conference call transcript - owens corning › investors › q3transcript110207.pdf · bluebay...

Thomson StreetEvents www.streetevents.com Contact Us 1

© 2007 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.

FINAL TRANSCRIPT

Conference Call Transcript

OC - Q3 2007 Owens Corning Earnings Conference Call

Event Date/Time: Nov. 01. 2007 / 11:00AM ET

FINAL TRANSCRIPT

Nov. 01. 2007 / 11:00AM ET, OC - Q3 2007 Owens Corning Earnings Conference Call



C O R P O R A T E P A R T I C I P A N T S Scott Deitz Owens Corning - VP, IR

Dave Brown Owens Corning - President and CEO

Mike Thaman Owens Corning - Chairman and CEO Elect

Duncan Palmer Owens Corning - CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S Ken Zener Merrill Lynch - Analyst

Garik Shmois Longbow Research - Analyst

Jack Kasprzak BB&T Capital Markets - Analyst

Ian Zaffino Oppenheimer - Analyst

Jerome Lande Millbrook Capital - Analyst

Jim Barrett C.L. King & Associates - Analyst

Richard Cazenove BlueBay Asset Management - Analyst

Mary Gilbert Imperial Gilbert - Analyst

Keith Johnson Morgan Keegan - Analyst

Keith Hughes SunTrust Robinson Humphrey - Analyst

P R E S E N T A T I O N

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Owens Corning earnings conference call. My name is Annie, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Scott Deitz, Vice President of Investor Relations at Owens Corning. Please proceed, sir.

Scott Deitz - Owens Corning - VP, IR

FINAL TRANSCRIPT




Thank you, Annie. Good morning, everyone. We're pleased that you've taken the time to participate in today's Owens Corning conference call and review of our business results for the third quarter of 2007. Joining us today are Dave Brown, Owens Corning President and Chief Executive Officer, and Mike Thaman, Chairman of the Board and CEO-Elect. Also joining us today for the first time is Duncan Palmer, our recently appointed CFO. Duncan joined Owens Corning in September of this year. Following our brief presentation this morning, we'll open this one-hour conference call to your questions. We will take questions from analysts and investors as time allows. We ask that you limit yourselves to one question and one follow-up so that we can field questions from as many people as possible. Before we begin, just a few reminders. Today's presentation will include forward-looking statements based on our current expectations and assumptions about our business. These statements are subject to risks and uncertainties, and our actual results could differ materially. Please refer to the cautionary statements and risk factors identified in our 2006 Form-10K and our second quarter 2007 Form 10-Q for a more detailed explanation of the inherent limitations of such forward-looking statements. We currently plan to file our third quarter 2007 Form 10-Q tomorrow morning before the open of the New York Stock Exchange. And importantly, we ask that you understand that certain data included within this presentation contains certain non-GAAP financial measures. For example, some of today's prepared remarks will exclude items that affect comparability. Those excluded items are captured in our GAAP to non-GAAP reconciliations found within the financial tables of our earnings release. During our third quarter results discussion today, remember that we have undertaken a number of significant strategic changes to our business portfolio, in particular the sale of our Siding Solutions and Fabwell businesses. These divested businesses have been classified as discontinued operations in our financial statements. Therefore, as we present our results today, you should keep in mind that our discussion, depending upon the context, may reflect total operations, continuing operations or discontinued operations. For the most part today, we will present continuing operations. When we comment on discontinuing operations, we will point that out. Now it's my pleasure to introduce Owens Corning's President and CEO, Dave Brown.

Dave Brown - Owens Corning - President and CEO

Thank you, Scott. Good morning, everyone. Thanks for joining us today. By now, it's likely that you've read today's news release that summarizes our performance for the third quarter. In that announcement, I confirmed my plans to retire by the end of this year. I will retire as CEO and as a member of the Board of Directors on December 6th. It's been my privilege to be on the Owens Corning team for the past 30 years. I will retire confident in Owens Corning's future under Mike's leadership. Mike has been with the Company 15 years and has been my valued business partner during my tenure as CEO. During my three decades with Owens Corning, I've seen my share of cyclical peaks and valleys in the building materials industry. Today, you will likely ask if we can foresee the trough of this cycle and if we can tell you when building materials will return to a better day. Given continued uncertainty on residential construction, that's difficult to forecast. Perhaps improvement will come sometime in 2008. Perhaps it will be 2009. As I think back to this call a year ago, when we were announcing our emergence from Chapter 11 and I think of all that has transpired since, there is one thing about which I am very confident. Owens Corning has prepared for this downturn like never before, as we have taken actions to perform through the cycle. In our Buildings Materials business, we have launched a fall sales promotion campaign to create demand for our insulation product. The national rollout of our newest roofing shingle is nearing completion and continues to create success for our customers. We've expanded our Masonry Products business. Our Basement Finishing and SunSuite business continues to grow as our brand has connected powerfully with homeowners in the remodeling market.

FINAL TRANSCRIPT




We've sold underperforming assets that weren't contributing up to our expectations, and we've curtailed operations to ensure that we are operating consistent with demand in the residential construction market. We have identified and are implementing cost reduction projects and will continue to do so to deliver significant savings in operating and corporate costs. The Company is also taking action in other ways. In the midst of the current down in demand for building materials, we've strengthened our presence in the fast-growing global market for composite materials made with fiberglass. These composites are strong, light, durable and flexible. They participate in a broad variety of markets, like transportation, electronics and aerospace. Demand for composite materials made from fiberglass has never been stronger and is growing at about two times global GDP, and Owens Corning is growing in this market. As I move towards retirement, I do so confident in the actions that we have taken and confident in the future of Owens Corning as a global company where market-leading businesses are built. And now here's Mike.

Mike Thaman - Owens Corning - Chairman and CEO Elect

Thanks, Dave. Let's start with today's big news. Last night, we issued a release that we had completed the acquisition of Saint-Gobain's reinforcements and tentacle fabrics business. As a result, Owens Corning now has a more global footprint in glass composites and reinforcements, and we've improved our ability to serve customers in fast-growing economies around the world. For the Company, we've increased our share of revenue from both non-U.S. markets and from commercial and industrial markets, bringing important balance to our Company's revenue sources. As part of completing this transaction, we announced in the quarter that we would be required to sell two glass fiber reinforcement manufacturing facilities, one in Battice, Belgium, and the other in Birkeland, Norway, to attain EU regulatory approval of our acquisition We anticipate that both plants will be sold during the first quarter of 2008. Today's acquisition, combined with the sale of our siding business and Fabwell for combined net proceeds of $425 million, has repositioned Owens Corning strategically, while maintaining our strong balance sheet. Certainly, the third quarter of 2007 will be remembered as a quarter of strategic accomplishment. However, the quarter also will be remembered as one that saw further weakening in the residential construction market and the demand for building materials in the United States. I would like to turn to results. Net sales for the third quarter of 2007 were $1.27 billion, compared with $1.39 billion in the third quarter of 2006. This 8.5% decline is a direct result of the continuing downturn in housing starts in the United States and the now-evident slowdown in repair and remodeling activity. For the first nine months of this year, sales trailed the last year by 11.4%. Third quarter net earnings were $112 million. Earnings per diluted share for the third quarter of 2007 were $0.86, which includes diluted earnings from continuing operations of $0.29 and diluted earnings from discontinued operations of $0.57 on a basis of 130.8 million diluted shares outstanding. Earnings from discontinued operations include the impact of the sale from our Fabwell unit and the Siding Solutions business. As part of the sale of Fabwell, the Company recognized a loss of $15 million, and we recognized a $122 million gain on the sale of the Siding Solutions business. When we look at comparability across periods, our primary measure is adjusted EBIT. Excluding $22 million in items affecting comparability, which Duncan will detail later in the call, our adjusted EBIT was $105 million in the third quarter, versus a prior year of $140 million. Gross margin as a percentage of consolidated sales was 16.3% during the third quarter of 2007, compared with 19.3% during the same period in 2006. The decline was primarily due to sales volume and price declines in our Insulating Systems business, along with increased Iowa facility costs and asset impairments reflecting market-related curtailments we are taking in some of our manufacturing plants. Marketing and administrative expenses totaled $102 million during the third quarter, a 22% decrease compared with the $130 million we spent during the third quarter of last year. These expenses, as a percent of consolidated net sales, were 8%, compared with 9.4% in the third quarter of 2006. A significant portion of this decrease was due to a reduction in our accrual for compensation expense in 2007 compared to 2006. Due to our projection that 2007 results will fall short of our targets, we significantly reduced our accrual for all of our pay-at-risk programs during the third quarter, resulting in a year-over-year reduction in expenses of $27 million.

FINAL TRANSCRIPT




Before turning to Duncan for a review of other financial matters, I'll provide a summary of the performance of our business segments. For the third quarter of this year, Insulating Systems sales were down 12.7%, compared with the same time in 2006, at $462 million, compared with $529 million in the prior year, when we were just beginning to feel what has turned out to be a very significant downturn in housing activity. Earnings before interest and taxes totaled $42 million for the quarter, which includes the negative impact of abut $11 million in incremental costs associated with fresh-start accounting, primarily related to increased depreciation and amortization costs. EBIT as a percent of sales was 9.1%, compared with 23.6% for the third quarter of 2006 and 9.5% during the second quarter of this year. We had expected insulation to make progress in operating margins in the quarter, due to the seasonal lift we would normally expect to have seen from the residential construction market. To the contrary, the summer saw further deterioration in the market outlook, affecting both pricing and volume. We have continued to be disciplined in our production of insulation. We are idling plants or lines as needed and have kept inventories in the normal range. Next, our Composite segment. Composite sales for the third quarter were $397 million, up a solid 12.5% from the same period last year. We saw moderate demand growth in many of our markets, which improved volumes. Also, with the weaker U.S. dollar, third quarter sales benefited by $10 million, the result of the translation of sales in foreign currencies back to the dollar. EBIT for the quarter was $29 million. This is a $5 million improvement from the prior year when you exclude $20 million of previously disclosed gains associated with precious metal transactions and insurance recoveries from the 2006 results. Our Composites business is performing well, and we believe that performance will be further strengthened with the addition of the global composites and reinforcements business acquired from Saint-Gobain. This acquisition expands our composites footprint around the world. Today, we have strengthened our position in India, Mexico and Brazil, and we've gained important new positions in the developing markets of Russia and Eastern Europe, as well as China. When combined with our leadership position in North America and Europe, this allows us to become the preeminent player in this important global market. We estimate that the acquired business would have generated EBITDA in excess of $100 million for full year 2007 before the costs associated with the leasing of precious metals, which we estimate to be approximately $30 million for the year. We have previously communicated that we expect synergies of more than $100 million to be realized by the end of 2011, with the majority of the synergies achieved during the first three years. We are still confident in this goal. Now let's turn to Roofing and Asphalt. Net sales for the third quarter of 2007 were $379 million, compared with $458 million during the same time in 2006, down 17.2%. The year-over-year decline reflects a period in 2006 that was only beginning to feel the impact of lower storm demand and the downturn in housing activity. In contrast, the third quarter of this year was impacted by the significant decline in housing activity, both in terms of new starts and existing home sales. Storm-related demand during the quarter was again below trend lines. Third quarter 2007 EBIT was $15 million, compared with $20 million during the third quarter 2006. While this quarter trailed prior year, we do anticipate that the second half 2007 EBIT will be better than the same period last year, as the business has been repositioned to perform in his weak market. Our Other Building Materials and Services segment no longer includes our Siding Solutions business, which was sold during the third quarter of this year. This segment is now comprised of Masonry Products, previously referred to as Manufactured Stone Veneer, and our Construction Services business. We made adjustments for the sale of siding. Net sales for the third quarter totaled $78 million, 19.6% lower than the comparable period in 2006. The primary reason for the lower revenue was an $18 million decline in sales, resulting from the closure of our Home Expert service line in the fourth quarter of 2006. EBIT for the third quarter this year was $6 million, compared with a breakeven performance last year. While not material to overall results, this is a nice improvement in the segment resulting from actions taken this time last year. Before turning to our guidance and outlook for the remainder of the year, it's my distinct pleasure to introduce our new CFO, Duncan Palmer, to review our EBIT adjustments and other financial matters. Duncan?

FINAL TRANSCRIPT




Duncan Palmer - Owens Corning - CFO

Thanks, Mike. There are a number of items regarding our EBIT adjustments that I will highlight, and I'll also touch on a few important financial items that we are often asked about. During my review, I will make reference to the financial tables that were included in today's news release. For the purpose of improving comparability of our results over time, we calculate what we call adjusted net earnings and adjusted EBIT, in which we exclude certain items from reported net earnings and reported EBIT. This is helpful to our Board of Directors, employees and investors as it allows for better understanding of our business performance from period to period. The items we exclude in these comparisons are items associated with our prior Chapter 11 proceedings, as well as restructuring and other non-recurring activities. Within the news release, we have included table two, titled Reconciliation Schedules. There you will see adjustments amounted to pretax charges of $22 million in the third quarter of this year, compared with a credit of $5 million during the same period in 2006. Included is an adjustment for costs associated with Chapter 11-related reorganization and restructuring items, transaction costs associated with the recent composites acquisition, and we recorded an impairment associated with preparing our manufacturing facilities to be integrated s part of the composites acquisition. As we have in recent quarters, we continued to amortize the cost of our employee emergence equity program. You will recall that shares associated with this program were awarded to all employees at the time of our emergence from Chapter 11 last year. These shares feature a three-year vesting and will continue to be amortized in the P&L until October 2009. These are non-cash expenses not relating to operations. Therefore, we include an $8 million adjustment to our reconciliation. Next, you'll see within table five, titled Business Segment Information, that general corporate expense declined by $52 million compared with the third quarter of 2006. A little more than half of this cost improvement is tied to the accrual of performance-based compensation. At Owens Corning, a significant part of compensation for all salaried employees is based on internal financial targets established at the beginning of each year. With the continued decline in the sales of our building materials during the year, it has become clear that we will come into the low end of the range of the financial objectives we established internally at the beginning of the year. Therefore, we have reduced the year-to-date accrual in line with the anticipated performance-based compensation, which resulted in a year-on-year reduction of $27 million in corporate expense. Of the remainder of the $52 million decline in general corporate expense, $11 million is attributable to the year-on-year improvement in the charge for evaluating inventories under the LIFO method. This results from a lower cost of materials in the Roofing and Asphalt business. The remainder of the $52 million is associated with adjustments from fresh start accounting. Now I will turn to depreciation and amortization in table four. That's titled Statements of Cash Flows. During the first nine months of 2007, D&A totaled $239 million, which includes $24 million resulting from the adoption of fresh start accounting upon our emergence from Chapter 11 in October of 2006, as well last $12 million depreciation and amortization from our discontinued operations. We currently estimate that D&A from our continuing operations will total approximately $310 million in 2007. Typically, we expect that our maintenance CapEx spend is about 80% of D&A. Regarding our level of debt at the end of the third quarter, the Company had $1.9 billion of short- and long-term debt with cash on hand of $450 million. Given current market conditions, our financial outlook and our intended uses of cash, we're comfortable with this level of debt. Subsequent to the end of the third quarter, the Company acquired the earlier-mentioned composites business for $640 million, which has impacted our cash and debt position. We estimate that at year end 2007, our net debt position net of cash on hand will be less than $2 billion. Obviously, this could be impacted by matters such as the timing of asset sales and financing decisions related to our alloy portfolio. We now estimate that our effective tax rate in 2007 will be at 30%, compared to prior guidance of 34%. Our federal tax net operating loss results in the distribution of cash and stock to settle our Chapter 11 case. The net operating loss is now $3.1 billion, compared to the prior estimate of $2.8 billion. We continue to expect that our 2007 cash taxes will be about 10% to 15% of pretax income for 2007. Now here's Mike to address our guidance for 2007.

FINAL TRANSCRIPT





Thanks, Duncan. Let me provide an overview of the changes we've made to our adjusted EBIT guidance, given our recent acquisition and asset sales. In our August 1st second quarter earnings communication, we said that our adjusted EBIT forecast of $415 million for 2007 did not reflect the impact of the composites acquisition, the sale of our Siding Solutions and Fabwell businesses or other related strategic changes in our business. Given that those transactions have now, in fact, taken place, it seems appropriate for us to establish a new baseline for our earnings guidance. So before we discuss our revised forecast, I would like to reconcile to a new baseline for continuing operation that incorporates the impact of these strategic changes. We had estimated in the [respective] offering documents for Siding and Fabwell that they would have contributed approximately $50 million of EBIT to Owens Corning in 2007. Accordingly, a new better baseline for continuing operations would be $365 million for our remaining businesses versus the prior guidance of $415 million. Going back to the beginning of the year, our original estimate of performance was based on the NAHB forecast of 1.54 million housing starts for 2007. The credit market issues from the summer have further weakened housing activity and created a significantly weaker outlook for new construction, impacting insulation pricing and volume. The resultant NAHB forecast for average annual housing starts in 2007 has dropped to 1.36 million with a current forecast for 2008 of 1.2 million. Based on these factors, we now believe a better estimate for adjusted EBIT in 2007 would be $335 million versus the prior estimate of $365 million. We've made significant strategic moves since our last call. So I'd like to put 2007 performance into a broader context. Our original EBIT estimate for the year was $415 million of EBIT, combined with $285 million of depreciation and amortization, producing EBITDA of about $700 million. With the strategic moves we've completed, we estimate that our new, ongoing business portfolio would exit 2007 having produced EBITDA of approximately $700 million. I get to this estimate by adding together our current estimate for EBIT from continuing operations of $335 million and the $310 million in depreciation and amortization from continuing operations, to get to about $650 million of EBITDA from continuing operations. When I add in the EBITDA of the acquired Saint-Gobain composites business of approximately $100 million and then subtract an estimated $40 million to $50 million of EBITDA contribution from the two glass plants that we have been required to sell, these puts and takes in total bring us back to about $700 million of EBITDA. We believe this is significant for two reasons. One, we were able to navigate the year and create a portfolio with stronger earnings power in our current market environment. Secondly, our portfolio balance towards faster growth economies and commercial markets and away from U.S. residential construction is a much stronger position as we enter 2008. One final item before I provide a brief summary and a look ahead to the fourth quarter and 2008. In February of this year, we announced a share buyback program authorized by the Board of Directors that allows the Company to repurchase up to 5% of Owens Corning's common stock. At the time of the announcement, we were expecting the composites transaction to be a joint venture and that we would have significant cash proceeds from the sale of the Siding and Fabwell businesses. Since then, we've identified a great strategic use of cash, the Composites acquisition that we completed this morning. Given this, the Company has chosen not to repurchase any shares during the third quarter. However, the authorization to repurchase shares as described continues to be in place. As we look to the year ahead, we will focus on four primary goals at Owens Corning. First, we will successfully integrate the Composites acquisition and create a new and exciting platform for our Company. Second, we will focus on the growth opportunities that exist with our customers to ensure their success. Third, we will promote the important role of our products in energy efficiency and greenhouse gas reductions. And fourth, we will streamline our cost structure and production capacity in response to weaker markets. Specific to the final point, as part of our operations planning, each business's staff department has been asked to further reduce their costs so that we begin 2008 leaner. These cost reduction programs include capacity and headcount reductions and the elimination of operational costs and general corporate expenses.

FINAL TRANSCRIPT




These actions have already begun and are expected to be largely complete by the end of the fourth quarter. We intend to reduce our operating costs by about $100 million, freeing up resources to support financial performance, as well as investment where we see opportunity for growth. In closing, we believe that the actions we are taking have positioned Owens Corning for success, as we both look ahead to 2008 and also look through the cycle to the better days for the housing market that will assuredly come. With that, Scott, we're ready for questions and discussion.


We can go to questions as you'd like to invite people into the queue, please. Q U E S T I O N A N D A N S W E R

Operator

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Ken Zener with Merrill Lynch. Please proceed.

Ken Zener - Merrill Lynch - Analyst

Good morning.


Good morning, Ken. How are you?


Good. I'm just wondering if you can step us down from this $415 million number to $365 million again. I heard what you said about the $50 million EBIT related to Fabwell and the Siding business. I guess I'm trying to tie that off with the $9 million after tax, $50 million pretax, contribution related to discontinued ops that's shown and where that $35 million gap comes from. Is it related to divestiture costs, or what is that?


Well, it's a good question, Ken. Let me walk through that. When we put together the offering document for those businesses and looked at how to position those businesses for sale, we really looked at them in terms of both how they contributed to Owens Corning and how they could contribute to a new buyer. And so a lot of the general corporate expenses, such as treasury and accounting and legal and others, we assumed in the offering documents of those businesses that they would be provided by the buyer. So in our internal reporting, where we fully allocate our corporate costs back to the business segments, in the divestiture documents, we took them more as a standalone how they would contribute to another company. And that resulted in those two businesses in total creating about $50 million of contribution for the buyers. And as a result, that's how we were able to get what we thought were successful divestiture proceeds. Now that does potentially leave behind some quote-unquote stranded costs in the corporation where we have some of those services, and they are not being deployed obviously against a business unit.

FINAL TRANSCRIPT




What we're announcing today with some of the cost reduction programs is it's our goal really to bring onboard the Vetrotex business or the Saint-Gobain Composites business as a part of that acquisition, achieve those synergies by getting significant scale out of our corporate-type expenditures and, at the same time, eliminate those stranded costs from our business as a part of going into 2008. So a lot of math in there, but as we looked at how it affected 2007, we did have costs in those businesses that don't go away, and so they would have contributed about $50 million to us in our initial guidance this year. We're now working to make some of those costs go away so that net-net we add back those costs also to the result. Does that make sense?


All right, and I guess related to the composite acquisition, appreciate what percent of the metal, those plants metal needs, are met by the $320 million leased metals that you talked about? And what is the potential improvement opportunity over time as you perhaps make those metal needs less, so the efficiency? So what percent of the metal needs of those plants are met by the $320 million you talked about?


Yes, let me start on this, and then I'll see maybe if Duncan has something he wants to add in on top of this. In the acquisition, we bought about half the metal that we need in order to support that operation, probably slightly more than half. And then the remainder we've stepped into the shoes of Saint-Gobain in the leases they had for about $320 million worth of metal. We have kind of a three-part strategy for dealing with that shortfall. We have some initial things that we could do right away in terms of productivity and changing mix of metal in order to address some portion of the lease costs. We have some longer-term things over the next three or four years that we can do to get productivity in the metal operations and balance out the metal that will eliminate another portion of it. And then we do think we'll have some ongoing lease costs associated with the metal to support the balance. We have not yet done our complete planning on that, but we are pretty confident that what's also not included in today's discussion is whatever the divestiture proceeds would be for the two plants in Europe, and we certainly expect that we can handle the metal issue for the amount of the divestiture proceeds or less. So when you look at it as a balance sheet issue, our sense is that we'll get enough divestiture proceeds to deal with that shortfall. However, it doesn't necessarily mean we'd go out and buy metal. We may actually, in effect, decide that financing with metal is a good thing to do. And maybe I'd turn it to Duncan just to talk a little bit about our philosophy around whether we would buy or finance metal.


Thanks, Mike. I think, obviously, we're in the process of developing that strategy at the moment, and I think over the long term we'd be taking a view both of a view of our balance sheet and how we wanted to manage the overall debt level of the corporation versus the overall cost of leasing metal versus owning it ourselves and, obviously, the risk that we face in terms of having an open position to metal prices over the long term. So there's a combination of those things. Obviously, we aim to be efficient both from a balance sheet point of view and a cost point of view, and those are the factors that are affecting us as we develop that strategy.


Great, thank you very much.


Thanks, Ken.

Operator

FINAL TRANSCRIPT




And your next question comes form the line of David MacGregor with Longbow Research. Please proceed.

Garik Shmois - Longbow Research - Analyst

Hi, good morning. This is Garik Shmois in for David.


Good morning.


Good morning. I know in the insulation side you've been closing some capacity. Can you just talk about what some of the competitors are doing? Are they acting just as rationally as you are at this point?


This is Dave. Just to kind of recap what we have done. We had a two-line facility in Candiac, Canada, that we shut down earlier this year. We announced about two weeks ago that we're going to close a line in our Newark, Ohio, facility. And we've also announced that by the end of the year we'll close another line in our Delmar, New York facility. And we just think that's consistent with the current demand that we see well into 2008. We don't have hard data on exactly what we think our competitors are doing. Our sense is that they are taking some of the same kind of moves that we are, downtimes over weekends, extended holidays, delaying rebuilds, those kind of tactical moves that we think would be consistent with the same kind of moves that we've made over the last 12 months.


Okay, and do you think there's more room for pricing to come down in insulation, or do you think we're close to the bottom of these declines?


That depends kind of on what the demand would be going into 2008. Our current forecast is consistent with the NAHB, that we would expect more weakness going through 2008. And history would suggest that when you see that, that there would be pressure on pricing. What we have seen, however, is kind of an unprecedented shutting down of lines. The lines that I just mentioned, I can't recall the last time we took that significant of action in such a short period of time. So on the macro level, I would expect pressure on price as demand declines, and that would be offset by how quickly Owens Corning and others would consider taking off capacity and turning it off cold.


Okay, and just lastly, on commercial construction, you mentioned that you're seeing weakness there. Is it negative comps that you're seeing, or you're seeing just a slowing in the growth rate?


In today's announcement, we really haven't said much about commercial construction at all. We have said that we've seen a slowing of the repair and remodel market, which we think is related to existing home sales and a general reduction in housing-related activity. We've generally been

FINAL TRANSCRIPT




pretty pleased with how our commercial markets have been holding up through the year, and that's become a bigger part of the contribution in the insulation business. While I address that, one thing I would say about insulation pricing, to build on Dave's comments, one of the things that's really I think changed dramatically for us in the last three months is the original framework for 2007, really in the industry, was that we would see weakness through the first three or four quarters, but that we would potentially see some strengthening in the market in 2007, and I think pretty much every forecaster saw 2008 as being a better year. Clearly, in the last 90 days, that outlook has changed dramatically. I think most people who are looking at '08 expect it to be weaker than '07 in aggregate and probably weaker than the market is today, which we've characterized as a fairly difficult market. So with that kind of as a backdrop, I think a negative outlook for the market would continue to put pressure on the insulation market. But I would also say that the history of our business performing through the cycle is the tougher the correction on the downturn, typically the faster the recovery on the upturn. And we do know that one of the things that would help us repair operating margins in insulation would be a fast recovery of the business. So while our outlook, I think, in the near term is that we would experience some more pricing and margin pressure because of the weakness, I think if we could have a hard downturn here and get a lot of this behind us in a short period of time, it should improve our outlook as you get to the out-years and you start modeling a housing recovery.


Okay, thank you. Thank you for that.


Thanks.

Operator

And your next question comes from the line of Jack Kasprzak with BB&T Capital Markets. Please proceed.

Jack Kasprzak - BB&T Capital Markets - Analyst

Thanks, and good morning.


Good morning, Jack.


Can you give us some guidance on where you think D&A will be for 2008? You mentioned a $310 million number for '07?


I think it's going to be difficult for us to give guidance on that, Jack, and let me tell you why. We are now in the midst of doing purchase accounting on the Saint-Gobain acquisition, and that is a business that has a fairly sizable asset base. The asset base in aggregate is probably greater than our purchase price. So we have work to do to go back and really do the purchase accounting and assign the value of the acquisition cost to the assets. Obviously how we do that will have a significant impact on depreciation in that business and, therefore, our overall depreciation. I think we're comfortable, and I know we're giving you kind of a mix and match, but we are comfortable that we've got the continuing operations number and

FINAL TRANSCRIPT




the EBIT for that pretty well benchmarked at $335 million for this year. That's our current best estimate. We are comfortable that our continuing operations this year will produce depreciation of about $310 million, which we talked about in today's comments. So if you combine those two numbers, you get a number like $645 million for this year in the base operation, and then if you work off of EBITDA numbers, we are comfortable saying that the acquired business would have EBITDA in 2007 of $100 million or more. So those are kind of the pieces of it, but how you break apart the Vetrotex or the Saint-Gobain piece in the EBIT and in the DA and what our forward-looking DA is going to be is really going to be a function of getting our purchase accounting done. I think we'll be prepared to talk about that when we do our fourth quarter review in February.


So I guess the $700 million run rate, which includes all the items you just mentioned, for EBITDA for the Company is the jumping-off point, more or less, for 2008, and then whatever we think -- whatever an individual thinks the performance might be of the continuing core businesses pre-Saint-Gobain on an EBIT basis, you adjust the forecast that way? And as far as getting to a 2008 or adjusting a 2008 forecast?


That's right. At this point, I think it's easier for us to provide information for you to be able to do that analysis at the EBIT numbers that are in our release for our continuing operations and then the EBITDA numbers in aggregate. And then obviously the impact to the marketplace on our building materials business and then the integration of the acquisition and the synergies and things would be the puts and takes to get to a 2008 number.


Okay, and then the $100 million of operating costs that you mentioned you hope to take out of the business, is that -- how much do you think you can get in 2008? Or I assume that's a run rate that you wouldn't get at all in one year.


Yes, our goal would be to work hard here in the fourth quarter and be in a position to get most of that in 2008. So that's certainly our internal planning.


So that's $100 million of potential cost saves that we would have to also take into account as a potential opportunity, if you will, for a 2008 forecast.


That's right. Now, I would want to make sure that you hear us clearly on this. That's not only selling, general and administrative expenses. It's not just SG&A. It's period costs in our facilities. It is the cost of shutting down lines. So whereas this year we came into the year expecting that we would start to see some recovery in the second half and then an uptick in '08 and we maintained kind of our readiness to serve at a level that would allow us to get back to maybe 1.5 million housing starts heading into '08, I think with the changes Dave talked about, the shutdown of the line outside of Albany, New York, in our plant called Delmar, the shuttering in of a line in our plant in central Ohio, we've actually taken a more aggressive view to say that in the near term, rather than taking idle costs or ongoing costs associated with running those assets, that we're willing to bring our readiness to serve level down a little bit and weather the storm at a deeper level of troughs. So some of that's going to appear in gross margin, and then obviously, some of that's going to be used to offset what we anticipate will be some continued volume pressure and pricing pressure. Having said that, when we look at our Building Materials businesses, we know that when the

FINAL TRANSCRIPT




market comes back, we need to be positioned to be able to service the demand that will be there. And we think that we're doing this in a responsible way to both deliver responsible financial performance in '08, but at the same time leave ourselves positioned for a lot of leverage on the upside.


Okay, great. Thanks a lot for that.


Thanks.

Operator

Your next question comes from the line of Ian Zaffino with Oppenheimer. Please proceed.

Ian Zaffino - Oppenheimer - Analyst

Hi. Just a quick question on the inventory side. Can you give us an idea of where inventories were worked down? Was it across the board and how does it look by division, and what are your assumptions there with your inventory? Thanks.


Okay, let me kick off. I'll make one comment about roofing, and then I'll let Duncan talk maybe about our overall inventory levels and how we see those. The one key distinction that we didn't bring out in the prepared remarks that I would like to make now is if you remember at this time last year, while we comped negatively in the third quarter in our roofing business, our operating margins hung in. So our operating margins to sales were about flat year-over-year. But in this call last year we talked about the fact that the market had gotten really backed up in terms of inventory and that we were very backed up in terms of inventory. And as a result, we anticipated taking a hard correction in that business in the fourth quarter, which, in fact, we did, producing a significant operating loss in the fourth quarter of last year. If you look at where we are specifically to that business, we committed to the investors on the call that we would operate the business differently in '07, that we would build inventories earlier in the year and then leave manufacturing flexibility on our assets during the summer and that if we didn't see storms we wouldn't find ourselves in a position at the end of the third quarter where we were long inventory. We, in fact, have achieved that in our roofing business, despite the fact that we're in a very weak market. So specific to roofing, I talked about optimism that our second half result in roofing would beat the second half of last year. That is an inventory story. So I wanted to highlight that. Specific to overall levels of corporate inventory, I'll let Duncan talk to that.


Thanks, Mike. I think what I'd say about inventory is that generally speaking we manage our working capital kind of in the range overall of about 10% to 12% of sales. So, as we see sales move up and down with the cycle, we'd expect our overall working capital level, including inventory, to go up and down with that. So we manage, obviously, very consciously to make sure that we are responsible with respect to our level of inventory as we manage the business and reduce it when sales are falling, and obviously, it builds as sales are rising. So, therefore, I think you'll see that our scalable kind of working capital that we'll be having sort of over the cycle.

FINAL TRANSCRIPT




In terms of -- there's also a seasonal effect in our business from a working capital point of view that I think's worth mentioning, which is that in general working capital builds in the first two quarters of our year and then reduces sharply in the fourth quarter relating to the overall sales activity in our business, which I think is something which is worth bearing in mind as you read our financials and think about our business going forward.

Ian Zaffino - Oppenheimer - Analyst

Okay, thank you very much.


Thanks.

Operator

Your next question comes from the line of Jerome Lande with Millbrook Capital. Please proceed.

Jerome Lande - Millbrook Capital - Analyst

Good morning. The first question on the additional cost savings, just more strategically speaking, would you classify the additional cost savings initiative as a reaction to the current climate, because some of it looks like things that you could have done at any time, like corporate, for example.


Well, Jerome, I'm not quite sure exactly how you're using the term reaction in terms of is it an impulsive reaction? We don't feel that it is. We feel it's a responsible reaction to the markets we're in. Obviously, when you see your core businesses get a lot weaker, you get maybe a little bit tougher in terms of what it's nice to have and what you need to have. I think that's one thing that probably is affecting our thought process today. But I think the second thing that's affecting our thought process is over the last five quarters, if you look at what the Company has done, we've effectively emerged from bankruptcy. We've become a public registrant again. Our public equity has been traded. We've divested our siding business. We've divested our Fabwell business, and we've completed a year and a half courtship of the Saint-Gobain composites business, resulting in an acquisition. That was a lot on our plate. And with that kind of agenda strategically, there wasn't really in the last five quarters or six quarters a good time to take a deep breath and say, okay, how do we really focus the agenda and start working on getting the costs assigned to the right priorities? We think we have the opportunity to do that now. So I think the natural evolution of the strategic agenda, as well as what's going on in our marketplace, has really given us an opportunity to bring a clear and renewed focus to our cost structure. At the same time, some of the things we're doing in terms of capacity are the things we need to do in order to be able to correct our inventory positions and correct our production positions without leaving a lot of idle costs in the business. So some of it is a direct response to what we're seeing in the market. Some of it is battening down the hatches because we do think that the marketplace over the next six quarters is probably going to be pretty tough. And then part of it is a narrowing of our agenda, knowing that we've accomplished a tremendous amount strategically in the last five quarters and maybe it's time to use a little bit of this consolidation phase to get some costs down.


FINAL TRANSCRIPT




Okay, so in other words, when things normalize, are there certain jobs that are coming out, for example, that you might wind up putting back?


Well, obviously, what we would like to do is grow the Company. And I think our Company, the way it's built in terms of systems and corporate infrastructure, is really built to scale. When you look over the last five years, as we've gone from less than $5 billion to more than $6.5 billion in revenue. The SG&A line in the Company really didn't more very much, and we were able to bring SG&A down from more than 11% of sales to less than 9% of sales just by scaling the Company. Obviously, as you go through a contraction on the opposite side of building a company for scale is it doesn't necessarily shed costs particularly easy when the markets begin to decline. So that requires a little bit more hard work. We would like work on getting at our structural cost position so that when we get to -- when we get after these cost reductions, that when we get through a new growth period, that we would establish a new level of scale and, therefore, new leverage coming out the back side of this cycle. I think fundamentally that's probably where the primary benefit of some of the moves we're making today would be felt by the investors. It's going to be hard to get a lot of the cost reductions we're working on now through to the bottom line based on our anticipated weakness in demand. But we would expect when demand returns, it's going to give us more leverage on the upside.


Okay, can you comment on a historical perspective of price fluctuation when you're in a downturn like this? I understand you haven't necessarily seen one like this, but in comparable ones. Do you continue to see price pressure when the housing start number hits its trough, or is it purely on the way down?


Given his deep experience in the business and the fact that this may, in fact, be his last call, I'm going to let Dave talk about where we've been on historical pricing.


Well, there's a pretty close correlation between capacity utilization and pricing in the industry, and what we have found is that the pricing pressure tends to ramp up when we get below about 90%, 92% capacity utilization. And we're below those levels in the industry today. So what we're seeing is pretty consistent with what we've seen historically. I've lost my -- where was I going to go from there?


Probably outlook, that as we see the market weaken --


Going forward, if you take a look, it's kind of the same answer that I had previously, that it's a combination of demand versus how many of the lines are turned off cold, and I kind of already outlined what we have done in the past. Probably one number that would maybe give you an answer that would be helpful, if you take a look at peak operating margins historically in our insulation business, it would be in the low 20s -- 20%, 22%. And if you look at trough margins in our installation business, it would be closer to 10%. So that may be kind of the answer to your question more so than pricing. I don't know if that helps or not.


FINAL TRANSCRIPT




That does help. Thank you. Lastly, at your analyst day a few months ago, you were obviously somewhat restricted in what you could talk about with the ongoing strategy for the Composites business with Vetrotex. So now that you've closed that deal, are we going to get some kind of presentation of detail on strategy and capital deployment and things like that? I mean, we've talked a lot about it today, but more of a broad presentation of how you view that business?


Absolutely, and we're looking forward to the day that we can do that. As you can imagine, given the amount of competition authority oversight to that transaction in both North America and Europe, we have been in some ways beneficial because it was a joint venture, we were able to get a lot of pre-integration organizational planning done. But on the other hand, as related to competitive and marketplace information, we were very restricted in our ability to do much in the way of planning there. So as you might imagine, we have teams around the world right now that are getting in a room for the first time and sitting and talking about market dynamics and sitting and talking about customers across the table as one Company, being able to work together and figure out how we want to move forward. Our expectation is we've got a very busy operations planning season for that team between now and year end. We're hoping that we can pull all of that together in terms of what our longer-term capital needs will be and what our near-term deployments are going to be and where we see big opportunities in the market. If you read the press release we put out today, though, announcing that deal, the one thing we did announce today is we are fairly certain, just based on our pre-integration planning that we will want to move quickly to expand our capacity in Russia and we will want to move quickly to expand our capacity in China. We see those as two footholds that we've gained in this acquisition that are strategically very valuable with where we see the business going. Obviously, we need all the standard regulatory and Board approvals on that, but that's one of the first places we're looking in terms of deploying capital profitably.


Thank you very much.


Thank you.

Operator

Your next question comes from the line of Jim Barrett with C.L. King & Associates. Please proceed.

Jim Barrett - C.L. King & Associates - Analyst

Good morning, everyone.


Good morning, Jim.


FINAL TRANSCRIPT




Dave, good luck in your retirement.


Thank you, I appreciate it.


Mike, speaking of composites, can you talk about what has been the recent pricing activity of your Chinese competitors in that area?


Well, Jim, that's a good question. We don't necessarily have good publicly available information sources that we can quote to in terms of what's going on with our competition. But we have seen -- over the last five years, I think we've talked a lot about the rapid rise of both the Chinese market and the rapid rise of a serious and capable group of competitors in China, and we take the growth of that competition very seriously. But we've also seen, I think, in the last year some change in the stance of the Chinese government in terms of export-led industries and in particular export-led industries that consume a lot of energy and could potentially have a negative environmental footprint. So I think most of the investors on the call would probably be aware that there's been some rollbacks on value-added taxes coming out of China for exporters. That has affected the competitors that we have in China and we do know that that has put a little bit of wind at our back in the places we face them around the world. So we do think there has been some responsible behavior in that regard. And then, at the same time, we know that there is a fair amount of inflation in China with respect to energy and labor costs, and we do think that will affect our competitors there, also. So we've seen some positive trends. I don't know that in terms of our theory of the acquisition that those aren't necessarily trends that we're taking to the bank. We're focused initially on getting the cost side of the business right and making sure that we go out and meet the customers and get to know what they need from us and expect from us. But we do think that we maybe have an opportunity here to do that in a way that some of the overhanging pressure that we've experienced over the last four years at least might be lessening, maybe not going away, but we may see some mitigation in that pressure .


Okay, good. And then speaking of the roofing business, now that you're a couple quarters into the GAF-ElkCorp merger or acquisition, how has that affected industry dynamics? How has it affected industry pricing? And has SureNail enabled you to gain share in what obviously is a tough market, or how do you view that intro at this point in time?


A great question, Jim. GAF and Elk have been working very hard, from our view, to integrate the two operations and they've made pretty systematic announcements through the year about bringing their product lines and manufacturing operations together and bringing their organizations together. So it looks like a very kind of standard and positive integration of the two businesses for them. Unfortunately, they've been doing that in an environment that's quite a bit weaker in terms of demand than the prior two years. If we look at '07, probably the overall market would be down as much as 25% versus where we were in '05. So we have seen a major correction in terms of the overall marketplace. And having said that, they're trying to put product lines together and move through some kind of [do good] of the inventory positions in a pretty weak environment. So I don't know that as a competitor you ever want to fault your competition. I don't think we could say that there's anything different that they can do besides that they need to work through the inventory positions that they have, but that has created a pressure in the marketplace that we wish weren't there.

FINAL TRANSCRIPT




We would expect that when they get their full integration done and they have a cleaner product line and a more straightforward relationship to their customers that that should bring some of the consolidation benefits to the market that we would expect to see. I don't know that we feel we're quite there yet. What we're learned with SureNail, with Duration with SureNail technology, that even in that kind of environment -- a weak marketplace and one where there's consolidation and disruption going on competitively -- that if you bring a winning proposition to your distribution partners, if you bring them a winning proposition that helps their contractors make more money and if the contractors understand how they're going to sell that product better in the home, that you can make money through the chain. And that has been a great product launch for us. It's still going national. It's still a relatively small proportion of our overall mix, although it is starting to get to be material in terms of impacting financial results. And I think it's also established a model for us thinking about, okay, what's the next thing we can go do working with our distribution partners to go grow their business and make their business more profitable. So we've been very happy with that. And candidly, I think if we didn't have that kind of product launch right now and didn't have that position with contractors and distribution, we'd probably be talking about a much more difficult environment for our roofing business than what we're currently seeing.


Okay, that's very helpful. Thank you.


Thanks, Jim.

Operator

Your next question comes from [Richard Cazenove] with BlueBay. Please proceed.

Richard Cazenove - BlueBay Asset Management - Analyst

Yes, good afternoon. A few questions, if I may. First of all, in terms of your depreciation and amortization from ongoing operations, I think in the press release you talk about a number of $320 million, but in the prepared remarks you talked about $310 million. I just wondered if you could reconcile the difference between the two.


Yes, I think we've gone back and forth in terms of how to talk about the continuing operations piece. Our best estimate today is, leaving aside Vetrotex or the Saint-Gobain composites acquisition, that after the divestiture of Siding and after the divestiture of Fabwell, what we actually have in our current ongoing portfolio is probably depreciation and amortization in the range of $310 million. In the press release, we were tying more to what do we think our reported number will be at year end? And that will actually include in the cash flow statement the year-to-date depreciation and amortization of the Siding business and the Fabwell business because that comes through the cash flow statement. And the P&L gets wiped out, but we'll still have accumulated that in our cash flow statement. So you get a little bit of apples and oranges, but in effect we are picking up the year-to-date depreciation and amortization of Siding and Fabwell in a cash flow statement which ties it to the $320 million. When you try to pro forma what really is the business portfolio at year end, we think an easier way to talk about that is to take the $335 million from continuing operations, the $310 million from our adjusted depreciation from continuing operations and then to take the $100 million of EBITDA from the Saint-Gobain acquisition net of the plant divestitures. And I tried to detail that in my comments.

FINAL TRANSCRIPT





Okay, and just in terms of the divestitures that you have to make, what sort of proceeds should we be thinking about from the sale of those assets?


We're right in the throes of kind of the last couple of rounds of negotiations on this, and it is a competitive bid process. We have a number of interested parties. I certainly don't think it would help our investors at this moment to start laying out what we think proceeds expectations will be. We think it will be a successful auction, and we think we'll get something resembling fair value.


But it shouldn't be, I presume, anything less than the multiple you paid for the assets the first time around?


Those assets have been historical assets of the Company for a very long period of time. So we built those assets as opposed to acquiring them.


Okay, all right. Two other small questions then. In terms of CapEx for the full year this year and 2008, can you give us some color on that? And secondly, in terms of the cash restructuring charges we should assume for the various programs that you're running, can you just give us some color on what that should be?


Yes, I'll deflect the second part of your question. We're not far enough along in terms of the restructuring programs that we are in a position to kind of estimate what we think the cash restructuring costs will be. We do think there's going to be some cost associated with the cost reductions, but we think that will all be positive-return projects, so that's obviously the standard we hold ourselves to, which we're going to pay cash to take our costs out at audit to deliver a positive return cash on cash. On the CapEx question, I will hand that one over to Duncan.


Thanks, Mike. For this year, I think a good guideline of where we see CapEx would be in the range of about $270 million to $290 million. I think we've guided on that in the past, and I think we're still comfortable with that. Because next year I think we are, as Mike said, in the process of looking at the opportunities that we have from the acquisition we've just completed and the growth opportunities to offer the concluding investments that we've announced subject to Board approval, regulatory approval, today. So I think we see opportunity for next year that we're still in the process of quantifying in terms of attractive opportunities in growing markets. So I think we'd normally expect in the case of our sort of underlying business, if you'd like, excluding that, maintenance CapEx runs in the order of 80% of our depreciation and amortization. And we do continue to see that kind of continuing into next year. So I think if you build that up, that says we're not comfortable kind of giving guidance yet on next year's CapEx, but we do see some (inaudible) opportunities that we will be looking out very hard in the next few months.


FINAL TRANSCRIPT




Okay, thanks a lot.


Annie, this is Scott. Given the strong interest in our call today and the information we're presenting, why don't we extend past the top of the hour and let's take questions from three more callers. And then if you can toss it back to me, we have some closing remarks.

Operator

Sure. Your next question comes from the line of Mary Gilbert with Imperial Capital. Please proceed.

Mary Gilbert - Imperial Gilbert - Analyst

Good morning.


Good morning, Mary.


Hi, Mary.


I wanted to find out, going back to the numbers that you talked about with regard to Saint-Gobain, you said you've got $100 million EBITDA, but then the two plants you're selling generate about $40 million to $50 million of EBITDA, is that correct?


That's right.


Okay, so that's kind of like $100 million less the $45 million, less the $30 million associated with the metals, the lease expense associated with the metals? Is that fair to say?


Why don't you keep going where you're going and then let me respond?


So it's kind of like a net sort of $25 million purchase, plus you're expecting to realize synergies of $100 million, but it will take -- you're going to realize most of it in three years. And then one of the questions I had is how much of the 100 -- like, if we were going to look at weighting, how much we'll get in years one and year two? So let's say is year one going to be where we see the greatest amount of benefit flowing through? Or is it going to be in two, and looking at that $100 million?

FINAL TRANSCRIPT





Well, I think you've got the relevant numbers that we're disclosing very much at your fingertips. One of the things that is difficult when you basically divest plants, which is what we're doing with Battice and Birkeland, is obviously depending on who the buyer is, they either are going to have their own corporate infrastructure to run those plants and, in effect, bring them in almost at the gross margin line, or they're going to need to put a fair amount of cost to build a management team and a management structure against that. We have a little bit of a hybrid in the divestiture that we're doing over in Europe, where we have put together a management team from our existing management team over in Europe to be able to lead those plants. And so, as a result, they do have a fairly good level of EBITDA. But there is, again, some levels of corporate services and other things that as the buyers look at that transaction, they're going to be looking at what it contributed to Owens Corning versus what they're able to get in their own contribution and their own financing. So there will be some work and part of our synergy plans will be in bringing together the European operations of Saint-Gobain and our team to make sure that we have the right level of corporate overheads in Europe to run our business. So we have some work to do to get through those divestitures. Obviously, we would have preferred to keep all of the assets in Europe and that was our preferred approach, but we couldn't get it done. We think the merits of the deal certainly outweigh the fact that we've had to divest these two plants. With relates to alloy, our long-term plan on alloy has typically been to own most of our alloy. And we think that there are periods of time, and now is probably one of them, where it's a pretty good market to finance some of the metals that we use, and then there are other metals that we don't think are particularly good assets to finance generally. We wouldn't expect on a go-forward basis, between the productivity programs we have in mind, some of the asset reconfigurations that we had in mind, that the $30 million that we see in the 2007 leases would be a recurring number. We think there will be some transition costs as we work our way through a program, maybe a little bit of additional capital that we'll deploy to buy some metal. And that between those two things, we'll manage those costs down pretty effectively and pretty quickly and that the cost in managing that will be well less than the divestiture proceeds. So when you add those two numbers together, I wouldn't necessarily say that they were additive because we are getting proceeds from the sale of Battice and Birkeland that we are going to use some of that money potentially to solve the alloy problem. So I think it's more of a we bought 100 of EBITDA, we're going to lose 50. We probably will have net positive proceeds as a result. And then, from there, we've got $100 million of synergies to go to work on.


Right. So, in other words, let's just say in the asset dispositions you get something like maybe $300 million or $320 million. So it's really sort of enough to cover the metals, effectively. So could we look at it that way, so to speak? And because I know it's not a fine science, because you may say, okay, we're going to take some of the metals or because of some of these programs that you've identified on the call of being able to move metals around and use different kinds of metals to sort of reach the productive opportunities that you see, I understand that it's just not a perfect science. But I guess I'm just trying to look at it economically, just trying to get down to what the contribution is. So could we look at it that way, and then we don't sort of count that $30 million for a moment I guess on a go-forward basis pro forma once those things go into effect. Does that make sense?


Yes, I think I'd be most comfortable saying that without speculating on proceeds, which is something we really don't want to do, that we think between internal productivity programs, add some reconfigurations and the proceeds that we get from the divestiture of those plants we will either be able to satisfy all of our alloy needs or we will have gotten excess cash for the Company that offset the financing costs of financing alloys. So if you pair up those two items and say should you feel comfortable that between those divestitures the alloy lease costs as a financing cost is either going to be a financing cost that's offset by some additional cash flow or it's going to be handled through our alloy program, we feel pretty

FINAL TRANSCRIPT




comfortable balancing those two issues off against each other. I'd rather answer it that way than talk about it in terms of our proceeds or our plans to buy metal.


Okay, so if I were to say $50 million is the net number, plus the $100 million of synergies, let's just say when it's all said and done, that probably looks okay. And then the key is how much of that $100 million you realize in the first year. And I was wondering if that would be where we would see the largest component. In other words, could we see a third of the $100 million flow through in the first year?


We have not given guidance beyond saying that we expect the majority of the synergies to be achieved in the first three years. I think that this is an area where as we get through the operations planning that I described earlier. I think we're going to have a much better ability in the next 90 days to put our arms around timing. But as a general matter, I would say that if coming from this conclusion, you concluded that we have at least $150 million of EBITDA and probably a lot more EBIT than DA because the synergies will be mostly EBIT, that our net EBITDA is at least $150 million of positive accretion for a $640 million acquisition with no additional alloy exposure and, therefore, we are buying that EBITDA in at about four times into our base with an exposure to growing global markets, that's the conclusion that we've drawn. And if you came to that conclusion, we wouldn't be uncomfortable.


Okay, but also, one last thing. Is it also fair to say that the assets that you're selling are higher cost and you're gaining lower costs? In other words, there's like a shift, and I guess that may even be incorporated in the $100 million, I'm just curious. But it seems to me that you're selling high-cost plants and gaining glow-cost plants. I mean, certainly, geographically, where they're located, it seems to be strategic in that sense. Do you agree?


I mean, strategically, we certainly believe that we want to have assets in the fastest-growing countries. So our decisions to invest in places like Russia to serve Russia and Eastern Europe and China to serve China is a much easier decision for us than had we stayed -- had we stood fast or had we kept Battice and Birkeland, I think the decision to invest in Belgium or Norway would have been more difficult for us, based on growth. Having said that, we are divesting very high-quality assets with good, positive cash flows, and we wouldn't want any of the buyers who potentially are listening to this call to think anything but that.


Oh, no, I understand that. I just figured that geographically, like you pointed out, you're going to gain a platform that is strategic for those growth markets.


And we'll take two more questions.


Thank you.

FINAL TRANSCRIPT





Thanks, Mary.


Thanks, Mary.


Thank you.

Operator

Next question comes from the line of Keith Johnson with Morgan Keegan. Please proceed.

Keith Johnson - Morgan Keegan - Analyst

Good morning. A couple quick questions. On the Roofing and Asphalt, I wonder, as you look sequentially on the operating margin on the Roofing and Asphalt segment, it looked like it declined from around 7% in the second quarter to around 4% in the fourth quarter. What was the main driver in that decline?


Your assessment is correct. We were feeling pretty happy, candidly, coming out of the second quarter that the business had snapped back smartly. And given how difficult things had been in the fourth quarter last year and the first quarter this year, we did get a little bit of positive momentum at our back. Part of it is the timing of the buy-sell equation on asphalt. So we had bought a fair amount of asphalt during the winter months when asphalt was cheap. We had built some inventories in the first quarter and some of those less-expensive inventories we were able to market into the marketplace in the second quarter at pretty good margin rates and that helped us. As you get into the summer, then, of course asphalt, because of paving and other uses, you tend to see some asphalt inflation, and so we did have to buy some asphalt during the summer to replenish our inventories. And then the third quarter market was weaker than I think we had hoped for and certainly was anticipated by the industry. So the buy-sell pricing on roofing was not as attractive in the third quarter. And that doesn't necessarily mean prices declined. It just means the replacement costs of our inventory relative to what we could sell it for wasn't as attractive, and I would say that's primarily market weakness.


Okay. I didn't know if you got into any lower operating rates as well in the third quarter because of the weak market conditions.


I mean, a bit. We certainly, as we look at our full-year forecast and then we look at our market share and our year-end inventory rolls, if we see market weakness, we have tended to want to jump on the brakes pretty quickly because of operating rates, because we've seen the costs of not doing that tends to be bigger. So we did have some corrections in our manufacturing operations in the third quarter. Generally, I'd give that team kudos for operating really well this year. I think we would have had a gangbuster year if we had seen pretty good demand.

FINAL TRANSCRIPT





Okay, on the two plants, composite plants in Europe that you're having to sell, you mentioned the EBITDA range. Could you give us an idea on the revenue side what those two plants were contributing?


I just don't have anything in front of me. You could go offline on that if that was important. If you wanted to call Scott Deitz, our Head of Investor Relations, we'll take a look a whether or not that's something we're comfortable disclosing. Obviously, there's an operating memo out there, but I don't think we've gone public with that number.


It was really just trying to roll into '08 how the EBITDA side kind of adjusts, trying to make sure we get the top line adjusted correctly. As you kind of came through the third quarter in Insulation, you guys have talked a lot about accelerating price competition. Did it continue at an accelerating pace through the third quarter in Insulation? In other words, it just keeps getting more and more competitive versus where you were in the second quarter/


A part of our view on insulation pricing is always going to be relative to expectations. I think coming into the third quarter, which is seasonally one of the stronger quarters of the year, the third and the fourth are typically when insulation demand is good. I think we expected a little bit of an uptick in demand that would cause a little bit of firming of pricing, and we, in fact, didn't see that. So I wouldn't characterize it as somehow pricing has started to fall apart, and it's really accelerated in terms of the price declines we've seen. But at the same time, we would have expected now that we've seen pretty significant price declines and we were expecting to be in a seasonally stronger market that maybe they would have begun to firm up a little bit, and I don't think we've seen that, either.


Okay. I want to make sure I understood or clearly wrote down in my notes what you said earlier. In the $640 million purchase price for Vetrotex, there were some metals included in that $640 million, is that correct?


That's right.


About half of your needs?


Half or slightly more than half.


FINAL TRANSCRIPT




And then when you talk about the $30 million lease expense associated with metals at Vetrotex, is that on half of the metals that you didn't get, or was that on like a 100%-type number?


The $30 million estimate would be on the $320 million of metals that we've stepped into Saint-Gobain's shoes on.


Okay.


Okay, thank you.


And one more question, please?

Operator

And your last comes from the lines of Keith Hughes with SunTrust. Please proceed.

Keith Hughes - SunTrust Robinson Humphrey - Analyst

Thank you. Just to make sure I have my numbers straight, on the $335 million guidance for the year, when you make your adjustments to get to that number, where are we at year-to-date on the same basis in EBIT?


If you look at table two of our press release in the year-to-date column you'd see that year-to-date we're at $259 million.


Okay, so that's the correct adjustments, okay. And, finally, in Insulation, how much pricing pressure have you seen so far in the last couple of months? I know you talked about expectations of the future, but what have we seen sort of year to date?


Well, more than we wanted. I think that's a fair statement. I don't think relative to the downturn we've seen in housing, I don't think we've seen anything extraordinary. I think what we've seen is an extraordinary downturn in housing. So as you listen to a marketplace that is now describing a peak to trough move that could be as much 50% or more in less than 24 months, since World War II you've got to go back and look at maybe a couple of times in the last 70 years where we've seen this kind of extraordinary downturn in housing.

FINAL TRANSCRIPT




So unfortunately I think given the extraordinary downturn we've seen the pricing pressure we've seen is pretty much expected. Now, having said that, it's a lot of pressure, because we are in a very difficult market.


And I assume the roofing pressure would have been substantially more so far, is that correct?


No, roofing just trades a little bit differently than insulation. Insulation is much more of a capacity utilization and fixed-cost-driven pricing. Roofing is more of a materials conversion business. So it certainly feels pricing pressure when utilization is weak. It has some pricing authority when utilizations are higher, but generally the objective in roofing is to manage your raw materials well and manage your pricing in the marketplace relative to your materials inflation and we've just tended to see much smaller gyrations in roofing margin rates as a result.


All right, thank you.


Thank you.

Operator

At this time I would like to turn the call over to Mr. Scott Deitz for closing remarks.


Thank you, Annie, and certainly thank you for the strong interest in our story today. With that, I'd like to turn it just briefly to Mike Thaman.


Well, I'm going to ask Dave to close today's call. But before I do that, I would certainly like to take the opportunity to thank him. I'd like to thank him on behalf of our employees and customers around the world. I'd like to thank him on behalf of our Company for his years of service and his outstanding leadership as our CEO. And I'd like to thank him personally for allowing me to be his partner and to learn from him over the past five years. It's been a great ride. I can't imagine sitting and doing these investor calls in the future without the two of us sitting side by side. But I'm sure Duncan and I will adjust. And with that, I will give you back the microphone, sir.


Thank you, Mike. That's very kind. I appreciate it. Just on behalf of all of us here at Owens Corning, I'd like to thank you for your interest in our Company and thank you for joining us today. And I'd like to leave you with one final thought, and that is that Owens Corning is taking aggressive actions to perform through the cycle. Have a great day. I'll be looking forward to listening next time. Take care.

Operator

FINAL TRANSCRIPT




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

D I S C L A I M E R Thomson Financial reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. Although the companies mayindicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON FINANCIAL OR THE APPLICABLE COMPANY OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. © 2005, Thomson StreetEvents All Rights Reserved.

conference call transcript - owens corning › investors › q3transcript110207.pdf · bluebay...

Documents