Owens Corning (OC) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the First Quarter 2011 Owens Corning Earnings Conference Call. My name is Shaquana, and I will be your coordinator for today. [Operator Instructions] I would now like to turn this presentation over to your host for today's call, Mr. Michael McMurray, Vice President, Investor Relations and Treasurer. Please proceed, sir.

Thank you, Shaquana. Good morning, everyone. Thanks for taking the time to join us for today's conference call in review of our business results for the first quarter of 2011. Joining us today are Mike Thaman, Owens Corning's 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 yourselves 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 purpose of our discussion today, we've prepared presentation slides that summarize our performance and results for the first quarter of 2011. We will refer to these 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. Please reference Slide 2 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. Reconciliation of GAAP to non-GAAP are found within the financial tables of our earning 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?

Thanks, Michael. And good morning, everyone. We appreciate you joining us today to discuss our first quarter results. Driven by continued strong performance in our Composites and Roofing businesses, Owens Corning delivered profit that was in line with our expectations for the first quarter. This performance positions us to reaffirm our full year guidance of $475 million in adjusted EBIT. I'll talk more about this in a few moments. Reviewing our first quarter results, total revenue was $1.2 billion, down 2% compared with the same period last year. In the face of markets that continued to perform well below their potential, EBIT was $61 million, down from $97 million one year ago. EBIT was negatively impacted by lower year-over-year volumes in our Building Materials businesses, as well as operating investments to expand our Composites capacity and convert Insulation facilities to boost our new EcoTouch Insulation. We expect that Building Materials and volumes will improve through the year and that our first quarter operational investments will start showing a positive impact by the end of the second quarter. Duncan will provide a more detailed reconciliation of our first quarter results in his comments. So let's now review how Owens Corning is performing relative to the expectations we framed for 2011. We said that we will continue our progress in creating an injury-free workplace. During the first quarter our rate of injuries improved by 30% over our full year 2010 performance. As you may recall, 2010 marked our ninth consecutive year of safety improvement. Achieving this level of further progress is particularly noteworthy. We said that Composites would deliver another year of double-digit revenue growth and $75 million in EBIT growth. We delivered 6% revenue growth in the quarter, continued pricing momentum and strong production leverage drove a 55% improvement in the first quarter EBIT. Our first quarter results are consistent with achieving our full year goals for this business. We said that Roofing EBIT margins of 20% were achievable for the year. The business delivered EBIT margins of 16% in the first quarter. And our Roofing results were slightly better than we expected. We were pleased to see volume recovery in the first quarter after closing 2010 with two quarters of very weak demand. We are focused on profitability and believe we are on track to achieve our 20% margin goal. We said Insulation would narrow its losses and embark on a measured path to recovery in 2011. First quarter Insulation losses were greater than last year due to challenging market conditions and planned operating costs associated with the conversion to EcoTouch production. We expect this business to continue to lose money in the second quarter and for the year. However, with moderate improvements in the new construction markets, we have actions in place that will produce profitability for the second half of the year. I'll speak more about the Insulation business later on my prepared marks. First quarter was in line with our expectations although weaker than last year and below Street consensus. In our fourth quarter call, we spoke about many of the items that impacted results in the first quarter. In particular, negative comps on Roofing volumes and contribution margins, further weakness in the residential new construction markets, costs associated with the EcoTouch conversion and start-up cost in our Composites business. When we provided our guidance for the year, we indicated that comparables will be difficult in the first half of the year and as a consequence our performance would be weighted towards the second half. We continued to expect that we will see moderate growth in the U.S. construction markets and that the overall economic outlook will not be materially impacted by the recent volatility in commodity prices or the potential disruption from the events in Japan. The performance that we are reporting today is consistent with its outlook and underpins our confidence in our full year guidance. Now let's turn to our review of our business segments and our outlook. Composites continued to build on its impressive momentum from 2010, as improved pricing and strong production leverage drove major improvements in the first quarter EBIT. EBIT totaled $48 million on EBIT margins of 10%. The first quarter marked the sixth consecutive quarter of price improvement for this business. On our last call, we commented that our newly installed capacity in China was up and running. The facility began shipping products in the first quarter and is expected to contribute to profitability going forward. In combination with the expansion of other facilities around the world, we continue to strengthen our position and take advantage of global composites demand growth. Moving to our Building Materials segment, Roofing continued to deliver strong profitability despite historically weak market conditions. The business delivered EBIT of $77 million in the first quarter. In addition, first quarter volumes were lower versus the first quarter of 2010. We are experiencing higher raw material costs, particularly in asphalt. We've taken pricing action in response to this raw material inflation. We executed a price increase in the first quarter and have announced a second price increase for the middle of this quarter. These actions, if successful, will allow us to cover the increased cost of raw materials that we have seen to-date. As anticipated, the Insulation business lost money in the first quarter, which is typically a seasonally weak period. Our Insulation business operates on a 90-day lag to housing starts. First quarter sales were impacted by lagged housing starts from the fourth quarter, which was 3% lower than prior year. As noted, costs associated with the conversion to the production of our innovative EcoTouch Insulation had a negative impact on first quarter results. EcoTouch represents the single largest product platform change in the history of the Insulation business. We view this as a game-changing product. We've received positive feedback from many of our customers and believe that EcoTouch is a major differentiator for Owens Corning in the marketplace. The plant conversions are well under way. And at this point, more than half of our facilities are producing EcoTouch. We expect the conversions to be substantially complete in our North American facilities by the end of the second quarter. In addition, we've announced pricing actions on our U.S. residential Insulation products that are expected to have a positive impact on results in the second half of the year. Finally, during our last call, I discussed our agreement with Masco that designated Owens Corning as the primary Insulation provider to their Contractor Services business. We're working with Masco to implement this agreement in the field and expect to see a positive impact on our performance in the second half of the year. Despite the market challenges we face, we are pleased to have delivered performance that was in line with our expectations for the first quarter. We expect stronger performance as the year progresses, with each of our three primary businesses positioned to benefit from growth. The headline is that we remain confident in our full year guidance of $475 million in adjusted EBIT in 2011. And our outlook for the balance of the year remains consistent with progress towards achieving our longer term goals of $1 billion in cumulative free cash flow from 2011 to 2013 and $1 billion or more of adjusted EBITDA in 2013. Our confidence is rooted in great businesses that serve great customers and markets. Our team is working hard every day to win with our customers and grow our business. We're excited about the tremendous opportunities for Owens Corning in 2011 and beyond. With that, I will now turn to our CFO, Duncan Palmer, for a more detailed look at our first quarter financial performance. Duncan?

Thanks, Mike. [Audio Gap] tables at today's news release and the Form 10-Q. Today we reported first quarter 2011 consolidated net sales of $1.24 billion, a 2% decrease compared to 2010. Our Composites segment increased sales over last year by 6%, primarily on higher selling prices, while revenues in Building Materials fell by 7% on weaker market demand and lower roofing prices. In the first quarter 2011, we did not have any adjusted items to our reported earnings before interest and taxes, EBIT. In recent years, when we have looked at period-over-period comparability, our primary measure been adjusted EBIT. The significant majority of the items we have adjusted, as unrepresentative of our ongoing operations, have related to major cost reduction programs and merger and acquisition activity. We will continue to provide adjusted EBIT as a measure to exclude significant items when we do not believe they are reflective of current operations. As I mentioned in our last earnings call, we will continue to adjust our effective tax rate to remove the effect of quarter-to-quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share. In the first quarter, we have adjusted our effective tax rate to 28%, in line with our anticipated annual effective tax rate for 2011. Adjusted EBIT for the first quarter 2011 was $61 million as compared to $97 million of adjusted EBIT in the first quarter 2010. Results for the quarter were in line with our expectations and provide confidence that we are on track to achieve $475 million in adjusted EBIT for the year. Adjusted earnings for the first quarter 2011 were $25 million or $0.20 per diluted share as compared to adjusted earnings for the first quarter of 2010 of $53 million or $0.42 per diluted share. Depreciation and amortization expense totaled $80 million for the quarter. This is consistent with our guidance that full year 2011 depreciation and amortization expense will be about $340 million. Our capital expenditures for the quarter totaled $91 million. We continue to anticipate that capital expenditures for the year will be around $400 million. Our businesses have experienced inflation particularly in commodity prices at a higher level than we had anticipated. This inflation affects our input costs particularly asphalt, other petroleum-related input materials and transportation costs. We would anticipate the effect to persist during the remainder of 2011. We have taken action to address the impact of cost inflation through productivity programs and price actions, notably in Roofing. Further increases in these input costs could impact our business during the year. Next on Slide 6, you will see adjusted EBIT performance comparing first quarter 2011 with the same period 2010 based on business contribution. Adjusted EBIT decreased $36 million from first quarter 2010 to first quarter 2011. EBIT in our Roofing business declined $51 million, which was the result of lower unit margins and sales volumes. Insulation EBIT was $11 million lower. These impacts were partially offset by our Composites segment, which increased first quarter EBIT by $17 million over 2010, demonstrating high operating leverage on increased sales. General corporate expenses and other in the first quarter 2011 were $9 million lower than the first quarter of 2010 due primarily to the divestiture of our North American Masonry Products business. For the full year 2011, general corporate expenses are expected to be between $80 million and $90 million. We have sustained a disciplined approach to managing our operating expenses despite growing our profitability over recent years. In the first quarter, we maintained our overall headcount below the year-end level of 2010. With that as background, turn to Slide 7, and we will begin a more detailed review of our segments starting with Building Materials. In the first quarter, Building Materials net sales was $786 million, a 7% decrease from the first quarter 2010. Building Materials delivered $30 million in EBIT for the first quarter 2011, $57 million less than the same period in 2010, but in line with our expectations. As we mentioned in the last earnings call, we expect that comparables in the first half of 2011 will be challenging, particularly in Roofing. The following 2 slides present the results in more detail by highlighting the businesses within the Building Materials segment, the Roofing business and the Insulation business. First, Slide 8 provides an overview of our Roofing business. Roofing sales for the quarter were $496 million, a decrease of 6% from first quarter 2010. As indicated on our last call, in 2010, we experienced very strong shipments in the first and second quarters as our customers built inventories in anticipation of improving market conditions. In the second half of 2010, we saw a significant reduction in our shipment volumes, particularly in the third quarter as our customers corrected their inventories. We therefore, anticipated our first quarter 2011 shipments would be lower than 2010, and they were. We currently expect that second quarter revenues will also comp negatively with 2010. We have seen some severe weather so far this year, storm demand is a regular part of U.S. roofing shingle demand. It is too early to say that the storms we have seen will have a material impact on demand in the second quarter or for the year as a whole. Overall, we expect modest revenue growth for full year 2011 with revenues more evenly split between the first and second half of the year, consistent with our historical experience. Our Roofing business delivered EBIT margins of 16% in the quarter that typically has lower EBIT margins than the annual average. As we entered the year, contribution margins were weaker than we saw in 2010. Based on the price actions we have taken, we expect margins in the second quarter to be about 20%. We continue to believe 20% EBIT margins are achievable in 2011 as a whole. Next, on to Slide 9. Insulation sales for the first quarter were $290 million, a decrease of 4% from the first quarter 2010. We experienced lower sales volumes given the current state of the U.S. housing market as lagged, seasonally-adjusted annualized housing starts fell by a further 3%. Our prices have been stable or slightly increasing across many of our Insulation markets. EBIT for the first quarter 2011 decreased by $11 million as compared to the same period in 2010. Insulation results were negatively impacted by lower sales volumes and operational investments associated with the launch of our EcoTouch installation. We expect that the conversion to EcoTouch production across our facilities will be substantially complete by the end of the second quarter. We expect that our Insulation business will demonstrate year-over-year revenue growth in the second half of the year based on our relationship as the primary supplier to Masco, pricing actions we have announced and the potential for a moderate improvement in housing start activity in the latter half of the year. We anticipate that revenue growth of as much as 10% this year is achievable depending on the degree and timing of improvement in market demand. This would enable our business to be profitable for the second half of 2011 as a whole. However, we would expect second quarter demands to comp slightly below second quarter 2010. As I remind you on each of our quarterly calls, this is a great business and a well-structured industry. Owens Corning's PINK Insulation is a powerful and enduring brand. We are the clear market leader, well-positioned to return to historical levels or performance when demand improves as we know it will. Next, Slide 10 provides an overview of our Composites segment. Composites sales in the first quarter 2011 were $492 million or 6% higher than the same period in 2010. This increase was primarily the result of higher selling prices during 2011 compared to the same period in 2010 on our relatively flat volumes. Demands in China dipped temporarily in January and February but shipments recovered significantly late in the first quarter and have continued in April. First quarter 2011 EBIT was well ahead of the first quarter 2010. Composites achieved 10% EBIT margins and delivered $48 million in EBIT driven by increased selling prices, which more than offset inflation and by improved manufacturing productivity. As we anticipated on the fourth quarter call, first quarter 2011 EBIT was sequentially below fourth quarter 2010 EBIT due in large part to start-up costs associated with our new facility in China, as well as other investment projects in our facilities during the quarter. We are extremely pleased with the performance of our new facility in China and are confident that this expansion, as well as our other investments, will contribute significantly to EBIT in 2011 beginning in the second quarter. As previously announced, to further capitalize on market growth, we are expanding our reinforcements facility in Russia, which is on target for start-up by the end of 2011. Based on these factors, we remain confident that 2011 EBIT can increase by $75 million over 2010 on low double-digit revenue growth. We expect year-over-year revenue growth in the second quarter to be in line with this overall projection with EBIT margins in the low double digits. We have a few additional items to cover. To Slide 11, we continue [Audio Gap] on cash generation and maintaining an investment-grade balance sheet. Due to the seasonality of our business, our operations typically use cash during the first quarter of the year. In the first quarter 2011, our operations used $213 million, which in line with our expectations, included additional seasonal working capital and a $78 million contribution to our pension plans. We did not repurchase any shares under the previously announced buyback program as of March 31, 2011, 7.7 million shares or 6% of the company's outstanding remain available for repurchase. We expect to complete the current authorization by the end of 2012. This represents a return of capital to our shareholders that reflects our strong output for earnings and free cash flow generation. We believe that our $2.4 billion tax NOL asset has delivered cash tax savings of about $140 million for the period 2009 to 2010. These ongoing savings demonstrate the value of the NOL. Due to our favorable tax position, we expect to incur less than $30 million cash taxes in 2011. We project that our effective book tax rate for the year will be 28% with some fluctuation quarter-to-quarter based on our blend of our U.S. and non-U.S. operations. Our first quarter 2011 results were in line with our expectations. And we remain confident in our guidance of $475 million in adjusted EBIT for the year, which translates into growth in adjusted earnings per share of more than 30%. There is significant uncertainty in the global economic environment, including the impact of the recent events in Japan and volatility in commodity prices, especially crude oil. We are monitoring the effects of these factors on our markets. The size and breadth of these uncertainties could pose challenges to our financial performance and outlook. In Building Materials, we believe that both Roofing and Insulation will benefit from higher year-over-year revenue in the second half of 2011 despite unfavorable comparables in the first half. As I indicated earlier, our outlook anticipates moderate growth in both U.S. roofing shingle demand and U.S. lagged housing starts. The Composites business is positioned to benefit from the growing markets and the start-up of our new facility in China. This performance keeps us on track to deliver on our goals of reaching $1 billion or more of EBITDA in 2013 and $1 billion of cumulative free cash flow over the period from 2011 to 2013. And with that, Michael, back to you for Q&A.

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

[Operator Instructions] Your first question comes from the line of Jonathan Ellis representing Bank of America Merrill Lynch.

Thank you. First question on the Insulation business and the comment about profitability in the second half of the year. I was hoping you could give a little bit more context around the various drivers, maybe some assumption around what housing starts would be and then also perhaps an update on price increases. I know you put through a residential price increase early this year, I believe, on the order of 6% to 12%, perhaps an update on how that has been accepted by the market.

Well, thanks for your question. Good question. I think that we covered a lot of this in our prepared remarks so let me summarize it kind of specifically to your question. I think there's really four drivers that when we look at first half, second half performance in Insulation, give us the confidence to say that we think the business could return to profitability in the second half. Let's start with your question about starts. We had come into the year on our fourth quarter call and said that we think starts would be 700,000 this year, so we've been a little bit more pessimistic about starts than maybe where the market was as we entered 2011. I think now – bluechip [ph] economic forecast has kind of come down to the 630,000 range. We've been kind of in those mid-600,000. So from where we are today, that would represent sequential improvement in the construction market and if we follow that path, we'd expect to see the market comp positively from the first quarter to the second, from the second to the third and the third to the fourth, particularly because we deal with the lag. And certainly in the second half, we'd expect to see the market comp positively to the second half of 2010. So that would be a positive. The second positive is in the second half of last year, we did have some EcoTouch conversion costs that were in our Insulation numbers. Those were in the first half of this year. So we would expect those cost to begin to come out of our numbers sequentially in the second half versus the first. And we'd also expect them to comp positively versus the second half of last year. Third, I think Duncan and I both spoke to the timing of the implementation of the Masco agreement that we talked about in our last call. We had said in February that we had been chosen by Masco to be their primary supplier of Insulation to their Contractor Services business. As you might imagine, it actually made some of those transitions happen in the field takes some time. That work is underway. We would expect that the additional volume from Masco would begin to have an impact on our performance really starting in the second half of the year. So again, positive sequential comp as well as positive comps to prior year. And then finally on pricing, we have announced a fairly significant price increase for late in the second quarter. Mid-double digits of 15% increase on most of our U.S. residential Insulation products. And then a bit higher increase on some of our high performance products, which are more expensive to manufacture, and deliver, we believe a greater value to the homeowner and to the builder. We've been working very hard on pricing and believe that beginning to move the needle on price is a very important lever for us to get the business back to profitability as soon as possible. Certainly, as the outlook for housing has become more pessimistic over the last 2 or 3 years, in terms of the speed of the recovery, it's become more important for us to get proper value for our products. So we would expect, again, with the achievement of that pricing that we would see a sequential improvement in our price both at comparable basis to the first half, as well as an improvement on a comparable basis to the second of last year. We really need kind of all four of those knobs to be kicking in and that's where the management team is focused and those are the actions we're taking. And as a result, we don't think that in the second quarter, we would get back to profitability. I think we're fairly clear about that so we do think across the second half, in total, we should be able to return to profitability in Insulation this year.

Great. That's very helpful. The second question is just on the Composites business. To be clear, do you need to see further improvement in Asia or further recovery off of -- I think, Duncan [ph], you mentioned improving in March and April but a further acceleration in order to get to your full year EBIT target or is the run rate now going to be sufficient in Asia to achieve that. And then secondly, talk about pricing in Composites globally, is there still more of a push in the United States on pricing? Or are you seeing that spread to other regions as well?

I'll handle the question related to Asia and then I'll let Duncan talk a little bit about pricing and our pricing outlook. What we said today in our disclosure was that particularly in China, we saw a little bit of kind of an air pocket or a soft patch in the business, midway through the first quarter. We were pretty pleased with where we saw volumes in March and kind of where we see volumes so far in April. So it feels to us like we were seeing a temporary issue or a timing issue as opposed to an overall correction or some type of softness in the overall market. We expect growth in China this year so we would expect to see normal growth in the China market through the year and I think our outlook would depend on that. But we don't need to see any type of remarkable recovery from today's levels of volumes in order to feel comfortable with the guidance we've given. Duncan, you maybe want to say a few things about pricing?

Yes, I mean we've seen as we said on the call, several quarters now -- and I think, we said the 8 quarters of consistent improving pricing overall in Composites. Obviously, there's a lot of different prices in a lot of different markets and regions in the Composites business, but generally, the trends are being, I mean, pretty good for several quarters now. And I think the market is still relatively in the early cycle of growth. And we talked about seeing some tightness in capacity end of last year. So, we've -- generally speaking, been seeing very positive trends in pricing in the Composites segment. We've been able to more than recover the inflation over the last year that we've seen. And we're probably back now in pricing to kind of roughly the levels that we saw before the crisis in 2008. In terms of the outlook for pricing, obviously, it will vary again by markets and by end-market applications. But generally speaking, I think we're still in the early stages of a Composite cycle and therefore, I think there's still the opportunity for us to continue to see that being relatively a help rather than a hindrance.

Okay. Thank you.

And your next question comes from the line of Michael Rehaut representing JPMorgan. Michael Rehaut - JP Morgan Chase & Co: Thanks. First question, just on the EcoTouch, I was wondering if you could -- if it's possible to drill down on that just a little bit more in terms of: number one, the cost impact; and number two, going forward, once that's fully implemented, what type of magnitude do you expect that to have either/or and on both a sales and margin side?

Okay. Let me talk first about what we're really doing there. I think with the EcoTouch product, we've come out with a new binder system for our Insulation product, which make the product softer, reduces the dust and irritation, has given us, I think, some very good mechanical properties and some performance properties for our customers. So we think we've created a sustainable and very green product without really any compromises for our customers. We've given them a product that is as good, if not, better. And most of our market research today says our customers prefer this product, and believe it is better than the product we are putting in the market prior to this conversion and in giving them a sustainability message and a performance message that, I think, is very welcome in the market today. In order to do that, we do need to shut down our facilities for a short period of time, we need to make some conversions and particularly the chemistry area of our plant. We then need to bring the plant back up and we have, obviously, a learning curve, a phenomena, as the employees in the plant learn how to operate the new technology and learn how to operate that is good economics. We've been at this now in terms of conversions through late last year and I think in the most pronounced way in the first quarter of this year. I think if you look at the delta in terms of EBIT performance from last year to this year and the first quarter, EcoTouch and some of the top line weakness probably describe most of the delta between last year's performance and this year's performance in terms of why we didn't comp positively with 2010. It was both top line and then some of these cost -- I would expect that you'd probably have a similar magnitude of impact to the cost side in the second quarter and then that would start to go away in the second half of the year, we'd actually comp positively to the second half. In terms of market impact, we have done a fair amount of research in particular with insulation contractors and their [ph] feedback that the product installs faster. That it comes out of the bag and recovers faster and that it performs better in the wall for them, so we think our customers will pick up some productivity. We do know that the contractors who work with it or the individuals who work with it have commented on the softness and kind of silkiness of the fibers. You know that we’ve, unfortunately, enjoyed a long-standing reputation for making product a product that is itchy. And I think most people go back probably 30 years with their experience of FIBERGLAS Insulation and drawing that conclusion. The product that we put in the market today is dramatically different than the product any of us would have as a reference point on Insulation. And in fact the product has very low irritation, very few people are today irritated or found, in any way, the product is itchy. So we really started to get a product that we can look people straight in the eye and say this is a product we think you'll enjoy working with. We think that will give us obviously a preference with the professional contractor who deals with the product all day long. And then obviously, as you move to retail, we think we've got a nice message for Home Depot who really is our partner today on the big box side, or the lumber yards or others who might sell to a do-it-yourself-er in terms of why this product is a good product for a do-it-yourself-er to consider for their re-insulation projects. So we think it's a winner all around and all those little bits of preference add up to the market-leading position we've always enjoyed in Insulation. Michael Rehaut - JP Morgan Chase & Co: Great. Thank you, Mike. The second question, just on roofing and asphalt, obviously, it's heartening to hear the reiteration of your outlook for the 20% margin there. In the first quarter and as you look into the second quarter, I was wondering if you could just kind of -- if possible, get a little more granular in terms of where you are with the -- I believe and correct me if I'm wrong, through the price, there's some additional price increases that your implementing in Roofing, and where that stands and if there's additional ones that you also intend to implement in 2Q as you are in Insulation?

Sure, I'd be happy to talk about that. Starting with kind of your first comment about volumes, we were happy to see that we felt that we had a pretty healthy quarter from a volume point of view in what is still a very weak market. So, I mean, relative to our market expectations, we are expecting that it's going to be one of the lowest markets on the last 15 or 20 years. But incrementally, a bit better than '10. And certainly the first quarter result, in terms of volumes, gives us confidence that that's probably the environment we're operating in. Coming into the year, I think we talked in the third quarter call of last year and also in the fourth quarter call of last year, there was very, very weak volumes in the second half. We were seeing more buy activity. We were seeing some more price competition in the market that weakened our contribution margins a bit in the third quarter and then I think further weakened our contribution margins a bit in the fourth quarter. We entered the year therefore, with a little bit less earnings power in the business than we had in the first half of last year. And I think that showed up in the margins that we reported in the first quarter this year. We did take a pricing action that was implemented in the first quarter. We've announced another price action for the middle of the second quarter. At that time we announced those, we were seeing some run-up in oil prices and asphalt costs. Obviously, we've seen the run-up in oil prices and asphalt costs accelerate over the course of the last 30 or 45 days, so we've been glad to be ahead of the curve on that. If you go back to '08, which was the last time we saw this kind of run-up in oil prices, that was a time that we were relatively successful in improving the pricing of our product and being able to recapture that inflation in the market. So that's where the scenario -- we see ourselves moving into here in the second quarter. And feel pretty comfortable that we should be able to get margins back to guidance in the second quarter. Michael Rehaut - JP Morgan Chase & Co: Great. Thanks.

And your next question comes from the line of Joshua Pollard representing Goldman Sachs.

Thanks a lot. My first question is on Composites, there seem to be a lot of moving -- sort of moving things within the quarter. At what point would you expect Composites to return back to its 4Q 2010 profitability levels?

Well, Josh, I mean we've said for the year that we think Composites would show a $75 million of EBIT growth versus prior years. So clearly, we are expecting kind of double-digit top line that Composites' overall level of profitability would improve and that we would get that out of both the operating leverage and some of the sequential pricing that Duncan talked about. I think in broad terms, you should expect to see that progress be made through the year. So we haven't given any specific quarterly guidance as to where we expect Composites margin to be in any given quarter. But clearly in the first quarter, we were impacted by some start-up costs, not just in our China facility, but we brought some additional capacity online in the U.S. and some additional capacity online in Europe. We would expect to see those investments in capacity start-up begin to pay some dividends for us in the second half -- second quarter and then continuing into the second half as, kind of, our operations line out and we start operating in a pretty balanced way.

And in the quarter, did you run into any issue shipping your asphalt product given the limited availability of trucks across the country? And if not, and storm demand picks up for you all, would you guys anticipate any bottlenecks in your supply chain for the Asphalt business?

It's a great question, Josh. We ship roofing on flat decks and certainly flat deck availability in the U.S. has been one of the issues even with kind of as weak as the U.S. economic recovery has been that -- that's a place where the market has gotten the bottlenecks I think sooner than you would've expected. It's really, I think, a competitive issue, as well as a supply chain issue. So on the one hand, could we potentially have some supply chain issues related to availability of flat decks? The answer to that clearly is yes. I mean, if we were to really see demand to pickup related to storms or we needed to start moving product across regions in some more pronounced way than we do today, that could tie up more equipment. Relative to the other roofing manufacturers, we think we're fairly well-positioned with some good long-term relationships with some carriers with whom we think we enjoyed good relations. So if that were a problem we think it would be industry-wide and we wouldn't expect that it would hurt us anymore significantly than any of our competition. So it really end up becoming a timing problem more than a market share problem. I think that's something we could work our way through.

Okay. And last sort of follow-up is -- what's the fulcrum on your stock, where you guys ultimately believe it makes more sense to hold the cash on the balance sheet than to use it for stock buybacks? The reason I'm asking is for the last 2 quarters, your share repurchases have come in below our expectation, and I'm trying to get a sense of the sort of pace and timing of your future share repurchases. Thank you.

Thanks, Josh, I'll take that, it's Duncan. What we've said is that we have 7.7 million shares outstanding under the repurchase program and we expect to be complete in that by the end of 2012. As we came into the year -- looking at this year as a whole, obviously, we took a look at whether the cash flow during the year is coming in, where the free cash flow is going to be in the year. It's traditional for us to use cash in the first quarter. We also used a little more than usual probably because we put quite a lot of money into our pension this quarter, as we looked to some of the things we needed to get done and terms of EcoTouch, in terms of making sure our stocks are up in China was on schedule. We were somewhat cautious about how we deployed our free cash flow in advance [ph] of some of those items as we looking further into the year. And the line of sight to free cash flow during the year -- I think you can expect us to evaluate that decision on an ongoing basis.

And your next question comes from the line of Josh Levin representing Citigroup.

When you gave your full year guidance back in February, were you assuming then that Insulation would return to profitability in the second half of the year?

Yes, when we gave our guidance, obviously, we didn't break it down maybe with some of the detail that we provided today. But our expectations for the Insulation business really have not changed in the last 75 days. So as we came into the year, we saw some of the challenges in the first quarter and the second quarter related to comps and market-based issues and didn't candidly expect to make a bunch of progress versus prior year. In the first half, we came into the year expecting to make progress versus prior in the second half of to and including making money. So I don't think we have seen anything in the last 75 days that has changed our expectations or outlook for the Insulation business.

Okay. And going back to EcoTouch, just trying to drill down a little bit, can you quantify, can you give us a number, the costs associated with the launch of EcoTouch in the first quarter and maybe the second quarter that will not reoccur in the second half of the year?

Yes, I mean, I think I probably gave as good an answer on that earlier in the call. When you look at the quarter, we were about $10 million down on EBIT versus prior year, top line was off about $10 million. If you look at the difference in bottom line performance in the business, it's really those two things that were driving the variance in EBIT year-over-year. Prices were stable to slightly up. We had some inflation but the inflation was not pronounced because that's really more of a natural gas-driven inflation and we have not seen a lot of inflation in those types of energy cost. So our inflation was fairly well under control. Our revenue was a little bit down and that caused us to lose a little bit of profitability or to create a little bit greater losses. And then in addition, we have these one-time costs that we think will start to go out of the books by the end the second quarter.

Thank you.

And your next question comes from the line of Kathryn Thompson representing Thompson Research Group.

Thanks for taking my questions today. With the expansion of your Masco composite facility, which is due to be completed by the end of 2012, could you confirm that this will be for your higher margin project? And a question for this -- is the target market for this project in the U.S. or elsewhere? Could you confirm the primary end markets for this planned expansion? And could you also just reiterate -- does this change any of your volume growth outlook for Composites over the next 12 to 48 months?

Yes, great question. We had previously disclosed, I guess, through our press release sometime in the first quarter, an announcement that we intended to expand our reinforcements plant in existing platform in Mexico. That expansion will take place probably beginning later this year and will continue through 2012, truly be available to us in a material way beginning in 2013. Our general philosophy in Composites is to try to match capacity to local market demand so we tend to think of regional capacity and regional demand and try to keep the business fairly well in balance. Our decision to add capacity in China, obviously, which is now behind us, was related to growth we saw in Asia. Our decision to add to capacity in Russia is related to some growth we've seen in Eastern Europe. And now our decision to expand in Mexico is related to some market opportunity that we see certainly in North America. But I think as importantly, probably the ability to create what we believe will be global scale low-cost platform, that if we do need to move product across geographies, we think the platform we have in Mexico is probably as low-cost a platform as there exists in the world. Depending on what happens with the Chinese currency, or inflation in China, it remains to be seen kind of how competitive the Chinese manufacturers will stay in terms of exporting from China to the U.S. or North America. So certainly that might create a bigger opportunity for us in North America than we're currently banking on. But with the global market growing at about 6% a year, I think we've talked previously that a scale melter [ph] adds about 5% to 10% capacity to our overall network. This will be just the next piece of capacity we need to put in place another for us today be able to maintain our global market position.

And do you expect that 6%-plus percent growth for the couple of years doing that -- is that part of your plan for adding this capacity?

Yes, we've said that I think in a good way that we're probably still early in the cycle for our Composites recovery. And that this recovery or this cycle actually represents a big opportunity for the company that we, maybe, haven't seen in the last two or three cycles. Typically, it takes a little longer into the cycle before we would see tightness in our capacity and have the ability to put capital into the business and have the ability to put in low-cost capacity. I think because of the restructuring we did post the Vetrotex acquisition, we took out a fair amount of high-cost capacity and actually ended up in a situation where we were at reasonably high levels of utilization fairly early in the cycle. So our goal here is to now use this opportunity to bring online very low cost, well-situated capacity that has a chance to operate through the remainder of this cycle and make good returns for the company and then also position us to be a very well-cost global manufacturer.

Okay, thanks. On [ph] Roofing, did you use any qualitative statements or are you seeing any increased resident demand from storms that we saw earlier this year?

Yes, Duncan talked about that a little bit and then maybe I'll just see what I can add on that. You know, on our Investor Day we put out a slide where we show 15 years of roofing demand and we break it -- this is market data and we break it by what is new construction-related, what is our estimate of re-roof and repair and what is our estimate of storm-related demand. I think for 2010, we estimated that there was about 6 million squares of demand associated with storms and I believe we've disclosed that we believe the 15-year average for that is around 8 million squares per year. This early in the year, it's hard to tell whether some of the storms we have seen through the Carolinas and here through the Ohio Valley are in fact accretive to the 6 million to 8 million that we would expect in any given year or whether they're just the normal storm demand that you would expect to cause there to be 6 million to 8 million squares of demand for the year. So it's a long storm season. You have the spring seasons, which is really starting now and then of course you have hurricane season in the fall. So it's very hard for us to give a forecast as to whether or not some of the storm activity we've seen today represents normal storm demand as we work our way through the year or whether it actually represents some additional market growth. I think you're going to have to give us probably another quarter or maybe even 6 more months before we really know.

Okay, great. Thanks for taking my questions.

And your next question comes from the line of Bob Wetenhall representing RBC.

With the -- as it pertains to the EcoTouch conversion, and I think this is -- I've oriented this question towards Duncan, what was the decision to expense it as opposed to capitalize it, because it looks like it's distorting your margin performance? And tied to that, are you expecting any market share pickup as you roll out the product?

Okay, this is Duncan. So I'll take the kind of financial question and maybe Mike can talk a bit to it in terms of market share. There are capital costs and operating costs associated with this investment as well as many others. And we are investing both in capital and the operating expenses. So I'll tell you a bit about the capital. The capital, obviously, as we convert different plants, why we're spending capital on that and one of the reasons why where seeing depreciation pickup maybe later in the year will be because we will fully implement the capital that we're putting into EcoTouch. The operating expenses are things like the start-up effects you see as you start up a new production facility -- typically you will see costs associated with the performance of those facilities as they come out the learning curve. And those are the kind of costs that you expense through the income statement. Mike, do you want to talk about market share?

Yes, I mean, related to market share, I think, internally, one of the very important teaching points we have as a leadership team with our commercial teams, with our general managers, is that great companies win market share and great companies earn market share. And certainly, the way you win market share or earn market share is by doing things that are better and different and innovative. And I would say in terms of our ability to approach our customers with something innovative, something new and something that we believe is better, it certainly gives our sales teams and our commercial teams a portfolio now of value add along with our Building Science capability, along with our geographic reach, along with our network, along with our people. It gives us a broader portfolio of value add that we bring to bear to our customers that give us, we hope, a more compelling argument as to why they would should reward us with more of their business, and why we have an opportunity to win some market share or earn some market share from our customers. I would say that as we look at our overall outlook, we are not assuming a big pickup in market share related to the EcoTouch launch that somehow underpins our more positive outlook for Insulation in the second half.

Okay. That's helpful. Switching gears to the reinforcement facility in China, could you give us just a rough estimate of what kind of EBIT contribution you're looking at the second half? I know you've talked about $75 million in pickup for the full year, what are you looking to get out of China this year? And can we use your second half as a normalized run rate for 2012?

This is Mike. I'm looking at Duncan to see if he can maybe give any additional value to the answer I'm about to give. We've been pretty reluctant to give specific guidance on specific regions of the world or on specific facilities because there's an awful lot of kind of intercompany transfer of product and other things that goes into the way we run the business. We run the business as a global business with a regional overlay. We've talked in the past about why we think this is such a good investment because currently our supply chain is actually shipping towards China, and that as this facility comes up, it gives some incremental capacity in Europe and North America to meet some growth that we see in those markets while giving us a low-cost platform in China to serve that local market. This is an investment that's China-for-China. I think probably the broadest guidance I can give you on that is, this is critical to the $75 million of improved EBIT that we advertised for 2011. And obviously, as we entered -- as we exit the year, with that type of performance, we're going to have good momentum at year end that we've expected to carry over into 2012. Duncan, I don't know if there's any you'd add to that.

Yes, before we go back to some of the comments we made on Investor Day, and just from memory, and I think we sort of said that this plant was about 5% to 7% of our global capacity or 5% to 8% of our global capacity, somewhere in that range. So it's a material plant for us but it's -- we probably expect this to obviously be at least as profitable as the average of our business. I mean, we're not adding a whole lot of incremental SG&A for this kind of plant. So it's a fairly profitable activity. So I think as there's also an opportunity to really drive incremental EBIT margins by having a plan that's very efficient such as this in a growing market and adding on to the platform that we already have. Over the longer term, when driving this business towards mid-teens type of operating margins, as opposed to low double digits -- so I think there is still -- we're still in the phase of a cycle where we're expanding the capacity of this business to generate profitability both in terms of pricing, but also in terms of our ability to have profitable capacity. And as we continue to see the market grow, we would anticipate adding this sort of capacity that we talked about in China, that we've announced in Mexico, expanding our plant in Russia. So I think all those will be additive to our overall margin story as we drive towards the mid-teens kind of operating margins that we're driving this business towards.

That's great. Thanks very much for the color.

Shaquana, maybe one more caller, please.

Your next question comes from the line of Dennis McGill representing Zelman & Associates.

Thanks for taking my question. Mike, I was hoping just to get your opinion on sort of within Insulation, the industry structure around pricing increases and kind of what's happened with prior ones. It's obviously critical to the profitability in the second half of the year and we'll see how this future price increases go through. But we've seen them kind of whittled away in the past, and with you guys being the market leader, can you just kind of talk through the moving parts there aside from just volume demand and what's going on in the end channel, kind of behavior, of market participants? And why we haven't seen stronger pricing actions in the past given the consolidated nature of the industry?

Well, given the nature of the construction markets, which I know you follow very carefully, for any manufacturer to be successful in a price increase, you've got to be in a position where your customer has a way to ultimately pass that price increase through to their customers. There's not enough margin today -- excuse me, there's not enough margin today in distribution or with the contractors or with the retailer for them to be able to absorb price increases from the manufacturer and not need to move prices with their end customers. So really, the challenge for us and the challenge for all the market participants has been, how do you create an environment where the homebuilder and the contractor are able to find a way to put a little bit more cost into a home associated with rising insulation prices. I think, ultimately, you need all the stars to line up to make that happen. You need a little bit improvement in the housing market, where homebuilders are maybe feeling a bit more optimistic and feeling like prices are not falling on new construction, so that they have some room in the pricing of their homes, that they can absorb a little bit of cost increase. You need contractors that are not making a lot of money today to see the possibility that driving for price with the builder is a way to more rapidly improve the performance of their business. And then you need manufacturers like Owens Corning to be able to support those kinds of factors in getting product into the homes at competitive prices. But really you realize some of the value are for what we do provide in the home, which is we provide energy efficiency for the life of the home. So it's kind of a silly value proposition to give away. But if you don't have that kind of lining up through to the end market, it's very difficult to get price. We're hopeful that some of those stars might be lining up here in the second half of the year as we start to see some recovery in housing, as we start to see the depth and duration of this downturn increase the focus on trying to improve profitability in the contractors business and certainly in Owens Corning's Insulation business.

So if I'm interpreting you correctly, it's more dependent on volume than the ability of manufacturers to stay firm? Because we've seen other industries where maybe the challenges with volume are just as significant, but the willingness for the manufacturing base to push forward has maybe helped. And maybe any color you can add about just the industry as a whole, it seems to be in a position where they need this increase maybe more than they have in the past and perhaps that factors into more success in the back half of the year.

Yes, I mean, I think if you compare or contrast Insulation to Roofing, today, we have relatively similar industry structures. I think if you go back 10 years ago, obviously, the Roofing business was quite a bit more fragmented than it is today. If you go back to the 2008 period of time where we saw the big run-up in oil prices and therefore, the big run-up in asphalt prices, as a manufacturer, we needed to be fairly aggressive about pricing in order to offset the inflation we were seeing. I think our distribution customers saw that actually as an opportunity for them to improve the performance of their business. And for a distributor, if prices are going up, if you buy well on the way up, you can actually get some margins that will widen out a bit as your purchase prices -- as your sale prices go up and your inventory cost maybe don't go up quite as quickly as your sale prices. So we've had kind of that virtuous dynamic in the Roofing side of the business where increasing prices has actually been reasonably beneficial to all the market participants. We have not had that on the Insulation side and I think from a cycle point of view, that's the cycle that's going to need to break in Insulation before we're going to see meaningful increases in our prices which will allow us to improve our profitability.

Okay. And just one quick one, for either yourself or Duncan, how should we model the divestiture for the Brazil facility, what kind of impact will that have in the back half of the year?

I mean, in terms of the actual gain on sale or loss on sale that we recorded, I mean that will be typically something that when it closes, if it's material or significant, then it's nature that we would kind of adjust out. In terms of the lost profitability of the business itself, I don't think we've provided any specific guidance as to how much money that facility makes for us in our Brazilian business. It is a profitable facility. It's certainly a facility that makes money and is profitable and will continue to be profitable. But it's not a very large facility in our overall network so I don't think it's hugely material in that context. And certainly, we fully reflected the potential loss of that profitability in our guidance overall for Composites for the year. I would, though, add maybe that we have two facilities in Brazil, the one that we're selling is definitely the smaller of the two.

So from a top line perspective it's only a point or so type impact?

We haven't provided specific guidance on that. I think I gave you the kind of color that I think would enable you to kind of back into this impact.

Okay. Thank you, guys.

Very good. Thank you for joining us today for today's call. With that, I'm going to turn it back to Mike who has a few closing remarks.

Thanks, Michael. First of all, thanks everyone for joining us on the call, and for your continued interest and support of our company. Obviously, I think the overall message for our first quarter results today is that while the results were a bit weaker than last year and certainly below Street consensus, that we felt actually okay about the quarter. That a lot of the things that impacted our results in the quarter were things that, candidly, we saw and talked about as we came into the year. I wouldn't be -- I'll be less than forthcoming if I said it's sometimes not more fun to run a business that gets way ahead of last year, early in the year, and then stays ahead. We knew coming into this year -- that wasn't the kind of year we were going to have, that we were going to comp negatively through the first half and that it was going to be a back-end loaded year. But it's not back-end loaded because somehow weakness in the first half has caused us to push objectives for performance into the second half. And then the actions that we took in the first quarter around EcoTouch, around bringing up some Composites facilities, pricing actions, getting our China operations and Composites operating, getting our position in the market set, are all the things that we needed to happen in the first quarter for us to continue to feel optimistic about the guidance that we gave for the year. I said it in my prepared comments, I'll repeat it now, that we think the headline for the call is that the expectations for the first quarter were met on the management side and that we continue to feel comfortable with our guidance for the year. And we look forward to having you join us again on our second quarter call. Thank you.

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