Owens Corning

NYSE:OC

Earnings Call Transcript 2019-Q2

[Operator]

Good day and welcome to the Owens Corning second quarter 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded.

At this time, I’d like to turn the conference over to Thierry Denis, Vice President of Investor Relations. Please go ahead.

[Thierry Denis, Vice President, Investor Relations]

Thank you and 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 second quarter 2019. Joining us today are Brian Chambers, Owens Corning’s Chief Executive Officer, 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 a 10-Q that detailed our financial results for the second quarter 2019. For the purposes of our discussion today, we have prepared presentation slides that summarize our performance and results and will refer to these slides during the 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 2 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 and presentation, both of which are 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 results.

Consistent with our historical practice, we have excluded certain items that we believe are not representative of our going 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 that enhance shareholder value.

For those of you following along with our slide presentation, we will begin on Slide 4.

Now, opening remarks from our CEO, Brian Chambers, who will be followed by CFO Michael McMurray and our Q&A session. Brian?

[Brian Chambers, Chief Executive Officer]

Thanks Thierry, and good morning everyone. Thank you for joining us today.

In the second quarter, we delivered record revenue of $1.9 billion, generating adjusted EBIT of $231 million. These results were driven by good commercial execution, strong manufacturing performance, and disciplined cost controls across the company. In addition, we significantly increased our free cash flow in the quarter through targeted working capital improvements and capex management.

Before I talk further about our second quarter results, I want to provide a brief update on the progress we are making on our key focus areas to continue delivering strong financial performance.

Coming into the CEO role, I outlined three operating priorities for our company: accelerate organic growth, drive improved operating efficiencies, and generate strong free cash flow. Over the past few months, I’ve spent a significant amount of time visiting our facilities around the world to review our initiatives, assess our market opportunities, and meet with our customers. I came away from these interactions with increased confidence that we are focused on the right priorities and that we have additional opportunities to grow revenues and strengthen the through-the-cycle earnings power of our company.

Within each business, we are implementing specific initiatives to drive our performance. In insulation, we are delivering solid growth in our technical and other building insulation businesses through geographic and product expansion as we continue to drive cost synergies through our integration work from recent acquisitions. In our North American residential fiberglass business, we are utilizing automation and further investments in process technology to improve manufacturing efficiencies and reduce costs as we position ourselves commercial to capitalize on the housing market. In composites, we are generating volume growth as we focus our commercial efforts on higher value applications such as glass non-wovens and specific markets like India, and we continue to improve our low-cost manufacturing position through our strategic supply agreements, completed large-scale furnace investments, and additional productivity.

In roofing, we are leveraging our vertical integration, material science capabilities, and commercial strength to design and market unique roofing shingles and components that appeal to contractors, homeowners and distributors. Across all our businesses, we continue to utilize our enterprise model to strengthen our market-leading positions through shared customers served by integrated commercial operations, core material science and manufacturing technology, cost effective and scalable corporate functions, and a global infrastructure that allows us to expand our geographic reach efficiently.

Now I’d like to discuss our second quarter results, starting with safety. Our performance this quarter improved versus quarter one and remained consistent with prior year, with a recordable incident rate of 0.65 versus 0.61 in the second quarter of 2018. Sixty-four percent of our sites are injury-free this year and almost half of our sites have remained injury-free for a year or more.

Our financial results for the quarter reflected good commercial and operational execution across the company, leading to organic revenue growth of 5%, 7% on a constant currency basis, with adjusted EBIT growth of 8%. Revenue grew by $94 million and adjusted EBIT improved $17 million on increased volumes, higher prices, and improved manufacturing performance.

In insulation, our technical and other building insulation businesses continued to produce strong results despite some softer market conditions in parts of Europe. In our North American residential fiberglass business, lower sales volumes and continued production curtailments more than offset pricing gains which were primarily the result of carryover from last year. In composites, we increased volumes through our commercial efforts; however, negative currency translation impacted both our top and bottom lines. Our operational focus continued to deliver strong manufacturing performance, which more than offset the impact of higher inflation. In roofing, we delivered volume growth above the market, consistent with the expectations we outlined during our first quarter call, based on strong customer demand for our products and more favorable geographic mix.

We were successful in realizing price from our April increase; however, this was offset by asphalt costs which continued to rise throughout the quarter. We continue to maintain strong cost controls across the entire company. Overall, operating expenses in the first half were below last year and we have reduced our full-year outlook for corporate expenses.

In addition, coming into the year we highlighted our commitment to improve our free cash flow in 2019 through an increased focus on managing our inventory and capex investments. In the second quarter, we improved our free cash flow by $130 million versus prior year, putting us on track to generate significant free cash flow in 2019. We are also actively managing our capital investments and have reduced our full-year expenditures by $25 million. We continue to prioritize free cash flow to ongoing dividends, a reduction of the Paroc term loan, and share repurchases.

Before turning it over to Michael to discuss our financial performance in more detail, there are a few other items I would like to comment on. First, we were honored to earn the number one ranking on Corporate Responsibility Magazine’s 100 Best Corporate Citizens list for 2019. This is the fifth consecutive year we were named to the top 100 list, which recognizes standout environmental, social and governance performance in companies in the Russell 1000 Index. Additionally, I encourage you to review our 13th annual 2019 Sustainability Report. It highlights our significant sustainability advancements and progress toward our 2020 goals. I’m very proud of what our 20,000 employees have accomplished to make a positive difference in everything we do.

Second, as we announced earlier this month, Julian Francis stepped down to become the President and CEO of Beacon Roofing Supply. Julian made numerous contributions to Owens Corning over the nine years he was with the company, and I wish him all the best in his new role. Todd Fister, who most recently our European mineral role and global foam glass businesses, was appointed President of the insulation business. Given Todd’s background and experience, I am confident he is the right leader to continue driving the growth and performance of our global insulation business.

In closing, I am pleased with our execution and performance in the second quarter, delivering record revenue, strong earnings growth and improved cash flow. We have a clear set of operating priorities, we have market-leading businesses and an enterprise model that creates unique value, and we have a strong and energized team dedicated to the success of our customers and our shareholders. I believe we are well positioned to capitalize on our market opportunities in the second half and beyond.

With that, I will turn it over to Michael to review our financial performance and outlook. Michael?

[Michael McMurray, Senior Vice President, Chief Financial Officer]

Thank you Brian, and good morning everyone. As Brian mentioned earlier, Owens Corning had a good second quarter, delivering record quarterly revenue of $1.9 billion and net earnings growth of 14%. We had strong commercial and operational execution in the quarter and we’re positioned to deliver another year of strong earnings performance despite some challenging markets.

For the quarter, revenue grew by nearly $100 million and adjusted EBIT grew by $17 million on stronger volumes, higher pricing, solid manufacturing productivity, and good cost control. Operating cash flow performance for the quarter was very strong at $438 million and included progress on working capital.

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

Today, we reported second quarter 2019 consolidated net sales of $1.9 billion, up 5% compared to sales reported for the same period in 2018, driven by higher sales volumes in roofing. On a constant currency basis, we delivered consolidated organic revenue growth of 7%. Adjusted EBIT for the second quarter of 2019 was $231 million, up $17 million compared to the same period one year ago as good commercial and operational execution across the enterprise generated volume growth, price gains, and manufacturing productivity. Net earnings attributable to Owens Corning for the second quarter were $138 million compared to $121 million in the same period last year. Adjusted earnings for the second quarter of 2019 were $143 million or $1.31 per diluted share compared to $132 million or $1.18 per diluted share in 2018.

Depreciation and amortization expense for the quarter was $112 million, up slightly as compared to the same period a year ago. Our capital additions for the quarter were $107 million.

On Slide 6, you’ll see the detail of our second quarter adjusting items, reconciling our 2019 reported EBIT of $230 million to our adjusted EBIT of $231 million. For the second quarter, our adjusting items amounted to a $1 million change related to the previously announced composites low-delivered cost actions.

Now please turn to Slide 7, where we provide a high level review of our adjusted EBIT performance comparing 2019 to 2018. Adjusted EBIT increased $17 million. Roofing EBIT increased by $24 million as compared to the prior year. Composites EBIT decreased by $4 million and insulation EBIT decreased by $7 million. General corporate expenses were $29 million, a $4 million improvement versus the prior year on disciplined cost management.

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

Sales in insulation for the second quarter were $661 million, down 3% from the same period a year ago. The negative impact of lower sales volumes primarily in our North American residential fiberglass insulation business, along with negative foreign currency translation was partially offset by higher selling prices. EBIT for the quarter was $42 million, down $7 million compared to the same period in 2018. The progress in our technical and other building insulation businesses was more than offset by lower sales and production volumes at our North American residential fiberglass insulation business, which is consistent with the expectation we set on our last call. Improved manufacturing overcame inflation in the quarter.

Improved performance in the technical and other insulation businesses was strong as a result of solid commercial and operational execution despite some weaker markets in Europe. We continue to expect this portfolio of businesses to generate revenue and earnings growth in 2019, driven by improved operating performance in our U.S. business and growth in global construction and industrial markets.

In our North American residential fiberglass insulation business, we’d previously highlighted the difficult volume comparison we would face in the first half of this year in the business as a result of some share loss and weaker housing starts. As expected, lower demand in the quarter and the impact of production curtailment actions in this business more than offset positive pricing. For this business, we have made significant progress in our production curtailment plan in the first half of the year. Curtailment cost in the second quarter should represent the high mark for the year. We expect additional curtailment actions in the second half but at a lower rate than the first half.

The price improvement that we realized in the second quarter for our North American residential fiberglass insulation business was primarily the result of carryover from 2018 pricing actions. Consistent with our goal of recovery in our market position, we made pricing adjustments to become more competitive with prevailing market prices. This improved our share position but has impacted our full-year outlook for price in 2019.

Current consensus estimates for U.S. housing starts would suggest that 2019 full-year lag starts will be down about 3%, which is relatively unchanged from the time of our last call. As a reminder, because of weaker fourth quarter and first quarter housing data, lag starts for the first half of the year were down about 7% year-on-year. For the second half of the year, lag starts are expected to be relatively flat year-over-year.

For 2019, we continue to expect growth in the technical and other building insulation businesses. We expect that this earnings growth will be more than offset by lower sales and production volumes in the North American residential insulation business. Our outlook for the second half in the insulation business stronger than in the first half based on the expectation of improving U.S. housing starts and normal seasonality. Although we made progress in the second quarter versus the first quarter, we would expect to comp negative in the remaining two quarters in 2019.

Now I’ll ask you to turn your attention to Slide 9 for a review of our composites business. Sales in composites for the second quarter were $535 million, down 1% compared to the same period in 2018. During the quarter, the business delivered volume growth of 4% despite slower global growth, particularly in Europe, North America, and global automotive markets. This revenue growth was largely offset by negative foreign currency translation. EBIT for the quarter was $67 million, down compared to $71 million in the same period last year. Manufacturing productivity gains and higher sales volumes largely offset input cost inflation and negative foreign currency. EBIT would have been flat on a constant currency basis. Composites delivered 13% EBIT margins for the quarter.

The composites business continues to deliver strong commercial and operational performance, and we were particularly pleased with manufacturing performance in the second quarter. From a cost perspective, we expect that our recently completed low-cost India facility expansion, our high strength glass strategic supply lines with CPIC in China, and our previously announced high cost smelter restructuring actions will drive manufacturing productivity and improve our cost position in the second half, which will further build in 2020. For 2019, we continue to expect growth in the glass fiber market consistent with the historical relationship with global industrial production growth. Global growth expectations have moderated as compared to the same time of our last earnings call.

Our confidence in improved operational performance has strengthened during the quarter. As a result, we continue to expect volume growth and improved operating performance to offset inflation.

Slide 10 provides an overview of our roofing business. Roofing sales for the quarter were $778 million, up 18% compared to the same period a year ago, primarily driven by higher sales volumes and higher selling prices. The U.S. asphalt shingle market improved by 4% in the second quarter as a result of accelerated storm activity and distributors replenishing inventories. As we discussed in our recent earnings calls, our volumes trailed the market the last two quarters due to the timing of distributor shipments and unfavorable geographic mix. This quarter, our roofing segment volumes grew by 13%. Our volumes outperformed the market on a higher share of industry shipments with better geographic mix, which puts our market share in line with our historic position on a rolling 12-month basis.

EBIT for the quarter was $151 million, a $24 million increase from the prior year primarily due to higher sales volumes. EBIT margins of 19% were in line with last year as production volumes remained relatively flat and pricing kept pace with inflation. The roofing business has consistently offset inflation with price. Our cash contribution margins continue to be healthy and support EBIT margin consistent with our long-term guidance. Asphalt costs remain high with inflation expected to persist through the third quarter. We implemented a successful April price increase and we announced a further increase effective in July to offset expected asphalt inflation.

The roofing business is positioned to deliver another strong year in 2019. Based on the second quarter market performance, we have improved our full-year market outlook and now expect U.S. shingle industry shipments to be relatively flat.

Now please turn to Slide 11 where I provide more context on our business outlook for 2019. The company’s outlook is based on an environment consistent with consensus expectations for global industrial growth, U.S. housing starts, and global commercial industrial construction growth. The global growth outlook has softened since our last earnings call; however, our commercial and operational execution to date has been strong.

In insulation, the company expects earnings growth in the technical and other building insulation businesses. The company anticipates this earnings growth will be more than offset by lower volumes and production curtailments in the North American residential fiberglass insulation business. In composites, the company continues to expect growth in the glass fiber market, although at a lower rate than our previous outlook. The company continues to expect volume growth and improved operating performance to offset inflation.

In roofing, the company has improved its outlook and now expects U.S. shingle industry shipments to be relatively flat. For Owens Corning, the company still anticipates a higher share of industry shipments and a favorable geographic mix comparison to the prior year. Contribution margins through the first half of 2019 position the business for continued strong performance.

Now please turn to Slide 12, where I provide guidance on other financial items for the year. Over the last four years, improved earnings, better working capital performance, and our advantaged tax position translated into a strong conversion ratio of adjusted earnings to free cash flow in excess of 100%. In the second quarter, our free cash flow performance was strong at $323 million. Inventories improved sequentially by about $50 million in the quarter. Further improvements are expected in the second half. For the year, we are confident that we will deliver another strong year of free cash flow conversion.

At this time, the company plans to prioritize free cash flow to ongoing dividends and making progress in paying down our bank term loan. Sequentially, we reduced net debt by over $300 million, which included paying down the Paroc term loan by $100 million. The remaining balance on the term loan is now $400 million. Additionally, free cash flow could be available for share repurchases under the company’s existing authorization, which has 3.6 million shares available for repurchase.

We now expect corporate expenses of $125 million to $135 million. This is a $15 million reduction to our prior guidance as a result of strong cost controls and the impact of performance-based compensation. Capital additions are now expected to total approximately $475 million, which represents a $25 million improvement from our previous guidance. Depreciation and amortization expense is expected to be about $460 million. Interest expense is expected to be about $130 million. As a result of our tax NOL, foreign tax credits and other planning initiatives, we expect our 2019 cash tax rate to be 10% to 12% of adjusted pre-tax earnings. Our 2019 effective tax rate is expected to be 26% to 28% of adjusted pre-tax earnings.

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

[Thierry Denis, Vice President, Investor Relations]

Thank you Michael. We are now ready to begin the Q&A session.

[Operator]

[Operator instructions]

Our first question today will come from Stephen Kim of Evercore ISI. Please go ahead.

[Stephen Kim, Evercore ISI]

Thanks very much, guys, appreciate the commentary here. I wanted to ask you about the EBIT guide on insulation and the comment about automation and process improvements in that segment. In the quarter, you did pretty nicely here in a tough environment, it looked like with good cost control and relatively low decremental margins, but your guide, if I heard you correctly Michael, was for EBIT to be down year-over-year in insulation in both 3Q and 4Q. I wanted to make sure I heard that right because by our numbers, it looked like 4Q could actually swing--you know, be flat to positive. I was wondering if there’s anything that’s going to be landing in 4Q that could be depressing that outlook in 4Q, if there is any--if you’re assuming volume will be flat to down or not, and if you could talk about the automation and process improvements a little bit more that you alluded to at the very beginning of the call.

[Michael McMurray, Senior Vice President, Chief Financial Officer]

Okay Stephen, I’ll take the question in regards to what the guide was for Q3, Q4, and you’re right - I did guide that third quarter and the fourth quarter would comp negative to last year, and then I’m going to hand it to Brian to talk a little bit about automation.

[Brian Chambers, Chief Executive Officer]

Yes, thanks Stephen for the question, good morning. If we take a look overall in the insulation business, I think we’ve talked about the two parts of the businesses. In terms of our outlook in the back half, we continue to see growth in revenue and earnings in our technical and other insulation businesses. We’re seeing good progress there, we continue to expect better volumes and pricing as we move into the second half. On the res side, I think we’ve talked about some of the adjustments that we’ve made in our pricing in quarter two in terms of getting our prices competitive in the market. That has started to restore some of our share position in the quarter.

I think in our residential insulation business as we walk into the back half, we continue to expect to perform better than first half. We think there’s a better market outlook with starts increasing the normal seasonality of the business. We’re starting to see some of that volume come back to us in terms of restoring our historical share position, and we think we’re better positioned overall in terms of some of the manufacturing performance that I talked about in terms of automation and process improvements.

Specifically, we’re making investments in our insulation business and our other businesses around automation tied to packaging. We see that generating unit cost improvements as we go forward. We also continue to invest in just process technologies that are improving our density efficiencies and other capabilities in our cost and our manufacturing efficiencies, so.

As you know, productivity, when we get that rolling into our manufacturing facilities, it takes a little bit to kind of translate through the P&L. We’ve seen some of that come through in the second quarter with good strong manufacturing performance in the business. We think that continues to trend well in the back half of the year, so we think we see growth in our technical and other insulation business in terms of revenue and earnings. We do think we comp negatively in our residential business tied to the volume outlook and a pricing outlook that we’re probably going to comp negatively, so that’s why we wanted to guide overall that we think we may continue earnings improvement versus the first half, but on a quarter-over-quarter basis the prior year, we think we’re still going to comp negatively as we finish the year.

[Operator]

The next question will come from John Lovallo of Bank of America. Please go ahead.

[John Lovallo, Bank of America.]

Hey guys, thank you for taking my question. Brian, more of a strategic question. Given that you’re a new CEO here at OC, is your vision for the company flexible enough to explore opportunities that could unlock value within the portfolio, so along those lines, really I’m asking have you, or do you plan to engage with some of these current investor groups that have focused on pursuing a path that could lead to rationalization in the portfolio?

[Brian Chambers, Chief Executive Officer]

John, thanks for the question. As I look at our company, I believe the best way to create value for our shareholders is to drive revenue growth, improve earnings, generate strong free cash flow, and to have a thoughtful capital allocation strategy. These are all the things that we’re focused on. As I talked about in my prepared comments, I’ve spent a lot of time traveling around the globe, visiting our sites, reviewing our operations, reviewing our initiatives, meeting with our customers, and I’m confident we have the right agenda in the company right now to drive growth, earnings, cash flow, and we’ve got the right initiatives in place.

I think our second quarter earnings performance and our revenue growth and overall financial performance is evidence of this strategy and this focus generating great value for our shareholders, so I feel really good about our strategies and our businesses. I think we are positioned very well, and this performance, I believe, has not just been one quarter. It’s been over the last four or five years, if you look at our continued revenue growth, we’ve grown top line about 6%, we’ve grown our EBIT about 16%, we’ve expanded our operating margins over 400 basis points, so I think a lot of work that is coming to fruition, that’s generating great results, and that’s going to translate into great value for our shareholders. We like our businesses, we like our strategy, we think we’re on the right track.

[Operator]

Our next question will come from Kathryn Thompson of Thompson Research Group. Please go ahead.

[Kathryn Thompson, Thompson Research Group]

Hi, thank you for taking my questions today. Just focusing in the composite segment and a slightly softer outlook, understanding that about [indiscernible] of your revenues are in the U.S. with a decent portion tied to building products, particularly with roofing, Europe has more of a transportation exposure, China originally focused on [indiscernible] and has since diversified, can you help us understand what region and which end markets were the primary drivers for this slightly lower guidance? Thank you.

[Michael McMurray, Senior Vice President, Chief Financial Officer]

Sure Kathryn, good morning, it’s Michael. Here’s what I’d say overall. I’d say that the overall composites market remains constructive and global growth remains positive; that said, global industrial production growth, or the outlook for global industrial production growth for this year has kind of softened as the year has gone on. At the start of the year, the expectation was for about 2.5%; on our last earnings call, it was about 2%, and as we sit here today the expectation for global industrial production growth is at about 1.5%.

We did see decent growth, both in the first quarter and the second quarter, about 4% in both quarters. We’ve seen really good growth in our non-wovens business, so kind of high single digits. Our business in India is performing well, and I would tell you that China is okay.

Where we have seen kind of overall--what I’ll call kind of regional or end market weakness would be clearly Europe. It’s slower this year versus last year. North America has slowed a bit, and then as you mentioned in your question, I’d say global automotive is down year-over-year, probably most pronounced in Europe and in China. I’d point to that industry utilization rates continue to remain pretty high. Our assets are running well, and while we’ve lowered our overall outlook for global growth, we think that we’re actually going to run our assets better than what maybe we had thought at the beginning of the year, and then with a little bit of lower inflation. We think the guide that we had given last quarter is largely intact, maybe just getting there in a little bit different way.

[Operator]

The next question will come from Matthew Bouley of Barclays. Please go ahead.

[Matthew Bouley, Barclays]

Hi, thank you for taking my question. On the insulation guidance, you guys talked about having made the price adjustments and recovering some share position, so I guess going forward, what are your thoughts on the ability to maintain residential price levels where they are at this point? Do you find that the market and utilization levels are recovered enough to perhaps limit any additional competitive adjustments that could be necessary, or is there still any fluidity there to monitor? Thank you.

[Brian Chambers, Chief Executive Officer]

Yes Matthew, thanks for the question. As we talked about on our last call, I’d say we came into the year with the pricing actions we took in 2018, and when we say it’s a much softer market, we took a look at our pricing relative to our historic pricing gaps in market and we knew we needed to make some adjustments. That’s really the work we’ve done over this quarter, to make our adjustments to pricing and get us competitive and get our price gaps back to historic levels as we look to restore our share position. The actions we took through the quarter, I would say I think we feel we’re in a good spot in terms of price competitiveness, and we’ve begun to see some of those volumes come back to us.

I think overall in the market, there’s regional natures to it, there’s different channels, but overall I’d say we think that market pricing is broadly stable, so as we look in terms of an outlook into the back half of the year, we think that with starts now, lag starts getting more flat, we saw housing starts in Q2 finally post a year-over-year flat number after two quarters of declines, so I do think we’re more optimistic on an outlook that we’re going to continue to see housing start growth that’s going to create additional demand. We always come back into seasonality in the second half a little stronger, so I think there is enough market growth out there that we hope the pricing environment stays solid.

We’re pleased with our pricing performance in the quarter we delivered. We think we’ve completed those actions, so we’re going to look into the back half of the year. We think we should be in a good spot.

[Operator]

The next question will come from Michael Rehaut from JP Morgan. Please go ahead.

[Michael Rehaut, JP Morgan]

Thanks, good morning everyone. Just had a question on the adjustments that you made to corporate expense and capex. Michael, if you could just give us a sense on the corporate expense side, you said you had some cost containment actions but also some reduced incentive comp. Wanted to get a sense of the $15 million, how that breaks down, and also on the cost containment side if that’s temporary or structural. Then on the capex side, the $25 million reduction, is that a shift of timing into 2020 or also just more of what you thought you needed to do in 2019, now you just realize you don’t have to do as much?

[Michael McMurray, Senior Vice President, Chief Financial Officer]

Good morning, Michael, good to hear from you. Maybe at a high level as it relates to both of them, I think no doubt sitting here today versus sitting at the start of the year, the expectations for global growth generally have slowed, also expectations for new U.S. residential construction is slower today than it what it was at the start of the year, which caused us to take a good look at cost, as you would expect us to do, but also the level of capital spend.

On the cost side of the house, it’s really--the new guide was basically down about $15 million, and it’s really made up of half on what I’ll call the discretionary cost side and the other half related to performance based compensation.

Then your question on whether it’s temporary or structural, I’d say it’s probably a bit of both. Throughout the recovery over the last decade, we’ve been super disciplined around cost generally and have been very, very cautious around adding new heads. We continue to put the brakes on a little bit harder this year, just given the overall uncertainty around bringing new heads into the organization, so I think some of it is structural, I think some of it is probably temporary assuming global starts to accelerate again.

On the capital side, a similar story - the growth expectations are a little bit less than we entered the year, so we gave our portfolio of projects a hard look and made some choices. Again similar to the cost side, I think some of it is structural and then some of it is probably temporary as well, and you can expect that we’re going to continue to work it hard.

[Brian Chambers, Chief Executive Officer]

Maybe I’d just add, Michael, I think coming back to our big operating priorities for the company, one is driving improved operating efficiencies and the third is generating strong free cash flow, so I think we’re going to continue to look at how we optimize our operations, how we look for structural opportunities to be more efficient, and I think that’s just going to be embedded in our manufacturing performance, it’s going to be embedded in our opex and SG&A investments, and I think on the capex side we’re going to continue to focus on how we’re making really good investments on capex and probably pivoting a little bit more towards productivity initiatives and those things in the near term. I think some of this will come through as more structural as we move forward.

[Michael McMurray, Senior Vice President, Chief Financial Officer]

And then Mike, just full visibility, with the new guide capital will be down about $65 million versus last year.

[Operator]

Our next question will come from Scott Schrier of Citi. Please go ahead.

[Scott Schrier, Citi]

Hi, good morning. In your filing, you talked about some transportation costs being a tailwind, you mentioned some other input cost inflation. I’m curious if you can parse that out a little bit more and talk about some of the buckets, and also what your expectations are on the cost side in the back half of the year.

[Michael McMurray, Senior Vice President, Chief Financial Officer]

Just maybe a point of clarification, you’re talking total company or you’re talking a specific business?

[Scott Schrier, Citi]

You could take it through total company and then anything that you should call out within the segments also.

[Michael McMurray, Senior Vice President, Chief Financial Officer]

Yes, I’m happy to take it from a total company. I’ll give some color around the segments, and then I’ll let Brian come in and add anything that he thinks that he should add.

At a total company perspective, the inflation headwind that we’re going to face this year is, I’d say, a good bit different than what we faced last year. Last year in particular, we faced a significant amount of asphalt inflation, we also faced a significant amount of inflation in North American transportation, trucking to be specific. Fast forwarding to this year, the trucking market has loosened significantly, actually it’s loosened as the year has gone on. We’ll probably see some modest inflation overall across all three businesses. Actually in pockets, we’ve actually seen some deflation, so transportation is going to be down significantly. We will see asphalt inflation - you heard in my prepared remarks and Brian’s prepared remarks that we’ve seen asphalt inflation in the first two quarters. We expect it to continue through the third quarter. At some point, we will see benefit from IMO 2020, but it’s probably late this year at the earliest, probably at some point in the first half more realistically. Other than that, I probably wouldn’t call out any big trends from an inflation perspective.

Anything you want to add, Brian?

[Brian Chambers, Chief Executive Officer]

No, I think overall more modest inflation across the board, we’ve seen some improvement in some of the energy costs. Asphalt remains the biggest inflation input headwind, that costs through the quarter continue to climb, they’ve remained stubbornly high. We think they’re going to continue to be high in the near term, so that’s something we’re going to be working on in our roofing business, and that’s the reason for our July price increase. But I think facing a more moderate environment and having good controllables--and I think also part of the focus there is around our sourcing initiatives. I think we’re starting to see some leverage in terms of how we’re working through and making some really great headway into some of our key initiatives in that space.

[Operator]

Our next question will come from Keith Hughes of SunTrust. Please go ahead.

[Keith Hughes, SunTrust]

Thank you. To follow up on that last question on particularly the asphalt inputs, are you expecting some more sequential increases in asphalt prices in the second half of the year, or your expectation is this just more of what you see year-to-date?

[Brian Chambers, Chief Executive Officer]

Yes Keith, thanks for the question. On asphalt costs, we’ve seen them kind of continually rising month over month and we see that continuing into the third quarter as we go forward. Fourth quarter, we still think it’s going to be high and higher on a year-over-year basis, but we generally start to see a little seasonal change in asphalt costs and we would expect to see that similar to this year, although at just a higher rate. So I think asphalt costs again have remained high. There’s a lot of talk on the IMO 2020. We maintain regular contact with our refiners to try to get their outlook and views, but we just haven’t gotten a lot of real information of how that is potentially going to materialize into reduced costs as we go into next year. In theory it should in terms of creating more supply with high sulfur content that should find its way into the paving and roofing markets, but we certainly haven’t seen any of that in the first part of the year and don’t expect it in the near term. So we would expect asphalt costs to continue to move a little higher as we move through the quarter through paving season, and then see a little seasonal decline, but that’s our best outlook for the year.

[Operator]

Our next question will come from Michael Eisen of RBC. Please go ahead.

[Michael Eisen, RBC Capital Markets]

Good morning. Thank you guys for taking the questions. Just following up on some of those comments around what you’re expecting from asphalt pricing and then taking that into account with the share gain you guys saw in the quarter and the strong volumes, can you help us think about what level of pre-buy there was in that number, if there was any pull forward you’re expecting ahead of those price increases, and how we should think about the volume-price dynamic going forward?

[Brian Chambers, Chief Executive Officer]

Yes, thanks Michael. I think we were very pleased with our volume performance in the quarter, and I talked a little bit on the last call, we kind of went through Q4, Q1 where our volumes were trailing the market. Really, we felt based on just timing of distributor purchases, of inventory and a little bit of negative geo-mix where there was business in parts of the market we’re a little bit under-share to our national average, and we expected that that was going to play catch-up in the first half.

We ended our first quarter volumes really strong, we started to see a lot of order volume come to us in the back half of the first quarter. That volume strength continued in quarter two, and that led to our increase. I think it was more around just the catch-up that we expected in quarter two to get distribution inventories of our products right in terms of servicing the out-the-door demand, and then we saw a little bit of improvement around the geo-mix in terms of where distributors were buying from us across the board. I think that was expected in terms of that volume, and we feel like we’re in a good spot now.

We tend to look at our share position not on quarter to quarter but over a six-month or over a 12-month lag, and on a rolling 12-month now we look at our share position and we really feel that we’re in line with our historical averages. As we go forward into the back half of the year, I think our volume expectation would be that we’d track pretty close to the market as we move forward.

In terms of the price-volume mix, again we were successful with an April realization, and we saw continued purchasing through that April price increase, so I don’t think there was a lot of inventory stocking ahead of that number. I think it was more just timing of when distributors were buying our product. We have seen asphalt costs continue to climb, we have announced and are implementing a July increase. Right now, it’s early days in the increase so too early to tell where that lands, but I don’t think there was a lot of pre-buying. When we look at the distributor inventory levels of our products, we feel it is at a good level relative to the second half market outlook for out-the-door sales, and so we just think it was kind of a natural catch-up to put our historic share positions in line with historic averages, and we feel as we go forward we’re going to be able to maintain a good balance in terms of volume and share. Again, we’re going to be implementing the price increase to try to recapture the expected asphalt inflation we’re looking to see.

[Operator]

Our next question will come from Truman Patterson of Wells Fargo. Please go ahead.

[Truman Patterson, Wells Fargo]

Hi, good morning guys, and nice quarter. Just wanted to follow up on insulation. It seems like the January price hike didn’t stick, so you guys are getting a bit more aggressive on market share. You guys discussed that you guys have recaptured some. Could you just discuss some of these early gains a little bit further and possibly quantify some of the recaptured market share? Then there has also been some discussion of a competitor adding loose fill insulation to the industry. What kind of impact could this have to your bottom line, and possibly could you just give your thoughts on you all potentially adding some loose fill capacity over the next several years?

[Brian Chambers, Chief Executive Officer]

Yes, thanks Truman, a lot to unpack. Let me try to work on it a little bit. I think we’ve said around the price adjustments in Q2 on the last call that given the weaker market environment, we saw our price gaps really inflate over historical averages. We wanted to get our pricing right in the market and relative to our historic pricing gaps - we did that work. I think the proof point of the value of our products and our brand and our commercial strength is at competitive pricing, we started to see volumes come back to us and we expect that that’s going to continue to grow as we move into the back half. But a lot of those adjustments were made through the quarter and we really were starting to see the benefits of that towards the end of the quarter, and I think we’ll see more of that as we go into the second half.

We feel we’re in a good spot in our current price points and we think we’re in a good position to continue to recover and restore our share position as we move through the year, so I think that was a pivot relative to the market environment we’re operating in today.

There was an announcement on a competitor adding loose fill, there’s been a lot of coverage there. I’m not going to comment on their strategy or their position. I think overall, loose fill continues to be running at pretty high capacity utilization. Demand for loose fill continues to grow, so we don’t think in terms of the timing of when this capacity would come on in a few years that’s going to have a meaningful impact on any demand capacity utilization factors, given the growth outlook for loose fill in the market. We feel in terms of our capacity, our position, we feel we’re in a very good spot. We’ve got great products, we’ve got a great cost position, we’ve got a good supply position, so we feel we’re in a great position with our current assets to service that growth.

[Operator]

Our next question will come from Phil Ng of Jefferies. Please go ahead.

[Phil Ng, Jefferies]

Hey guys. It doesn’t sound like you saw much pull forward in 2Q for roofing, comps are relatively easy in the second half due to the weaker storm dynamic. Appreciate you expect to outpace the market, but given the strength you saw in the first half, it would imply a pretty noticeable deceleration. Just curious what we should think about the next few quarters - are you just being conservative just because storms are tough to predict? Any color would be helpful.

[Brian Chambers, Chief Executive Officer]

Is your question more on the market outlook or our volumes within the market, just so I’m clear?

[Phil Ng, Jefferies]

A little bit of both, right, because you obviously outpaced the market pretty noticeably in Q2, and for your trends to be--I mean, the market to be flattish and for you to be a little bit above that, it would imply flat volumes in the back half. Just seems like comps are relatively easy and if there’s no pull forward, we could see a little more growth in that.

[Brian Chambers, Chief Executive Officer]

Yes Phil, I appreciate your question. Let me start a little bit with the market. We came into the year with an expectation in terms of manufacturing shipments, that manufacturing shipments for the year would probably trail out-the-door sales because of some of the fourth quarter inventory build that we saw. I think in the second quarter volumes, the market volumes were very strong, and after a pretty wet spring, I think we saw when there are dry days, there’s a lot of activity and out-the-door sales are strong. We’re seeing our retail customers have strong out-the-door, when we talk with our contractors, their backlogs are in a very good spot, so I think overall we feel like we were able to look into the back half and think that we’re probably going to have a little bit stronger market based on good repair-remodeling activity, and through the first half, particularly in the second quarter, we’ve seen quite a lot of smaller storms, what we call pocket storms in local communities, and if that pace of storm activity continues into the back half, I think we could see a little bit stronger storm activity than average.

At a market level, we continue to see strong out-the-door sales tied to repair-remodeling growth, we’ve seen storm activity through the second quarter that puts us on a pace to be slightly above averages, and that’s where we raised the overall market outlook in terms of our volume opportunity.

I think in terms of our opportunity, Q2 was a big catch-up for us, so I think we still would expect that there is some opportunities in terms of Q3, Q4 where we’re going to track a little bit better given some of the geo-mix headwinds we faced last year and some of the customer positions we have, so I think we’re probably dialing down, that I think our volume opportunities to outperform the market are less clearly since we had a pretty big catch-up in Q2, but I still think there’s some opportunities as we move forward in the back half.

[Operator]

Our next question will come from Ken Zener of KeyBanc. Please go ahead.

[Ken Zener, KeyBanc]

Good morning gentlemen. Brian, based on your comments, it sounds like res price declined sequentially. If you could confirm that, and maybe give a baseline for what commercial is doing. Then Michael, you talked about most of the curtailment costs being in the first half versus the second half. Could you perhaps be explicit as to how much occurred in the first half - is it 80%? Thank you. Did the volume you gained from price absorb the 4% of your capacity that was curtailed? Thank you.

[Brian Chambers, Chief Executive Officer]

So Ken, let me talk start to talk a little bit about the price decline through the quarter. You’re absolutely right - I mean, we came into the quarter in our res insulation business, we were making pricing adjustments through the quarter, so we clearly have--while we saw good price performance in Q2, as we exited Q2 I think the pricing adjustments are going to turn into a negative comp for us as we move through the back half of the year. I think the January increase, we pretty much have not seen any realization on that, and the price momentum in the business for the full year is really going to be tied now to just the carryover pricing.

[Michael McMurray, Senior Vice President, Chief Financial Officer]

Then Ken in regards to your curtailment cost question, maybe just to set a baseline, so in the first quarter we had incremental cost of $16 million related to our North American residential insulation business; for the second quarter, that was $20 million, so a total of $36 million year to date. What I said in my prepared remarks as we looked at the second half, it would be our expectation that the second half is less than the first half. Clearly the second quarter as the high mark at $20 million. We will still have meaningful amounts of curtailment both in the third and fourth quarter, but it will be, I’d say, modestly less than what we experienced in the first half of the year.

[Operator]

Our next question will come from Justin Speer of Zelman & Associates. Please go ahead.

[Justin Speer, Zelman & Associates]

Thank you. I wanted to see if you could dig in with us on these margins for roofing, because when I see a 13% increase in volumes in front of a price increase, it makes me think that the distribution inventories may be a little bit fuller ahead of that price increase, so maybe it was the case in front of the April increase. With that being the case, and the jury is still out on the success or not of the July price increase, can you help us understand how margins look in the back half if you’re not successful, so snapping a line on asphalt costs which are clearly higher, that you’re not successful in the price increase, how the margins cadence, and then conversely if you are, how you think the margins cadence?

[Brian Chambers, Chief Executive Officer]

Okay, thanks Justin. Let me kind of take them in order and we’ll try to catch them. I think in terms of volume comps again, in terms of pre-buy or inventory levels, we do our best in terms of customer checks to look at our inventory levels relative to their out-the-door sales of our products, so I think distributors through the second quarter were buying our product in anticipation of the demand that they were seeing in the quarter. They didn’t buy our product as heavy in the previous two quarters, so I think they were playing a little catch-up on their inventory positions with our product. As I look at volumes and the order book in July, we’ve kept pretty solid, so that’s my reference to when we do our channel checks around inventory positions relative to out-the-door sales and the buying patterns we continue to see in July, we feel pretty good that that was buying to expected near-term demand, not a big piling of inventory against the July increase.

I think in terms of margin outlook as we go through the back half of the year in roofing, we would continue to expect to see some improvement across. I mean, on a first half versus second half basis, we’re going to see the impacts of the price increase in April kind of rolling through the back half, and we’re going to see some improvements in production and manufacturing performance, so some of the productivity efforts that we’ve put in place in Q1 and Q2 are going to generate meaningful performance benefits in the back half of the year, and we get a little bit of volume leverage as we move in the back half of the year. I think we feel very good on the margin improvement performance in roofing, even if we don’t get the July increase; but I would share with you, we look at our asphalt costs inflating and believe that that price increase is needed to offset that, and we’re going to push hard for that.

[Michael McMurray, Senior Vice President, Chief Financial Officer]

Justin, I know you get this, but there’s some simple math at work as well in regards to EBIT margins. Our contribution margins remain healthy, we’re offsetting inflation with price, but as price goes higher and you deliver the same level of absolute EBIT, margins get compressed. But I’m sure you understand that.

[Thierry Denis, Vice President, Investor Relations]

Madison, it’s Thierry. It looks like we have time probably for one more question.

[Operator]

Okay, thank you. The next question will come from Garik Shmois from Longbow Research. Please go ahead.

[Garik Shmois, Longbow Research]

Great, thanks for sneaking me in. I had a question on technical insulation. If we look at the 10-Q and how you’re breaking out the results by geography, it looks like there’s a decline on the insulation side in pretty much all regions in the second quarter, so I’m just trying to square if you’re expecting this softness to continue in the second half of the year in non-residential markets, and if that’s contemplated in your statements expecting full-year growth on technical.

[Brian Chambers, Chief Executive Officer]

Garik, thanks for the question. A little bit more about our technical and other building insulation business - I mean, across the board I’d say I think we do expect to see continued revenue growth and earnings growth as we move through the back half of the year. That was a big part of our insulation strategy, to really grow our business globally through product platforms that service low, medium, high temperature applications in markets around the world, move more into industrial and commercial applications with more stable margins, and that’s what we’ve seen in terms of the market performance. So I think a little bit in the first half what we saw, and I spoke about, our mineral wool business in Europe, there are a few countries that we have high share positions at, that we’ve seen the market headwinds be a little worse in terms of--particularly in Finland and Sweden. I think that’s impacted a little bit of the performance that you seen in Europe.

I think the other big thing, though, is across the portfolio, it’s a global portfolio, and we saw quite a negative impact of currency translation in the second quarter, and that really impacted in terms of the revenue and even the earnings inside of this, but we think that kind of flattens out as we go forward on a year-over-year comp. So overall in the technical and other insulation businesses, I think we’re well positioned in terms of we’re seeing growth in our mineral wool business, our foam glass business positioned well in the back half, our pipe and mechanical, our distribution businesses in North America, we’re bringing on new products and growing the business there, and our regions are performing well. So overall, I think we do expect an outlook in the back half to grow revenue and earnings in our technical and other insulation business.

[Michael McMurray, Senior Vice President, Chief Financial Officer]

Then Garik, maybe just to add a few specifics for clarity, within the insulation segment for FX at the revenue line for the quarter, about $20 million headwind, largely all in Europe. Thanks.

[Operator]

Ladies and gentlemen, this will conclude our question and answer session. At this time, I’d like to turn the conference back over to Thierry Denis for any closing remarks.

[Thierry Denis, Vice President, Investor Relations]

Very good. Well, thank you everyone for joining us for today’s call, and with that I’ll actually turn it back to Brian Chambers for a few closing remarks.

[Brian Chambers, Chief Executive Officer]

Thank you, Thierry. Thanks everyone for your questions today. As I stated at the beginning of the call, I’m pleased with our overall financial and operational performance in the second quarter. I think we’ve executed well against our three operating priorities, really all aimed at strengthening the earnings power of the company and creating value for our shareholders. I believe the progress we’ve made in the first half of the year puts us in a good position to capitalize on our market opportunities in the back half. I want to thank you for your interest in our company and for your time today.

[Operator]

The conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.