Owens Corning, Inc. Q4 2009 Earnings Call Transcript

| About: Owens Corning (OC)

Owens Corning, Inc. (NYSE:OC)

Q4 2009 Earnings Call

February 17, 2010 11:00 am ET

Executives

Scott Deitz - VP, IR & Corporate Communication

Mike Thaman - Chairman & CEO

Duncan Palmer - CFO

Analysts

Michael Rehaut - JPMorgan

Dennis McGill - Zelman & Associates

Ken Zener - Macquarie Research

Jack Kasprzak - BB&T Capital Markets

Jim Barrett - CL King & Associates

Herb Hardt - Moness

Joe Gagan - Atlantic Credit

Operator

Good day ladies and gentlemen and welcome to the fourth quarter year end conference call. My name is Marge and I will be your operator for today. At this time all participants are in a listen only mode. We will conduct question and answer session toward 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 call over to Mr. Scott Deitz. Please proceed sir.

Scott Deitz

Thank you Marge. Good morning everyone. Thank you for taking the time to join us for today's conference call and review of our business results for the fourth quarter and full year 2009.

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. We ask that you limit yourselves to one question and one follow-up.

Earlier this morning, we issued a news release and filed a 10-K that detailed our results for the quarter and the year. For the purposes of our discussion today, we have prepared presentation slides that summarize our performance and our results for the fourth quarter and full year 2009.

We will refer to the slides during this call. You can access the slides at owenscorning.com. You will find a link on our homepage and a link on the investors section of our website. This call and the supporting slides will be recorded and available on our website for future reference.

Before we begin, we offer a couple of reminders. First, today's presentation will include forward-looking statements based on our current forecasts and estimates of future events. Second, these statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially.

Please refer to the cautionary statements and the risk factors identified in our SEC filings for more detailed explanation of the inherent limitations of such forward-looking statements. We ask that you understand that this presentation and today's prepared remarks contain non-GAAP financial measures.

Also note that GAAP to non-GAAP reconciliations are found within the financial tables of our earnings release. For those of you following along with our slide presentation, we will begin on slide four. Now we offer, opening remarks from our Chairman and CEO, Mike Thaman followed by CFO, Duncan Palmer and then onto our Q&A session. Mike?

Mike Thaman

Thank you, Scott. Good morning everyone. Thank you for joining us today to discuss results for the fourth quarter and full-year 2009. Owens Corning completed a very successful year in 2009. The year was highlighted by record roofing performance and strong free cash flow.

We achieved the goals we set for the year based on solid execution. Our progress and results in 2009 position us for adjusted earnings of 25% or more in 2010. We generated $335 million in free cash flow during the year. This performance was exceptional driven by outstanding results in our Roofing business and significant reductions in working capital and capital expenditures.

Overall, demand for our products in 2009 were lower due to weakness in the U.S. housing market and the global economy. 2009 net sales were $4.8 billion compared with $5.8 billion in 2008.

Lower sales and Composites and Insulation led to the year-over-year decline. Adjusted EBIT was $308 million in 2009. Adjusted earnings were $145 million or $1.14 for adjusted diluted share compared with $152 million or $1.17 per adjusted diluted share in 2008.

We finished the year with net debt of $1.65 billion compared with $1.98 billion at the end of 2008. We have ample liquidity to meet our financial obligations to continue to access the capital markets on favorable terms, and to begin to look ahead to growth.

Our balance sheet is solid and worthy of its investment grade ratings. Duncan will provide a complete reconciliation for our fourth quarter and full-year results in his comments.

As we entered 2009, we said that we would achieve a number of important objectives during the year. I offer this assessment of our achievements. We said that we will continue our progress in creating an injury free workplace.

Our safety performance improved by 6%, the eighth consecutive year of improvement for our company. We said the strong Roofing momentum would carry in 2009, it did. We achieved full year operating margins in Roofing of 28%, Roofing EBIT was a record.

We said that weakness in our composite segment will persist with the first half of 2009 and that the segment would return to profitability in the second half. We are pleased that the composites were profitable for the third quarter and remained profitable through the fourth.

As importantly, we took decisive action to curtail our production and reduce our inventory to acceptable levels. As we entered 2010, we are restoring production levels to meet demand. We said that the insulation business will face a difficult market. And that the market weakness would carry into 2010.

The business lost money in 2009. This is a great business which prior to this year had an uninterrupted track record of profitability. Our 2009 performance clearly illustrates the depth and breath of the current U.S. housing downturn.

We said that we will reduce operating expenses and capital expenditures by a combined $300 million, we achieved this objective. I am pleased with what we accomplished in the face of weakness in the U.S. housing market and the global economy.

Our cost control was strong, our cash flow was exceptional, the way we are exceeding our expectations 12 months ago and we have positioned well entering 2010. Now, I would like to turn to the businesses and to our outlook.

Our Roofing business had a fantastic year. Roofing delivered record annual profits with EBIT improving to $530 million up more than $300 million compared with 2008 which was our previous record.

This performance is even more impressive considering that the industry volumes were asphalt shingles were down about 10% compared with 2008. Full year operating margins in this business were 28% while we anticipate that we are entering a less favorable environment for raw materials we believe the sustaining margins in excess of 20% is an achievable for 2010. Our Roofing team will continue to innovate in support of our customers to be relentless in its cost reductions and to capitalize our market growth.

Now our Insulation business. A demand driver for this business is U.S. residential housing starts. In years of strong housing insulation used in Canada and U.S. new residential construction can represent up to 60% of insulation revenue.

In 2009, we estimate the new construction represented only a third of our revenue. U.S. housing starts were down about 40% in 2009 compared with 2008 which was already the press market.

Our experience is that Residential Insulation demand lags residential housing starts by about three months. Fourth quarter 2009 housing starts were 19% lower than the same quarter in 2008, therefore first quarter 2010 demand in our insulation business is expected to continue to be weak. From the full year analyst estimate that starts will be about 700,000 units up modestly compared with 2009. At such a low level of housing starts, our insulation business is likely to lose money again in 2010.

Our insulation business objectives for 2010 are clear. We will work to narrow the losses we have seen during this prolonged housing downturn. We will continue to manage operational cost capacity aggressively ensuring that business is positioned for the eventual recovery and we will focus on utilizing advanced building science to innovate product to save energy in homes and commercial building.

Now I will move to our composite segment. In prior calls I provided a chronology of the actions we took to return composite to profitability following the global demand collapse in the fourth quarter of 2008. We brought production levels well below demand and began to reduce inventories. We aggressively managed costs, working capital and capital expenditures. We were profitable for the second half of the year and we restored our inventory balances to target levels by year end as we said we would.

Our Composites recovery plan is on target. As a result of continued improvement in demand, we were able to restart some of our manufacturing operations in the fourth quarter earlier than previously planned. These startups had some negative impact on our margins in the quarter. Having those assets running at the start of the year will accelerate operating leverage for us in 2010.

Returning this business to double digit EBIT margins we saw in 2008 remains our priority. We expect to see solid profitability in Composites in 2010 with improvement through the year. Construction of our previously announced reinforcements plant in China continues. This project strengthens our presence in this important region. This plant is expected to improve our cost position and profitability in 2011.

Based on our performance in 2009 and our outlook for 2010 we expect Owens Corning's performance to further improve. We believe our Composites and Building Materials segments will both be profitable for the full year 2010. On a continued strength of our Roofing business, our improving Composite segment and narrowed losses in our Insulation business we expect adjusted earnings per share to grow 25% or more in 2010 which translates to $350 million or more in adjusted EBIT.

Now to provide a more detailed look at our performance, our financial position and our guidance I will turn to CFO, Duncan Palmer. Duncan?

Duncan Palmer

Thanks Mike. Let's start on slide 5 where we show our key financial data for fiscal 2009 and for the fourth quarter. You will find more detailed financial information in the tables of today's news release and the Form 10K that was filed earlier. Today we reported 2009 consolidated net sales of $4.8 billion, an 18% decrease compared to 2008.

For the fourth quarter, consolidated net sales were $1.2 billion, which was down slightly compared with the quarterly sales one year ago. Despite the decrease in net sales, we delivered $335 million of free cash flow in 2009 driven by record Roofing performance and significant reductions in working capital and capital expenditures.

In a moment, I will review our reconciliation of items to get to adjusted EBIT. As a reminder, when we look at period-over-period comparability, our primary measure is adjusted earnings before interest and tax, adjusted EBIT. Adjusted EBIT for 2009 was $308 million, down from $328 million in 2008. Results for the year continue to demonstrate the strength of our business portfolio and our ability to execute in the midst of the weak global economic environment and U.S. housing market.

Adjusted earnings for 2009 were $145 million or $1.14 per diluted share. For the fourth quarter 2009, adjusted EBIT was $33 million, compared to $59 million for the same period in 2008. Adjusted earnings for the fourth quarter 2009 were $1 million or $0.01 per diluted share. Consistent with our cost reduction actions during the year, marketing and administrative expenses decreased by $24 million in the fourth quarter and by $95 million for the year compared to 2008.

Depreciation and amortization expense totaled $325 million for the year which was in line with our guidance. We estimate our 2010 depreciation and amortization expense will be in line with 2009. Our capital expenditures for 2009 excluding purchases of precious metal totaled $232 million, compared with $366 million in 2008. This is consistent with our guidance.

We believe that 2010 capital expenditures will continue to be lower than depreciation and amortization. In addition, we took actions to decrease working capital during the year and these actions contributed $134 million to our cash generation in 2009 and $176 million during the fourth quarter.

On slide six, we reconcile full year 2009 adjusted EBIT of $308 million to reported EBIT of a $192 million. I will discuss the nature of these reconciling items on the next slide. Moving to slide seven, you can see the reconciliation of our fourth quarter adjusted EBIT of $33 million to reported EBIT of $2 million.

The integration of the Composites acquisition continues to deliver synergies well ahead of our original plans. In 2009, we achieved our synergy goal of a $100 million. While this is two years ahead of our original schedule, we will continue to pursue additional synergy opportunities.

We incurred $12 million of integration costs in the fourth quarter associated with achieving these ongoing savings. We have continued to respond to the market environment and to reassess our cost structure across the company. During 2009, we took further cost reduction actions including significant capacity curtailments, extending plan bound times, reducing head count and delaying and cancelling capital projects.

We achieved our annual cost savings goal of $160 million in 2009 and we expect to at least half of these annual savings will be permanent reductions where the costs will not return when we restart idle production capacity. We incurred charges of $8 million in the fourth quarter related to achieving these savings.

Next, as you have seen in prior quarters, we adjusted for the costs associated with the employee emergence equity program, a total of $12 million. These shares which were awarded to employees at the time of our emergence from Chapter 11 in 2006 have now been fully amortized.

Next on slide 8, you'll see an illustration of how the full year adjusted EBIT performance has evolved from 2008 to 2009 based on business contribution. Adjusted EBIT declined $20 million from 2008 to 2009. The Roofing business sustained the momentum that began in the fourth quarter of 2008 and increased EBIT by $345 million.

This was offset by the reduction in profitability of the Composite segment, Insulation business and other Building Materials business which faced weaker demand in their respective markets. General corporate expenses in 2009 were in line with 2008 and we expect these costs to be between $60 million and $70 million in 2010.

Now if you move to slide 9, you will see adjusted EBIT performance comparing fourth quarter 2009 with the same period in 2008 based on business contribution. Adjusted EBIT decreased $26 million from the fourth quarter 2008 to fourth quarter 2009.

Our Roofing business sustained the level of performance demonstrated in the fourth quarter of 2008 despite lower demand. This improvement was more than offset by a decline in the profitability of the composite segment which experienced lower year-over-year prices, higher manufacturing costs, resulting curtailments taken in 2009 and start-up cost associated with bringing production back on line during the fourth quarter.

With that as background, turn to slide 10 and we will begin a more detailed review of our segments starting with building materials. In the fourth quarter, building materials had net sales of $746 million, a 16% decrease over the fourth quarter of 2008. Despite these lower sales building materials delivered comparable EBIT results between 2008 and 2009.

The following two slides discuss these results in more detail by highlighting the key businesses within the Building Materials segment, the Roofing business and the Insulation business. First slide 11 provides an overview of our Roofing business. Roofing sales for the quarter decreased 38% from fourth quarter 2008 due to lower demand from storm activity and new residential construction. For the year demand was down approximately 10% from 2008.

Despite the lower demand EBIT margin momentum continued throughout 2009. As a result the business achieved a $345 million increase in EBIT in 2009 as compared to 2008. We expect the relatively weak demand we experienced in 2009 to persist into 2010.

We have taken significant actions since 2007 to improve the profitability of the roofing business. We have achieved improvements in our production processes including energy efficiencies and reductions in the raw materials costs of our Shingle formulation and we have also reduced overall manufacturing fixed costs.

In addition we have launched new product lines, improved our mix and grown our accessories business. These programs had a significant impact on this business beginning in 2008 and we have delivered over $100 million of EBIT improvement compared to 2007.

In addition the Roofing industry is attractive. We have seen stable selling prices since the fourth quarter 2008 that has enabled this business to deliver full year operating margins of 28% in 2009. As we enter 2010 we are seeing a less favorable raw material environment notably rising asphalt costs. However we do believe the sustaining operating margins in excess of 20% is an achievable growth for 2010.

Next on to slide 12. Our Insulation business continues to feel the impact of the weak U.S. housing market. Despite 32% lower lagged housing starts, fourth quarter net sales were in line with fourth quarter 2008. Our insulation business includes a diverse geographic and markets portfolio which has helped moderate the impact of the decline in North America housing starts.

In particular sales of Insulation to Australia in response to that country's re-insulation initiative helps drive higher sales in the fourth quarter. Fourth quarter 2009 EBIT for this business was a loss of $9 million due to the impact of low demand and under utilization of our production capacity.

In response to the prolonged weakness in demand, we have taken actions to reduce active production capacity and to align our cost structure with market demand. As a result, our Glass Fiber capacity utilization was 60% in the fourth quarter. While these actions have positioned business to perform well when the market recovers, we will struggle to achieve and sustain profitability in this business until demand improves.

This is a great business in a well structured industry. Owens Corning's PINK Fiberglas insulation is a powerful and enduring brand. We are the clear market leader, well positioned to return to historical levels of performance when demand improves, as we know it will.

Next, slide 13 provides an overview of our Composite segment. Composite sales in the fourth quarter were flat to the same period in 2008. Demand in our reinforcements business decreased by 45% in December 2008, but has increased each quarter throughout 2009 and ended the year stronger than the fourth quarter 2008. In addition, the gradual price declines that we experienced in the first nine months of 2009 particularly in Europe have stabilized and we began to see pricing improve in the fourth quarter.

We continue to produce less than we sold during the quarter, which allowed us to reach our year-end inventory goals. In fact, we brought some production back online during the fourth quarter. Capacity utilization rose from 55% in the third quarter to 70% in the fourth quarter. We expect to continue to increase capacity utilization in 2010, so that overall production meets demand during the year.

We believe that the actions we've taken in 2009 have positioned this business to continue its recovery towards double digit margins. Next, we have a few additional items to cover before turning to our Q&A.

Now to slide 14. Throughout the year, we have further strengthened our balance sheet. We have $946 million available in our senior revolving credit facility as of the end of the year. In addition, we have $564 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 to refinance our bank facilities and to sustain our capital investment plans.

In connection with our bond offering in the second quarter, our credit ratings were reaffirmed with those S&P annuities. In October, S&P improved their outlook on our investment grade rating from negative to stable, also in December fix ratings initiated coverage and assigned us an investment grade rating of BBB minus with a stable outlook. On slide 15 we provide reconciliation between adjusted EBIT and free cash flow for 2009. This illustrates the significant sources and usage of cash throughout the year.

We provided guidance for several of these items for 2010. Now on slide 16, we expect that we will deliver $350 million or more of adjusted EBIT in 2010. This guidance is inline with published consensus of a $1.40 to $1.50 of adjusted EPS based on the 25% tax rate and interest expense inline with 2009. While we utilize a 25% tax rate to arrive at adjusted earnings, our cash tax paid for income taxes in 2010 will be less than $35 million reflecting our favorable cash tax position.

Also as we disclosed in our 10-K, we expect contributions to the company's pension plans to give out $38 million in 2010. With that Scott, back to you for Q&A.

Scott Deitz

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And your first question comes from the line Michael Rehaut from JPMorgan.

Michael Rehaut - JPMorgan

First question on the composites business, you had mentioned that with some starting up of capacity that did have a negative impact on 4Q profitability I was wondering if you could give us a rough idea to quantify what that was and if those start-up costs, certainly you are still expecting even with the start-up cost profitability to improve next year but if you would continue to see those start-up costs next year as well and what those might be and then I have second question.

Mike Thaman

Yeah as we talked about on the call, what we saw in '09 is demand declined in the range of about 25% in our business throughout the year and we had to drop our production by almost 40% in order to get our inventory positions back to where we wanted them and really that situation persisted from a production point of view, really probably weighed into the fourth quarter so you can imagine our quarter, we were still producing primarily at fairly low levels our shipments were a little better. We had fairly high cost inventories because we had been producing at low levels through the third quarter and the first part of the fourth quarter so we didn't have a particularly good cost positioned in our production heading into the quarter so that the bit of demand growth that we saw wasn't particularly accretive, then on top of that we did see that as demand picked up we actually were going to over shoot our inventory targets which gave us an opportunity to bring production on that had really been scheduled for very late December and may be in the January, we started bringing some production on in November and the earlier parts of December.

Because the business was so close to breakeven you know those start up costs which on an individual line basis aren't that significant we are starting up two or three lines you know they are material on the business that's close to breakeven. So I don't want to overstate you know kind of the size of the impact of the startup costs I don't think that's going to be a big theme for us coming into 2010.

The opportunity for us in 2010 is we see demand coming back probably two thirds of the way to where it was in 2008 and we are going to bring production back two thirds of the way to where it was in 2008 which will give us really both leverage on the top line but also tremendous leverage in terms of production and manufacturing costs.

We expect to begin to see that in the first quarter and then as the year progresses better demand and better production economics will cause us to improve results through the year so that's really the shape of and how the year finished out why the business from a profitability point of view went a little bit sideways in the fourth quarter but I think we would say internally it met you know really all of our internal objectives in terms of working capital targets costs and productivity targets but most importantly we want to get the position ready to have some operating leverage in 2010 and we think we have that.

Michael Rehaut - JPMorgan

Thanks for that recap Mike and I will kind of just ask my follow up to that and my second question the same thing so just to finish off that idea on composites you know you talked about getting back to double digit margins also talking about getting to those margins by the end of 2010 is that still what you are guiding for or the goal and then just the second question on the roofing business you talked about despite your outlook for raw materials potentially to be higher that you think you can still be above 20% operating margins if you can just give us elaborate on that a little bit and what that impact might be to profitability as you see it as I also understand that you've set for a pass through on the asphalt pricing and just a little bit color there?

Mike Thaman

First, let me come back on the comments on the Composites double digit operating margins. We continue to say that that's our goal that getting the business to breakeven was an intermediate goal, getting the business to profitability is an intermediate goal, but then ultimately we see this is a business that will operate in double digit operating margins sustainably. We did not say in our prepared comments today that we thought that would happen in 2010, so I hope we didn't misspeak, but we didn't want to give the impression that we see that happening in 2010.

As I said earlier, we're really only probably going to be back two-thirds of the way to where we were in 2008 in terms of volume and production and really 2008 for the first three quarters was the last time we demonstrated double digit. So we think there is more to go in terms of production operating leverage and demand before we feel comfortable projecting that we will get to that double digit target. As relates to Roofing, if you comp the fourth quarter, our fourth quarter was pretty weak in terms of volume, which didn't come as a huge surprise to us.

Last year, in the fourth quarter we were dealing with hurricane Ike which had come up, I think in September or October, a fairly late season hurricane which had stimulated some demand, so we knew we were against the tough comp. we also knew that with free supply in the industry, there wasn't a lot of incentive for customers carry a lot of inventory year-end. Many of them knew they could replenish their stocks after the first of the year, so they were in a position where they could really slow down their purchases at year-end, so we knew that we had a risk or a chance or that we would see pretty sizable reductions in demand in the fourth quarter we did.

We're pretty happy that given that we still saw very good operating margins and actually operating margins that were six, fold points better than what we had in the fourth quarter of 2008. So we enter the year with a pretty good margin profile. We did say and Duncan talked about the fact we are seeing asphalt prices climb. That does put pressure on our margins. I certainly wouldn't characterize our pricing ability in that market as a pass through of asphalt cost. We know that asphalt costs do affect our profitability and we in the past have worked hard to try to recover raw material costs in the pricing of our products.

But it continues to be a competitive market. There continues to be a lot of challenges in the marketplace to ensure that we can get price in the market. So part of our guidance downward on operating margins to kind of 20% plus for the year would suggest that there is some risk we would see some compression associated with raw material costs that we wouldn't be able to achieve or that potentially from a timing point of view would give us some compression through the year. All in all though, there still are an absolutely great performances expected in 2010 from Roofing.

Michael Rehaut - JPMorgan

Okay, great, thanks and look forward to seeing you in a week from tomorrow.

Operator

And your next question comes from the line of Dennis McGill from Zelman & Associates. Please proceed.

Dennis McGill - Zelman & Associates

Thanks for the color on the Composites in the fourth quarter, I was hoping to maybe push you a little bit further because if we think about the third quarter I know you guys were certainly pleased turning profitability there and I would have thought that trajectory through the quarter was maybe a positively into potentially some stronger margins in the fourth and you mentioned you don't want to overstate the size of the startup cost. So, how should we think about the momentum of the business excluding the costs heading into next year because I think obviously the double digit margin is several years away but thinking about how quickly we could maybe get into a mid single digit range? Is there anything that we need to be factoring in aside from the normal leverage in the business that might mitigate that in the near term?

Mike Thaman

It's a great question Dennis. I appreciate you asking it. One of the challenges we've had in communicating about the business is the change in demand was really a discontinuity on the write-down. So in the fourth quarter of last year, it drops straight down and then its been kind of a continuous ramp which we have been very pleased with because sequentially the business has shown improved demand all through '09 and we're kind of forecasting in '10 unless we get some kind of different economic outlook that '10 would be likewise, that we will continue to see sequential improvement in demand as the year progresses.

We've really kind of had 2 discontinuities though in terms of production. So when demand dropped the way it did, about middle-weight first quarter of '09 is when we really shut off a lot of our capacity and we went from running almost a 90% level to running at about 50% level. We stayed down at that level for a very long period of time late into the fourth quarter and then to a certain extent the way we're bringing production back on is a bit of a discontinuity. It's not really a ramp. We hit our inventory targets hard and now we're bringing a fair amount of capacity back up all at the same time to meet the demand that we see in the market and match production to demand.

So the impact of the operating leverage, of bringing the capacity back online we would expect will be pretty strong in 2010 which is why we have some confidence that the business should be solidly profitable in the year and should be improving through the year. As I said in my earlier answer to Michael, we don't see that we're going to have demand or production levels all the way back to the '08 level which would give us confidence saying we get the double digit this year but we do see that demand and production will probably get two thirds of the way from where it was in '08 to where it was in '09.

So we're going to make a fair amount of progress from the '09 trough back to the '08 levels and I think that would be what would give us confidence that we'll improve to decent operating margins in '10.

Dennis McGill - Zelman & Associates

Okay and then just kind of running the math on that because you guys have some different numbers with the divestitures, your commentary about getting two thirds or way back. So you're looking for volumes. It could be up in the 15% to 20% range in 2010, everything holds.

Mike Thaman

Yeah the way the math works is when volumes drop 25% then they improve 25%, but you're still only two thirds of the way back. If you think about it in absolute tons, if we drop 25 we come back about 15. But on a percentage basis if you drop from a 100% to 75%, you can improve by 20% or 25%, you don't get back to a 100. So from that 25% drop we saw we'll get two thirds of the way back to where we were in '08.

Dennis McGill - Zelman & Associates

And then just focusing on Insulation for a minute, what type of price versus raw material impact are you assuming in your guidance for next year realizing there is some price increases in the channel and they appear to be at least marginally successful thus far, what's factored into your guidance from that standpoint.

Mike Thaman

Yeah we've seen a fairly stable price environment in insulation really over the last year and we've actually seen a fairly stable inflation environment. I guess the good news or the bad news of that is when you look at the profitability of the business, we would imply from those numbers that for some of the toughest segments of the industry some of the players may be down around cash cost which is why we're not seeing pricing move a lot and in a low inflation environment pricing has not moved a lot.

I think what we're seeing now though is for the first time ever as we said in our call; Insulation manufacturers are losing money which is a very unnatural act for us. We're not accustomed to that at all. We would certainly like to see anything we can do to try to improve the profitability of the business in the near term knowing that long term profitability comes from real and sizable improvements in the housing market. I think we would generally look at 2010 as being another year of relatively stable pricing, relatively team inflation and then most of our efforts in narrow losses would come from great execution and good cost side management which is where our team's focused.

Operator

And your next question comes from the line of Ken Zener from Macquarie. Please proceed.

Ken Zener - Macquarie Research

Roofing margins which fell sequentially, obviously well above this historical rate, did it surprise you the amount of decline relative to where you were going into the fourth quarter?

Duncan Palmer

This is Duncan, I'll take that question. I think when we look at Roofing margins throughout 2009 and they continued the low momentum that we saw building in the latter part of 2008 obviously. Obviously overall for the year we saw a path where we were seeing operating margin in the third quarter in the low 30s and capacity like 21% in the fourth quarter. And typically, this business is a bit stronger in the second and third quarters than it is maybe in the first and fourth quarters, and that's kind of typically what we have seen in this business. But we're still very pleased with the operating margin performance that we did see in the fourth quarter and did represent a six point increase over the fourth quarter of 2008.

On the asphalt side, we elude it a little bit to the pricing environment we're seeing on the cost side in asphalt. That was probably increasing during that the fourth quarter into the first part of the year. We have seen a reasonably tight asphalt environment. As Mike said, historically certainly in 2008 we were able to recover asphalt price increases in the business fairly effectively I think in 2008. So that gives us some confidence that we will be able to sustain margins at or above 20% during 2010 as a whole.

Ken Zener - Macquarie Research

Right and the reason that I asked that is because it your commentary of 20% plus seems a stark break from where you had said low teens and you have to prove it. Does this represent in the face of raising asphalt prices, a higher based expectation for you in this business versus you were just a couple of quarters ago?

Duncan Palmer

What we've said is that in the long run, this is solidly a double digit margin business and we're still confident that's the case. I think given the momentum we have seen in 2009 even in the face of quite weak demand in the fourth quarter to be able to sustain the margins at a higher level. I think what we're saying is in point of view for 2010 that we see that momentum continuing and we have some reason to give us confidence that certainly in 2010 we could see operating margins above 20%.

Ken Zener - Macquarie Research

Right, but it seems like in the near record low housing here, kind of flattish volumes is what you're talking about, inflationary pressure. You're comfortable seeing 20. It seems to suggest a secular shift in your expectation for the business?

Operator

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

Jack Kasprzak - BB&T Capital Markets

I wanted to just circle back on Roofing and make sure I understand the dynamic that you're seeing in the market. I think there is a 5% to 7% price increase out for asphalt shingles. Are you saying that that's not enough to cover where asphalt costs are or you think they are going to be in spring or that you are just not confident in giving the price increase?

Mike Thaman

I think we are taking may be a little broader gauge look at the question of roofing margins for 2010 beyond just the price increases out on the street right now. When we look at the year what we are seeing is that refinery economics are continuing to change, refineries haven't been making that much money and its putting pressure on all refined goods and in particular asphalt availability and also asphalt pricing so we are seeing a bit more volatility in asphalt than we have seen in prior years, because of that we think we maybe going to have year here in 2010 where the timing and impact of asphalt cost could be more pronounced than what we saw in '09,'09 it was relatively tamed through the year and I think '09 was characterized as a year of stable pricing and stable cost as we did into a year where there is inflationary pressure, there certainly has been evidence in the past, that we see some margin compression on the way up I don't think we are really trying to handicap the probability of achieving any individual price increase, I think we are really more trying to set investor's expectations to just say as we look at this year maybe we don't have quite as positive a dynamic as we had heading into '09 and then therefore we might see some margin compression. In terms of long term margins which is something that we are talking about on the prior question, I don't think we have really changed or re-guided on long term margins beyond I think you have heard us in each of these quarterly calls, get more and more bullish on double digit margins for our roofing business for sure and I think as quarters go by we get more confident of sustaining above the prior guidance but we haven't come back and said what we think, a good long term margin performance for the business would be.

Jack Kasprzak - BB&T Capital Markets

You think the bad winter that a lot of the parts of the country are having is going to generate any increased roofing demand when we get into the spring what's your view of roofing volume right now?

Mike Thaman

That's a tough one for me to answer because I take a pleasure with my team that I won't get on these calls and be a weatherman. We do know that we have a couple of things in this winter, one is its been a pretty severe winner particularly in parts of the south where typically you don't get a free start cycle.

We also had a lot of rain on the West Coast where there hasn't been rain for a long time. Typically those two things caused people to discover may be that a roof that they've been repairing or limping along actually leaking so I would take directly those two probably have a positive impact on roofing demand. Pretty tough for us to make you know a meaningful estimate of how much of that will show up on our number.

Jack Kasprzak - BB&T Capital Markets

Okay and on the comment on composites getting two thirds of the way back from where you were in '08 the delta from '08 to '09 was about $240 million of operating profit I mean does that suggest that you think a good two thirds of the way of $240 million in 2010 is that the translation more or less?

Mike Thaman

I mean I wasn't trying to be specific I think one of the things that's going to be a challenging getting all that operating profit back or getting two thirds of that operating profit back is we are doing it on a little bit weaker top line. So you got to call back a little bit more volume to work your way up that curve because the business does have a positive operating leverage but I guess more again in terms of broader indications of our expectations the business was operating around 10% in 2008 until we got to the fourth quarter the business lost a little bit of money I characterize it as you know just slightly below breakeven we would certainly think that if we are able to ramp up our production levels two thirds of the way back to where they were in '08 demand were to come back two thirds of the way that we should be able to move somewhere from marginally breakeven but not profitable back to some of the levels that we saw in '08, that you give somewhere between half to two-thirds of the way there.

So I think the gist of your question is probably consistent with what we are trying to say the specificity that I don't think we're prepared to guide that narrowly.

Operator

And your next question comes from the line of Jim Barrett from CL King & Associates.

Jim Barrett - CL King & Associates

Mike, two related questions on the Composites. First, the Chinese becoming price aggressive in Europe. I understand the European commission has taken up the case against them. Have the Chinese responded to that by pricing more rationally in Europe? Could you give us an update on that?

Mike Thaman

Sure. I think what Jim refers to is the European Composites Manufacturing Association did bring an anti-dumping claim against the Chinese somewhere in the second half of 2009 and the European Union in December announced that they were going to investigate that claim. So, that's an ongoing kind of investigation that whether or not there was dumping in Europe, and I think obviously that's for the European Union and the Manufacturing Association to sort out. You know, clearly I think it's an indication of a couple of things. One is it's an indication that the market fell very dramatically at the end of '08 and that's a competitive intensity around the world and in particularly in Europe accelerated quite a bit.

I think it's an indication that there may in some cases even be government intervention to try to defend some of the markets. I think what I would say as we enter 10 and we look at Chinese competition, we've never really believed that the right structure of the Global Composites Industry is the kind of all the glass in the world be made in China and then exported around the world.

We think matching regional supply and demand being fairly close to your customers, making products that are appropriate for that market and doing it in low cost countries in each region. So, Mexico or Brazil for the Americas, Russia for Europe or Eastern Europe or Europe, obviously China, India those are good places for us to be manufacturing today and that's we think you seen us invest.

So, as the Chinese market has improved I think that's taken some pressure hopefully off of the Chinese manufacturers in terms of them finding an outlook for their products and then as the rest of the markets improved, I think that's also helped some of the manufacturers like ourselves bring production back up to acceptable level. So, the general level of pressure in the market today is probably a bit different then what we are feeling in the first half of '09 right after the collapse.

Jim Barrett - CL King & Associates

Okay. And then on the follow-up is you obviously adding capacity in China itself. I take it that's a function of the fact that you feel you can compete price rise in terms of technology would the Chinese in their own market?

Mike Thaman

Yeah, I mean for sure we are confident in our ability to compete with the Chinese in terms of technology and similarly situated when we get to similar factor cost and similar locations we also have confidence in our ability to compete on the cost side. What we are doing in China, it is in fact capacity add but it doesn't really increase our capacity position or our market position in China that dramatically.

Today actually we are importing into China to meet some of the customer demand that we have been able to secure in the country and when we bring that facility up, what we are really going to be able to do is we are going to be able to in country source some of the production that today is coming from other parts of the world. So, when we look at that in terms of our economics, we see it as a fairly low risk investment in that facility is effectively already loaded and its just going to be a significant cost opportunity for us to stop shipping and get to a low cost manufacturing platform so we are very anxious to bring that facility on line more to support the position we already have in the Chinese market, then they somehow go move into a new position in China.

Operator

And your next question comes from the line of Herb Hardt from Moness please proceed.

Herb Hardt - Moness

You had mentioned in your comments that Australia was a contribution to the insulation business, can you give us some sense of how much it was?

Duncan Palmer

Yeah this Duncan, I mentioned in my comments that if you look at our insulation business kind of quarter-over-quarter in fourth quarter you would assume that the revenue line was essentially flat on that kind of environment where housing starts have actually been falling, I think one of the contributors to that was the product that we were supplying to Australia, the Australian's have had a fairly aggressive stimulus action to stimulate re-insulation during 2009, the governments has been sponsoring in Australia because of the lack of supply in Australia we have been able to supply that both actually from China and also in some of our U.S. facilities, it was a factor in the quarter, somewhat in the third quarter and also in the fourth quarter and what I am trying to say wasn't a huge amount of our revenue in the fourth quarter but it was certainly a material in the context of making up for some of the shortfall that we have seen from lower U.S. presidential demand in the fourth quarter.

Herb Hardt - Moness

Do you expect it to continue?

Duncan Palmer

I think its something which is tailing off somewhat. I think its stimulus action that is limited in time and limited in dollars in Australia as per my understanding. So I think we would expect that to tail off in the early part of 2010.

Scott Deitz

We'll take one more question and then we'll go to closing remarks.

Operator

And your next comes from the line of Joe Gagan from Atlantic Credit. Please proceed.

Joe Gagan - Atlantic Credit

Just have two questions. It says here according to what I'm reading that you had $368 million in EBIT profits for 2009. Is that correct?

Mike Thaman

Joe, we reported adjusted EBIT today of $308 million and then in our presentation that accompanied today's comments, we have a reconciliation from that adjusted EBIT number to the EBIT number that is the GAAP number that's reported in our numbers which is a bit less due to the adjusting factors.

Joe Gagan - Atlantic Credit

Okay, so it was $308 million and you're predicting $350 million for adjusted EBIT for 2010. I know in 2009 all of the EBIT came from the profits from the Roofing business. Do you expect any positive contributions from any of your other business besides Roofing to EBIT in 2010?

Mike Thaman

We do. If you can kind of walk through the pieces of our analysis today on the call, we're certainly expecting Composites to turn from losses to profitability throughout the year. So, that bar in terms of contribution we believe will be positive in 2010. We talked about narrowing our losses in Insulation. So while we believe Insulation will lose money in terms of contributing to EBIT and earnings growth, we are expecting that Insulation will make some contribution this year and we certainly expect that Roofing will continue to be an earnings engine for the company. We forecasted or suggested that there maybe a bit of margin compression that we would experience in 2010. Obviously that's not baked in the cake. Roofing is a very short circle business. So we're managing that business everyday. But that may in fact end up being a bit of a negative bar in 2010 but we would still be able to grow overall earnings because of the turnaround in Composites and the narrowing of the losses in Insulation.

Joe Gagan - Atlantic Credit

But as far as the turnaround in Composites, you must have some idea in your head out of the $350 million. Is that $50 million or $20 million or what's your rough approximation if you're offering that figure?

Mike Thaman

I think we talked through in fair detail today, what the dynamics we see in the Composites market are and kind of bridging from what we saw the performance of the business in '08 to the performance you saw in '09 and then some expectations for '10. As a rule, we don't really give guidance by business and we typically don't give guidance at all by quarter either. We tend to give broad guidance for the Company to set investor expectations. I think it's reasonable for you to conclude that our internal plans, we have pretty good line of sight on how we would get the businesses to the guidance we've offered today.

Joe Gagan - Atlantic Credit

And the last question was this. As far as the price increases for Roofing, have those been announced and passed through or have they just been announced and it's in the period where they haven't actually been passed through where you charge people higher amounts? Where specifically are you in that process?

Mike Thaman

Well, what I would say about Roofing is, Roofing is a fairly complex distribution channel and it's also not one homogenous market nationally. It really operates as a bunch of regional markets. So while on these calls, we talk about pricing in very simplified terms and we talk about operating margins in very simplified terms as a national business with national operating margins, I think it's reasonable for our investors to understand that it's actually a composition of a lot of different channels, a lot of different products, and a lot of different geographies with a lot of different competitive dynamics.

I would characterize very price increase as a continued negotiation between the manufacturer and distribution for when and how pricing will be affected in the market place. The pricing that has been announced for February I think is in that classic negotiation of making sure that we don't harm our customers by trying to recover raw material costs in the pricing of our product and we work with our customers to ensure that when we ask them to take a price increase from us, we must position them to be able to get pricing in the market.

Joe Gagan - Atlantic Credit

Yeah, but what I've noticed is a lag between announced increases and it actually wasn't charge. So you can't tell me whether you've actually charged the increases of 5% to 7% as of today? You can't tell me that?

Mike Thaman

Yeah, we don't guide with that level of specificity in terms of Roofing pricing.

Scott Deitz

I think we have time for one more brief question, if there is somebody in the queue that has a brief one.

Operator

You have no question at this time, sir.

Scott Deitz

Okay, very good. Thank you Marge and thank you for joining us for today's call. With that I'll turn it to Mike Thaman who has a few closing remarks.

Mike Thaman

Well, thanks Scott. First of all I want to thank everyone who joined the call. We appreciate your interest in our company and appreciate your interest in hearing our story and the quality of your questions. As I said in my prepared remarks, we were very satisfied with our 2009 performance and we would certainly feel comfortable calling 2009 a great success for our company.

I cant underestimate both the dramatic improvement we saw in our Roofing business as being the core earnings engine of the year but also the fine work that was done across the entire company in terms of driving cash flow and reducing our net debt position by over to $300 million for the year.

When we came into the year, we believed that we might generate cash flow in the order of magnitude of maybe a $100 million. As the year went by we continue to increase that estimate based on strong performance on both the working capital and cash side of the business as well as in Roofing.

In some regards we got done probably two or three years worth of work on the cash side of the business in 2009 which really has positioned our balance sheet in a wonderful way for us to take the issue of near term liquidity of the table entirely to really be able to access the capital markets, to get the maturity and structure of our debt that would like and then finally for us to start really looking ahead to the future in terms of growth opportunities.

We think we have a wonderful portfolio of businesses. In 2009 our investors were able to see Roofing performing at very high levels and Composite and Insulation suffering a bit based on market dynamics. What we would expect you to see in 2010 is roofing continue to perform at a high level, Composites coming on stream and then Insulation again struggling a bit because they're a very difficult market.

We do think its reasonable to conclude though that housing is demographics driven and then when we get back to a realistic housing market here in North America that we will see utilization levels in demand for Insulation products that restore it to the high levels of performance that we had seen really almost every year in its history up to about 2008 when we saw this dramatic decline in Insulation.

So we feel very good about the portfolio and the actions we have taken. We continue to be focused on the cost side of the business, continue to be focused on building business with our customers, on helping our customers grow their business.

That would give in us the confidence to guide to what we think is strong our earnings growth in 2010. It will be nice to work our way through the year with our investors and talk to you about our progress earnings but we certainly feel like a 25% growth in adjusted earnings per share as a nice benchmark to put out there and a nice goal for us to drive against in 2010.

We look forward to reporting our first quarter earnings on April 28 which is also a Wednesday and hope that all of you have an opportunity to join us for that call and again thank you for your support of our company and your interest in our message. Have a nice day.

Operator

Thank you for the participation in today's conference. This concludes the presentation and you may now disconnect. Good day.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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