Owens Corning (OC) 2014 Q2 法說會逐字稿

Good morning, and welcome to the Owens Corning Second-Quarter Earnings Conference Call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Thierry Denis, Director Investor Relations. Please go ahead.

Thank you, Emily, and good morning, everyone. We appreciate you taking the time to join us for today's conference call, and a review of our business results for the second quarter of 2014.

Joining us today are Mike Thaman, Owens Corning's Chairman and CEO, and Michael McMurray, Chief Financial Officer. Following our presentation this morning, we will open this one hour call to your questions. Please limit yourself to one question, and one follow-up.

Earlier this morning, we issued a news release and filed a Form 10-Q that details our results for the second quarter. For the purposes of our discussion today, we've prepared presentation slides that summarize our performance, and results for the quarter. We will refer to these slides during this call.

You can access the slides at our website, OwensCorning.com. We have a link on our homepage, and a link on the Investors section of our website. This call and the supporting slides will be recorded, and available on our website for future reference. 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, and 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, this presentation and today's prepared remarks contain non-GAAP financial measures. The calculations of non-GAAP to GAAP measures may be found within the financial tables of our earnings release on OwensCorning.com.

Adjusted EBIT is our primary measure of period over period comparisons. And we believe it is a meaningful measure for investors to compare our results from period to period. Consistent with our historical practice, we have excluded non-recurring items and items that we believe are not representative of our ongoing operations when calculating adjusted EBIT.

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. In the second quarter, we have utilized an effective tax rate of 29%, in line with our anticipated annual effective tax rate on adjusted earnings for 2014.

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

Now, opening remarks from our Chairman and CEO, Mike Thaman, who will be followed by CFO, Michael McMurray. Mike will then provide comments on our outlook prior to the Q&A session. Mike?

Thank you, Thierry, and good morning, everyone. We appreciate you joining us today to discuss our second-quarter results.

Today, Owens Corning reported consolidated revenue in the quarter of $1.36 billion, flat with the same period a year ago. The Company earned $96 million in adjusted EBIT for the quarter, down from $124 million last year. Adjusted earnings were $45 million, down from $68 million one year ago.

The Company's financial performance for the quarter reflects continued year-over-year improvement in both insulation and composites. The improvement in these two businesses was in line with our expectations for the first half of the year.

Roofing volumes under performed in the market in the second quarter. And the volume weakness through the first half of the year resulted in updated full-year guidance that we issued in June.

At the outset of the year, we discussed a number of expectations for sustained or improved performance across our businesses in 2014. Now, I will review our performance against those expectations, starting with safety.

As it indicates each year, we said that we would continue to make progress toward our goal of creating an injury free workplace. We continue to perform at a very high level of safety, with a Recordable Incident Rate of 0.5 for the six months ending in June. This is consistent with our rate in the same period a year ago. Year-to-date, we have greatly reduced the severity of our injuries, and our goal is to achieve and maintain injury free workplaces across our global network.

In insulation, we said we should continue to realize the benefit from growth in US residential new construction, improved pricing, and operating leverage. Insulation delivered $14 million more in EBIT in the second quarter versus last year, driven primarily by better pricing and volume growth. The insulation business also improved EBIT for the 12th consecutive quarter.

In the first half, the business delivered operating leverage of 63%. This is consistent with our guidance of 50% operating leverage through the recovery.

In composites, we said we expect improving market conditions and pricing to drive EBIT growth. With improved manufacturing performance and higher volumes expected to offset higher rebuild costs and cost inflation. The second quarter composite's EBIT was $37 million, an increase of $5 million over the same period last year. I'm pleased with the progress in composites.

Our operating performance has been very good, and market conditions have been supportive of both volume growth and improved pricing. We realized a $10 million price improvement compared with the second quarter of 2013. In addition, we are seeing stronger volumes in glass reinforcements in the second quarter, with second-quarter growth outpacing first quarter.

In roofing, we entered the year with expectations well above our current outlook. In our June guidance update, we said that first half volumes could be as much as 20% lower than the same period in 2013. Roofing volumes in the first half were down slightly less than 20%.

Our share of the market improved in the second quarter versus the first quarter, but was below our share in the second quarter of 2013. As a result, our volumes under performed in the market for the second consecutive quarter.

Revenue in this business dropped 14% year-over-year and EBIT margins were 14% for the quarter, on lower volume leverage, lower prices and higher asphalt costs.

Before I move to our outlook for the business, we had one other achievement in the quarter that I'd like to note. We released our 2013 sustainability report, demonstrating good progress toward achieving our 2020 environmental footprint goals.

Highlights of the report included: commissioning the largest on-site solar energy system in the state of New York at our Delmar insulation plant, recycling 1 million tons or 10% of all the asphalt shingles in North America, and doubling the freight miles that were driven on natural gas in Owens Corning. These sustainability initiatives provide economic benefit, in addition to environmental benefit.

Now, let me review our expectations for the remainder of 2014. We expect that the insulation business should continue to benefit from growth in US residential new construction, improved pricing, including our June price increase, and operating leverage. We continue to focus on proving insulation prices, as we return the business to historical levels of profitability.

The composites business is benefiting from stable global economic growth, improved operating performance, and pricing. We expect pricing to be the primary driver of EBIT growth in 2014. Based on year-to-date performance, we expect that the full-year price improvement for the business will likely be at the top end of the previously communicated range of $20 million to $30 million.

The roofing market was down for the first two quarters of the year. For the full-year, we now believe that the market will be flat to slightly down. Our goal for the second half will be to restore our share of the market to historical levels, so that we more closely track the market.

We are obviously disappointed with our first half performance in roofing. Given the market conditions, mid-teen margins appear to be the near-term reality.

We believe that we have the right action plan to improve our second half volume performance, and continue to demonstrate price and margin discipline. In the near-term, the business will likely perform at margin levels below those which we enjoyed over the past five years. The continued momentum in our insulation and composites businesses is expected to more than offset the weaker financial performance in the roofing business, and we will generate earnings growth for full-year 2014.

With that, I'll now turn it over to Michael, who will review further details of our business and corporate performance. I'll then return to recap, and open up the call for questions. Michael?

Thank you, Mike, and good morning, everyone.

As Mike mentioned earlier, in the second quarter, our insulation and composites businesses continued to demonstrate year-over-year improvement. The momentum and earnings growth in these two businesses is expected to more than offset the weaker financial performance in our roofing business.

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

We reported second quarter 2014 consolidated debt sales of $1.36 billion, which were largely flat with sales reported for the same period in 2013. In our roofing business, net sales were down 14%, primarily on lower sales volumes.

Net sales in our insulation business were up 8%, primarily on increased selling prices. Lastly, net sales in our composites business were up 7%, due primarily to higher sales volumes and increased selling prices. In a moment, I'll review our reconciliation of items to get to adjusted EBIT, our primary measure to look at period-to-period comparisons.

Adjusted EBIT for the second quarter of 2014 was $96 million, compared to $124 million in the same period one year ago. Adjusted earnings for the second quarter of 2014 were $45 million, or $0.38 per diluted share, compared to $68 million or $0.56 per diluted share in 2013.

Depreciation and amortization expense for the quarter was $78 million, and in line with the prior year. Our capital expenditures for the quarter were $77 million, including the net effect of alloyed purchase and sales.

Now on slide 6, let me reconcile our 2014 second quarter adjusted EBIT of $96 million to our reported EBITof $73 million. In the second-quarter, we entered into an agreement to sell our European masonry products business, which resulted in a $19 million impairment charge that we have adjusted out of earnings. We expect this transaction to close in the third quarter of 2014.

We have also adjusted out $4 million of costs at our New Jersey roofing facility that was damaged as a result of Superstorm Sandy as discussed in previous calls. We do not expect any further charges related to this project.

Also within the quarter, we received the final payment of $44 million related to the sale of our US masonry products business, Trumbull Industries, which closed in the fourth quarter of 2010. This payment had no impact on earnings.

Now, please turn to slide 7, and I will provide a high level review of our adjusted EBIT performance. Comparing to the second quarter of 2014, with the same period one year ago.

Adjusted EBIT decreased $28 million. The $14 million improvement in our insulation business and $5 million improvement in our composites business, were more than offset by a $54 million decline in our roofing business. General corporate expenses were $7 million lower versus the prior year, primarily due to a reduction in performance-based compensation expense and strong cost controls.

With that review of key financial highlights, I ask you to turn to slide 8, where we provide a more detailed review of our businesses. Starting with building materials.

For the second quarter, building materials net sales were $884 million, a 4% decrease compared to the prior year. Building materials delivered $80 million in EBIT, down from $120 million for the same period in 2013.

Slide 9 provides an overview of our roofing business. Roofing net sales for the quarter were $437 million, a 14% decrease compared with the same period a year ago.

EBIT in the quarter was $62 million, down $54 million compared to the same period in 2013. The declines in revenue and EBIT were primarily driven by lower sales volumes, along with slightly lower selling prices. EBIT margins for the quarter declined 9 points, as a result of lower fixed cost volume leverage, lower selling prices, and higher asphalt costs.

We continued to face challenging market conditions during the second quarter, and we were disappointed with the performance of our roofing business for the first half of 2014. The market weakness we experienced in the first quarter continued into the second quarter. Within the quarter, we estimate that industry shipments were down low to mid-single digits year-over-year.

During the second quarter, we improved our overall share of placement, but continued to under perform the overall market. Roofing channels that generally replenish on a sell through basis and where we have higher exposure, continued to track below the market during the quarter.

In addition, our share of placement within distribution channels was impacted early in the second quarter from late first quarter buy activity that shipped in the second quarter. As indicated on the first quarter call, we did not participate in late first quarter discounting.

We previously expected the US asphalt shingle market to grow in 2014, primarily driven by growth in new construction activity, and possibly some growth in re-roof. Given the market performance on a year-to-date basis, we now expect the full-year market in 2014 will be flat to slightly down.

This should result in the second half market being slightly up to flat compared to the prior year. We are working to improve our share of placement, and it is our goal to see our volumes more closely track the market in the second half of the year.

Now, slide 10 provides a summary of our insulation business. Sales for the quarter in insulation of $447 million were up 8% over the same period a year ago on higher selling prices, and the acquisition of Thermafiber. Slightly higher sales volumes were offset by unfavorable mix.

The business delivered EBIT of $18 million in the second quarter, compared to $4 million in the same period one year ago, primarily on higher selling prices, partially offset by inflation. This was our 12th consecutive quarter of EBIT improvement in our insulation business.

The insulation business delivered strong operating leverage for the first half of 2014. Operating leverage was over 60%, driven largely by higher selling prices with some top line demand growth in the second quarter.

And as we have discussed on previous calls, our goal is to deliver 50% operating leverage through the recovery. As we've experienced in previous quarters, our operating leverage results will be subject to volatility, due to the timing of pricing, shipments, production, and capacity actions.

Volume growth, particularly in new construction, was not as robust in the first half of the year as we originally expected. Growth was limited by challenging weather conditions in the first four months of the year, and its impact on construction activity.

For the second quarter, US residential volumes were up slightly on lagged housing starts that were flat year-on-year. We expect volume growth to accelerate in the back half of the year, as current consensus estimate for 2014 US housing starts is just above 1 million units.

We continue to be very focused on improving pricing in our insulation business, even though market conditions earlier in the year were less supportive of price actions. The US residential business took further action mid-year, and I'm pleased to report that we have made good progress. Looking forward, the insulation business should continue to benefit from growth in US residential new construction, improved pricing, and strong operating leverage.

Now, I'll ask you to turn your attention to slide 11 for a review of our composites business. Net sales in our composites business for the quarter were $505 million, a 7% increase compared to the same period in 2013. The increase in revenue was driven by higher sales volumes, increased selling prices, favorable customer mix, and the impact of foreign exchange translation.

Prices continued the sequential improvement that started in the third quarter of 2013, and we are seeing a healthy volume environment, as second-quarter demand growth out paced the first quarter.

EBIT for the quarter was $37 million, compared to $32 million in the same period last year, due primarily to improved selling prices, that were partially offset by higher expenses associated with plant rebuilds. In composites, this was our 4th consecutive quarter of year-on-year EBIT improvement, driven primarily by improved operating performance and pricing.

For the year, we continue to expect moderate global industrial production growth. Based on our year-to-date performance, we expect pricing to be at the high-end of the previously communicated $20 million to $30 million range. As discussed on previous calls, improved manufacturing performance and volume growth are expected to be offset by higher expenses associated with plant rebuilds and inflation.

Now, I thought it might be helpful to provide a bit more visibility into plant rebuild expense for 2014. As a reminder, we will complete rebuilds on melters that represent roughly 20% of our global capacity in 2014. This represents about two times typical rebuild activity.

We expect that plant rebuild expense will be roughly $30 million higher in 2014, versus the previous year. Rebuild expenses for the first half were about $10 million higher than the same period in 2013, and we were able to grow our year-to-date adjusted EBIT in the business by $23 million.

Plant rebuild expense in the second half are expected to be about $20 million higher than in the same period one year ago, with the majority of expenses taking place in the third quarter. We expect the momentum we have established in the first half will more than offset these headwinds in the second half.

Now, let me turn your attention to slide 12. In June, our Board of Directors approved our second quarterly dividend payment to be made on July 29, 2014. The dividend represents added value to our shareholders, and demonstrates confidence in our earnings and free cash flow outlook.

In the second quarter, we also repurchased 300,000 shares of the Company's stock for $12 million under a previously announced share repurchase program. And as of June 30, 2014, 7.7 million shares remain available for repurchase under the Company's current authorization. As we balance our priorities for the future deployment of free cash flow, both dividends and stock repurchases will be important mechanisms to return capital shareholders.

With that review of our second-quarter results, I now ask you to turn to slide 13 where I review our guidance for 2014. We continue to expect that our full-year of adjusted EBIT will be greater than the previous year, even though our results for the first half of 2014 trailed the previous year by $23 million. The continued momentum in insulation and composites and the actions we are taking in roofing to drive better volume performance give us confidence in delivering this expectation.

Now, please turn to slide 14, where I provide other financial guidance for the year. We expect corporate expenses to be in the range of $100 million to $110 million. This represents a $20 million cost reduction versus our previous guidance, due to strong cost controls and lower performance-based compensation for the remainder of 2014.

Capital spending guidance for 2014 has been reduced $30 million, and is now expected to be about $370 million. Including approximately $65 million of spending associated with the construction of our new non-wovens facility in Gastonia, North Carolina.

Depreciation and amortization expense is expected to be about $315 million. Our $2.1 billion US tax NOL will significantly offset cash taxes for some time to come.

As a result of our tax NOL and other tax planning initiatives, we expect our 2014 cash tax rate to be approximately 10% to 12% of adjusted pretax earnings. Our 2014 adjusted effective tax rate is expected to be approximately 28% to 30% of adjusted pretax earnings.

Thank you. And I'll now hand the call back to Mike. Mike?

Thank you, Michael.

As I noted at the outset of today's call, the Company's financial performance for the quarter reflects continued year-over-year improvement in insulation and composites. Roofing volumes were down through the first half of the year.

We believe we have the right action plan to improve our second half volume performance in this business, and continue to demonstrate price and margin discipline. The continued momentum in our insulation and composites businesses is expected to more than offset the weaker financial performance in the roofing business, and generate earnings growth for the full-year 2014.

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

Thank you, Mike. Emily, we're ready to begin the Q&A session.

(Operator Instructions)

Stephen Kim of Barclays.

I just wanted to touch on the roofing business a little bit. You've talked about the fact that you don't think you lost as much market share in 2Q as you had in 1Q. It seems to me that from what we're hearing out the marketplace, that the pricing discipline in the industry that the industry enjoyed a couple years ago seems to be breaking down.

Not just in terms of manufacturers having to discount, but also distributors getting more competitive with one another. I was just curious if you could maybe give some color commentary on what you're seeing in that regard. In terms -- do you believe the discipline in the industry is going through a period here where there's a bit of a breakdown in discipline, both at the distributor channel and retail, as well as the manufacturers?

Stephen, it's Mike. It's a very good question, and there's no doubt that what we're seeing in our reported results and what we're seeing in the business is that it's a more competitive environment out there today. If you look at how we played through the first half of the year, Michael talked in his prepared remarks about some of the buy activity at the end of the first quarter that we decided not to participate in. We were looking at end of the first quarter going into the early part of the second quarter, there was an April price increase out there. I think we were very focused on price discipline, and trying to affect margin improvement from the first quarter to the second quarter based on pricing. Obviously, that strategy hasn't played out for us. It impacted the first quarter volumes, and then some of the deals that were done at the end of the first quarter continued to ship in the second quarter.

So it also affected second quarter volumes. If you look at our second quarter margins, they're not what we've grown accustomed to. But we still are at margins in the mid-teens. So there's still a fair amount of profitability in the industry for shingle manufacturers, and I think that, that is a both good news bad news story. It's good news because we are still quite profitable, but it also gives some competitors and also some of the manufacturers the ability to work with pricing as a way to attempt to get market share.

I think, as we look at it today, we had historically given our guidance for the business as being mid-teens or better. When we arrived at that guidance, it was based on some historical analysis of the performance of our business, and the things that we've done to try to improve the structural cost position and product lines. It was also based on some competitive analysis of the marginal economics of the different players in the industry, and how their economics work in terms of trying to gain share and take volume at the expensive price. And both of those analyses brought us to the conclusion that when our business is operating in the mid-teens, it doesn't make a lot of sense, based on marginal economics in the industry, for some of our competitors to be chasing more market share.

So, we don't necessarily see that it should put a lot more impact on margins in our business as we roll forward, but I think that's something that remains to be seen. I think this price environment, we hear from a number of our distribution customers, is not working well for distribution. I think that the market worked much better for distribution when there was some Winter buy activity. In the Winter, they could load in some low-cost inventories, and then we were in a rising price environment through the year. That tended to give them the support they needed to be able to manage pricing in the marketplace. I think some of the manufacture pricing actions and then some of the distribution pricing actions have broken that down as well for the distributors.

So, it's a bit more difficult market right now, and I think it's going to need to sort itself out. Which is why I said in my comments I think at least in the near-term as we look into the second half of the year, we don't see the catalyst that moves us out of this mid-teens margins environment. We do see some nice underlying trends in the market and some things that we think we can do with our business that help us get back to our historical market share levels, without disrupting the market unnecessarily.

We think that's really more related to not participating in the buys in the first half, but really being more competitive and pricing at market prices in the second half should get us back to our market position, which is what we've enjoyed historically. So we're working our way through this. But, we think we're at a margin level today that at least based on our current understanding of the market, we should be able to sustain.

That's very helpful. I appreciate that. I'm sure there's going to a lot of questions on roofing. So let me just shift over to insulation for a minute. You saw an improvement I think of about $18 million. I think there was some commentary in the release about pricing adding about $22 million. So I was curious, first of all, do I have those numbers right? And then, could you give a little bit of color about the operating leverage inherent in the business, and maybe why we didn't see as much as we might have thought, outside of the pricing which is actually operational?

Well the actual improvement in the business for the quarter was about $14 million, and we've improved the EBIT line, and we've improved $36 million year to date. And I think what we've said is, the primary driver of that EBIT improvement year to date has been pricing. So, it's pricing that's coming through in the business today that's driving the EBIT improvement.

If you look at the second quarter, we didn't have a lot of volume growth in the second quarter. We work off of lagged housing starts. And, in fact, if you go back and look at actual starts in the first quarter of 2013 and then actual starts in the first quarter of 2014. Lag those into the second quarter, which is when we'd see them, the actual number of units built in the first quarter of 2013 is about flat with 2014.

So even in a 10% up housing environment, which is what consensus is today and what we're working off of, that was going to play out -- it looked like in our view much more as growth in the first quarter for us. Not much growth in the second, and then growth in the third in the fourth. So, this was going to be the soft spot quarter in terms of volume based on the shape of housing starts, and that's why I think what you're seeing in top line for the second quarter is a little bit more correlated to where the timing of starts are going to be in 2014.

Got it. Thanks very much, Mike.

Philip Ng of Jefferies.

You mentioned that you saw some push back on insulation pricing early in the year, but you're seeing better traction. Can you give us a sense of the magnitude we should expect in 3Q, or the back half, in general? And just the timing of that?

Well, we continue to make progress, obviously, in the first half of the year, as evidenced by the answer I just gave Stephen regarding insulation pricing. We did have a late 2013 price increase that we were hoping would give us increased momentum for the first half of the year. That price increase wasn't as successful. There was some price improvement in the market. But I think weaker volumes, the tough Winter, slower housing starts, just didn't create a market environment where our customers felt confident that they could pass that pricing through.

Seasonally, now, we're heading into the second half of the year, where there's a lot more units to be insulated. We've also seen a little bit of pickup in housing starts over the last three months, where housing starts to average about 1 million units in the March, April, May timeframe. We have the number for June that everyone is trying to digest, and I'm not sure any of us are really sure where June housing starts were because of that big decline in the Southeast. But if you look at May, April, and March, we averaged about 1 million. So we think there's decent volume out there in the second half of the year that gives our contractors the opportunity to be busy. That has the builders with decent volumes, and that we should be in an environment where we're more successful on pricing.

In Michael's comment, and we don't comment on individual price increases in terms of realization, but we did have a price increase late second quarter that was a double-digit price increase in the 12%-ish range, and we feel that we had good success with that price increase. So that should help us in the second half.

Got it. That's very helpful. And then on roofing, if I understand your guidance correctly, you're expecting volumes to be flat to down modestly. The industry, as a whole as well as Owens Corning, was pretty weak in the first half. That would imply a pretty big bounce back in the back half. Is that how I should be understanding it? And can you give us some color on how volumes are tracking in June and July?

Sure. So, let's just do the math on our overall guidance for the industry. Michael said that the industry through the first half we think is down low to mid-single-digits. So for the industry in total to be flat in the second half, it would have to be up about that same amount in the second half. So down low- to mid-single-digits in the first half. We typically ship a bit more the first half, so we probably need to be up mid-single-digits in the second half to get a flat full year. What we said today in our guidance is, we're expecting the overall industry could be flat to slightly down. That probably puts the second half, in our view, somewhere between flat to maybe up mid-single-digits. It's going to be somewhere in that range.

So I don't think we need a gigantic bounce back, but we are going to need to see better volumes in the second half than and we saw in the first -- the second half relative to last year versus what we saw in the first half of the year. I think if you step way back and say, we have a year here where in many parts of the country, Winter lasted five weeks longer than it lasted in 2013. And you said, where would you expect the volumes to be at the midpoint of the year? You'd expect them to be behind last year. So, I think with all of the buys and timing issues and market share issues and everything else. At a very macro level, if you just step back and say, given that half the country was under snow for five extra weeks this year, is it unreasonable or unnatural that the market be a little behind last year? And yet, you could still expect the overall market to be flat to last year. That seems like a reasonable conclusion.

Now, obviously, if we print a couple of additional consecutive quarters of negative growth for the overall market, that's not going be a good theory. And it would say that reroof is falling yet further, because storm demand seems to be comping about flat to last year. New construction should be flat to slightly up. So for the overall market to be down appreciably, it would be another year of a leg down in reroof. And it seems like there's enough activity out there today that, that just doesn't feel like right kind of base case for the industry. In terms of our business, we have seen improvement as we've come through the year. Part of that has been the evolution of the channels, which Michael talked about. Some of the channels that work on replenishment, obviously, get stronger during the seasonally strong parts of the year, we get more shipments there.

That helped us a bit with our market share. We also had a bit more shipments in some of the other channels in June. So June, we did comp positively to last year. So we saw some pick up as we went through the second quarter, and these buys worked their way out of everyone's book of business and worked their way out of inventory. So, we have some signs of optimism. But I would tell you, it continues to be a tough volume market, and a difficult price market for us. And I think our team is doing a very, very good job of trying to get the best possible profitability out of the market for Owens Corning.

Got you. That's very helpful. Good luck in the quarter.

Michael Rehaut of JPMorgan.

Just going back to roofing for second, sorry to return the focus there. But obviously, a key mover for the quarter. What gives you the confidence, in terms of to the extent that volumes can come back a little bit for you in the back half of the year and regaining a little bit of share? Is it completely some of the channel replenishment, and the June just coming back a little bit naturally for your business? Or are there other Company-specific actions on top of that, that you're looking at? And would that in turn, put any further pressure on these mid-teens margins, which you appear to be expecting for the back half?

Yes. I think, obviously, we've had a lot of internal dialogue and a lot of reviews of market by market, customer by customer, region by region, where the business stands. So our team is all over the business in terms of volume and market conditions. I think that analysis has given us some confidence that where we were not volume effective in the first quarter, it was really, fundamentally, a product of us not meeting market price conditions. And that, simply, we are a market price competitive company.

Our goal is, obviously, to make a lot of money for our shareholders. But if market conditions are establishing prices that require us to meet market pricing, that's the way Owens Corning operates. And I think with the exception of late first quarter, when there were some of these buys, for the most part, the rest of our activity in the first half of the year would be a market price type behavior. And we know that, that's resulted in us being able to sustain our normal position in the market. So, really, the second half is just getting some of the noise out, and the noise of these buys out. Us just competing in market prices, and us believing that we have enough contractor loyalty, we have enough distributor loyalty, we add enough value in terms of our service programs, our product offerings, some of our product differentiation, that we'll go back to a normal spot in terms of what our customers are selling out their door.

As long as long as their selling the appropriate percentage of Owens Corning product out their door, they're going to buy the appropriate percentage of Owens Corning product in on the buy side. So, easy said, hard done, I guess, would be how I describe that. Which is, there's no magic to this except for market by market, customer by customer, and making sure that we're very much in tune with market conditions, and that they're selling enough of our product to want to buy a share of product that's acceptable to them and acceptable to us.

And as you do that, I guess the key question is -- and perhaps you've even seen some of this in your profitability levels in 2Q and maybe that's what I'm missing. But as you continue to retake some of that share or meet the market, so to speak, that is incorporated in your outlook for mid-teens or the operating margin that you saw in the second quarter going forward for the back half of the year?

Yes. Based on the current market conditions, we didn't really see a lot of -- in fact, margin deterioration in the second quarter, if you look at as on a margin dollar, variable margin dollar per unit basis. Variable margin dollars per unit in the second quarter, were pretty much in line with the first quarter. Now typically, we make progress and they are better in the second quarter because there has historically been good pricing actions in the Spring that have allowed us to widen margins out a little bit in the second quarter.

We didn't see that this year. What you're seeing in our numbers for the second quarter is, a bit of compression on operating margins due to fixed cost absorption because of weaker volumes. So, the fundamental selling equation on shingles, we still have decent margin dollars -- variable margin dollars, per square on the shingles that we sell. That if the current market conditions sustain themselves, we think that we can continue to deliver good operating margins at decent volumes.

I appreciate that, Mike. And then, just on the composites, I appreciated the additional comments on the rebuild costs, the incremental rebuild costs of about $30 million. And that equates, rough map, I think to about 1.5 points of margin for this year. That $30 million incremental. Just to dot the I and cross the T here, as you'd expect 2015 to go back to a normal rebuild type year. Is that correct, number one? That it would return to that, and so therefore, that $30 million of incremental costs you wouldn't see -- expect that to recur in 2015?

Yes. So I want to make sure all of the investors on the call understand the dialogue. Because this is built off of prior calls as well. But we had come into the year saying that we had to rebuild about 20% of our global capacity this year. Our melters typically last about 10 years. Corrosion and just the impact of melting glass over a 10-year period of time, requires you to put the melter into turnaround and realign it with new refractory block and other things. That has capital associated with, it also has expense dollars associated with it, because a lot of the activity is both downtime and then also expenses associated with doing the work which aren't able to be capitalized.

Because we were rebuilding 20% of our melters in the average life, or 20% of our capacity, and the average life is about 10 years, in a typical year we rebuild about 10% of our capacity. And that's where the 2X number comes from. On an incremental basis, that produced about $30 million of cost headwind versus 2013. Now, 2013 was not super large rebuild year. So we were comping against a year was down a bit. And when we look ahead to 2015, we're still working out our capital plans in terms of looking at melter life, and which melters are going to need to be addressed in 2015, which ones can be extended into 2016. I think it's fair to conclude, we'll be able to claw back some substantial portion of the $30 million.

I don't know at this point that we've given you enough information for you to be able to conclude whether it will be some or all of that. But I think your point, which is, directionally on a comparable basis should it turn into a tailwind for us next year, we would expect it would be. And we would expect it would be at a material level, in terms of contributing to operating margin. I just don't want you to come the conclusion we'll be able to get all of it back until we finalize next year's rebuild schedule.

Ken Zener of KeyBanc Capital Markets.

So, the volumes on roofing were better than I think people initially expected. But, I'm struggling with a broader question about how to think about your Company, and how you guys are thinking about guidance. I know that, over the years, there's been several iterations giving it at the segment level. What you're doing this year in composites, and then of leaving it a little more generalized between the two other segments. Could you help us think about, as you struggle through this process as well. You can't control the weather, housing is going to do what it does. But, could you help us think about how we can -- or the challenges you face in communicating to us around the guidance of your Company?

Because roofing, you can't figure it out. But insulation, perhaps around some said variables that we might have sensitivity to, would be helpful. Because it seems that while your businesses can be very good, it's hard to synchronize them. So I realize it's a little broader question, Mike 1 or Mike 2. But if you could help us through this. Because this seems to be one of the issues that your stock has in particular. Thank you.

Thanks, Ken. It's a great question, and hopefully my answer is up to the challenge. You started your question by saying, how should we think about the Company. At a very high level, I'd ask you to think about the Company the way we've always asked you to think about the Company, which is three great businesses in three great industries all of which are capable of delivering double-digit operating margins.

In recent history, while we believe that, that's been true, our financial performance has largely been driven by one business, which has been our roofing business. As we've worked composites through a difficult global competitive environment, and as we've worked installation through an excruciating housing downturn. Now if you look at those two businesses, composites now with four quarters in a row of improvement, insulation now with 12 quarters of a row of improvement. Both of them demonstrating operating leverage of around 50% during that improvement period. And with those two businesses improving $60 million just in the first half of this year, I think we're getting much closer to financial performance that looks like three great businesses in three great industries.

Now, unfortunately, and I think frustratingly to the leadership team here, roofing which has been our business that's been most volatile and most difficult to guide and most difficult to forecast, happens to be overwhelming that message right now. Because of some of the challenges in roofing. But, if you look at our overall portfolio and we have are roofing business that is a mid-teens or better business through some recovery in the roofing cycle, which is consistent with what we've been saying. And then you have a composites and an insulation business which continue on the path to recovery.

That we've begun to demonstrate over the course of the last three years in the case of insulation, the course of the last year in composites, you actually get much closer to an overall Company with a very strong portfolio of businesses. That, at least relative to historical standards, is actually operating with all three businesses operating at high levels of performance in a synchronized way. Now, that's high level performance of roofing as it relates to the last 20 years, it's not high levels of performance necessarily right now as it relates to the last 16 quarters. We haven't given up on roofing one day again being a 20% operating margin business, we're 5 points of price away from that reality. So, there's not a lot that's needed to see the roofing business perform better.

But, we're seeing roofing performance today that we think is sustainable and is consistent to the way we've guided that businesses historically, even though we're disappointed that it's not as good we expected to be. But we'd ask you to continue to think about our Company as being three great businesses, two of which are establishing a very nice track record of improvement that we believe is sustainable. One of which, has been more of a challenge to forecast, but even in its tough days, is producing mid-teens operating margins and great cash flow.

Yes. It's tough. Complexity tends to breed a discount, and I'm not an activist type perspective. But it would certainly help. Could you, on insulation, the amount of price that you've got, was that a pretty much 100% from the residential side? Implying commercial, what's going on domestically commercial, or international and insulation, obviously Canada. But is that price gain largely in the residential domestic side? Thank you very much.

Thanks, Ken. The pricing is, I would say, largely residential. But if you look at the product line that goes into residential, we tend to call those products light density, which are fluffy fiberglass insulation products. Which would be what you'd be accustomed to seeing in a standard stick built residential construction. Those similar product lines, which are built off of similar assets, tend to move pricing in tandem with a couple of the commercial markets. So, some of the insulation products that would go into standard commercial construction, some of the insulation products that go into metal buildings. Some of the insulation products that go into some duct insulation and HVAC type insulation, are made on similar assets.

And as a result, when we see residential pricing improving, we tend to see also some improvement in some of those other a little bit more engineered light density products. So, it's a bit more broad-based than residential. But I think for purposes of how to think about the business and for purposes of your analysis, the driver of price improvement in insulation would be the residential business.

Thanks.

Dennis McGill of Zelman & Associates.

The first question, just on pricing. I think the disclosure in roofing was that prices for the quarter were down 3%, and I think you said June volumes were up year-over-year positive in June. Can you just talk about pricing trends for the quarter? Did you have to get more or less aggressive on price to gain that volume?

We don't disclose anything on monthly pricing, or have any public disclosure on that. I would say there's not -- I don't think there's a big story to be told there or big news there. I think from our perspective, margin rates, we tend to manage off of variable margin dollars per square. Our margin rates and pricing, I would say, were fairly stable through the quarter.

Okay. And then, on the insulation side, you just went through it on the price. But can you also maybe talk generally what you're seeing volume-wise across the various pieces? You've, I think, talked enough about the new construction side. But maybe reinsulation, commercial, international. What you guys are seeing there on volumes?

So going back to the new construction piece, it's always just a good reminder that when we look at starts we look at lag starts. And if you do the math on that, the first quarter lag starts this year were not really much improvement over what was last year. But, already what's baked in the cake for the third quarter. We should see an improvement in lag starts for the third quarter as a result. Our expectation is, we'll see a little bit better volume on the residential side in the second half.

I would say, some of the other key markets, the commercial markets, some of the OEM markets, have looked more like economic growth. We're seeing some positive growth in those markets, but they probably tend to track GDP or industrial production type growth more than they would track residential new construction. Asia has continued on the international side to be a good market for us. Canada has been a little bit weaker. That's been true for, I guess, the last couple years. We've seen housing starts start to come off a little bit there. We've seen tougher weather patterns and things. So, Canada has been a little hard to forecast, and maybe not as robust as what we saw a couple years ago. We're very well-positioned in Canada, competitively. Because we have production assets in Canada.

So as the Canadian dollar weakens, our cost position in Canada does not deteriorate. We do have some competitors who ship some product in from the US. So, we would believe that, that would make them a bit less competitive going into Canada. Conversely, we are profitable in Canada. So with the weakening of the dollar, we also see less profits, in terms of translation on the profit we make in Canada. But that market, at least for us, is well hedged in that our production in Canada, we sell and make in Canadian dollars. So as the dollar goes up and down, we don't have an impact there. If anything, a weaker dollar maybe extends our competitive advantage in Canada a bit relative to a US manufacturer trying to sell in Canada.

So I guess Canada is down, Asia is up, and non-residential you'd say is up a little bit. And any color on retail?

Retail, interesting, it's been a little bit of a tale of two cities, there. On the roofing side, retail has been one of the channels that's been a little bit weaker for us. We talk about that as one of the markets that buys on a replenishment basis. Obviously, the big retailers don't take long positions on inventory. They bring inventory in when they need it. And same-store sales growth and things in heavy building materials like roofing have been, for the most part, early in the year and through the second quarter, trailing behind last year. Insulation sales of retail have actually have been fine. So, that's been more of a roofing theme for us than insulation. We've been happy with retail sales on insulation.

Okay. Appreciate it. Thank you.

George Staphos of Bank of America Merrill Lynch.

I had a couple of questions, again, on roofing. So, as we think about the rest of the year, and what your revenue trajectory could look like, you noted that June comps were positive. I think you said, Mike. And you expect to track in the line with industry more or less, and I think you're guiding to flat to maybe mid-single-digits up for the industry. Now as I recall, third quarter last year, you lost a fair amount of market share for what you had deemed to be somewhat aberrational effects based on the regions, the Midwest versus the coast. So, if that's true, what are the puts and takes? Why couldn't you do maybe a bit better than the industry from a revenue growth standpoint within roofing in the third quarter, and for the whole of the second half?

The second question I had on roofing is, you talked about variable margin dollars and the like and your analysis of your peer set. Do you think that if you looked at it on a cost of capital basis, that most of your competitors right now are basically at a breakeven level versus cost of capital? If not, why would you expect to get any kind of pricing, any kind of margin improvement until you see a much larger pickup in reroof? Thank you, guys. Good luck in the quarter.

Thanks, George. Responding to your first question, you're in fact right. If you go back to last year, our third-quarter share in roofing was not stellar. In fact though, our fourth-quarter share in roofing was very, very good. So, our second half performance last year in roofing from a market share point of view was very much in line with our historical average numbers. There was just timing, in terms of what came in the third and what came in the fourth. So in terms of the goals we've set for ourselves, flat to slightly up market, trending back towards our historical market share. Little bit easier comp in the third quarter, so maybe a little bit easier opportunity to catch up to last year's volumes in the third.

If that's where we stood at the end of the third, then we maybe have a little bit more to go in the fourth, because our market share was pretty high in the fourth. But we're cognizant of that in terms of the guidance we're giving that we're going to have to make progress in each of the two quarters in terms of market share, and try to get back to volumes that are acceptable to us.

In terms of -- your question around cost of capital, it is a way of looking at the industry, I think, at this point in time, our estimate of our competitors would be most all of our competitors are certainly making money today, and are earning positive returns on capital. There's not a lot of investment opportunity, though, because you don't see a lot of growth in demand. So, the ability to apply capital to the roofing market would be applied, really, based on the theory of you could get a bigger share of a fairly static pie, and that would be the purpose of putting capital in.

That goes to the comments I made earlier about the marginal economics, I've tried to take additional volume at lower prices. Today, when we look at the marginal economics of ourselves, when we look at the marginal economics of most of our competitors, we don't see anyone who has a cost position or a market position where their marginal economics of trying to grow through price, that they have that kind of advantage that, that's a winning strategy for them. Obviously, for us, over the course of the last four or five years, we've made a lot of money in the business, and we've tried very hard to earn market share. But we've never seen a point in time, even given the level of profitability that we've had over the last four years, that it made sense for us to somehow try to take additional volume at lower prices. Just based on how the marginal economics of our business would work if we went and did that.

We don't think we're unusual in that regard. We think that's the same position most of our competitors find themselves in. So, while cost of capital, return on capitals are acceptable, the marginal economics of cutting price to gain volumes just don't seem to be there for anybody in the industry. Because, it's a fairly consolidated industry today. So most everyone has a reasonable amount of market share, and doesn't have the economics to do that.

What you're saying is, to gain the share you'd cut the price sufficiently. That whatever spread you had from your analysis would dissipate, and so would therefore obviate the desire to do that in the first place. That right?

I think that's one factor. And the second factor is, historically, any market share gained based on cutting prices isn't sustained.

Fair enough. Thanks, guys. Good luck in the quarter.

Emily, this is Thierry. We probably have time for one more round of questions.

Keith Hughes of SunTrust.

To just switch back to roofing, real quick. In terms of production volumes for the second half, based on your demand outlook you've discussed several times, would you expect manufacturing volumes to be up or down versus -- or manufacturing production rates to be up or down versus prior year?

Boy, I would expect that manufacturing would be about in line with prior year. But that's going to be very dependent on the timing of the volume. It's also going to do be dependent on asphalt costs. So, a lot of our decision on how much to produce in the second half of the year is driven by, A, what we're shipping. But, B, as we get later in the year, if we think asphalt is inexpensive and it's going to inflate in the first part of the following year, we'll go ahead and buy some asphalt and convert it into finished goods in order to position ourselves with low cost inventory. If we think asphalt costs are relatively high and we're not going to see that inflation, we'll deplete our inventories.

And since the business doesn't have a lot of manufacturing fixed costs absorption, most of our fixed costs absorption problems in the business -- or our fixed costs leverage tend to be more fixed overheads and headcount related. That's not a big driver of our margin economics, in terms of whether we curtail production, or whether we push production ahead.

Okay. Final question. What is your sense of where roofing channel inventories are right now, based on discussion with distributors and what you see from competitors as we end the second quarter?

Our sense is, that first of all, the distributors as they've continued to consolidate and grow and become more sophisticated, I think they are becoming increasingly efficient in the amount of inventory they need to carry to support their business. So they are very turns focused. So in flat markets, I don't know that it's a good assumption any more than any flat market they'll end each year with the same amount of inventory they had in the prior year. If their volumes are flat, I would expect that they would expect to see some inventory product activity, and probably find ways to reduce their inventories. That said, some of the big distributors have also been opening some new branches and expanding their geographic footprint, which tends to also be additive to inventory. So the macro sense of inventory, we think flattish inventory is probably a reasonable assumption year-over-year.

Our sense is, that out the door sales for distribution out the door sales for most of the channels, have been comping mildly positive, which is causing them to work their way through the inventories they bought early in the year. That given that manufacturing shipments comp negatively through the first half of the year in a market that we think now is probably comping positively out the door. That's a dynamic that would say we're going to see some reorders in the third quarter and fourth-quarter in support of the outlook we've given for the overall industry. So, that would be the theory of how our guidance holds together in terms of when people are going to need to order, and why they're going to need to order.

Thank you.

This concludes our question and answer session. I'd like to turn the conference back over to Thierry Denis for any closing remarks.

Thank you, Emily. Thank you everyone for joining us for today's call. In fact, I'd like to turn it back to Mike Thaman for closing comments.

Thank you, everyone. Particularly for your obviously interest in the Company, and your ongoing support of the Company. I think we've covered all the bases in today's call, in terms of talking about Owens Corning and talking about the businesses. There's a lot of really good things that we're reporting today that I don't want to get lost in the roofing volume headlines for the first half of the year. Our insulation business and our composites business are $60 million of EBIT more profitable than they were in the first half of last year. That is the continuation of a trend that we've seen now for multiple years in insulation.

It is consistent with and we believe at the beginning end of a trend of what we would expect to see in composites, as we've seen a more disciplined capacity environment, a more disciplined global utilization, and a more constructive pricing environment. We believe that our two big fixed cost intensive businesses that can produce big-time operating leverage on growth. That both those businesses at the same time are now positioned to continue on a path of volume growth associated with global industrial production, and volume growth associated with residential new construction. And that we can drive that through to improved operating performance, improved volumes, improved pricing, and great operating leverage.

Unfortunately, right now, we're doing that in an environment where the roofing business and the roofing market have disappointed us a bit in the first half. I don't want that disappointment to be so pronounced that we lose sight of the fact that the business is still a big and significant business, with healthy margins producing significant EBIT and significant cash flow. We are obviously working very, very hard to get it back to the levels of performance that we've enjoyed over the last four years.

Having said that, we've always believed that Owens Corning was a Company that had three great businesses, and that the real strength of our Company is when all three of those businesses are performing at very high levels. And as you look through the report we put out today, I think you're going to look through that report and see we are actually getting closer to that reality of three very strong businesses performing at high levels.

We've got some work to do to finish out the year. And make sure that we produce a strong year financially. I think we've got a lot of good momentum, and two of the businesses will help us get there. And then we've got the challenges ahead of us that we believe we're up to, in terms of getting the roofing business with a performance that we're proud of in the second half. We look forward to talking to all of you on our third-quarter call to give you an update, and appreciate your continued support. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.