Owens Corning (OC)

Q3 2010 Earnings Call

October 27, 2010 11:00 am ET

Executives

Michael McMurray - Vice President of Investor Relations and Treasurer

Duncan Palmer - Chief Financial Officer and Senior Vice President

Michael Thaman - Chairman of the Board, Chief Executive Officer, President and Chairman of Executive Committee

Analysts

Keith Hughes - SunTrust Robinson Humphrey Capital Markets

James Barrett - CL King & Associates, Inc

Michael Rehaut - JP Morgan Chase & Co

Robert Wetenhall - RBC Capital Markets Corporation

Dennis McGill - Zelman & Associates

Garik Shmois - Longbow Research LLC

John Kasprzak - BB&T Capital Markets

Joshua Pollard - Goldman Sachs Group Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Owens Corning Earnings Conference Call. My name is Feb, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to Mr. Michael McMurray, Vice President of Investor Relations and Treasurer. Please proceed.

Michael McMurray

Thank you, Feb. Good morning, everyone. Thank you for taking the time to join us for today's conference call in review of our business results for the third quarter of 2010. Joining us today are Mike Thaman, Owens Corning's Chairman and Chief Executive Officer; and Duncan Palmer, Chief Financial Officer. Following our presentation this morning, we will open this one-hour call to your questions.

Please limit yourselves to one question and one follow-up. Earlier this morning, we issued a news release and filed a 10-Q that detailed our results for the quarter. For the purposes of our discussion today, we prepared presentation slides that summarize our performance and results for the third quarter. We'll refer to these slides during this call. You can access these slides at owenscorning.com. We have a link on our homepage and a link on the Investors section of our website. This call and the supporting slides will be recorded and available on our website for future reference.

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

This presentation and today's prepared remarks contain non-GAAP financial measures. Reconciliations of GAAP to non-GAAP are found within the financial tables of our earning release.

For those of you following along our slide presentation, we will begin on Slide 4. And now opening remarks from our Chairman and CEO, Mike Thaman; followed by CFO, Duncan Palmer; and then our Q&A session. Mike?

Michael Thaman

Thank you, Michael. Good morning, everyone. Thank you for joining us today to discuss our third quarter results. Total revenue in the third quarter was $1.2 billion compared with $1.3 billion in the third quarter of 2009, a decrease of 12%. Adjusted EBIT was $90 million in the third quarter, a 33% decrease compared with the same period a year ago.

Our third quarter financial report once again demonstrates the value of Owens Corning's portfolio of market-leading businesses. While we had to rapidly adjust our Roofing business to a sharp market correction, we're able to sustain strong profitability. The financial impact of volume weakness in Roofing was at least partially offset by continued strong performance in Composites, which has once again emerged as a powerful financial contributor for the company. And Insulation has continued to produce manageable losses in a very challenging market condition.

We began the year by offering guidance that we could deliver $350 million or more of adjusted EBIT. As the building materials market appeared to strengthen in the first half, we felt confident in our ability to significantly exceed that guidance. We now know that the market's first half strength was a false start. And in fact, the full year market opportunity for both the Roofing and Insulation businesses will be well below the levels that we had anticipated when we entered 2010.

Based on our year-to-date performance and the current operations of our businesses, we continue to remain confident that we will exceed our original $350 million guidance for the year. In light of the significant uncertainty in building materials demand for the remaining two months of the year, we believe that the range of our performance for the year will likely fall between $360 million and $390 million of adjusted EBIT.

We repurchased $100 million of stock during the quarter based on continued strong cash generation. This represents 3.7 million shares, nearly 3% of our outstanding shares. We continue to have 8.2 million shares in the existing authorization.

I will now review how our company is performing against the additional expectations we framed for 2010. We said that we will continue our progress in creating an injury-free workplace. Our ongoing focus on safety resulted in a 16% reduction in injuries year-to-date compared with 2009.

We said that we would drive improved profitability in Composites this year. This segment had another solid quarter. We delivered $43 million in EBIT during the quarter compared to $2 million in the third quarter of 2009.

We said that we would sustain Roofing margins in excess of 20% for the year. While the market demand dynamics can create some volatility in our quarterly performance, we remain on target to reach this goal. We delivered operating margins of 23% in the third quarter and 24% on a year-to-date basis.

We said that we would work to narrow losses in our Insulation business. On a year-to-date basis, our losses are flat with prior year. Despite some positive progress on pricing in the U.S. market, we do not believe that our outlook for the fourth quarter demand will allow us to achieve this goal for the year.

Now I'll review each segment, starting with Composites. Financial results in Composites continue to be strong. Over the last three quarters, it has been gratifying to see the results for Composites returning to their potential. Capacity utilization has returned to the high level seen in 2008. The sequential improvement in pricing that began in the third quarter of 2009 has continued.

Our European business slowed down in August, as we said it would during our second quarter call. The third quarter performance was sequentially flat as expected, but we continue to build on the underlying momentum established during the first two quarters. We continue to see particularly strong demand for composites in Asia, consistent with our growth strategy in that region. Our investment in the new composites facility in China is on track to begin startup by year end.

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