Owens Corning (OC) 2015 Q2 法說會逐字稿

Good morning and welcome to the Owens Corning second quarter 2015 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 of Investor Relations.

Thank you, Laura. Good morning, everyone. Thank you for taking the time to join us for today's conference call and review our business results for the second quarter of 2015. Joining us today are Mike Thaman, Owens Corning 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 second quarter. For the purposes of our discussion today, we prepared presentation slides that summarize our performance and results for the second quarter of 2015. We will refer to these slides during this call. You can access these earnings press release Form 10-Q and the presentation slides at our website, www.owenscorning.com. Refer to the investors link on the bottom right side of our homepage. A transcript and recording of this call and the supporting slides will be available on our website for future reference.

Please reference slide 2 before we begin, where we offer a couple of reminders. First, today's remarks will include forward-looking statements based on our current forecasts and estimates of future events. These statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially. We undertake no obligation to update these statements beyond what is required under applicable Securities laws. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent risks and uncertainties affecting such forward-looking statements.

Second, 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 www.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've excluded nonrecurring 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 at arriving at adjusted earnings and adjusted earnings per share. In the second 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 Thaman, 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. Good morning, everyone. We appreciate you joining us today to discuss our second-quarter results. We're pleased with our second-quarter performance as all three businesses made substantial contributions to earnings. Composites had an outstanding quarter, driven by continued strong commercial and operational execution. Roofing experienced strong shipments and improving margins throughout the quarter. Insulation continues to make progress with growth expected to accelerate in the second half on the recent improvement in US housing starts.

The Company delivered consolidated revenue in the quarter of $1.41 billion, up slightly from the same period a year ago. We earned $156 million in adjusted EBIT for the quarter, up from $96 million last year. Adjusted earnings were $93 million, up from $45 million one year ago.

At the outset of the year we discussed a number of expectations for sustained or improved performance across our businesses in 2015. Let me review them now beginning with safety. As is the case each year, we said that we would continue to make progress on our goal of creating an injury free workplace. We achieved a 19% improvement over the second quarter of last year, and regained momentum in our safety performance. We remain focused on an injury free work place and are committed to improving our overall safety performance in 2015.

In Insulation we said the business should continue to benefit from growth in US residential new construction, improved pricing and operating leverage. Insulation delivered its 16th consecutive quarter of EBIT improvement. EBIT for the quarter increased $7 million over the second quarter of last year, driven primarily by improved pricing. In the first half, the business delivered operating leverage of close to 50%.

During our previous call, I discussed a $90 million investment for the construction of a new mineral wool plant to be built in the United States with capacity available in 2017. We recently announced that the location will be Joplin, Missouri. This new capacity will help us meet the needs of our customers in a growing market.

In Composites, we updated our outlook on the first quarter call and said that we expected a $45 million EBIT improvement over 2014, including the negative impact of a stronger US dollar. For the quarter, Composites delivered $67 million in EBIT, representing its eighth consecutive quarter of EBIT improvement and its highest quarterly EBIT in seven years. The business grew revenues despite currency headwinds of nearly $50 million. Our year-to-date EBIT improvement is $63 million, exceeding our prior full-year guidance of $45 million. Mike will update our outlook on Composites in his prepared remarks.

In Roofing, we said the outlook would be largely determined by competitive pricing dynamics, the timing and value of asphalt cost deflation and overall market demand. The second quarter built on the foundation of the first quarter. In the first quarter, we saw lower production, lower shipments, weaker margins and less inventory build in the channel, positioning us for improvement through the remainder of the year. In the second quarter, the improvement we had hoped for was realized with better shipments, better production, lower cost, higher prices and significantly better profitability.

Before I move to our outlook for the business, we had one other achievement in the quarter that I'd like to note. We are proud to have released our 2014 sustainability report, continue our industry leadership in this area. As the report highlights, we made good progress toward achieving our 2020 environmental footprint goals. For example, we are now a leader in the recycling of 2.4 billion pounds of end-of-life shingles through our networks, representing a 33% increase over the previous year. And this number continues to grow. Currently there are over 100 major cities with recycling locations covering 60% of the United States population and allowing us to add the label, shingles are recyclable to our packaging. I invite you to visit our website in order to review the full details of the progress we've made on sustainability.

Now let me review our outlook for the remainder of the year. We expected the Insulation business should continue to benefit from growth in US residential new construction, improved pricing and operating leverage. Looking forward, recent housing data and current forecast of 1.1 million starts suggest acceleration in the second half, which we expect to result in approximately 10% revenue growth during that period. We continue to expect full-year operating leverage to track slightly below 50%.

In Composites, our actions to produce low delivered cost assets, strong commercial operational execution and the tightening capacity environment, position this business to continue the momentum we've established.

In Roofing, the first half played out generally as we had hoped. First half industry shipments were down mid-single digits, while our shipments were up mid-single digits. As a result, our overall market position improved in the first half. We continue to expect a flat Roofing market for 2015 and our second half volumes should track the market, producing mid single-digit growth. We now have sufficient visibility to the market demand and competitive dynamics in our Roofing business to provide full-year EBIT outlook for the Company. In today's press release, we provided an EBIT range for the full year between $460 million and $500 million. We feel confident that we should be able to deliver Owens Corning best EBIT performance since the peak of the housing cycle nearly a decade ago. It has been our goal to get to the $500 million EBIT level and we think that it may be possible this year with continued fundamental improvement in the market for each of our businesses.

We're pleased with how things have gone in the first half of the year. And we're optimistic about the opportunities ahead of us for the remainder of 2015. With that, I'll now turn it over to Michael, who will further review details of our business and corporate performance. I'll then return to recap and then we'll open the call up for questions. Michael?

Thank you, Mike, and good morning, everyone. As Mike mentioned earlier, we are pleased with the performance of our businesses and our second-quarter results. Owens Corning is a better Company when all three businesses are making meaningful contributions to our financial results.

Now let's start on slide 5 which summarizes our key financial data for the second quarter. You will find more detailed financial information in the tables of today's news release and the Form 10-Q. Today, we reported second quarter 2015 consolidated net sales of $1.4 billion, up 4% as compared to sales reported for the same period in 2014. Net sales in our Insulation business increased 1%, primarily on higher selling prices. In our Composites business, higher selling prices and higher sales volumes were offset by roughly $50 million of foreign currency translation. In our Roofing business, net sales were up 15%, primarily on higher sales volumes. Adjusted EBIT for the second quarter of 2015 was $156 million, up $60 million compared to the same period one year ago. Adjusted earnings for the second quarter of 2015 were $93 million, or $0.79 per diluted share, compared to $45 million, or $0.38 per diluted share in 2014. Depreciation and amortization expense for the quarter was $76 million, down $2 million as compared to the second quarter of 2014. Our capital expenditures for the quarter were $95 million. Cash from operations improved by $74 million for the quarter compared to the same period one year ago. On a year-to-date basis, cash from operations has improved by $197 million. For the year, we expect to see strong free cash flow conversion of adjusted earnings primarily as a result of our advantage tax position and better working capital performance.

Now please turn to slide 6, where we provide a high level review of our adjusted EBIT performance comparing the second quarter of 2015 to the second quarter of 2014. Adjusted EBIT increased by $60 million, or about 60% over the same period last year. Each business showed improvement year over year with about an 80% or $30 million increase in our Composites business and about a 40% increase in both our Roofing and Insulation businesses, with improvements of $28 million and $7 million, respectively. General corporate expenses were $5 million higher versus the prior year primarily due to an increase in performance-based compensation expense.

With that review of key financial highlights, I ask you to turn to slide 7 where we provide a more detailed review of our business results, beginning with our Insulation business. Sales in Insulation of $451 million, were up 1% from the same period a year ago on higher selling prices of $7 million. The business delivered EBIT of $25 million in the second quarter, compared to $18 million in the same period one year ago, primarily on improved pricing. This was our 16th consecutive quarter of EBIT improvement in our Insulation business. Volumes were relatively flat compared to last year on modest new residential construction growth and an elevated comp in 2014 resulting from increased buying activity ahead of the midyear price increase. In addition, we've seen some gap widened between US residential starts and completions, which may have contributed to a somewhat slower market.

Over the past three months, we have seen good progress from the starts perspective. Insulation volumes picked up throughout the month of June, and we are off to a strong start in July. Looking forward, we expect stronger volumes and financial performance in the second half of the year, which should translate into revenue growth of about 10%, based on the current consensus for US housing starts. As we have discussed on previous calls, we expect average operating leverage of 50% through the recovery, although 2015 operating leverage will track slightly below this goal.

Now I'll ask you to turn your attention to slide 8 for a review of our Composites business. Sales in our Composites business for the second quarter were $508 million, up approximately 1% from the same period a year ago. Revenue grew on higher volumes, improved selling prices and favorable product mix despite currency headwinds of almost $50 million. On a constant currency basis, revenues would have grown about 10%. Selling prices continued their sequential improvement for the eighth consecutive quarter.

EBIT for the quarter was $67 million, almost double compared to the $37 million in the same period last year. These strong results were driven by higher selling prices, higher volumes and strong manufacturing performance. EBIT results were partially offset by the impact of $8 million of foreign currency translation. This represents our eighth consecutive quarter of EBIT improvement and the highest quarterly EBIT in seven years.

We are pleased with the progress that we have demonstrated in the Composites business over the past two years, including improvements in operating margins and return on capital. The actions we have taken to achieve a low-cost manufacturing network in the tightening capacity environment, position this business to continue the momentum we've established over the past eight quarters.

Over the past couple years, we have pursued a strategy to support future growth with supply alliances. We are recently expanding an existing supply alliance with a China-based manufacturer, which will benefit 2016 and beyond. We will incur some additional implementation costs associated with this agreement in the second half. As a reminder, we previously said that a majority of our 2015 rebuild expenses and costs associated with the startup of our US non-wovens facility, would fall in the second half of the year. As a result of these items, and lower specialty glass sales in the second half of the year, we expect lower EBIT in the second half of 2015 versus the first half. And second half EBIT to be broadly in line with the second half of 2014.

For the full year, we continue to expect moderate global industrial production growth. Based on the strong results for the first half of the year, we now expect a full-year EBIT improvement of about $60 million at current foreign exchange rates. Foreign currency translation is expected to negatively impact revenue by about $200 million and EBIT by about $25 million for the full year.

Slide 9 provides an overview of our Roofing business. Roofing sales for the quarter were $503 million, a 15% increase compared with the same period a year ago, primarily on higher sales volume. EBIT in the quarter was $90 million, up $28 million compared to the same period in 2014. Roofing delivered 18% EBIT margin for the second quarter. Higher than anticipated volumes in the quarter improved production leverage and accelerated the asphalt deflation, which totals about $18 million. These benefits, with some improvement to sequential pricing, resulted in higher margin than previously guided.

We are pleased with the performance of our Roofing business and the first half of the year has played out generally as we had hoped. We saw limited discounting and less inventory build early in the year. We experienced improved volumes and better sequential pricing in the second quarter, with asphalt deflation tracking broadly in line with expectations. As you recall from our first quarter call, we thought that the industry volumes would be down at least 25% in the first quarter, without the benefit of no industry shipments at that time. In fact, first-quarter shipments were down 35%, and as a result, second quarter shipments were stronger than anticipated. We were pleased to see a strong rebound in the second quarter, with market growth of just over 40%. Our volumes slightly trailed the market as a result of geographic and channel mix. For the first half, we were pleased that we improved our overall market position. As a reminder, volume growth, as calculated in our 10-Q, includes Roofing accessories and the sale of asphalt to third parties and is not comparable to US asphalt shingle volume growth.

We continue to expect a flat market for US shingle shipments in 2015. First half industry shipments were down mid-single digits, while our shipments were up mid-single digits, representing a nice recovery in our position for the first half of 2015. We now expect industry volumes for the first half of the year to be a bit more than 55% of full-year demand, versus a 50/50 split we discussed in our previous earnings call. We would also expect our second-half volumes to broadly track the market and therefore grow mid-single digits versus the last year on a flat full-year market. We continue to see asphalt deflation as a constructive way to improve our margins in 2015. As I highlighted on our first quarter call, asphalt price declines flattened in late spring with increased paving demand. Asphalt deflation has largely tracked with expectations and we continue to expect asphalt deflation of over $50 million in 2015.

Now let me turn your attention to slide 10 which provides an overview of significant financial matters and our outlook for 2015. The Company's Board of Directors declared a cash dividend of $0.17 per share, payable on August 4, 2015 to shareholders of record as of July 20, 2015. In the second quarter, under previously approved announced share repurchase program, we repurchased about 700,000 shares of the Company stock for $28 million at an average price of $39.70. As of June 30, 6.6 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 to shareholders.

Our market outlook is for continued growth in US housing starts and moderate global industrial production growth. Expectations for 2015 US housing starts are at 1.1 million units.

Now please turn to slide 11 where I provide financial guidance for the year. Based on the results we have delivered to date and our outlook for the balance of the year, we expect full-year EBIT between $460 million and $500 million with most of the variability driven by the Roofing business. We now expect full-year Corporate expenses to be at the bottom of the $120 million to $130 million range. Capital expenditures are expected to total approximately $380 million. Depreciation and amortization expense is expected to be about $310 million. We expect interest expense to be about $110 million. Our $2.2 billion US tax NOL will significantly offset cash taxes for some time to come. As 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.

Thank you, Michael. As I noted of the outset of today's call, Owens Corning success in the second quarter was a result of positive execution in all three of our businesses. We are pleased with our progress in Insulation, record EBIT margins in Composites and stronger volumes and improved margins in Roofing. Given the significant progress in Composites and Roofing combined with our expectation that Insulation will continue to benefit from growth in US housing starts, we expect full-year EBIT in a range of $460 million to $500 million, with most of the variability within this range driven by the Roofing business. And now I'd like to turn the call over to Thierry, who will lead us in the question-and-answer session. Thierry?

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

(Operator Instructions)

Michael Rehaut of JPMorgan.

First question I had was on Roofing. And obviously you had nice improvement in the margins there, so congrats on that. Two questions. One, if you could describe the pricing environment currently. I believe you said that they were up a little sequentially, but on a year-over-year basis it appears that they were down, I believe 10% versus down 5% in the first quarter. And also in terms of the -- secondly, in terms of the asphalt deflation, I believe you said that was $18 million for the quarter and that you still expect over $50 million for the full year. So it would seem like the 2Q, if you just supply a run rate on that for -- over the next quarters, apply the same quarterly run rate, that it would seem that the third and fourth quarters would be similar to the second quarter. Just want to make sure I'm thinking about that correctly.

Okay thanks, Michael. Let's talk about pricing first and then I will talk a little bit about asphalt deflation. I think in the context we are in today, it's much easier to discuss pricing sequentially than it is versus last year. So I'll make a few comments versus last year, but I think it's probably more relevant to talk about pricing sequentially.

What we are reporting today is that prices in the second quarter were sequentially improved versus the first quarter. So what we said on the first quarter call was we were looking for better production levels, better shipment levels, higher prices and lower cost. And in fact we saw that, which really underpins the improvement in operating margins we saw from 5% or so in the first quarter, 18% in the second quarter. We think that's critical to our outlook for the second half and that we do think that volumes in total in the second half will probably trail a bit volumes in the first half. But we are seeing that the launching point into the second half, we have a much better margin rate coming out of the second quarter than what we had either last year or where we enter this year. So we're feeling good about the second half.

The comp to last year is a little bit complicated because prices did come down in the second half of last year. In fact, in our pricing, prices went up in the second quarter last year because we removed winter dating from our numbers and there were big discounts in the first quarter. So we gave the impression in our 10-Q and in our financial reporting that prices had increased in the second quarter in our books, because they had. But then we went through some price adjustments in the second half and reversed a lot of that pricing back out. So that's why I think the quarter-on-quarter comparisons could give you the impression that prices dropped in the second quarter because there's a bigger gap to the second quarter of last year. But in fact the sequential comparison would show that prices are up from the first quarter to the second quarter, which I think is a really constructive dynamic.

Particularly in a deflationary environment, you touched on deflation, we had said about $50 million of deflation. We said we thought the bulk of that would be in the second half. At the time we made that -- gave that direction or gave that guidance, we had expected candidly volumes in the second quarter to be a little bit weaker than what we actually shipped. So we had a lot of good shipments at the end of the quarter, where we had low asphalt cost in the shingles that we shipped. In our internal planning, some of the shingles we had anticipated would be shipped in the third quarter. So that effectively brought some of that deflation we expected to see in the third quarter into the second based on the timing of shipments.

We think that's good news. We think the shipments in the second quarter were stronger because market demand was stronger. So our sense is the Roofing market out there is good. The fact that overall the industry shipped 5% less in the first half of this year than we shipped last year, would certainly suggest it's not an inventory build situation out on the channel, but that it's actually a replenishment type demand, which is very constructive for us as a manufacturer. So we feel good about the way the dynamics of the Roofing played out. It has not caused us to believe we'll see more deflation this year, even though if you take the $18 million and you annualize it you might get to a bigger number. We think in fact, based on the way the volume is laid out, that $50 million, or maybe a little bit more than $50 million, still good guidance on deflation.

That's perfect, Mike, and very comprehensive answer, as always. A second question on the back half expectations for Composites. Appreciate the color as to why you think the EBIT will be flattish year over year. As you list of those components, I was hoping to get a sense from you -- obviously every year there's different elements of maintenance, facility maintenance, et cetera, and so this might be difficult. But as you've identified some of the supply lines and the non-woven that might be impacting that back half profitability, what amount of that would you consider, if at all, nonrecurring or more limited in nature? And to contrast that, importantly, versus what you consider your annual ongoing type of maintenance that you have to perform for the overall Composites footprint?

So Mike, this is Michael. That's a good question. And I think I can give you some good help from a direction point of view. I don't think I'll give you any specifics from a 2016 perspective. But I think you're on an interesting point.

So if you back up to last year, you'll recall that rebuilds in general were quite elevated and that rebuild expense for the year, if I remember correctly, was up about $30 million year on year from 2013 to 2014. And as we move into 2015, we said that rebuild expense in addition to the startup costs that we have associated with our new non-wovens facility, are going to be broadly the same. So as you move into 2016, it will clearly have some rebuilds. But you would expect that we'd have a bit of a tailwind in 2016 from less rebuild expense.

Stephen Kim of Barclays.

Good strong results and congratulations on that. So my first question, just to touch up on Roofing here. With respect to the asphalt deflation, you talked about the $18 million that you could get to from your 10-Q. But some of that deflation I would expect to is probably related to asphalt sales, the liquid asphalt sales, not the shingles. And so I'm wondering if we look at the margin benefit from lower asphalt prices, would we -- what should we be using or thinking was your margin benefit? I wouldn't think it would be all the $18 million, because the stuff -- the asphalt is done on a pass through, I would think, right? So if you could help me think through what the margin benefit was from the lower asphalt?

Stephen, thanks for your question. I appreciate it because it actually gives me a chance to clarify and make sure that everyone understands the convention we use when we talk about pricing. You're in fact right that the asphalt business, we have a business where we process asphalt and sell it on an OEM basis to other shingle manufacturers and then also into distribution for things like commercial Roofing applications. That business we characterized in the past as being a cost pass-through basis. We have a processing fee in some cases, in other cases we just have a price gap off of (inaudible) materials. For purposes of our inflation or deflation reporting when we talk about shingles, we exclude the pass-through economics of our asphalt business. So the $18 million deflation number that we're talking about today, is in fact the deflation we achieved on the shingles that we sold.

One when of the things we also tried to clarify on today's call, is in the reportable segment we have the impact of these asphalt pass-through sales, we also have accessories sales in that segment as well as shingles sales. And because we're in a deflationary environment, our asphalt business, while still a good business, shrank in the quarter because we sold and passed through at lower prices. So our overall top line and the volume growth you would calculate out of our 10-Q, significantly underestimates the actual growth in shipments of shingles hopefully Michael clarified that effectively in his comments. But the overall shingle market was up a little over 40% in the quarter, down 5% for the half. We were up a little bit less than 40% for the quarter, up 5% for the half and our shingle business had $18 million of cost asphalt deflation in the second quarter, with a little bit of cost inflation actually in the first. So our year-to-date cost deflation is slightly less than $18 million, but it was $18 million for the second quarter.

Got it, just writing that down. Okay, all right yes that's an important clarification. So I guess the follow-up question would be, how much of the $45 million decline in sales was shingles versus other products? This is all within the Roofing business as well.

The $45 million decline in sales Stephen, give me that number because we reported today revenue of $503 million versus prior year revenue of $437 million.

Kathryn Thompson of Thompson Research Group. I'm sorry, were you not finished?

No I'm sorry, Stephen, I was asking for a clarification on that question, Laura.

I apologize, very sorry. Let me unmute his line again.

I can jump on. So you reported a $45 million impact from price. Yes and so I was wondering how much of that was related to shingles versus other products?

So we would use the same convention there that we use on asphalt cost deflation. So the $45 million price decline that we reported in the second quarter is specific to shingles and then the $18 million of cost deflation that we reported in the quarter is specifically to shingles. And we -- I want to be really transparent on this. This -- our financial reporting in our 10-Q, this was a little bit more complex this quarter because it's a little bit of an oddity that we've seen a quarter with such a significant increase in shingle volumes while we were seeing asphalt cost deflation and it made some of the numbers that we put into the Q less clear than we'd like them to be which is why we've offered additional information here on the call.

Got it. Thank you very much.

Kathryn Thompson of Thompson Research Group.

First, is on Composites. I'm looking, how much of your margin growth in Q2 was driven by outsize results in Europe? And specifically, the checks that we have done is the market is structurally better this year because Chinese composite imports are effectively noncompetitive, not only because of the anti-dumping, anti-subsidy tariff, but also because of FX headwinds. So if you look at your composite results as a whole, in looking more specifically at the margin results, how much was it Europe versus other geographies?

Kathryn, it's Michael. I'll take that question. I think what I said maybe at a high level, is that we're really pleased with the execution of the Composites business in the quarter, but really over the last two years. And as we look at the progress that we've made this year in the quarter, specifically, we've made progress I think broadly across all regions.

You're right to call out Europe. We have made significant progress in Europe this year. You know back over the last three or four years, we've taken a significant amount of restructuring effort in Europe. We had a fair amount of rebuild activity in Europe last year as well. We're seeing the fruits of all that work that we got done over the last couple of years. And then you're right, currency has been our friend and some of the anti-dumping policies that have been in place have been helpful from a pricing perspective as well. And then volumes have been relatively pretty good in Europe as well. So we're real pleased with the progress that we've seen in Europe on a multi year basis, but in particular, the first six months of this year.

Thanks and my follow-up question is on Insulation. You pointed out that Insulation volumes some were impacted by the lag between permits and starts. To what extent do you think volumes were at all impacted by very high precipitation seen in certain geographies such as Texas, Oklahoma and Colorado this year?

Well obviously we all have views on that, but it's very hard for us to get good hard data or to track that. At a very high level, probably the metric we look at is starts versus completions. And we have seen, probably over the course of the last three quarters, four quarters, that there has been increasing disparity between starts and completions would suggest to us that potentially there's more lag between when a house is started and when that house is completed and therefore, there may be more lag between the start of the house and the 90 days, which we estimate is about the time the inflation goes into the home. Now some of that could be weather-related or some of the dynamics you're discussing. I think if you also look at labor growth in new construction, labor growth has been slower than growth in new construction. So we could be also seeing some of the lag extending due to the labor bottlenecks.

So we think there's a number of factors that are likely contributing to why we're maybe seeing a little bit slower growth in Insulation demand than the lagged housing starts would suggest. I would tell you, we think it's also within rounding errors. So while we've been on the low side of housing starts in our macro for the last couple quarters, we also get some industry data around market share and things and we're pretty confident that we're tracking the market, in terms of shipments. And that really there's just a market phenomenon where there's getting to be some pent-up demand in the market that we'll eventually see. We're hopeful and would expect to see a fair amount of that start to unwind here in the second half. And I think in Michael's comments he did say that we saw reasonably good volume in our late June order book and that so far early in the quarter, the third quarter for Insulation looks pretty good. So we're I think expressing some optimism here on the call that we think the second half should be the point where we turn the corner based on the last four months of starts.

Garik Shmois of Longbow Research.

Congratulations on the quarter. Just a follow-up question first off on Insulation. Wanted some clarification on your 10% revenue guidance for the second half of the year. Is that for the entire Insulation division, or is that just a comment specific to the US residential component?

No that's for the entire reportable segment. So obviously if you look at second-quarter housing starts, I think second-quarter housing starts were up about 14% versus the second quarter of last year, somewhere in the mid teens. So on a lag basis, we would expect in the US residential side, that we would see both demand growth that would be better than the 10% and also, we are getting positive price there. so we would expect to see volume and price in the US residential segment.

But if you look across our entire Insulation business, that still represents less than half of the overall business. And some of the other parts of the business grow with industrial production or grow with GDP or grow with the geographies that we're in. So it's a mix issue. But as we mix it through, we feel the growth there should be I think quite a bit stronger than that 10%, producing 10% overall growth in the segment.

Okay, thank you. And then a follow-up question on Roofing. You've talked about your outlook for the second half of the year, for the full year for that matter, for demand. Just given the context in the second half of last year, which you had tried to regain your share position, you did so successfully and particularly in the third quarter. How should we think about your volume growth in Roofing on a year-over-year basis in the third and fourth quarters? Should it track relatively similar to the mid single-digit outlook that you have for the industry? Or is there going to be a little bit of variance, just given how your volumes progressed a year ago?

I think Michael gave some commentary on this. Let me build on a couple of the things that Michael said. Our current estimate based on a flat market for the full year, which is still I think the estimate we're building all of our outlook off of, is that the industry has probably shift about 55% of full-year demand in the first half and that we would ship about 45% in the second half. And that's really just math.

We know first half shipments, and if you assume it's flat for the year, that would mean we have about 45% to go on a year to go basis. In fact, if that's the environment we're in, that produced 5% lower shipments in the first half than what we saw last year. It should, therefore, produce about 5% higher shipments in the second half than what we saw last year. So it would produce some volume growth for the manufacturers in the second half, even in a flat market.

Last year in the first half we were not happy with our market share position, primarily late first quarter and in the early part of the second quarter. I think we expressed last year on our fourth-quarter call, I guess earlier this year, that we felt we had done what we needed to do that at the second half of last year our market position was consistent with where we've been historically. So we would expect our market share in the second half to be consistent with where we've been historically, which would also suggest it's consistent with where we were last year, which is why we gave the guidance today that we'd expect our volumes to roughly track the market in the second half.

Mike Wood of Macquarie Securities Group.

I understand your logic on the asphalt deflation timing, I get a lot of the questions on this topic would like to clarify. I get a lot of confusion from investors basically calculate that what your $50 million guidance assumes is maybe a 10% or 15% asphalt price decline. And there's some industry data out there and PPI data suggesting that decline is 30%. So could you just clarify on that topic? Is it the industry data with the asphalt decline is overstating the impact? Or is it somehow getting mitigated in your $50 million guidance?

This is Mike, let me take that and then maybe if Michael has anything he'd want to build on, I'd open it up over to him. Our $50 million guidance is obviously built up off our cost of goods, the timing of shipments and the timing of asphalt purchases. And we said early in the year that there is some lag between the time the crude oil hits the refinery, between the refinery moving it through to asphalt, the asphalt coming into our system, getting into a shingle and being sold. And we said is about three months from the time it takes oil to get through to asphalt prices and about three months for asphalt prices to get through to our cost of good. Which is why we didn't really see much deflation until we got into the second quarter of this year because we didn't really see the big break in oil prices until late third and more then pronounced into the fourth quarter of last year.

So that supply chain dynamic hasn't really changed. We cautioned, I think on the last call, that typically in April/May, you often see a flattening of the deflation curve because the paving market starts to pick up and so the refiners have alternative uses of the asphalt that they produce. And as a result of that we have not seen asphalt come down to the level of pricing that would be suggested by where crude oil has moved to. So historically, a drop in crude of a certain percentage would imply the same percentage drop or a similar percentage drop in asphalt. We've not seen that through this cycle. We got a portion of the way there and then April and May came, paving season started to open up, asphalt prices firmed up and we didn't move all the way down. So part of, I think, the variance between where we would put asphalt cost deflation and maybe some of the external estimates would be that we don't see asphalt coming all the way down to the prices that would be suggested by crude oil, maybe until later in the year, potentially, if at all.

The second thing is I think at least some of the analyst reports I've read maybe over estimate the amount of cost of goods that asphalt represents in our shingle business. If you look at our overall Roofing segment, because we have the asphalt processing business, we process and sell a lot more asphalt then actually -- and so it goes into our shingles. And so when we look at what goes through our shingles and what goes through our cost of goods, the movement in asphalt prices based on published numbers that we would track and the $50 million guidance, pretty much tie out So we continue to think it's good guidance. And it's just a hard place for us to give a lot more information than that, because we'd have to basically layout our entire cost of goods, which is something we're not prepared to do competitively.

Very helpful. (multiple speakers)

Yes, the only other thing I'd add, that your 30% probably is a bit high from a deflation point of view as to where we sit today.

Understood. Just as a follow up on Composites, many other industrial companies have been reporting a pretty broad slow down in China, including destocking. Just curious what your view is and what's been happening in the China Composites market and if there would be any risk that there would be dumping of capacity from China into any other markets? Thank you.

Thanks, Mike, it's Michael, again. Our Composites business in China is doing relatively well this year. I'd say volumes and profitability are up year on year. We read the newspaper just like you do, so we're cautious and we're watching. But what I'd characterize it so far this year, is so far so good.

Yes, maybe I'll add a point on top of Michael's. I think one of the things we've been reporting really over the last four or five years as we come out of the very difficult financial performance for Composites in 2011, is that we've seen a real slow down in any capacity expansion or capital investments in the overall industry. So growth in China is important to us and it's a very good thing for our industry.

A slow down, I don't think is terribly worrisome provided we still see growth because we believe the overall industry is operating in the 90% level. So there's not a lot of capacity in China that would come out of China looking for new demand. Unless we actually saw a decline in the Chinese market. And at least on the Composites applications, where we have the more significant positions, we're seeing fairly stable and growing demand. So we think China is stable. Our sense is it's definitely slowing down, but we were able to get an industry structure over the course of the last four or five years that I think can deal with a bit of a slowdown in China without changing our outlook for the business.

George Staphos of BofA Merrill Lynch.

This is actually Alex Wong sitting in for George. Congrats on the quarter. First question just on Roofing. I know you touched on the sequential pricing improvement but can you talk about what you're seeing in the -- currently in the marketplace regarding maybe yield relative to past attempts that Owens Corning has undertaken and your pricing outlook for the balance of the year especially given the latest round of announcements?

It's generally our practice that we don't talk to specific price increases or talk to the yields on specific price increases. But I think it's -- suffice it to say that because there was very limited discounting in the first quarter, that most of the sequential price increase that we would be reporting in the second quarter is not a byproduct of the elimination of discounts, but it's actually a byproduct of some realization of the price increases that were announced in the second quarter, which we think is a very optimistic note for the industry.

I think if you talk to most of the distributors and people who buy and resell shingles, a rising price environment is the most attractive environment, if you're in the business of buying and reselling shingles. No one wants to see their inventories devalued. And increasing prices gives our customers the opportunity to also widen out their margins.

So we're in an environment today where the sequential pricing that we saw in the second quarter really was a byproduct of our ability to pass higher prices to the marketplace. And I think our own customers ability to pass that through improves their profitability as well.

Thanks for that. And then as a follow up, recurring guidance, the $40 million swing factor between the low end and high end, can you provide some color around what conditions you need to see to drive both to the low and high end and what would you characterize as your biggest concerns entering second half of the year?

Yes, it's a very good question. Obviously we started the year in our Roofing business $60 million behind last year. So in the first quarter of 2014 we did $80 million of EBIT, this year in the first quarter we only did $20 million. I think when you start in the $60 million hole, your first objective is to get out of the hole. We made $30 million of progress here in the second quarter. So on year-to-date basis our Roofing business is still $30 million behind last year. I think if you look at our guidance, one of the things that we need to be able to achieve in order to get to the low end of the range, is we would need to see Roofing come back to levels of performance that at least were similar to last year.

So I think step-by-step, our goal would be to see Roofing make more progress on catching up on last year through the third quarter. Fourth-quarter volumes are always a big question mark in Roofing so I think a lot of the variability that we would ascribe to Roofing would be how much volume do we see in the fourth quarter and how does that set us up for next year? Obviously, our preference is going to be to see that this year we sell shingles to our customers that they resell. We think the big inventory effects that we've seen over the last couple of years, either the year end effects or first-quarter discounting have made the market difficult for manufacturers like Owens Corning to make money. I think it's also made it difficult for our customers to make money. So our expectation is we would see ratable demand through the third and fourth quarter, based on what our customers sell out the door. And depending on the timing of that and the margin rates associated with that, I think we could be somewhere between the low end and the high end of the range.

John Baugh of Stifel.

Thank you and congrats on a nice quarter. Two things, quickly. One, an asphalt. If we assume oil doesn't change or asphalt cost don't change appreciably, is there a benefit that goes out into 2016? Could you quantify it? How long does it go out?

And the second question on Composites, curious what your year-to-date volumes were in that business and how that may be tracking relative to the global industrial growth number you talk about or whether you're gaining share, losing share, et cetera? Thank you.

Okay. Related to asphalt cost deflation, effectively with our report today where we say we achieved $18 million of asphalt cost deflation in the second quarter, I think where as we had previously characterized the profile of deflation this year as we need to get some piece of it in the second quarter and then the bulk of it would come in the second half, I would say that today based on the results we're reporting today, it really is much more that we're seeing almost a full portion of deflation in all three of the quarters, second, third and fourth. So as we go into next year, I think we would have a positive comp if asphalt cost stayed where they are today in our first quarter. But probably by the second quarter, we wouldn't be comping positively. So, there's some amount of additional deflation we'd expect to see with lower cost at the end of this year then what we had at the end of 2014. But I think by the time you got to the second quarter of next year, we'd be comping about flat on cost.

There is a possible additional improvement in our cost position if at the end of the summer and paving season ends, we would see asphalt prices again begin to come down closer to where they would be historically versus crude oil. And if we were to see that between now and year end, than that would potentially give us some additional deflation next year. But that's not something we're counting on. The refinery complex has changed dramatically over the last couple years. So we're trying to get a sense of where the equilibrium prices on asphalt and I think at this point we've got our arms around it pretty good with the $50 million in guidance we've given. I'll let Michael talk about Composite volumes.

Yes, thanks, Mike. Quickly on Composite volumes, I think as you would have taken away from our prepared remarks and some of the questions that I answered earlier, I think broadly across pretty much regions in which we operate across the globe, we've seen positive volume growth year on year. Looking at it on a year-to-date basis, if you look at our Q, I think you can tease out that roughly that equates to about 4% growth year on year. We highlighted at the beginning of the year we were expecting to see a little bit of weakness in particular within the oil and gas sector, which has materialized. But overall, volume growth is tracking nicely about 4% on a year-to-date basis.

Thank you.

Keith Hughes of SunTrust.

I had two quick questions on Roofing. First, you had talked about the sequential improvement in shingle prices into the second. If prices stay where they're at heading into the third quarter, would you on a year-over-year basis be up in pricing? I know there's a lot of calculus involved and I can't figure it out on my own.

And then question number two is on manufacturing volumes, given your view on the market. What would your capacity utilization rates in Roofing that you're planning right now be versus prior year in the second half?

Okay, let me come back to your first question, Keith. Your first question was third-quarter pricing relative to second quarter, or third quarter relative to third quarter of last year?

Third quarter relative to prior year given where you are as you end the second.

Yes relative to prior year, we would continue to be well below last year. So the entire pricing curve this year is really the shape of it doesn't look a lot dissimilar to last year, but it's well below it. And that is really when we came out of last year, we had the big discounting in the first quarter. We saw some price increases and discounting came out of the second quarter. We then adjusted our pricing in the third quarter.

So as third and fourth quarter prices were below the overall level of pricing for 2014, as a result when we came into 2015, we were just starting off of a lower base. And obviously the number we watch is margin rates and we've been able to adjust to that price level and deliver 18% margins in the quarter, which is a really constructive number for us. So production was very, very good with some deflation and some sequential pricing. At today's price levels, we can make very good money in the Roofing business.

And so the production volumes in the second half, will those be above the prior year given that the industry appears to be on a path for decent second half of the year?

Above the prior year -- first of all in Roofing, the timing of our production is not terribly important because our fixed costs are relatively low and absorption is not super important, particularly in any given year. We've been pretty careful about inventories this year, particularly because it's a deflationary environment, so we want to make sure we don't put high-cost asphalt into our inventories. So my sense would be that we'll probably produce in the second half about what we would ship. And since we're expecting shipments in the second have to be slightly above last year, I'd expect production to be at about the same level at to what we saw last year.

Okay. And to go back to the first question, there's various price increase announcements that's been out in the industry for a couple different periods. Do you have a view at this point on the potential success of those for you or for the industry as a whole in the third quarter?

I think (inaudible) I don't think I remember whose question I answered on that, but we've been very pleased that we saw some positive sequential price in the second quarter. Obviously, our hope for the year would be that we'd continue to see that kind of constructive and progressive pricing through the year. That's very good for us, it tends to be very good for our customers. But I wouldn't speak specifically to any of the announced price increases or our view on them.

Laura, this is Thierry, we probably have time for one more round of questions.

Stephen East of Evercore.

Mike, if I could follow up on the Composites, talking about China. What percentage of your business is going into China? And you talked about more value add, what -- is it just industrial production that you keep your eye on? Or what's probably the biggest macro metric that you look at for China?

In our investor disclosure, you will see that China represents about 26%, I believe, of the overall global market and as a percent of OC revenue, it's roughly 10%. I think that's in our standard investor pack that should be out on our website. And again, global industrial production is the primary measure that we look at when thinking about the Composites business. Clearly, as you go around the globe, there are various pieces of the end market which are more relevant. Obviously, thinking about China, infrastructure is relevant. Automotive though is actually a quite nice growing segment for us as well. So again, so about 26% or a quarter of the overall market, about 10% of our revenue and we've seen good progress this year on a year-to-date basis.

Okay. Then on Insulation, you've got some gives and takes in retail. I was interested in where that's shaking out right now. Are you getting your -- you think you're growing that segment, getting the pricing. And then I know it's early for 2016, but just looking at your cash allocation, where you're going on CapEx spend, et cetera. Do you have any big projects that are looming we need to be aware of?

Yes, so on Insulation, when we look at the overall market demand, and I spoke to this earlier, that we generally think we're tracking the market. If you break it down into some of the segments that exist inside our Insulation business, you've got some alternative channels. But generally, the products we sell are retail, the products we sell to the new construction contractor, the products we sell into distribution is a very similar product. So we get market share -- we measure market share data at that level.

Our sense would be that because of some of the moves at retail, maybe a bit more of our volume in the quarter did go through the retail channel. But, our overall volume in the quarter tracts the market. So we think we're doing very well in retail. And obviously with their brand, and our trademark color and other things, we bring a pretty unique value proposition to a retailer, so that is a place where we should shine and we should do very well.

With respect to capital allocation, the non-wovens facility we're building down in North Carolina was obviously a big capital spend. We would expect that, generally, the substantial portion of that spend should be behind us this year. We're expecting to commission that plant late this year. So it's really the Joplin, Missouri, mineral fiber facility that we spoke of earlier on today's call that would be the biggest capital call on next year.

We've been a pretty heavy rebuild schedule in Composites, including two of our very important melters in the US, two very low cost strategic melters, which are the two melters we're rebuilding in the second half of this year. We do have an outlook over the next two or three years that the level of rebuild expenditure that we're going to have in Composites will start to come down a bit with the rebuilds we've done in Europe, with the rebuilds we've done in North America now.

So generally in terms of our cash flow outlook, the more profitable we are, the more valuable our tax position is because our cash tax rate is well below our GAAP tax rate. And then obviously as we get through this surge of CapEx that we've had in Composites, as well as some of these big expansions that we have between non-wovens and mineral fiber, we're getting to a period we believe as we get into 2016 and behind where we're going to have a lot of flexibility with free cash flow to pursue growth, to pursue share repurchases, as Michael talked about, to support our dividend, to support our balance sheet with our investment grade credit rating. So hopefully, this is the environment we've been looking to get into with three great businesses operating at high-margin levels with great cash flow. And I think we are beginning to demonstrate that here in the second quarter.

Excellent. Well thank you, everyone, for joining us to today's call. And with that, I'll turn it back to Mike for some closing remarks.

Well thank you, Thierry. Obviously, I hope you took away from Michael and my comments that we're very pleased with the progress in the second quarter. Particularly, I think, the quarter was result of positive execution in all three of our businesses. I don't know how many times in my career I'm going to have the opportunity to report a quarter where the Corporation EBIT is up 60%, Composites is up 80% and Roofing and Insulation are both up 40%. Those are some pretty heady numbers. I don't know that we can sustain that through all the quarters of my career, but it was fun to have one where we have all three of the businesses really showing that kind of growth and that kind of improvement at the same time.

Obviously, that is consistent with the overall strategy we've laid out for the Company though. We've been talking now for two or three years with our investors of getting all three of our businesses and our portfolio operating at vary high levels of performance at the same time. I think you're seeing the power of that capability inside Owens Corning in the numbers coming through the second quarter.

I'd expect that we would be able to demonstrate through the second half of the year, continued progress. And I think most importantly, that progress that we're demonstrating here in the second quarter and through the second half should continue on into 2016 and 2017, provided we see the kind of macro environment and economic fundamentals that underpin our very, very good businesses. So we're very proud of the quarter, we appreciate the support of all the people on this phone and we look forward to talking to you on the third-quarter call.

The conference has now concluded. Thank you for attending today's presentation, you may now disconnect.