Owens Corning's Hosts 2012 Analyst/Investor Day (Transcript)

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Owens Corning (NYSE:OC)

2012 Analyst/Investor Day

March 09, 2012 8:15 am ET


Thierry Denis -

Michael H. Thaman - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Arnaud Genis - Group President of Composites Solutions

Marcio Sandri -

Julian Francis -

Paul Wei -

Charles E. Dana - President of Building Materials Group

Michael McMurray - Vice President of Investor Relations and Treasurer

Frank C. O'Brien-Bernini - Former Chief Sustainability Officer and Vice President of Science & Technology

Sheree L. Bargabos - Vice President and President of Roofing & Asphalt Business

Duncan J. Palmer - Chief Financial Officer and Senior Vice President


Michael Rehaut - JP Morgan Chase & Co, Research Division

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Garik S. Shmois - Longbow Research LLC

Andrew Fineman

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

Dennis McGill - Zelman & Associates, Research Division

Herbert Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division

Stephen Kim - Barclays Capital, Research Division

Will Randow - Citigroup Inc, Research Division

James Barrett - CL King & Associates, Inc.

Paul Galat

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Mike Wood - Macquarie Research

Thierry Denis

Good morning, everybody. I'm Thierry Denis, Director of Investor Relations, and I'd like to welcome you to Owens Corning 2012 Investor Day. For those of you who are in the room at the World Headquarter location here with us, thanks for making the trip. I think you won't regret it. And then we also have a live webcast at the same time. And for those people who are actually following us on the web, thanks for your interest in the company.

This is going to be a great day. I'm very excited about the program we've put together. I'm very excited about having the opportunity to meet with you again. We've had a chance yesterday night to actually chat with a number of you. So I enjoy the fact that we get to see each other again, meet new faces as well but also very excited about the program we've put together. And the program was designed with you in mind. So we've considered your concerns, issues, the questions that I tend to get, and we try to incorporate that as much as possible in the content that we will deliver today. I'm hoping by the end of the session today, you feel like you have a better understanding of the drivers of our businesses, a better understanding of the outlook of our businesses and then as result, are in a better position to model and make financial investment decisions.

You'll see that we will actually go beyond what we've done before in a number of areas in terms of helping you understand some of the specifics of our businesses, and that's intentional. And the intent there is to help you make these decisions with better information.

Now how is the day going to unfold? We -- you should have by now and if you don't, please raise your hand. You should have a packet of information on your desk. In that packet of information is the agenda that I'll take you through in a minute. But more importantly, there's also a safety card. Safety is a core value at Owens Corning. You'll hear us talk about safety at every earnings call. So please take a moment to go through the instructions here. You'll find directions in case of emergencies. You'll find instructions on what to do in case of a tornado event. Today's more like snow flurries, but you'll never know. So actually in case of tornado, you would want to exit the room from -- through the door that you used coming in, and then we'll direct you to a shelter, which is likely to be in the kitchen area. In case of a fire emergency, there's actually an emergency room behind this screen, behind myself, and you'll be directed to exit the building that way. And also I'd like to remind you that this is a non-smoking facility, so if you do wish to smoke, we will ask you to actually exit the building and then there are designated areas outside. So please take a moment to go through these instructions. This may be the best thing you do today. Hopefully, you won't need them.

Now the rest of the packet does contain the agenda of the day. And we will start in a few moments with remarks from Mike Thaman, our CEO, and then we will go from there to a review of the Composite business. Arnaud Genis, President of the Composites business, will lead that with you. He will invite members of his management team, and you'll see that we'll actually spend quite a bit of time going to some degree of depth on the Composites business. I know many of you have questions and would like to better understand that business, and hopefully, we'll try to address that concern. We will then break. And actually, before the break, you'll have about 15 minutes of Q&A. So I'll come back and coordinate that for you, but you will have an opportunity within that section to ask everything you've always wanted to know about Composites to Arnaud. We'll take a 15-minute break mid-morning, and then we will be back at 10, and then we'll move on with Chuck Dana, who will lead us through the review of the Building Material businesses, the Insulation and Roofing. Chuck is the President of the Building Materials Group. He would also involve key members of his management team in the review.

So then that will take us to somewhere around 11:00 roughly. And then Duncan Palmer, the CFO -- our CFO, will then do the financial review, and then we will actually conclude with Q&A with Mike and Duncan together. So we'll have a little bit more time at the end for general Q&As, and you will have Q&As after each business section within the relevant business category.

Okay? And that should take us until about 12, and by that time, we will close. And then there's actually lunch available, for those of you who want, in the room next door. We'll give you directions on the way out at that point in time. Okay, so that's the way the morning will unfold for you.

The best part of the job is actually for me to share some of the disclaimer comments with you. I talked about the safety risk at the beginning. Hopefully, you won't have to be subject to any of that, but there are other types of risks that are associated with this type of event. And you want us to make forward-looking statements, correct? So we will. And those forward-looking statements are based on expectations as of today and all of those are subject to risks and uncertainties. So obviously, results may differ materially from what we're projecting today. Now those risks and uncertainties, you can actually review in our SEC filings, and we spent quite a bit of time covering those, so please take a look at that. We may also refer to non-GAAP financial measures, and those, if you do want to reconcile those to GAAP measures, you can find those explanations in the same SEC filing. Okay?

So with that being said, I wish you a very good session. I'm particularly excited about the content that we have to deliver today and the message that we will deliver to you. And on that, I'd like to invite Mike Thaman, our Chairman and Chief Executive Officer, for his opening remarks. Thank you. Mike?

Michael H. Thaman

Thanks, Thierry, I appreciate it. I hope that's about the right volume level. Welcome, everyone. We certainly appreciate you coming into Toledo, and also those who have joined us on the webcast, thank you for joining us on the webcast. We think we have a great Investor Day scheduled for today. This is our second year now of doing this event here in Toledo. And hopefully, last night, those of you who had a chance to join us for dinner and those of you who've been with us this morning, going to see the pride that we as a company have in being able to show off our people and our products. I thought we had a very nice product display last night with some of our innovations. I think you had a chance to talk to some of our people who do that. And certainly, one of our key objectives for today is to let you get to know our management team. So as Duncan and I go out and travel on the road, I think many of you have gotten to spend time either with me or with Duncan or with our investor team, but that's not really where the earnings engine of Owens Corning comes from. It's more our businesses and our people who work in our businesses. And today, I think you'll have a chance to see a very, very good Composites team and a very, very good Building Materials team talking about their business and the outlook that we have for their business.

I'm just going to make some fairly short opening remarks, go through a few of the headlines of our last couple of years of performance, some of the headlines of the things that we're going to share with you today. As Thierry said, we'll then go to the Composites and Building Materials. And then I'll come back up at the end with Duncan, and we'll do an extended Q&A period after we've shared some of the materials with you to try to put that into a bit more context.

Let's just start with Owens Corning. I think many of you know our company, but we are a 75-year-old company founded in 1938. In 2011, about $5.3 billion, about 15,000 people. One of the things we're very proud of is we have been in the Fortune 500 for 57 consecutive years, which is the number of years the Fortune 500 has been around. There's only about 70 companies that enjoy that distinction. And we think it says something very important about our company and also the products that we make and the markets that we serve, which is we make very useful products that go into useful applications. There's nothing particularly that's a fad about the products that we make. We make insulation materials that improve the energy efficiency of all types of construction. We make roofing materials that keep houses warm, dry and protect it from the elements. And we make composites materials, which we'll talk about today, which reinforce different resin systems to make them more durable, make them stronger, give them more capabilities. That has been a big material substitution that's been going on around the world in the global industrial markets for the last 30, 40 years. So we are making useful, practical, valuable products in the global economy that have allowed the company to sustain its growth and allows the company to sustain its position in these markets over the last 57 years and as a result, enjoys the distinction of the being only 1 of about 70 companies that's been able to say that over the life of the Fortune 500.

We are a component of the Dow Jones Sustainability index. Today, Frank O'Brien-Bernini, who is our Chief Sustainability Officer as well as our Head of Building Science, will spend a little bit of time talking to -- about what we've achieved on the building code side of the business in terms of driving energy efficiency in construction. We actually see sustainability as a business strategy for our company, so in addition to having very good footprints in all of our manufacturing facilities, in addition to having very safe products that are heavily tested -- and we know that they can be utilized safely and endure in their application for many years -- we also believe that some of the trends around sustainability with renewable energy and energy efficiency actually benefit the products of Owens Corning. So we've been quite aggressive and on our front foot stance with regards to sustainability. I think Frank will have a chance to touch on some of that today.

We pretty much describe ourselves as a company that operates 3 very good businesses in 3 very good industries. So we believe that we have, in many cases, the best industry in what -- the best business in what are some of the best industries that we would like to compete in. So we really enjoy a great portfolio of businesses and really do believe that we've got lots of growth opportunity for those businesses in terms of top line, in terms of earnings power and also in terms of cash flow. Now what we've delivered over the last 2, 3 years in what has been a pretty challenging environment, I think if you look at our 2 core markets, one being housing and the other being global industrial production, in the last 3 or 4 years, we've seen kind of unprecedented either depression or volatility in each of those 2 markets. So the U.S. housing market, of course, has had its worst 4 years since the depression. And certainly, with the volatility we saw in 2008, 2009, with global industrial production in the financial crisis and the impact that had on global industrial firms, we've had to navigate through some pretty tumultuous waters. And yet because of the strength of our businesses, because of the quality of the industries in which we compete, we've delivered some very, very good results we believe.

First and foremost, as Thierry said, we start every meeting with safety. We have reduced the number of injuries in our company by over 90% in the last 10 years. Just to put that in real terms, about 10 years ago, we had roughly 20,000 employees, and we had an injury rate of over 1,000 employees per year being injured. Now that might sound like a lot, but when we benchmarked that at the time, we were about median for a manufacturing company. So that was a pretty average level of performance for a manufacturing company a decade ago. We said that wasn't good enough for Owens Corning. And we set on a path to become a company that had 0 injuries. Over the course of those 10 years, we've improved every single year, and last year with a global population of about 15,000 employees, we were able to reduce the number of injuries to about 70. So more than 1,000 people in our company who had been injured 10 years ago are no longer being injured, so really making a difference in people's lives, making a difference with our customers. They listen to the story and they ask us for help from us, how we do we put a safety program like this in place in order to make this a part of how they operate. And it's something our people are very, very proud of, and it's something we're proud every earnings call, every investor meeting to talk to our investors about because we think it's an important measure of a company's ability to execute, to set a goal, to demonstrate that you can care for your people and take care of your people and then deliver on that commitment. And we think Owens Corning has done that very, very well.

We've also delivered 90% growth in adjusted earnings over the course of the last 3 years despite a difficult macro environment. I think you've seen particularly very strong performance from Roofing and a significantly improved performance from our Composites business that's really powered a lot of that growth. I'll talk about how we see our portfolio kind of moving through the next 3 to 5 years, and in fact, we believe over the next 3 to 5 years, you could see very, very good performance out of all the components of our portfolio. And we think that's a pretty exciting time for our company as we see a housing recovery.

We strengthened our balance sheet. We extended debt maturities. Duncan will talk a bit about that. We do like our balance sheet. We carry an investment grade credit rating. We do carry a reasonable debt load, but we make sure that we always have long-dated maturities on our debt so that as a company, we have the ability to work through difficult market environment and always know that we've got the balance sheet that would support our businesses.

We continue to invest and I think in particular in our Insulation business. And today, we'll talk a little bit about how we see the Insulation business now hopefully coming out of some very difficult performance and into some stronger performance with a recovery in housing. But we did a major product overhaul with the EcoTouch innovation that we announced and released last year. Hopefully, many of you had a chance to see that last night at the product review. We did the FiberTEK acquisition in the third quarter, which gave us some important capacity in a portion of that business called Blowing Wool, which is the insulation that goes into attics. We also have been making investments in low-cost capacity in Composites. So we've talked, I think, fairly clearly about the investment we made in China. We have an investment this year coming up in Russia, which will be very low cost. We have an investment also in Mexico this year that will come up, which is low cost. And I think Arnaud and his team will do a very good job of giving you the whole picture of what our global Composite asset base looks like and how we're moving that asset base to be very low delivered cost global asset base capable of producing very, very good returns.

Finally, we have had strong cash flow performance. We're quite proud of our tax position. We are not generally a cash tax payer. As a result, when we have good levels of profitability, we normally translate that into good levels of cash flow. In the near term, most of our M&A work has been portfolio moves where we've had divestitures that are about equal size to what we bought, so as a result, most of our acquisition work has been funded with divestitures. As a result, most of our free cash flow has been applied to share purchases, which has been, we think, very good for our shareholders and an effective way for us to return capital to our shareholders.

Now when we look at the portfolio -- and this is a new chart and I think a very simple chart and a chart probably any of you could have created -- we went back nearly 20 years in each of our businesses and just created a very simple color code, which is if a business is losing money, it's a red dot. If a business is making single-digit operating margins, it's a light green dot. If the business is making double-digit operating margins, it's a dark green dot. So I mean, I'm not -- not, I don't think, a PhD in slide making here. I think we wanted to give a long historical context though because I think this chart really supports the story.

So let's start with Insulation. Clearly, when you look at this chart, the consistent, most consistent and most highly performing business in our portfolio is in some ways surprisingly our Insulation business. Many of you have only known our company since we emerged from bankruptcy in 2006, at which time we saw housing dropping from 2 million units to 600,000 units, which is the key macro indicator that supports this business. If you go back before that time, this was the business that only knew how to make double-digit operating margins. We think we've done a lot of very fundamentally sound things in this business to make it a more competitive business to lower its breakeven cost, to give it the product and technology capabilities it needs to compete going forward. The only thing we're missing right now is an improving housing market. And certainly, there seems to be better optimism this year that we are in fact beginning to see the early innings of an improving housing market, and we'll express today every confidence that in any decent housing market that our Insulation business will be able to return back to historical levels of performance. So we don't see anything but improvements in the structural upside in that business with significant market headwinds over the last 4 years. As those market headwinds turn into tailwinds, we believe the historical performance we've seen in that business is indicative of the type of performance we should expect to see going forward.

Our Roofing business, in fact, was a very consistent kind of single-digit performer. And I think many of you know the story of the industry consolidation, of the significant restructuring steps we've taken in our Roofing business to improve its performance. And you know the spectacular performance that Sheree and her team have delivered over the course of the last 4 years. Again, we see that as a business that has had consistent performance over 20 years, is now delivering consistently superior performance over the last 4.

Finally in Composites, if you go back to the decade of the 90s, this is a business that was very accustomed to making strong double-digit margins. And when we guide today to believing that we'll have this business back to mid-teens margins kind of by the middle of this decade, that's really not at all inconsistent with its long-term history. It's a bit inconsistent with its recent history. So you can see the decade of the 2000s. The business pretty much operated in the single digits with the exception of the one year in 2009 when we saw the big downturn from the financial crisis. We know that the competitive intensity of what we saw in the 2000s with the expansion of capacity out of China, with the growth of the Chinese market and with exports coming out of China put a level of pressure on our business that caused us to embark on a strategy of consolidating the industry and caused us to embark on a strategy of trying to move our asset base increasingly to a low-cost position. I think what you'll hear today -- and it's a pretty exciting story -- is we think we're starting to get now visibility to seeing the benefits of that strategy, that we are further along today in our ability to build out a low delivered cost network, that we are further along today in the maturation of the Chinese market, the maturation of our Chinese competitors and the competitiveness and rate of export of product out of China that the decade ahead should cause the market to come back to our strategy, which has been fundamentally to balance supply and demand by region and to have the right products in the right place for our customers and grow with the market in all the regions of the world. So I think we've got a very interesting story here, all of which causes you to think about or project out the part of the chart we haven't shown you, which is what does this company will look like when all 3 of our businesses are operating at double-digit margins. And I think we've been pretty clear in our guidance with Roofing being mid-teens or better, with Insulation returning to double-digit margins in 1.5 million housing starts and with Composites being at mid-teens margins in the middle of this decade that we certainly can now see a picture where our entire portfolio moves to bright green over the next 3 to 4 years. And we think that's a pretty exciting story. That's really the story that we're here to share with you today.

So what you'll hear today. We operate in global markets with very good long-term macro drivers. Global industrial production, which is driven by economic growth, driven by wealth, driven by population, we think that's a pretty kind of irreversible trend. Material substitution, primarily in our Composites business, which we'll share with you today has a long track record and a very good trend. U.S. housing, which is clearly depressed and is supported by demographics that would suggest we have an opportunity for housing to go back to 40- or 50- year averages of 1.5 million starts. And then energy efficiency, which is clearly the lifeblood of economic growth around the world, we don't see any trends that would cause us to believe that energy is going to be any less valuable in the future, and therefore, products that deliver energy efficiency are going to be more and more in demand as the economy grows around energy.

We're going to tell you that we have great businesses in well-structured industries, that they are capable of strong growth in both earnings and cash flow and that's all of our businesses. We believe every one of our businesses can deliver strong growth in earnings and cash flow. As long as we get an environment of continued global economic growth and improving housing. So right now, we're really waiting for our macros to give us the underpinnings of the performance that we know our businesses can deliver in an environment where the economic engines and the earning engines of these businesses can really shift into high gear.

Composites is the undisputed leader in a growth industry. Insulation is a proven franchise that we expect will return back to historical levels of performance. And our Roofing business, which has been such a top performer, it's still operating in a market that's well below its 15-year averages. So we're going to share with you today a bit of a growth story in Roofing where we do believe the coming years will bring more volume and more activity in the Roofing market at very well good levels of performance and very good levels of margins. So in total, we think what we're sharing with you today is an Owens Corning business that's positioned for growth and really positioned for the next 3 to 5 years to be very, very good years for our company.

I'm going to get off stage at this point, and get some of the business folks into the room. The one thing I would hit on this next slide is we are reiterating our guidance today of $1 billion of EBITDA in 1 million housing start environment. So we continue to feel comfortable that, that's a pretty good midterm milestone or stake in the ground for where we think the company can be when we see that macro get to that indicator. Obviously, that's also predicated on some level of continued growth in the global economy. We'll also talk -- and I'll leave this to Duncan to talk to you with more detail. We do believe we'll see free cash flow conversion of around 100% of net income over the course of the next 3 to 5 years. So we won't necessarily do that every year, but on average, because of our tax position, because of the way we've deployed our asset base and because of the position we have to the recovering macros, we do think that the cash story is every bit as interesting and as exciting as the earnings story.

With that, what I'm going to do is I think we're going to hand out the next pieces of materials. I'm going to ask the folks to come down and do that. We've learned from previous Investor Days, so we've given you a folder, not a binder. The last couple of years, this took about 5 minutes while the binders open and close. I think we can do it a little bit more quietly this year.

And I'd just like to take quick opportunity to introduce Arnaud and his team, and then I'll invite him on stage. I think many of you have had a chance to meet Arnaud. He has done some work with investors. Arnaud has been leading our Composites group for about a year, but he has been in the composites industry for about 25 years. He came to us with the Vetrotex acquisition when we bought that business in 2007. He's the consummate leader in this business. We've been a very, very excited to have him on our team. With him today is Marcio Sandri. Marcio runs the glass reinforcements portion of Arnaud's business, which is all of our glass assets. Marcio also has a long experience in the chemicals industry and also with Owens Corning. A year ago, we asked Marcio to actually move to China and run our global business from Shanghai. We thought it was important to have one of our senior leaders on the ground in the fastest-growing market trying to improve our intelligence and understanding of that market. Marcio has been over there with his family since the second half of last year. I think that's paying real dividends, and he's becoming a very sophisticated global executive for our company.

In addition, Julian Francis, who runs the Americas, will tell us a story a bit about the great things we've gotten done there. And then Paul Wei, who is part of our U.S. team, who we've sent over to China to be the General Manager of our China business, will go through some discussion of what we're seeing today in China. So I think we've got a good global team here today to share with you the Composites story.

With that, I'm going to get out of the way, and I'm going to invite Arnaud up to tell you about Composites. Thanks.

Arnaud Genis

Good morning, everybody. Can you hear me? Yes? Good. Well, first of all, I'd like to say that I'm very happy to be here. It's my second participation to the Investor Day. Can you hear me? I come here. Okay. I need to move my microphone. Okay. Sorry about that. I always enjoy the interactions with you because, well, you ask a lot of questions, a lot of clever questions. Yesterday, one of you made a comment, which was well, Composites is really the black box of Owens Corning. And you know that glass is transparent. Glass fiber is used in translucent applications, so my mission today is that you no longer say that and that you leave this room understanding very well 4 things. The first thing is that Composites are growing faster than the economy, growing faster than traditional materials, and we would share with you how we model this market.

The second thing that I'm going to share with you is how much China has changed our industry structure over the past decade. China has become a major consumer of glass fiber, obviously, with its massive industry growth. China has also become a major glass fiber producer. That's the number two. The number three is that the next decade is going to be very different from the previous decade, because the very fundamentals of the Chinese glass fiber industry are changing with the strengthening of the renminbi with industry -- energy availability constraints. With inflation, the game is changing. And the fourth one is that this is going to be our decade. We have a winning model. We have a winning model, which is based on, as Mike shared, a growing share of low-delivered cost assets. We have a winning model, which is based on a global footprint and while we are extremely optimistic about our position or our success in the coming years.

As Mike mentioned, well, you will have in front of you 4 presenters. You see the group made of a Brazilian, a Welsh, a Chinese American and a French, who will make sure that at the end of this one-hour session, Composites, extremely easy to understand. You will see that it's a very simple market. And the model to project our financials is much more simpler than what you've thought.

Just to tackle [ph] Owens Corning, when we invented the glass fiber and many of the markets 60 years ago, we have been a very responsible actor in the sense that, well, we have created a lot of end markets. And when needed, we went down in the value chain so as to transform markets, to transform markets from traditional materials to composites. We have also had a good flare, a good nose to detect in advance which economies, which geographic areas would emerge as key growth engines. Actually, we enjoy first in positions in very high-growth markets such as Brazil, Russia, India. We also enjoy first in position in end markets that we anticipated would grow very fast like wind energy in China.

We also had a very smart M&A strategy that contributed to the industry consolidation. The last one, obviously, was the acquisition of the Saint-Gobain reinforcement patent. But before that, we did acquisitions in Mexico, Canada, Japan, et cetera.

Today, we sell glass fiber in 3 product forms: fibers, fabrics and engineered mats. Now when used on either glass fiber market there's a fourth product shape that we do not sell, which is textile yarn. And textile yarn, as the name mention, are used mostly in textile processors, mostly in electronic applications for printed circuit boards but also for construction and for industrial applications. We are not in that market. When you read some reports on glass fiber market, you may find some textile yarn numbers in there. Just consider that it's roughly 0.5 million ton market. Yes. And so well just to be very specific on this textile yarn issue, all the numbers that we are going to share today -- and we are going to share a lot of numbers that we have never shared before -- do not include yarns.

Now very quickly on that one because I think you are familiar with what Composites is. Composites is really an engineered materials system. We reinforce resin in general where we can reinforce other kind of system. You see here the cutaway of a boat, with several layers of glass fiber, have a very important property that bring the mechanical performance to this boat hull. You are familiar with the pictures that are in the lower part of this slide. But all these applications leverage the unique attributes of Composites. Composites enable to reduce weight. When you go from steel to composite, you reduce the weight of a part from 20% to 40%. Composites provide mechanical performance, as I mentioned, but they also provide freedom of shape, integration of parts, reduction of tooling costs. So there's a lot of attributes that make Composites be a very compelling technical and economical solution.

Now very often I hear investors say, well we don’t really understand where are Composites. This is very difficult. We've heard that there are 40,000 applications. Yes, composites is everywhere. We live in a composites world. So what we have done to make things maybe more visible to you, we've picked 3 markets, construction, transportation and industrial, and we have put together a very short video, 3-minute video, that is going to show you over the period of time the evolution of these various sectors. Construction, transportation, industry have adopted a lot of composite materials, and you will see over a 20-year history how much these industries have been transformed by the adoption of Composites.


Amazing, right? A lot of application and every decade has brought new applications. I think while your intuition was already telling you there's Composites everywhere, we don't tag Owens Corning inside. That would be a lot of Pink Panther everywhere in your daily life, but indeed, we are anywhere. Now over a 60-year period, so this market has become a $7 billion market. I think you are familiar with these 5 end markets that we have already shared with you in the past. Now when you look at the these markets, you'll understand that well your lifestyle, that the growth of emerging countries, the productivity of our industries, the capital intensity of our industries really rely on the continued use of composite materials.

When you look at these markets, you also see that some megatrends do favor the growth of this composites industry. Construction, think about it. In 20 years, there will be 1 billion inhabitants more on the globe. These people will need water. They will need houses. They will need buses. They will need trucks to transport the goods they produce or they consume. Think about transportation. Emerging countries will need more cars. Consumers want to have cars over there. The developed world, we need to reduce CO2 emissions, so we need lighter vehicle. When need to consume less oil, so lighter vehicle again. Industrial, Mike mentioned, well, it's forecasted that industrial production will grow massively because of the growth of the population and urbanization so all these extremely favorable megatrends for our industry.

Over a 30-year period, you see that the growth of this market has been a very sustainable growth, outpacing the growth of industrial production. When industrial production was growing 3%, we have grown 5% consistently. And well, you will appreciate that the diversity of end markets and the geographic spread of this market is also enabling this industry to mitigate spot difficulties in a country or in a given market. Every decade has brought new applications for Composites, and you've seen that over the past decades, there was an acceleration related to the growth in China -- China and Asia globally.

Now in the past, we've always talked about this market growing 1.5x and 2x GDP, which is a very good correlation. Now we found an even better one with industrial production. That's quite obvious to understand. Well, in GDP you have agriculture and you have services that are not particularly relevant to the use of composites. You see on this chart that over 30-year period, our correlation with a very narrow fluctuation is 1.6x industrial production. Now given our position in the value chain, we are quite high in the value chain. You understand also that when you look at a shorter period of time, acceleration or deceleration in IP growth will cause this 1.6x to be within a range that broadens. And you see that over a 10-year period of time, the fluctuation is 1.3x to 1.7x. Now when we look at our manufacturing network, obviously, we plan our capacities well in advance, and we do we use this 1.6 multiplier.

We've made a similar analysis for traditional materials. I said in my introduction that traditional materials are being somehow cannibalized by Composite materials, but when you look at it, you'll see that wood over the past 30 years has not grown at all. Steel has grown slower than industrial production. Aluminum, slightly more and glass fiber, 1.6. So you'll see that this is a natural evolution from wood to steel to aluminum to composite materials. And actually, what this trend towards more engineered materials is also reflected by the high-growth rate of carbon fiber. Below the bar, you have the size of the respective materials, and you see that glass fiber has a tremendous potential because we are only 1% of the steel market.

So with that, well, you get it. The 3 megatrends that we have talked of, population growth, increasing share of urban population, the compelling need to a more sustainable world, these 3 megatrends are really causing first, the industrial production to accelerate, but it's also causing this material substitution that I've talked of to happen. And therefore, with straight math, 4.4% is the IP growth that is projected for the next 5 years with a slower growth at the beginning of the period. That's what economists are saying, and indeed, we've seen some slowdown last year. And this year will also be a more moderate growth. It's still growing and materials substitution of 1.6, so straight math give us a growth over the next 5 years of 7% for this market. Okay? So we are pretty comfortable. In the past, we have always told you this is a market that grows 5% to 7%. We remain absolutely aligned with this growth outlook.

Now Marcio is going to talk to you -- is going to share with you numbers that we have not shared with you in the past about this geographic split of the markets, about the split of our sales. And his points will be very much around our resolve to grow our low-cost delivered assets to 75% over the middle of this decade. And actually, you will see in the subsequent presentation how much of a success we have built in the U.S. and how we are proliferating this model in Europe also. Okay? Marcio?

Marcio Sandri

Thank you, Arnaud. Thank you. Good morning, everyone. For me, it's certainly a great morning to be here in front of you and to have a chance to talk about our business makes of this a great morning. Arnaud said that in his team, he has a French. He has Welsh. He has Brazilians and he has American Chinese. It is clear that I'm the American-Chinese guy here. At least on the sense that I lived 4 years in Toledo, Ohio, and I've been living in Shanghai in the last 6 months. You have just heard a great story about Composites. Arnaud very well explained how this market plays, how much this market has been growing and what are the drivers for the growth of this market. It is my objective in here to show you how our business, the Composites business of Owens Corning, is positioned in this market. I will do that through telling a little bit of today's story, a little bit of the industry structure, and I'll talk a little bit about our strategy going forward that we think and we know that will make of our business a global winning business, not just today but tomorrow.

Let me start by showing you a picture of this global business and how we are positioning in this global business. Just to give you some explanation first, we are -- in this presentation, we are organizing our business in 4 different regional segments. And we'll talk about the key ones during the presentation. The first one is Americas, and Americas comprise North and Latin America. Then, we have EMEA. EMEA stands for Europe, Middle East and Africa. And for now on, I'll -- for -- to facilitate our conversation, I will refer to it as Europe only. And then we have Asia Pacific, which I broke into 2. One is China and I did that because China is the largest market for Composites. And other countries of Asia, which for Owens Corning is mainly India, South Korea and Japan where we have manufacturing operations.

A little bit of explanation, what you see in the boxes is in the top, you have the Owens Corning position in that particular region. The dark bar is -- represents the percentage of the region's revenue to the total market revenue of Composites. The red bars represent the percentage of Owens Corning sales in that same region, and the blue and red dots that you see all over the place represents the manufacturing sites of Owens Corning. In Americas, Owens Corning has one unquestionable leading position. That has been the case since we started 60 years ago. 45% of our revenues are generated in here. In Europe, which is the largest region for Composites, was 32% of the total -- on the total revenue. We also have a leading position. It was built in our long history of innovation in Europe, and it was built through the acquisition of the Saint-Gobain reinforcement business. In other countries of Asia, which comprises India, the fast-growing market for Composites, we again have a #1 position as you can see now here. That is based on a great team that understands the marketplace and know how to deliver what are the needs of our customers. In China, the largest individual market for Composites was 24% of the global revenue. We have the largest opportunity for Owens Corning. We have one emerging position there, and we have been growing our share year-after-year. And we are doing that through investments in capacity and through investment in business development.

Our strong regional positions associated with the manufacturing capacity well balanced around the globe gives us an unrivaled supply position to support the growth of our customers around the planet.

As I defined our position in this global market, I want to talk and spend some minutes talking about today's scenario, the actions that we are taking based on today's scenarios and the near future outlook for the Composites business. As of -- as 2011 was coming to an end, excess inventory was being built by Owens Corning and by our competitors. The main reason for this inventory buildup was the slowdown in Europe, starting in the end of the second quarter last year and then the less-than-expected growth of emerging economies on the third and the fourth quarter. As a consequence, a negative pricing environment was created during the time that we are negotiating the annual contract. It was not as drastic as the one that happened in 2008, 2009 when price erosion hit the high single digit. As we shared with you in your last earning calls, this time, it'll be in the low-single-digit side, which demonstrated that the market has -- has matured and that Owens Corning has increased its competitiveness in the marketplace. Even though we had that situation in the end of 2011, 2012 is still a year of growth for Composites, and we are projecting that the market is going to grow between 3% and 5%. As we turned aware of the situation, we have taken some early actions to re-accommodate our production and to produce less than what we would be selling in 2012 so that we finish the year with the inventories that are balanced with the demand in the marketplace. That will create momentum towards the end of 2012 and beginning of 2013 when the growth in demand will grow even further. The balance in inventories will provide a favorable pricing environment and will allow us to have a large positive operating leverage in a lower-cost global network. We are confident that we are taking the right actions to return quickly to double-digit margin no later than 2013. As you saw in Mike Thaman's presentation, we like green, and we like dark green.

As much as we feel very confident about the near future and the actions that we're taking, we also have a long-term growth strategy, which we are resolved to execute. Our growth strategy has 4 key pillars, and I will describe each one of them as you see on this slide. Firstly, we will continue to innovate with and to the benefit of our customers. We have started important partnerships that will lead to new products that one -- that is one that we shared with you already, which is our partnership around nanotechnology with Lockheed Martin. We also have established a program called best in class. This project -- this program has very clear targets and very clear deadlines, and by best in class, we mean to develop products that meet customer expectation and exceeds our competitors in the requirements of the -- that the customer has on the product.

Growing in China, the largest composite market, is the greatest opportunity to our business. We are committed with it, and as you know, I personally have moved with my family to Shanghai, and now I'm operating our global business out of Shanghai. There's a little story in Owens Corning. I spent 4 years in Toledo, and they thought I was speaking Chinese. They send me to China just so that I could find that it was bad English. It was not Chinese. We are also going -- we're also having some ongoing investments in new capacity in Russia and Mexico. The investment in commercial and business development in Brazil and India and our plans for new investments in manufacturing sites in the same countries will speak of our third pillar, investing in emerging countries. The fourth pillar, which is proliferating a low delivery cost model requires that I share with you some personal history or story and I'll share with you the definition of a very important concept. Before I had this job of Vice President of the Global Reinforcement business, I was running Americas out of Toledo. And during that time, we have implemented a great and successful story about low-cost manufacturing platform. This model delivered fabulous results for our business and made of it a business that we love today here in Americas. And Julian will talk more about this later. It is my vision that we will implement the same model around the globe, and we will get the same results around the globe for sustainable growth. The key concept that I told you is what we call low delivery cost asset. Low delivery cost asset is one asset, which delivers product or serves our -- its customers with the lowest cost comparing to all the other suppliers. That's why we call low-delivery cost asset, is the asset that delivers product to the customers at the lowest cost when compared to the other suppliers. This is a key strategic advantage because manufacturing cost itself does not guarantee that you're going to succeed depending where you have your facility located.

It is intuitive that if you have low delivery cost, you have better operational margins. And you can see that in the graph. This is a real numbers from our business. The proliferation of the low delivery cost model started 4 years ago. In 2007, about 30% of our assets met below delivery cost definition. In 2011, it has grown to 50%.

That caused a gain of 3 percentage points in our operating margin, moving from 7% to 10%. The continuous implementation of this model around the globe in the next 3 years will lead us to have 75% of our assets meeting the criteria, and will consolidate the mid-teens margins of a business that grows in one attractive market as defined and explained by Arnaud.

To validate our vision and our strategy, we have to discuss the industry structure and our competitors, otherwise, I don't think that our strategy would be as solid as it has to be. That will close the first part of this presentation, and will lead to the specifics of each one of the regions.

In the last decade, a transformation has occurred in Composites, it has been caused by the growth of demand in Asia and the appetite of the Asian players to add a lot of capacity, leveraged on a business model of large, single location manufacturing sites, exporting to the rest of the world. This transformation is easily seen when you look at the list of the top 5 suppliers in the market. In 2002, there was only one Asian player in the very bottom of the list, NEG. Nowadays, 4 out of 5 are Asian manufacturers with a large predominance of the Chinese: CPIC, Jushi and Taishan. Very important to observe, as you look at this slide, that during this transformation, Owens Corning was able to maintain the global market leadership. That was accomplished through some strategic moves as the acquisition of Saint-Gobain, the Vetrotex business and the increase in our competitiveness that I showed in the low delivery cost strategy [ph].

This transformation has not stopped. It has changed direction and started to favor Owens Corning in its strategically placed and growing low delivery cost network. It is no secret that energy inflation, increasing labor costs and unfavorable exchange rates will reduce the competitiveness of Chinese manufacturers. Actually, this has started already. As you see in the left-hand side picture, by 2011, the dollar-denominated Chinese manufacturing costs has increased 22% more than the U.S. manufacturing cost. Looking forward, by 2016, China is estimated to have on additional dollar-denominated manufacturing inflation, 35% higher than in the United States. The cost of producing glass fiber in China is certainly coming closer to the one in the rest of the world.

On the top of that, as you can follow in the right-hand side graph, the Chinese glass fiber capacity available to export grew between 2006 and 2009. Due to this rapid capacity expansion provoked by Chinese suppliers that I mentioned before. But it has started to drop in 2010. And it is forecast to keep shrinking in the coming years. This is because the Chinese are adding less capacity going forward, and that is because the Chinese market is growing fast, which requires the part of the capacity existing in China stays in China to serve the local market. There is no doubt that a process of erosion of the Chinese exporting model has started, and should continue in the years to come.

Consistent with our vision and our strategy, such erosion will benefit our well-distributed and our low delivery cost network. I want to share with you a slide that I like very much. It is the living proof of the analysis that I just shared with you. The data used to generate this graph, it is the exporting statistics sourced by official Chinese agencies. One can easily see a rapid growth of the Chinese manufacturer participation in the demand outside of China up to 2007, which then stabilizes in the period 2008 to 2010 and starts to decline in 2011. For me, this is the beginning of one year of favorable environment for Owens Corning's global and balanced network. Owens Corning strong position in the marketplace, a clear strategy set for success and the more favorable structure of the industry makes our future very promising. That sets the stage nicely to transition this presentation to our successful story in Americas.

I'll now hand it over to Julian Francis, our Managing Director and Vice President for the Americas business. Julian?

Julian Francis

Thank you, Marcio. I've got just a couple of slides to make 2 key points. The first is about what Marcio just talked about, our repositioning of our assets in the Americas. And second, how we are capitalizing on our competitive advantages to win with our customers in the future.

In 2007, we undertook a repositioning of our assets in the Americas. There were 3 primary actions that we took to establish a strong, low-delivered cost position. First, we invested in scale assets to fully leverage them, expanding furnace production capacity in key products to support market growth. Second, where it made sense, we consolidated underperforming assets and shrank them to establish a base on which to build. Getting the size of the assets right is a necessary but not sufficient condition for success. We also needed to reduce complexity in our operations. In order to do this, we took a third step and decided to go to a focused factory model, making only 1 or 2 products at each facility. This creates operating efficiencies, it reduces product and equipment changeovers that limit output and we carry fewer raw materials, such as chemicals needed in our process which in turn reduces the silos that we store them in and reduces our overall capital requirements. This focus also helps our operators become experts in their areas, understanding the entire process rather than specializing in forming or packet [ph]. This expertise has an impact on quality and efficiency, driving out errors from our production process. But perhaps most importantly, it is much easier to duplicate best practices across a standard production platform than it is on a uniquely configured asset. That's what makes us confident we can replicate this model.

These actions delivered the results we expected, moving 75% of our assets to the low delivered cost position, and we are now in a position to take advantage of excellent factor costs in raw materials in our conversion needs. So these were the actions we took to get to a low delivered cost position. So let me talk a little bit about what we're doing with our customers to win in the future.

Beyond low delivered costs, we have 2 sustainable competitive advantages in the Americas: supply chain flexibility and customer intimacy. The fact is that our primary competitors have a physically long supply chain with few options. Supply from Asia is subject to currency risks, political risks, an inflation delta as Marcio explained, and risks in the supply chain that is dependent on single-source locations or countries. Our supply chain is shorter and more flexible. We measure shipping time in days, not weeks.

We can move material on trucks or rail depending on what makes sense. Second, our customer intimacy. We have a long history with our customers. Some going back more than 50 years, including the company that molded the body panels for the very first Corvette. We have built a strong sales and technical team that understands our customers and able to work [ph] them and their machines. They are comfortable with pultrusion and infusion, filament winding and RTM. They are relationships that endure with our customers. Behind our frontline team is a wonderfully strong corporate research team in Granville, Ohio, and a passionate management team here in Toledo and Brazil.

So in summary, we repositioned our assets using a model we can replicate to give a low delivered cost. We have a differentiated supply chain that creates value for our customers, and a customer intimacy, which allows us to be closer to our markets than any of our competitors. This leads to a business in the Americas that we love and a model that we can replicate around the world.

Marcio will share now some thoughts on how we're going to do that in Europe.

Marcio Sandri

Thank you, Julian. We certainly have created a model in the -- this successful story of Americas. I mean if you paid attention in what Julian said and I hope you have not made any notes, so that you cannot share with our competitors. There's a very specific model in there. And we want to implement this model around the globe so that we create a sustainable business.

Europe is the large, attractive business for us. It generates 32% of the global composites revenue as per the first slide that I shared with you. We love our leading position in that market, and went to make -- to take advantage of the ongoing downcycle to accelerate the implementation of the model that we learned in the Americas. We have started with the expansion of our existing low-cost platform in Russia due to start up in the second quarter of 2012. In February, as you heard, we announced the consolidation of our Western Europe assets that will lead to a 5% reduction of our high cost capacity around the globe. As announced in our earnings calls, it will have a total cost of $130 million, half of which is cash that will be largely offset by sales of land and precious metal that will be freed in the operation.

The remaining assets will then have higher capacity utilization, which helps to reduce cost. Besides product-dedicated facilities as much as we did in Americas, will have better quality, more consistency and higher productivity, making our customers happier. You can see in the graph, in the right-hand side, that we're going to cause in Europe a thing that is very similar to what we did in Americas. Our low delivery cost asset basis will increase from the current 10% to 70%, when everything is said and done. Any additional demand that cannot be covered by the local assets will then be served from our low-cost global network, which will be increased by 8% with the addition of Russia and Mexico. We are proliferating the successful model proved in Americas to Western Europe, in order to create a sustainable and profitable business.

I would like now to hand it over to Paul Wei, our General Manager of Owens Corning China. Paul will share with you the exciting opportunities that we have in China and how we are succeeding. By the way, he is the next Chinese-American of the organization.

Paul Wei

I was going to say thank you, Marcio, but I guess I'm going to be the Brazilian presenting China today, so let me know how I do. Good morning, everybody. I'd like to take the next few minutes to share with you our story in China, and why I think it presents a unique opportunity for investment and significant growth and how we are positioning our businesses to grow in China.

Quite simply said, China today is the largest market in the world for glass fiber, and it represents 24% of the global demand and industrial production will remain in the high-single digits for the next 10 years. As you look at the chart to the left, you'll see that growth has been rapid in the last 10 years and primarily fueled by low cost of production, exports and the heavy investment in infrastructure. However, as we look forward to the next 10 years, what we are seeing is a significant shift with a focus to investment on domestic growth. Driving this is going to be continued investment in power and energy, infrastructure away from the coastal regions and to meet a growing consumer demand for an increasingly wealthy society. And those of you who have been to Shanghai or China know what I'm talking about.

To achieve this, what the government has really recently announced for performance materials in its 12th Five-Year Plan, a renewed effort to grow and triple these materials to more than RMB 2 trillion annually by 2015. And in the glass composites market, we are seeing a similar growth structure in trend. Today, we estimate that about 30% of the market is performance based. And what that means is that applications and composites must meet, in conjunction with local and government institutes, strict standards in quality, safety and often must meet leading global specifications. Players in this market must bring best-in-class technical capability and support, and when qualified, it represents a very unique opportunity because the platform is set on a large scale for future growth.

So I'd like you to take away from this slide is that while China is indeed the largest market in the world, it is changing and the dynamics are shifting towards higher performance and quality. And our strategy is actually to take a leading position in the performance markets and then to diversify to the broader markets, not only to leverage our size but also to protect our leading position. We took a leading step in that direction last year with the opening of our Yuhang facility, which has our low delivered cost asset and we are excited about the possibilities that it will bring as we can penetrate the performance markets and also the broader market and it will be fully loaded by Q3 later this year.

Let me now turn to a few examples of how we are winning in the performance market. Those of you who are at the booth -- is there something, all right. Okay. Those of you who were at the booth last night saw that we have a leading position today in wind energy -- is it up? Okay? Better? Okay.

Those of you who are at the booth last night saw we have a leading position in wind energy not only as a reinforcements producer but also as a fabrics provider -- you need me to go to the mic? Okay, great. As a fabrics provider. China, while growth in wind energy has moderated since the beginning of last year, primarily as turbine inventory is reduced to meet growing grid connections, will still be the largest market in the world for wind energy for many years to come. And in fact, we believe that it will surpass the 12th Five-Year Plan to install more than 70 gigawatts of power generating capacity and more than 115 gigawatts of cumulative capacity by 2015. Our leading products, Advantex and Ultrablade, which is a high-performance, high-modulous glass, are highly specified today in turbine blades and this is becoming more important as not only the blades get longer for efficiency, but also to meet the rigorous challenges of offshore wind.

As we turn to the light vehicle and transportation market, today we have a leading position with our Advantex rovings for compressed natural gas cylinders. We estimate today that more than 700,000 vehicles in China today are already running on compressed natural gas, and this will continue to grow as primary vehicle producers begin to offer compressed natural gas as a stock option. Our products today are already specified with leading producers known for their safety record and this is critical in the industry as safety is paramount.

In the oil, gas and high-pressure pipe market, we are leading today with our Advantex products for water desalination. Water shortage is an issue in China. And today, 2/3 of the counties face some sort of a shortage and 1/4 face a severe water shortage. The government's 12th Five-Year Plan calls for significant investment in water desalination and increasing its capability from 2,000 cubic meters a day to more than 12,000 cubic meters a day in the next 2 to 3 years.

And last but not least, in the commercial buildings market, we are leading today with our glass non-woven products for acoustical ceiling tiles. Acoustical noise in offices and apartments is becoming a significantly increasing problem in this billion square meter gypsum ceilings market. And we believe that our products will continue to grow as commercial buildings are constructed. These are just some examples of how Owens Corning is leading in the performance markets today. And we believe that by continuing to invest in these markets and bringing value-added solutions to our customers through innovation and through business development, we'll be able to continue to bring new opportunities and new possibilities in the future.

So consistent with that strategy, we are pleased to announce the opening of the China Composites Center, which will happen later on this year. The mission of the center is actually very straightforward. Number one, it's to promote the continued use and benefits of composites to the industry. As Arnaud talked about earlier, our story is really about transformation from traditional materials to composites, and there is no better time to do that now than in China. Number two, it's to speed up the qualification process for composites. This center will be home to leading experts, both in composite design and application development and we will be able to replicate key tests with our customers, to speed up specifications with data. And number three, to work with our customers to define what will be the next big transformation in composites in China, whether that is working on the applications I shared with you earlier, or something perhaps even more forward-thinking like aerospace with our high-performance glasses. This center will be home to our customers and leading specifiers to debate and collaborate on the next transformation.

So in closing, I'd like -- I hope I was able to share with you why we are so excited about this market in China, and how we are preparing our talent and our investments to meet this next wave of growth. There is no doubt in my mind that China, will be, for many years to come, a significant market for glass composites, and I believe we are well-positioned for that growth and I look forward to working in China, and continuing to work -- to put new investments in China to meet that growth.

And with that, I'd like to turn it over to Arnaud for closing comments.

Arnaud Genis

Thank you, Paul. Okay, I'm just going to wrap up here and go back to my opening comments, which are again, global trends do favor the growth of composites materials faster than industrial production, 1.6x. That leads us into, well, a 5% to 7% CAGR growth for composite materials. This is an industry structure which is changing, you've seen the evolution of China, the fact that the growth of the domestic market in China is going to outpace the incremental capacities that they will be building. Also the fact that, well, the cost factors will be much less favorable moving forward.

And -- well, lastly, this low delivered cost model that we have successfully developed in the Americas will be proliferated. We are on track on the execution of our plan in Europe. Obviously, this is always a difficult exercise but the entire team is mobilized and acting very responsibly. But this will enable us to go back next year to the double digits EBIT margin that was mentioned in our fourth quarter call and will put us on track also for our guidance for this -- the middle of this decade of the mid-teen EBIT margin. Okay?

So I hope that at the end of these presentations, things are clearer for you about the bright future of composite material, the very unique position we have in this market. Again, this is a market where you have 3 kinds of actors. You have Asian actors that are just in Asia, you have regional actors, industry containment [ph], that obviously are suffering from the lack of tide [ph] and you have seen that, well, some of them are pulling the plug, this was the case last year with one European producer and we are the unique global supplier, leading the market. We have been leading this market for the past 60 years, and we have a winning model for the next decade.

Now with that, I'm going to open the Q&A session together with Thierry.

Question-and-Answer Session

Thierry Denis

Good. So you've heard from our key business leaders, I guess, in composite business. And with Arnaud, you actually have access to probably one of the most expert business person in the industry. Arnaud has spent a considerable amount of time in that industry and I know you're all dying to ask questions about the composite business. So what we're going to do is we're going to spend the next 15 minutes or so taking questions. Because we want to give as many of you an opportunity to ask a question, what I'd like, that I would ask you to do is actually limit your time to one single question, so we can cover more people. And if you can -- don’t do that all at the same time. But if you want to raise your hand, if you have a question, then we will bring the microphone to you and then I'll direct the operations. And I guess, Mike Rehaut, he's the first one already. If you want to state your name and the name of your firm as you go and then your question for the transcript, thank you.

Michael Rehaut - JP Morgan Chase & Co, Research Division

It's Mike Rehaut, JPMorgan. First question, well, I guess, my own, my single question then I'll get back in queue. We're used to the conference calls. The end market global breakdown was very helpful in giving a better picture of how the demand flows across the different industries. I was wondering if you could give us a sense relative to those different buckets where Owens Corning's own breakdown is relative to the global share if possible, at minimum, to just give above and below, for example, I remember seeing on the wind side a higher share, like around the 15% type of number, I remember that. So I was wondering if you can kind of give a sense, per industry where OC is above or below the global share.

Arnaud Genis

Right. So we've grown with this market. Over the past 60 years, we have developed a lot of applications. So you have markets that we have contributed to develop, where specification is a very long process and obviously in these markets, we have a stronger position than our competitors. Mike mentioned regularly in conference call that, well, the time required by customers to move from one producer to the other is quite lengthy. I mean you have high-tech applications like automotive, like electronic, where obviously the time to -- for our competitors to catch up with us is quite significant. So to answer your question is a bit difficult, you have 40,000 applications. But I would say, you can really consider that in those markets that are highly-specification driven, we are relatively strong and that in more commoditized markets, well, obviously we will -- we are competing given the low cost structure that we have, but these are not a big area of focus. Our capacities are flexible. We can go from one market to the other, and that's the way we manage both our manufacturing network and our sales network.

Michael Rehaut - JP Morgan Chase & Co, Research Division

[indiscernible] are you above or below?

Arnaud Genis

We don't talk about share by end market but we are very strong wind. I mean, I would like to mention one thing we talked about, the Chinese wind market. Paul mentioned the special glass that we have developed for wind application. Only yesterday, I was talking about the shift of the evolution in the Chinese wind market. A lot of the evolutions are really favoring us. When you think about, well, China wind, I don't know if you've ever seen a map on where the wind turbines are being built. They were built in Inner Mongolia, and part of the difficulties in the 2011 market were the grid connection to bring all this electricity to the coastal areas. Moving forward, in China, you will have the growth of wind farms in low wind areas, close to the coast. And where you use a low wind turbine, you use a bigger blade. And to use a bigger blade, you need to use a thicker glass, and that's why we have a proprietary glass, okay? So just to answer in a nutshell your question. Well, we do have a strong position in wind, but we are strong in all these markets, and the market share that we have shared with you is the result of strong market share in all these markets. Wow, we have a lot of questions.

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

Ken Zener, KeyBanc. Arnaud, could you discuss the impact of the aging Chinese capacity as their first-generation furnaces have to be rebuilt, how that impacts your view on their capital allocation, both domestically and how they're looking to invest abroad, as well as, does that rebuilding of the furnaces enable them to compete in the specialty area where you have far higher share than they do?

Arnaud Genis

Okay. I'm glad that you asked me that question. Actually, I could have paid you to make that question, because we talk a lot of the capacities. You have a lot of communication that happened around the new capacities that are being built in China, right? But what no one talks of, are the capacities that are being taken out. I've been living in Japan, I used to be a sales man for a glass fiber in Asia. At that time, there were 500 glass fiber producers in China. Whoever would use glass fiber, we would be forming from models, the glass fiber that he was using, okay. So in the chart that we are showing to you, well, we use our onstream, well-rounded 3 big Chinese competitors and also the more regional players, but there are so many people that are going out of business in China that are not mentioned. So I think it's important to highlight that. That's number one, we don't talk of the capacities that are being put -- taken out. Number two, you've seen on the graph that most of the capacities have been built in 2007 and 2008. 25% of the world capacities were added in 2007, 2008 by our competitor. And obviously, they don't have our technology, their furnaces last less than ours and then they need to put a lot of capital on the table to rebuild these furnaces. So I think the appetite also for incremental capacity will be impacted by the cost of the maintenance of the fleet of furnace that they put during that time frame. Okay?

Thierry Denis

Okay. We've got a question from -- Okay. Go ahead, Keith

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

It's Keith Hughes from Suntrust Robinson Humphrey. Can you give us some sort of idea of where your capacity is by geography now, and what it will look like post the restructuring you referred to earlier?

Arnaud Genis

Well, we've given you a breakdown of our sales by region. As Mike mentioned, our strategy is really to produce regionally and serve regionally. We do have some flow of products from one continent to the other. For example, well, you know that before starting our Chinese plants, we have been seeding the market from the United States. Right now, as we are growing in Russia, we have been seeding the Russian market also from our global network. But in general, I think, if you take the map that we showed to you, it would be fair to assume that there's not much difference between the sales split and the manufacturing split. Well, obviously, the goal in Europe is that part of the turnaround in the profitability in Europe, will be the thing that we will be consistently, permanently operating at that very high capacity utilization over there.

Thierry Denis

Okay. We have the next question from Garik. Garik, you want to state your name and the name of your firm?

Garik S. Shmois - Longbow Research LLC

Sure. Garik Shmois from Longbow Research. In the past, we've seen supply chain disruptions. I was just wondering if you could talk about your visibility with respect to supply chain bottlenecks and maybe characterize it with respect to the end market dynamics that you've outlined, perhaps bottlenecks that could come up in construction or wind or industrial, and where the risks are?

Arnaud Genis

You mean bottlenecks at the end market level? Like, can you be more specific?

Garik S. Shmois - Longbow Research LLC

Yes, exactly. Maybe if you could talk about the steps within the supply chain particularly in the end markets.

Arnaud Genis

Okay. Well, actually, one of the most known bottleneck by you guys is the grid capacity in the China wind energy market. I would say, outside of that, what can be the bottleneck? It can be the product that go with our glass fiber. Take, for example, the big thermal plastics guys. Back in 2010, the entire industry was in a very short position, there was a shortage of glass, there was a shortage of resin also. So you can have a bottleneck in the resin supply, availability. Outside of that, I think, well, laminating glass fiber is pretty light in terms of capital expenditure, and I don't see really impact on the -- in terms of that growth, that CAGR that we showed, the 5% to 7%, I don't see bottlenecks being a threat. I mean, you may have 3 months, 6 months of difficulties because -- when you look back in 2010, our market grew 23%, this is massive. When you look at steel or aluminum, they had a similar situation but they didn't have that explosive growth just like we had in 2010. So it takes time for people to -- rehire people to build the capabilities. But I don't see any structural bottleneck that could be a threat. Julia [ph]?

Thierry Denis

I'll bring down the mic to Andy down there? Andy, you want to state your name and the firm?

Andrew Fineman

Andy Fineman, Iridian Asset Management. I would like to understand, I would talk a little bit about visibility in composites. And what I mean by that is, it's a business where you have a long period of time from conception to startup of new capacity and pretty significant capital costs involved in those. And yet it seems, at least from the last couple of years, like it's a business where you have had some difficulty with visibility of demand and the examples are: not knowing that there was 30% of the constructed base of wind turbines in China were orphaned and not connected to the power grid, so there was -- this excess that was going to disrupt the market and then, I'm not really sure I understand why everybody in Europe produced excess capacity in 2011. So I'd like you to just address the visibility of your markets and whether you can improve that going forward.

Arnaud Genis

Well, visibility, when you look at over a long time period, I think the slide is very clear, right? You take industrial production times 1.6 and you get it. If you look over a long period of time, this market has grown 5%, and we are telling you, it's going to grow 5% to 7%. Over a short period of time, I mean, we are emerging from a major economic crisis that has created a lot of volatility in several areas, in several industries. Who could have predicted that the United States would go through such an awful crisis? Who could -- I mean, I could take all these examples. When you look again at steel or aluminum, they're in the same situation we are. And we emerged from the crisis in 2010, our market grew 20-plus percent and everybody restarted capacity, thinking that 2011 would be a second year of very strong recovery and that's the situation. Now it's a year where everybody is adjusting, and where you will emerge from 2012, with a balanced situation. So this is my answer. When you talk of wind in China, I think that China is a huge market. If you look at the earnings call of the big wind producers that have -- that are further down in the value chain, they have an even more intimate knowledge of the market, they did not see that grid connectivity issue either, right? So it's being addressed, I think while we are learning from this kind of situation. But to us, I don't think it would have changed anything. We were a very significant player in the Chinese wind energy market. We were supporting this market from the United States. We have a very clear resolve to grow our market share in China, not only in wind, but in many other applications, so we need local capacity, right?

Thierry Denis

So you want to bring the mic to Bob? He's actually the handsome gentleman on the back row there. Bob, in the back.

Arnaud Genis

Bob is going to go through numbers.

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

Thanks for the terrific detail this morning, it's really helpful in getting a better understanding of what's going. I just wanted to see if we could tie the operational initiatives that you've highlighted today to financial performance. And in your prepared remarks, you said next year you're looking to get back to a 10%-plus or a double-digit low teens EBIT margin and for a long-term multiyear goal, you were targeting a mid-teens and perhaps 15% EBIT margin by 2015 or 2016. And I was hoping you could shed some clarity on the breakdown in terms of, maybe walking us through how you're going to find those 500 basis points of margin improvement, and I just wanted to see if you could put it into a bucket between the gross -- the operating benefit you get financially from increased sales in tandem with the growth of the market, and put that into contrast with the benefit you get from the substitution of high-cost assets for low-cost assets in the portfolio.

Arnaud Genis

Right. Well, clearly, well, 2012 is a transition year, where we need to address inventory. And we have said that, well, we are reducing our manufacturing activity or the output versus the capacity by 7%. This is a very significant cost that we are not going to have next year. The second that we mentioned is the pricing headwind, and assuming that's, well, at the end of 2012 or maybe also second half of 2012, once the market is a more balanced situation, pricing will have stabilized. Actually, they're stable right now, but we can envision to look at the recovery in that field, and then restart capacity. So it's mostly driven, really, on 2 topics: one is operating leverage, by the fact we have new capacities on the ground, Mexico, Russia, and then with the increased portion of our low delivered cost assets. And then, well, Europe. Europe plan is totally executed and delivering the benefits of the adjustments that we are taking there, not only in manufacturing but also in the back-office functions over there.

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division


Arnaud Genis

We don't disclose -- we don't go to that level of detail but be sure that we will be there.

Thierry Denis

We've got time for one more question. And then when the question is over, actually, I'd like you to stay in your seat, because we're going to be distributing the Building Materials material before the break. So I think you want to have that for when we begin. Let's take the gentleman here, on the second row. Julia [ph]?

Dennis McGill - Zelman & Associates, Research Division

Maybe this question is best for Paul...

Thierry Denis

State your name and the firm.

Dennis McGill - Zelman & Associates, Research Division

Yes. Dennis McGill from Zalman. I'm trying to understand how you view the Chinese competitors because on one hand...

Arnaud Genis

How we what? Sorry...

Dennis McGill - Zelman & Associates, Research Division

How you view the Chinese competitors? What you're trying to convey? Are you viewing competitors that are more rational today and going forward, or are you seeing the benefits of some cyclical headwinds to them that will help you in the near term, but there's still uncertainty longer term?

Arnaud Genis

Well, you know -- okay, some of our Chinese competitors are listed on the stock market, they raise funds through IPOs and they have to be rational, right? The reality is, at the end of the day, you can look at your P&L based on an EBIT or based on the cash. Very much in the past, they were just looking at the cash they generate, forgetting about the depreciation of all the massive investments they had put together that will need to be rebuild as I mentioned earlier. So for me, there's a natural evolution in the way they approach the business. Actually, we see it even in the technology, in their approach to the market, they are indeed maturing. So we are pretty optimistic. They are maturing. And the second point is the fundamentals, the delivery cost, just evolving as we showed. We are a producer in China. So we know exactly what the cost structure is in China. We also know that the Chinese government is also pushing this industry to mature, to consolidate, to create more value for the overall Chinese economy, okay? So yes, we are optimistic about the long-term behavior of our Chinese competitor.

Thierry Denis

Great. Thanks, Arnaud. Great questions. So we're going to distribute now the materials for the next session, which takes place after the break. So please pick up your packet before you leave, that are being distributed now. And there will be more opportunities toward at the end of the session to ask general questions again and then Arnaud will be there at lunch. It's now 9:52, and we're going to break as soon as you have your packets here. And I'd like everybody to be back here for 10 past 10, at which time we will resume with the Building Materials Group.


Thierry Denis

Okay. If you please would like to take a seat now, we're just about to resume. Thank you.


Michael H. Thaman

Well, welcome back, everyone. I hope everyone enjoyed the morning with our Composites team. We're going to switch gears now and move to our Building Materials team. I want to take this opportunity to again introduce our team. I think one of, probably my favorite parts of our Investor Day and one of my favorite parts of having the team come here to Toledo, the investors come here to Toledo is letting you get to know our team. I'm awfully proud of the talent that we've assembled and the leaders that we have. I think that you saw that with Arnaud and Julian and Marcio and Paul. This team's probably a bit more familiar to you, although you haven't seen them in some of their roles. So today you'll see Chuck Dana, who I think you've seen at every Investor Day. And Chuck and I have worked together now for 15 years at the company in a variety of roles. A year ago, I asked him to come over and lead our Building Materials group. Chuck has brought his same exuberance and enthusiasm to Building Materials that you always knew him for in Composites. I think he and his team have made really nice progress in moving our Building Materials businesses forward. Michael McMurray, who you've known in our Investor Relations and treasury function, who is now working with Chuck as his Head of Finance, will talk to us about insulation. Frank O'Brien-Bernini, who you've seen at virtually every Investor Day, is going to through some of the Building Science, that we think underpins our optimistic outlook for the business and then of course, Sheree, who is typically the highlight of Investor Day, will talk about her great business which is Roofing. So with that, I'll bring Chuck up on stage and we'll get into Building Materials. Thanks, Chuck.

Charles E. Dana

Well, as you know, this has been a year in Building Materials for me. My team here is very experienced in this space from a variety of perspectives. But what I'm going to talk about today is -- first 3 things about Building Materials. I think we executed well in a pretty tough 2011 market. We definitely see an improving market in the next few years and I think we'll be able to get back to a more traditional Owens Corning theme of growth. We will deliver profitability improvement as we're well prepared to service the demand that we do believe will be a reality in the next couple of years.

Now to describe the insulation business, Michael and Frank are going to talk to you. Michael, VP of Finance for BMG for, really, only the last 4 or 5 months but knows the business very well from his prior role. Frank O'Brien-Bernini, who's the Chief Sustainability Officer, but for us, he is talking today about Building Science, and let me explain that a little bit. Sustainability is important to Owens Corning, how we manage our plants, how we manage our materials responsibly as we manufacture our product. But also, we wanted to think about, and we spent a lot of time in the big group of guys that think about Building Science and how are customers use their products or our products in buildings using green, energy-efficient products to make houses more comfortable, to make houses more energy-efficient are examples. And you're going to hear some very specific new products that comes out of Building Science. And Frank will be talking about that. And Sheree Bargabos, who has been a good leader of our Roofing business for the last 10 years, and as you saw the little bullets going from light green to dark green, I'm just challenging Sheree to come up with a better green color for future years, but she'll talk to you about Roofing.

Just a few facts about our business. It's a strong and recognized brand. You saw the ad, we invest in our brand. It does work for us. Home Depot is a believer in our brand particularly and they amplify what we do. I think that commercial highlighted EcoTouch, the ease of installation. It's our thinking about our customers, our customers that buy the product tend to be insulation contractors or retailers, but the ease of installation and then the comfort that the homeowner feels. It also is playing into the reinstallation market, which is something that has received a lot of focus over the last few years but is really gaining hold and I think Frank will explain to you why that in fact is happening.

We're a market leader in each of our businesses. We partner with key players in the industry such as the Home Depot, Masco, Lowe's, ABC Supply, these are the names that you see and hear about, and we're quite close with each of these. We're expanding our business in Asia and Latin America, both of which have been profitable throughout the downturn in U.S. housing. In fact, you heard Paul Wei talk about China expanding to the west, we're building a new insulation plant in Xi'an, which will be starting up in 2013. As you see with our manufacturing sites employees, we have a network capacity and the position to support the growth as the end-use markets come back to us.

The next few pages I'm going to sort of show you pictures of our -- the different pieces of our business. This is our residential insulation business. On the left, you see an installer putting EcoTouch into a home. EcoTouch insulation provides comfort, which you see on the right-hand side of this slide. It's a new product, EcoTouch is the new product we introduced in 2011. High recycled content, natural materials, formaldehyde free, soft, easy to install. I hope you've got a feel for it. This is a different product than any of our competitors. We think it's the best product in the market.

As you will hear from Frank and from Michael, the market is improving. Codes and consumer expectations require more take per home now than in the past and that trend will continue, as you've heard virtually every presenter talk about energy efficiency in one way or another and it's core to what Owens Corning believes the future holds. When I talk about take per home, let me explain a little bit. Based on construction techniques and codes, we look forward in our market, plan our capacity, et cetera, based on how many pounds of insulation would go into walls or attics or XPS foam might go around the foundations and that would be the take per home and we believe that's increasing, and you'll hear a little bit more about that as we go forward.

Another product in our insulation portfolio is extruded polystyrene foam, which our brand name is FOAMULAR, very visible in the marketplace. It's this very strong market position, a very -- a nice 3-player industry, it's a highly specified product, both residential and commercial applications. This, again, this business has been profitable throughout the downturn.

This is what we call our engineered insulation systems business. It's insulation products that are assembled to some extent. You can see the form for pipe insulation on the left. On the right, that's for HVAC and duct liner applications. On the left, it tends to be more of a commercial or industrial application. And the right, it is another residential application where, as we move into a higher housing start environment, we would expect that side of our business to grow commensurately. Not pictured here, but part of this business, is also we have an OEM business where we sell insulation products for the metal building industry or also for appliance industry, for example, among others. This segment used to be, when we were making back in the 2006, 2007 time -- substantial earnings engine, and it has earned money throughout the downturn in the overall insulation or what we would call the residential insulation market.

And lastly but certainly not least is our Roofing product. This is our TruDefinition Duration Shingles with SureNail Technology, which you saw and I hope you noticed. It's quite an innovation. This is a typical roof, but we've invested quite -- in innovation, in thinking about how our customer and our customer's customer would think about our roof and the roof product that we sell. Better esthetics with the color, which is a value to the end consumer. It's easier to install, which is a value to our installer. More accessories, we offer a system, not just a product. It's a very focused innovation effort. And our customers love the new product as it's coming out.

This is a representation of the last 3 years. This is a pretty big business, $3 billion -- it's been above $3 billion, profitable overall for the last 3 years. We've improved our competitiveness each year in what I've described as overall, at tough market conditions, low by any standard over the last 20 years. We've improved with our customers through placement and new customers through innovation. EcoTouch is an example and the TruDef Duration Shingles.

I'm proud of what our team accomplished in 2011. The third consecutive year of 20% EBIT margins in roofing. The FiberTEK acquisition gave us low-cost blown-in insulation in the right locations while leveraging that capacity that we already had. Our focus on the Insulation business cost and efficiency, which resulted in breakeven performance in the fourth quarter. And you saw successive quarters of improved performance throughout the year as some of the actions, particularly in operations, took hold. We have a growing Insulation business in the international space, and it remains profitable. So I believe we executed well and we're prepared for market growth.

So as we go forward and you hear from the rest of the team how I'm going to spend my time over the course of the next years. First, customers. This is a relationship business. I spent a lot of time with our customers. We care about what our customers say about Owens Corning and how we can improve what our customers say about Owens Corning. We understand how our customers make money, and we believe we can help them make more money.

On innovation, we, as a company, reached out and spent considerable time and energy to convert our entire fleet of assets to a new product in a down period. And that took a lot of will because it was expensive. We now are moving on to a different period, but we're going to continue with innovation. We continue to improve our shingles and we continue to grow in China.

On operational excellence, we have substantial cost-out in insulation, leading to the breakeven in the fourth quarter. You've heard our guidance that would describe partly our operational excellence, which is moving from a loss of $100 million to making $100 million when housing starts get to 1 million starts. That's a far different picture than the last time we were at 1 million housing starts when we broke even.

Growth, and this is the story of the day, I think, is that as housing, we believe is recovering, we see that month-by-month, we see new start numbers. This affects, of course, our Insulation business. It affects our Engineered Insulation business as you saw with HVAC. But I think something that probably is a little bit missed is it does affect our Roofing business as well. We're at a 15-year low in the size of the market, excluding storms in Roofing. And as that returns to a more historic level, there's a substantial bump-up in the market and we believe we’d have our fair share of that. So there's a big growth story in Roofing that I think you will like.

You're also going to hear about codes and the desire for energy efficiency as a separate growth story to a rising market in terms of homebuilding. And I think that's a separate growth story that's going to be quite interesting to you. And as I say, we have the capacity to supply this. We have a team that's prepared to capitalize it and generate that growth to be quite profitable with very good leverage.

So with that, I will invite Michael McMurray.

Michael McMurray

Thanks, Chuck. Good morning. It's good to see everyone. I remember many of you from my Investor Relations and Treasury role. It's interesting, funny story last night at the cocktail hour, I was talking to one of our sell-side analysts who was asking me how I was enjoying my new role and actually what I was involved in. Then he kind of stepped back for a minute and said, "Well, maybe you know something now."

All right. So listen, I'm going to talk to you about our Insulation business today. I'm very excited to be here today. I wanted to establish a couple of facts that we all know are true about our Insulation business. The first one is that we are the undisputed market leader in North American residential, commercial and industrial fiberglass insulation, undisputed market leader. Second, PINK Insulation and the Pink Panther are both enduring brands, very recognizable in the marketplace. Owens Corning has a rich history of innovation. The fact is we invented fiberglass insulation in the late 1930s and just recently, launched the largest platform change, our EcoTouch product in 2011. Also it's a fact that this business has a history of strong earnings. During the period 1985 to 2008, this business delivered average EBIT margins of 15%, and we're confident this type of earning performance will return. I think we can all agree that this is a great business in a well-structured industry.

Today, my partner Frank and I are going to demonstrate a number of things. First, we're going to demonstrate that this business is poised for growth and that we face some wonderful macros. The big 3 macros that we face are positive demographics, growing U.S. housing starts and energy-efficiency policies. Now I'm not going to spend a bunch of time today talking about positive demographics because you all are familiar with growing population and household formation. These are facts that we don't need to take you through today.

Talking a little about growing U.S. housing starts, though, you heard Mike on the earnings call talk about that we expect to narrow losses significantly on 700,000 housing starts, and there's clearly some optimism in the marketplace around housing starts, clearly some optimism with builders. I actually had the pleasure last night to sit and have dinner with Dennis McGill of Zellman & Associates. And Dennis shared with me Zellman & Associates new starts for 2012 as 675,000. So as many of you will know -- 765,000, excuse me. Thank you, Dennis. 765,000, and that would correspond to 25% growth year-on-year. Thank you very much, Dennis, that's a very important point.

The other thing, a big thing that we're going to talk about today is energy-efficiency policies. And Frank is going to demonstrate a number of very important things. Frank is going to demonstrate that codes matter and code adoption is going to significantly drive take per unit. Also, we've been aggressively managing this business for both cost and capacity. We also have diverse end markets, diverse distribution and customer diversity, which is an advantage to OC. Finally, I think when we conclude today, we'll prove to you that this is a proven franchise that will return to historic levels of profitability.

Now to talk a little bit about the North American insulation market structure. Looking first at our North American fiberglass insulation market. This is a $2 billion market that is very well structured. There are 3 manufacturers that represent 80% of the market. OC has had the lead in this market since the invention of insulation and continues to lead both in share and innovation.

Now moving on to our XPS foam business. This is a $600 million to $700 million market that is also a very great business with great structure. We have a very strong #2 position and has been profitable throughout the downturn.

To talk a little bit about how Owens Corning maintains our market-leading positions in these markets, first is our expertise in building science that Frank is going to expose you to today. This is a group that's led by Frank, and has delivered significant value for Owens Corning. Also it's our product innovation, keeps us ahead of the market like our advancements with EcoTouch. Also our commercial capability, including our industry-leading sales force, and then lastly, our strong and flexible North American manufacturing footprint.

Now I want to talk a little bit about our customers and channels. We are aligned with our customers. We have strong channel access. We have diverse routes to markets. And we have strong relationships with channel leaders. Some of these customers are familiar to you, like the Home Depot. And some may be less familiar, like ATCO. The key takeaway, though, is that we have deep and broad customer network.

Now let's talk a little bit about the retail channel. Key products in this channel would include residential glass and XPS foam. A key relationship for us is the Home Depot. Obviously, you know that Home Depot is the market leader in residential home repair and remodel. We have a sole-supply relationship with the Home Depot. In 2011, we received 2 awards with Home Depot, the Marketing Innovation Award and the Environmental Partner of the Year.

Now moving on to our contractor channel. Products in this channel include residential and commercial glass and XPS foam. I point out that the commercial side of this business is actually growing quite well. This includes residential new construction, retrofit and light commercial. An example relationship would include Masco Contractor Services. And as many of you know, we signed a new relationship with Masco in 2011, where we're now their primary supplier for insulation.

Moving on to our OEM channel. This is in the commercial and industrial segment of our business. Products in this channel are primarily engineered glass solutions that tend to carry higher margins. Example relationships would include appliance makers like GE, Whirlpool and Electrolux. And we have glass going into ranges, dishwashers and washing machines, giving both thermal and sound properties. Another customer that I highlight is ATCO, which is an OEM distributor for flex duct going into HVAC.

And then lastly, our distribution and pro dealer channel. Products in this channel include residential, commercial, industrial glass and XPS foam. An example relationship would include PrimeSource, which is a distributor not only for insulation but also roofing, or 84 Lumber, which is a pro dealer or a lumberyard, which again both services our Insulation business but also roofing.

Now I'm going to talk a little bit about our insulation end markets. The Insulation business has 4 diverse end markets. North American residential new construction that represents roughly 1/3 of the top line; North America repair and remodel, which is about 1/5 of the top line; North American commercial and industrial, which is about 1/4; and then 2 businesses outside of North America, our Latin America business and our Asia-Pacific business, which combined make up about 1/5 of our top line.

To talk a little bit about North American residential new construction, we have a market-leading position and a well-recognized and very strong brand position. This market is operating far from its potential. We expect growth going forward on the order of 10% to 25%, driven by starts, positive demographics, energy-efficiency policy and code adoption. Remember code adoption. The low end of this range assumes a very modest growth in housing to 2014, and we have very high confidence that within this range it's clearly 10% plus. The high end of the range is more consistent with current consensus estimates for 2014.

Now moving on to the North American repair and remodel end market, or what's referred to as retrofit. Again, we have a market-leading position and a well-recognized brand in this space. I would point out to you that in the United States, there are 80 to 90 million underinsulated houses. Also, there are 7 to 9 million underinsulated houses in Canada. The primary product in this market is loose-fill or blown-in insulation. And we have a leading position in this product segment. And loose-fill is growing in share, and it's a bright spot for residential. Many of you will remember that in 2011, we closed the FiberTEK acquisition. This further strengthens our position in this growing segment. Growth here, we expect greater than 5%, driven by the aging housing stock, energy-efficiency policies and existing home sales.

Moving onto North American commercial and industrial. Again, a market-leading position. This is a great business. It's been profitable throughout the downturn, includes diverse end markets, like engineering solutions and these types of solutions carry premium margins. And there's a focus on the total building envelope. We expect growth of 5% to 10%, driven by code and green-driven specifications and an owner-operator focus.

Lastly, outside of North America. Again, this is our Asia-Pacific and Latin America business. Both great businesses, both businesses profitable and growing throughout the downturn. We expect growth going forward on the order of 5% to 10%, driven by urbanization, a growing middle class and emerging energy-efficiency trends. Pulling it all together, we expect double-digit earnings growth in the coming years.

With that, I'm going to ask Frank O'Brien-Bernini to come up on stage. Frank is our Chief Sustainability Officer and our Head of Building Science. Frank, over to you.

Frank C. O'Brien-Bernini

Thanks, Michael. We're going to go through a few slides that are going to kind of frame what you've heard several times referred to this morning around energy efficiency and what's going on in that space. You certainly can't cover the building materials marketplace without seeing and running into every day conversations around green building, around energy efficiency. There are some very dynamic green building programs. You might hear terms like net zero-energy building, passive house building. So those are all on sort of the beyond code, leading marketplace, really proving that energy efficiency all the way to zero-energy building have a role to play inside the built environment. Kind of behind all of that, the unsung hero in this, in driving reduced energy consumption are the progressing energy-efficiency building codes that provide the floor of energy efficiency. That is, provide specifications for the minimum energy performance that is acceptable for a new building, whether it's a residential or a commercial building.

So those codes come to be about by a 3-part or 3-step mechanism. The first of which is the codes have to be developed. And that's developed by a consensus process, where a bunch of people throughout the industry work together to have a consensus decision on where the next energy efficiency code should be. Then it has to be voted on and passed by this consensus organization. So that's step number two. Step number three is then they have to be adopted, in many cases, adopted by a state. In some home rule states, they have to be adopted by municipalities, like is the case in Texas, one of the largest building environments, so a very, very important one. So they have to be developed, passed and then adopted, so this 3-step process. And what's very interesting is all 3 of those steps had been advancing dramatically over the last handful of years or so, which underpins the conversation we're going to have next.

So the first slide here. I need to set a little groundwork on how you should think about this. This is energy productivity on the left. So if you think about a home that has 100% energy productivity improvement, it's running essentially half the energy that the prior home or prior code would've been. So what we have here is energy productivity on the y-axis. And the timescale, not of actual annual years, but these are code years. So when you see 2006 IECC, that's not actually the annual year of 2006, but it's the 2006 International Energy Conservation Code. And it so happens as you can imagine that they roughly are passed and adopted -- well, passed at least in the years that's there. So that's where you get the annualized name.

So many years ago, in the '70s and before the '70s, there were building codes, but primarily those building codes represented common builder practice. So whether it was a fire code or structural code or whatever, they were set pretty much to codify the common practice in the industry. Something very interesting began to happen in the mid-'80s and that was in the 1987 timeframe, when the first energy code, the first significant energy code at that time was called the Model Energy Code, was passed that went above common builder practice, and for the first time ever, really set a bar of energy performance above and began to drive an increase in energy-efficiency performance for buildings.

Now that, we went nearly 2 decades with relatively modest improvements in the energy code. There were small changes along that way. But then began this 3-year cadence with the 2006 International Energy Conservation Code that set a new bar that was a significant improvement over past, and there was lots of work by the Department of Energy, these code officials, this consensus organization to set this new bar that everyone has to rise to. And at that same time, a decision was made that every 3 years, this group would come back together, they would analyze innovations that have occurred in the marketplace, new materials, new products, new cost structures. And so that innovation Owens Corning is very much involved in, new innovations for energy efficiency. So they look at that, they look at the cost of energy, fuel and determine where can we go with the next code. What is cost-effective to elevate to the next level the energy efficiency? And you can see, 2006, it happened again in 2009. That 2009 code was a very important code, and I'll talk to you a little bit in a moment about what was special about the 2009 code. And then the 2012 code was just passed late last year. So that's the most recent code. And then there's the 2015 goal set. The code is just starting to be worked on that advances that even further.

So you can see a massive increase in the energy productivity for -- and this is a residential chart. Commercial follows very similarly, but this is the residential chart. So you can see tremendous -- if you think about your home like you would your car, in a miles per gallon analogy, the average house today runs about 12 hours on a gallon of oil equivalent. And so as you get up into this 100%, you're going to be operating twice on 24 hours on a gallon of oil equivalent. Now not many houses run on oil, they run on electrical power and natural gas mostly, but that energy equivalent of a gallon of oil.

So with that, remember I said there's -- so the codes are set. Now they've been passed, the third step is adoption. And a very interesting thing has occurred in the last few years around adoption. Typically, when a code was passed, it would take -- there were early adopter states. And interesting, some of those early adopter states weren't necessarily where all the builds were being built. So you need to look at not only state adoption, but also where the focus of the building is going on. Typically, it took 10 years or so from code passage to most of the states adopting. And some states never adopted the codes, they were running on very, very old codes.

Now I'm going to put up a build box here. So in 2009, only about half the buildings that were built, residential homes, were built under what was at that time the most recent code, the 2006 code. Very interesting thing happened over the last few years, in that this year, 2012, about 75% of the homes will be built under the most recent or the 2009, which is largely the most recent, I did say the 2012 was just passed, but under the 2009 code. So now 75% are going to be built under that code that I showed the large ramp-up, which that code, your home would run for about 17 hours on a gallon of oil equivalent, so 12 to 17. So very important, both passage of code and adoption. So with that, we're further expecting that by 2015 or so, another 1/3 or so of the build will have adopted the most recent, even stronger code of the 2012 code. And there are some very interesting things about that 2012 code that I'll reference as well. So that's the code progression story.

And so you might say, "Well, what impact does that have on Owens Corning products?" Well, as you can imagine, we’re talking about it because it has a big impact on our product. And so I gave a couple of examples around -- remember I said, it has to be set and adopted for state-by-state or region-by-region. So you see both states and then climate zone indicators here. So I call your attention to the upper right, where you see R-value, if we’re in Texas, what was the code in the 2005 timeframe, the last time when we were building 2 million homes. So we were at a very high-capacity utilization across the industry. And it had an R-value of 19.

R-value is the measure of thermal performance or resistance of an insulation product. And so when you double the R-value, you double the thermal resistance of the product. So going from R-19 to R-30, so a 60% increase in the requirement for R-value, which in that application turned into about a 60% increase in utilization of fiberglass. That application in a roof in Texas would typically be just loose-fill product, that was referenced earlier, to get that very efficient product. You probably saw it in a display yesterday out here. There was a box of loose-fill next to our AttiCat machine. Well, that is the type of product that would be used to meet that code. So a dramatic increase.

You can go around and see in North Carolina, an increase in wall insulation requirement for crawl spaces in North Carolina. You see walls in Illinois, Zone 5, that's a climate zone, increase R-13 to R-21. So very large increases related to the prior chart of new codes, pass and then adopt it. So this is very cool. And we're very excited about the impact that these codes have, of more codes that are impacting our insulation demand.

Now the air sealing is a very interesting story. There was never in the past any standard for air sealing of homes in the baseline code. So there was -- people did put caulk and tried to seal buildings and all that, but there was no code requirement. Now this air sealing has a very specific measure. You basically stick a big blower in a door of a home and turn the blower on, evacuate the home to a pressure difference from the inside to the outside, and you measure the air flow rate. Well, for the first time ever, there was a standard set in the 2009 International Energy Conservation Code that said no more than 7 air changes could be allowed per hour at this what's called a 50 pascals pressure drop from the inside to the outside.

So what that did is it drove a need for effective sealing solution for builders to meet this new code. So the 2012 code further raises that bar dramatically to 3 air changes at 50 pascals. And the 2015 code is expected to set it at 1. So a dramatic reduction in the allowable air infiltration, which has driven tremendous innovation in the marketplace, including work that Owens Corning has done on a product that I'll speak about in a moment that we've introduced into the market to seal buildings very cost effectively. And we call that product EnergyComplete. And you probably saw that out here as well. So this is very, very exciting, both on the insulating and the sealing, but all about providing energy-efficient envelopes for residential buildings.

So what does that do to demand? So I'm going to ground you a little bit here, this has nothing to do with housing starts, the number of houses built. This is normalized to a single housing start. So it's normalized insulation usage. So in 2005, normalized to 1. So however much insulation for a given house you're using in 2005, a very interesting dynamic as you all are well aware that's happened in the marketplace from 2005 to the current build in 2012. And that's a very dramatic increase in the amount of multifamily housing that are representing a portion of those builds. And if you look down here, we've gone from a multifamily mix of about 17% in 2005 to currently in the 30% to 35% range. So what does that do? That effectively reduces the square footage of a start. So a start is not a start. So you have to look at the mix of square footage, and the way we do that is we look at the multifamily mix. A typical multifamily home built today is about half the size square footage of a typical single-family home. So that's an important thing to understand this mix.

So the cool thing that has occurred over the last few years is that, that dramatic mix change in the type of housing has been totally offset by the code advancement that I just referred to. So that is the take per unit that Chuck talked about earlier, has remained the same even though we've had this very large reduction in effective square footage of home because of the multifamily mix. Now the single homes dipped a little bit in 2008, square footage, but are pretty much right back to sort of historic levels and we expect that to go -- we do expect the multifamily to regress more to the mean, and as do the external folks, Global Insight, Moody's are expecting in the 20% to 25% mix. And so if you look at the impact that, that has with the regressions to the mean on multifamily and this code impact, you can see the expected demand in the 2016 timeframe to be about 20% above our current level, above 2005, and take per unit because of continuing adoption of code, of which is a portion of that, and the regressions more of the mean in the multifamily mix.

So that's a very interesting dynamic. Now I'll draw your attention to the pink thing up there because I don't want you to misunderstand that. The pink bar up there indicates what would occur -- remember I talked about this adoption rate of 75% right now in 2009. What is the opportunity, if you waved your golden wand and the 2012 was totally adopted by 2016? You can see you've got another big bump. So that is what would occur if you had a 100% adoption. And that is largely unlikely without some kind of federal policy that would drive that kind of adoption rate. But I wanted to indicate what's behind those goes and what could happen with full adoption of the rates.

So we'll move now to sealing. I talked about this sealing opportunity. Owens Corning has launched a new product, EnergyComplete, that surgically goes in where buildings leak. And we go in and we put this nice latex pink foam product. We spray it in exactly where buildings are leaking in a very surgical, very efficient way, reduce the air infiltration and provide increased energy efficiency of the homes in a very, very efficient manner. You can see some statistics on air leakage reduction there.

And so finally, I want to just conclude to say that one of the most common questions that we get because of the media coverage and all is what's going on in this -- I hear about spray foam, what is the deal with spray foams? And the deal with spray foams is that they seal and insulate where you put them. Now they’re a very expensive way to seal and insulate, but they do, do that. So when you fill a cavity, it both seals and insulates. With a product like this, we seal very effectively and then we insulate. And the bottom line story is that the result, so normalized to Owens Corning's installed cost for our systems, the Owens Corning solutions, of our wonderful EcoTouch insulation that Chuck talked about earlier, combined with EnergyComplete, open-cell and closed-cell spray foams, those are 2 different types of spray foams, are between 3 and 5x more expensive for the exact same thermal performance. You get that thermal performance by sealing and then providing R-value in insulating. And for equivalent performance, 3 to 5x more expensive. So we expect this to continue to be very niche-y, very high-end, focused on nonvalue building. And we're very pleased with our offerings of EnergyComplete and EcoTouch as a high-value solution in this market.

So with that, I'm going to pass it back to Michael.

Michael McMurray

Thanks, Frank. Before I move on, 2 things I wanted to make sure were in the transcript just one more time. The first one is codes matter and the Zellman housing start this year is forecasted at 765,000 units.

All right. So now I'm going to talk a little bit about capacity utilization. This is a view for 2012 based on an expected 700,000 housing starts of what we think the current industry, not OC, the industry, is operating at. A couple of things that I point out. Since the downturn in 2007, there have been 8 major plant closings. 3 of them have been led by OC, 1 in Québec, 1 in Arizona, 1 in Utah. Guardian has closed 2 plants, 1 in Ontario, Canada, and 1 in South Carolina. Johns Manville has closed 1 plant in New Jersey. CertainTeed has closed 1 plant in Pennsylvania. And more recently, kind of late last year, Knauf closed a plant in Alabama. So looking at this chart overall, looking on your left side, looking at total capacity, we expect the overall industry to be operating at about 50% capacity this year.

So moving to the right. This is operating plant capacity. So this would be single-line plants or multiline plants that are operating or multiline plants that have lines down. So we estimate that this year, the industry is going to be operating at roughly 60% capacity. And then again moving to the right, which is operating lines, this would be hot lines in active plants that are running. And we think the industry's going to be operating at roughly 70% this year. And I think you can rest assured that for all 3 categories, Owens Corning is operating at higher utilization, although I'm not going to disclose what we're operating at today.

The other thing that I would point out that's important, utilization varies by region. The Northeast is a bit more tight. The Midwest is a bit more balanced and the West Coast is actually more long. To talk a little bit more about the OC fiberglass insulation network, this is a slide that many of you all have seen before. Just as a reminder, the green triangles are our facilities that are operating with all lines that are up. The yellow triangle are facilities that are operating but we have some lines down. And then the red triangles represent mothballed facilities. As you know, Owens Corning has the most extensive North American network, with multiline facilities and a multiline facility is an important point. This gives us flexibility, which drives the cost advantage, but also just as importantly, a customer service advantage. So we're constantly reevaluating our network both from an optimization point of view both on cost and service. And rest assured, we're prepared to respond quickly as demand returns.

This is the EBIT performance of our Insulation business over the past 27 years. During the period 1985 to 2008, starts in the U.S. averaged 1.5 million units. During this period, the Owens Corning Insulation business delivered average EBIT margins of 15%. EBIT margins as high in the low 20s, but never below 10%. This is the first downturn in 70 years where this business has lost money. Looking forward, we think this will benefit from the aggressive cost and capacity actions that we have taken, energy-efficiency policies and code adoptions, as Frank pointed out, and a continued improvement in U.S. housing. We are very confident that this business will return to historic levels of profitability.

All right. In closing, this business is poised for growth and a return to profitability. I think we demonstrated significant progress in the second half of last year. Specifically in the fourth quarter of last year, we broke even. It's the first time this business broke even since the third quarter of 2008. We believe that this business is positioned to deliver $100 million or more of EBIT on 1 million U.S. housing starts. This is an improvement of $200 million over our performance in 2011. We anticipate EBIT margins of at least, and I highlight at least, 15% at 1.5 million U.S. housing starts. And this is because the significant actions from cost perspective that we've taken on our portfolio during the downturn. And we are targeting 50% operating leverage as the market recovers.

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

With that, I'm going to turn it over to our current darkest, greenest dot, Sheree Bargabos, the President of our Roofing business. Sheree?

Sheree L. Bargabos

Well, thank you, Michael. Good morning, everyone. I want to thank you again for taking time to be here. We genuinely appreciate it. I'm pleased to have the opportunity this morning to update you on our Roofing business. And we have a great business in a great industry, and we're certainly poised for growth. And I'm delighted to share our continued success and our outlook for the future.

We have a strong brand and a leading market position in a very stable and attractive industry. We have the wind in our back as the economy recovers and housing improves, driving growth in roofing demand. And we continue to invest in innovation with a focus on enhancing profitability and productivity in our business. As you can see from this summary of our financial performance, we've delivered 4 consecutive years of double-digit operating margins and a cumulative $1.5 billion of EBIT. And we did this in the face of the weakest roofing market in more than 2 decades. And I'm very grateful to my team for such strong execution performance.

Now what I'd like to do is I like to walk through the industry and marketing dynamics and review the key drivers of our business performance in both the near- and the long-term. Let's start with the U.S. steep-slope roof covering market, a $9 billion-plus market in today's economy, which is comprised of an estimated 70% asphalt shingles. The graph on the right shows the installed cost of various roofing systems. You can clearly see that asphalt shingles have an installed cost advantage. And with materials representing roughly 30% to 50% of the installed cost, the risk of substitution is low, even in a higher-priced asphalt shingle market. Given its beauty, durability and low installed cost, asphalt shingles will continue to be the highest value offering and the product of choice in the future.

Now let's turn our attention to the asphalt shingle market, which is very attractive based on size, high barriers to entry and low risk of substitution. Shingles alone represent an attractive $6.5 billion market. In addition to that, roofing accessories, which we call essentials, as they are essential to the performance of the roof, represent an additional $1 billion-plus revenue opportunity. Demand closely correlates with overall housing activity and reroofing represents roughly 75% of the asphalt shingle market, with volatility coming, as most of you know, from storm demand. Growth is anticipated as the housing market recovers, driven by home affordability, improving home values and home remodeling activity.

And we continue to be part of a well-structured industry. This is a slide that many of you have seen before and it makes a key point, which is that the industry has indeed undergone structural change. Today, 4 competitors represent approximately 90% of the market. And based on our estimates, this compares with 10 competitors servicing 90% of the market more than a decade ago. Although the market is still very price-competitive, this structure is very favorable for our future.

Now let's take a closer look at market demand, which the industry measures in squares or 100 square feet of roofing sold. I want to be very clear here about what we see and about what we hope you see, which is a robust outlook for growth. The great portion of the demand bar represents base reroofing demand, the red represents major storm-driven demand and the blue represents new construction. The line across the top represents sales of existing homes. One of the key macroeconomic indicators with a high degree of correlation to nonstorm roofing demand. From 1997 through 2005, the industry grew at a 3% compound annual growth rate. And then over the following 6 years, industry demand contracted as housing activity declined, with reroofing negatively impacted by low home equity values, tight consumer credit and a record level of unemployment. Over the near-term, I would expect a recovery to a 15-year nonstorm market of 132 million squares, which represents 30 million squares of additional demand as housing activity returns to more normal levels. In fact, in 2011, we saw the first growth in nonstorm reroof demand that we have seen in the past 3 years, which is a very positive sign. Bottom line, the roofing market is expected to grow at a 5% to 8% compound annual growth rate over the next 3 to 5 years as the market returns or approaches the 15-year average.

We serve a broad base of industry-leading companies, representing diverse geographic reach and varied business models offering multiple channels or routes to market to serve contractors, builders, dealers and homeowners. We continue to build customer intimacy and to strengthen and sustain our market position with leading innovations that deliver enhanced value and improve our customer's business.

Our flexible national asset footprint allows us to better serve our customers and is a source of competitive advantage. We have 14 manufacturing sites and 16 lines, the majority of which are convertible laminators, which have the capability to make multiple shingle styles and shingle types. Over the past 2 years, we've invested more than $40 million in state-of-the-art upgrades to our Memphis, Tennessee, and Atlanta, Georgia, facilities to improve our capability to serve our customers. This footprint gives us the ability to support market growth, and it also provides tremendous flexibility, allowing us to rapidly adjust regional capacity to meet changing market conditions.

In addition, we're supported by our own Composites team, the largest glass fiber manufacturer in the world, with leading technology positions in both fiber and specialty glass nonwovens, as you heard earlier today. We've invested more than $30 million in upgrading a second line at our Aiken, South Carolina, plant with state-of-the-art nonwoven technology, and this line is starting up as we speak. In summary, we're well positioned to serve market growth as housing activity improves.

The products we make and sell include a complete line of asphalt shingles and roofing accessories that work together as a high-performing system. We also make and sell a variety of processed asphalt products for residential, commercial and OEM applications, which leverages our asphalt asset base. And I'm very excited to share with you our latest innovation. And I hope all of you had a chance to see it in the display area last evening. Our TruDefinition Duration Series Shingle with SureNail Technology. I call it the ultimate beauty and the beast. It offers true esthetic enhancement, and coupled with our patented SureNail Technology, it features a tough woven fabric nailing area for high performance and ease of installation. TruDefinition Duration delivers differentiated performance for our customers. And we streamlined our overall product offering to deliver true simplicity in selling for our customers. In short, this innovation gives us a, I have to say it one more time, true differentiated advantage through innovation.

So to summarize, we continue to sustain our strong market position and increase our competitiveness through customer intimacy, a great brand, innovative products, a flexible asset base with capacity for growth, vertical integration, and last but certainly never least, a very talented team. In short, we have a well-managed business in an attractive industry that is poised for growth. We have a strong track record of delivering $1.5 billion cumulative EBIT over the past 4 years. We have a leading market position with great customer diversity and a laser-like focus on driving their growth. We're providing differentiated products and systems, as well as driving cost improvements through innovation. We have invested in our asset base and are well positioned to support 5% to 8% compound annual growth as housing activity returns to more normal levels.

As we look forward, and as Mike stated in his opening comments, all this gives us confidence in operating margins of mid-teens or better over the mid- to long-term. 16 months ago, when we were last together, I shared my personal goal is to stand in front of you each and every Investor Day and report on our Roofing business as a $2 billion revenue, 20% operating margin business. I'm pleased to stand here today and report that we've delivered against that goal. And rest assured, I remain steadfast in this objective.

In closing, I'm very proud of our performance. I'm proud of the value that we're creating for customers and shareholders. And I could not be more excited about our future prospects for growth and margin performance. I want to thank you for your time today and your continued interest in Owens Corning. And now I'll turn it back over to Chuck for Q&A.

Charles E. Dana

Thank you very much, Sheree. That's a great story. Thierry, how would you like to...

Thierry Denis

Sure, thanks, Sheree. Same format as before. So we have about 15 minutes now of questions. I'd like you to stick to one question again, no follow up, so we can get back on schedule hopefully. And we have mics, right? We have mics ready, okay? So we'll take one from Herb on the right-hand side.

Herbert Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division

Herb Hardt, Monness, Crespi, Hardt. A year ago, I think you were fairly firm in 20-plus percent operating margins in the Roofing division. Now you're fairly firm in mid-teens. Basically, what happened? Is it more cost pressure or competitive pressure on end-market pricing?

Charles E. Dana

Well, I don't think we've ever been firm over the long term to say 20% margins. I think what you heard Sheree say was that was her personal goal. I think our guidance has remained mid-teens or higher, and we’re always pleased when it's higher as it was last year.

Thierry Denis

Next question, we have Steve in the back. I think it's Steve.

Stephen Kim - Barclays Capital, Research Division

Steve Kim, Barclays. Just a sort of a longer-term question, just touching on foam. I know that you talked about the fact that there's a significant cost differential between foam and fiberglass insulation. And I'm not here to talk about the next 3 to 4 years. But I am curious about how you're positioning the company for 10 years out. You talked about surgically applying foam in certain areas where it matters most. But my experience in the construction industry suggests that contractors aren't very interested in being surgical about their insulation needs. So I was curious as to whether you could talk about why you don't think it's a good idea to actively engage in some sort of a branded PINK, maybe with fiber -- glass fiber strands in it, some sort of proprietary thing that you can get out there and actually position yourself at a time when the market is really nascent and yet-to-develop so that you're not chasing this maybe 5 to 10 years down the road.

Michael McMurray

Okay. Well, I'm going to start this, but I'm going to ask Frank to come up because I think there's 2 ways, I think, to talk about that. First, I would challenge whether the spray foam business is nascent. I think it is -- perhaps we have a better solution that I think will actually substitute for those applications. As we pointed out the economics of it, it's very -- it's expensive, it's a boutique product. And we're not that confident that it performs all that well. And we've invested quite a bit in building science to say we do think we have a product that does perform well. And I think Frank can amplify that a bit. We've been in business for 80 years. We know our product performs essentially a substantial length of time. This is not what we understand yet about spray foam.

Frank C. O'Brien-Bernini

Yes. Let me provide a little bit of perspective. Spray foam, if you followed this industry back for the last 10 years or so, kind of began to grow through its use of what I talked about earlier of because it's sealed and insulated. So there was a time where there was no sealing standard at all. So when you filled a cavity or a stud bay in a home where you build a wall, you fill that with some kind of insulator, when there was no sealing requirement and people didn't know much about sealing, when you spray the foam in there and it's sealed and insulated, it provided a pretty good improvement in the energy efficiency of the home. So legitimately, there became a strong interest in this idea of spray foam, sealing and insulating. Now it's always been extremely expensive. So it was an expensive way to do that, but it had a legitimate energy-efficiency improvement. Now fast-forward to now, where there are many sealing solutions, and people are sealing by outside, like our FOAMULAR extruded polystyrene foams, putting them on the outside of buildings and taping that, like you saw in the room, and providing very good sealing technology. To now if you then put something that's really expensive into a wall cavity, it has this redundant sealing capability for just that area you put it, it's a very expensive, totally nonvalue-added application. So in my view and certainly my company's view, spray foam is a product whose time had come and now has gone as a result of advancing understanding of building science and how to more effectively seal and insulate buildings. So that's our view and why we're not anxious to head down that path into a niche-declining application.

Michael H. Thaman

And, I think, whether we bring value by having a PINK spray foam product that we aren't particularly enamored of, I just don't think the value would be with us. And that's where we try to do our acquisitions. It's where we think we can a better owner.

Thierry Denis

Okay. Next question we have Will over here.

Will Randow - Citigroup Inc, Research Division

Will Randow of Citi. Just a follow-on with Steve's question. In terms of spray foam, when you think about it big picture, a lot of builders are still using it. In particular, think about a few of the public ones. Have you had conversations with them? And have they discussed why they prefer that product over yours? And then as a second part to that, is there any value in being a producer of spray foam outside of the chemical companies?

Michael H. Thaman

Okay, I'll take your second one. First, which is sort of quick, which is -- no, I think, first of all, I think the chemical producers are probably more the winner in this space, which I think is pretty clear. But with regard to big builders, really, through our Masco partnership, I can't say all of the big builders. But we have announced pretty substantial programs with Lennar, Horton, KB. So we are in conversation with all, largely through Masco. And our EnergyComplete offering over the past 12 months is massively moved into a different space where it's easier to install, it's more cost effective, and it's really quite impressive. At IBS show, we showed -- we had a lot of builders over for demos, and it’s good, very well received by them. So I think you'll see it in many more homes, largely through National Builders. Now someone -- maybe the question was about surgically applied. I do want to address that this -- we have -- if you look at the machine that we had in the past versus the machine that we have today, and I do not think we had the machine over there, it's kind of a misnomer. What surgically applied is -- intended to do was very low material application efficiency. And the machine that we have to do this is very lightweight. It made it simple for the contractor and, actually, at a reasonable price point. We think this is good for contractors. It's another way to make money that's simple. It doesn't involve suits, clearing out the house, big trucks. It's a really -- we think it's going to be a pretty slick application.

Thierry Denis

Jim? On the left-hand side there? Julia [ph]?

James Barrett - CL King & Associates, Inc.

Chuck, Jim Barrett, CL King. Given the 60% capacity utilization, what are your -- can you tell us generally what are your plans versus depreciation for capital expenditures over the next several years in insulation?

Charles E. Dana

Okay. I think the place I would go there is first, I think -- remember there's plant capacity. Many plants are shutdown. When you talk about hot capacity utilization, that's currently at the 70%. We're very confident that with our current hot capacity, we can serve up to 1 million housing starts, okay, which -- so no -- there's maintenance capital, but no capacity additions. We think within our hot -- currently hot plants, we can get up to 1.5 million starts. So again, no significant capital, other than maintenance capital. And the one variable on that, which would be good news, actually, would be Frank's story on code adoption. If you ever get into that PINK space at 1.5 million starts, we're probably going to need something. And the industry -- I think the story, probably, is mirrored in the industry, although I don't know for sure how competitors might proceed in that, in those environments. But otherwise, our capital expenditures are at or below depreciation for sure. Thanks, Jim.

Thierry Denis

Very good. Moving back to the other side -- on the second row, the gentleman there?

Paul Galat

Paul Galat from Skylands Capital. A quick question on the insulation price increase effective March 31. In language, I saw no job quote security going forward. Could you help me attempt to quantify how that could impact profitability for insulation?

Charles E. Dana

Yes. Okay. Well, the price increase that was announced for March 30, April 1, in that space, talked about no job quotes. And I think the simplest way I think about that is all shipments after April -- did I say March? I meant April 1. But all shipments after April 1 would be at the now higher price, and there wouldn't be price protection for a job quote. Someone is going to build 30 houses in Mississippi, and we give them a quote in February. And we learned a lot. I think that's a question that's probably in some of your minds in terms of the gypsum price increase, which talked about a cessation of job quotes. And that's kind of something that's taking some learning in the marketplace and applying it to our price increase, which was subsequently followed by everybody with that language as well. And the impact on the business, we certainly hope it's substantial. 12% would be a good start.

Thierry Denis

Okay. Thank you. On this side?

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

John Baugh with Stifel, Nicolaus. In that guidance of 1 million starts to make $100 million in insulation, does that assume existing home sales stay where they are? Or some rate of growth there and/or a change in re-roofing?

Charles E. Dana

$100 million is insulation only. So now we haven't really -- we haven't put out a similar target as to how much we make in Roofing at 1 million housing starts. Certainly, at 1 million -- I don't know how that exactly correlates to existing home sales. I think it would be consistent -- depends on when the 1 million starts happens. What we believe is that our Roofing business market would grow as housing -- as existing home sales grows. To the extent that it follows it -- we do believe that the curve more or less follows new housing starts, that there would be growth also in the market, and we presumably keep our share and grow roof -- had volume growth in roof...

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

And commercial as well. I mean, would that, we assume, be flat? Or that grows...

Charles E. Dana

Oh, commercial. I don't think commercial necessarily moves in that space. But on the -- in our commercial and industrial business, which we call engineered insulation systems, the piece that's HVAC, certainly would grow commensurate with that, exactly, and the same proportion as our res business.

Thierry Denis

Okay. We're going to take one more question and, as we do that, we're actually going to start distributing the package for the next session. And then -- so that when Duncan Palmer is on stage, we're ready to go. Andy, you want to take the last question?

Andrew Fineman

Andy Fineman. So for 2012, it's pretty important that -- given the outlook for Composites earnings to be down and Roofing to be about flat, it's pretty important that insulation has a pretty big improvement. So given your current outlook for housing starts for 2012 relative to losing $97 million last year, do you think you can -- how close can you get to breakeven? Can you cut it by half? Can you cut the loss but 3/4? Any kind of range you can give, I'd take.

Charles E. Dana

Well, I think we said substantial. And Mike -- and we're going to substantially improve our insulation business. And I might be able to help it by how. I mean, one of the things that we have going for us is we're -- into 2012, apart from a better market, we spent -- largely we spent the money for EcoTouch conversions last year. We won't have that this year. We'll have the full year impact of Masco volumes and leverage this year as opposed to last year. We have the full year impact of FiberTEK. And those are all reasonably good-sized positives that, year-over-year, are going to help us. I would also argue that the mood on price increases last year versus what the mood is this year is quite different. And I think that's the level if, 3 months from now, I was exceedingly confident on the strength of -- and the price increase absolute was holding in the market, we'd have a -- we'd probably have a more aggressive scenario. But those are a few of the factors, and we certainly want to -- we're tired of being a red dot.

Thierry Denis

Good. Thank you, Chuck. Well, this actually concludes the business section of the program. And now we're going to move to the financial review and then corporate comments. I'd like to invite Duncan Palmer on stage. Duncan is our Chief Financial Officer.

Duncan J. Palmer

Thank you, Thierry. Good morning, everybody. I'm pleased to see you all here. In many cases, some familiar faces. In some cases, some new faces. This is my fourth Investor Day. So short-term guidance for you who are on the East Coast. The weather here moves to you a day later. So you've been enjoying 60 degrees last couple of days, this is coming your way. I'm not a weather forecaster, I don’t really want to be one, but I just thought I'd pass that on. Anyway, I'd like to start off talking about our financial strategy, and that's what I'm going to spend the next few slides talking about, and then reiterating some of our guidance points.

And the first thing I'd like to say is, you're probably going to notice some strong similarity to what I said at the last Investor Day. In fact, those of you who've been around a while will notice some strong similarity to what I've said the previous Investor Day and the Investor Day before that. And I make no apologies for that. Our fundamental financial strategy and approach to capital deployments has not changed, and it remains a very disciplined one and one that's very focused on adding value to investors, to shareholders and creating shareholder value.

As you've heard, there's a lot of good reason to believe that we will see growth in our end markets, grow our top line and see strong earnings power in all of our businesses, which will drive us to produce a lot of cash flow. And as Mike said, we sustain a strong balance sheet that enables us to continue to invest in our businesses and to support growth in our businesses. And we also balance that with returning cash to shareholders over the long term.

I'd like to start off talking about 2012 guidance. First, a little recap on what we have guided to. We have said that we expect to grow adjusted EBIT in 2012, very specific, on the basis of about 700,000 housing starts. People such as the NAHB and Blue Chip have forecast that we expect to see housing starts around about 700,000, maybe even a little more this year, and that's the basis on which we've provided our guidance. We are not forecasters of housing starts. Frankly, I think you guys have probably as much idea exactly what housing starts are going to be this year as we do, but that's kind of our guidance. And secondly, we do expect there to be modest, as Arnaud talked about earlier on, modest economic growth globally. Again, we're not forecasters of that. That's kind of in line with the consensus that prognosticators of global growth talk about, and that's where we're conditioning our guidance of adjusted EBIT growth. And that will produce a very strong cash flow year in 2012.

Now the basis of that, we have just talked about that insulation will significantly narrow losses, and Chuck talked about some of the drivers of that and why we are confident that, that will occur. We also have guided that Roofing will deliver another strong year, albeit that, given that storms were so strong last year on the basis of an average storm year, this year, we would expect the market demand overall to be down, maybe in the mid-single digits in terms of overall market demand.

Composites is unlikely to grow EBIT in 2012 due to the short-term market conditions that we're facing, although we do see a strong return to double-digit margins in 2013 as you heard earlier on. Capital expenditures for the year, we expect to be about $350 million, including some purchases of precious metal during the year.

Cash tax is expected to be about $30 million. And the book tax rate, about 25% on adjusted earnings. And we have also said that we expect our general corporate expenses to be in the $110 million to $120 million range, up on last year, driven mainly by higher pension costs and incentive compensation costs.

Now we did hear, in some detail, about the actions we're taking in Europe. We do expect there to be, as we shut down, about 5% of our global capacity in Europe. We do expect to take charges over 2012 and 2013 about $130 million, of which about half will be cash. Those $130 million will be adjusted out of our adjusted EBIT and adjusted earnings. I want to make sure you're clear on that in terms of how we've provided our guidance. And secondly, we've also said that we expect a lot of that cash to be offset by sales of land and precious metal associated with the facilities that we're shutting down.

I'd like to move on now and talk about our balance sheet. As we've heard earlier from Mike, we have a very strong balance sheet. I'm being -- we're very proud to be an investment grade company and to run our company in that way. We've take actions over recent years, which have continued to improve not just our balance sheet, but also our maturity profile. It's not just a question of how much you owe, it's also a question of when you owe it. And so we have been able to push out the maturity of our revolving credit facility. For example, until 2016. We've also, last year, entered into a $250 million accounts receivable securitization facility, which matures in 2014. And we've also laddered our bonds –- I think we have a well-laddered set of maturities in 2016 to 2019 and 2036, which gives us a very strong profile, both in terms of our balance sheet strength and also our maturity profile. So we do have more than ample liquidity to support our growth and to sustain investment. And capital markets do remain very open to Owens Corning.

In terms of mid-term outlook. Again, based on factors and drivers you've heard about today, we have –- see a significant growth in adjusted EBIT over the future years and also significant growth in cash flow associated with that, in an environment of recovering U.S. housing and continued global growth. Underneath that, we would expect capital discipline to maintain in our businesses. As you heard from Chuck, in terms of Building Materials, we probably expect to be at or below depreciation over the next few years in terms of investment. But we would expect to continue to invest in composites to grow capacity in line with the overall market and, therefore, that we would expect, overall, as we said at our last Investor Day, for capital expenditure over the next 5 years to be about 110% of depreciation and amortization.

In terms of working capital, we would manage working capital and expect it to grow in line with our overall sales, with some variability from time to time based on supply and demand balancing. But fundamentally, that's going to be driven by the way in which our top line actually grows. And in terms of our tax position, we'll continue to see a very attractive tax rate, below 10% for the next few years, particularly as our NOL is in place in the United States. And we would expect to maintain corporate expenses over the next 3 years at between $100 million and $120 million, in line with how we talked about 2012. All that will add up to us seeing very high levels of free cash flow conversion from our adjusted net earnings of up to 100%, on average, over the next 5 years. A very powerful set of overall attributes, driven by the top line and bottom-line growth in our overall businesses. All that is consistent with us delivering adjusted EBITDA of $1 billion or more at 1 million annualized housing starts with continued global growth.

Given the high cash -- free cash flow conversion that we expect in our company, it makes sense, I think, for us to talk about our capital allocation strategy and how we deploy capital between our businesses and between giving cash back to shareholders, back to investors over time. We do believe that our current level of debt is appropriate. And as we therefore deploy cash in our businesses, we will continue, as we just talked about, to invest in our organic growth, particularly in the Composites business as that grows, and also growing that in line with the overall global market. And then we would also balance opportunities that we might see in acquisitions with the overall return of capital to shareholders, which we see in the short to medium term as being primarily through share repurchases. We have said in the past that, given the cyclicality of our business and given how low we are on the housing cycle, we do not think a dividend is appropriate. And we still think that is true, although, in the medium to long term, I think we would consider as appropriate. And as housing recovers and insulation particularly returns to being profitable and returns to being a green dot, as we know it will, that we would keep that question of a dividend under review.

So in terms of our acquisition criteria, we get asked a lot about, "What do you look for in terms of acquisitions? What do you look for in terms of criteria to invest against, and how would you make those decisions?" You heard from Chuck that one of our key criteria is that Owens Corning is a better owner from the current owners of the asset. We typically look for situations where we can bring some unique value, particularly proprietary situations that we can get ourselves, an advantaged position to be a better owner. And in terms of where we see potential for acquisitions, there is quite a lot of consolidation already in many of our Building Materials platforms in North America. So I think geographic expansion is something that is very much on our mind and how we could do that, building on some of the global platforms that we already have. In some cases, there may be opportunities for us to extend some of our product lines beyond the markets and businesses that we're currently in, but which are synergistic with our current platforms. And all of these have to be businesses in well-structured industries where we can achieve attractive future returns on capital for our shareholders. All that would be balanced with the priorities of vesting [ph] our capital in terms of creating shareholder value and returning cash to shareholders.

As I say every Investor Day, our tax position is a very significant asset for Owens Corning, one which we're very proud of and one which we guard in terms of its value and making sure that we achieve its value over time. We have $2.3 billion U.S. federal NOL with an estimated present value of approximately $650 million. That's about $5 a share and delivers about cash tax savings of about $70 million a year. That's a very, very valuable asset for us. In terms of cash taxes, we, therefore, expect our cash tax rate over the next few years, particularly as the NOL is in place and certainly, over the next 5 years, to be below 10%. In terms of how we expect our book tax rate to look, we would expect that to be between 25% and 28% as we've said at our last Investor Day, kind of driven by a mixture of where our earnings are in terms of the U.S. versus foreign earnings. Obviously, the U.S. tax rate is more of the nature of 35% or more, and foreign earnings typically are lower rates. So that blend of earnings kind of drives where the tax rate is. And also, that guidance is based on our tax planning opportunities, which also give us the opportunity to optimize our rate into that range.

So now, before I invite Mike back on stage for some Q&A, I'd like to summarize some of the mid-term guidance that you've heard from our businesses during today. And the way we've done that here is to talk about some of the top line key drivers that we see in our end markets, what those lead to in terms of mid-term market growth in those markets, and then how we see that growth translating into earnings power for us in Owens Corning and our different businesses.

And I'll start with insulation. Housing starts, obviously, is a big driver for us. I think as Michael and Frank have probably made very clear, and I'm -- Chuck has reiterated, you've heard many times, we do think that code implementation and code adoption will be a very important driver of glass fiber demand going into the next cycle. We do expect the U.S. market to return to historic levels. The average housing starts of 1.5 million we expect to see in the next cycle, and that we do expect to see that recovery. And we've also indicated that we expect to see $100 million of EBIT or more as some 1 million annualized housing starts, and we would expect to return to 15% EBIT margins or better at 1.5 million housing starts.

In Roofing, we've said that activity is driven by existing home sales, the underlying activity. And obviously, there is some volatility year-to-year based on storm activity. On that basis, we would expect to see a return of maybe as much as 13 million squares getting to the 15-year average in terms of demand. That's around about 30% over the next few years, and that would translate into a 5% to 8% CAGR in terms of non-storm demand over the next few years. On that basis, we'd also expect to see margins in our Roofing business, as we've said at our last Investor Day, to be mid-teens or higher in terms of driving profitability in that business. And I think Sheree was very clear in her point of view on that.

In composites, we see that our business is driven by industrial production, global industrial production and also global industrial production in the different regions in which we operate. And we would expect, based on historical growth and based on projections of industrial production that have been made by people such as Global Insights, that over the next few years, we would see 5% to 7% overall market growth for glass fiber reinforcements, as indeed we said at our last Investor Day. On that basis, we would expect to grow margins to the mid-teens, and EBITDA margins over the next few years, and also expect to return to double-digit margins, specifically in composites in 2013. So you can see a lot of opportunity for growth, both in terms of top line, bottom line and also cash flow for our company. And with that, I'd like to bring and invite Mike back on stage, and Thierry, also, on stage, and we'll go to Q&A.

Thierry Denis

I guess you're used to the format by now, so we'll have about 20 minutes of Q&As. And I see hands in the air already. Ken, you have a question?

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

Ken Zener, KeyBanc. If I can, 2 questions. One, if someone could just comment on the margin in insulation relative to prices that you expect as demand occurs? In historical context, was it historically 2%? 3%?

Michael H. Thaman

Historically 2%. Oh, I mean, if you view where prices are today relative to where prices were at their peak in 2005, 2006, I mean, we've seen, through sequential quarters, really early in the downturn in housing, we saw a fair amount of price loss. So we would say we make a very valuable product. I mean, a product that goes into a house and saves energy for 50, 60, 70 years. And in some ways, this capacity utilization cycle and this housing cycle devalued our insulation products. So we're not really embarrassed to believe that our insulation should sell for higher prices because it's a more valuable part of the house than the way it's currently being valued. Our near-term outlook, and I think Chuck touched on this very, very well, is, with utilization levels where they are right now, we will continue to look for opportunities to try to move pricing, but that over the long term, our ability to really get back to historical price levels is probably going to built off of a pretty good recovery in the housing market. So when we give our guidance on $100 million of earnings on $1 million of starts, we're not building in recovery all the way back to pricing levels that we would have seen in 2006, 2007 -- or 2005, 2006. I think as you get back to 1.5 million with the story we told today around codes, what that would do to increase demand or what that would therefore do to utilization, I think we're a little less comfortable saying that we would expect to see historical pricing levels as we got to kind of that level of starts activity.

Michael McMurray

Thierry, you're calling them out?

Thierry Denis

Okay, we've got somebody on the right-hand side there.

Mike Wood - Macquarie Research

Mike Wood at Macquarie Capital. Can you just go through, back in the '08 period where you reset Roofing margins higher? Essentially how much of that was driven by restructuring? How much -- just industry getting more disciplined on price. Help us understand how to think about Roofing margins going forward. And that was also during a period of pretty high asphalt price appreciation with the repaving work that was done. So can you just put that in context?

Michael H. Thaman

Yes. I mean, when you look at that time period, and really 4 things happened kind of simultaneously in that 2007 to 2009 time frame as we look at kind of the reset in the performance of our business, I mean, first, absolutely, we just created a better business. So we've had, in some of our previous investor decks, the whole program we had for about $150 million worth of performance improvements in our business. It was product line, design, it was marketing mix, it was facility personalization, it was lean and cost reductions. And on a $2 billion business, that represents about 8 points of improvement on a business that had always earned kind of in the mid-single digits, some years a little bit better than that. So we had pretty good line of sight on how we could do things to our business that we thought were proprietary improvements. Things we could do that weren't necessarily obvious things that our competition would do. In some cases, it was because our competition had already done it, and we were a little bit in catch-up mode. So we saw about 8 points of improvement that got us into the teams, just from things we could do to our business. Then if you go to the 2008, 2009 time frame, I think 3 big things happened. One is new construction had really declined as a percent of the mix of the roofing market, and new construction had been a part of the market where there was more price competition, where some of the new construction pricing was spilling over into reroof markets. And there's really no good reason when you look at an $8,000 reroof job that the roofing manufacturer should be giving their product away into an $8,000 reroof job. So with new construction becoming a much less import part of the market, I think that took some of the price discipline that the manufacturers wanted to have and that Owens Corning wanted to have in the market, and it took some of the pressure off that. Secondly, we saw oil go to $140 a barrel. So we saw such a rapid inflation in oil prices and asphalt prices that really, as a manufacturer, you had no choice but to go out and try to recover that inflation. And the third thing was, that was a period of time where GAF was integrating Elk, which they had acquired, and we were coming out of a period of very poor profitability, where there was lot of obsolete inventories in the channel, there were a lot of product lines being discontinued, there was a lot of -- I would describe it almost as mayhem in the market as that integration was happening and some of the product changes and product line changes were going through the markets. When we came out the other side of the $140 oil, I think a lot of our customers who had always believed that their best way to make money was to have very inexpensive shingles, actually realized that a rising price environment didn't hurt them and that, in fact, a number of the distributors understood that they could make money in a rising price environment if they bought well and they had discipline from their supplier in terms of how pricing was administered so that they would devalue their inventory. So I think those 4 things kind of combined. Everyone got to the end of 2009 and said, "This is a business that just can make money." And certainly, we have been very focused on trying to understand how we help our customers do a better job with our product, selling it through so that they make good money. And we believe that we're good at that, that we're entitled to making good margins in the business.

Thierry Denis

Good. Next question. Mike?

Michael Rehaut - JP Morgan Chase & Co, Research Division

Michael Rehaut, JPMorgan. Duncan, you kind of laid out the broad criteria for the M&A. And I think that, on the margin, it's kind of an incremental -- potential incremental driver to the story. So I was wondering, among yourself and Mike and the team, where do you see the pipeline today in terms of activity and focus, maybe today versus a year ago? Are there, perhaps, more targets on the radar screen today? And if we can expect over time, maybe compared to the last couple of years which have been relatively quiet, an increased portion of free cash flow going towards this area?

Michael H. Thaman

Yes, maybe I'll talk a little bit about our track record, and then I'll ask Duncan to talk a little bit, maybe organizationally, in terms of the resources that we've put against this. But if you look at the time period 2007 to 2011, so if you take those 5 years, we've actually been more active, I think, than is really apparent, based on our top line, because we were both acquiring and divesting. So if you go back to 2007, we divested nearly $1 billion worth of revenue. I guess it's not quite that much. $600 million to $700 million worth of revenue when we sold out of our siding business. At the same time, we were buying in Vetrotex. So we did a significant swap, we think, in the quality of the earnings engine of our company. We think we did a significant swap in terms of having assets that we could add a lot of value to. But in terms of growing the business or actually applying free cash flow because we had proceeds from one divestiture that helped pay for the acquisition. In fact, it looked like we didn't have a lot of activity. I think if you then look at what we've done over the course of the last 18 months, at the end of 2010, we divested our manufactured stone veneer business which operated under the name Cultured Stone; very much of a new construction-driven business. In Canada, we had business that probably did better in high-end, high-price-point construction. We didn't feel like we had enough levers left to pull in terms of restructuring that business. We just didn't have enough synergies to continue to drive down our cost base. We sold that to Boral. Boral obviously has brick operations. They have distribution operations. They had a lot more levers that they could bring to bear in making that a better business. And around that same time, we got involved with the FiberTEK acquisition, which was a tuck-in on the insulation side. So again, not a lot of top line growth and not a lot of free cash flow deployment because we had a source of cash and a use of cash. I think, going forward, you've probably gleaned from today's presentations, we like all the businesses that are left. I mean, we're very, very happy with our Roofing business, our composites business, our insulation business in terms of those earning engines. So the next round of activity in the corporate development area is much more likely to be a use of cash flow and growth in the company. We've put resources against that to get ourselves positioned to be able to do that well. And I'll let Duncan talk a little bit about that.

Duncan J. Palmer

Yes. So when we formed really capability around corporate development back, I think, in 2009, the early part of 2009, we started to staff up a little bit more in terms of this area, hired resources from the outside who had experience in this area, both on the corporate side and also on the investment banking side and formed a group. That's been very helpful in driving 2 or 3 big things for us. I mean, one is getting transactions done. So the Masonry Products, Cultured Stone transaction, for example. The sale of our asset in Brazil, the Capivari sale that we did in composites this year. That was heavily led by that team. And also, the acquisition that we did with the FiberTEK assets that we did and completed in 2011. Those were all heavily worked on by that team. So I think we have a proven track record of capability in that area. I would say that, that team has also helped us in terms of putting rigorous screening processes in place, rigorous process around how we develop proprietary situations so that we're not going to auctions, for example. So I think that's been very helpful to us too. And also, continuing an ongoing dialogue of what does the pipeline look like, how is the pipeline evolving, what's the external marketplace, how is that evolving? And so I think we have good capability in that area and good resources against it, and we have a track record of actually being more active than you might originally think.

Michael H. Thaman

Yes, and I'd say one last thing in this area, which is I think the stuff we've done over the last 3 or 4 years is pretty non-obvious. So going and finding FiberTEK, I don't think that was a company many of our investors were aware of because it was private. Going and getting Vetrotex out of Saint-Gobain was something that our investors are probably aware of, but it required work in development to go do that. Likely that the most interesting transactions for us are going to have that kind of flavor. I mean, we get a lot of banking books, obviously, as you might all imagine, of not great building materials businesses with lousy balance sheets. And we don't think we're a great buyer of not great businesses with lousy balance sheets. So if you just screen what's kind of coming across the transom today, most of what's for sale at good prices are just not very good businesses or have big financial problems. We're looking for great businesses. I mean, we think, as a company, what we're good at is building, growing and creating fiercely competitive businesses that are great businesses in great industries. That's what we're interested in.

Thierry Denis

The next question comes from Bob.

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

It's Bob Wetenhall from RBC. If you're not going to pursue any transformational acquisitions just because they don't appear in front of you and you're continuing to execute against your plan, it sounds like you're going to generate a lot of free cash flow out of net income, given your tax shield. What do you expect to do if you're clinging to that $1 billion of EBITDA by 1 million housing starts? And I assume -- are you also reiterating free cash flow guidance of $1 billion cumulatively when you get to the point?

Michael H. Thaman

Yes. I mean, I think we've been very consistent in our approach to talking about free cash flow on our balance sheet. I mean, we do like having an investment grade profile. We don't believe it makes sense to overdo that. So I mean, we're BBB minus. I don't think you'll hear us stand in front and talk about how we'd like to see a big improvement in our credit rating. I think we'd like to maintain ourselves at low investment grades. We generally found that the investment grade markets are open when companies like that need money. And the investment -- and the non-investment grade market is often not open when companies that are a bit cyclical in their earnings capability need money. So we've always believed that the right place for us as a company to position ourselves is kind of in the low rungs of the investment grade to make sure that we always have access to the capital markets. We manage maturities very carefully. I think Duncan talked about that. We like to have long dated maturities so that we have good visibility to when we owe money. Because, again, we know that there can be fairly rapid changes in our market conditions. But your conclusion from today's presentation, which is with the right kind of market environment, which we continue to describe as a growing, global, industrial production market albeit, in some parts of the world, slow. But we do need to see continued global industrial production growth. And with a recovering housing market, we would generate a lot of cash, we'd invest in our operations first beyond that if we didn't find great M&A that we wanted to do. We’d use share buybacks in the near term to use that -- return that cash back to our shareholders. And then as Duncan said, as insulation returns to profitability, as housing gets more decidedly into a recovery, I think the nature of our review of a dividend would probably to become more pointed.

Thierry Denis

Okay. Got one more question from Will, and then we'll go to Andy.

Will Randow - Citigroup Inc, Research Division

Mike, in terms of -- when I think about minority players within an industry, I'd always have a tendency to pursue a share at the healthiest-margin businesses and typically compress lucrative pricing. So how are you thinking about innovation in businesses like Roofing, hopefully to offset some of these new entrants that's coming in and scaling up to your technology -- or minority, sorry?

Michael H. Thaman

Yes. I mean, I assume by minority you mean kind of the lower-market-share players. Right? I mean -- so you've got -- in all of our businesses -- and I think we reviewed that, kind of today, and how we think about the share of the top players in the industry in composites, I mean, Marcio went through a chart that showed, interestingly, the top 5 players had changed fairly dramatically, the share of the market from the top 5 players actually hasn't changed that dramatically. So we think it's the nature of our businesses, both Insulation, Roofing and Composite, that having a group of premier players that have scale operations, that have low cost, that have innovation and technology capability that allow them to serve sophisticated customers that want to rely on big, committed partners in the supply side, that is the nature of our markets, because we also have pretty consolidated customers. So I think big customers want to do big business with big suppliers. In all of our markets, there's always a risk of the marginal player trying to move market share positions based on price. I guess the first word that jumps to my mind is better. The way you stop that is you're better. Right? You have better cost, you have better products, you have better people, you have a better history, you have better relationships with your customers, and I think that's what you would see as you look at what have been pretty tough market conditions. I mean, even Sheree's business, which is fabulous, she's at 20-year lows in terms of new construction and reroof demand, and that business is still doing great. Our Composites business has not had 3 or 4 years of great, continuous global industrial production growth and yet has put up some good numbers and a bright green dot last year, right? Now we're going to go backwards a little bit off that this year, but we had gotten finally back to what we've known as historical performance in that business in the 90s. We'll take a step back, but we're very confident we will get back to where that business has demonstrated. I think, clearly, today, you saw that same competence in Insulation. So we challenge our people to be better than the competition. We want our customers to buy from us because they make more money when they buy from us. And if that's the case and someone comes in with a lower price and says, "How about giving me some of your business?" You'd hope your customer answers the question, "Well, how do I make more money by buying from you, because not everything is about the first-buy price?" So we're pretty confident in the way our industries are structured, the focus of our people, the focus of our technology, the quality of our asset base, that we're well positioned in our markets.

Will Randow - Citigroup Inc, Research Division

If I could tuck in one bookkeeping, how much do you think D&A will be down, Duncan, in 2013, plus the Europe charges?

Duncan J. Palmer

We haven't specifically provided guidance on D&A for '13. I think we said, for '12, around about 320, I think, we said. Obviously, it's going to be a factor of how much capital investment we'd be making, how that factors in, and the netting out -- some of the accelerated depreciation we'd expect to see and some of the charges that we would adjust out. But we haven't provided specific guidance on 2013.

Michael H. Thaman

Yes. And going outside of that is the guidance question. I mean, one thing I would say, and I think it came through in today's presentation, is we saw the global composites market grow in 2011. We believe it will grow in 2012. We believe industrial production will grow in 2013, and the market will grow again next year. So we are continuing to invest, even though there's some disinvestment in Europe. We are continuing to invest in the low-delivered cost assets in other parts of the world. So that investment is, in effect, offsetting whatever asset we're taking out of Europe. So I don't know that we would expect that we can run our company on a lot smaller asset base going forward, just a lower cost and more focused asset base.

Thierry Denis

Good. I don't see a lot of hands in the air anymore, which I'm thinking is a sign that we've actually answered more -- most of your questions, not a lack of interest. But we'll take one last question from Andy. I think you had your hand up.

Michael H. Thaman

Andy, we're going to give you the last word. Yes, not really. I'll close after this.

Andrew Fineman

You're never going to get to be [indiscernible]

Michael H. Thaman

Yes, I don't want to get you too enthusiastic.

Andrew Fineman

I just wanted to ask, you talked about acquisitions. So if you just improve earnings a little bit, and I know you're expecting to do more than that, over the next 5 years, you'll have about $1.5 billion of free cash flow after paying, because you've got D&A equals CapEx or approximately. So what size -- if you had your druthers and you could do what you want, how much of that would you spend on acquisitions?

Michael H. Thaman

I'm going to ask Duncan to ask -- answer the question about size a little bit, of what size acquisition we'd feel comfortable doing. I think the acquisition opportunities for our company are going to be pretty specific, and it's very hard for us to manage that in terms of an asset accumulator who might stand up and say, "I'd like 1/3 of my free cash flow to go to dividends, 1/3 of my free cash flow to go to acquisitions and 1/3 of my free cash flow to go to investment above depreciation." I think the businesses that we study, that tend to talk about free cash flow that way, have looked at their business more in an asset accumulation mode than they have in terms of building and developing market-leading businesses in well-structured industries. And if your real approach to business is to have market-leading businesses in well-structured industries, you're going to have to be prepared to have the balance sheet capacity to act when you see the opportunity to further advance that strategy. So I wouldn't say that we have an allocation mindset. I think we have a mindset of managing our balance sheet and our operations in such a way that we don't find ourselves locked out of an opportunity when the opportunity presents itself, but that we don't also create financial inflexibility, always waiting around for the right deal. So that's a balancing act. And I think if you look at our track record, we've been pretty successful doing that. The deals that came to us didn't necessarily come to us at the exact moment we wanted to do it. We knew housing was declining in 2007, and we saw the ability to do Vetrotex. We had given ourselves enough gun powder to go do that, and we liked getting more global at that moment. And so we committed a lot of capital, $675 million to go do that deal. So it was a deal of size. FiberTEK, we put ourselves in a position where our Insulation business was losing money, and yet we had enough financial wherewithal out of Composites and Roofing to really advance the cause in Insulation and give us more upside leverage in a recovery. So creating a balance sheet strategy that gives us the ability to act when the opportunity presents itself is probably more the way we think about it. Duncan, maybe you'd talk a little bit about size.

Duncan J. Palmer

Yes. So I think as Mike kind of briefly talked about there, I mean, we've done acquisitions in recent years. FiberTEK is probably $100 million or thereabouts. We've probably say that was kind of a small-ish acquisition. I think the Vetrotex acquisition, which is around about a $640 million kind of acquisition, I think I would call that a large-ish acquisition, right? And that kind of bookends what we mean by small-ish and large-ish, and I think most of the things that are on our pipeline kind of fall in that sort of range. I'm not saying there couldn't be opportunities that could be different than that but, generally speaking, that's sort of the opportunities we see, and they tend to be fairly clumpy, right? So it's not like there are 10 opportunities a year. It's going to be of that nature. Now as Mike also said, the nature of the acquisitions we would do would be we would buy something, but then invest through what that gave us the opportunity to do. So take Vetrotex, where we bought some assets now which we've been able to build out; we're expanding our platform in Russia; we've taken the asset we have in Mexico, we're expanding that; we've got a bigger platform in China. It gives us kind of flexibility to do things. And same with the FiberTEK asset, we're converting those assets to loose fill production, right? So it's also about buying businesses and then investing in them, and investing in them with the ability to create value for our shareholders, rather than just buying something and kind of leaving it alone and trying clipping coupons from it. So fundamentally, it's about buying things that augment our business portfolio so we can then bring value through our channel, through our products, through our markets and also through investments. Okay?

Thierry Denis

Thank you. This meeting is about us sharing information, but also about these dialogs. So I appreciate the quality of the question. So we'll let Mike close the meeting now with a few remarks.

Michael H. Thaman

Okay, thank you. Well, first of all, I want to thank our team. Everyone worked very, very hard to prepare for this day and, in a lot of ways, internal reviews are kind of like if you're a golfer hitting balls on the range but, at some point, you've got to take to the first tee and come out here and play. And I think our team played very, very well today. I was very pleased with some of the new analyses that we shared with you today. These are analyses that we've used in our internal management reporting and our internal evaluation of our businesses. We listen carefully when we go on the road, and we talk to investors about what are the kinds of things that you're using to evaluate, both the attractiveness of Owens Corning as an investment and also evaluate the performance and the execution of management. And I think we laid out some things today in terms of how we think our markets work and the drivers for our markets work, but also some of our goals in terms of where we'd like to get to in terms of our asset base, low-delivered cost positions, market growth from codes and code adoption. I think that gives you some good benchmarks over the next 3 to 5 years to say, "Are we able to make the things that's we see, as big opportunities for our company and big opportunities for our investors, come true inside our businesses?" I have one last chart, I'm going to ask Jen to bring that up, and I'll just kind of walk through. A good -- communication practice is always to start at the beginning and say, "Here's what you're going to hear," and then hopefully come back at the end and review whether or not, in fact, that's what we delivered. We wanted to focus on drivers of our business so that you get as much confidence as we did, based on your outlook for industrial production in housing, that if you believe in things like global industrial production, you believe in material substitution, you believe in the U.S. housing market, you believe in energy efficiency, clearly, Owens Corning is very, very well positioned to take advantage of those underlying macro trends. We don't pretend that we control these trends. We do look at trends, though, that we say, "What can we ride? Where can we position our company to take advantage of trends that we think can be beneficial to investors, beneficial to growth, beneficial to the careers of our employees?" And certainly, when we look at the global nature of our business and, I think, the global team that we've put in front of you today, when we look at things like energy efficiency, the underlying demographics in the U.S. related to housing, when we look at material substitution and engineered materials that are growing faster than the economy like glass fiber, we really like our portfolio, we really like the position in. We have great businesses in well-structured industries. I was once on a panel some place, and I heard a phrase that I'd never heard before, and it never occurred to me, which was a phrase called "portfolio envy." And we're talking about a group of CEOs who were in an investment panel, and someone was talking about their portfolio and they said, "Someone else has this other business, and I've always really liked that business and it interested me." And the someone else said, "Oh, I always had a little bit of portfolio envy for that business." And I think it had never occurred to me in my time at Owens Corning, because I don't think we've ever had portfolio envy for anybody's businesses. I mean, we look at the businesses we have and say, "These are great businesses and businesses that we love to operate, have fun operating and love to represent to you, our investors." We do believe that a macro environment that is constructive will create tremendous earnings leverage for our business. And by constructive macro environment, we don't need to see massive global growth. We would just like to see good, consistent global growth that would underpin a nice recovery in our composites demand that would take the trends that we saw around our Chinese competition around inflation, around cost base, and allow us to load our assets and progress forward to get to the margin goals that we established. We'd like to see a constructive market in the U.S. around existing home sales. We believe we're seeing the beginnings of reasonable pricing stability in U.S. construction. We're maybe starting to see some dialog that will lead to a more constructive mortgage market. We're beginning to see maybe some recovery in new construction, albeit at very, very low levels. We're seeing rent inflation. So we're seeing a number of things that cause us to say, "We're maybe in the early innings of beginning to see the housing recovery, which has been predicted every year for each of the last 4 years and has been wrong for each of the last 4 years." Maybe 5's a charm here, and that we are actually going to see a constructive housing market. I think you saw on the existing home sales side how that would help our Roofing business get back to historical levels. That's a lot of volume for the market, a lot of volume for us. I think you certainly understand on the Insulation side how a constructive new construction market loads our plants, gives us the operating leverage that we love and gets that business back to very, very high levels of performance. So you should expect from us and expect to hear from us again, maybe 5, 6 quarters from now when we do a next big Investor Day that, in that kind of environment, we should expect to report that we're beginning to see the progress in all 3 of these business moving towards those bright green dots, with all of our businesses moving into the double-digit operating margin with a company that has great growth prospects, great earnings prospects and certainly, great cash flow characteristics. And that's what gets us excited and causes us to come to work every day to keep powering ahead and make this company as great as we know it can be. So we appreciate your interest. We have lunch for those of you who can stay. We'll have management available to follow-up on any additional issues. And if you are not staying for lunch, we wish you safe travels on the way home. Thanks.

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