Owens Corning

NYSE:OC

Earnings Call Transcript 2018-Q1

[Operator]

Good day, and welcome to the Owens Corning Q1 2018 Earnings Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Thierry Denis. Please go ahead.

[Thierry J. Denis, Owens Corning]

Thank you, Brian, and good morning, everyone. Thank you for taking the time to join us for today's conference call and review our business results for the first quarter 2018. Joining us today are Mike Thaman, Owens Corning's Chairman and CEO; and Michael McMurray, Chief Financial Officer.

Following our presentation this morning, we will open this one-hour call to your questions. In order to accommodate as many call participants as possible, please limit yourself to one question only. Earlier this morning, we issued a news release and filed the 10-Q that detailed our financial results for the first quarter 2018. For the purposes of our discussion today, we have prepared presentation slides that summarize our performance and results and we'll refer to these slides during this call.

You can access the earnings press release, Form 10-Q and the presentation slides at our website, owenscorning.com. Refer to the Investors link under the Corporate section of our homepage. A transcript and recording of this call and the supporting slides will be available on our website for future reference.

Please reference slide two before we begin, where we offer a couple of reminders. First, today's remarks will include forward-looking statements based on our current forecasts and estimates of future events. These statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially. We undertake no obligation to update these statements beyond what is required under applicable securities laws. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent risks and uncertainties affecting such forward-looking statements.

Second, the presentation slides and today's remarks contain non-GAAP financial measures. Explanations and reconciliations of non-GAAP to GAAP measures may be found in the text and financial tables of our earnings press release available on owenscorning.com.

Adjusted EBIT is our primary measure of period-over-period comparisons and we believe it is a meaningful measure for investors to compare our results from period-to-period. Consistent with our historical practice, we have excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT and adjusted earnings. We adjust our effective tax rate to remove the effect of quarter-to-quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share.

We also use free cash flow and free cash flow conversion of adjusted earnings as measures helpful to investors to evaluate the company's ability to generate cash and utilize that cash to pursue opportunities and enhance shareholder value. For those of you following along with our slide presentation, we will begin on slide four.

And now, opening remarks from our Chairman and CEO, Mike Thaman, will be followed by CFO, Michael McMurray, and our Q&A session. Mike?

[Michael H. Thaman, Owens Corning]

Thank you, Thierry. Good morning, everyone. Owens Corning generated 14% revenue growth this quarter. For the quarter, we saw a decline in margins, primarily associated with the impact of greater-than-anticipated inflation across all three businesses, particularly Roofing. We continue to expect strong results for the year as realized and announced price actions are anticipated to overcome the impact of material and transportation inflation going forward.

Our strong market positions that support our price outlook, combined with our operational execution, expanded geographic reach and the impact of our recent acquisitions, support our efforts to generate consistent results through various market conditions.

In brief, the fundamentals and the outlook of our three businesses and Owens Corning, continues to be strong. It should be noted that our first quarter 2018 results include a full quarter of the FOAMGLAS business and two months of the Paroc business.

As you know, in February, we completed our acquisition of Paroc. This acquisition expands our geographic scope in Europe and broadens our portfolio to include insulation products across the high, medium and low temperature ranges in all three major markets: North America, Europe and China.

We are pleased with the Paroc team, their market position and their high quality technology, which we've begun to leverage in our U.S. mineral wool business. The integration is on track and we're excited about the growth opportunities Paroc will bring to our company and our customers.

Revenue was $1.7 billion, up 14% for the first quarter of 2018 compared with the same period last year. Adjusted EBIT for the quarter was $152 million, down 11%. All three of our businesses were negatively impacted by material and transportation inflation, but the impact was most pronounced in North America, particularly in Roofing and Insulation.

Before I talk about our business results in detail, I'd like to give you an update on our safety program. As I said before, our commitment to safety is unconditional. We are constantly focused on advancing our goal to create an injury-free workplace. Our recordable incident rate for the quarter was 0.46, a 6% improvement over the comparable period last year. This is particularly significant given our extensive efforts to implement our safety standards in Paroc's facilities as part of our integration.

Now I'd like to review our performance and then talk about our outlook for 2018. In our Composites business, we generated EBIT of $60 million in the quarter compared with $71 million in the first quarter of 2017 and delivered EBIT margins of 12%. Results were negatively impacted by lower volumes, primarily from a strong prior year comparison. Material and transportation costs were higher than expected, resulting in a margin performance slightly below our expectations.

In our Roofing business, we delivered EBIT of $97 million in the quarter compared with $125 million in the prior year quarter, with EBIT margins of 15%. EBIT was impacted by a mid-single-digit decline in volumes that tracked the overall market. In addition, margin rates declined as we experienced inflation through the quarter and did not realize price improvement until late in the quarter, associated with our previously announced March increase.

For the quarter, Insulation grew revenue by $197 million or about 50%. This growth, as expected, was driven by the contribution from our FOAMGLAS and Paroc businesses and significant price improvement in the U.S. residential and fiberglass building insulation product line.

Volume gains in U.S. residential were a bright spot as industry-wide capacity tightness drove some marginal volume to Owens Corning. EBIT increased to $32 million, up $27 million from the $5 million in the comparable quarter last year, producing the highest first quarter EBIT in over a decade. Higher price contributed $22 million to this EBIT performance.

Finally, I'd like to highlight a management development. Last month, we announced that Arnaud Genis, our President of Composites, will retire after 30 years in the industry. We announced that effective May 25th, Marcio Sandri will succeed him. Throughout his 17-year career with Owens Corning, Marcio has delivered strong financial and operational results. He is a global executive, well-positioned to make a meaningful impact on both the Composites business and the company.

Arnaud has been instrumental in transforming our Composites business. He's delivered record financial performance and in shaping the long-term direction of our company. We thank Arnaud for his many contribution and wish him and his family well as they begin this exciting new phase of their lives.

Now on to our 2018 guidance, overall, we expect an environment consistent with consensus expectations for U.S. housing starts and global industrial production growth. Consensus estimates call for a strong global economy and a continually improving U.S. housing market that is constructed to our financial outlook.

In Roofing, we expect continued growth in both the new construction and remodeling markets. Return of storm demand to historical averages would result in a mid-single-digit decline in the overall U.S. asphalt shingle market.

In Components, we anticipate that the business will grow at double-digit rates. We continue to target to recover asphalt cost inflation and higher transportation costs through pricing actions. We are optimistic about the May increase – May price increase and anticipate that it should allow us to recover margins to target levels on a go-forward basis. Additional price actions are likely necessary to respond to any further inflation concerns and restore the lost profitability from the first quarter. Overall, we anticipate another strong year for Roofing in 2018.

In Composites, our target continues to be EBIT improvement of about $20 million even with higher-than-anticipated inflation for the year. This increase will be driven from growth in the glass fiber market and improved pricing partially offset by inflation and higher rebuild costs.

In Insulation, we continue to expect to deliver significant earnings improvement in 2018 increasing EBIT by $150 million. Last quarter, I said, our outlook included about $70 million from implemented pricing actions. Based upon the realization of price actions through the end of the first quarter, we are upgrading these estimates to about $90 million. However, the incremental $20 million of price that we've already realized will be required to overcome our new full-year transportation inflation expectations.

The potential benefit from any additional price actions, including our May increase in U.S. residential is not reflected on our outlook. We believe market conditions support further progress on price through the year. The remainder of the EBIT growth is anticipated to come from Paroc and FOAMGLAS acquisitions and improvement in our U.S. mineral wool business.

We expect our Insulation operating leverage for the second half to be consistent with our 50% long-term guidance despite a weaker first half. With additional price realization, full-year operating leverage of approximately 50% is possible. Michael will discuss this in more detail during his remarks.

From a full-company perspective we expect to convert adjusted earnings to free cash flow at about 100%.

As I said during our last earnings call, market conditions should support a number of important milestones in 2018, achieving more than $7 billion in revenue, generating double-digit operating margins in all three businesses and converting 100% of earnings to free cash flow.

Our outlook remains unchanged despite some inflation challenges in the first quarter. Our underlying businesses are strong and we're focused on maximizing growth to achieve our targets.

With that, I'll turn it over to Michael, who will further review the details of our business. Michael?

[Michael C. McMurray, Owens Corning]

Thank you, Mike, and good morning everyone. As Mike mentioned earlier, we produced strong top-line growth, driven by our acquisitions and robust pricing actions in Roofing and Insulation, but our earnings were negatively affected by materials and transportation cost inflation, particularly in North America.

Across all three segments, we experienced approximately $50 million of inflation, which was higher than expectations coming into the year. We have taken a number of pricing actions and achieved $30 million of price improvement in the first quarter compared to the same period last year and further actions are underway. These actions, along with a strong macro environment, position the company to deliver another year of record results.

Now let's start on slide 5, which summarizes our key financial data for the first quarter. You'll find more detailed financial information in the tables of today's news release and the Form 10-Q.

Today, we reported first quarter 2018 consolidated net sales of $1.7 billion, up 14% and over $200 million compared to sales reported the same period in 2017. The Insulation business was the primary driver, resulting from our two acquisitions and strong price execution.

Adjusted EBIT for the first quarter of 2018 was $152 million, down 11% compared to $171 million in the same period one year ago. Substantial pricing progress was more than offset by cost inflation.

Net earnings attributable to Owens Corning were $92 million versus $101 million in the same period last year. Adjusted earnings for the first quarter of 2018 were $90 million or $0.80 per diluted share compared to $97 million or $0.85 per diluted share in 2017.

Depreciation and amortization expense for the quarter was $109 million, up about $25 million as compared to the first quarter of 2017. The year-over-year growth was driven by $17 million of incremental depreciation and amortization from our Insulation acquisitions and $5 million of accelerated depreciation for previously announced restructuring actions. Our capital additions for the quarter were $94 million.

On slide 6, you'll see the detail of our first quarter adjusting items, reconciling our 2018 first quarter reported EBIT of $131 million to our adjusted EBIT of $152 million. For the quarter, our adjusting items totaled $21 million. We adjusted out $17 million of cost primarily associated with the acquisition of Paroc. We also adjusted out $4 million of restructuring charges resulting from the actions announced last year to strengthen Composites' low delivered cost position.

Now please turn to slide 7, where we provide a high level review of our adjusted EBIT performance, comparing the first quarter of 2018 with the first quarter of 2017. Adjusted EBIT decreased by $19 million as strong revenue growth was more than offset by margin compression from cost inflation, materials and transportation. Insulation EBIT increased by $27 million as compared to the prior year. Roofing and Composites EBIT decreased by $28 million and $11 million, respectively. General corporate expenses were $37 million.

With that review of key financial highlights, I ask you to turn your attention to slide 8, where we provide a more detailed review of our business results, beginning with our Insulation business.

As highlighted on last quarter's call, we closed on the previously announced acquisition of Paroc on February 5. Both Paroc and FOAMGLAS integrations are progressing well, and we are pleased with the performance of both businesses in the first quarter. Together, these acquisitions significantly extend our geographic footprint and portfolio technologies across the insulation temperature spectrum.

Sales in Insulation of $596 million were up nearly 50% from the same period a year ago, primarily on the contribution of the Paroc and FOAMGLAS businesses, significant price realization and higher volumes. Commercial execution was very strong in our U.S. residential business.

EBIT for the quarter was $32 million, up $27 million compared to the same period in 2017, producing the best first quarter EBIT in over a decade. The EBIT improvement was driven by strong price execution, the contribution of Paroc and FOAMGLAS and continued growth in U.S. residential.

This earnings growth was tempered by higher than expected transportation inflation and operational headwinds at our new U.S. mineral wool facility that we discussed on last quarter's call. Absent these items, our operating leverage would have been consistent with our long-term goal of approximately 50%, excluding the impact of acquisitions.

Let me give you an update on our new U.S. mineral wool facility. On our last earnings call, we said we expected to make progress during the first quarter. I'm pleased to report that we stabilized manufacturing operations at this facility in March. And while it had been a negative impact to the first quarter, we remain confident the business will be a meaningful tailwind for the remainder of 2018.

On the last earning call, we shared our expectations for full-year 2018 EBIT growth of approximately $150 million in the Insulation business. This guidance was primarily based on the realization of previously implemented pricing actions, contributions from FOAMGLAS and Paroc and improvement in our U.S. mineral wool business.

As Mike noted, we made further price progress in the first quarter, in particular, in our U.S. residential business. As a result, we have upgraded our full-year price estimate to $90 million, based upon the realization of price actions through the end of the first quarter. The additional price attainment from the first quarter is expected to largely offset the $20 million of higher than anticipated transportation inflation for the year. Further price actions have been announced for May, and we have high confidence that we will make even further progress.

For the full-year 2018, we continue to expect EBIT growth of approximately $150 million, driven by the realization of previously implemented pricing actions, contributions from FOAMGLAS and Paroc and the improvement in our U.S. mineral wool business. Based on this guidance, we anticipate second half operating leverage of approximately 50%, excluding the impact of acquisitions. We see the potential for additional earnings growth, but this will be dependent on the benefit of additional pricing actions, primarily in our U.S. residential business. This would potentially position us for 50% operating leverage for the full-year.

One item to note, we expect our second quarter operating leverage will be largely consistent with the first quarter due to downtime cost associated with the upgrade of our Pipe Insulation technology at our Newark, Ohio facility. We are excited about this investment and the technology it brings to our commercial and industrial Insulation business.

Now I'll ask you to turn your attention to slide 9 for a review of our Composites business. Sales in our Composites business for the first quarter were $511 million, flat as compared to the same period in 2017. Favorable foreign currency translation largely offset lower sales volumes.

As we discussed in last quarter's call, we expected a difficult volume comparison in the first quarter as a result of double-digit volume growth we produced in early 2017 from restocking, and a temporary stoppage in the Indian wind market related to regulatory changes. We are confident the Indian wind market will recover in the second half of 2018. Outside of the wind market, the overall Indian glass market remains quite strong.

EBIT for the quarter was $60 million, $11 million lower than the same period last year on higher material and transportation costs and lower sales volumes. Inflation was higher than we anticipated and as a result, our first quarter financial performance was slightly below our expectations. Despite these headwinds, Composites still delivered double-digit EBIT margins in the quarter.

In 2018, we expect continued growth in the glass fiber market driven by global industrial production growth. We expect the benefit from market growth and higher pricing will be partially offset by accelerated inflation and higher rebuild cost. We continue to expect to deliver a fourth consecutive year of record financial performance with EBIT growth of about $20 million, although increased inflation is a headwind to this guidance.

As highlighted on the last quarter's call, the timing of higher rebuild cost will impact our second quarter results. And as a result, we expect the second quarter to comp negatively to last year.

Global growth remained strong, industry utilization rates remained high, and India wind is recovering, as expected, which should produce strong earnings performance in the second half.

Slide 10 provides an overview of our Roofing business. Roofing sales for the quarter were $642 million, up $15 million compared with the same period a year ago, primarily on higher selling prices. Shipments for the U.S. shingle industry were down about mid-single digits year-over-year. Our shingle volumes broadly track the market. The decline in the shingle market was partially offset by double-digit growth in our components business.

EBIT in the quarter was $97 million, down $28 million compared to the same period in 2017 as higher-than-expected asphalt and transportation inflation more than offset higher selling prices. Asphalt inflation is being driven by higher crude prices and strong coking margins. We expect asphalt inflation to be as much or more than we experienced in 2017 based on our current outlook.

Strong trucking demand and a shortage of drivers and equipment has fueled transportation inflation and this has been most pronounced in our Roofing business, where we utilize flatbed trucks, which is one of the tightest transportation markets. These pressures have driven a 15% increase in outbound shipping costs and are expected to persist for the balance of the year.

We are pleased with the progress that we made on our March price increase and we have a high confidence we will make further progress with our May increase. A successful May increase will restore margins for the rest of the year to levels consistent with our long-term guidance. Additional price action will be needed to achieve full-year 2018 margins, consistent with our long-term guidance.

The Roofing business continues to be positioned to deliver another strong year in 2018. We expect continued growth in new construction and remodeling demand for shingles. Strong demand at historical – storm demand at historical long-term averages would result in the shingle market being down mid-single digits. We also expect the Components business to continue to grow at double-digit rates. On a full-year basis, we expect that our pricing actions will cover increased asphalt and transportation costs.

Now let me turn your attention to slide 11, which provides an overview of significant financial matters and our outlook for 2018. In the first quarter, under a previously announced share repurchase program, we repurchased 1 million shares of the company's stock at an average price of $82.86 per share. As of March 31, 6.5 million shares remain available for repurchase under the company's current authorization. As we balance our priorities, with the future deployment of our free cash flow, both dividends and stock repurchases will be important mechanisms to returning capital to shareholders.

In 2018, paying down the Paroc term loan will be a priority. The company continues to expect an environment consistent with consensus expectations for U.S. housing starts and moderate global industrial production growth. In Composites, we expect EBIT to grow by about $20 million, although increased inflation is a headwind to this guidance.

For Insulation, we expect EBIT growth of about $150 million, which excludes the benefit of any additional price actions in the U.S. residential business.

In Roofing, we expect another good year with growth in remodeling and new construction. Storm demand at historical averages would more than offset this market growth. Similar to last year, full-year corporate guidance will be provided on the second quarter call.

Now please turn to slide 12, where I provide guidance on other financial items for the year. As discussed on last quarter's call, improved earnings, better working capital performance and our advantaged tax position has translated into a strong conversion ratio of adjusted earnings to free cash flow in excess of 100% in recent years. In 2018, we expect another strong year of free cash flow and a conversion rate of about 100%.

We expect corporate expenses to be between $140 million and $150 million. Capital additions will be about $500 million. This includes about $75 million of CapEx related to the Paroc acquisition, which is primarily related to a new line in Poland that began construction in the fourth quarter of 2017. We expect this new capacity to be available in 2019.

Depreciation and amortization expense is expected to be about $450 million. Interest expense is expected to be between $125 million and $130 million. We expect that our U.S. tax NOL, along with other carry-forwards and credits will significantly offset cash taxes for some time to come.

As a result of our tax NOL, foreign tax credits and other planning initiatives, we expect our 2018 cash tax rate to be 10% to 12% of adjusted pre-tax earnings. Our 2018 effective tax rate is expected to be 26% to 28% of adjusted pre-tax earnings, which is a six-point reduction from the prior year as a result of U.S. corporate tax reform.

With that, I'll turn the call over to Thierry to lead us in the question-and-answer session. Thierry?

[Thierry J. Denis, Owens Corning]

Thank you, Michael. Brian, we're now ready to begin the Q&A session.

[Operator]

All right. We will now begin the question-and-answer session. Our first question today comes from John Lovallo with Bank of America. Please go ahead.

[John Lovallo, Bank of America Merrill Lynch]

Hey guys. Thank you for taking my question. I guess, in terms of raw material and freight inflation, if things were to stay – if material inflation was to stay at today's levels, are you expecting a full offset with pricing as soon as the second quarter?

[Michael H. Thaman, Owens Corning]

Good morning, John, it's Mike. Obviously, it's going to be different for each of the three businesses. So as we talk through the inflation challenges, in Insulation, we're obviously seeing inflation, but we've already price well in excess of inflation. So really, the inflation we've seen there is an offset to our upgraded estimate today of the amount of price we've already realized.

In the last quarterly call, we had said we had already realized about $70 million of price, on this call we're saying we've already realized $90 million of price. We didn't move the guidance for improvement in our Insulation business from the $150 million of EBIT improvement we have previously guided to because we think, on a full-year basis, we'll see about $20 million of incremental inflation from the time when we gave that guidance. So we think that incremental $20 million in Insulation has been eaten up by our full-year expectation of inflation. And then obviously, we have additional opportunity to go back and get some additional price as we go through the year.

In Roofing, what we said today was we think the May increase, which is the one that's currently announced and the one that's most imminent, would likely get us back to our target margin rates on a year-to-go basis. It would not recover any additional inflation beyond our current expectation and obviously, it wouldn't recover the margin we didn't get in the first quarter as inflation got ahead of price.

So we would expect that we would need some additional pricing action through the summer to get ahead of inflation, really get on top of it, so that our margin rates caught up for some of the margin we lost in the first quarter. But the May increase with good – with good realization of the May increase in Roofing, we would expect we'd be get back to target margin rates on a year-to-go basis coming out of that increase.

In Composites, the inflation is much less because that's a global business. Most of the inflation we're seeing right now is North American and petroleum-based. We probably have some limited opportunity to get price, but as Michael said in his comments and I said in my comments, we do think that the inflation we're seeing in Composites is probably a bit of a headwind to the guidance that we've given, so the execution challenges, they got a little bit higher in terms of overcoming that inflation for execution.

[Operator]

Our next question comes from Matthew Bouley with Barclays. Please go ahead

[Matthew Bouley, Barclays Capital, Inc.]

Hi. Thank you for taking my question. I guess, I wanted to follow-up on the Insulation price increase, specifically, that you've outlined for May. Understanding you're not including that in the guidance, but is it possible if you could outline, what the potential would be in a successful scenario for that? Just to kind of help us gauge, I guess, where – what kind of what the upside is in that segment? Thank you.

[Michael H. Thaman, Owens Corning]

Sure. Maybe I can help you a little bit by just looking at what happened in the first quarter. So when we were on the last call, I guess, that was probably mid-February, we were just beginning to see the impact of the January increase and then we had, at that time, announced an increase on one of our product lines for the end of March.

So we've had, in the last 90 days, the ability to get some additional information about the realization of the January increase and we also had the full impact of what we got in the March increase. I would say that the upgrade to our estimates is probably a mix of seeing good realization from the January increase as well as that additional March increase, which we had not included in our original guidance.

So those two together got us about another $20 million of realized price for the full-year. Obviously, as you get later into the year, May still being relatively early in the year, but as you get increase later in the year, you don't get the full-year impact of those. So we think a good realization of a May increase could have a material impact to the amount of price we would get for the full-year, but I'd be really reluctant to guide to specific numbers related to that increase.

[Operator]

The next question comes from Ken Zener with KeyBanc. Please go ahead.

[Kenneth R. Zener, KeyBanc Capital Markets, Inc.]

Gentlemen.

[Michael H. Thaman, Owens Corning]

Good morning, Ken.

[Kenneth R. Zener, KeyBanc Capital Markets, Inc.]

So price didn't unfold the way expected, just because of (00:30:00), obviously, the asphalt, but the transportation, if we look at your current – the current market price versus where we are for the remainder of next year – the remainder of this year, I think we're really trying to understand how exposed you might be to incremental costs that would therefore further eat up any price gains you might get. First question.

[Michael H. Thaman, Owens Corning]

Sure. Let me take that first with Roofing and then I'll talk a little bit about Insulation. In Roofing, we would be inclined to think that in terms of quarter-on-quarter inflation that we probably are through the worst of it in the first quarter.

Couple reasons to think that. One is we did start to see some inflation in the second half of last year on logistics costs and transportation costs. So we would expect that we're going to comp against a little bit more elevated numbers in the second half of the year.

But the second thing is we've taken a number of actions in the first quarter to manage our freight costs more effectively. I think significantly, one thing we were able to do in the quarter was build a little bit of inventory. I think you heard us on prior calls talk about the fact that we were running at very low levels of inventory and were actually incurring some costs associated with moving product around between facilities in order to meet the service requirements of our customers.

By getting the right inventories deployed across our supply chain, we'll be able to shorten some shipping lanes and still be responsive to the service needs of our customers.

I think the other thing we've done is we have actually gotten more proactive with our customers in trying to get them to work with us to help manage this cost. I'd say probably in the first quarter, maybe half of our volume decline was associated with shipments. Late in the quarter that we were seeing very, very high freight rates. And we kind of delayed those shipments and we'll get those shipped in the second quarter.

So where I think previously we were working on a ship directly to the customer request date in all cases, today, if we're seeing very, very expensive freight, we'll talk to the consumer about what makes sense for us and what makes sense for them. And in some of those cases, it causes a delayed shipment if they've got inventory to cover their current demand.

So I think we've got some management actions in place that are going to help us manage our overall freight spend. And I think our expectations around inflation are probably realistic in terms of what we expect to see on a remainder year basis. So that's why we feel pretty good about our ability to cover the inflation.

Obviously, we've talked, I think, a couple times now about – in the prepared remarks, about the May increase. I mean, the May increase for us in Roofing is very critical to getting the margin rate back on track.

[Operator]

Next question comes from Susan Maklari with Credit Suisse. Please go ahead.

[Susan Maklari, Credit Suisse Securities (USA) LLC]

Thank you. Good morning.

[Michael H. Thaman, Owens Corning]

Good morning, Susan.

[Susan Maklari, Credit Suisse Securities (USA) LLC]

Going back to the Composites, I understand that it sounds like it's a little harder for you to get pricing there. But I guess, can you just give us a little more color on what you're seeing in terms of maybe global competition? It sounds like that had gotten better for a while, has that changed at all? And are you seeing any geographic differences in terms of the pricing power, as you think about that business globally?

[Michael C. McMurray, Owens Corning]

Yeah. Thanks, Susan, it's Michael. I mean, look, maybe what I'd say, kind of first and foremost, if you look back over the last maybe four or five years, we're really pleased with the progress the business has made both from an operational and a commercial perspective.

I'd also remind you that this is a material business and that's competing with other materials. And so any pricing that we take has to be responsive to the different materials that we're competing with.

The other thing that I'd remind you is that a material portion of this business is subject to annual contracts. I'd also remind you that over the period, 2014 to 2017, we made roughly about $100 million improvement in both margin and mix. Last year, price actually went backwards to the tune of about $18 million, if my memory serves me correctly. As we look at this year, other than a difficult first quarter comp and the Indian wind that we – Indian wind weakness that we spoke about, we actually see good demand, so global growth is good.

Utilization rates remain very high, and we're going to make some positive price in 2018 that's just not going to offset inflation. But given the inflation that we're experiencing, no doubt, our competitors are experiencing it and other material producers are experiencing inflation as well. And I think that sets us up well later in the year given the overall strong macro market to make price progress as we move into 2019 – or further price progress, excuse me.

[Operator]

Next question comes from Scott Rednor with Zelman & Associates. Please go ahead.

[Scott Rednor, Zelman & Associates]

Hi. Good morning. I was hoping you guys could just speak to the Insulation volume. I think there was a fair amount of confusion last quarter on where that would shake out, and recognizing that 1Q is a fairly strong number. But I know there's some puts and takes over the balance of the year. So maybe, Mike, you could kind of just walk through how we should think about that?

[Michael H. Thaman, Owens Corning]

Yes, Scott, thanks for the question. I said in my prepared remarks, a bright spot for us in the quarter was volume. We've had a thesis for the business, which is we were going to enter a phase here where due to industry tightness, we would get a disproportionate share of the marginal growth in the industry. I think that's what the first quarter felt like to us.

A couple of our competitors had some production issues, so there was some capacity – additional capacity tightness in the first quarter that was unanticipated. And in a number of cases, that caused volume to come towards Owens Corning. And we benefited from our supply chain and our network manufacturing capacity. So the first quarter volume was a positive and probably above our expectations coming into the quarter.

As you noted on a go-forward basis, we do have some mix in our business and some mix in our market share. On a go-forward basis, we're going to be a little less represented in retail for the remainder of the year, so that'll be a bit of a headwind to our volume growth. I think we will pick up some additional growth in the new construction and the residential side.

So on balance, we still have a bit of a muted view on how much volume is going to drive growth. I think that's going to be very, very impacted by what is the pace and the rate of increase in housing. But certainly we would expect that the seasonality of the business will cause there to be more pounds available in terms of demand in the second, third and fourth quarter this year than there was last year, just because of how seasonality works and certainly more pounds available of demand in the second half than the first half. So we would expect to see very good volumes underpinning our business.

We would anticipate that if we have good overall industry growth that most of that growth opportunity could come towards Owens Corning because of our supply position. And we certainly think it supports our outlook to continue to drive improved margins and try to get prices back to where they were in the previous cycle. Even with the positive outlook we've given and the strong pricing actions we've taken this year, Insulation prices are still below where they were a decade ago and we still got work to do to get them back to acceptable levels.

[Operator]

Next question comes from Michael Wood with Nomura Instinet. Please go ahead.

[Michael Wood, Nomura Instinet]

Hi. Thanks for taking my question. Wanted to just ask about the Louisville market, and where that plant that had suffered the fire stance in terms of whether or not it was restarted. And generally speaking, when your competitors restart mothball plants, how does that end up impacting industry price attempts during that time? Thank you.

[Michael H. Thaman, Owens Corning]

Yeah. Mike, thanks. Our understanding of what's going with industry capacity, I don't want to comment directly on specific competitors' facilities, but we did see industry tightness in the first quarter and some of that was as a result of the fact that there were production issues in our competitors' facilities and we heard that, obviously, from our customers who were coming to us looking for, in particular, the product line you're discussing, which is Louisville.

Our outlook for the remainder of the year is we anticipate that those fade into the rearview mirror and that actually the competitors and Owens Corning both produce well for the remainder of the year. Even given that outlook, in particular, the Louisville market we anticipate is going to be very tight for the remainder of the year. That's a product line that's currently on extended cycles for – certainly for Owens Corning and we anticipate that's probably going to be the reality of the year for most of this year.

Your question about what happens when competitors bring on capacity, it's a growing market where everyone's operating at high levels of utilization. So the capacity that's being brought into the market has been brought in to service demand growth. So we think that that's a pretty natural event. If you have an industry that's growing at 5% or 6% per year, you're going to need one or two new lines per year to meet that demand growth.

So the fact that we're seeing that kind of capacity come in is perfectly logical relative to the demand outlook. So obviously, we've seen good price performance on a year-to-date basis. We have good confidence in the pricing we've already attained and, I think, have an optimistic and bullish point of view on the additional pricing we should be able to get through the year.

[Operator]

Next question comes from Stephen East with Wells Fargo. Please go ahead.

[Stephen East, Wells Fargo Securities LLC]

Thank you. Good morning, Mike. Mike, maybe you could just sort of handicap for us, in looking at both Roofing and Insulation, the likelihood of price hikes both maybe numbers and magnitudes. Obviously, Insulation has more potential but if you could sort of handicap what you think the market might be able to bear as we move through the rest of this year.

[Michael H. Thaman, Owens Corning]

I mean obviously it's difficult for us to give that outlook given the competitive nature of our markets. I'd give you a couple kind of benchmarks to benchmark against. So we are moving Roofing prices up in the first quarter as a result of the March price increase. That one is already kind of baked into the marketplace in terms of where pricing is competitively in the market.

As I said, there is a May price increase that's been announced by Owens Corning. We would, even with that increase, still have Roofing prices that are well below 2014 levels. So we're not – shingle prices came down a bit during the period of time where we saw oil deflation. They came down more slowly for a period of time than what we saw in terms of oil deflation, so we were able to improve our margins during that period.

Now we've seen oil inflect and oil is going back up. We demonstrated last year that in a rising oil environment we were able to get price to offset the impact of inflation. That's certainly our view for this year. But we're certainly not getting to any level of price that is not pricing that's been seen in the market in recent history. So as recently as 2014, shingles were more expensive than where they are today and we've seen good growth of the market during that period of time.

As I said on the Insulation side, we're still well below 2006 peaks, so that's in nominal terms. In real terms we're well, well below. It's a very valuable product. So I don't see that there is a price level that's in our outlook on the pricing that's somehow has an impact on demand for the product.

[Stephen East, Wells Fargo Securities LLC]

All right. Thank you. That's helpful.

[Michael H. Thaman, Owens Corning]

Thank you.

[Operator]

Next question comes from Stephen Kim with Evercore ISI. Please go ahead.

[Stephen Kim, Evercore ISI]

Yeah. Thanks very much guys. I just wanted to try to make sure that we're crystal clear on what you're saying with respect to the Roofing margin guidance. You said that a successful May increase would bring margins consistent with long-term guidance basically for the rest of the year. Since you were talking about a May increase, I want to be clear that you're saying that you think that that May increase realization could bring margins consistent with your long-term guidance even as soon as 2Q.

And then as part of that you mentioned that you expected to be able to offset your transportation and asphalt costs this year. But you didn't specifically mention all inputs because you also had some other inputs in this quarter I think about $9 million or something headwind that was not asphalt or transport. And so I just want to make sure that you were talking about covering all of those or just the asphalt and transport, but not this other category.

[Michael H. Thaman, Owens Corning]

Okay. Thank you, Stephen. Well, let me just kind of reconcile margins a little bit and then get around to your question. So in the first quarter our margins were 15%. What we disclosed in our Q was $13 million of price improvement and $33 million of inflation from input costs and logistics, so the net of those two is $20 million, which is about three points to sales. So without that inflation a more normalized margin in the quarter had we been able to cover it would have been closer to 18%, which I think is pretty consistent with what we've seen historically in the business when we have really good years where we're producing kind of that 20% type margin. We typically start the first quarter a little bit below that number just because of geographic mix, channel mix and some other reasons and then we tend to get a little bit better margin performance in the second and third and then tail off a touch in the fourth.

So in round numbers, I would say we're probably three points of margin behind coming out of the first quarter as a result of only $13 million of price on $33 million of inflation. What we're doing with, obviously, the May increase is trying to get caught up on what we would see in terms of quarterly inflation. And then obviously, as we get into the second half of the year, we saw a little bit of inflation in the second half of the year. So the comps should get a little bit better unless we see another bump up in oil prices.

You added to the question, the nuance of input cost inflation versus asphalt cost inflation. So if you read – on a careful reading of our Q, you would see that we had $22 million of input cost inflation, $11 million of which we attribute – I'm sorry, $13 million of which we attributed to asphalt cost. The remaining $9 million, we now have a fairly sizable underlayment business as a part of our InterWrap acquisition and all of that is polypropylene.

Polypropylene, we've also seen inflation as it comes off of oil-based feedstock. So a significant portion of that remaining $9 million would come with polypropylene. That is included in our pricing outlook, so we have different arrangements in terms of how we price in the underlayment market, but we're moving underlayment prices in the market and then also some of our contracted business would have escalator clauses and other things that allow us to capture that cost. So we feel good about that.

There is some non-oil-related input cost inflation. Typically, we're able to handle that through pricing or through productivity. Our manufacturing team does a wonderful job of driving cost down every single year. So without getting – grinding too deeply into the numbers, I think, the broad guidance which says we can get enough inflation to – we can get enough price increase to offset the impact of asphalt cost inflation and logistics, is consistent with our point of view that that would get us back to margins for the business as consistent with our long-term guidance on margins.

[Operator]

Next question comes from Sam Eisner with Goldman Sachs. Please go ahead.

[Samuel H. Eisner, Goldman Sachs & Co. LLC]

Yeah. Thanks so much and morning guys.

[Michael H. Thaman, Owens Corning]

Morning, Sam.

[Samuel H. Eisner, Goldman Sachs & Co. LLC]

So just a quick follow-up on that one. I guess, this would then be a two-part question because I got a little confused on that answer. Are you saying long-term margins are the 18% level that you used to report or the 20% based on the most recent Analyst Day? And then secondarily, when you think about the $50 million of overall inflation you cited for headwinds in the first quarter, how should we think about that number for the entirety of 2018?

[Michael H. Thaman, Owens Corning]

Okay. So the long-term guidance or the margin guidance for the business is 20% margins. That's what we said at our Investor Day, that's what we delivered last year. Certainly, coming into this year, that's where we would have set expectations for the business in terms of what we are looking for.

My commentary about being about three points of margin off of that target in the first quarter is based on history. And I think if you look at history, you'd see many of the years where we delivered 20% margin performance, our first quarter performance was a bit below that. Now last year was a bit of an anomaly on that because of the shape of the inflation curve, but our general expectation in the business is that the first quarter, from a margin rate point of view – from a volume point of view, first quarter is typically pretty good. From a margin rate point of view, we typically lag a bit in the first quarter and then improve through the year. So we would expect that we would get pricing here that would move margin rates back to that 20% type target that we've set.

Obviously, to do that, we're going to have to do that relatively quickly, so it's going to have to happen in the second and third quarter in order for it to happen on a year-to-go basis. So we are focused on getting margins back and getting them back in the second quarter.

What we've said though is if we were to just be 20% margins on a year-to-go basis, then obviously we wouldn't recapture the five points of margin we're missing or three points of margin we're missing from the first quarter and the first quarter come in closer to 18%. So we're going to need to get above that target coming out of May in order to be able to get back to full-year margins of 20%.

Probably May is not sufficient to do that and then probably there would need to be another pricing action during this summer in order to achieve that. It'll depend on market conditions and volumes, et cetera, whether or not we're able to get all of that done this year. But certainly, on a year-to-go basis, our focus is getting back to that 20%-type margin target, which we think is very achievable.

[Operator]

Next question comes from Garik Shmois with Longbow Research. Please go ahead.

[Garik S. Shmois, Longbow Research LLC]

Yeah, thanks. Just a follow-up on that last point. Just wondering, in your confidence in getting further Roofing pricing, just given you've got in the second half of the year, assuming a normal storm year, very difficult comparisons and that volumes are going to be down high single-digit, low-teens, let's say, in the second half, is the market strong enough to support future Roofing pricing actions?

[Michael H. Thaman, Owens Corning]

Yeah, I mean, obviously, we believe it is. I think the conversation in the market today is markedly different than what it would have been two years ago and I'm not talking about Roofing, I'm talking about all building materials. I mean, there's a lot of inflation across most of the building materials, the distributors who make a living, buying and reselling these materials are living in an inflationary environment and are using their skill sets in order to make sure that they are moving pricing through the market. So they have an incentive to want to see that they manage inflation well. We have an incentive to communicate very openly on where we think prices are going to go so that they are able to manage that inflation.

They have other non-material related inflation too. So their opportunity to try to sustain their margins or improve their margins comes from moving pricing on the products they sell and then using some of that advanced margin to cover the inflation that they are experiencing. So I think, generally in an inflationary environment, distributors do well, provided that expectations are well thought out between the manufacturer and our customer.

So I think the market environment is one where the conversation in the market is how do we manage the inflation we're seeing to make sure that we achieve our business goals. And our business goals are not, in some way, in conflict with the downstream goals of our customers. So we feel like we've demonstrated that in March that we'll able to get that done here in the second quarter. And then even if volumes were to begin to decline some in the second half on a comparable basis, a deflationary environment is not really good for anybody, so we would hope that pricing would hold.

[Operator]

The next question comes from Keith Hughes with SunTrust. Please go ahead.

[Keith Hughes, SunTrust Robinson Humphrey, Inc.]

Yes, I'm sure weather has played some role in demand here, but – Roofing and Insulation. I guess, if you could just give us any kind of indication in April, if you've seen with either, within Roofing or Insulation, an inflection up or down in terms of volumes?

[Michael H. Thaman, Owens Corning]

Keith, I mean, it's a good question. I don't think that we would necessarily see it in our order volumes. Roofing is typically, in the first quarter, a product that goes into inventory. So we talk to our customers a lot about those sell-through and try to get a feel for how they feel about the market.

In the northern part of the country, the market got to a slow start because we had a lot of bad weather up here. You've got regional differences based on some of the carryover of storm demand, so Florida has been very strong. The southwest has been a little bit weaker because it was very strong last year, so it's comping a little bit weaker versus the last year.

So I would say we see some regional differences associated with kind of specific things.

On the Insulation side, the market's been very, very tight, so really it's been our customers asking for the product as soon as we can ship it. So I don't feel like we have much inventory that's out there in the channel. Inventories have been pretty tight for us as a manufacturer. And so as a result, I think what we're seeing is demand that paces what is the market demand right now.

[Operator]

The next question comes from Michael Eisen with RBC Capital Markets. Please go ahead.

[Michael Eisen, RBC Capital Markets LLC]

Good morning, gentlemen. I was hoping that you guys could take a second to talk about Paroc and Pittsburgh Corning. I think the results that came in from those businesses were better than I had anticipated. And just wanted to see how your outlook is for the end market demand there? And how the integration process is going relative to your initial expectations?

[Michael C. McMurray, Owens Corning]

Sure. This is Michael. So maybe I'll start high and then I'll go low specifically around the first quarter results.

But both acquisitions are integrating very, very well. So obviously, the Pittsburgh Corning acquisition that we closed on the middle of last year, integration activities are quite advanced and are broadly in line with our business case expectation or even a bit better, so that's going well.

Paroc, which we closed on in early February, is off to a strong start. I'd say end markets, broadly in line with expectations, so we're seeing growth where we expected growth.

Obviously, within Pittsburgh Corning, we had highlighted that one of the key markets is LNG, which is going through a little bit of an air pocket, but actually – we actually see demand growth probably coming a bit sooner than we originally anticipated when we closed on the deal.

Specifically, to the quarter itself, if I'm not mistaken, acquisitions delivered about $9 million or $10 million of EBIT, which may have been below folks' original expectations. At a high level, I tell you that both businesses have similar seasonality to our North American Insulation business. And so that's why the results in the first quarter in particular were a little bit low.

And then Pittsburgh Corning has an industrial business, where things will kind of move around a little bit lumpy maybe quarter-to-quarter.

But again, at a high level, acquisitions are performing very well and tracking on or a bit above business case.

[Operator]

Our next question comes from Kathryn Thompson with Thompson Research Group. Please go ahead.

[Kathryn Ingram Thompson, Thompson Research Group LLC]

Thank you. Just a quick follow-on to that question, appreciated the $9 million to $10 million contribution in the quarter from acquisitions. But understanding that Paroc, you don't have a full quarter impact from having that in your portfolio. What was – from acquisitions, what's the full quarter top line and EBIT contribution, had it been included for the full quarter?

And then finally, I think it's important to understand, there is a different dynamic for pricing realization in these acquired businesses versus more the resi focus. If you could just have a few points just on the differentiation of how pricing is approached in that market versus resi? Thank you.

[Michael H. Thaman, Owens Corning]

Kathryn, let me start by talking about the pricing dynamic, and then I'll turn it back to Michael to talk a little bit about the quarter. I'd like to remind you that the primary inflation we're seeing here is U.S. based inflation, and it's asphalt and transportation-based inflation.

Paroc is, obviously, primarily a Northern European business. We're not seeing the kinds of inflation issues or challenges we have over there. So the pricing is being determined really by the competitive set and the market dynamics in Northern Europe.

And I would say, very, very different in terms of the dynamics. And we've got an outstanding management team there that's doing a good job of managing volumes and margins in the business, and we've been really happy with what we've seen through the first kind of three months of owning that business.

Pittsburgh Corning, I would say, is quite similar, in that, it's got a European business, and then it has a global technical Insulation business. It's a very valuable product relative to our product, so the value of the product causes our transportation costs to be a much less significant portion of the cost of goods than what we would see in Insulation or Roofing, where a typical truckload product is in the $15,000 range for both Insulation and Roofing.

So if you get more valuable products, you get out of the bottlenecked or congested U.S. transportation market. These themes that we've talked about on the call don't really apply. So we feel very good about our ability to manage price and margin in both those businesses and don't really have some of the challenges in those businesses that we're addressing in our Roofing and Insulation business today.

[Michael C. McMurray, Owens Corning]

And then...

[Operator]

Oh, I'm sorry.

[Michael C. McMurray, Owens Corning]

Yeah. And then I was going to handle the follow-on question that Kathryn had as well. So in regards to Paroc, when we closed the acquisition in early February, we gave guidance for the full year. So on a full year basis, we said $500 million of revenue, $100 million of EBITDA and $50 million of EBIT.

Obviously, you're going to have to take 11/12ths of that, because we didn't own it for the full year. And so – and all that impact is largely in the first quarter. And then as I said earlier, this business has seasonality that's not dissimilar to our North American Insulation business.

[Operator]

The next question comes from Phil Ng with Jefferies. Please go ahead.

[Philip Ng, Jefferies LLC]

Hey, guys. You're seeing very strong momentum on Insulation pricing. It sounds like the markets are still pretty tight. But it's been a while since we've seen this type of momentum. So can you remind us historically in a tight market with rising inflation, how many price increases has the market seen in the past? Thanks.

[Michael H. Thaman, Owens Corning]

Yeah. Sure, Phil. I mean, I would go all the way back to kind of 2004-2005 timeframe when I was CFO at that time, so I was well involved with the business going back to that period of time. And my recollection is that we had a pretty good cadence over a couple year period of time of three increases per year that was typically an increase early in the year, and then there would be an increase kind of in the middle of the spring. And then as you got into kind of the peak of demand season, which would really start to kick in kind of mid-summer, that would be an opportunity to potentially go back on a third increase.

So, we were significantly more profitable through that cycle. I guess, I would say, from an Owens Corning point of view, we maybe had less urgency to believe that we needed to get prices back to acceptable levels, because we just haven't gone through the gigantic trough that we've had for the last decade. So, I think in this case, the climb is steeper because we have more to climb. But I think that's probably not different than what has been demonstrated in the past with our business in terms of its ability. Once it gets on the climb, it can climb pretty quickly.

[Thierry J. Denis, Owens Corning]

Hey, Brian, this is Thierry. It looks like, we have room for probably one more question before we offer some closing remarks.

[Operator]

Okay. Our final question today will be from Michael Rehaut with JPMorgan. Please go ahead.

[Michael Jason Rehaut, JPMorgan Securities LLC]

Thanks. I appreciate you sneaking me in under the wire here. I guess, just wanted to circle back, Mike, to your comments about Composites with the reiteration of the $20 million EBIT improvement expectations. But at the same time, you kind of said that there's somewhat of a limited opportunity to get incremental price in North America, and the incremental inflation does appear to be a little bit of a headwind to the guidance. So, I just wanted to understand, kind of – you reiterated the $20 million improvement, but there seems to be some cautionary remarks around that. So, are we to kind of think that maybe it's closer to $15 million or $10 million, what? If you could just help us kind of quantify what the downside is to that if indeed you're kind of veering towards something a little bit below $20 million?

[Michael C. McMurray, Owens Corning]

Hey, Mike, it's Michael, I'm happy to take the question. So, I mean, so no doubt on the call today, we signaled that the inflation that we are seeing in Composites was maybe a little bit higher than we anticipated. And that's predominantly in North America, and it's predominantly related to transportation. I would point out that the value of Composites on a truck is substantially higher than either Roofing or Insulation, so the overall impact is not as material.

But it is a bit of a headwind, and we wanted to point it out. Obviously, all of the earnings growth comes in the second half, but we're reasonably confident that we can get that done. The second half comp gets a bit easier. Obviously, we're coming off the difficult comp from the first quarter. We also had the credit event in the third quarter of last year. And then in the event, it actually got soft in the second half of last year as well. So we feel pretty good about the guidance, but we did want to introduce a little bit of caution, but I don't think it's material.

[Operator]

This will conclude our question-and-answer session. With that, I'd like to turn the conference back over to Thierry Denis for any closing remarks.

[Thierry J. Denis, Owens Corning]

Very good. Well, thank you, everyone, for joining us for today's call. And actually, Mike Thaman will offer some closing remarks.

[Michael H. Thaman, Owens Corning]

Okay. Thank you, Thierry. Obviously, the quarter was a little bit noisier than we had hoped due to some of the unexpected inflation and logistics costs that we experienced, so in businesses that we know have great fundamentals and great ability to produce financial results, we had some headwinds in the quarter that disturbed our margin rates, changed a little bit of our expectations where we thought we'd be in the quarter. We think we've addressed those issues very directly in terms of how we're managing the business.

Most importantly, we believe we have pricing power given our market positions. And also given where our industries are, that we have the ability to go back and recover this price, so we think it really is a timing issue in the first quarter. We will improve as we go through the year, and we really haven't moved off of any of our substantive guidance points for the full year despite the fact that the first quarter was a little bit weaker than we expected.

So, we're looking forward to accelerating out of the first quarter and really showing improved performance in the second, third and fourth and delivering another great year. And that's really fundamentally driven by the fact that we have outstanding businesses, outstanding industries with really great market positions. And our confidence in that continues unabated, and we're looking forward to seeing better financials come through the results for the remainder of the year.

Thanks for joining us. We look forward talking to you again on the second quarter call.

[Operator]

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.