Owens Corning Q4 2008 Earnings Call Transcript

Feb.18.09 | About: Owens Corning (OC)

Owens Corning (NYSE:OC)

Q4 2008 Earnings Call Transcript

February 18, 2009 11:00 am ET

Executives

Scott Deitz – VP, IR & Corporate Communications

Michael Thaman – Chairman & CEO

Duncan Palmer – CFO

Analysts

Michael Rehaut – JP Morgan

Ken Zener – Macquarie

Mary Gilbert – Imperial Capital

Dennis McGill – Zelman and Associates

Jim Barrett – CL King and Associates

Keith Hughes – SunTrust

Garik Shmois – Longbow Research

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2008 Owens Corning earnings conference call. My name is Shaquana, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator instructions).

I would now like to turn the call over to your host for today, Mr. Scott Deitz, Vice President of Investor Relations and Corporate Communications. Please proceed, sir.

Scott Deitz

Thank you, Shaquana. How are you this morning? And good morning, everyone. Thank you for taking the time to join us today for our conference call in review of our business results for the fourth quarter of 2008. Joining us today are Mike Thaman, Owens Corning’s Chairman and Chief Executive Officer, and Duncan Palmer, Chief Financial Officer.

Following our presentation this morning, we will open this one-hour call to your questions. Please limit yourselves to one question and one follow-up, so we can answer as many of your questions as possible during the 60 minutes we have together.

Earlier this morning, we issued a news release that detailed our results for the quarter and the full year of 2008. Form 10-K further detailing our results was also filed this morning. For the purposes of our discussion today, we’ve prepared presentation slides that summarize our performance and our results for the fourth quarter and the year. We will refer to the slides during this call.

For those of you listening to this call via the Internet or if you are on the telephone and near a computer, you can access the slides at owenscorning.com. You’ll find a link on our homepage. There is also a link on the Investor Section of our website. This call and the supporting slides will be archived, and available on our website for future reference. This call is being recorded.

Before we begin, we offer a few reminders. Today’s presentation will include forward-looking statements based on our current forecasts and estimates of future events. These statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially. Please refer to the cautionary statements and risk factors identified in our SEC filings for a more detailed explanation of the inherent limitations of such forward-looking statements.

Now, Mike, let’s turn it to you.

Michael Thaman

Thanks, Scott. Good morning, everyone, and thank you to joining us today. Owens Corning completed a successful 2008 in a difficult global market. Full year revenue came in at $5.8 billion, up 17% compared with 2007. Sales were up because of solid performance and acquisition related revenues on our composites business. In our roofing business, we enhanced our product mix, increased selling prices and improved volumes. Excluding items affecting comparability, adjusted EBIT from continuing operations was $290 million. This result was in line with the guidance that we had sustained throughout 2008.

Our cash performance was good. We finished the year with net debt below $2 billion, consistent with expectations. We have ample liquidity and cash to meet our financial obligations and support our growth. Duncan will provide a complete reconciliation of our fourth quarter and full-year results in his comments.

We said that we would achieve a number of important objectives during the year. We said that we will continue our journey to create an injury free workplace. Our safety performance improved for the seventh consecutive year. Owens Corning has reduced the number of employee injuries by more than 87% in this timeframe. We said that we will reduce our cost by $100 million in 2008, we surpassed that mark. We said that composites operating margins will approach double digits for 2008. Through the first three quarters, the business demonstrated this level performance. Obviously, we saw significant weakening of volume in the fourth quarter. I will address this further when I discuss our outlook for the composites business.

We said that we would achieve $30 million in acquisition related synergies. We are pleased to report that we surpassed this goal with 50 million of synergies in 2008. We said that we will reduce the size of our acquired precious-metals leases through technology and productivity programs, in other words without using cash. We did. We began the year with over $300 million in leases. Today, we have less than $25 million remaining, dramatically improving the quality of the composites asset base.

We said that we will improve our roofing and asphalt business, we did so, and we did so on a fast timeframe and with great impact. Sales were up 35% compared with 2007. EBIT was up more than six times and operating margins were 10% for the year. It was the best year in the 30 history of this business. We said that our insulation segment would be profitable in 2008 and it was despite a very difficult year in the US construction market. We said that we will continue to manage a strong balance sheet. Owens Corning benefits from a strong capital structure that provides ample liquidity.

Finally, we said that adjusted EBIT for 2008 would be at least $265 million, and we said there was an additional upside of as much as 10% because of the performance in our roofing business.. As noted earlier, today we reported adjusted EBIT of $290 million in line with that guidance. In summary, we achieved our primary goal for 2008. Despite a significantly more volatile market than we had anticipated, the strength of our portfolio and strong execution allowed us to achieve our objectives.

Now I'll provide a review of each of our businesses. Let’s start with composites. The integration of the November 2007 acquisition of Saint-Gobain’s reinforcements and composite fabrics businesses is a success. Our execution was sound and we demonstrated the earnings power of this business in 2008. During the fourth quarter, our composites group saw a dramatic reduction in demand. As the industry supply chain responded to the expectation of weaker global growth, we saw significant curtailments in inventory destocking by our customers. This resulted inasmuch as 45% volume losses in the month of December. In response, we have begun to balance our capacity by extending downtimes and rebuilds. We stopped operations of three of our furnaces, we had delayed significant capital projects, including the expansion that we had previously announced in Russia.

We expect that these weak market conditions will persist in our composites business at least through the first half of this year. Despite expectations of weaker global growth through 2009, our internal analysis suggests that we may see no balanced demand levels in the second half associated with inventory equilibrium in the supply chain. When this happens, we anticipate that margins should recover to the double-digit level exhibited in the first three quarters of 2008. Until then, we anticipate weaker margins associated with historically weak volumes.

Now let us turn to roofing. Solid improvement in performance in our roofing and asphalt segment led the way for building materials in 2008. We benefited from gains in productivity, a streamlined asset base, improve selling prices, enhanced mix, and significant storm related demand. Some of that storm related demand will carry into 2009. The outlook for roofing and asphalt continues to be good for 2009. We expect that this business will have another strong year, assuming normal storm activity. Many of the gains achieved in 2008 are sustainable.

I am personally very proud of the progress we have made in this segment. We’ve satisfied customers and we’ve delivered shareholder value in an otherwise dismal US building materials marketplace. It is worth noting that asphalt prices have not declined at the same dramatic rate as crude oil. With the impact of stimulus on highway paving and infrastructure spending, and with the spring storm season approaching, the balance between supply and demand for asphalt could continue to remain tight.

Finally, let us talk about our insulation business. Housing starts in the US were down 33% in 2008 compared with 2007. Demand for insulation continued to decline. Our commercial and industrial markets had not faced the same severe downturn but we are now seeing accelerating demand weakness in these markets as well. Despite another challenging housing start numbers announced this morning, our view to analysts estimate is that the housing market for 2009 should be in the range of 550,000 to 650,000 units. Without a significant change in this outlook for the US housing market, we expect our insulation segment will lose money in 2009. Eight of our insulation lines are already idle. We will take further actions to reduce the production as necessary and to lower our costs. On a positive note, we did see evidence of prices stabilizing in the second half of 2008.

Sales volume in our residential re-insulation market was up about 10% from a low base in 2008. The recently enacted economic stimulus plan in the US has provisions that will drive energy efficiency actions which should benefit Owens Corning. The plan increases funding to the existing DoE weatherization program to $5 billion. This is 10 times higher than the prior funding levels. The plan also includes allowances for the insulation of edicts and increases the number of homes that qualify. Under the plan, households that are at or below 200% of the poverty line are now eligible for up to $6,500 of the weatherization for their homes. In addition, the stimulus plan provides for tax credits for home energy efficiency products, including insulation. The tax credit is 30% of the incurred costs, up to $1,500, through 2010. We believe both of these provisions create opportunity for our company to rebound in the insulation segment.

Our composites group should also benefit from the stimulus bill. A three-year extension of the protection tax credit is established for electricity derived from the wind. In addition, the tax incentives for wind development have been enhanced, and investment tax credit option has been established, and developers will have the ability to exchange these investment tax credits for cash. We are hopeful that these provisions will help sustain the momentum in the US wind market. As I reflect back on 2008, I am somewhat amazed by the amount of economic and market instability that we have experienced. The uncertainty which we had been managing in the US residential new construction market has now spread to all of our markets. Despite the instability, our company performed well and responded to the challenges.

As we look ahead to 2009, it is clear from our 2008 performance that Owens Corning now has three great business franchises. Our roofing and asphalt business segment demonstrated that it is a changed business. It has proven that it can be a strong performer regardless of the cyclical nature of the US housing market. Our composites business is now global with a proven ability to generate growth and profitability. It is a solid business platform serving customers in growth markets around the world. And despite the current market challenges, our insulation franchise is still without peer. Across cycles, this business has consistently demonstrated outstanding performance. With increased emphasis on energy efficiency, and an inevitable recovery in the construction market, insulation’s best days continue to be in the future.

Before we turn to Q&A, I will turn it over to Duncan to further review the fourth quarter and full-year 2008. Duncan?

Duncan Palmer

Thanks, Mike. Let's start on slide five where we detail key financial figures for fiscal 2008 and for the fourth quarter. You'll find more detail financial information in the tables of today's news release and the form 10K that was filed earlier.

Today, we reported 2008 consolidated net sales of $5.8 billion, a 17% increase compared to 2007. For the fourth quarter, consolidated net sales were $1.3 billion, which is flat compared to quarterly sales one year ago. For full year 2008, the growth was driven by two of our business segments, the roofing and asphalt segment delivered record annual sales of 35% increase over 2007 as a result of higher selling prices and higher sales volume. Composites sales increased by 39% during the year, largely because of the company's fourth quarter 2007 acquisition.

As a reminder, when we look at period over period comparability, a primary measure is adjusted earnings before interest and tax, adjusted EBIT. In a moment, I will review our reconciliation of items affecting comparability to get to adjusted EBIT. These items totaled $94 million in 2008 compared to $196 million in 2007. For the fourth quarter of 2008, these items totaled $33 million compared to $134 million during the same period in 2007.

Our adjusted EBIT from continuing operations for 2008 was $290 million. This is in line with the guidance of $265 million, with upside of up to 10% given on the third quarter earnings call. Given the market environment, we are very proud to meet our guidance. Adjusted earnings for 2008 were $124 million or $0.95 per diluted share. For the fourth quarter of 2008, our adjusted EBIT was $48 million compared to $88 million for the same period in 2007. The adjusted earnings from continuing operations for the fourth quarter 2008 were $16 million or $0.13 per diluted share. Later in the presentation, I will further discuss how we're adjusting tax expense in calculating adjusted earnings, which we believe will provide a more comparable measure of our performance.

In the fourth quarter, marketing and administrative expenses increased by $26 million. The increase was attributable to operating the acquired composites business for the whole quarter and increased performance-based compensation expense. Depreciation and amortization totaled $331 million in 2008. This includes an additional depreciation expense recorded as a result of finalizing the purchase price allocation related to the composites acquisition. Our capital expenditures totaled $366 million in 2008 excluding purchases of precious metals. This is in line with our guidance. The increased capital accelerated synergies in the composites business and funded energy reduction programs in all our operations. Net debt state below $2 billion at the end of 2008 consistent with our expectations.

Moving to slide six, you can see the details associated with the reconciliation of our fourth quarter adjusted EBIT of $48 million to reported EBIT of $15 million. We provider this as a better measure of our current operating results. The integration of the composites acquisition delivered synergies of $50 million in 2008, well ahead of our original plans. In 2009, we expected to deliver an additional $25 million in synergies. We incurred $23 million of integration and transaction costs in the fourth quarter of 2008 associated with achieving these ongoing savings.

Next, as you have seen in prior quarters, we adjusted for the non-cash amortization of costs associated with the employee emergence equity program, a total of $6 million. These shares which have a three year vesting schedule and will be amortized in the P&L until October 2009, were awarded to employees at the time of our emergence from Chapter 11 in 2006. As part of capturing the value from integrating our composites acquisition, we have an ongoing program to improve our efficient use of precious metals as production tooling. This program is significantly ahead of schedule. As part of the acquisition, we assumed a portfolio of over $300 million in precious metal leases. To date, we have reduced our exposure to less than $25 million.

Now if you move to slide seven, you will see an illustration of adjusted EBIT performance comparing fourth quarter 2008 for the same quarter in 2007 based on business segment contribution. We illustrate this to show how our business segments have evolved. Adjusted EBIT declined $40 million from the fourth quarter 2007 to fourth quarter 2008. Our roofing and asphalt business continued to deliver outstanding results in the quarter and capped of the most profitable year in our history for this business. This improvement was offset by both the insulation and composite businesses facing weaker demand in their respective markets.

Now if you move to slide eight, you'll see an illustration of how the full-year adjusted EBIT performance has evolved from 2007 to 2008, again based on business segment contribution. Adjusted EBIT declined $51 million from 2007 to 2008. The roofing and asphalt business had a sixfold EBIT improvement and the composites business had a successful integration of the 2007 acquisition. This result was offset by the EBIT decline in insulation and other building materials businesses driven by much weaker demand. Adjusted EBIT was impacted by increased general corporate expense. This included an increase of $57 million in performance based compensation expense from a low payout in 2007. In addition, there was a $39 million increase in charges to value of inventories using the LIFO accounting method, primarily related to higher asphalt costs in our roofing business. Starting in 2009, we will include the LIFO charge within the business segment's results to evaluate their operating performance. In our first quarter results, we will provide reclassified prior period numbers for comparability.

With that as background, turn to slide nine and we will begin a more detailed review of our business segments, starting with composites. Composites experienced a global economic slowdown during the fourth quarter, especially in December when volumes were down as much as 45% year over year. This drove year over year net sales down 17%. Fourth quarter EBIT for the business was $19 million compared to $46 million for the same period in 2007. The precipitous weakness in demand resulted in higher inventory levels throughout the composites industry supply chain. We have taken aggressive action to manage our cost structure by stopping operations of three of our furnaces, delaying capital projects such as our announced expansion in Russia, and decrease in 2009 capital spending. We will continue to take actions to align our capacity with market demand, which we expect to be weak into 2009.

Through the first three quarters of 2008, EBIT margin was 10%. While EBIT margins for the fourth quarter of 2008 slipped to 4%, we expect EBIT composites margin to return back to levels similar to those exhibited in the first three quarters of 2008, once inventory equilibrium is reached within the composites industry supply chain.

Next on to slide 10, insulating systems business. Our insulation business continues to feel the impact of 10 consecutive quarters of progressively declining US housing starts. Fourth quarter net sales in this segment were down 17% compared with the fourth quarter of 2007. Substantially all of this decline was due to a reduction in sales volume as prices stabilized in the second half of 2008. Fourth quarter 2008 EBIT was a loss of $9 million due to decreased volumes and medical and delivery inflation.

We are proud that our insulation business was profitable for the full year 2008. However, we expect that 2009 market conditions will be even more difficult. In light of these conditions, we will continue to take actions to line production capacity with market demand and the lower costs. Despite these actions, this business will struggle to achieve profitability in 2009. This is a great business in a well structured industry. Owens Corning Pink fiberglass insulation is a powerful and enduring brand. We are clear market leader, well positioned to return to historical levels of performance when the housing market bottoms and improves as we know it will.

Next slide 11, provides an overview of our roofing and asphalt business. Fourth quarter 2008 completed a record year for the roofing and asphalt business with a 69% improvement in net sales over the fourth quarter 2007. The business achieved $70 million of EBIT in the fourth quarter 2008, a tremendous turnaround from last year. EBIT for the year was up over sixfold from 2007. We are proud of the sustainable productivity improvements that we have created within this business. With this level of performance in 2008, roofing and asphalt has emerged as a strong franchise with our portfolio.

Next other building materials and services on slide 12, this segment is comprised of our masonry product business and our construction services business. Fourth quarter 2008 net sales of $46 million were down 31% compared with the same period in 2007, primarily due to declines in our masonry product business , resulting from continued weakness in new construction and repair and remodeling. The decline in volumes and increase idle facility costs in masonry products resulted in a fourth quarter EBIT loss of $13 million for this segment. This result is disappointing. The dramatic downturn makes it likely that we will continue to endure losses in this business in this market. In response, we have taken further actions to curtail capacity and reduce costs in masonry products. We will maintain a keen focus on cash flow in this business.

Next moving to slide 13, we have a few additional items to cover, before turning to our Q$A. We repurchased 1.8 million shares at an average price of $19.43 per share in the fourth quarter. During 2008, the company has repurchased 4.7 million shares at an average price of $21.47 per share. After the 2008 repurchases, we have 1.9 million shares remaining under the previously announced share buyback program.

On slide 14, you will see a description of both our cash tax position as well as reported tax expense. For the year 2008, overall cash taxes paid out were $33 million, which was lower than the $40 million of guidance provided in the third quarter. We expect cash taxes in 2009 to be less than we paid in 2008. And as we discussed in the third quarter earnings call, we recorded a noncash charge to establish an accounting valuation allowances in accordance with FAS 109 accounting for income taxes. For the year, this charge totaled $909 million.

The charge to record the valuation allowance is a non-cash charge and will have no impact on Owens Corning’s cash flow, liquidity, credit facilities, or our $2.7 billion US net operating loss carry forward to offset future profits. We believe that we will have sufficient US profitability during the tax loss carry forward period to realize substantial all of the economical value of the net operating losses before they expire. We estimate that our long-term effective tax rate will be 25% based on a blend of US and non-US operations. Therefore, to improve comparability of our adjusted sales, beginning this quarter, we will apply this 25% tax rate to pretax earnings to arrive at adjusted earnings.

Now to slide 15, we have a strong balance sheet. We have no material debt maturities coming due until the fourth quarter of 2011, and we have $615 million available in our revolving credit facility as of the end of 2008. In addition, we have $236 million of cash on hand. We expect that the cash we have on hand coupled with future cash flows from operations and other available sources of funds will provide ample liquidity to allow us to meet our cash requirements, capital investment plans, and to endure significant additional market volatility. Capital expenditures will be less than $275 million in 2009. Depreciation and amortization expense will be approximately $350 million.

All indicators point to another challenging and rapidly changing environment for our business in 2009. However, we believe that the fundamental drivers of our key markets all support sustained long-term growth. We are taking action to maximize our cash flow in 2009. We will manage our capacity to align production with demand through curtailing operations, closing select facilities, extending downtime through machine repairs, and delaying expansion projects. We will reduce capital expenditure by almost $100 million from 2008. We will continue our focus on driving working capital efficiencies across all of our businesses. These measures along with our operating performance will help us generate possible free cash flow in 2009 and maintain a strong balance sheet.

With that, Scott, back to you for Q&A.

Scott Deitz

Thank you Mike. Thank you Duncan. Before we moved to the Q&A, we offer a reminder and ask that our listeners understand that our slide presentation today, our prepared remarks and our Q&A discussion may contain non-GAAP financial measures. Also note that the GAAP to non-GAAP reconciliation are found within the financial tables of our earnings release and our form 10-K.. Again please limit yourselves to one question and one follow-up so that we can get to as many questions as possible. So, Shaquana, let's turn to the Q&A session.

Question-and-Answer-Session

Operator

Yes, sir. Thank you. (Operator instructions). And your first question comes from the line of Michael Rehaut with JP Morgan. Please proceed.

Michael Rehaut – JP Morgan

Hi, thanks. Good morning everyone.

Michael Thaman

Good morning, Michael.

Michael Rehaut – JP Morgan

First question just on roofing, you know certainly you're still getting the benefits of the re-roofing demand and the price increases put in place in mid ‘08, you know I just wanted to ask I guess more of a longer-term question, you know the results here are obviously record results and you know historically I believe roofing has always generated more of the high single digit, mid to high single digits type of margin. Over the next two or three years, I mean – what are your expectations, are there things that structurally have changed or – how do you I guess guide our thinking in terms of either on a competitive or structural standpoint in terms of industry players and cost structure? I mean is that mid teens margin sustainable or over longer term should we think more in terms of something closer to what has been achieved historically?

Michael Thaman

Michael, let me take a shot at that. It is a very, very good question, and I think if you look at the slide we presented today, which was slide 11, we do graph the operating margins on there, and I think is probably a good backdrop to maybe some of the comments that I would make. The big change in the roofing market for certain was that the GAF acquisition of Elk Corporation in late 2006. And I think if you have been following these calls, since we have been public now, in late ‘06, what we saw during that period of time was a significant storm activity in ‘05 and ‘06, that was kind of followed a boom followed by a bust at about the same time that Elk and GAF were going together. And there was a fair amount of dislocation in the marketplace and as a result in 2006 and 2007 I think show that from an operating margin point of view where we were low single digit.

We had said during that time that we always thought the industry structure, our position in the market, our capabilities and our product line show allow that business to be a high single digit or maybe even a double-digit operating margin business. And if you go back to the first quarter 2008 when we made a loss, we said that we thought that better times were coming, the asphalt prices have been coming through the market, that we were able to recapture that in terms of pricing to our customers, that our customers were having success passing through to contractors. And we got into a bit of a virtuous cycle in 2008, where the pricing environment and industry structure, our productivity programs and our mix all come together in a way I think we could envision it would happen. We just wanted to see it happen before we really committed to making it happen.

So we're comfortable as we head into ‘09 that the kind of performance we delivered across all of ‘08 is reasonable performance, high single digits or even that 10% type operating margin is a reasonable target for the business. In ‘08, we did not have a gangbuster year in terms of overall industry demand. While there were some storms, new construction at one point was 25% of this market, it is now much less. And so as a result, overall industry demand in ‘08, we think was still pretty well below trend. And we think in ‘09, unless we have some significant storm activity here in the spring, that ‘09 would probably below ‘08. So we're not expecting a big market in ‘09, but we are expecting another strong year as due construction recovers, as you see more financing in the repair and remodel market, as you see people having more confidence in equity of their home, some of the things they would bring back the core re-roofing market, we would expect to see a stronger market, we think that would benefit performance too.

Michael Rehaut – JP Morgan

I appreciate the detailed response. One quick follow-up if I could before I move to the second question, the – are you seeing any incremental capacity coming online or anything in terms of other competitors coming in to the market, kind of enticed by these higher margins?

Michael Thaman

No, we're not. The competitive profile is pretty stable and I guess one of the things and I will say it again, we don't think it is unreasonable for roofing manufacturers to earn these types of margins. So to a certain extent, while these are not the margins you have seen over the last couple of years in the business, we don't think these are the kinds of margins that would necessarily encourage a bunch of new entrants. It is a relatively capital intensive business, it is important that you have access to strategic supply of raw materials. The product lines are pretty broad and are he managed across distributions, so there are some fairly natural barriers that create a market that we believe should be stable and should allow roofing manufacturers to make reasonable and acceptable returns which we think we now are.

Michael Rehaut – JP Morgan

Okay. Second question, during the presentation, you mentioned that you will be taking some restructuring actions with regard to the masonry business which I guess you said was the core driver to the downturn in profitability in other building materials and services. I was wondering if it is possible to give a little bit more granularity there in terms of what those restructuring actions might be, to quantify it potentially in terms of cost and potential, cost savings and benefits in ’09, and similarly for insulation as well given how that margin profit level continues to slide, if there are any incremental actions that you might be taking and what benefits that might be for ‘09?

Michael Thaman

Okay. Let me start with masonry, which is a business that we operate under the market name Cultured Stone. That business I think probably has the strongest exposure inside of Owens Corning to both new construction and I would describe it as kind of new construction production builder. It was a very strong market in the southwest and on the West Coast where you had kind of stucco type construction where masonry is a wonderful accent and improves the value of the home. Those markets really have been the hardest hit with the downturn in new construction and that business continues to bear the brunt of that.

We operate that business with two facilities, one on the West Coast, one on the East coast, because it is freight cost sensitive. We did shutdown a facility at the end of ’07, in early only ‘08 to get to a two point network. It is pretty hard in our analysis to go from a two-point network to a one network because of the freight issues. So we're moving more aggressively to reduce our ship levels and reduce our headcount in the plans in order to their production level consistent with what we have see in terms of near term and. We don't typically give any guidance by segment, so I wouldn't get into specific details or expectations with that segment.

Suffice it to say that we understand that it is probably a market that is not going to recover in 2009 and that the game plan in that business is going to be cost containment and managing the cash flow. On the insulation side of the business, we have taken strong action up to now. On this call, we talked about the fact that we now have eight lines shut down. I guess I would on your attention to an analysis that I was looking at, which is housing starts dropped by about 450,000 units from ‘07 to 2008 – I'm sorry from ’06 to ‘07, and then dropped again about 450,000 units from ’07 to ‘08. So in absolute unit numbers, the amount of downturn we saw in the market from ’06 to ‘07 is about the same as what we saw from ‘07 to ‘08.

If you look at the performance of our insulation business, we actually declined almost $300 million of EBIT from ’06 to ‘07 when we saw a 450,000 drop in housing starts. And from ‘07 to ‘08, we only saw a decline in EBIT of about $175 million. So clearly we are having success taking cost actions, to flatten out that cost curve, to try to shed more of the costs associated with losing capacity and losing absorption, but at the same time it is clear we don't have enough leverage to offset all of the implications for us with dropping demand.

I think as we look into ‘09, you should expect from us that we will continue to pull the levers to manage our capacity and our cost to continue to try to flatten that curve. We are expecting that we will have another year of significantly down housing starts. I think you have heard some optimism in my comments that maybe we have begun to see prices flatten a bit which you would expect to happen as our business and we would expect other businesses in the industry begin to go from making profit to making losses. I think you should expect we're going to try very hard to find opportunities to utilize the stimulus bill to do what we're really like to do, which is turn those eight lines back on an insulate a bunch of edicts in America as a part of energy efficiency and as part of the stimulus. So you'll see us pulling levers on the cost and the capacity side, managing price very carefully, but also continuing to invest in those places where we can utilize the stimulus bill to drive growth for the business.

Michael Rehaut – JP Morgan

Great. Thanks so much.

Michael Thaman

Thank you Michael.

Operator

Your next question comes from the line of Ken Zener with Macquarie. Please proceed.

Ken Zener – Macquarie

Good morning.

Michael Thaman

Good morning, ken.

Ken Zener – Macquarie

I guess it is actually a follow question on your last comments about the operating leverage of the business, it looked like it was for the year around 60%, kind of 40% in 4Q. Is there any real reason you think that your guys operating leverage or sales contribution would change?

Michael Thaman

Yes, Ken. I went into that a little bit. Let me maybe develop those comments a bit further. I mean obviously early on in the downturn when we were losing volume, we were not only losing the leverage associated with that volume, but that volume was also very, very profitable. So we were shedding both the profits associated with the trucks we weren’t shipping as well as the leverage associated with those trucks.

The business on a cash cost basis is still fairly profitable. It is a high fixed cost business, a high asset business, and we shall continue to make positive cash when we sell product, but clearly not at the kinds of margin rates that we were in the past. So you would expect to see that the operating leverage would flatten because of the margin rate of the business and I think you would expect to see that the operating leverage would also start to flatten because of the management’s action – the management actions that we have taken in order to pull cost and capacity out of the business.

Ken Zener – Macquarie

Okay. And I guess just a follow up to that, the three plants in composite and the eight plans in insulation, you guys have shut down or idled, what is that respectively (inaudible)?

Michael Thaman

Ken, you broke up at the very end. Maybe you can just repeat the last sentence of your question?

Ken Zener – Macquarie

Right. The three plants in composite that you’ve idled or shut and the eight plants in insulation, what is that actually as a percentage of each segment capacity?

Michael Thaman

Okay. On the insulation side, we have given broad outline of how we think the marketplace works and in broad terms we had said that we believe the market is about 40 melters in total, that we would have somewhere around 40 to 50% of those melters. So if we were to have eight melters now, we would estimate that is probably 20% of the overall market in broad terms, and that might be as much as 40% of our overall capacity.

Ken Zener – Macquarie

Okay. Then I guess when you think about the 550 to 650 starts that you outlined and obviously I think generally the risk is on the downside not be upside, how do you think about bringing those plants back on line or actually just kind of shutting them, and what are the costs – what’s the cost process that you think about? I know you have done a kind of a slowdown (inaudible) where they weren’t getting paid, can you just kind of explain how those idled plants might be actually shuttered in the event that starts stay where they are?

Michael Thaman

Yes. I mean we have a lot of levers here beyond just shutting off lines. So we manage our capacity as you can imagine kind of in fine brush strokes as well as broad brushstrokes. The broadest thing we can do is to take a line out of the system and even beyond that is to take a plant out of the system. So as we sit right now, we have one plant that is totally idle, which is our plant outside of Montreal. We have lines that are idled in most of our other plants, so we continue to maintain a national network, we continue to maintain a national workforce, we continue to maintain the technical resources and the labor experience that we need in our plants in order to be able to bring them up quickly.

As we get into further curtailments, we also have the ability to shut lines for a week during each during each month, we have the ability to run long weekends, we have the ability to run at lower shift levels or lower throughput levels. So we will also be turning those knobs in order to make sure that we keep some capacity available to ramp up relatively quickly. The next tranche of capacity is that we can ramp up we believe quite quickly within a month or so of deciding to bring capacity on would be to bring a line-up in an existing plant where we still have a workforce, where we still have technical resources, where we have an asset-base, and we just need to heat up and make glass.

And then obviously the longest startup would be if we were decide to go and bring up the plants right now that is down cold, which is our plant outside of Montreal. We are well positioned we believe if we can get the market to get a little bounce from the stimulus plan that we have all the capacity online and available and ready to go if the market presented us with that challenge.

Ken Zener – Macquarie

Thank you.

Operator

Your next question comes from the line of Mary Gilbert with Imperial Capital, please proceed.

Mary Gilbert – Imperial Capital

Yes, good morning.

Michael Thaman

Good morning Mary.

Mary Gilbert – Imperial Capital

I wondered if you could talk about specifically the markets in composites that are being affected, where you are seeing the weakness, where you are seeing the excess capacity and also geographically? And then it sounded like you thought that you would see a rationalization of that capacity by mid year, is that kind of what you are thinking or could you clarify that please?

Michael Thaman

Sure Mary. I appreciate you giving us opportunity to clarify that. We have always said that we think over longer periods of time the composites business grows at about 1.5 times to two times global GDP. And we have not lost our confidence in those estimates. So we come up with those estimates by looking at 40 years and 50 years worth of data for the composites industry. We also know that when expectations of growth in an economy change, and the global economy probably six months ago was expected to grow about 3% in 2009, and today you see estimates anywhere from flat to even negative half or negative 1%.

When you see that kind of change in growth expectations, you see various levels of supply chains starting to jump on the brakes in terms of wanting to curtail their orders of materials and wanting to curtail their production to start to get their inventories back in the line with new expectations. We talked in our third quarter call back in October that we have seen some weakness in Europe coming out of the traditional August holidays in Europe but that we have not yet seen that in the rest of the world. What I would say is really on the heels of that call starting in November, we saw, pronounced weakness in the Americas, we saw it in Asia, particularly in Japan, we saw continued weakness in Europe.

And I would not say it is not dissimilar from what you have heard a lot of the big chemical guys talk about, or what you have heard a lot of the big metals guys talk about, you know the aluminum guys or the steel guys as well as kind of the Dows and the Duponts of the world. Those are the same markets that we plan and it seems based on our review that most of the companies out there are seeing somewhere between 30 and 60% declines in near term order activity based on kind of being in a B2B kind of business.

Now we know that this is an inventory correction, we know that the global economy has not suddenly started declining by 45% or even 30%, we know that it is relatively flat. The composites market is a broad brush kind of proxy for the global economy, so when we get back to stability, we know there's an order book out there, and as we look at our profitability and our margin rates, if we get to even a flat market year over year by the second half of the year, we would expect that we would bring enough capacity on and have a good enough order book that would get right back to the kinds of double-digit margins that we were able to demonstrate in the first three quarters of ‘08.

So it is really working through an inventory correction, now obviously that scenario does not provide for another leg down in the global economy. We would know how to respond to that and we would know how to manage our business. I think to be effective that would be just a longer period of time through which we go through an inventory correction at the end of which we would expect to then get back to production balanced to demand and decent operating margins of the business.

Mary Gilbert – Imperial Capital

Okay. So you are seeing currently – and I want to make sure I got this right, 30% to 60% declines in near term order activity?

Michael Thaman

We said reading of other companies who are positioned in similar markets, we are seeing declines in order activity in that range from all the other people who are announcing earnings.

Mary Gilbert – Imperial Capital

Okay. And are you experiencing that same level of activity?

Michael Thaman

Yes. In my prepared comments, we said that we saw as much as 45% decline in the month of December.

Mary Gilbert – Imperial Capital

Yes.

Michael Thaman

I think the overall top line for composites in the fourth quarter was more like down 17%, so it was high teens. So I guess obviously you are seeing some timing issues and we would probably expect kind of month on month that we start to see our demands build as different ones of our customers come back on the line as they work through their inventory issues, ultimately allowing us to be back in full production. Our internal analysis and we're very clear in my comments, it is just our internal analysis, would suggest that really by about the middle of this year, we should be able to work through this inventory situation which speaks to some amount of optimism for the second half, but obviously the timing on that is very, very hard to call.

Mary Gilbert – Imperial Capital

Okay. That's very helpful in clarifying that. Also, when you talked about being free cash flow positive in 2009, and you give us some metrics like for example CapEx, cash taxes, but it sounds like where we're going to see some of the benefits include potential cash generation from working capital, is that true?

Duncan Palmer

Yes. Mary, this is Duncan. Yes, I think it would be reasonable to expect that you’d see some benefit from working capital and obviously in an environment such as we are in, we're looking for efficiencies across all of our businesses. But also in an environment where we would expect top line to be declining year over year, we would also expect our working capital to also decline year over year. So I think it is reasonable to expect that we see cash generation from working capital in 2009.

Mary Gilbert – Imperial Capital

And what kind of magnitude would it be, will it be the same magnitude as on a percentage basis as the decline on the top line? Is that kind of an estimate that we should use in trying to model this out?

Duncan Palmer

I mean broadly speaking I think that would be a good place to start modeling, yes, because I think overall if you model our working capital as a percentage of sales, it has been reasonably stable over time, and you could take a look at that and model that out as how much free cash flow, how much cash flow might come out of working capital during the year.

Mary Gilbert – Imperial Capital

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

Michael Thaman

Thank you Mary.

Operator

Your next question comes from the line of Ivy Zelman with Zelman and Associates. Please proceed.

Dennis McGill – Zelman and Associates

Hello. It is actually Dennis McGill on for Ivy.

Michael Thaman

Good morning Dennis.

Dennis McGill – Zelman and Associates

Good morning. One question having to do with the composites inventory situation, can you put into perspective either from your guess of the industry or you guys position where you sit with the inventory on a week’s basis, or how do you want to quantify it relative to where you would like to be just to put this in perspective?

Michael Thaman

Well, there is really two issues in your question. One is where we from an inventory point of view and then where is the industry from an inventory point of view. From our perspective, our inventories are a little bit higher than we would want them to be because the market changed very, very rapidly in November and December and we can respond but it typically takes us 60 to 90 days between employee notification and technical issues and product qualification issues for us to decide and be able to take melters out of the network.

We had rationalization in our business plan for ‘08. We had taken down some facilities as a part of us trying to rationalize and restructure Asia. Those are helping us today that we have done those actions and then we're working on additional actions, but we think getting our inventories where we would like them, probably wouldn't expect to see a big change or improvement for us in the first quarter. But we would expect by the second quarter, we will be under producing demand and be able to get our inventories under control, bringing capacity back online, when we see the order book demanding us to bring capacity online.

From an industry point of view, these are fairly long supply chains. So we would often sell glass to someone who might compound it or process it somehow with some type of resin who then may sell it to a molder or someone else who further processes it, who would then turn around and sell it to some type of OEM, who would then sell it to some distribution or consumer. So there is this opportunity here for there to be inventory piles, three or four levels in the supply chain, and I think that is why we are seeing a 3% change in expectations of global economic growth, resulting in the kinds of significant changes in volume we are seeing in the near term. Each one of those chains are working their way through the inventory issues at different rates and that is why we have some optimism that our business will just kind of build monthly until we finally get back to some amount of equilibrium.

Dennis McGill – Zelman and Associates

Do you have assumptions as far as the composite manufacturers are going, what will happen to pricing in the first half of this year?

Michael Thaman

We haven't given any guidance or expectations around pricing. What I would say and we have said is throughout ‘08 is it was neither a tremendously positive pricing environment in ‘08, but it is not a negative pricing environment. Most of the manufacturers experienced a fair amount of inflation in ‘08 and our improvement in ’08 was entirely driven by productivity, synergies, integration benefits that was not driven by price. So I don't think we faced any type of pricing bubble in composites that weaker demand would some how cause us to get into an aggressive price down scenario. So we think we can manage the price and the cost side of this, we are really not managing the volume side of it, and that’s been the bigger challenge.

Dennis McGill – Zelman and Associates

Okay. And then my follow-up on your comments you just made about end where composites would be a proxy for the global economy, I think over a longer-term we would agree with that, but I would like to understand it from an end product standpoint, how you guys are thinking about it, because when I look at your exposure, whether it is construction, automotive, consumers, electronics, those all seem like areas that are going to remain under more pressure, significantly more pressure than the global economy at least in the near term, and particularly 2009. So could we see a situation where the global economy and the composites proxy for that deviate more so in the near term as some of these markets are adjusting?

Michael Thaman

Certainly we could. I mean when we’ve looked at this historically and we’ve looked at this through various recessions going back on our data, we have tended not to see that. So while it is a big broad economy and I can understand it from your perspective, a fairly broad assumption, I think if you look at kind of the plastics industry, which is a pretty good proxy for composites demand, historically the plastics industry has had enough new applications and other things that are going on, that they (inaudible) where there is weakness.

I think the specific example we talked on today's call was wind. You can see where wind because of credit issues and other things could have gotten decidedly weaker in the United States, although that’s certainly not the biggest wind market in the world, Europe would be. But now you are seeing stimulus focused specifically on trying to get cash into the hands of wind developers to make sure that we continue to make progress against renewable power. So I think there is an argument, a counterargument almost market by market. And we try to do our internal analysis customer by customer that it tends to be a fairly customers intimate business and that is how we would go about trying to understand what our customers are currently seeing, and that's really the basis that caused us to be able to say we think we could get through a large part or all of this inventory correction through the first half, but the timing remains to be seen.

Dennis McGill – Zelman and Associates

Okay, that's very helpful. Thanks a lot guys.

Michael Thaman

Thanks Dennis.

Operator

Your next question comes from the line of Jim Barrett with CL King and Associates. Please proceed.

Jim Barrett – CL King and Associates

Good morning everyone.

Michael Thaman

Good morning Jim.

Jim Barrett – CL King and Associates

Good morning Mike. Duncan, can you take us through your pension fund contribution in ‘08 and give us your thoughts on how we should look at the cash flow and earnings impact of what I assume is the drop in pension assets at year-end?

Duncan Palmer

Yes, thanks. As you know, we have roundabout $800 million, $900 million pension liability in the US and also some liabilities overseas, but by far the largest obligation is in the US. We invest our assets in a portfolio which you will see in our 10-K if you look. It is reasonably conservative in comparison to the medium pension fund, so while obviously our asset returns were negative during the year, we feel that when we benchmark that with other pension funds, we did pretty well in terms of being probably in the top quartile versus most of the other pension funds that we have seen.

So from the point of view, we somewhat sort of smooth out some of the impact. And when you look, actually the impact that it's going to have in both our earnings and our cash flow in 2009, I think those impacts will be relatively moderate. So the impact for EBIT is going to be quite small and the impacting cash flow, I think we disclosed that our pension contribution in 2009 will be in total in globally will be of the order of $62 million. Just from ,memory I think in 2008 that number was roundabout similar level.

Jim Barrett – CL King and Associates

Great, okay. Very good. I appreciate that, thank you.

Operator

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

Keith Hughes – SunTrust

Yes. On the composites business, you mentioned that you had three furnaces down, what are the total number of furnaces that you have post the transaction a couple of years ago?

Michael Thaman

Keith, we don't disclose specifically on number of furnaces for competitive reasons as you could imagine. What we have done is we have taken three furnaces down in ‘08 and a lot of that was permanent. We had a facility in Thailand and another facility in Asia that we wanted to rationalize and load production into the facilities we currently have in China as well as load our facilities in Japan. So some of that was a migration to try to get more productive and more cost-effective.

Today the facilities or the lines that we are talking about bringing down and focused on bringing down is more to adjust our production levels to demand levels. It is not a easily modeled industry as insulation because the product lines are unique and they are unique to end use applications and tooling that you use to produce those product lines are unique need to individual facilities. So it is not as kind of a uniform market as maybe what you would see for the fiberglass insulation market where we're more comfortable talking about the total market and the total number of melters as being somewhat interchangeable.

I think this business, the asset base is a little more end user specific. We think we benefit because we had the largest fleet and the most diverse asset base, but that gives us the ability to get cost and production out of our environment in a much lower cost way than maybe some of our competition that would be less scale and therefore less ability – less able to turn knobs.

Keith Hughes – SunTrust

Okay. The – as you point out, the insulation business had a pretty significant negative contribution margin when we first went into this downturn and it has come back up. If we got to composites, the way you produce your composite products versus the insulation, are there similar dynamics, is there something that makes it less cyclical, what is your view there?

Michael Thaman

Well I think that if you look at our fourth quarter, we did see revenue down 17% versus the prior fourth quarter, which is a pretty significant drop. It was on the order of magnitude of $100 million. And we were still obviously positive in terms of our operating performance in the quarter. So you clearly see some amount of negative leverage in the business when you lose $100 million of revenue, but I think year over year we were showing something like a decline in EBIT of about $27 million. That feels to me kind of the order of magnitude of the leverage that we would see in that business.

Keith Hughes – SunTrust

But the fact that it so backend loaded, it sounds like you really had to pull down production in December, it wasn’t really through the full quarter, does that not adjust the calculation?

Michael Thaman

That would adjust it a little bit, but we did see – I mean it did come through the whole top line. So you know the top line number which is probably a strong October, a weakening November, and a very weak December, we would hope that as we start to talk about the first quarter and the second quarter, we would talk about a weak January and an improving February and an improving March and an improving April.

So as we really do see the market reacting, I think year end is a particularly difficult time. Most companies are trying to take actions by year-end, so I think that probably put an exclamation point for most companies in terms of taking action to try to get out from underneath inventory positions and it backed up on us. I think probably we're starting the year a little bit weaker than the fourth quarter on average, but we would hope by the end of the first and the end of the second, we are getting back to where we started before.

Keith Hughes – SunTrust

Okay. And final question is unfortunately an accounting question, but on the goodwill and the intangibles, there was no impairment, and I had seen multiple industrial companies have taken impairments to the stock price and whatever else the auditors have dreamed up, I guess I'd get your comment on that, why did you not see that, is that something that might become an issue in the future as we look to be in a pretty severe downturn, at least for the rest of this year?

Duncan Palmer

Yes, thanks. This is Duncan again. Well, we obviously took a hard look at all our impairment testing on an annual basis. We did so again this year. And when we do that, we take a very rigorous view of all our assumptions and as you would have seen we have filed our 10-K. We have taken no impairments and our auditors are fully comfortable with that. If you look at where most of our goodwill is, we took most of it on in the context of our fresh start accounting after we emerged from bankruptcy, and most of that good will I think you will see is in our insulation business, and we remain very confident and comfortable that our insulation businesses will operate and will make a lot more money through the cycle as we look at more normalized level of housing starts.

So when we come to value that business and think about that in the context of impairment testing, we are not applying values that would typically come out of a 600,000 housing start type number. We are using much more through the cycle time valuations and therefore taking a much more long-term view. So as you would have seen, because we have filed, we have taken no impairment charges and that remains our view.

Keith Hughes – SunTrust

Okay. Thanks a lot, Duncan.

Scott Deitz

Shaquana, I think we'll take one more question, and then we will go to closing remarks.

Operator

Yes, sir. Your last question comes from the line of Garik Shmois with Longbow Research. Please proceed.

Garik Shmois – Longbow Research

Hi. Thanks taking my call. Just on the CapEx figure, is it essentially maintenance CapEx that you have in the guidance?

Duncan Palmer

I will take that. I mean our CapEx is a blend of some – of maintenance CapEx in order to maintain assets. It is also got some CapEx to energy savings projects and some growth, some limited growth projects around our business. Obviously, we have taken a very hard look this year at what we can do in terms of deferring some of the projects that we had announced. You would have seen that we have announced deferral of our expansion project that we had announced for Russia.

I think that's something in these markets circumstances and taking a look at the Russian market, we feel that that is something that we felt comfortable deferring in terms of managing our CapEx for 2009. So we have taken examples like that through our business. We have been going through it line by line, all the items in our CapEx budget, making sure that we are being as prudent as we can be in balancing maintenance of our current assets and taking advantage of reducing it where there are some growth opportunities, but obviously we have cut that back.

Garik Shmois – Longbow Research

Sure. And just secondly on share buyback, you still have about 1.9 million shares remaining under the program, could you just review the share – the use of cash potentially to buy back some of the offerings?

Duncan Palmer

Yes, thanks. I mean in the past we have said that where we see clear line of sight to free cash flow that we would maintain the option of repurchasing shares as part of the treasury tool kit in terms of how we would see application of free cash flow. I think it would be fair to say that in 2009, we see value of liquidity to us to be very high. We are obviously managing that very carefully and keeping under review all our uses of potential cash. So I think it would be fair to say that we keep it in our arsenal, but we value liquidity very highly this year.

Garik Shmois – Longbow Research

Sound good, thanks a lot.

Scott Deitz

Mike, any closing comments?

Michael Thaman

Yes. You know I think the bottom line for us for 2008 as we look backwards is we really did complete a successful year. When we went into 2008, we knew that we had won business that had always been admired and respected by investors, and that was our insulation business. It’s a business that has consistently delivered 15% operating margin through cycles, it has years below that, it is years above that, but we have always felt comfortable telling investors that we think over the long-term that is a business that can earn 15% or better margins.

We went into the year saying that we thought we could do better in roofing and we went into the year with a lot of promise associated with our composites business. And I think as we come out of 2008, we are very comfortable talking about the fact that we really believe Owens Corning has now created three very strong business franchises in our roofing business, our insulation business and our composites business.

Obviously in the near term, those three great businesses are being impacted by the market environment that we see. Most notably our insulation business because of its exposure in new construction and our composites business as it works through the issues that we talked about on this call. We do think our roofing business will carry us through the first half of the year and provide us good strength and profitability. We're hoping that someone here soon we will find a bottom to the global economy, we’ll find a bottom to new construction, and that we can begin to build off of those bottoms. We think the company is very, very well positioned, that when that happens, we have a lot of positive earnings leveraged that would continue to be in our composites business. We had a great business in our roofing business and we obviously have significant earnings leverage that is still embedded in our insulation business when demand recovers.

I wouldn't want it to be lost as we come off of the call on the importance of some of the macro trends that would be currently affecting our company. It is not lost on us that when the United States responded to the economic challenges that we have and when money was put aside for stimulus that very specific initiatives were put in place to fund insulating homes, to encourage people to take tax credits, to put more insulation in their homes, to encourage the continued building of renewable energy, the continued building of wind, to the continued benefit of our insulation and our composites business.

At the bottom of it, of a bad economy, it is easy to conclude that these are nice to haves, not need to haves, and they are going to go away. I think we are seeing strong leadership globally. We have seen in other parts of the world where we operates that these markets need to be continued to be developed, that the market for saving energy and the market for creating more renewable energy continue to be strong long-term trends and our company continues to be positioned to benefit from that.

So we go into 2009 with our eyes wide open. Obviously, we believe we have got a track record over the last 10 quarters in the new construction side of the business for our ability to manage cost, our ability to manage capacity, our ability to respond to the market environment, I think we also have a nice track record of our ability to invest in businesses where we see opportunity like we have done in roofing. We would ask you to continue to expect that from us in 2009 and we look forward to having you on the call on April 30 for our update for the first quarter. Thank you very much for joining us and thank you for interest in our company.

Operator

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

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