Owens Corning (OC) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Third Quarter 2013 Owens Corning Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Thierry Denis, Director of Investor Relations. Please go ahead.

Thank you, Andrew, and good morning, everyone. We appreciate you taking the time to join us for today's conference call to review our business results for the third quarter of 2013. Joining us today are Mike Thaman, Owens Corning's Chairman and CEO; and Michael McMurray, Chief Financial Officer. Following our presentation this morning, we will open this one-hour call to your questions. [Operator Instructions] Earlier this morning, we issued a press release and filed a Form 10-Q that detailed our financial results for the third quarter. For the purposes of our discussion today, we prepared presentation slides that summarize our performance and results for the quarter. We will refer to these slides during this call. You can access the earnings press release, Form 10-Q and slides on the Investors section of our website. The transcript and recording of this call and supporting slides will be available on owenscorning.com for future reference. Please review Slide 2 before we begin where we offer a couple of reminders. First, today's presentation and remarks includes forward-looking statements based on our current forecasts and estimates of future performance. Actual results may differ materially from those projected in such statements. Additional information about the risks, uncertainties and factors that could cause these material differences can be found in today's press release, as well as in our 2012 Form 10-K and third quarter 2013 Form 10-Q. This presentation and today's remarks contain non-GAAP financial measures. Reconciliations of non-GAAP financial measures to the most comparable GAAP measures may be found within the financial tables of our earnings release on www.owenscorning.com. Adjusted EBIT is our primary measure of period-over-period comparisons and we believe it is a meaningful measure for investors to compare our results from period to period. Consistent with our historical practice, we have excluded non-recurring items and items that we believe are not representative of our ongoing operations when calculating adjusted EBIT. We adjust our effective tax rate to remove the effect of quarter-to-quarter fluctuations, which has the potential to be significant in arriving at adjusted earnings and adjusted earnings per share. In the third quarter, we have utilized an effective tax rate of 30%, and Michael will explain our updated guidance in his prepared remarks. For those of you following along with our slide presentation, we will now move to Slide 4. And now, our Chairman and CEO, Mike Thaman, will make some opening remarks, followed by remarks from our CFO, Michael McMurray. Mike Thaman will then provide some closing comments prior to the Q&A session. Mike?

Thank you, Thierry, and good morning, everyone. We appreciate you joining us today to discuss our third quarter results. Owens Corning delivered improved year-on-year performance in each of our businesses, generating positive momentum for the remainder of the year. Our Roofing business sustained strong margin performance. The Insulation business delivered its best quarter in 6 years, and is profitable year-to-date. And Composites improved EBIT by $10 million compared to last year. The company delivered $119 million in adjusted EBIT, an increase of $38 million from the third quarter of last year. Consolidated revenue for the third quarter was $1.32 billion compared to $1.28 billion in the same period of 2012, and adjusted earnings were $63 million, an increase of $23 million from the same period last year. Based on our year-to-date performance, we have maintained our outlook of at least $100 million of adjusted EBIT growth in 2013. At the start of the year, we discussed a number of expectations for improved performance across our businesses. Let me review them now, starting with safety. As is the case each quarter, we said that we would continue to make progress towards our goal of creating an injury-free workplace. We've had a 6% improvement of recordable injuries year-to-date versus the comparable period last year. We remain focused on an injury-free workplace and are committed to achieving a 12th consecutive year of safety improvement in 2013. In Roofing, we said that we would improve margins and see better pricing. In the quarter, we delivered 20% margins, a 2-point increase year-over-year, sustaining the margin improvement that we reported in the first half of the year. In the Insulation business, we said that continued improvement in the U.S. housing market would translate to a return to profitability for the business in 2013. In the third quarter, EBIT was $18 million, an improvement of $15 million year-over-year. The Insulations business delivered its best quarter in 6 years and will achieve full year profit in 2013. In Composites, we expected to improve financial performance as the year progressed, by demonstrating operating leverage in a stable price environment. While Composites improved third quarter EBIT by $10 million compared with last year, on a sequential basis, EBIT was down $11 million. I'll provide more details on Composite's performance later in my remarks. I would also like to review a few other important items in the quarter. First, an agreement was reached with the local government and Hangzhou, China, to close and sell our facility in exchange for approximately $70 million. This action is consistent with our strategy to reduce our capital intensity in China, while continuing to meet the needs of this important market. Second, Owens Corning repurchased 1.4 million shares of its common stock for $54 million in the quarter. As of September 30, 8.6 million shares remained available for repurchase under the company's current authorization. Finally, for the 4th year in a row, Owens Corning has earned placement in the Dow Jones Sustainability World Index in recognition of our sustainability performance. This year, Owens Corning was named the industry leader for the building products category. Now I would like to further discuss the performance of our businesses, as well as our outlook for the remainder of the year, beginning with Roofing. Roofing margins continued to be strong. Revenues were flat compared with last year. While industry shipments were up in the third quarter, our volume performance in the quarter trailed the market, giving back our outperformance of the first half. On a year-to-date basis however, our volumes have largely tracked the overall market. In the quarter, our volumes were particularly impacted by geographical variation in demand. The coastal markets compared positively year-on-year where we tend to have market share below our national average. Regions in the center of the country compared more negatively for the quarter where we tend to have market share above our national average. For the full year, we expect improved margins over 2012 on strong price realization, despite the fact that energy shipments are expected to be down mid-single-digits. In the Insulation businesses, another quarter of financial progress has resulted in year-to-date profitability. Operating leverage adjusted for the Thermafiber acquisition was approximately 40% for the quarter and is 45% year-to-date. The business has delivered about $50 million in year-on-year price improvement. This represents progress, although prices still remain below historical levels. The integration of our Thermafiber mineral wool business, which we acquired late in the second quarter, is going very well. Our customers are taking advantage of our ability to provide product in specialized high-temperature construction applications. The Insulation business will achieve full-year profitability for 2013. Our expectations included continued growth in U.S. residential new construction, improved capacity utilization and higher prices. In Composites, benefits from our asset repositioning and favorable production rates were tempered in the third quarter by the cost of rebuilding our furnace in South Korea and manufacturing challenges. Late in the quarter, we saw marked improvement and increased efficiencies in our manufacturing network and believe that this will positively impact financial results as we close out the year. Our earlier outlook for improvement in Composites was based on assumptions of lower production cost and stronger volumes. We now expect flat-year EBIT to be -- full-year EBIT to be flat due to lower than anticipated IT growth, lower than expected North American roofing demand and the impact of manufacturing challenges on our third quarter financial performance. Year-to-date, prices are flat compared to last year. However, sequentially, prices have increased in each of the last 2 quarters. For Owens Corning, adjusted EBIT has improved by $79 million year-to-date and we are positioned to achieve at least $100 million of adjusted EBIT growth for the year. With that, I'll now turn it over to Michael who will review further details of our business and corporate performance. I'll then return to recap and then open up for questions. Michael?

Thanks, Mike, and good morning, everyone. As Mike mentioned earlier, our year-to-date results support our outlook of at least $100 million of adjusted EBIT growth in 2013. Before I discuss our quarterly results in more detail, today, we reported on an important transaction in our Composites business that was executed this quarter. We reached an agreement to close and sell our composites glass reinforcement facility in Hangzhou, China, in exchange for proceeds of approximately $70 million from the local government. The facility will be closed in late 2003 -- (sic) [2013] and the land will return to the Hangzhou authorities during the first half of 2014. The closure will result in capacity reduction of about 40,000 tons for Owens Corning. To replace this capacity, we will leverage our previously announced supply lines with Jinniu. This represents a creative and capital-efficient solution that enables us to maintain our market position in this growing region, lowers our cost position and reduces our capital footprint. We received $17 million in the third quarter, and expect the remaining cash proceeds to be received over the next 2 to 3 quarters. The sale will result in a gain of approximately $30 million to $40 million, when the transaction closes in 2014, which we will adjust out of our results. Now let's start on Slide 5, which summarizes our key financial data for the quarter. You will find more detailed financial information in the tables of today's press release and the Form 10-Q. Today, we reported third quarter 2013 consolidated net sales of $1.3 billion, up 3% compared with the same period in 2012. In our Roofing business, net sales were flat compared with the same period in 2012, as slightly higher selling prices offset the impact of slightly weaker volumes in the quarter. Net sales of our Insulation business were up 12% on stronger volumes, higher selling prices and the acquisition of Thermafiber that closed in the second quarter. Lastly, net sales in our Composites business were down slightly, due primarily to the impact of foreign exchange translation. In a moment, I'll review our reconciliation of items to get to adjusted EBIT, our primary measure to look at period-to-period comparisons. Adjusted EBIT for the third quarter of 2013 was $119 million compared to $81 million in the same period 1 year ago. Adjusted earnings for the third quarter of 2013 were $63 million or $0.53 per diluted share, compared to $40 million or $0.34 per diluted share in 2012. We have used an effective tax rate of 30% on adjusted earnings results for the quarter. I will discuss our updated tax guidance later in my prepared remarks. Depreciation and amortization expense for the quarter were $78 million, including $2 million accelerated depreciation related to our asset repositioning in Europe. Depreciation and amortization was $11 million lower than the third quarter of 2012, which included $14 million of accelerated depreciation related to our asset repositioning in Europe. Our capital expenditures for the quarter were $74 million. Next, please turn to Slide 6 where we reconcile our third quarter adjusted EBIT of $119 million to reported EBIT of $106 million. We've adjusted out $2 million of net losses related to the flood that occurred in October 2012 at our New Jersey roofing facility as a result of Hurricane Sandy. The net loss included the impact of an $11 million insurance recovery received during the quarter. As we noted on recent calls, the facility is insured for property damage and business interruption losses, and as a result, we believe that the overall financial impact will be minimal. However, the timing of recoveries has resulted in expenses being taken in periods before the insurance proceeds are received, which is why we are adjusting the impact of this event out of our results. In the third quarter of 2013, we have reached full operating capacity at this facility. We are pleased with the speed and the efficiency of our roofing team in bringing this plant back online. In addition, we've adjusted out $5 million of expenses related to our previously announced 2012 restructuring actions. Finally, we've adjusted out $6 million of severance costs associated with the closure of our composites facility in Hangzhou, China, that I discussed in my earlier remarks. Now please turn to Slide 7, where we provide a high level review of our adjusted EBIT performance comparing the third quarter of 2013 with the same period 1 year ago. Adjusted EBIT improved $38 million. Each of our businesses improved EBIT performance versus last year. Our Insulation business improved by $15 million, our 9th consecutive quarter of year-over-year performance improvement. Our Roofing business improved by $13 million on higher pricing and lower manufacturing costs. And our Composites business improved by $10 million. General corporate expenses were flat versus the prior year. With that review of key financial highlights, I ask you to turn to Slide 8, where we provide a more detailed review of our business results, starting with Building Materials. For the third quarter, Building Materials net sales were $902 million, a 5% increase compared to the prior year. Building Materials delivered $114 million in EBIT, up $86 million for the same period in 2012. Slide 9 provides an overview of our Roofing business. Roofing net sales for the quarter were $471 million, flat compared with the same period a year ago. EBIT in the quarter was $96 million, up $13 million compared to the same period in 2012. The business achieved 20% EBIT margin on flat year-over-year revenues. Volume trailed the market in the quarter but have largely tracked the market on a year-to-date basis. In the third quarter, we estimate that industry shipments were up mid-teens year-over-year, driven by strong volume growth in Western and Atlantic Coast states, partially offset by volume weakness in the center of the country. The roofing industry is a regional business and manufacturer share positions can vary significantly region by region. In general, Owens Corning has a stronger share position in the central regions of the U.S., and weaker share positions out West and on the Atlantic coast. Our national market share on a year-to-date basis is down slightly, although we have maintained our share position when adjusting for geographic mix. Year-to-date, we estimate that the industry shipments are down mid-single-digits versus last year. Based on year-to-date volumes, we expect full year 2013 industry shipments to follow this trend, primarily due to lower store volumes. Despite current market conditions, we have continued to deliver quarterly year-over-year margin improvement and expect improved full year margins over 2012 on strong pricing and manufacturing performance. Year-to-date EBIT margins remain strong at 21%, a 4-point improvement over the same period in 2012. As we look to the fourth quarter, we expect that EBIT margins will be lower than rates seen during the first 3 quarters of 2013 on seasonally weak demand. This is a trend consistent with what we have seen in the fourth quarter margin over the last decade due to seasonality in both sales and production levels. We anticipate contribution margins in the fourth quarter will continue to be attractive and capable of sustaining strong annualized EBIT margins. Now Slide 10 provides a summary of our Insulation business. Net sales for the quarter in Insulation of $431 million were up 12% over the same period last year on stronger volumes, improved pricing and the acquisition of Thermafiber. The business delivered $18 million in EBIT compared to $3 million in EBIT in 2012. Our strong third quarter performance has lifted our year-to-date EBIT performance to a profit, which is a significant milestone for this business. As I stated on our last call, our Insulation business has turned to profitability on a trailing 4-quarter basis at about 800,000 lagged U.S. housing starts. The last time we were at breakeven was in 2008, at just over 1 million lagged starts on generally higher prices. Our team has done a great job of lowering our breakeven through strong cost management and manufacturing performance. Operating leverage in the third quarter was approximately 40%, excluding the impact of our second quarter acquisition of Thermafiber. On a year-to-date basis, operating leverage is approximately 45%, excluding Thermafiber. Throughout the year, we've invested in product quality, our manufacturing network and the Owens Corning PINK brand. These investments have been a bit of a headwind for operating leverage this year. U.S. new construction insulation volumes are healthy and have continued to track with growth trends and new residential starts. In addition, the business has continued to demonstrate strong price realization in the quarter. On a year-to-date basis, the business has delivered about $50 million of year-on-year price improvement. As the U.S. housing market continues to recover, we expect to see further sales growth with improved pricing as industry capacity utilization tightens. With the pricing actions that we have taken and the improved volume leverage and manufacturing performance we have demonstrated year-over-year, we remain confident in our guidance of double-digit revenue growth and a profitable full-year 2013. Now I'll ask you to turn your attention to Slide 11, for a review of our Composites business. Net sales in our Composites business for the quarter were $453 million, a 1% decrease compared to the same period in 2012. The decline in revenue was driven primarily by the impact of foreign exchange translation. For the quarter, overall volumes were down slightly versus our expectations on lower than anticipated IP growth and weakness in North American roofing demand. Our third quarter pricing actions delivered positive sequential results and we are encouraged by recent trends. EBIT for the quarter was $21 million compared to $11 million in the same period last year on lower plant startup and maintenance costs and improved capacity utilization. EBIT results declined sequentially as a result of plant maintenance cost, challenging manufacturing performance at the 2 facilities and lower volumes. I'm pleased to report the manufacturing challenges that impacted our third quarter performance have been largely resolved. And now, we expect full year Composites results to be consistent with last year. With that review of our third quarter performance, I now ask you to turn to Slide 12, where we will review our other financial guidance for 2013. We have revised our outlook for capital spending to be about $350 million, down from $380 million, primarily as a result of higher repair versus replacement cost associated with the rebuild of our New Jersey roofing facility. The overall cost of this rebuild is consistent with our original estimates. However, we had originally anticipated more costs to be classified as capital versus expense. Excluding the capital cost of this rebuild, capital spending is still expected to be roughly in line with depreciation and amortization of about $315 million. We now expect corporate expenses to be about $105 million, down from our previous guidance of about $120 million. The primary driver of this decrease is reduced variable incentive compensation. As a result of the geographic mix of our earnings year-to-date and our outlook for the remainder of the year, we have revised our outlook of our full-year effective tax rate on adjusted earnings to be about 30%. Our $2.1 billion U.S. tax NOL will significantly offset cash taxes for some time to come. Our expectation for cash taxes remains unchanged at about 10% to 12% or $30 million. Even with significant year-over-year earnings growth, our cash taxes have remained flat to 2012 as a result of our NOL position and successful tax planning initiatives. During the third quarter, we repurchased 1.4 million shares of the company's common stock for $54 million. These share buybacks represent a returned capital to our shareholders and reflect our strong outlook for growth in earnings and free cash flow generation. In summary, we delivered improved performance in each of our businesses in the third quarter compared to last year. And although early in the year, there are expectations of a more rapid acceleration of construction activity and a better roofing market, we remain confident that we will deliver at least $100 million of adjusted EBIT improvement in 2013. Thank you. I'll now hand the call back to Mike.

Thank you, Michael. As I noted in the outset of today's call, all 3 of our businesses improved performance over 2012, and we're positioned to finish the year strong. Our year has not been without challenges. We've had some unexpected market headwinds, notably a declining roofing market and an overall weaker global economy. In addition, we've had some execution challenges, specifically in the third quarter composites manufacturing performance. However, we are very pleased with our overall progress in 2013. The continued execution of our management actions, including price realization in insulation, margin management in roofing and cost reductions in our production network and price realization in composites, will provide a significant step forward in the financial performance of our company for 2013 and into 2014. With that, I'd like to turn the call over to Thierry who will lead us in the question-and-answer session.

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

[Operator Instructions] The first question comes from George Staphos of Bank of America Merrill Lynch.

Two questions here. First, can you recall when the last time you saw such a divergent trend in your market share in roofing was and what caused it? What gives you confidence that it's the regional factors and not some relative difference in pricing and promotion? And the second question I had, what was the incremental impact of the investment that you made on product quality, manufacturing, network, et cetera, within insulation and will that all reverse next year?

Thanks, George. Let me start by talking about Roofing. I would tell you, I guess, I've been with the company now 21 years, so I've been around the analysis of our results for a long time. This was really the first quarter that we dug into kind of state-by-state shipment data and state-by-state market share data at the level we did because we saw some trends in the quarter that did surprise us in terms of the size of the volume swings that we saw in some parts of the country. So at least, in my history, I would say this is probably the biggest change in the overall geographic mix of the market. Now I think this is a bit of an outgrowth of the change we've seen in the overall market over the course of the last 4 or 5 years where we are seeing more inventory put into the market early in the year and then we're seeing distribution customers primarily manage that inventory through the summer, so that end use market dynamics are now starting of having an impact on kind of regional demand and regional shipment characteristics. So I wouldn't say that -- our theory is not that we saw the end use market shift as dramatically as maybe we saw it in our books, but that because of inventory effects, we saw the order pattern of our customers shift. And certainly, on the coast, up and in the Northeast where there's probably still a lot of Sandy rebuilding and then the new construction markets kind of down into Southeastern Florida and then along the West Coast, which is a little bit more new construction-driven generally for asphalt shingles, those are markets that are a little bit below national average for our share. And then, kind of as you come off the coast, that tends to be a little bit above national average for our share. A lot of those markets saw a lot of storm activity in 2011 and 2012. As we've gone back and done some detailed analysis of those markets, there does appear to be a bit of a storm hangover effect where if you have a lot of storm activity in a year, that does pull forward some reroof demand, maybe for the year or 2 that follows, where some of the roofs that might have gotten done in '12 or '13 got pulled forward because of insurance claims. So we can explain most of the variation we've seen in the market as being a normal evolution of what we've seen in storms and what we've seen in new construction. We can also explain it based on inventories that we saw year-to-date, and so we took pretty good comfort when we looked at all our year-to-date numbers, kind of on a region-by-region basis and nationally, we think we sustained our position in the market. Because with some regional changes, our market share is down just a touch this year, but on a regional basis, our market share is pretty much where we expected it to be. But it all kind of showed up in the third quarter and we were feeling pretty good that we were a little bit ahead of the market through the first half, and then here in the third, we kind of took that outperformance and reverted back to the overall market. I think the thing we're most proud of though is our margin performance obviously through all 3 quarters has been outstanding. We got the year off to a great start in the first quarter, managed our margins very successfully through the second and the third. So when we look at year-to-date numbers for roofing, we're nothing but pleased. And probably the only point of disappointment would be we came into the year thinking the overall roofing market should be about flat for the full year, it's down mid-single-digits year-to-date, and we think it'll be probably down mid-single-digits for the full year. So the overall market opportunity is less than what we might have expected when we came into the year, but we've overcome that headwind with better margin performance. Your second question, which was really a question about the investments we've made in insulation, in product quality, in the operational network. I'm going to comment on that question a little bit differently and just talk for a second about operating leverage and then I'll work my way back to that. I think Michael made in his comments and I said in my comments that excluding the Thermafiber acquisition that our operating leverage in the quarter was about 40%. If you read our 10-Q, we said about 1/3 of the growth in Insulation in the quarter came from Thermafiber, we grew the business about $50 million, so kind of $16 million, $17 million of that was Thermafiber. When we disclosed that acquisition, not a significant acquisition in terms of what we paid for the business. It's about a 10% EBIT business. So if you pull the EBIT of that business out, you pull the revenue of that business out, you can see that revenue growth in the organic underlying business was closer to kind of $33 million, $34 million, and the overall EBIT growth was probably more in the $15 million range if you pull out some EBIT for Thermafiber. So year-to-date, we're about 45% when you make that adjustment. In the quarter, we're about 40% when you make that adjustment, we think that's a fair adjustment because obviously, when we gave that guidance, we didn't contemplate how acquisitions would play into that. If you actually back up to last year and do that same analysis over the last 7 quarters, our operating leverage is about 51%. So we've always said that operating leverage would bounce up and down a little bit quarter by quarter and some of that is because of some of the investments that we're making right now in terms of product quality, and in a couple cases, bringing on some capacity that causes some onetime costs. But for the most part, we're really happy with our operating leverage. I wouldn't say that there's a lot of benefit, I think, from our perspective, or even from our investors' perspective, trying to quantify some of those quarter-on-quarter investments because there's some of the noise that's always going to exist in this overarching operating leverage target we've set. But I think we're right on track in insulation when you look at the 50% operating leverage goal, we're right on that number over 7 quarters. And then, if you listen to Michael's remarks, we had said that at 800,000 lag starts in the second quarter, the business was breakeven on an LTM basis. It's now making money LTM, it's now making money year-to-date as we start progressing our way back towards a more constructive construction market. So we're very enthusiastic with all the underlying trends we see in our Roofing business -- our Insulation business and feel very, very good about the progress that we reported here in the third quarter.

[indiscernible] Kim of Barclays

I just wanted to follow up on the previous question. With respect to the Roofing business, if we could take the revenue, you were talking about the fact that the regional analysis this quarter was something that you hadn't really undertaken as extensively before but that it was basically indicating that you had held share. I guess, I'm curious is if over the next 6 months or so, you kind of learn differently that perhaps you see some evidence that you had lost some share. I was wondering, what are you prepared to do in terms of your pricing? Is your general sense that you're prepared to rein in pricing in order to recover some share or hold share? Or if you could just sort of comment about your overall views for how you balance share or perceived share with your pricing strategy, that would be helpful.

Well, thanks, Stephen. A great question because I think that a little bit how we talk about the business here in the quarter is instructive in how we think about the business also in terms of pricing, which is, for reporting purposes, we obviously report the business as though it's 1 big national market. We report pricing and margins as though it operates as 1 big national market. And in fact, you do see some pretty significant variations region by region and even in local markets, not just in terms of market share among the industry participants, but also price levels in individual markets and also margin performance in markets. So it is possible, as you said, that if we saw share trends that we didn't like and we thought that the root cause of those share trends was pricing competitiveness that we in fact might need to respond, I think the way we would think about that is it wouldn't be a national response and that the market doesn't really operate as a national market but it's possible that you could find some geographies where we felt, to defend our position in the marketplace, we needed to either adjust the pricing on 1 or more of our products, and I think that's the other real benefit of our product line, which is really our showcase product is our duration shingle, which is a Croydon engineered shingle that's preferred by reroof contractors. It has real benefits to the reroof contractor in terms of how it's installed, it has real benefits to the homeowner in terms of the aesthetics and also in terms of warranty. So we have real value built into that product and I wouldn't necessarily feel like if we had a region or a market where price competitiveness was an issue, that it would necessarily impact the price levels of that product. It might impact some of the products that go into new construction, which tends to be where there's been more price competition. So we're now talking about some percent of some percent of some percent of the market where, if we needed to adjust pricing, we would do that in order to support our share position. So we think that's all manageable and those are all the things that happen every single day in the business. So what I would describe to you as a look forward on how we might think about pricing in the business, it's things that our team have been doing every day for the last 10 months of the year in terms of how we got to the results we reported today. So on a year-to-date basis, we've had all those same margin management, price management, market share management challenges and the net of that, the result has been great margins and sustaining our position in the market. And I think, going forward, I would expect our team to be to manage all those dynamics on a market-by-market basis and produce great margins and sustain our market position in the market. So I think there's nothing about the future that feels any different about the past. If anything, having come through the winter discounting last year, where the winter discounting, in our view, worked for us in a much better way. We were able to offer much milder discounts as a result of the fact we didn't see big change in asphalt prices. We were able to ship our product in the first quarter at very good margins. We're certainly heading into the winter setting that kind of goal for our team, that we would like them to manage the winter discounting in a way that we sustain our position in the marketplace but that we still come into next year with good margins and position our customers with good inventories heading into the spring selling season.

Great. Yes, that would be great. Appreciate that. Second question relates to your Insulation business. Actually, the builders that we speak with have been talking about and reacting to the fact that demand sort of slowed over the summer and there's a concurrent call right now with a builder who indicated, I guess, that October volume trends were slower than September, and this is, I think, in general, something that we're hearing more and more about. In general, the idea that margins at the homebuilder side are starting to -- you're starting to see a crest forming in 2014. And in that environment, I was curious -- or against that backdrop, I was curious if you could comment on whether you think you're seeing any growing resistance or slackening in your ability to achieve positive pricing trajectories in Insulation or if you believe that, that is not really something that you're perceiving in the marketplace?

Sure. I mean let me first start by talking a little bit about what we think the overall market for housing is. I mean, certainly, we read all the reports that you guys produce and that others produce and it does seem like the market has gone through a little bit of a flat spot here. It's not that it's gone into decline but that rate of growth, we maybe saw through first 5 or 6 months of the year has slowed down a bit. Our internal analysis of that would suggest that, that makes a fair amount of sense, given that we saw a pretty rapid and sudden rise in mortgage rates. That kind of the rate of change of mortgage rates in a very short period of time would cause a little bit of a shock effect in the market where some buyers were maybe eager to come in the market, would take a pause, and really evaluate their financial situation and their decision about buying a house. That said, when we look at the fundamentals of the market, home prices have continued to go up, mortgage rates on a historical basis are still very, very low. Housing starts have been extremely low for a 5- or 6-year period of time. All the demographics are showing an increasing rate of household formation and rents are going up in most major markets. So when you have that kind of stew of activity in the marketplace, it certainly says to us this is a pause in kind of an exorable rise of housing activity, which is what's really important to us. I think in that environment, with increased housing activity, as a manufacturer, our facilities are getting more loaded. We're still not at margin rates that are acceptable to us, so certainly, our stance would be if we have manufacturing operations that aren't producing margins before we would go and add a lot more production into our network, we would like to see better margins, which is why our focus has been on price management. Certainly, we would bring capacity on to meet growth in demand. So we have the ability to go do that but we need to see better margins. The builders have been getting a lot of price. So I think the overall cost of an insulation package has a share of the value of new construction. I don't have the number in front of me but I'm guessing, over the last 15 years, insulation packages have probably been cut in half as a percent of the total cost of a house. So from a value point of view, us and our contractor customers are providing tremendous value to the builder and tremendous value to the homeowner in a product that saves energy for the life of the entire -- life of the house. Today, at prices that are low compared to history and certainly low compared to the price of the houses, I think, if you had on top of that, what's happening with building codes, we talked about this in the past, but there continue to be positive developments in the recommendations of the IECC in terms of the implementation of building codes that cause houses to become more and more energy-efficient and therefore, good value insulation packages become more and more valuable to the builder. We certainly think we're still in a very valuable place in the product we provide and the value proposition which we provide it. So I wouldn't expect that in terms of the value we provide, that there would be much pushback on what we do in insulation. Now it's a competitive market. I think the pushback would be if our product was priced uncompetitively and the builder had better options, we know the builders are going to go to how they can build the house with the best possible value. But as long as we're priced competitively and we're working hard to provide that builder great value, we think that we should be able to restore pricing back to something that looks more like historical prices on a nominal and real basis.

The next question comes from Michael Rehaut of JPMorgan. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: My first question has to do with -- both my questions have to do with Composites actually. You mentioned that you're encouraged by the pricing actions in the third quarter and -- but at the same time, there was a little bit of weakness, I believe, you said in North America, in addition to global IP. So I was just hoping to get a little bit more granularity, if possible, in terms of the pricing trends that you saw during the quarter, and particularly in North America, but perhaps you could take us across Europe and Asia as well to the extent possible. Just trying to get a sense of the direction of pricing and if that should be a tailwind along with the resolution of some of the manufacturing issues that you saw in the third quarter?

Sure. I'm happy to talk about that. Let me first talk about your North American question because it maybe that my prepared remarks were kind of inartfully written. But the objective of our comments regarding the North American market, in particular the North American roofing market, was really a volume comment. So we thought coming into the year, obviously, we thought that the roofing market in total would be flat. We're now calling that market kind of down mid-single-digits. That's an important market to Owens Corning as a roofing manufacturer. It's also a very important market to our Composites business, particularly North America, where we're really the leading supplier of glass and mat to that market. So we've had to adjust our expectations for volume related to that vertical in North America, which is a really good vertical for us on the Composites side. That's not a price comment. So from a pricing point of view, that has not impacted our outlook on pricing nor has it affected our near-term pricing. We reported today on the call that we had sequential price improvements from the first quarter to the second, and then again from the second quarter to the third. I would say that, that's pretty much in every region of the world. Now when we talk about materiality, we didn't, I don't think, telegraph today that we're yet getting material levels of price that are going to bridge that gap back from where we are today at probably 5% EBIT margins back to where we were just 1.5 years ago, both 2011 and 2010, the business produced EBIT margins of around 10%. But we do think that a couple quarters of sequential pricing is a really important leading indicator, and the fact that we're getting that in almost every region of the world is a very important leading indicator of our overall theory for the business, which is for Owens Corning, when we see long periods of reduced investment in capacity by us and our competitors, when we see periods of demand growth where utilizations industry-wide are improving, we have seen for Owens Corning that, that has produced pricing cycles and has produced the ability for us to improve the margins of the business. That's certainly our theory of composites today. And then, over the next couple years, we're working our way towards trying to create one of those pricing cycles for our company. I think over the last couple quarters, we've at least seen early indications that continue to support that thesis. So that's a lot of work for us to do for the remainder of this year. I think most of you are aware that we do have contract negotiations with a fairly sizable portion of our customer base in the fourth quarter. How that supports improved pricing within those contracts and how that supports improved pricing in 2014 is the next chapter of the book for us to write, but we're optimistic, based on we've seen in the last couple quarters, that the trend is on the right direction for our business and that eventually, price will be a big lever for us getting back to kind of double-digit EBIT margins that we demonstrated in '10 and '11. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Great. And I guess, the second question also in Composites, with the agreement to close and sell the facility in Hangzhou, if you just us a sense, I don't know if it's possible, just a little history on this particular facility, if this was the one that I believe opened up a couple years ago when there was a disruption in the wind market and the expectations in terms of profitability for this particular facility, if it was a drag on profitability in 2012 or 2013? And you also mentioned a partnership to continue to serve the facility, how that would potentially flow through the income statement?

Sure. Happy to talk about that. And I, first of all, I really appreciate you asking that question because to the extent there's any confusion about that, this gives me an opportunity to clear it up. The facility we built and commissioned 3 or 4 years ago is in Yuhang, which is actually quite close to Hangzhou. So the confusion there is real. But that facility, which is a greenfield site, is operating exceedingly well today. We think that's probably one of the low-cost facilities anywhere in the world. We have found a good market for the production of that facility, which does include some improvement in the wind market in China, but is very much now diversified across all the performance markets of China, and we've been very, very happy with the performance of that plant, that it's fully loaded and performing at very high levels relative to any other plants in the world. The Hangzhou facility was a facility that was owned by Vetrotex at the time of the acquisition. It's really a legacy composites facility in China, so it's been around for a while. The reason why the municipality approached us is it's really now moved kind of into the city proper. So I think, at the time it was built, it was way out in a rural area, and as the city of Hangzhou has grown, it's now kind of engulfed our facility. And as a part of the economic development plan for the town, it's -- I say town, it's city, I mean, these are all cities that are much bigger than some of the cities we have here in the U.S. They came to us and said they would like to revert the land back to them. It was a subscale, relatively high-cost facility. It did support our market share position in China but I would say it was not materially contributing to financial results in China. We obviously were nervous about the ability to strike a deal that allowed us to recover some of our capital and also put us in a position where we could maybe make the investments that will allow us to sustain our market share position. I think the team was very clever and creative. We worked with Jinniu, who's a local manufacturer, they had some desire to try to drive their cost position down. They came to us looking at our Advantex technology and asked for a license. We reported in the second quarter that we agreed to license them and help them build a melter in exchange for an offtake agreement. In effect, that offtake agreement provides us about the same amount of volume in China as we were producing in Hangzhou but we can do it at lower cost. We can defend our market share position in China, and actually, recycle some of this capital that had been at the Hangzhou facility back into the corporation. So it's really a winner for us all around. And I think as Jinniu's facility comes up and we start putting that product into the market, as the facility in Hangzhou reverts back to the municipal government, you'll see some margin expansion in our business in China, which obviously we don't report that segment specifically. I would just comment quickly so that people aren't confused, we announced a separate transaction with Taishan in the second quarter where they're going to make a specialty product that we had to manufacture in Europe, and we're expecting a similar type of transition next year, which is that facility in Europe, which was a part of our European restructuring, will get to the end of its furnace life here sometime in the next 2 -- couple quarters. When we get to the end of the furnace life for that facility, it will then be shut down. Taishan will pick up the production of that facility at lower cost. We have an offtake agreement to take that product back to the markets that we're currently serving and we're going to work with Taishan to try to develop the market for that product in China. So we've done a couple of transactions here that give us the ability to defend our position in the market, reduce our capital base in composites and reduce our cost base all at the same time. And this is one of those that kind of came through the financials this quarter so it made sense for us to report on that in more detail but it doesn't have anything to do with our facility at Yuhang, which is operating very well and at very low cost today.

The next question comes from Mike Wood of Macquarie.

In Insulation, excluding the acquisition, it looks like, overall, you had relatively flattish volume growth. Can you give us a sense of the sales volume trends by your major categories such as your North American housing, C&I and Canadian businesses? And ultimately, was there, in hindsight, a pre-buy hangover ahead of that June price increase that you felt in that North American housing-related businesses?

Yes, Mike, it's a great question because, in fact, when I went through the operating leverage reconciliation, you can look at the quarter and either you look at the insulation top line and say, gee, growth was pretty good but they didn't get the leverage. Or when you adjust out Thermafiber, I think you can look at the quarter and say, gee, for the quarter and year-to-date, leverage is pretty good, but the top line growth maybe isn't as aggressive as what we would've expected. And you hit the nail right on the head, which is when you go by segment, the commercial and industrial markets are obviously growing quite a bit more slowly than U.S. residential construction. The 2 markets that had been a helper for us over the course of the last 2 or 3 years, which was Canada and Asia where we had seen decent growth, we're not really seeing growth now outside of the U.S. Canada had some stimulus in housing starts and some incentives and other things that have caused starts year-over-year to decline. Our business in Asia is still doing very well but some of the credit tightening and other things has definitely affected rate of volume growth. So kind of our non-U.S. geographies haven't really contributed this year. Our commercial and industrial business has contributed to growth but is not contributing at the rate of U.S. residential. And so U.S. res, which would also include re-insulation, some of the products we sell at retail in lumberyard is not just pure new construction, we are seeing that kind of 20% growth that you'd expect to see based on where housing starts are. So when we take the pieces of the business apart in management reporting, we feel very good about where we see growth in the U.S. res market, we feel good about what we're seeing in terms of operating leverage, we feel good about what we see in terms of sequential pricing, we feel great about being profitable year-to-date. We feel really good about the best quarter in 6 years and we really think we're starting to see an Insulation business that will become a big theme in the financial performance of our company and certainly in the outlook to our stock price.

Got it. And then, in terms of, broadly speaking, the pre-buy that you've seen in both roofing and insulation, how are you thinking about managing differently going forward when you have an upcoming price increase in insulation, winter discounting in roofing?

Yes, I think they're different businesses but I think pre-buying is a fact of life when you're in a business that has inventory positions and customers who take inventory positions and also when a lot of your management focus is on trying to manage and execute price increases well. You don't want to do that at the expense of your customers, you want to do that in a way that your customers have the ability to make margin and improve their performance as a result. Insulation and roofing work very differently though, which is insulation is a very bulky product, difficult to store. So what we've seen historically is a pre-buy in insulation of 1 week or 2 weeks tends to be a fair amount of pre-buy and we would potentially expect to see some pre-buy. We have a November price increase in the Insulation -- in our Insulation business, here coming up in the fourth quarter, which we put in place to make sure that our contractors have good price visibility on how to price business in new construction for next year. We would expect that we would see some purchases in the quarter that would wash out in the quarter and then maybe some purchases in the quarter that would carry inventory positions into next year in insulation but I wouldn't say that, that's going to be a material theme. Roofing is very different because you can store the product outside. So storage cost of roofing, I mean, it's designed to be out in the weather. So we've seen a much different dynamic there and we think that dynamic will continue and that probably what manages that dynamic on our behalf and our customers' behalf is the price swings are less dramatic. And we do hear from our distribution customers this year that there's been some margin compression out their door. And we certainly believe, as many of them do, that the overhang of very low-cost inventories being put into the market earlier in the year are making it harder and harder for our distribution customers to manage pricing through the year. So creating these really big overhangs in the market in the first quarter hasn't been helping the manufacturer like Owens Corning. We don't think it's helping our customers either and so the sanity of what we saw last year of trying to give a little bit smaller discounts, put more reasonable inventory positions into the business early in the year and then manage pricing through the first half of the year to allow them to earn some margin on the product they buy from us is probably the right way for that industry -- for us to operate with our customers.

That question will come from Ken Zener of KeyBanc Capital Markets.

I wonder if you guys could expand on Insulation. You obviously give very good disclosure in your Q where you talked about Insulation EBIT being up $15 million and $48 million year-to-date, which seems to overlay pretty close to the $15 million and $50 million benefit you guys got from pricing in Insulation. Mike, you talked about Canada, commercial markets, Asia. But to the extent all the EBIT expansion was on price with the volume gains offset by kind of inflation mix or SG&A, as you guys highlighted, did you guys expect to get volume gains at this point of the cycle? Because my impression was that price was more of a later cycle EBIT catalyst but it appears to be the sole catalyst.

Yes, thanks, Ken. Let me talk for a second about price and then maybe talk about kind of how we see the evolution of leverage in the Insulation business and kind of where we are, what inning we're in, in that evolution. One of the things that's a little bit -- is not misleading in our disclosure because it's accurate, but it can be a little bit misleading in terms of how you would want to do the analysis is we reported through the first half of the year that last year through the first half, we've seen insulation prices were about flat. We reported some price gains in the second and third quarter as we finished out the year. In fact, through the first half of last year, we've seen a little bit of price weakness early in the year that we had recovered in the second quarter. So we had kind of flattish overall price in the first half. So our comps this year, when we look on year-on-year comparisons of price, we show that we had gotten a lot of price versus the first half of last year but in fact, sequentially, most of that price we picked up first in the third quarter last year was a price increase then, then we picked up some more price sequentially with our price increase in the first quarter of this year. Now we picked up price again sequentially with our price increase through the summer, which has given us some gains here in the third quarter. And again, with the November price increase, with some success in that increase, we probably expect to pick up price sequentially as we head into the beginning part of next year. So we're not going to necessarily show smooth price progression, we're going to show some sequential price kind of after each price increase as we get a little bit of a rhythm and success in price increases. I would say that when we looked at the recovery of the Insulation business, we were losing about $100 million at 600,000 starts, we had said we thought we could make $100 million at about 1 million starts, and that we didn't see any reason when we got back to 1.5 million starts that we would anywhere besides our normal historical margin rates of 15% better, which is what we had [indiscernible] 25 years. I think we're right on track with that curve. I think, early on, we thought we would get a lot of manufacturing and operating leverage because we had a number of melters that were operating at less than 100%, so our marginal economics of putting more production into our melters was pretty good and we knew that in the early innings, some recovery in housing would give us some additional volume that we could manufacture at marginal economics on melters that were already running. We then got to a stage where we needed to start turning on some capacity to support demand growth and it was really in that stage, which is the stage we're in, where it was our expectation we were going to need to see higher prices in order to give us the incentive to really want to bring that capacity because in fact, our margin rates in the U.S. residential construction market have been negative, I mean, we've been pretty clear about that. So in fact, growing volumes in that segment, if it's not marginal manufacturing economics, as you grow volumes, there's no calories at all in that growth because the margin rate is actually negative. So we've now gotten to a point where the margins in U.S. residential construction are at least kind of neutral, and as a result, as we get some price, the marginal price falls through, even though the volume is being supported by some additional production. We'd expect, as we get into the next stage of this recovery, that we would get to positive margins in U.S. residential construction. And so, in fact, we get a little bit better operating leverage in our facilities, we would actually make positive margin on the volume we ship and we would start to get price falling through to the bottom line. But it's hard for us to see with negative margins why we wouldn't get into a period a year where we would get some price recovery and that would fall through. But right now, the volume we ship is still not particularly profitable and so it's not giving us a lot of leverage and we don't have marginal manufacturing economics anymore. Most of our hot melters are fully utilized.

Appreciate that. Roofing, the comments you just made a few questions ago raised the idea. Can you talk about inventory since you did such a regional analysis, how you think it is if there was pre-buying, if there was too much as we move into year-end when seasonally, there's some sequential price historically, all else being equal, seasonal weakness in pricing, can you talk about inventory levels? And then, you seemed to comment on some distributors trying to move their inventory, putting a little pressure on price related to -- for whatever reason, could you expand on that and clarify the inventory as you see it?

Yes, we comment on that, I would tell you, we're not the authorities on this and we don't have great visibility to it. So we tend to kind of do a math balance equation. We look at industry shipments, we look at our estimate of how big we think the overall end-use market was, and if we think introduced shipments are in balance or out of balance with the overall end-use market, then inventory was either created or depleted. I think, this year, our overall sense nationally, and I'll talk about it nationally, where we say the market is going to be down mid-single-digits is if manufacturer shipments were down mid-single-digits, that would probably pretty much mirror distributor and retail and lumberyard shipments into the market. So the end-use markets was probably down about mid-single-digits. The distributors bought about that same amount. And as a result, the year-end inventories would be about in balance with where they were last year. So on a regional basis, there's probably some markets that are ahead of that position, there's some markets that are behind that position, but kind of our current guidance assumes that if the market is down mid-single-digits, that, that basically is both end-use estimate, as well as shipment estimate and that those 2 numbers are about in balance. As we look into next year, that puts storm demand at a pretty low level relative to history. It puts new construction demand in a position where we would expect it to continue to grow with new construction. And it actually puts reroof demand for this year having declined a bit versus 2012, and so we would expect now that some of these storms in the center of the country are a little bit further in history that maybe we'd start to see some recovery there. so our initial thoughts for next year is it's reasonable to expect that both the new construction and the reroof market would increase next year and that in fact, storms are probably at least comping flat to maybe some improvement. So if we can get through the fourth quarter here with good margins, if we can have the right inventory position with our customers, the thing that would really make us feel good about roofing is actually having great margins in a growing market, which may be the environment we find ourselves in next year.

This concludes our question-and-answer session. I would like to turn the conference back over to Thierry Denis for any closing remarks.

Okay. Very good. Thank you, Andrew, and thank you all for your participation to the call today. Our next quarterly earnings call is scheduled for February 12 of next year, when we will report on full-year 2013 results. And in the meantime, I'd like to take this opportunity to remind you that we will be holding an Investor Day in our Toledo, Ohio headquarter location on November 8, and I look forward to seeing many of you here. And now, I'll turn it back over to Mike for a few closing remarks.

Thanks, Thierry, and thanks, everyone, for your interest in our company and for your very good questions. Obviously, we're pleased with a lot of things that are going on in the business. If you look at our guidance originally for the year, our guidance was $100 million of EBIT improvement with upside being determined by the rate of recovery of the U.S. construction market and its impact on our margins. I think today, in our guidance, we backed off a little bit on some of the upside statements and said, look, we think we'll get the $100 million of EBIT improvement or more but we're 10 months through the year. So I think it's a little easier for us to see that maybe the roofing market isn't going to give us the tailwind we're looking for, and in fact, it may be a bit of a headwind in aggregate. U.S. new construction has been great. It's not quite galloping ahead at this moment but we continue to be very confident in it. So it maybe could've given us a little bit more of a push than it's given us but we've been very happy with that -- how that's played out. And obviously, global industrial production has been kind of downgraded through the year and that's been one of the themes that's hurt our composites demand profile. So some of the things that could've helped us produce some significant upside to that number, which were market-based, didn't come to pass. But some of the execution things that we needed to do in order to get to that guidance, we feel very good about our performance. So margin management in our Roofing business has been very good year-to-date, price management and production management in our Insulation business has been very good year-to-date, price management and price realization in Composites is starting to show some early signs of progress. And despite a little bit of our commentary of disappointment in the third quarter in terms of manufacturing performance in composites, we are seeing better performance in our manufacturing network and we're seeing creative deals, like the Jinniu deal and the Taishan deal, which is giving us some ability to continue to support our market position without needing to put capital into that business. And in fact, in this quarter, finding a way to actually recycle some capital out of that business while continuing to lower our cost. So from a management agenda point of view, I feel like we're right on track this year in what we needed to execute. I would have loved to have seen a little bit stronger markets, but the market themes that we talked about for this year, we think are market themes that support next year again. So we would expect to see some better roofing market next year. We would expect to see continued growth in new construction. And in fact, we would expect to see industrial production improving a little bit from what we saw in 2013. So we're continuing to work every day to get the businesses positioned for a more positive macro environment that allows us to accelerate earnings growth. But relative to our history, we're feeling very good about the fact that $100 million of EBIT growth or more this year represents a very nice step forward for the company financially with more to come. So thanks for your interest in our company and we look forward to seeing many of you at Investor Day here next month. Have a safe week. Bye-bye.

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