Owens Corning

NYSE:OC

Earnings Call Transcript 2019-Q4

[Operator]

Good morning. And welcome to the Owens Corning Q4, 2019 Earnings Conference call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Scott Cripps, Vice President of Investor Relations. Please go ahead.

[Scott Cripps, Vice President of Investor Relations.]

Thank you and good morning, everyone. Thank you for taking the time to join us for today's conference call and review of our business results for the fourth quarter and full year 2019. Joining us today are Brian Chambers, Owens Corning's Chief Executive Officer; and Prith Gandhi, our Interim 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 yourselves to one question only.

Earlier this morning, we issued a news release and filed the 10-Q that detailed our financial results for the fourth quarter and full year 2019. 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 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 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 comparison and we believe it is a meaningful measure for investors to compare our results. Consistent with our historical practice, we've 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 utilizing 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. And now, opening remarks from our CEO, Brian Chambers, who would be followed by Interim CFO, Prith Gandhi and Brian, will cover our outlook before our Q&A session. Brian?

[Brian Chambers, Chief Executive Officer]

Thanks Scott. Good morning, everyone and thank you for joining us. I know many of you have had the opportunity to speak with Scott, our new Vice President of Investor Relations. I want to thank Thierry Denis for his many contributions during his time leading Investor Relations and wish him well in his retirement and welcome Scott to his first earnings call. I'd also like to welcome Prith Gandhi, our Interim CFO to our call this morning. We're fortunate to have someone with his extensive financial experience serving in this role.

I'll start my review today with safety where we continue to perform at a high level. Our recordable incident rate for the fourth quarter was 0.61 consistent with the same quarter in 2018, bringing the full-year rate to 0.65 finishing slightly higher than the prior year. As you know, safety is a top priority for our company and we continuously strive for an injury free workplace. I'm proud that 50% of our sites worked injury free in 2019.

And now on to our financial results. I'll share some of my perspectives and then turn it over to Prith to provide more detail on our fourth quarter and full year results. I will then come back to talk about our 2020 outlook. For the quarter, we delivered revenue of $1.7 billion and generated adjusted EBIT of $204 million. Our team executed well delivery results in line with our expectations. Overall, our volumes continue to outpace the market in our businesses with revenues being impacted by some price declines and negative foreign currency.

Adjusted EBIT in the quarter was down $24 million versus prior year, driven by lower earnings and insulation. Within Insulation, our focus in 2019 was to make progress restoring our historical share position in our North American residential business, leveraging productivity and process improvements to reduce our operating costs and growing our technical insulation businesses. Through this work, we believe we are well positioned for stronger performance in 2020.

For the full year, we delivered record revenue of $7.2 billion and generated adjusted EBIT of $828 million. Our performance was driven by great commercial execution, strong manufacturing performance and good cost management across the company, which was more than offset by negative foreign currency, inflation and curtailment actions taken in our installation business. In addition, we generated record operating cash flow of just over a $1 billion and improved our free cash flow by $324 million. Throughout the year, we remain focus on three operating priorities. Accelerating organic growth, driving improved operating efficiencies and generating strong free cash flow.

I'd like to update you on the progress we've made in each of these key areas. In 2019, revenues for the company grew 1%, 3% growth on a constant currency basis. In Roofing, we increased revenues 6% and delivered EBIT margins of 17% for the year on shingle shipments that outpaced the market. Our commercial focus to help contractors and distributors grow their businesses with our differentiated products and recognized brand generated market share results consistent with our expectations for the year. Our revenues in composites increase 1%, 3% growth on a constant currency basis. While we experienced slowing industrial production growth rates throughout the year, our volume grew 4% by focusing on higher value applications such as specialty glass nonwovens and wind energy.

Demand for our roofing mats also increased during the year in line with higher shingle shipments. Installation revenues for the year were down 2% flat on a constant currency basis. Our technical and other building insulation businesses continue to perform well, but as expected we experienced a more challenging market environment in the fourth quarter. This was primarily due to the timing of global projects in slowing European markets.

In our North American residential fiberglass business, we made good progress in restoring our historical shared position. Although lagged housing starts were down for the year, we've seen housing starts improving the fourth quarter and are encouraged by continued strong builder confidence. In addition to organic revenue growth, we also made good progress in driving improved operating efficiencies, delivering improved manufacturing performance across the company as we realize the benefits of standardized work practices, process improvements and automation.

Last quarter, we discussed actions taken within the insulation business to improve our cost position in our North American residential fiberglass business. We have completed most of these actions and are beginning to see the benefits of our work. I'm pleased that our ongoing productivity and process improvements have enabled us to further optimize our production capacity, while maintaining our ability to service our customers and meet future demand. We also maintain good cost controls and identified ways to leverage our scale and enterprise capabilities, which resulted in total operating expenses for the company finishing 2019 slightly below 2018.

On our third operating priority, generating free cash flow, we delivered strong performance in 2019. Free cash flow increased $324 million versus the prior year to $590 million, which resulted in free cash flow conversion of 118%. We accomplished this through good working capital management, balancing our production with end market demand and actively managing our capital investments. Total capital expenditures in 2019 were $451 million in line with our depreciation and amortization.

Moving forward, we remain focused on extending the operating life of our existing assets through advanced manufacturing and other initiatives and prioritizing investments that best support our enterprise-wide productivity and organic growth initiatives. In 2019, we reduced the proc term loan by $300 million and returned $143 million to shareholders through dividends and share repurchases. In 2020, we plan to prioritize free cash flow to dividends and paying off the remaining $200 million balance of the proc term loan.

Additional free cash flow can be deployed for share repurchases. With our focus on operating and capital efficiency and strong cash flow generation, we continue to see the opportunity to return at least 50% of free cash flow to shareholders over the next few years. Before turning it over to Prith to discuss our financial performance in more detail, there are a few other items I would like to comment on. First, I'm proud to report that for the seventh consecutive year we remained an industry leader in sustainability for the building products category in the 2020 edition of the Sustainability Year Book published by S&P Global in collaboration with RobecoSAM. And we obtained a perfect score on the 2020 Corporate Equality Index for the 16th consecutive year.

We appreciate being recognized for the sustainable way we run our company and for the great work our people do every day to make an impact in our communities and in the world. In April, we'll release our 14th annual sustainability report which will detail our progress toward our long-term sustainability goals. Sustainability is central to our purpose. We are very proud that our products address energy efficiency, product safety, renewable energy, durable infrastructure and labor productivity. These are areas where our customers need more innovation and we are well-positioned to provide solutions to these global challenges.

Finally, I'd like to recognize all of our employees and their families based in China who are coping with the Coronavirus epidemic. We will continue to be proactive in supporting the safety and well-being of our people and stay actively engaged with our team in China to assess the potential impact on our business.

With that I will turn it over to Prith and then I'll return to talk about our outlook. Prith?

[Prith Gandhi, Interim Chief Financial Officer]

Thank you, Brian and good morning, everyone. As Brian mentioned, Owens Corning delivered record revenue of $7.2 billion and adjusted EBIT of $828 million in 2019. Through focused working capital management and discipline capital spending, we produce record operating cash flow and almost $600 million of free cash flow for the year.

Please turn to Slide 5 which summarizes key financial data for the fourth quarter and fiscal year 2019. The tables in today's news release and the Form 10-K include more detailed financial information. For the fourth quarter, we reported consolidated net sales of $1.7 billion, down about 2% versus 2018. Each of our businesses faced into some pricing headwinds and we face modest market declines in technical insulation in Europe and in the U.S. shingle market. Adjusted EBIT for the fourth quarter of 2019 was $204 million, down $24 million compared to Q4, 2018. The lower EBIT performance in the quarter was driven by insulation which was down $26 million.

Net earnings attributable to Owens Corning for the fourth quarter was $73 million compared to $171 million in Q4, 2018. Adjusted earnings for the fourth quarter of 2019 were $125 million or $1.13 per diluted share, compared to $152 million, or $1.38 per diluted share in Q4, 2018. For 2019, net earnings were $405 million compared to $545 million in 2018. Adjusted earnings for 2019 were $500 million or $4.54 per diluted share compared to $550 million, or $4.94 per diluted share in 2018.

The full year EPS comparison was affected by two below the line adjusting items in 2019. First, in Q1, we adjusted out of $12 million non-cash income tax charge related to 2017 US corporate tax reform, compared to a $23 million non-cash income tax benefit that was recognized in 2018. Second, in Q3, we issued a green bond and tendered portions of our 2022 and 2036 bonds. We incurred a $32 million loss on extinguishment of debt that was adjusted out.

Moving on depreciation and amortization expense for the quarter was $120 million, up $10 million as compared to Q4, 2018. The growth in the fourth quarter of 2019 was due to accelerated depreciation from the insulation restructuring actions announced in October. For 2019, depreciation and amortization expense was $457 million. Our capital additions for the year were $451 million, down about $90 million versus 2018. During 2019, we focused capital spending on investments that will improve throughput, drive cost reductions and support organic growth.

On Slide 6, you will see our adjusting items. Reconciling full year 2019 reported EBIT of $753 million to adjusted EBIT of $828 million. For the year, adjusting items to EBIT totaled $75 million. As discussed in October, we took actions to reduce future pension obligations by transferring about $90 million of pension obligations through the purchase of an annuity contract with plan assets. In the fourth quarter, we recorded a $43 million non cash settlement charge. We also recorded $28 million of restructuring costs, primarily associated with insulation network optimization actions announced in October.

Please turn to Slide 7 which provides a high-level review of full year adjusted EBIT comparing 2019 to 2018. Adjusted EBIT decreased $33 million; roofing EBIT increased by $21 million as compared to the prior year. Composite EBIT decreased by $4 million and insulation EBIT decreased by $60 million. General corporate expenses were $104 million, down $10 million from 2018.

Now please turn to Slide 8 which provides a more detailed review of business results beginning with insulation. Sales for the fourth quarter were $723 million, down 1% from Q4, 2018. The decrease was driven by lower sales volumes in the technical and other building insulation business in Europe and the negative impact of foreign currency. EBIT for the fourth quarter was $89 million, down $26 million compared to 2018. The EBIT results were largely consistent with the expectations we shared in October. The year-over-year decline was largely driven by continued curtailment costs and lower volumes.

For the full year, sales were $2.7 billion, down 2% versus 2018 with growth in technical and other building insulation more than offset by lower volumes in the North American residential fiberglass insulation business. Higher selling prices were partially offset by negative foreign currency translation. In 2019, insulation EBIT declined by $60 million to $230 million as progress in technical and other building insulation was more than offset by lower volumes and curtailment costs in North American residential fiberglass insulation.

For the year, improved performance in technical and other insulation was driven by volume growth, improved pricing and strong commercial and operational execution.

Now please turn to Slide 9 for a review of our composites business. Sales in composites for the fourth quarter were $480 million, flat to the same period in 2018 and up 1% on a constant currency basis. Despite slower global growth, composites volumes continue to moderately outpaced the broader market. EBIT for the quarter was $56 million flat to Q4, 2019; continued strong commercial and operational performance offset input cost inflation, unfavorable currency and a competitive price environment. For the quarter, composites delivered 12% EBIT margins.

Full year sales were $2.1 billion, up 1% as compared to 2018. Revenue grew 3% on a constant currency basis driven by 4% volume growth. Our volumes outpaced the broader market on strength and wind and gloss nonwovens. In 2019, EBIT declined by $4 million to $247 million. The benefit of favorable manufacturing performance and volume growth were more than offset by higher input cost inflation, lower selling prices and negative foreign currency.

Slide 10 provides an overview of our roofing business. Roofing sales for the quarter were $529 million, down 3% compared with Q4, 2018 on slightly lower shingle volumes and moderately low selling prices. In the fourth quarter, US asphalt shingle industry shipments were down 5% versus Q4, 2018. As expected, our shingle volumes outperform the market in the fourth quarter. EBIT for the quarter was $87 million, a $4 million increase from the prior year as a seasonal decline in asphalt costs and lower transportation costs offset moderately lower prices. Roofing sales for 2019 were $2.6 billion, up 6% versus 2018. U.S. asphalt shingle industry shipments grew 2% over 2018. OC's volumes outpaced the market through solid commercial execution.

In 2019, Roofing EBIT improved by $21 million to $455 million on above market volume growth. Our full year price improvement and tailwind from transportation costs more than offset the impact of asphalt inflation. Our cash contribution margins continue to be healthy and the business is well positioned for a strong 2020.

Please turn to Slide 11 where I will discuss significant financial highlights for 2019. As Brian mentioned, free cash flow improved by $324 million from 2018 and we delivered strong free cash flow conversion of 118%. Over the last five years, we have delivered free cash flow conversion in excess of 100% on strong earnings, good working capital performance and our advantage tax position. During 2019, we return $95 million to shareholders in dividends and $48 million in share repurchases.

At the end of 2019, 3.6 million shares were available for repurchase. Also in 2019, Owens Corning became the first US industrial company to issue a green bond extending our weighted average bond maturity by 1 year to 16 years. We continue to maintain an investment grade balance sheet and in December, we received an upgrade from Moody's. Owens Corning is now rated investment grade by all three major rating agencies.

Please turn to Slide 12 for a discussion of select financial guidance for the year. In February, the company's Board of Directors declared a quarterly cash dividend of $0.24 per share payable on April 3rd to shareholders of record as of March 6. Since inception in 2014, the dividend has grown an average of 7% per year. In 2020, we expect the combination of higher earnings, working capital improvement and focused capital spending to drive another year of strong free cash flow conversion. The company plans to prioritize free cash flow in 2020 to ongoing dividends and to pay off the term loan associated with proc.

Additionally, free cash flow could be available for share repurchases. As we look forward, we are targeting overtime to return at least 50% of free cash flow to investors through dividends and share repurchases.

Moving on we expect corporate expenses between $125 million and $135 million. The expected year-over-year growth is primarily due to the reset of performance-based compensation to more normalized levels. We anticipate first quarter total corporate expenses to be up modestly versus Q1, 2019. We expect capital additions to be in line with expected depreciation and amortization expense of approximately $460 million. Interest expense is expected to be about $115 million, down from $131 million in 2019 on reduced total debt and lower interest rates.

Our 2020 effective tax rate is expected to be 26% to 28% of adjusted pre-tax earnings. As a result of our foreign tax credits and other planning, we expect our 2020 cash tax rate to be 10% to 12% of adjusted pre-tax earnings.

Now please turn to Slide 13 as I return the call over to Brian to discuss the outlook for our company. Brian?

[Brian Chambers, Chief Executive Officer]

Thank you, Prith. I'm pleased with our execution and performance in 2019 delivering revenue growth, improved operating efficiencies and strong cash flow. Given our market leading positions, customer focus and innovative product and process technologies, I believe we are well positioned to capitalize on the market opportunities we see in 2020. Consistent with prior years, our outlook for the company is based on consensus global industrial production, US housing starts and global commercial and industrial construction indices.

In installation, we expect a stronger U.S. new residential construction market and modest growth in global construction and industrial markets. Builder sentiment continues to be optimistic and recent US housing trends remain positive with significant growth expected in the first half of the year. In 2020, we expect to generate strong earnings growth, primarily through increased volumes and improved operating leverage in our North American residential fiberglass insulation business. This is partially due to the impact of our network optimization actions which are estimated to generate annual savings of $25 million by 2021 with about $20 million this year.

We also anticipate continued earnings growth in our technical and other building insulation businesses. We expect a strong start to the year in insulation with good earnings growth in the first quarter. In Composites, we anticipate a weaker glass fiber market in the first half of the year, which should strengthen in the second half consistent with global industrial production growth expectations. We continue to focus on growing higher value downstream applications namely specialty glass nonwovens and wind energy, as well as driving strong manufacturing performance with our low-cost assets. Given weaker market conditions to start the year, we expect to face a difficult comp in the first quarter driven by lower volumes and a competitive pricing environment.

And in Roofing, we expect relatively flat US shingle industry shipments for the year assuming average storm demand. With the lack of a significant storm carryover possibly impacting first quarter demand. While there has been a lot of speculation regarding the potential impact of IMO 2020, currently this new regulation is not expected to have a significant impact on our asphalt cost. Our cash contribution margins in the business entering 2020 position us for continued strong performance. And in the first quarter, we expect EBIT margins to track prior year as we realize limited price cost gains relative to asphalt deflation on slightly lower revenues.

Overall for the first quarter, we expect adjusted EBIT for the company to be relatively flat to prior year as earnings growth in insulation is expected to offset a weaker composites market while roofing EBIT margins tracked similar to last year on slightly lower revenues. With regards to the potential impact of the Coronavirus on our outlook, we continue to stay very close to the changing conditions and are working through the various operational and commercial implications as we prioritize the safety and well-being of our people. At this point, we could see a modest first quarter impact in our insulation and composites businesses based on delayed plant startups and limited sales, which we have incorporated into our first quarter outlook.

With that I'll turn the call back over to Scott to open it up for questions. Scott?

[Scott Cripps, Vice President of Investor Relations.]

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

[Operator]

[Operator Instructions]

The first question will come from Matthew Bouley of Barclays,

[ChristinaChiu]

Hi. This is actually Christina Chiu on for Matt this morning. My first question is actually just on the ARMA data that came out for the month which I came up with a quarter which showed a drop in industry volumes. And I'm wondering how can you kind of reconcile the different change or volumes in the quarter and what does that kind of imply from a market share perspective.

[BrianChambers]

Well. Good morning, Christina. Thanks for the question. So when ARMA data came out, the quarter was down about 5%. The full year was actually up and as we kind of go back and walk through the progression of volumes last year, we were expecting as the year progressed that when we came into the fourth quarter we might see some lower manufacturing shipments into distribution really on a comp basis versus the prior year. In 2018, we were seeing some asphalt inflation. We were seeing some distributors I think build up some inventory in the fourth quarter of 2018. We didn't expect that to repeat in 2019 and that did not occur.

I think we were --we've indicated on our last quarter call that actually volumes might be down a little bit more, but we actually saw some seasonally good fourth quarter weather that extended the roofing season. So we actually saw a little bit more volume come through the fourth quarter and had some good out the door sales. So I think in context the quarter played out pretty much as anticipated with the exception that there was a little bit stronger out the door sales on some better weather. And then the overall market was up. So as we roll forward down to 2020, we expect to see another good year of roofing volumes. We're seeing solid repair and remodeling activity, good contractor backlogs. We're seeing some new construction growth that will drive demand and then we always anticipate and expect and plan for kind of average storm volume. So the one caveat is the back half of last year we did not see as much kind of large storm demand.

So we're probably coming into this year with a little bit weaker carryover that might impact volumes for the market and for us in the first quarter a little bit. But, overall, we feel that 2020 is going to be another very strong constructive roofing market.

[Operator]

The next question will come from Michael Wood of Nomura Instinet.

[RyanCoyne]

Hi. This is Ryan on for Mike. Just curious on composites. Are you able to quantify for us the first half weakness that you're calling out? And then will second half strength be enough to keep composite segment EBIT flat for the full year?

[BrianChambers]

Thanks Ryan. Yes, when we look at glass fiber demand in our composite business, I guess the first thing I'd say is like I think our composites business performed very well in 2019. We delivered 12% EBIT margins in a market where we were continually see industrial production growth slowing kind of throughout the year. But our strategy and composites has been very much to focus on kind of key market growth and key higher value end market applications namely our glass specialty nonwovens, wind energy. So those two market segments for us stay pretty strong through the back half of the year, while we saw weakening industrial production, weakened automotive demand and some other parts that impact the composites business.

So, generally, we've guided that glass fiber demand tracks with industrial production. And so we are expecting in the first half now that we've come in. We saw global industrial production growth slow through the back half of the year. We hope we've seen that stabilized but certainly we expect weaker demand volumes in the first part of the year that we expect kind of grow sequentially and as we get into the back half of year improved, but that's based on consensus industrial production growth. So that's something we're going to continue to watch and monitor as we go through the year. But as we look at year-over-year glass fiber demand kind in the first quarter versus last year, we think it's a little weaker demand environment that's going to impact our volumes and impact our earnings. And then also with that weaker demand environment in the back half of the year, we saw some pricing declines. We had to meet some competitive situations there.

And we think that's creating a bit of a negative comp coming into the first quarter. So I think we're guiding to being down in the first quarter year-on-year. And I think on the back half I think a lot of that's going to depend on how industrial production grows through the year because we would expect volumes then to track back going forward.

[Operator]

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

[JohnLovallo]

Hey, guys. Thank you for taking my question. On the insulation side can you just help us quantify the fourth quarter curtailment charge? And then what your expectations are for potential additional charges in 2020 please?

[BrianChambers]

Yes. Thanks for the question, John. So I think we would have reported that fourth quarter curtailment charges in insulation were about another $10 million I think for the quarter. So that would have put the total year in terms of curtailment cost up a little over $60 million. So again as we think about the curtailment actions we took last year, we said a part of that were tied to just capacity curtailments we were taking to adjust our inventory. So again in 2018, we were expecting a bigger market in 2019 for volume, so we build up inventories. So we had to correct that as we were very focused on working capital inventory management. So we took those curtailment actions to address that at one time inventory correction.

And then the balances of the curtailments were really tied to fix cost absorption. So we had lower volumes and we were just absorbing those fixed operating costs to the P&L as we incurred them to the course of the year. So part of that we addressed by reducing our full operating cost. So these were actions we took that we talked about on the last quarter call to reduce our total operating expenses in the network with actions we took in Kansas City and to consolidate that facility to a loosefill-only production plan. And we think that's going to realize about $20 million of improvement here in 2020. So part of the curtailment cost coming back is just through lower operating costs that would come through that action.

And then the balance of curtailment cost is going to depend really on the volume growth. So we've had good starts here in the fourth quarter and another good print here this morning. So we're optimistic that we're going to see a good volume growth kind of consistent with current housing expectations as we see that continue to grow through the year. That's going to improve our volume and our manufacturing leverage and that would minimize any additional curtailment costs as we move through the year.

[Operator]

The next question will come from Mike Dahl of RBC.

[MikeDahl]

Good morning. Thanks for taking my question. I wanted to ask about the comments around strong cash contribution margins to end 2019 and setting up for good performance in 2020 in roofing and just hoping to reconcile that with in your comments around it being flat year-over-year and margin performance in 1Q and kind of a flatter market demand environment. Just a little more color on what you actually mean by that comment around strong cash contribution margins continuing.

[BrianChambers]

Yes, Mike. Thanks for the question. I think we referenced strong is kind of just historically our cash contribution margins are very consistent. And we tend to operator in our roofing business with very strong and high cash contribution margins. So I mean that's reference to that. If I just look at kind of where we finish the year in terms of cash contribution margin, so we started to see a little bit of deflation come through the P&L in the fourth quarter in both asphalt and a little bit of transportation. We did see some pricing adjustments we made earlier in the quarter that also flowed through. So those pretty much balanced out in terms of that and as we manage the business and we really manage us around cash contribution margins.

So we try to manage price relative to inflation and deflation to maintain good strong contribution margins in the business and that's what we're always balancing. So and that's what we did in the fourth quarter. So I think the reference was we finished the year with very good cash a contribution margin that positions us for continued strong performance in our roofing business for the year. And again, I think we finished -- we are very pleased with our roofing performance for the full year delivering 17% EBIT margins in good market conditions. So we expect that we're on -- we are starting out in a good rate as well coming into Q4 or coming into Q1. I think the comments around the margin rate in Q1; we're really tied to because we're balancing kind of a very flat price cost mix. So we're bringing in a little bit of pricing headwinds into Q1 relative to year-over-year performance.

So again back to 2018 was kind of a rising asphalt inflationary environment and we had rising prices. This year we've seen a little bit of deflation and we had some pricing moves that we made. So we're kind of coming into the year when we look at potential deflation here in the first quarter that we think that price cost mix is going to be pretty flat. And we're not going to be able expand margins in the quarter and then we potentially could have a little bit less volume with some weaker carryover storm demand. So that would just put some pressure in the quarter around some of our operating leverage. But for the full year, we feel very good coming in with good cash contribution margins; we see a good outlook in terms of volumes and in the market, but we just think there's going to be little bit of timing here in Q1 as we start out.

[Operator]

The next question will come from Kathryn Thompson of Thompson Research Group.

[KathrynThompson]

Hi. Thank you for taking my question today. Appreciated your color earlier on composites kind of a broad outlook and how it flows from first half to second half. But wanted to see if you could dig a little bit more for outlook by region and even by product. Essentially want to better understand if some of the more muted expectations are a carryover of a softer outlook for Europe which certainly played through last year. And then a thoughts on how domestic roofing segment results also impact the composite results. Thank you.

[BrianChambers]

Yes. Thanks Catherine. Good morning. If we kind of look regionally, I think as the year played out first in the back half of last year and kind of how we're seeing now, we're really kind of tracking to industrial production growth. So we saw declines in North America which is a key market for us through the back half of the year. First quarter projections are that to be down year-over-year, so that's a big market for us in terms of glass fiber demands overall. We did see Europe weakening as well through the back half of the year and again starting off weaker and then expected to grow. And when we look at our kind of geographic footprint, I mean, we're very strong in North America. We're very strong in Europe. And we're also very strong in India.

India, we saw a little bit better performance, weaken in the back half but that's gotten a little better and we think that's going to be a bit of a tailwind for us in India. So China we play but it's about 10% of our business so we're not as impacted by the slowdown in China right now. From an end market application, in 2019, we saw very good wind growth in China; in Europe; in North America. We continue to see the install of wind energy moving up in 2020. So we expect to see some gains there. Really in North America primarily there, a little bit in Europe and in China again.

So I think that that gives us some tailwind in terms of overall demand. And then in terms of roofing, we would expect the impact on a roofing business year-over-year to be pretty flat because we're calling for an outlook for North America roofing business to be relatively flat at this point.

[Operator]

The next question comes from Susan Maklari of Goldman Sachs.

[SusanMaklari]

Thank you. Good morning. My question is really around as we look to 2019; the focus was really on volume and restoring your market share especially in the insulation part of the business. As you think about 2020, what will be the balance in terms of price versus volumes? And how are you thinking about what those impacts could be as it relates to each of the segments?

[BrianChambers]

Yes. Susan, I am assuming you're talking more in insulation in the questions. Okay. I think I'll say we look at our insulation business, we have our North American residential business then we have our technical insulation business a little more global. Inside our North American residential business, we always balance price and share. I think if again going back a little bit to the first part of 2019, we came into the year with price points above our historical gap, so we had to make some adjustments in pricing early part in the year to get our price points more in line with those historical pricing gaps that we have. And as we did that we did see volume come back to us and sequentially we've been able to gain share quarter-over-quarter. And I think that's just a testament of where we have our price points competitive and right, customers value our products; they value our quality; they value our commercial expertise and our service.

So we were encouraged through the course of the year that with competitive pricing we were able to regain and restore that share position. And that's a balance we're going to continue as we move into 2020. But we do see the market opportunity is certainly turned and started to grow relative to the last year at this time we were seeing kind of a weak Q4 and weak first quarter and we saw good growth in the fourth quarter. We saw another good start printing for January. So we expect to see a good growth here in the first part of the year. So we did announce January increase; it's early days for that increase but we're seeing positive gains and we think that's going to kind of build through the quarter. So we do see the opportunity for prices we as we start the year. And certainly we think with the volume growth in our work commercially, we're going to continue to gain some incremental shares as we move through the year. So I think we're going to be able to maintain a very good balance of achieving price and getting our position back to our historical share.

On the technical and other build insulation, it's more of a global platform of product lines and businesses but again we've showed positive pricing gains in 2019 within the technical and other insulation business. These tend to be products that are going into commercial and industrial applications, little less price cyclical in nature and so that is certainly played out for us in 2019 and as we look into 2020, we would expect to be able to achieve some pricing gains as well within that that product line as we continue to earn some share and bring some new product innovations in the market that will continue to grow our revenues in that part of the business.

[Operator]

The next question will come from Truman Patterson of Wells Fargo.

[TrumanPatterson]

Hi. Good morning, guys. Thanks for taking my question and nice results. First, wanted to touch on US residential insulation. Can you just give an update on industry capacity utilization? Where we are today after you all removed a couple plants or a couple lines from the industry over the past two years? And if you could just play out a hypothetical situation that starts to grow kind of 10% from here, where would that put industry utilization rates? And also can you give an update of potential capacity coming online over the next a year or two. Do you all have the current footprint to really capture your appropriate market share starts were to grow kind of at a 10% clip?

[BrianChambers]

Thanks Truman. I'll kind of impact that I think a little bit of time, in terms of industry capacity utilization I think we talked about on the last quarter call that the move we took in terms of the consolidation in Kansas City and taking some of that capacity out was putting our capacity utilization kind of in line with the industry. So we think we're running that good solid high capacity utilities utilization rates as we finish the year. And we think that's continuing as we go forward. So I think that's I think we're in a good spot there. Owens Corning is relative to the industry capacity utilization rates.

In terms of capacity coming on stream, I think we talked about a couple of loosefill plant additions that are scheduled I think to come on stream kind of first part of 2021. We continue to believe that that's not going to have a major impact in terms of supply demand balances; in terms of the growth of loosefill as we go forward so. And then in terms of kind of our capacity and our ability to service the market. Part of the actions we took within our network to optimize was really based on productivity and process improvements that have allowed us to produce more material through the existing footprint. So as we continue to make these productivity and process improvement gains, we're getting more throughputs. We expect to be able to get more productivity and throughput in 2020. And so when we did this work in the fall, we were expecting to be -- to see housing starts growth this year kind of mid-single digits.

So we believe we're --we've got good capacity to service that growth as we go forward. If it moves beyond that I think we've got some upside capacity within our existing network, but also we do have some idle assets that we could potentially bring back online. We could do that relatively quickly and very efficiently if we saw demand growth and starts kind of continue to strengthen through the back half of the year and into 2020. So we think we're well positioned to service our customers as the market grows.

[Operator]

The next question will come from Seldon Clarke of Deutsche Bank.

[SeldonClarke]

Hey. Thanks for the question. Just stick with insulation, in addition to that $20 million of savings you expect this year from the network optimization efforts. Just given your outlook for pricing growth and market share winds and just where you are from a productivity standpoint? How should we think about the core operating leverage or incremental margins in your insulation business for 2020?

[BrianChambers]

Yes. Thanks for the questions, Seldon. We've reported before that we saw kind of good operating leverage in this business to be at about 50%. Now when we made that statement and gave that kind of guidance, we certainly were more focused towards the residential new construction business and our facilities that make fiberglass that didn't account some of the acquisitions that we've made. In additions, we've made around foam glass and mineral wall. But I think in general that continues to be good guidance around our North American residential business. So as we move forward into and beyond we would expect to see that kind of operating leverage potential on any kind of revenue growth we would see inside the residential part of our insulation business.

[Operator]

The next question comes from Justin Speer with Zelman & Associates.

[JustinSpeer]

Hi. Thanks guys. Like one of the things I want to do, if you can unpack for us as we think about starts potentially normalizing towards $1.5 million in next couple years. What do you think the mid term margin potential of the business is, if you have to restart up new for idle capacity? What do you think a normalized margin is based on what you've done with your network thus far? In insulation.

[BrianChambers]

Yes. Thanks for the question, Justin. If we get to those kind of operating starts or kind of those kind of housing starts and get to that kind of operating level. I mean clearly, we're going to see an improvement and increase in our operating margins. It's kind of difficult to speculate what those could potentially be because it's going to depend on some other factors beyond just volume leverage. But I think here I'd look back at kind of our historical performance as a good guide. When you look at what we've been able to achieve in kind of past housing starts environment at a $1.5 million start. So clearly we'd be running our assets full out and we begin great manufacturing leverage. We would expect additional pricing opportunities operating in that kind of market environment and an overall great leverage.

So I would expect to see pretty nice improvement in terms of our operating margins within the business consistent with that kind of housing start environment. But again very difficult to kind of pin exactly what that would look like because it would depend on some other factors, but certainly stronger and I think historically we've operated at very high operating margins in the business and that would certainly be a potential.

[Operator]

The next question comes from Keith Hughes of SunTrust.

[KeithHughes]

Thank you. Questions on non residential insulation, you've made some positive comments on the 2020 guidance around those businesses. I just want to confirm I guess number one; are you talking about everything outside of non-residential both in US and Europe? And you specifically talk about earnings improvement not so much on revenue. So any kind of shade to the year you would expect on those businesses would be helpful.

[BrianChambers]

Yes. Thanks Keith for the question. I think we're very pleased with our performance in 2019 and our technical and other insulation businesses both from some revenue growth and EBIT performance. And I think growing this part of the business has been a really key part of our overall installation strategy to grow in global, industrial and commercial markets. We've been able to develop and grow and get into some new product platforms that service low medium high temperature ranges. And so we've been able to get into new applications. And I think that's helped stabilize our overall margins and in this business segment, we certainly see more stable margins. There's margin movement within volume leverage, but we don't see the big price cyclicality that we see in our res business.

So you are correct that when we talk about this is really everything in our insulation business outside of our North American res business going forward. So as we see kind of 2020 progressing out again we saw a little bit of headwind in the fourth quarter in our European part of our technical business with some markets slowing through the quarter. We look at consensus estimates for parts of Europe we're strong in and we think those markets have stabilized. We operate our mineral wool business primarily where we're heavily set towards the Nordic countries.

So we saw a little bit more decline in those regions in those markets in 2019 relative to some other parts of Europe, but again we've seen those markets kind of stabilized. And we're expecting to see growth as we go forward. So I think we've tempered and said we expect some modest revenue and earnings growth through that segment of businesses because I think it's-- we're seeing some a little bit of different market environment, a little bit weaker in Europe; a little bit stronger in North America but on balance we still expect to see good revenue and earnings growth as we progress through the year.

[Operator]

The next question comes from Garik Shmois of Loop Capitol.

[GarikShmois]

Hi. Thanks. I wanted to ask on roofing margins with oil prices staying relatively low. What's your outlook with respect to some of the cost buckets and recognizing, you're not expecting much in the way of IMO benefits, if you can talk about that in a little bit more detail and how we should expect some of the raw material costs to flow through on the roofing side in 2020?

[BrianChambers]

Yes. Thanks for the question, Garik. So for raw materials and roofing and I mean clearly, asphalt costs are the largest bucket. We do have other input costs that are larger scale around our nonwovens that feed into the roofing mat and in our granules. So those are the big sources of inflation that we continue to see as well as some labor inflation through our workforce. But primarily it's been around asphalt and I think on the IMO 2020 impact, I mean we've been talking about this for about a year now it. Something we continue to monitor and look at but I think where we say we're not seeing a significant impact. We do expect to see some modest asphalt deflation through the year in the space. And that's something we're seeing here in Q1. But I think what we're finding out as we talk and work with refiners is they are using and reprocessing this through Coker's into higher value fuels instead of pushing this into the asphalt market.

So while we're seeing the high sulfur oil content in the market, we're seeing refiners just reprocess this and the higher value products and not pushing it in the asphalt market. And that's what we said while we do expect to see some modest deflation through the years as this rolls out; we're just not seeing currently any significant deflation as a result of this. And that's really what we're balancing. So in terms of overall raw material inputs for the year, we would and are currently seeing some asphalt deflation that we could play out through the course of the year. Some modest deflation there and then other raw materials we are seeing and expect to see some inflation, so that will be some of the balance and then we'll also --we continue to look at transportation costs in the business.

We saw transportation costs moderating and deflate a little bit in the back half of last year. And we're seeing that kind of in the current market environment as well. So that would be another input cost that we're going to track and watch closely as we go through the year.

[Operator]

The next question comes from Stephen Kim of Evercore.

[StephenKim]

Yes. Thanks very much guys. A couple questions on insulation. You, I think following up on Justin's question about where margins could be maybe another way of asking that would be historically you've talked about the volume only incremental. I think somewhere around 50% or so, but your mix of businesses is different now and I was curious as to how we should be thinking about excluding price, excluding moves and commodity costs just what your volume related incremental across the segment looks like today. Is that --should we be thinking that's like 30% or 40% something like that if you could give us some color on that? And then sort of part of that as you go through 2020 what is the likelihood that your insulation EBIT more than recovers what you lost in 2019. It exceeds 2018 EBIT level, is that in your eyes, and is that something that is a realistic expectation given the improvements you're seeing?

[BrianChambers]

Thanks Steven. Appreciate the questions. I'll take the second one first. I think we've purposely decided not to guide kind of on full year outlooks when we get into the business. And we're trying to give really good color in terms of the quarter-by-quarter which we've given in terms of guidance overall for the company and for the business here in Q1. So I mean clearly, I'll go back to my comments. I think we are -- the changes and work we've done in our insulation business last year, we've seen good progression in our historical share growth and volume growth. We've adjusted our operating cost position and improved that quite a bit.

We're seeing good growth in technical and other insulation that we expect to continue in 2020. So from a full year perspective outlook in our insulation business, we're expecting to see strong earnings growth in residential which we talked about in our outlook and some solid growth in our technical and other. So we think we can grow the segment overall. When it comes back in terms of operating margins, again, historically we've been able to get good operating leverage off of our assets as we've grown volumes. And there's nothing in our operating network that would change historically what we've been able to achieve as we've seen good volume growth. In fact, we're operating I think even a little more efficiently.

So I would expect to get good operating leverage as volume grows but I really don't want to speculate in terms of what that upside margin potential could be, but it certainly is stronger than where we're operating today and we think historical operating margins are certainly potential in the business with good volume leverage and pricing.

[ScottCripps]

Carey, this is Scott it looks like we have time for one more question.

[Operator]

Our last question will come from Kenn Zener of KeyBanc.

[KennZener]

Good morning, everybody. Just checking, thank you. I wonder with composites I understand industrial production being weaker right now, it looks in the first half versus the second half, but if you look at the 12% margin there about that we were at in 2018 and 2019. Could you talk to some of the factors that would be necessary to get back to the 14% range we saw in 2017? Is that really a function of mix? Is that a function of input costs abating? If you could just expand on that a little bit. Thank you very much.

[BrianChambers]

Yes. Thanks for the question, Kenn. Again, yes, we've had pretty stable margin performance in the business for the last several quarters. And again I think our team is executed well. I think where we're focusing our commercial activities to grow in higher value applications some key markets has been a big part of the earnings driver. The other big part of our earnings driver has been our manufacturing performance. So we've invested to make sure we're operating low cost scalable assets and we're getting great manufacturing efficiencies through those assets.

So I think the factors that would kind of continue to build out our operating margins and composites. I think one would be just continued strong performance in our manufacturing, great operating efficiencies which we've been able to demonstrate and we see opportunities to continue to improve and grow and gain on our manufacturing productivity. I think mix does play into this as we kind of shift our mix to more kind of higher value downstream segment and products, where we can earn a little bit better margin on those. And then the third would just be pricing, overall pricing in the market for us and allowing us to get some incremental pricing on our product.

So those would be probably the three big factors. Continue strong manufacturing performance; continued growth and product mix and higher margin products for us and then some pricing improvements that could walk us back up to that 14% level.

End of Q&A

[Operator]

And this concludes our question-and -answer session. I'd now like to turn the conference back over to Scott Cripps for any closing remarks.

[Scott Cripps, Vice President of Investor Relations.]

Very good. Thank you everyone for joining today's call. With that I'll actually turn it back over to Brian.

[Brian Chambers, Chief Executive Officer]

Okay. Thanks Scott and thanks everyone for your questions. In closing, we've made substantial progress with our operating priorities. All aimed at creating value for our shareholders. We have market leading businesses and attractive markets, innovative product and process technologies and an enterprise model that creates differentiated value. And we have the right team in place dedicated to the success of our customers and our shareholders. Our teams are executing well. Our businesses are favorably positioned within their respective industries and markets. And we're well positioned for a strong 2020. So I want to thank you for your time this morning. And we look forward to speaking with you again during our first quarter call.

[Operator]

Thank you. The conference is now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.