distributors don't have a lot of business. Most manufacturers don't have a lot of business. And you can get into an environment where every order is being priced and negotiated over. Obviously, it continues to be a very competitive market, and we see good competition for every order that's out there. But we got through the winter months with relatively stable prices. We got this little positive tailwind in terms of volumes in the first quarter. So is the Roofing got up to be in a stronger start that we expected. So the combination of those two put us in a position to being able to upgrade guidance. And I don't think it goes to a change in the belief in the core operating capability of our businesses. We've always believed that the businesses we have can operate at this kind of levels. I think it more goes to the timing with which our markets begins to return back to their potential. And therefore, as a result, our business has the ability to get back to their potential.

Our next question comes from the line of Keith Johnson from Morgan Keegan. J. Keith Johnson - Morgan Keegan & Company, Inc.: Just a couple of quick ones on some sequential changes, maybe on Composites just as for clarification purposes. What was the average utilization rates you guys had in the fourth quarter of '09?

It was about 70%. So we disclosed and for the whole year 2009, it's about 60%. We brought some facilities back up towards the back of the year, particularly in the fourth quarter. On average during the fourth quarter, it was running about 70%. We rounded about 83% in Reinforcements in the first quarter. J. Keith Johnson - Morgan Keegan & Company, Inc.: So just in my mind, trying to equate that, I guess, 13% sequential improvement with the significant improvement we saw on the operating margin line, were there any other factors in the first quarter that kind of helped the margin? Foreign exchange, just type of things that we should think about as we kind of model forward for the rest of the year?

Yes. I mean a couple of the things we said, looking at the price, and then we talked about price being sequentially better first quarter than the fourth quarter overall in our business. And what we did say that prices in the fourth quarter had kind of stabilized and began to turn the corner from a decline we saw earlier in 2009. So I think price was a factor in that. I think that's something, which was Michael saying earlier, we continue to focus on as our markets kind of continue to recover. Utilization, and therefore, operating leverage, obviously a big factor. We took a lot of cost out. Over 2009, and that shows in 2008, we're taking cost out too. It's been retaining those cost reductions, and then seeing those come from our operating leverage has obviously been factor. And then one thing, if you remember in the fourth quarter, we had said that there was some start up cost associated with bringing some of that capacity back online in the fourth quarter. Obviously, that level of start-up cost did not repeat in the first quarter. So obviously, we also had an impact on the quarter-over-quarter kind of leverage that you saw. J. Keith Johnson - Morgan Keegan & Company, Inc.: What were the start-up costs in the fourth quarter?

We disclosed that we have had some start-up costs associated with bringing capacity online in the fourth quarter, which have made a difference in the fourth quarter's results. It didn't specifically give a number, but it had been -- it'd given out as a roughly break-even kind of quarter, slightly positive quarter. It was material in the context of that kind of number. J. Keith Johnson - Morgan Keegan & Company, Inc.: And what was the foreign exchange even if they don't margin in the first quarter of '10?

There was a foreign exchange benefit in terms of the sales line. I think it was a benefit year-on-year. I don't think it was -- we didn't disclose anything on its benefits on the EBIT line, if there's any benefit in revenue. J. Keith Johnson - Morgan Keegan & Company, Inc.: Just sequentially, looked like you had a nice drop off in interest expense, from $30 million down to $26 million. I didn't know kind of what's the driver was there. It looked like your net debt position didn't change substantially fourth quarter to first quarter. So not quite sure what's driving that decline?

We did disclose that actually in the fourth quarter that we did execute an interest rate swap against some of our fixed-rate debt bringing to floating. So that had a benefit in terms of our interest expense from the fourth quarter to the first quarter.

Marisol, it looks like we have time for one more question.

And our next question comes from the line of Keith Hughes from [indiscernible] SunTrust.

You talked in the prepared comments on the European capacity within Composites, adding in Russia, not opening up Spain. What does that do to your total capacity within the European market? And is the outlook there any different for Composites than you find in the other parts of the world at this point?

Great question. Let me start with the second part of your question first and then I'll come back to the first part. We said all throughout last year that when we really saw the big drop off in global industrial demand, we saw it coming pretty equal pieces across Asia, Europe and North America or the Americas. We also said throughout last year that we certainly were seeing Asia recovering most quickly and getting back to kind of 2008-type levels much more quickly than either the Americas or Western Europe. We've also disclosed that we've seen the Americas recover a bit more quickly than we have seen Europe recover. So it's probably lagging in terms of recovery. I would say that we have a growth outlook for Europe from where it is today. But that growth outlook is probably more cautious, and then maybe our growth outlook is for the Americas and certainly, more cautious than our growth outlook for Asia. As a result of that, we're trying to keep our production capacity pretty well-balanced in Europe. One of the things that you've kind of rightfully seen in the announcements we put into the release today is that, our decision to not restart in Spain and to try to improve our cost position and balance our capacity to demand and then our decision to invest in Russia, we are offsetting some of that capacity loss in Spain with some additional capacity in Russia. But Russia is an existing operation, so it's not a greenfield. We're going on an existing operation there where we have an old melter that needs to be rebuilt. And we're going to refurbish that melter and put in something as more state-of-the-art and we'll get some amount of capacity increase. But it's not going to be a significant capacity increase for the region of Europe. In totality, our overall philosophy, and I think this goes to the prior questions too, is to try to keep capacity and demand pretty well-balanced by region, so that we aren't really at the whim of foreign exchange and getting cost mismatches with pricing. So having the European asset base, having the Asia asset base, with the investment in China, and then having the North American asset base, all configured to be able to serve their local market at low cost, is where we continue to drive our Composites business.

Very good. Thank you for joining us for today's call. With that, I'll turn it back to Chairman and CEO, Mike Thaman for a few closing remarks.

Well, thanks, Darrel. We certainly appreciate all the investors' interest in the company and all the good questions and dialogue. I'll kind of go back to where we started today, which is, we think today we are announcing really an outstanding first quarter. We think we've got the year off to a very strong start, and we're obviously pleased to be able to upgrade our guidance by an additional $100 million to adjust the EBIT of $450 million and earnings per share in a $2 per share range. I think this really speaks to, hopefully, something you've all been hearing from us as we've talked with investors over the course of the last couple of years, which is, we think we've got an outstanding portfolio of businesses. And that while our markets have each in their own way gone through periods here of operating well below their potential, we've continued to build and invest in our businesses to make them the strongest possible market-leading business as they can be. As you look into 2010, I think you're going to see a portfolio of Owens Corning that is dramatically improved from '09. In '09, it was really a Roofing story. I think in 2010, we're building too much more with Roofing and Composites story. And our goal, obviously, is to see this housing recovery calmed, where one day we can get on this call with you and talk about Roofing, Composites and Insulation story. We're confident that they will come. We'll do that to get great long-term outlook for our company. But our near-term outlook is also quite strong and quite good. So we feel good with where we are right now. We feel great about our balance sheet. We think we're operating pretty well around the world. Our teams are focused on trying to build our customer base and build our capabilities. And we're just happy to be off to a great start. We look forward to talking with you again in three months as we discuss the second quarter. Thanks for a great call.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.