Owens Corning (OC) 2015 Q3 法說會逐字稿

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

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Thierry Denis, Vice President of Investor Relations. Please go ahead.

Thank you, Allison. Good morning, everyone. Thank you for taking the time to join us for today's conference call in review of our business results for the third quarter 2015.

Joining us today are Mike Thaman, Owens Corning's Chairman and CEO; and Michael McMurray, Chief Financial Officer.

Following our presentation this morning, we will open this one-hour call to your questions. Please limit yourself to one question and one follow-up.

Earlier this morning we issued a news release and filed a 10-Q that detailed our financial results for the third quarter. For the purposes of our discussion today, we've prepared presentation slides that summarize our performance and results for the third quarter of 2015, and 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 forecast 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 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 third quarter, we have utilized an effective tax rate of 33% on adjusted earnings, the midpoint of the 2015 range published this morning.

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, Mike 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 third-quarter results.

As noted in the press release, we had a very strong quarter, representing a record EBIT performance for the Company. All three businesses made substantial contributions to this performance.

The composites business continued the momentum we've seen throughout the year, driven by stronger volumes, improved pricing, and good manufacturing performance. Our roofing business saw volume growth in the quarter, with improved margins benefiting from the continued asphalt deflation we've discussed throughout the year. The insulation business grew at double-digit rates, reflecting the improved housing activity in the second half of the year. This marks the 17th consecutive quarter of EBIT improvement for our insulation business. All three businesses performed at double-digit margin levels in the quarter as a result of positive macro trends and solid commercial and operational execution.

The Company delivered consolidated revenue in the quarter of $1.46 billion, a 6% increase from $1.38 billion for the same period a year ago. We earned $198 million in adjusted EBIT for the quarter, up from $132 million last year. Adjusted earnings were $113 million, up from $73 million one year ago. We're also pleased to note that we've delivered year-to-date cash flow from operating activities of $384 million, up from $62 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 toward our goal of creating an injury-free workplace.

We continue to perform at a high level of safety. Through the third quarter, the number of recordable injuries is tracking at approximately an 8% year-on-year improvement. We are on track to have the best safety performance in the Company's history.

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 17th consecutive quarter of EBIT improvement. Revenue grew at a double-digit rate in the quarter, and we continue to see price improvement.

As the housing market recovery progresses, we will see continued performance improvement in this business. We also remain confident in the commercial segment of the insulation business, and are underway in the construction of our new mineral-well facility in Joplin, Missouri.

In composites, we updated our outlook on our second-quarter call, and said that we expected a $60 million EBIT improvement over 2014, including the negative impact of the stronger US dollar. Composites delivered double-digit margins for the quarter, and improved its EBIT by $29 million, the result of volume growth, improved pricing, and good manufacturing performance. The composites' business performance in 2015 reflects the effective execution of our previously announced strategy of cost leadership, price realization, product leadership, and capital efficiency.

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. For the quarter, roofing delivered $45 million of EBIT improvement on both volume growth and asphalt deflation, restoring year-to-date margins to mid-teens. Pricing in the marketplace was stable on a sequential basis, although still below last year's level.

Asphalt deflation contributed $27 million of benefit in the quarter. We are seeing this business play out as we had hoped, and are pleased about the developments that have helped us repair margins this year. 2015 is shaping up as a better year for our roofing business.

Before I move to our outlook, we had one other achievement in the quarter that I would like to note. For the sixth consecutive year, Owens Corning earned placement in the Dow Jones sustainability world index, in recognition of our sustainability initiatives. The Company was also named the industry leader for the Building Products group for the third consecutive year.

We're proud of our accomplishments in the area of sustainability and the recognition we receive as a global leader. Next week, we will announce more ambitious 2020 sustainability goals for reduction in greenhouse gas and toxic air emissions, along with new sourcing partnerships that will further demonstrate our commitment to leadership in reducing our carbon intensity.

Now, I will review our outlook for the remainder of 2015. The Company expects to continue to benefit from sustained improvements in the US housing market, along with moderate global growth. In composites, we now expect a full-year improvement of $80 million based on current volume and pricing strength. This improvement includes the impact of $25 million in currency headwinds.

In roofing, we continue to expect that the full-year US shingle market will be in line with 2014. We expect the full-year benefit from asphalt deflation to be around $60 million. Overall, this business is positioned to meet or exceed last year's EBIT performance.

As I noted earlier, our insulation business should continue to benefit from growth in the US residential new construction market, along with improved pricing and operating leverage. We expect revenue growth of about 10% in the second half, with full-year operating leverage of approximately 40%.

In July, we provided an EBIT range for the full year of between $460 million and $500 million for Owens Corning. Based on strong year-to-date performance, and our outlook for the remainder of the year, we now expect adjusted EBIT to be at or above the high end of that guidance, and feel confident we should deliver Owens Corning's best EBIT performance in nearly a decade.

With our current guidance, we're expecting more than 20% growth in the Company's full-year EBIT performance. On a year-to-date basis, all of our businesses are ahead of last year, and we expect that our overall corporate performance will be driven by full-year margin improvement in all three businesses. Our current performance and the positive momentum in our markets puts us on track for double-digit margin performance in all three businesses in 2016.

On November 18, we will host an Investor Day in which Management will review our businesses in more detail. At that time, we look forward to sharing how we will continue to build on our current momentum.

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

Thank you, Mike. And good morning, everyone.

As Mike mentioned earlier, we had a very strong quarter and were very pleased with our results. All three businesses delivered double-digit EBIT margins in the quarter, resulting in a 14% adjusted operated margin for the Company. As I have said on previous calls, 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 third quarter. You will find more detailed financial information in the tables of today's news release and the Form 10-Q.

Today, we reported third quarter 2015 consolidated net sales of $1.46 billion, up 6% as compared to sales reported for the same period in 2014. Net sales for insulation business increased 11%, primarily on increased sales volumes. In our composites business, higher sales volumes, favorable product mix, and higher selling prices were offset by roughly $50 million of foreign currency translation. In our roofing business, net sales were up 6%, primarily on higher sales volumes.

Adjusted EBIT for the third quarter of 2015 was $198 million, up $66 million compared to the same period one year ago. This represents record EBIT performance for the Company. Adjusted earnings for the third quarter of 2015 were $113 million, or $0.96 per diluted share, compared to $73 million, or $0.62 per diluted share in 2014. Depreciation and amortization expense for the quarter was $73 million, down $2 million as compared to the third quarter of 2014. Our capital expenditures for the quarter were $89 million.

Cash from operations improved by $125 million for the quarter and $322 million for the year-to-date compared to the same period one year ago. For the year, we expect to see strong free cash flow as a result of improved earnings, better working capital performance, and our advantaged tax position. Over the past several years, we have heard from investors about the desire for Owens Corning to deliver better free cash flow performance.

I'm pleased to report that we will make significant progress in 2015. The investments we have made in composites to achieve a low-cost network are now paying dividends. Also, we have demonstrated this year that when all three businesses make substantial contributions to our financial results, significant free cash flow is achievable. Given our progress year to date, we expect free cash flow conversion of adjusted net income to be about 100% in 2015.

Now, in slide 6, let me reconcile 2015 third quarter adjusted EBIT of $198 million to our reported EBIT of $196 million. We have adjusted out $2 million primarily related to the prior restructuring action we took in Japan.

Now, please turn to slide 7, where we provide a high-level review of our adjusted EBIT performance, comparing the third quarter of 2015 to the third quarter of 2014. Adjusted EBIT increased by $66 million, or about 50% over the same period last year. Each business showed significant improvement year-over-year, with a 91% increase in our composites business, a 78% increase in our roofing business, and a 35% increase in our insulation business. General corporate expenses were about $24 million for the quarter, in line with the previous two quarters, but higher than the same period in the prior year, primarily due to an unusually low comparison in 2014.

With that review of the 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 $502 million were up 11% from the same period a year ago. The business delivered EBIT of $58 million in the third quarter compared to $43 million in the same period one year ago, primarily on improved volume.

This was our 17th consecutive quarter of EBIT improvement in our insulation business. Revenue grew at a double-digit rate in the quarter, consistent with our expectations for improved housing activity in the second half of the year. We are pleased with the progress that we have made in our insulation business. While we have made some progress in price this year, we expected a better price environment at the outset of the year.

For the full year 2015, we now expect operating leverage performance to be consistent with our year-to-date performance of approximately 40%, which has been effected by price realization below expectations. We continue to remain confident in our guidance of 50% average operating leverage through the recovery. The insulation business should continue to benefit from growth in US residential new construction, improved pricing, and operating leverage. We expect revenue growth of about 10% in the second half of 2015.

Now, I'll ask you to turn your attention to slide 9 for a review of our composites business. Sales in our composites business for the third quarter were $500 million.

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Can you hear me now? I'm good? I'm going to start over on slide 9.

Now I'll ask you to turn your attention to slide 9 for a review of our composites business. Sales in our composites business for the third quarter were $500 million, -- (technical difficulties) -- [up approximately 2% from the same period] one year ago. Revenue grew on higher volumes of 6%, favorable product mix, and improved selling prices despite currency headwinds of almost $50 million. On a constant currency basis, revenues would have grown about 12%.

EBIT for the quarter was $61 million, almost double compared to $32 million in the same period last year. Composites continued to deliver double-digit EBIT margins and improved EBIT on stronger volume, improved pricing, stronger manufacturing performance, and favorable product mix. Selling prices continue their sequential improvement for the ninth consecutive quarter.

Commercial and operational execution exceeded expectations in the quarter. We are pleased with the progress that we have demonstrated in the composites business over the previous 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 have established.

For the fourth quarter, we expect our normal sequential decline in volume of a little more than 5% and lower production leverage primarily related to seasonal plant curtailments that support the US asphalt shingle market. In addition, we expect higher sequential startup cost related to our new non-wovens facility in Gastonia, North Carolina. These costs will continue into 2016.

As a result, we would expect fourth quarter EBIT to come in below last year's fourth quarter EBIT. For the full year, we continue to expect moderate global industrial production growth. Based on our strong volumes, continued good manufacturing performance, cost management and pricing strength, we now expect a full-year EBIT improvement of about $80 million. Our outlook includes the impact of foreign currency translation, which will negatively impact revenue by close to $200 million and EBIT by about $25 million for the full year.

Slide 10 provides an overview of our roofing business. Roofing sales for the quarter were $502 million, a 6% increase compared with the same period a year ago, primarily on higher sales volume. EBIT in the quarter was $103 million, up $45 million compared to the same period in 2014 on stronger volumes and improved margins. Roofing delivered 21% EBIT margins in the quarter.

Year-to-date, margins are back to mid-teens on volume growth and asphalt deflation. Pricing was stable sequentially through the third quarter, but remains below last year's levels. Our US asphalt shingle volumes grew double-digits, and we believe our third-quarter volume performance was broadly in line with the market. Asphalt deflation contributed $27 million of benefit in the quarter, and we now expect full-year asphalt deflation of around $60 million.

We continue to expect a flat market for US shingle shipments in 2015. We believe industry shipments for the first three quarters were broadly flat with last year, and therefore, we would expect fourth quarter industry shipments to be flat as well. We expect fourth-quarter margins to be sequentially down by as much as 10 points, as compared to the margins seen during the third quarter of 2015 on seasonably lower demand.

As a reminder, over the three-year period from 2012 to 2014, we experienced aggressive discounting in inventory build within the channel during the first quarter, which resulted in higher shipments. During this period, first quarter shipments averaged about a third of full-year demand.

When you review the data, you see that higher first quarter shipments typically pull volumes out of the third quarter. As a result, we tended to have weaker third quarter volumes in those years and a less dramatic drop in volumes in the fourth quarter. This resulted in a less dramatic seasonal decrease in EBIT margins from the third to fourth quarter.

Given the lack of discounting and related channel build in the first quarter of 2015, we expect a more traditional demand pattern, with strong reported third quarter volumes and an expectation that our volumes could be down as much as 40% sequentially in the fourth quarter. This would drive the decrease in EBIT margins from the third to fourth quarter, more consistent with years prior to 2012.

One final reminder, the US and Canada commercial industrial end-market represents approximately [16%] of the top line, and is primarily related to third-party asphalt sales. Given deflation in oil and asphalt, our asphalt sale prices are expected to be down about 30% year-over-year, driving a corresponding impact on revenue we derived from this end market.

We are pleased with the performance in our roofing business, and so far 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 stable pricing in the second and third quarters, with asphalt deflation tracking broadly in line with expectations. Based on our performance to date, we expect the business to meet or exceed last year's EBIT performance.

Now, let me turn your attention to slide 11, 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 November 3, 2015, to shareholders of record as of October 19, 2015. In the third quarter, under a previously announced share repurchase program, we repurchased about 1.1 million shares of the Company stock for $47 million at an average price of $44.72.

For the year-to-date, we have repurchased about 2.1 million shares of the Company stock for $89 million at an average price of $42.13. As of September 30, 5.6 million shares remain available for repurchase through 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 current 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 12, where I provide financial guidance for the year. We previously expected full-year adjusted EBIT in a range between $460 million and $500 million. We now expect to be at or above the high end of this range.

We expect full-year corporate expenses to be around $110 million. Capital expenditures to total approximately $380 million. Depreciation and amortization expense to be about $310 million, and 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 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 effective tax rate on adjusted pre-tax earnings is now expected to be 32% to 34%. The increase from 30% to 32% is primarily due to better performance in the US, where we have a higher statutory tax rate. We also had some minor prior-period adjustments.

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

Thank you, Michael.

As I noted at the outset of today's call, Owens Corning had a very strong quarter, representing an all-time best EBIT performance. Our insulation business grew EBIT for the 17th consecutive quarter. Our composites business delivered its ninth consecutive quarter of EBIT growth, and our roofing business improved margins to 21% and is now tracking ahead of 2014 on a year-to-date basis.

Given our performance this year and our outlook for the remainder of 2015, we are confident we should deliver EBIT at or above the high end of our previous guidance of $460 million to $500 million.

And now, I would like to turn the call over to Thierry, who will lead us in the question-and-answer session. Thierry?

Thank you, Mike.

Allison, we're now ready to begin the Q&A session.

(Operator Instructions)

Our first question comes from Stephen Kim from Barclays. Please go ahead.

Thanks very much, guys. And good results in the quarter.

Thank you.

Wanted to first start off with your insulation business. You have talked about incrementals there of 40% for the year. Longer term, I think you've talked about 50% or better.

It was about 25% in the quarter. And we know the pricing was disappointing. I'm wondering, how much of the difference between the current incrementals that we're seeing and your forecasted incrementals is due solely to an improved outlook for pricing?

Thanks, Stephen.

As we talked about our operating leverage guidance, we said through the recovery, which is now in multiple (inaudible), we expected we would have about 50% operating leverage. And in fact, based on our comments today, where we said we think this year will come in around 40%, we're still at about that 50% level cumulatively over the last four years through the recovery.

So we're still tracking pretty well to the overall guidance we gave there on 50% incrementals. You're correct that in the third quarter, our incrementals were a bit weaker. I think there is some comparison issues and other things that caused the third quarter to look a little bit worse than the full year. But fundamentally, I would say there's nothing in the quarter that causes me to believe that the underlying momentum around incrementals is different in this quarter than it has been in the others. I think we're going to average about 40% through the year.

Your second question around pricing, I think that's a key observation for us. We came into the year thinking that we would maybe do a little bit better than our current guidance at 40%. I think the gap or the disappointment is primarily on the pricing side. We would have expected, at this point in the recovery, that prices in insulation should be accelerating from what we saw in 2013 and 2014, and in fact we're experiencing a bit of a deceleration in price performance.

We think that's specific to 2015. So, we had kind of a context or some facts and circumstances associated with this year that have made the price environment a little bit more challenging. The nature of the price announcements and the price increases that were put into the market earlier in the year created some expectations of some price protection through the year, so it's been difficult to raise prices as we've gotten later in the year as demand has gotten a lot stronger.

We also saw weaker demand early in the year. So the market was quite competitive for volume early in the year, which made full realization of the price increase that we announced earlier in the year challenging. So we didn't have great realization of the price increase at the beginning of the year. We've had a bit of a challenge trying to realize price here in the second half of the year.

Our hope would be, as we go into 2016, that we maybe have a little bit more constructive environment on price. I think as you know, our prices of insulation are still well below where they were a decade ago on a nominal basis, and we've had inflation. It's a high quality product; it adds a lot of value. There's no really good reason why insulation shouldn't be valued in the new construction market, and we're working very hard to try to get back to value for our product and pricing for our product that's consistent with the investment we have in the business and the value of the product we offer.

Great. Thanks. Certainly in insulation, some of the pricing, the way some of the pricing announcements were made over the year, particularly in the beginning of the year, probably accounts for some of that.

I wanted to switch to roofing. And I know you're going to get a bunch of questions about the volume and the margins. I wanted to ask you specifically about the pricing.

I think you -- I think Michael talked about asphalt prices being down roughly 30% year-over-year in that segment. We know there's obviously some co-mingling of your asphalt prices in your -- together with your shingle prices and the numbers that you report to us. I was wondering if you could give us some -- help us see through some of that? And give us a sense for -- if pricing stays flat sequentially, how much would you expect -- and I'm talking shingles here.

If shingle pricing stays flat sequentially, how much do you think year-over-year shingle prices will be up or down in 4Q? And if you could help us understand what that shingle-specific price performance was, year over year, in 3Q?

I think we have some pretty good disclosure on this in our 10-Q. So we've tried hard to enhance that and make sure that our investors have the ability to kind of track pricing.

I think this year, we talked pricing primarily sequentially, and we said in the second quarter and then in the third quarter that prices were relatively stable on a sequential basis. I think we've given indications based on our outlook for the fourth quarter, we did not call prices down for the fourth quarter. So we are -- we do believe that for the second half of the year, prices will be largely stable or flat sequentially to where they were, exiting the first half of the year.

They are in fact tracking below last year. That was true in the first half of the year. If you remember last year, we had to do some price corrections in the middle part of the year, coming through in the second and third quarter. We're still comping against those numbers, but we're comping pricing today below those numbers.

I think our characterization of pricing being stable would suggest that, while we're meeting competitive situations and we're seeing competitive situations in the market every single day, we are not seeing widespread discounting, which characterized 2014. So whereas in 2014, we would say there was national market-wide price movements, I think today it's much more on a regional or a local basis. It's somewhat channel specific. Even at times, new construction versus repair-and-remodel specific.

So we're seeing a very different -- and I would say positive -- market environment today around pricing, in that it's still very competitive, but we are seeing prices relatively stable. That said, our overall price level in the third quarter and expectation for the price level in the fourth quarter is that those price levels will be below last year. We also said we expect full year asphalt cost deflation to be $60 million. That's related to our shingle business.

Michael broke out and gave a little bit more guidance today on that commercial and industrial end-market, which is our asphalt business to other roofing manufacturers and into the commercial roofing business. That's independent of our guidance around deflation. So, the $60 million of deflation is specific to our asphalt shingle business, given that we are saying we think the overall market will be flat, our volumes will be slightly up because of our share position last year, and that we think asphalt cost deflation will be $60 million.

I think the inference of that in an overall flat EBIT year is that most of that's been given back in price in total relative to 2014.

And our next question comes from Michael Rehaut from JPMorgan. Please go ahead.

Thanks. Good morning, everyone. Nice quarter.

The first question I had was on composites. I think definitely better than expected results than we were looking for. And I think also perhaps as implied by guidance last quarter, where there were a number of items I think that you highlighted -- and I think this was more for the second half overall, not for 3Q specifically.

But you cited rebuild expenses and costs associated with the startup of the US facility, implementation costs with an expanding supply lines for the Chinese-based manufacturer, as well as lower level of higher-margin specialty glass sales. Those were the three items that you kind of talked about.

Clearly, it looks like there are some things that are on the positive side that are perhaps giving greater than expected tail winds. But I just wanted to get back to those three drivers that you mentioned last quarter and ask if all of those items are in effect still in your guidance for the year, or if some of them are deferred, or if there's other elements that have kind of played into the picture as you now look at the second half, overall?

Okay. Thanks, Michael. It's Michael. Why don't I give you a bit of color on the quarter itself, and then I can specifically take on the question you had specifically around rebuild costs and startup costs and how we shape that for the year?

But you're right. So, we delivered very strong results in the quarter, $61 million versus $32 million year on year. You heard me in my prepared remarks talk about exceptional operational execution and exceptional commercial execution really kind of hitting the ball out of the park on all fronts.

We probably guided last quarter a little bit conservatively. As I back up to the beginning of the year, where I sit today, maybe we guided a year a little bit conservatively, but I would rather be a little bit conservative, maybe, than aggressive. We've really seen three big bright spots in 2015. And let me take you through those.

So the first one would be Europe. Our European business went through a pretty extensive restructuring over the last three or four years. And the European business has executed very, very well this year. Again, both commercially and operationally, and I would say that their results are probably about a year ahead where we thought they would be when they started the year. So again, really strong performance in Europe driving some of the upside that we've seen in the year.

Secondly, the other area I would highlight is manufacturing. So manufacturing this year has been a significant tail wind. Again, they are probably about a year ahead of where we thought we would be, as we sit here today versus at the start of the year. Very smooth operations, good cost takeout, and execution of rebuilds, which I'll come to in a minute.

The third is the third bright spot that I would highlight would be developing markets. So there's a fair amount of uncertainty in developing markets when we entered the year. Fair amount of FX volatility. You know that we have exposure in Brazil, India, Russia and China. And so we were a bit conservative on what was going to play out during the year. Quite frankly, given our position and given three of those markets have pretty big imports, it's turned out to be a bit of a tail wind for us this year versus a headwind.

Those are probably the three big bright spots for the year, and why we probably have consistently exceeded guidance. Probably have a little bit of implication as we look to 2016 and beyond, because they may not repeat.

In regards to your specific question on rebuild, you're right. We said that rebuild and startup expense in 2015 would roughly equal rebuild expense in 2014, with the majority of those expenditures taking place in the second half of the year. That's broadly, broadly still in line with what we expect, although rebuild execution has gone very, very well and expenses are probably tracking a little bit lower than what we had anticipated at the start of the year.

Lastly, I would just remind you that our Gastonia, North Carolina facility is under startup, and those costs are going to be more heavily weighted to the fourth quarter, which I think I highlighted in my prepared remarks.

That's very helpful, Mike. Thank you for that. And I guess just second question on the below the operating line. You made adjustments for full-year guidance in terms of lowering corporate, as well as raising the tax rate.

I guess obviously you're not at the point yet to talk about 2016 guidance per se, but just wanted to get a sense of thinking about things from an ongoing basis? If there were certain items that on the corporate expense were deferred and that you might see that moved into 2016? So, kind of an ongoing corporate expense? How to think about that, and if there are any items, again, that were shifted forward or the changes there?

And then also on the tax rate, with the move-up by 2 points. Was that due to any type of geographic mix, and is that something that, on an ongoing basis should be now more of the go-forward type of rate?

Thank you, Mike. So I think I can help you. So just as a reminder, let's take corporate expense line item first.

So just as reminder, at the start of the year, we had guided to $120 million to $130 million. On the last quarterly call, we lowered that guidance to low end. And then on today's call, I've given you guidance of $110 million. You'll recall that last year, corporate expense came in significantly below our first part of the year guidance, primarily as a result of lower performance-based compensation, but also as a result of very good spend control.

As we went into the start of this year, we kept the reigns on corporate costs and have been very disciplined throughout the year. So we're clearly seeing some benefit there. And at some point, we'll have to probably take the reigns off a bit.

Then the other thing that happened in the third quarter, which won't be repeatable, is we had about a $7 million insurance settlement. So, with a claim related to -- prior to the Company's bankruptcy that we were successful in collecting on, and clearly that won't be repeatable.

And then in regards to -- in regards to tax, yes, the change in rate is predominantly driven by the geographic mix of earnings. And then we've also had a couple of prior period adjustments, two minor ones which were in the third quarter. But the big driver is actually the geographic mix. That is driving it higher. I'm probably not going to give you guidance for 2016, but clearly, we'll lay that out in much more detail at our investor day mid-November.

The one thing I want you to stay focused on though, is we have a $2.2 billion tax NOL, and cash tax this year remains unchanged at roughly 10% to 12%.

Our next question comes from Ken Zener from KeyBanc. Please go ahead.

Good morning, gentlemen.

Good morning, Ken.

So in roofing, Mike, you talked about your expectations that from a volume perspective, you might be up a little bit versus the market because of the market share last year. If I look at the sales, you talked about -- down sequentially 40% volume is the number you kind of threw out there. Obviously, with less volume, there's going to be some fixed cost absorption.

Given that pricing was stable sequentially, asphalt's kind of flattened out a bit, would you assume that margin degradation sequentially is going to be largely associated with those fixed cost overhead components, or is there actually a change in your variable cost or hypothetical gross margin, there?

Thanks for the question, because I appreciate the opportunity to clarify that.

We think variable margins, which is the way we really -- that's the key management data that we manage the business to internally. We would expect variable margins to be relatively flat really from the second to the third, and now from the third to the fourth. So the asphalt cost deflation that we saw come through in the second quarter continued through the third and will continue into the fourth, has given us a fairly stable variable margin performance over the last couple four months and we would expect through the remainder of the year.

We were explicit today about saying that we think EBIT margins could decline by as much as 10 points in the fourth quarter for the very specific reason you're bringing up. And it's really on the fixed cost absorption or fixed cost as a percent of sales basis.

The downtick in volumes in the fourth quarter will be more pronounced than what we've seen in the last three years, primarily because third quarter volumes were better than what we've seen in the last three years, producing a bigger downtick, producing a bigger sequential decline in EBIT margins, but our variable margins are intact and really in good shape.

Thanks for that clarification.

And then [Mike, two]? I wonder if you could clarify, it seems like -- I know you guys never look at the stock price, but it seemed to me -- you made a comment about perhaps being -- you're not making any outlet comments on FY16, but I kind of heard some cautiousness around composites. I saw -- I noticed the stock moved around.

I just wonder if you said something you didn't mean to say in terms of these tailwinds that you had in composites might, because they did better than you expected, might be headwinds next year? I think that's the way I kind of heard that.

Was that what you meant to say? I know you guys will get more clarity at the analyst day, but if you want to expand on that, I would appreciate that. Thank you.

Let me talk to that, Ken, and obviously specific -- we're not looking at the stock prices.

I know. I know.

-- I don't know -- I'm not going to talk specifically to that.

I will talk about our outlook for composites, which is very bullish. A year ago, we improved EBIT in the business by about $50 million. We were around $100 million in 2013. We stepped up to $150 million in 2014. We've given guidance today that we expect EBIT improvement in the composites business of $80 million in 2015, which would put us well above $200 million at double-digit operating margins.

I think one of the open questions has been, as we've updated guidance through the year, what's going better in composites? I would say that the market is going about as we expected. I would say pricing is going about as we expected and that our operating performance and our agenda around cost improvements and our agenda around performance improvement in the business is about a year ahead of schedule.

And I think that's maybe what Michael was saying in his comments, which is some of the things we're seeing this year, which are good guys and helping performance, absolutely are repeatable and absolutely are sustainable, but they are actually some of the performance we expected to see in 2016 now appearing in our 2015 books just because we've gotten a better on the operations side a little bit faster than we expected.

So if there's any confusion at all, I want to be very clear. We expect operating improvement in composites in 2016, we expect volume improvement in composites in 2016. We expect price improvement in composites in 2016. We expect operating margin improvement in composites in 2016.

We see green lights in that business. It's operating well today, but it's in our view, not anywhere yet nearing its potential performance. We see upside in that business pretty much across all aspects of the business.

And our next question comes from Dennis McGill from Zelman & Associates. Please go ahead.

Hi, Mike.

Just to push a little bit on that composites, I think you said margin being up next year, which sounds pretty optimistic. Just want to make sure as you dial back maybe to the revenue side, I think where maybe clients and probably analysts as well are a little uncertain as to just how you get comfortable with some of the industrial slowdown, globally. That it isn't a headwind that's to come on the revenue side, and that's ultimately seemingly been the trigger to weaker than expected margin performance?

So maybe just detail what you've seen recently, from either a geographic and/or end-channel perspective, just to maybe put some confidence behind what you've said from that outlook?

Let me make a few comments on this, and then maybe Michael will want to add some additional specifics.

But we're not seeing the slowdown that I think is often reported, particularly in the analyst reports associated with our business. We've seen decent growth in most of the geographies around the world. Where we think the overall market has probably been declining, which is a couple of the developing countries like Russia or Brazil, we're basic in those countries, so we have manufacturing operations and generally those were import markets.

So devaluations of the currency have actually benefited us, because it's made imports more expensive. It's made our manufacturing costs more competitive. So some of the places where there was volatility and currencies has actually played a little bit to our advantage, because we're in those countries and manufacturing in those countries.

I think it's probably without question that China is slowing down some. I think slowing down is different than declining. So if we see volume growth in China that's a couple points weaker or 3 points weaker than maybe what we've seen over the last couple years, that's a very different scenario for our business than actually somehow seeing that volumes will decline in China.

I have not seen, and maybe I'm reviewing different economic reports than the folks on the call, but we haven't seen a lot of people calling for China to go into actual negative growth. We've just seen commentary that China will likely continue to slow down, particularly on the industrial side.

Given the amount of progress we've made industry-wide on capacity utilization and capacity, I think the composites industry is in a position to absorb a slowdown in growth in composites without creating much turmoil in the marketplace. So, in prior cycles, when global industry capacity utilization was maybe in the 80%'s, if you saw declines with capacity coming online, that created a lot of tension in the marketplace and weak pricing. We don't see a lot of capacity coming online.

We see rebuild activity now among our competitors, which is a pretty straightforward way to adjust inventories if your outlook to demand changes. So we think there's a number of tools and levers that are available to us to adjust our capacity relative to market expectations or demand expectations. So we're relatively bullish.

The last thing I would say is we've absorbed a pretty tough decline in oil and gas-related volumes in North America this year, associated with the price in oil. That's an important end-use market and North America is a very important market for us, and we've absorbed that impact this year and still put up very good numbers, very good progress. We think on a year-on-year basis, oil and gas will not be robust next year, but the decline we see in oil and gas won't be anywhere near the decline we've had to deal with this year in oil and gas.

It's not that the business has not been without some challenges from a market point of view this year. We've overcome challenges in Brazil and Russia. We've overcome challenges in oil and gas, but we're operating very well, and feel like the pricing environment is stable to up. The volume environment is stable to up. I think if you can give us that kind of environment, we've demonstrated we can make very good money in the business.

Okay. Is it possible if you were to look at the 6% volume in the whole segment, just to segment that by North America, Europe, and Asia-Pacific? Just to speak to what you're talking to, which is pretty broad-based strength?

We publish a slide in our investor deck that shows where our revenue is by geography. So obviously we're overweighted towards North America. We're kind of market-weighted toward Europe and we're a little bit underweighted to China. But China's been the fastest growing market.

So for us to be showing kind of broad-based growth across the business, we had growth in the third quarter. We didn't have a ton of volume growth in the second. We had very good volume growth in the first. So kind of a year-to-date basis, our volume growth is a bit below what we showed in the third. But we would see volume growth pretty much in all regions of the world.

So it's been, it's been broad-based performance in the business, and as Michael said -- in particular, we're very happy with the rate of improvement we've seen in Europe. It has exceeded our expectations for the year.

And our next question comes from Keith Hughes from SunTrust. Please go ahead.

To build on the last question within composites, if we look at it from an end-user market perspective, are there -- oil and gas I assume is negative, but beyond that, are there any [ones] that are really driving what was a solid volume performance in the quarter?

You know, Keith, it's Michael. We have a slide, we had a slide in our investor deck that we kind of show or segment in the end-market. You heard Mike talk about oil and gas being the one market that's weak. That's probably the one that I would highlight as being weak.

Otherwise, whether it's transportation, consumer, wind or construction, we've seen pretty positive trends throughout the year. In particular, I would probably call out transportation. There has been really good automotive build this year in particular in North America.

Okay, and second question on that, part of that business I know goes through distributors. Some of your lower margin items. As we approach the year end, how are they thinking about inventories during the winter months and 2016 in general? What have you heard from them?

As far as I know, distribution isn't a huge part of our business. I think it's actually relatively small. But, things in general are pretty balanced.

As you know, the industry as a whole is operating at 90% utilization within China, they are operating at about 90% utilization, or actually certain product lines and geographies that are experiencing tightness. I don't think there's any inventory backup anywhere that I'm aware of.

And your next question comes from Garik Shmois from Longbow Research. Please go ahead.

Thank you. Question on roofing. You had $15 million in production benefits in the third quarter. I was wondering if you could expand on specifically what that entailed? Did you tend to overproduce demand in the quarter to take advantage of lower asphalt costs? How does that set you up from an inventory perspective at the plant level, when we're looking out into 4Q and into next year?

Thanks, Garik, this is Mike.

We did have a benefit in the third quarter relative to the third quarter of last year. I think that goes to some additional disclosure that Michael made in his prepared remarks regarding the timing of shipments in roofing and how that impacts our economics. If you look at last year, we had an obviously big first quarter. We produced through kind of the midpoint or late in the second quarter at pretty high levels, and then began to realize that the shipments in the first quarter had created an inventory build that actually was going to blow back on us in the third quarter.

And that's I think in our analysis what we've seen is this winter dating or buy activity in the first quarter hasn't had so much an impact on the second quarter, historically. It's actually had an impact on the third quarter. So last year, as we entered the third quarter, we took production way down, and to give us some runway to be able to get to our year-end working capital targets, we needed a fair amount of time to reduce production and had to take production down really across the network for the second half of 2014.

This year, we didn't have that big first quarter. We didn't produce big in the first quarter. I would say we've been producing pretty ratably to shipments. And as a result, we had good production economics in the second where we weren't yet slowing down. We had good production economics in the third quarter where we produced about to our shipments, so we didn't have inventory build, a little bit, actually, inventory reduction in the third quarter.

Now we're positioned to produce at the fourth quarter at about what we believe our shipment levels will be to get to our year-end inventory targets. It's really a timing issue. Last year in the second quarter, we probably benefited from producing when we didn't have as much shipments, and then that came back on us in the third. This year, we pretty much produced to shipments every single quarter.

So we're comping against a little bit weaker second quarter -- third quarter number last year, which shows a benefit, and then we'll comp against I guess a comparable fourth quarter number, which is why we'll see margin weakness in the fourth.

Okay. Shifting now to insulation, you put up double-digit volumes in the business in line with your previous outlook. Expect it to continue in the fourth quarter. What are the main end markets that are contributing to that type of volume growth? Is it -- I think coming out of the second quarter, you talked about some pent up demand because of weather, acceleration in US housing. Is that really the material contributor to volume, or is there something else?

It's really residential new construction. If you look at the current housing start forecast for this year, it's [eleven thirty] is the consensus, somewhere in that range. That's about a 13% improvement in residential new construction versus last year, where I think we finished it right around a million.

That's actually been a little bit back-end loaded, so if you look at how the 1.130 million would play out throughout the year, if you recall in the first quarter, the housing start numbers were printing around 1 million. Really since April-May time frame, we've been more consistently at the 1.2 million range. We're really seeing new construction at above that 13% growth rate in the second half of the year, just based on the timing of the starts.

We had some headwinds. Obviously we're dealing with FX, which is hurting revenue, which is hurting top line. We have a good-sized business in Canada. We do very well there. Obviously the Canadian dollar getting a lot weaker has been hurting top line.

We also have some resin-based foam business, particularly polystyrene related, and with some deflation in polystyrene, we have seen a little bit weaker price environment, although margins have been fine that business. Because of weaker polystyrene, we have not had a robust pricing environment there.

So as a result, we have a little bit of top line headwind from those businesses. But we've been overcoming that with growth in residential new construction in the US primarily.

And our next question comes from George Staphos from Bank of America Merrill Lynch. Please go ahead.

Hi. It's actually Alex Wong sitting in for George. Thanks for taking the question. Just starting out with roofing, can you just talk about where the incremental $10 million of asphalt benefit came from? And then related, can you provide any color on how we should frame the potential benefit for 2016, assuming no changes from today?

Alex, I assume when you talk about the $10 million of incremental benefit, you're talking about third quarter versus second. And fundamentally, that's a timing issue, where we had said coming into the year that we expected about $50 million of deflation and we expected to see most of that in the second half.

We updated that guidance on our second quarter call and said that actually we had seen a little bit better volumes in the second quarter and as a result, we had shipped some shingles we had expected that would be second half in the second quarter, and as a result, had pulled some of our deflation outlook into the second quarter and had gotten some of that benefit in the second.

But we didn't have a full quarter of benefit in the second. We didn't really get to a full quarter of benefit associated with deflation until the third. So I think you're just seeing the impact of three full months of lower asphalt costs coming through our numbers. We would expect that to come through our numbers in the fourth quarter, albeit on lower volumes. So we'll have less benefit in the fourth quarter, because we'll ship fewer shingles. But the overall cost per shingle benefit would be pretty similar to what we saw, probably starting in the mid-second quarter and then through the third, into the fourth.

You had the question about next year. Obviously, we do have some ability, as we go into next year, to have asphalt comp positively for us through the first quarter-and-a-half of next year. Since we didn't see a lot of benefit through the first quarter-and-a-half, we would expect to carry these asphalt costs through into next year and hopefully be able to take some of that benefit through to the bottom line, in terms of continued margin improvement.

And then we've seen some additional weakness in oil prices for a period of time, where oil kind of dipped down into the $40s. Oil has kind of picked up again. And if you look at the futures, I'm not sure that there is a huge spread today between the oil that's probably in our numbers for the second half of 2015, versus the outlook for what oil prices would be in 2016. If anything, it's biased toward the benefit side.

If you look at oil futures,, that those came to pass, we would probably see some additional benefit in 2016, as those oil prices came through relative to what we paid for asphalt in 2015.

Got it. Appreciate the color. And then just second question on capital allocation. Is there any way to comment on the outlook for CapEx in 2016?

I understand it may be a little early in the planning process. So if not, maybe you can just detail what are some of the key areas and opportunities requiring some investment for next year? Thanks a lot.

Thanks. We've said that reinvestments in the business we feel like we ought to be able to invest in our business at about 100% of depreciation and in some years, 90% of depreciation.

And keep our assets well maintained, safe, and get incremental capacity expansions and productivity associated with capital projects in the continuous process type manufacturing environment. Capital projects tend to bring with them benefits around throughputs and benefits around productivity so it's all pretty integrated. We don't have separate maintenance budgets and productivity budgets. Our maintenance budgets tend to be productivity budgets and vice versa. I think that's pretty reasonable going into next year.

As we look at the footprint of our business, we've come through a pretty strong capital spending cycle here in composites. We have some rebuilds that we'll do next year. And then I think we start to get into a little bit of a benefit beyond 2016 related to rebuilds. We'll detail that a little bit more at our investor day coming up here in November.

We have announced obviously a couple big capital projects. We should be largely complete with the capital spending associated with Gastonia by the end of this year, which is a non-wovens facility. We'll be in the bulk of the capital spending for our Joplin, Missouri mineral-fiber facility next year. So that would be something that would come in above depreciation. We have a couple capacity expansion projects that look interesting to us.

But I would say that we have been at the high $300 millions the last two or three years, which has been both the maintenance and productivity capital, as well as the expansion projects. And we haven't announced anything that would cause you to believe we're going to be above that level.

This is Thierry. I think we have time for one more round of questions.

Certainly. The next question will come from Mike Wood from Macquarie Securities Group. Please go ahead.

Hi, thanks. I love the Pink Panther music before the call started, by the way.

(Laughter)

Thanks, Mike.

You answered a lot of the short term questions I had, so I was just wondering if we could switch to some longer-term thoughts. I'm curious what your view is. This year, you've had the asphalt deflation that you called out. But the price decline more than offset that asphalt deflation.

Curious what your thinking is longer term on price costs in the roofing industry? Sort of what it would take to turn that positive, going forward?

Well, I think in the near term, the most constructive way for us to see some margin expansion in the roofing business would be for us to have additional asphalt cost deflation and be able to capture that asphalt cost deflation in our P&L. I think what we've been able to demonstrate this year in our business is we've been able to do that, and I think that's also been an environment that's been constructive for our customers. If you understand distribution-related businesses, typically, deflating costs hurt the value of your inventories and compress margins. I think the roofing distribution market today is very competitive.

Additional deflation of roofing prices would, if anything, in our view, likely put downward pressure on our customers' prices, which would not be good for their businesses. So a stable price environment from the manufacturer is where we can get -- where we can get to our margin goal and support stable pricing to our customers seems to be a winning formula.

Now, obviously, the best equation generally in distribution-related businesses is rising prices, because that revalues their inventories and allows them to expand margins. We saw some progress this year in the April-May time frame associated with a May price increase, where we did get some positive price realization. I think that was good for us, and I think that was good for our customers. I think that's a bit of a challenging thing to guide to or to expect in the deflationary environment.

So our goal would be to try to manage into next year with flat prices sequentially and a little bit more deflation. Since we won't be comping off of a high-priced year like we were in the first half of 2014, our price comparisons would be a little bit better next year and as a result, maybe our margins would expand out a bit more.

Great. As a follow-up, around this time last year you commented on your expectation for the winter discount. Do you have thoughts as to whether or not you'll attempt to lead a low or no winter discount this year?

Our view on winter discounting, which I don't think has changed much over the last three or four years, is that it's not constructive for Owens Corning. We don't necessarily believe it's constructive for our customers. As it got bigger and more widespread, I think it created price confusion in the marketplace at the distribution level. It created piles of low-cost inventories that had to be worked off through the year. And we certainly heard feedback from our customers that that was a difficult environment for them.

Also, the history of winter discounting, that used to be a good idea when the market was much more Northern and winter-based. If you look at where the United States has houses today and population, the market is not quite as seasonal. So the need for manufacturers to find a way to keep their plants busy in the winter has kind of gone away over the last decade, and it also used to be that asphalt prices were a lot more seasonal. Asphalt prices were very high in the summer and they used to be very, very cheap in the winter. With cokers and with the changes in refinery economics, we don't see that either.

It's kind of a time-worn idea in our view that you should try to somehow produce a bunch of shingles in the winter and ship them out and have them in the marketplace as big inventory piles. Our economics don't support it. And I don't think our customers' economics benefit from it. So our view would be, we would like to see a repeat of our strategy in 2015, which is we would go into next year and sell our customers the product they need in the first quarter of the year, and then track their business through the year.

I will say again what I've said on every call, though. It's a competitive market, and to the extent we see competitive pricing that doesn't allow us to achieve our margin goals, we're going to go where we need to go on competitive pricing to maintain that we defend our market share.

Ladies and gentlemen, this will conclude our question and answer session. I will now turn the conference back over to Mr. Thierry Denis.

Very good. Thank you, everyone, for joining us for today's call. With that, I'll turn it back over to Mike Thaman for a few closing remarks.

Thank you, Thierry.

As I noted at the outset of today's call, Owens Corning had a very, very strong quarter. Not only did we deliver all-time best EBIT performance, which is something we're really proud of, but we also had very, very good cash performance and that's a performance that will continue through the remainder of this year and I think into the coming years.

We've made great progress in getting the profitability and return on capital of all three of our businesses, in some cases to exceptional levels and in some cases to acceptable levels, but in all cases, great progress. I think Michael noted we've been really pleased with the pace of progress in our composites business. That business has continued to perform at high levels, above our expectations and continued to move its agenda forward at a very quick rate.

The highlights of the quarter for us were insulation putting up a 17th consecutive quarter of EBIT growth, composites with a 9th consecutive quarter, and roofing, on a year-to-date basis, is now ahead of last year. It was a bit daunting earlier in the year, when at the end of the first quarter we were $60 million behind last year. We made a good dent in catching that up in the second quarter. We've now caught fully up in the third quarter and have given guidance on today's call that we expect roofing to be at or above last year's performance on an EBIT basis and probably a tick ahead of last year's performance on a margin basis.

And given that outlook and given our performance year to date, we've upgraded our overall corporate guidance a bit. We were previously at a $460 million to $500 million range. We've said today we now expect we'll be at or above the high end of that range.

So lot of things lining up well for the Company in 2015. And I think for me, probably the most positive is all of those are things that we believe carry us into 2016 with expectations of continued performance improvement in each of our businesses. I said in my prepared remarks that we do believe with the right macros and momentum in our external markets, that 2016 could mark the year where all three of our businesses produce double-digit EBIT margins.

Any of you who have been around me in investor meetings or at other times know that over the last four or five years, that's something I've talked about as a destination for our Company. I think that destination is maybe coming into view and we're getting closer to that as something that will become a reality for us.

We will talk more about that at our investor day on November 18 and go into our businesses in more detail at that time. We hope many of you are able to join us in person. We will be putting out the webcast details and communication details associated with that probably early in November, and I think we'll have very good information on our businesses that helps support our strong outlook for the remainder of this year, as well as our outlook for 2016 and beyond.

Thanks for joining the call, and we appreciate your interest in our Company.

The conference has now concluded.

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