Owens Corning (OC) 2015 Q1 法說會逐字稿

Good day, and welcome to the Owens Corning first quarter 2015 earnings conference call and webcast.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference call over to Mr. Thierry Denis, Director of IR. Mr. Denis, the floor is yours, sir.

Thank you, Mike, 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 first quarter of 2015. Joining us today are Mike Thamen, 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 10-Q that detailed our financial results for the first quarter. For the purposes of our discussion today, we've prepared presentation slides that summarize our performance and results for the first quarter of 2015. We will 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 on the bottom right side of our Home page.

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 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. Reconciliations 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 first quarter, we have utilized an effective tax rate of 31%, in line with our anticipated annual effective tax rate on adjusted earnings for 2015.

For those of you following along with our slide presentation, we will begin on slide 4. And now, opening remarks from our Chairman and CEO Mike Thamen, 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 first quarter results.

Owens Corning had a good start to 2015, with first quarter performance that was consistent with the expectations we set coming into the year. Insulation continues to benefit from growth in US housing starts. Results in Composites reflect strong execution and operational performance. In Roofing, first quarter revenues and margins were weak. However, the Roofing business did not experience the discounting and inventory build in the channel that we saw in the same quarter last year, positioning the business to deliver higher volumes for the remainder of the year. The Company earned $60 million in adjusted EBIT for the quarter on consolidated revenue of $1.2 billion. Adjusted earnings were $22 million.

During our fourth quarter 2014 call in February, I discussed a number of expectations for sustained or improved performance across our businesses in 2015. Let me review them now, starting with safety. We said that we would continue to make progress towards our goal of creating an injury-free workplace. The Company experienced an increase in recordable injuries in the first quarter, with 25 recordable injuries compared to 21 in the prior year. Safety performance in March and April has been much improved and we remain committed to improving our overall safety performance.

In Insulation, we said the business should continue to benefit from growth in US residential new construction, improved pricing, and operating leverage. Insulation delivered EBIT improvement of $6 million. The business has improved EBIT performance for 15 consecutive quarters. First quarter operating leverage of 25% was impacted by the timing of expense items and in line with expectations.

I also want to highlight that today we announced an investment that will drive growth in our Insulation business. In June, 2013, Owens Corning acquired Thermafiber, a mineral wool insulation manufacturer, to support growth in the North American construction markets. Thermafiber has been a great addition to our portfolio and has been operating close to capacity in a growing market. Anticipating continued growth, our Board of Directors approved a $90 million investment for the construction of a new mineral wool plant, to be built in the United States and operational in late 2016.

In Composites, we said we expected 2015 EBIT improvement commensurate with 2014, partially offset by the negative impact of a stronger US dollar. First quarter Composites EBIT was $60 million, an increase of $33 million, representing the 7th second quarter of EBIT improvement. Selling prices continued their improvement trend and the business is off to a strong start. Results reflect strong execution and operational performance. Our performance in the first quarter has raised our outlook for full-year results, which I will discuss more fully later in my remarks.

In Roofing, we said the outlook could be largely determined by competitive pricing dynamics, the timing and value of asphalt cost deflation, and overall market demand. Roofing performance was consistent with our expectations, delivering mid-single digit EBIT margins on lower sales, lower production volumes and lower pricing in comparison to the previous year.

Shipments by US asphalt shingle manufacturers declined significantly during the first quarter, as we did not see the broad discounting or channel inventory build that occurred in 2014. This is in line with our expectation of a more balanced distribution of shipments throughout the year. Asphalt cost deflation has largely tracked with expectations. We still expect full-year deflation of over $50 million, with the bulk of the benefit in the second half.

Now let me summarize the expectations we have for the remainder of 2015. The Insulation business should continue to benefit from growth in US residential new construction, improved pricing and operating leverage. We continue to expect average operating leverage of 50% through the recovery, with 2015 leverage tracking slightly below that goal. Market momentum is positive, and we are positioned to deliver another year of strong growth.

In Composites, we are very pleased with our performance in the first quarter and expect to benefit from continued moderate global industrial production growth. Based on a strong start to the year, we now anticipate a full year EBIT improvement of up to $45 million, comprised of up to $70 million in improvement on a constant currency basis less the foreign exchange impact of $25 million at current exchange rates.

In Roofing, we continue to anticipate a flat market for 2015, with a more balanced distribution of shipments throughout the year. On our call in February, I indicated that Roofing performance for 2015 would be determined by the timing of shipments, stability of pricing and timing of asphalt deflation. That view is unchanged.

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 it up for questions. Michael?

Thank you, Mike, and good morning, everyone. As Mike mentioned earlier, we are off to a good start to 2015. We expect our Insulation business to continue to benefit from growth in US housing starts, and results in our Composites business reflect strong execution in operational performance. In Roofing, we are positioned to deliver stronger volumes at better margins for the remainder of the year.

Now let's start on slide 5, which summarizes our key financial data for the first quarter. You will find more detailed financial information in the tables of today's news release and the Form 10-Q. Today we reported first quarter 2015 consolidated net sales of $1.2 billion, which were down slightly compared to sales reported for the same period in 2014. Net sales in our Insulation business increased $24 million, primarily on higher sales volumes. In our Composites business, higher selling prices and higher sales volumes were offset by the impact of foreign currency translation. In our Roofing business, net sales were down 21% from the prior year, primarily on lower sales volumes and, to a lesser extent, lower selling prices.

In a moment, I'll review a reconciliation of items to get to adjusted EBIT, our primary measure to look at period to period comparisons. Adjusted EBIT for the first quarter of 2015 was $60 million, down $17 million compared to the same period one year ago. Adjusted earnings for the first quarter of 2015 were $22 million, or $0.19 per diluted share, compared to $35 million, or $0.29 per diluted share, in 2014. Depreciation and amortization expense for the quarter was $75 million, essentially flat as compared to the first quarter of 2014. Our capital expenditures for the quarter were $56 million.

Now on slide 6, let me reconcile 2015 first quarter adjusted EBIT of $60 million to our reported EBIT of $58 million. We have adjusted out $2 million related to the closure of two melters we announced last year, one in Japan and one in Canada. As a reminder, these actions will allow us to exceed our 75% low delivered cost goal in the Composites business.

Now please turn to slide 7, where we provide a high level review of our adjusted EBIT performance, comparing the first quarter of 2015 with the first quarter of 2014. Adjusted EBIT decreased by $17 million. The $33 million improvement in our Composites business and the $6 million improvement in our Insulation business were more than offset by a $60 million decline in our Roofing business. General corporate expenses were slightly lower versus the previous year.

With that review of key financial highlights, I ask you to turn to slide 8, where we provide a more detailed review of our business results, beginning with our Insulation business. Sales in Insulation of $379 million were up 7% from same period a year ago, primarily on improved volumes. The business delivered EBIT of $7 million in the first quarter, compared to $1 million in the same period one year ago, primarily on higher selling prices. This was our 15th consecutive quarter of EBIT improvement in our Insulation business.

As previously disclosed, we anticipated that both EBIT and operating leverage in the first quarter would be impacted by the timing of expense items. As we've discussed on previous calls, we expect average operating leverage of 50% through the recovery, although 2015 operating leverage will track slightly below that goal. Looking forward, we continue to expect the Insulation business to benefit from volume growth, improved pricing and operating leverage.

Now I ask you to turn your attention to slide 9 for a review of our Composites business. Sales in our Composites business for the first quarter were $478 million, flat compared to the same period in 2014. Higher volumes, improved selling prices, and favorable product mix were offset by the impact of foreign exchange translation. Selling prices continued their sequential improvement for the 7th consecutive quarter. EBIT for the quarter was $60 million, more than double compared to the $27 million in the same period last year, primarily due to improved selling prices and favorable product mix. In Composites, this was our 7th consecutive quarter of EBIT improvement.

We had some positive contribution from Specialty Glass sales in the fourth quarter of 2014. This accelerated in the first quarter of 2015, with stronger Specialty Glass sales contributing about $12 million of the year-on-year EBIT improvement. We expect sales associated with this campaign to end in April, 2015.

Looking forward, we expect the positive momentum delivered in the first quarter, along with higher base glass volumes, to drive significant earnings growth in the second quarter, but we expect results to be slightly down sequentially as a result of lower Specialty Glass sales. For the year, we continue to expect moderate global industrial production growth. Based on a strong start to the year, we now expect a full-year EBIT improvement of up to $70 million, before the impact of foreign currency translation. At current spot rates, foreign currency translation is expected to negatively impact revenue by about $200 million and EBIT by about $25 million.

As a reminder, on the fourth quarter call, we said that rebuild expense and costs associated with the start-up of our US non-wovens facility should roughly equal 2014 rebuild expense, and that the timing of these costs would fall in the later two-thirds of the year. As a result of expense timing and lower Specialty Glass sales in the second half of 2015, we would expect second half 2015 EBIT performance to be broadly in line with the second half of 2014.

Slide 10 provides an overview of our Roofing business. Roofing sales for the quarter were $393 million, a 21% decrease compared with the same period a year ago. About three-fourths of the decline in net sales was driven by lower sales volumes. Lower selling prices drove the remaining decline. EBIT in the quarter was $20 million, down $60 million compared to the same period in 2014. More than half of the decline in EBIT was driven by lower sales and production volumes, and the remainder was driven by lower selling prices.

Let me take this opportunity to set some context. Over the period from 2012 to 2014, we experienced aggressive discounting and inventory build within the channel during the first quarter. During this period, first quarter industry shipments averaged about 35% of full-year demand and first half shipments averaged about 60% of full-year demand. If you look back over the previous decade, a time period where we did not experience heavy first quarter discounting or the related channel inventory build, industry first quarter shipments averaged about 25% of full-year demand and first half shipments averaged about 53% of full-year demand.

On the fourth quarter call, we indicated that if first quarter shipments were closer to 25% of full-year demand, industry volumes could be down as much as 25% in the quarter. You will recall that we trailed the market in the first quarter of 2014. Given our expectation to ship at our historic share for all of 2015, we anticipated our first quarter 2015 volumes could be down more than 10%.

We believe there was limited discounting and less inventory build in the channel. As a result, we now estimate that industry volumes were down by at least 25% in the first quarter, although official industry data has not been published. Our Shingle volumes were down about 20% in the quarter, which would represent some recovery of first quarter market share.

We continue to expect a flat market for 2015. Based on a more historical distribution of shipments for the year, we would expect industry volumes for the first half of the year to be closer to 50% of full-year demand. As a result, we anticipate second quarter industry volumes to be up about 5% to 15%; and therefore, we would expect Owens Corning volumes to be up a bit more, as we trailed the market in the second quarter of 2014.

During the first quarter, the market environment was constructive, as evidenced by limited winter discounting. Compared to last year, prices were down mid-single digits, primarily as a result of competitive actions taken in 2014. There were some sequential price movements, as we made some competitive adjustments early in the first quarter. Prices have since been stable and we have announced a price increase effective May 1.

We continue to see asphalt deflation as a constructive to way to improve our margins later in the year. Asphalt cost deflation has largely tracked with expectation, although price declines flattened somewhat in April, with increased paving demand. We expect to see some asphalt benefit in our financial results in the second quarter, with the bulk of the impact in the second half of 2015. We continue to estimate that this could translate into asphalt deflation of over $50 million in 2015, based on the current outlook for crude prices. Higher sales volumes combined with higher production volumes and some asphalt deflation would position the business to deliver second quarter EBIT margins similar to last year.

Now let me turn your attention to slide 11. In the first quarter, under a previously announced share repurchase program, we repurchased about 340,000 shares of the Company's common stock for $13 million, at an average price of $39.21. As of March 31, 7.4 million shares remain available for repurchase under the Company's current authorization. As we balance our priorities for the future deployment of our free cash flow, both dividends and stock repurchases will be important mechanisms to return capital to shareholders.

Our current market outlook is for continued growth in US housing starts and moderate global industrial production growth. Expectations for 2015 US housing starts range between 1.1 and 1.2 million units.

Now please turn to slide 12, where I provide other financial guidance for the year. We continue to expect full-year corporate expenses to be in the range of $120 million to $130 million. Capital spending will be about $380 million. This includes an additional $25 million related to the construction of our mineral wool plant. Depreciation and amortization expense is expected to be about $310 million. Interest expense is expected to be about $110 million.

Our $2.2 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 2015 cash tax rate to be approximately 10% to 12% of adjusted pre-tax earnings. Our 2015 adjusted effective tax rate is expected to be approximately 30% to 32% of adjusted pre-tax earnings. Thank you, and I'll now hand the call back to Mike. Mike?

Thank you, Michael. Owens Corning is a better company when all three businesses are making meaningful contributions to our financial results. Both Insulation and Composites showed strong improvement in the first quarter and contributed materially to our performance, continuing their momentum from 2014. Both businesses should continue to benefit from growth in US housing starts and global industrial production, as the year progresses. We also believe Roofing is positioned to deliver improved performance for the remainder of the year.

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. Mike, we are now ready to begin the Q&A session.

Yes, sir. Thank you.

(Operator Instructions)

Stephen Kim, Barclays.

Hello, guys. Congratulations on a strong quarter.

Thank you, Stephen.

I wanted to start off, let's start off with the Roofing. Obviously, you give a lot of detail and we are hearing some very positive things in the industry, not least of which is the fact that you have seen pricing behavior, as you head into the second quarter, be much better, not just on your account, but also across the board. I guess my first question is sort of a general question. Why do you think that you're seeing a more, let's say, defensive posture from the manufacturers in terms of protecting their pricing and margins this year versus prior? And let me just throw out a possibility. One of the things we've heard is that perhaps your margins are as much as 1,000 basis points better than your peers, your smaller peers particularly; and so as your margins get into the low teens, it causes the smaller player to scrape along the bottom, and maybe that's what's driving it. Can you opine on that a little bit?

Sure. I think the dynamic in the first quarter, which I think Michael spoke to at length, was a more constructive environment than what we've seen in the last couple of years, where there was very aggressive discounting and a big inventory build. I think the inventory build, from our perspective as a manufacturer, did not serve us well, as we had to bring a lot of production into the early part of the year in order to service that and then we had kind of weak demand through the ensuing three quarters. I think you heard discussions from some of our customers in the industry talking about it didn't necessarily serve them well, in that it created a lot of inventory out in the channel. It was very difficult for them through the year to understand where retail pricing is or where the pricing of the product should be in the marketplace.

So, I think there were a lot of alignment in the second half of the year that many of the participants were unhappy with the level of profitability and level of performance, both on the manufacturing side, as well as the distribution side. And from a manufacturer's perspective, we didn't really have the economics, coming into the early part of this year, to offer discounts. We limped our way out of last year with margins that didn't look like the kind of margins we've grown accustomed to. And we certainly were hoping that we could get through the first part of this year with a little bit better pricing environment and then maybe use some of the asphalt deflation as a way to repair our margins, which obviously, we were under pressure here in the first quarter.

The theory that there's some advantage on Owens Corning as a manufacturer in the marketplace, it would be hard for me to try to quantify that for you. I would say we believe we have very good brands and very good products, and that we believe that our products are able to be sold at a price premium to some of the other manufacturers in the industry. We also believe we have very good manufacturing economics and very good material science, which allows us to compose a shingle at very competitive costs; potentially costs that are more competitive than some of the other players in the industry.

So, if you can get a little bit higher price and you have a little bit lower cost, that's obviously going to put even more margin pressure on some of our competitors. So that would be our intention in how we run the business is to build competitive advantage on the product side, both in terms of the prices we can achieve, as well as the costs we manufacture. And that should put some margin stability into our business. So hopefully, that is what we're seeing. But we can't know for sure that, in fact, that's the dynamic that's driving the current performance.

George Staphos, Bank of America Merrill Lynch.

Congratulations on the quarter and thanks for all the details. Following up on that question, recognizing that there is good logic and rationale to understand why manufacturers would like to see margins improve in the Roofing business. Mike, does there come up shipment threshold where maybe you start worrying about the asphalt deflation being able to repair margins and it perhaps being dealt back? I know you are expecting, from your commentary, shipments to be up 5% to 15% in the second quarter. Would something materially below that begin to, in your view, question whether you could repair margins to that degree?

And the question behind the question, should we worry at all about what's been somewhat of a weak start to housing starts? Hopefully, most of that being weather-related, but nonetheless, it is what it is, somehow feeding back into repair, remodel, and roofing over the course of the year? Thank you. And good luck in the quarter.

Thank you. So the overarching assumption in our discussion today about the Roofing business is that we are expecting the overall year in terms of manufacturer shipments to be about flat to last year. And we do, I think, a pretty good job in our Investor Relations materials laying out the composition of the Roofing market, the portion that's new construction, the portion that's reroof and remodel, and then the portion that's driven by major storms.

And the way you get to the assumption of an overall flat market would be for new construction to be up slightly, which is less than 20% of the overall market, the storm market about flat to last year, which was about an average or unremarkable type year for storms. And then you'd need that core repair/remodel market to be about flat or maybe down just a touch, offset by a little bit of growth in new construction. So, we are not really forecasting strong growth in any of the pieces of the market and we think the overall market goes sideways.

Now if that's the case-- and we don't have any indication today to cause us to believe that's not a good assumption -- most of what we're hearing from our customers is that their out-the-door sales either through the first quarter, through the first 15 weeks of the year, including what we've seen through April, is that they're flat to up a bit versus last year. So we think our customers are selling through at a reasonable rate.

Michael went through some math that said it's not unusual for us to see shipments in the first quarter that represent 25% of the overall year's demand. And that typically, when that happened, you saw first half shipments that were 53% of the overall year's demand. That's not the profile we've seen in the last three years. So we take 2011, 2012, 2013 -- I'm sorry, 2012, 2013, 2014 -- and get a different result, where those numbers were closer to 35% than 60%. But if you go to the period 2001 to 2011, you get numbers more like 25% first quarter, 53% first half. If it were that kind of profile, we would expect to see a volume uptick in the second quarter. We'd expect to see our volumes track that uptick. And I think that would be consistent with the assumption that the overall market is flat for the full year.

I think if we were to see volumes flat quarter-on-quarter, you could probably get to still supporting a belief that the overall market is flat for the full year, because that would say you have now shipped a quarter of the year in the first year, a quarter of the year in the second quarter, and then you still have half the year to go in the second half of the year. We've seen some years where that's the profile. I think we'd probably feel more confident coming out of the second quarter, if in fact, we saw some growth.

I can tell you last year, we saw our business really fall off a cliff at the end of the first quarter. We had shipped a lot of volume into the channels by the end of March. The channel was pretty saturated and we started the second quarter very weak. We've seen a different profile to the early start to the quarter this year, in that we came out of the first quarter and continued at about the same shipping rates in April that we were at in March. So we don't think we've seen any early indications that would cause us to believe the overall market is weaker than what we expect.

Mike, that's very helpful. Thank you very much.

Thank you.

Mike Wood, Macquarie.

Good afternoon. You talked, Mike, about the Roofing inventory being relatively low, referring, obviously, to the lack of the incentive the distributors had to pre-buy. But how are the manufacturers such as yourself building inventory ahead of the uncertainty as to when the demand from the distributors actually come, given the unusual cadence this year relative to last year?

Yes. You know, we talked about this a fair amount on the fourth quarter call, that we were coming into the year cautious about first quarter volumes, and in fact, ended up shipping even less than what we had anticipated. So on the fourth quarter call, we had said we thought the market could be down as much as 25% and that we would be down double digits or more. On today's call, we said we think the market was down more than 25%. Our volumes were down about 20% on the asphalt shingle side.

So we had a positive gap to the market, we believe. Although Michael did mention in his comments that we have not gotten the official report from the Roofing Manufacturers Association. So we're working off a little bit more qualitative data on this quarter than we traditionally do, and we've relied a bit on some of the analysts' channel checks and other things, as well as our own competitive intelligence, to believe that we think we're right, that the market shipments were down 25% or more. So all of that gave us a bit of a positive gap which restored our position in the market. But I would say overall, the quarter was still a little bit weaker in terms of shipments than we had expected when we were on the call in February.

Net, net, we'd say that's a good thing. Because of our perspective on this coming into the year, we had planned lower production levels in the first quarter. So production in the first quarter for us was well below 2014 levels. So our inventory position is improved versus where we would have been had we produced at the levels we were at last year.

That gets us more quickly through layers of asphalt costs so that we can start getting more quickly to maybe some lower cost asphalt, but that's still going to be on a lag. It takes two to four months for oil prices to get through the refinery. It takes two or three months for asphalt costs to get through our supply chain and get to the market and show up in our economics. So we're not really looking at significantly improved economics in the second quarter, from an asphalt cost point of view. But we are going to get some improvement by taking production levels up a bit, because we were pretty disciplined, from a production point of view, in the first quarter.

Understood. But there is no issue of you ramping up production to meet that potential pre-buy ahead of the May demand, the May price increase? I guess that's what I'm really trying to ask, if there's issues with production.

No.

-- if there's a spike in demand.

Where we sit today, we feel comfortable we've got the flexibility in both our inventory position and our productive capacity to be able to meet surges in demand. I think probably the one outlier on that would be potentially if you saw some big storms. That tends to stress regional assets. So while I'm making comments nationally that I think broadly are probably correct for us, and I would say probably for most of the other manufacturers, you do see, if you have a concentration of storms in a specific geography, that might stress one region's ability to service demand. But generally, I would say that it's still a free supply type environment in terms of capacity.

Katherine Thompson, Thompson Research Group.

Hello. Thank you for taking my questions today. I'm going to switch from Roofing over to Composites. First, it's a two-part question. First, could you give a little bit more color on the higher mix of Specialty Glass in the quarter and why you will see this dissipate as we progress into 2015? And then the second leg of the Composite question is, how much of the new European tariff on Chinese composite imports helped in the quarter versus just core improvement in the European market in and of itself? Thank you.

Hello, Katherine. It's Michael. I will take that question. So, we called out actually that there were a fair amount of Specialty Glass sales in the quarter. I actually gave some specifics to that, that within the quarter itself on a year-on-year basis, it added about $12 million of EBIT. Some of our Specialty Glass lines and some of our Specialty Glass sales can be kind of lumpy throughout the year. And this specific campaign ramped up late last year. The bulk of the sales were in the first quarter of this year, and it will ramp down in April.

That said, we're pleased with the quarter overall. We made a lot of progress on a number of fronts, both from a manufacturing point of view of volumes in general. So volumes in general across the regions and across our various lines of business were pretty good, save the stuff that we pointed out in the fourth quarter that we expected to be a little bit weak, which was Roofing volumes, obviously, were a bit weak in the first quarter; and then we said that oil and gas demand was going to be a bit weak, as well.

And then your second quarter was related to the anti-dumping in Europe and specifically how that is helping us. I don't think I can quantify it specifically for you. But I think clearly the euro versus the dollar and the euro versus the RMB is helpful for our Composites business in Europe and then the anti-dumping is helpful, as well. But I can't quantify it for you specifically.

Okay. Thank you very much.

Keith Hughes, SunTrust.

Yes. My question is in Insulation. Can you talk about the pricing increases in Insulation in residential versus your industrial and commercial? Was there a variation there?

Yes. Thanks, Keith. We had a price increase late 2014, early 2015. It spread across most of our fiberglass product lines. There was a little bit different -- a little bit different levels of price announced in the residential markets, where the price increases that were announced were in the mid-teens. The industrial type markets tended to have a little bit lower price announcements. In the fourth quarter call, which was in the middle of February, we had some visibility to how that was progressing, and we characterized it at that time as we were seeing pretty good realization of the price increases that we had announced in the first quarter. I would say that our view on that is pretty much unchanged from where we were 90 days ago.

The number was 2%. Round numbers, 2%. Struck me as kind of low, given what seems to be going on in residential Insulation. Can you break out what the price change was in residential Insulation in the first quarter?

Yes. So if I understand your math, we talked about the primary driver of improvement for the quarter in Insulation was price. Insulation improved by about $6 million of EBIT. So if you take that $6 million of EBIT on the entire business, you're going to get a number like 2%. There's a lot of moving pieces inside that Insulation segment. So we have geographic mix. We've got, obviously, Canada is an important business for us. Asia is an important business for us. We also have some non-fiberglass products, where we make some extruded polystyrene foam products, which were not included in some of the price announcements that we had made in the early part of this year.

So in total, I think you have to look across the whole portfolio of businesses inside that segment, as well as the timing of the increases. And I think probably doing the math the way you did it -- and I understand how you come to that conclusion and concluding that we only got 2 points of price -- is probably on the low end of where we would think pricing is in the market today.

Garik Shmois, Longbow Research.

Thank you. A follow-up question on Composites and the mix benefit in the quarter. I think it implies that there is an additional $8 million of favorable mix, in addition to the Specialty Glass benefit. Can you talk about how we should think about mix as it relates to your improved Composites guidance for the year? Specifically, how much additional mix is baked in?

Yes. That's a good question, Garik. So I spoke specifically around the $12 million of mix related to Specialty Glass. If you take a look at our Q for the first quarter and pick it apart, you will see that in total there is about $20 million coming from favorable mix. If you think about our portfolio of business, clearly Roofing sales or Glass that goes into Roofing is down pretty significantly in the first quarter. That's a lower calorie business for us. And then higher -- but overall, volumes are up for the quarter. And so we're actually selling higher -- more higher calorie glass and less lower calorie glass, both in the first quarter. And excluding the Specialty Glass that I called out, we probably expect some of that trend to continue for the balance of the year. But we haven't given specific guidance for the year on mix.

Okay. Thanks. And then quickly on Insulation, the mineral wool capacity addition. Can you provide a little bit of context on how much additional capacity this might provide for you moving forward?

Yes. Let me make one additional comment on Michael's answer to your question about Composites, and then I'll talk for a moment about mineral wool. We did upgrade our outlook for Composites today. We had previously said that we thought the business would track about the same amount of improvement versus prior year on a constant currency basis and then would have a currency headwind. Today, we upgraded the amount of improvement. We also increased the amount of currency headwind to produce a $45 million net improvement year on year in the guidance we gave today.

A big part of that upgrade is exactly what Michael spoke to in his answer to your question, which is we came into the year pretty certain that we were going to have some volume headwinds in the Roofing side of the business, as well as the oil and gas side in the US. I think we came out of the quarter feeling pretty good about what we've seen in terms of demand and the other parts of the business, that we actually did show growth in tonnage or dollars in the first quarter. And I think that's really where the improved outlook has come from. We're pretty happy right now with where Composites demand is, relative to where we think it could have been, given a couple of the headwinds we had. And that's really the primary driver of the upgrade in our outlook there.

Related to the mineral wool capacity, we're building a scale facility here. So with the Board's approval of the expenditure, we'll build a facility that gives us good capacity, that allows us to cover the different parts of the market we see. There is a decent amount of opportunity out there in the commercial construction market. There's some opportunity in the residential construction market, although not as big, but growing at a reasonable pace. And then there's also some opportunity in the industrial type markets, where we also participate in fiberglass. So we're going to build an asset that gives us the flexibility to be able to have some capacity across those markets. And because of that and because of our footprint in those markets, the capacity that we put in will more than double what we have in the mineral fiber market.

Philip Ng, Jefferies.

Good morning. What's the early read on the May Roofing price increase and what kind of feedback are you getting from the distributors? Are you seeing pretty good support from the initial roll?

Yes. First of all, it's generally our practice not to talk prospectively or speculate on what we are seeing in terms of price increases. So, I am not going to be able to answer your question directly. The one thing I would say is there's been a fair number of price increase announcements on the part of the distributors who we sell to. And I think generally it's viewed in the industry that if you have a price environment where prices are going up, that's good for our customers and it's good for us. Whether, in fact, that's something we are able to achieve here in the second quarter is something to be seen.

Okay. That's helpful. The reason why I ask is because when I look at your 2Q guidance for flattish type Roofing margins year over year, it seems fairly conservative. Because if your volumes are up 5 to mid-teens and you've got some benefit from lower asphalt, what's the missing piece? Because if you're getting any type of pricing, it just seems somewhat conservative. Just want to figure out, get a better feel for what the, I guess, offsets are.

Well, just to make sure that we're clear in our guidance on this. In Michael's comments, he said he expected that second quarter Roofing margins would be similar to the Roofing margins we produced in the second quarter of last year. In the second quarter of last year, Roofing margins were quite a bit better than the Roofing margins we just delivered in the first quarter. So the first quarter here, we were mid-single digits. Last year in the second quarter, we were low teens. We are expecting that better production, shipping a little bit more volume, and maybe starting to see a little bit of asphalt cost deflation would be the steps that would help us get there, plus potentially a more positive price environment.

Okay. That's helpful. Thanks.

Dennis McGill, Zelman and Associates.

Hello. Thank you, guys. First question, just wanted to be on Insulation. Can you just walk through what's happening in the home center channel right now? I know you won some business at Lowe's. Maybe help us understand where you are in the load-in of that business, and if there's any offset to expect through the year on the other side from Home Depot?

Yes. I don't remember which call we talked a little bit about home centers. So let me give you an update on that. What I would say is probably five or six years ago, I don't remember the exact date, we really saw a big trend in the home center channel to go single brand. And at that point in time, we were 100% in our Roofing business with Lowe's and we were 100% in our Insulation business with Home Depot. And our competitors, obviously, had the Home Depot Roofing business and our competitors had the Lowe's Insulation business.

I think Home Depot probably has led a bit of a move away from that strategy and towards a multi-brand strategy. So we went through line reviews with most of the major home centers last year, where they looked at all the manufacturers. What came out of that is we did see some Insulation volume at Home Depot go to our competition. We also did pick up some locations at Lowe's. So we now have both those home centers with Owens Corning Insulation in their stores. We have not commented on what the net of that was. But I think what you see now is both of them have us in and a secondary brand or another brand in the home center.

We really experienced the same thing on the Roofing side of the business, as well, which is we had had 100% of Lowe's business. They've now brought one of our competitors in. So they are now multi-line in the Roofing business, and we were able to get a bit of business at Home Depot, and we've got some Home Depot stores now.

So I think it was a tense time, obviously, for us. These are big and very, very important customers to us. And we believe we enjoy a very good relationships with both of them. We also think we do a very good job in the home center channel of supporting them at the store level. So we weren't surprised that we were given the opportunity to do business with both of them, that we would be able to win business with both of them. So we were very happy with the outcome, and we think we've gotten through to a fairly stable result.

That's very helpful, Mike. If you don't mind speaking to the net benefit. Are both retail chains set now with the new allocations?

Yes. I mean, this is -- you know, you work through this. You tend to work on -- at least in the building materials category -- you tend to work on a regional basis with the home centers. So they will give you a region. All of that has been identified. The regions that we lost, we are seeing our volumes come out of those regions where we are no longer shipping to those stores. The regions that we won, we are seeing that we're beginning to ship into those. So I think that the timing of either benefit for loss for us will, for the most part, offset as we go through the year.

James Armstrong, Vertical Research Partners.

Good morning. Thanks for taking my question. Could you talk a little bit more about the Specialty Glass in Composites? What end markets are you seeing the most strength from?

Thanks, James. It's Michael. The Specialty Glass business for us, it is a global business and represented in the Americas, Europe, and China, or Asia-Pacific. One of the areas that has been strong this year versus last year is wind. So this type of glass tends to be high strength and have different performance characteristics and go into more sophisticated applications than you'd see in some of our lower priced glass. But it's global, and we've seen strength for Specialty Glass really kind of evenly across the entire globe. Mike, anything you want to add?

Yes. I guess the only thing I'd add is, I think Michael characterized it as these tend to be glass formulation driven. So we make a lot of different product forms. But then occasionally, we will have a customer, an end market that will come to us and say, can you actually change the formulation of the glass and create a glass chemistry that gives them different performance characteristics, normally around strength. And because of that, when you change the glass formulation in a melter, you go through a transition period where you don't make very good glass for a period of time. You run a bit of a campaign where you then make glass that meets the specification, and then you have to transition back out of that, which is why this business, when we have the opportunity to make some Specialty Glasses for a customer, it tends to be a good opportunity from a profitability point of view. But operationally, we think we are advantaged in this market, because we have the largest fleet of melters in the world. We have the ability to reassign assets.

And so we tend to be very open in the marketplace that if you have a need and we could make you a glass, we'd like to have the opportunity to see if we can't make something that would fit your needs. And some of these have very long cycle sells, where we go two or three years working on a project, then eventually we have a couple or three months of production.

We knew coming into the year that we were going to have good Specialty Glass performance in the first quarter. The fact that we produced this result in the first quarter had really no bearing or impact on upgrading our guidance. This was included in the way we saw the year coming into the year. It's really the other things we saw in the business in the first quarter, in terms of volumes, operating performance, pricing, that caused us to get more optimistic about our outlook for Composites.

Okay. That helps. With the two to three year lead times on these projects, as we go into the out years, are there other similar projects that you have in the pipeline?

We would always have a group of projects in the pipeline, based on the set of customers that we talk to in these markets. A lot of times, if it's another place where you might see these types of products go would be, say, military. A lot of it would come back to, does that customer win the project. And then they're going to turn around and come back to us and say, okay, can you make glass that would help us fulfill that? So sometimes, we are working with a customer who is also in a long cycle sell. So even if we have a list of projects that we are working on that might provide an opportunity for us, we don't know whether those are real opportunities until our customer is successful in their long cycle sell.

We called it out of the numbers today, because we didn't want the rate of the improvement of the business to be at all misleading. And in the second quarter, Michael said that we think we will comp sequentially down a bit, though we are quite optimistic about the quarter, because I think if you pull Specialty out of the first quarter, we would expect it to comp sequentially positive on a little bit better volume. So the underlying momentum in the business is still quite good as we head into the second quarter.

John Baugh, Stifel.

Thank you and good morning. I just wanted to confirm on Roofing. You are talking about a $15 million deflation in asphalt, I believe, for the year. Could you refresh our memory, roughly, what the asphalt spend in 2014 was? And I know you don't want to forecast Roofing prices. Is there any better view on how that delta between asphalt pricing for the rest of the year may look versus pricing? And what is your oil assumption or asphalt cost assumption going forward? Thank you.

Okay. I am happy to talk that through. Really, our oil price assumption is no different than where it was 90 days ago on the fourth quarter call. The forward curve for oil has not moved appreciably. We've been giving guidance and working off the forward curve for oil assuming that those oil prices will be the prices that the refiner will experience and that that will, therefore, drive asphalt prices. We have a lot of data, as you might imagine, that goes back multiple years or decades on looking at the different relationships between the price we pay for asphalt and the price of oil based on different conditions. What was the condition of the gasoline market or the paving market or the other potential end use markets for the refiner, and how did that influence that ratio of asphalt cost to oil cost?

Clearly, coming out of the latter part of last year, asphalt was quite inflated relative to the underlying oil prices. And we expected that asphalt would start to trade in against oil. We had not really begun to see asphalt costs fall much, even through the fourth quarter of last year. It was really starting at the end of last year that we started to see some prices from the refiner that indicated oil prices were going to come through our economics.

They're now working their way through our supply chain. Our supply chain includes tanks of hot asphalt. We then manufacture shingles from that asphalt. We then carry a finished goods inventory of shingles, and then we ship them. So it's not until we ship an invoice that we would start to see it come through our cost of goods. So this part of our business is a fairly long supply chain.

We have a second piece of our business where we also process and sell Roofing asphalt to other Roofing manufacturers. Now that business tends to be very much of a processing cost or cost-plus kind of business where the changes in the economics of asphalt, if you translate it directly through to the change in the price that we sell the processed asphalt, and as a result of that, we don't really put that into our price calculations. That would really skew our price calculations. That's more of a processing and pass through business.

In terms of our overall cost of goods, we have not disclosed on that. I think I can give you a little bit of help. In today's presentation on the Roofing business slide, we break out which portion of the business is commercial and industrial versus which portion of the business is residential. That16% that's commercial and industrial, that tends to be the part of the business that's much more us processing asphalt and selling it through to the market. So even though that might show up as being a portion of our asphalt purchases, we would say asphalt deflation or inflation is -- we're relatively insulated from inflation or deflation in that portion of the business.

The remaining 84% is really our Shingle and our Accessories business. So it's a sizable portion of that remaining 84% would be asphalt shingles. Our real asphalt spend that would be driven off of this would be whatever portion of that 84% is our asphalt cost of goods. But we have not disclosed on what percent of our overall cost of goods is asphalt.

Mike, this is Thierry. We have time for one more question.

Yes, sir. That question will come from Al Kaschalk of Wedbush Securities.

Good morning. A couple of clean-up questions, actually. On the Composites side, can you talk a little bit about the benefit in the quarter that came from, or from the year, that'll come from the closed plants and, in particular, the volume? And I would like to try for the discussion to exclude the Specialty sales of Specialty Glass, if we could.

So Al, is the question what's the benefit that's going to come from the closure of the plant in Japan and the one in Canada?

Well, throughout the commentary has been that you benefited from manufacturing and operational improvements. And I believe that included, last year, some closed plants. So I don't know if you can articulate it. I was just trying to understand the benefit from an operational standpoint that you're getting that we should continue to see. Because if we look what you did in the quarter and your guidance, I think it implies closer to more of a 9%, 10% type of segment margin. I'm just trying to get the components of that.

Al, this is Mike. Let me try to put some color around that. I think we characterized -- obviously, we doubled EBIT in the quarter. So we had a significant pick up, from $27 million of EBIT last year to $60 million of EBIT this year. If you add back the Specialty or subtract out the Specialty, we still went the from $27 million to about $50 million. So you've got more than $20 million of improvement quarter on quarter on relatively flat volumes.

Some of that improvement is coming from the fact that we have a little bit sweeter mix, and I think Michael went into a good amount of detail on that, which is, our volumes were down in the end market for Roofing, and that tends to be a lower margin, simpler product line. And we were able to find enough business in the market to offset that decline and keep volume growth in the quarter in some of our more heavily engineered products, where we can get better value and better margins.

So, I think if you are looking for reconciliation on that 20 of improvement from last year to this year, excluding Specialty, I think a portion of it is price and a little bit better mix in the volume we did sell. And then a sizable portion of the remainder is our just manufacturing at lower costs and our operating better. So you are really now seeing, I think, in material ways, the benefit of all the cost restructuring we're doing coming through in sustainable margin structure for the business, and really, I think, a step change in the sustainable margin structure of the business.

Very helpful. That helps. Finally, on the mineral wool side, is it fairly well bracketed in terms of the costs of this plan and getting this up and running? I think it was -- you indicated it increased $25 million. I am not sure if that's the size of the spend for that facility. But just talk about maybe a little bit of the -- I won't say complications, but what needs to get done? Is this a simple facility or is it a little bit more complicated?

Thanks. We disclosed today that the overall cost of the facility would be about $90 million, and that it would come into operation into the second half of next year. In our CapEx guidance for this year, we increased our guidance for the amount of capital we'll deploy this year by about $25 million, which represents $25 million of the $90 million. So in order to get the project to be available for production and sales in the second half of next year, we'll now begin spending money on site preparation and improvements and some long lead time items around equipment. And we will see, we think, about $25 million of that spend this year, which will leave the balance, or about $65 million, in our outlook for next year.

This is the first mineral wool facility that Owens Corning has built. So I am not going to underestimate some of the potential challenges associated with this. Although I would say over the course of the last ten years, since 2006, we built a new Composites facility in China. We built a significant increased capacity in Russia. We are in the process of building a non-wovens facility in North Carolina. We have done a lot of reconfiguration of our Insulation assets to respond to the down turn. From an engineering and construction point of view, I think we do a reasonably good job and we tend to hit our estimates. So I am not terribly concerned on the capital side. I think we can build it for this amount of money.

You always are focused and it's very important that the startup goes well and that you can get the equipment to run effectively. If we were not able to do that, that obviously would be a headwind in the second half of next year, if we had a facility that had an opportunity to ship product and we weren't able to achieve the production economics we expect. We'll have a big team of people very focused on making sure that we do that effectively.

So it is a risk, like any other capacity expansion. But it's growth. And one of the things that we are very proud of in what we have been able to achieve over the last five years is a lot of the capital that we spent on behalf of our shareholders went into some very cash intensive restructurings in Europe. It went into some capacity expansions in Composites that offset melters that were not competitive that we had to shut down. So we did a lot of balance sheet work and investment to get our operations more effective.

We think we're heading out of that phase. Our Eco Touch conversion in Insulation is largely done. Our low cost conversion in Composites is largely done. We think the cash restructuring, you can see, has really come down to a very small number in our adjusted numbers. And we're now actually starting to employ capital towards places we can grow, like non-wovens and like mineral fibers. So we think it's a positive mix, because we are actually changing the EBIT generating footprint of our Company by giving more top line opportunity and more bottom line opportunity to our investors.

Thierry, with that, I think that was the last question. So maybe I will make a few summary comments and then I will let you close the call.

Sure. Thank you.

Let me say thank you again for joining us on today's call. Obviously, in my opening comments, I said I thought we were off to a good start in 2015. We feel good about the underlying momentum in our Composites and our Insulation business. I think both of them are beginning to look like the kinds of businesses we knew that they could be. I think probably over the course of the last two or three years, it's been easier to see that progression in Insulation quarter on quarter, as we put together 15 consecutive quarters.

I think the jury was maybe a bit more out on Composites a couple years ago. We were very focused in our execution, believed we could get the low cost, believed that we could innovate and bring some new products to the marketplace, believed that we could extend some competitive advantage. And I think the quarter we just put up is a bit of a down payment on our belief in that strategy and what we think that business can be for us. So it's heartening for the team here to see the progress in Composites and see this quarter come through.

So really now, our two big glass businesses that benefit from volume growth, operating leverage, and a positive price environment, we're really seeing those two businesses side by side with very, very similar dynamics. Decent growth in demand, providing operating leverage, providing a positive price environment, and really underpinning strong performance across the Company.

We've always loved our Roofing business. For a number of years, it was the game in town at Owens Corning, where we were not making money in Insulation or Composites. Roofing was the business that got all the attention. I think through the course of last year, when we had a challenging year in Roofing, we saw the portfolio balance out. On the fourth quarter call, I said I actually think that with the portfolio balancing out, we now come into 2015 with the belief that maybe we have an opportunity to see all of our businesses improve.

Certainly, as we come out of this first quarter, we would expect to see the businesses improving from here to the end of the year, with Roofing having better volume opportunities ahead of it and with continued improvement in terms of Composites and Insulation volumes.

So we feel like we started the year right. One quarter, obviously, does not make a year. And the Company and the team have a lot of work to do to make sure that we deliver a great year. But we are pleased to be out of the gates the way we expected, and we look forward to talking to you again on the second quarter call. Thierry, any closing comments?

Thank you, Mike. And thank you, everybody, for joining us for today's call. And Mike, the operator, we are ready to close the call now.

Thank you, sir. To the rest of the management team for your time today. The conference call is now concluded. At this time, you may disconnect your lines. Thank you, and take care, everyone.