Owens Corning: Diversifying Away From Housing and Becoming A Leader of Composites

None of this is really a surprise and while it may be unpleasant now, the long term business fundamentals for Owens Corning (OC) actually improved during the quarter.

Q3:

• The company repurchased no shares and still has 5% remaining under the authorization.

• Earnings before interest and taxes (EBIT) from continuing operations in the third quarter of 2007 were $83 million, compared with $145 million during the same period of 2006.

• For the first nine months, EBIT from continuing operations was $191 million, compared with $408 million for the same period of 2006. Excluding comparability items, adjusted EBIT from continuing operations for the first nine months of 2007 was $259 million, compared with $392 million during the same period in 2006.

• Gross margin as a percentage of consolidated net sales was 16.3 percent during the third quarter, compared with 19.3 percent during the same period of 2006.

So, what has happened that has improved the long term outlook?

Owens completed the acquisition of Saint-Gobain's Reinforcements and Composite Fabrics businesses for $640 million following approval by regulatory authorities in Europe and the United States. The acquisition accelerates Owens Corning's global growth strategy and strengthens its position as a market leader in glass reinforcements and composites.

With the completion they announced, they intend to expand their glass reinforcements and composite fabrics production capabilities beginning in 2008.This will support market growth in Asia and Eastern Europe, and specifically in the developing and emerging countries of China and Russia, which is growing 5%-7% worldwide and even faster in developing countries.

Our composites business delivered a strong quarter, said Dave Brown, president and chief executive officer. The weakness in new residential construction continued to have a significant impact on the overall performance of our company. We've acted decisively to make our company more global and lessen our exposure to the cyclical nature of the U.S. housing market.

The second half of 2007 will be remembered as one of strategic accomplishment, said Mike Thaman, chairman and CEO-Elect. Our acquisition of Saint-Gobain's Reinforcements and Composite Fabrics businesses and the divestiture of the siding and Fabwel businesses bring important balance to our company's global revenue sources. We have seen progress in the operating performance of our building materials businesses as the markets have continued to weaken. We have taken actions that position our capacity and cost structure for a weaker market in 2008.

Yesterday's acquisition of Saint-Gobain's Reinforcements and Composite Fabrics businesses accelerates our global growth in both developed and emerging markets, said Thaman. This extends our reach to commercial and industrial glass fiber markets that are growing at twice the rate of global GDP. It also allows our customers to benefit from an expanded product range, world-class technology, and improved logistics and supply capability, while enhancing shareholder value through the addition of a business that is expected to generate EBITDA in excess of $100 million in 2007, not including the costs associated with the leasing of metals.

As a previously stated goal, in Q3 Owens Corning completed the sale of its Siding Solutions business to Saint-Gobain for approximately $368 million of net proceeds as previously announced on July 17, 2007. The sale included the company's Norandex/Reynolds distribution business with 153 U.S. distribution centers in 38 states and three vinyl siding manufacturing facilities.

Owens is quickly diversifying itself away from the US housing market into a rapidly growing international business, composites. This segment in Q3 grew sales by 12.5% and EBIT by 20%. Owens Corning, after this move has seen its business composition go from 70% US residential to 50% US and now 50% international.

Long term the composites will be a huge winner for Owens, now a world leader in this category.