Owens Corning (OC) 2015 Q4 法說會逐字稿

Good morning, and welcome to the Owens Corning Q4 and full-year 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. Please go ahead.

Thank you, Kate, and 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 fourth quarter and full-year 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-K that detailed our financial results for the fourth quarter and full year. For the purposes of our discussion today, we have prepared presentation slides that summarize our performance and results for the fourth-quarter and full-year 2015, and we will refer to these slides during this call.

You can access the earnings press release, Form 10-K and the presentation slides at our website at OwensCorning.com. Refer to the investors link under the Corporate section of our home page. The 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 and certainties 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 and in the appendix of this presentation 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 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 in arriving at adjusted earnings and adjusted earnings per share. For the full-year, our adjusted effective tax rate was 33%. We also used free cash flow and free cash flow conversion of adjusted earnings as measures helpful to investors to evaluate the Company's ability to use cash to pursue opportunities that enhance shareholder value.

For those of you following along with our slide presentation, we will begin on slide 4. And now, opening remarks from our 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 fourth quarter and full-year 2015 results. Fourth quarter revenue was $1.3 billion, compared with $1.26 billion, one year ago. Adjusted EBIT for the quarter was $136 million, up from $107 million in 2014. Adjusted earnings for the quarter was $79 million, up from $55 million in the prior year.

For full-year 2015, Owens Corning consolidated revenue was $5.4 billion, up slightly from $5.3 billion the prior year. Full-year adjusted EBIT was $550 million, up significantly from $412 million in 2014. Full-year adjusted earnings were up 46%, with $304 million in 2015, up from $208 million in the prior year. Owens Corning also generated nearly $350 million of free cash flow and exceeded 110% conversion of adjusted earnings.

Owens Corning delivered an outstanding year. The Company is at its best when all of its businesses make meaningful contributions to our financial results. All three businesses posted significant earnings growth for the year and the Company achieved record earnings growth.

Now, as I do every quarter, I'll review our performance as it relates to the expectations we set for the year. As is the case each year, we said that we would continue to make progress toward our goal of creating an injury-free workplace.

Owens Corning continued to maintain a very high level of safety performance in 2015, with 7% fewer injuries than 2014. The Company had 85% fewer injuries than the average manufacturing company as measured against the rates published by the US Department of Labor. We remain focused on our goal of zero injuries.

In Insulation, we said the business should continue to benefit from growth in US residential new construction, improved pricing and operating leverage. During the third quarter call, we said we expected revenue growth of about 10% in the second half of the year, with full-year operating leverage of approximately 40%.

Insulation delivered its 18th consecutive quarter of EBIT improvement. For the quarter, the business produced $70 million of EBIT and grew margins to 14%. We delivered better than expected operating leverage in the fourth quarter on improved productivity and earnings grew by nearly 50% in 2015. Revenue growth in the second half was slightly below our expectations.

In Composites, we updated our 2015 outlook on our third quarter call and said that we expected an $80 million EBIT improvement over 2014, which included the negative impact of a stronger US dollar. In the fourth quarter, the Composites business delivered $44 million of EBIT. Full-year earnings grew by 56% and the business delivered an $83 million EBIT improvement over 2014, with 12% full-year EBIT margins.

Strong commercial and operational execution combined with the strategy of low-cost manufacturing has proven successful. The business delivered outstanding results despite currency headwinds of more than $180 million of revenue impact and $24 million of EBIT impact.

In Roofing, we said that we expected full-year US shingle industry shipments to be in line with 2014, and the full-year benefit from asphalt deflation to be around $60 million. We also said that the business was positioned to meet or exceed last year's EBIT performance. Roofing delivered $34 million EBIT improvement, with mid-teen operating margins in 2015. Pricing was stable through the fourth quarter, although it remains below the prior year's level.

Full-year asphalt deflation was about $70 million, with $24 million in the fourth quarter. The strong fourth quarter resulted in full-year industry shipment growth of about 5%, which was above our prior expectation of a flat market for 2015. We had strong market base execution on shingles and component sales in terms of both growth and profitability. We're pleased with the developments in 2015 that have helped us prepare margins and position the Roofing business for continued success.

In addition to these business results, I want to review other significant accomplishments and milestones that position us well for the future. Based on the strength exhibited across our portfolio and confidence in our market outlook, our Board of Directors declared a quarterly dividend of $0.18 per share, representing a 6% increase. Since the dividend was initiated two years ago, we've increased the payout by approximately 13%.

Construction is underway on the $90 million mineral fiber insulation plant in Joplin, Missouri. We expect this capacity to be available in 2017, and help us meet the needs of our customers in a growing market. Our new non-wovens composites plant in Gastonia, North Carolina is now in the startup phase. The facility will support the growing US construction market with technology capable of meeting the evolving needs of our customers.

We're also excited to begin 2016 having announced an agreement to acquire Ahlstrom's non-wovens and fabrics business, reflecting Owens Corning's commitment to capital efficient growth in our Composites business. The acquisition, which is subject to regulatory approval, will provide new revenue, technology, talent and access to markets.

With that, let me now turn to 2016. In Insulation, we expect revenue growth will be slightly weaker than the growth experienced in 2015. While we do expect margin expansion, the magnitude of the improvement could fall below that experienced in 2015 and is dependent upon the progression of pricing and volume in the US residential new construction market.

In Composites, we expect continued growth in the glass fiber market, driven by moderate global industrial production growth. Following very strong earnings growth in 2015, we expect the business to improve either by at least $20 million in 2016, on price and volume growth. This would represent an EBIT improvement of more than $100 million over two years.

In Roofing, we anticipate modest market growth, primarily driven by growth in new construction markets. We hope to see a replay of 2015, with a balanced distribution of shipments that track end market activity.

We expect to see additional asphalt deflation in 2016, and are focused on realizing a portion of the deflation in improved margins. We anticipate earnings growth in all three businesses in 2016 and expect to provide EBIT guidance later in the year.

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 open the call up to questions. Michael?

Thank you, Mike, and good morning, everyone. As Mike mentioned earlier, Owens Corning delivered an outstanding year, achieving record earnings growth driven by strong commercial and operational execution in all three of our businesses. I'm also pleased to report that we made significant progress in free cash flow this year, as a result of improved earnings and strong working capital performance.

Now, let's start on slide 5, which summarizes our key financial data for the fourth quarter. You'll find more detailed financial information in the tables of today's news release and the Form 10-K. Today, we reported fourth quarter 2015 net sales of $1.3 billion, up 3% as compared to sales reported for the same period in 2014.

Net sales in our Insulation business increased 6%, primarily on increased sales volumes. In our Composites business, higher sales volumes and higher selling prices were offset by roughly $42 million in foreign currency translation. In our Roofing business, net sales were up 8%, primarily on higher sales volumes.

Adjusted EBIT for the fourth quarter of 2015, was $136 million, up $29 million compared to $107 million in 2014. Adjusted earnings for the fourth quarter of 2015, were $79 million, or $0.66 per diluted share compared to $55 million, or $0.47 per diluted share in 2014. For the full-year, the Company delivered double-digit operating margins.

Our 2015 effective tax rate was 33%, in line with our previous guidance. Depreciation and amortization expense for the quarter was $76 million, relatively flat compared to the $75 million in the fourth quarter of 2014. Full-year depreciation and amortization expense was $300 million, and capital additions for the year were $403 million, excluding alloy.

In 2015, the Company improved cash from operations by almost $300 million, as a result of improved earnings, better working capital performance and our advantaged tax position. We achieved free cash flow conversion of adjusted net earnings of 112% and returned $212 million to shareholders through dividends and buybacks.

Now, please turn to slide 7, we provide a high-level review of our adjusted EBIT performance comparing 2015 to 2014. Adjusted EBIT for the year, increased $138 million, or 33% over last year, led by significant improvements in our Composites, Insulation, and Roofing businesses of 56%, 48%, and 15% respectively. General corporate expenses were $108 million, in line with expectations.

With that review of key financial highlights, I ask you to turn to slide 8, where we provide a more detailed review of our business results, beginning with our Insulation business. Sales in Insulation for the quarter of $518 million, were up 6% from the same period a year ago. Revenue growth in the second half was slightly below expectations, as industry shipments were weaker than anticipated, primarily due to an elongated construction cycle and higher than anticipated currency headwinds.

Insulation delivered EBIT of $70 million in the fourth quarter, compared to $46 million in the same period one year ago, primarily on improved volume and pricing. This represents 14% operating margins and our 18th consecutive quarter of EBIT improvement. Operating leverage exceeded expectations in the quarter on strong manufacturing productivity.

For the full-year, Insulation sales were $1.85 billion, up about $100 million as compared to 2014, primarily on increased volume, higher selling prices and favorable mix. EBIT for the full-year of $160 million, was nearly 50% higher than previous year EBIT of $108 million, primarily on improved volume and pricing.

Pricing improved by $24 million in 2015, however, it remains well below the market peak. While we have made some progress in price in 2016, we either expected a better price environment at the outset of the year and more progress during the year.

Consensus expectations for US housing starts are above 1.2 million units for 2016. Therefore, we anticipate a market growth rate for US residential new construction similar to last year. We expect another year of earnings growth, as our business should continue to benefit from growth in new construction, increased capacity utilization and improved pricing.

As we said in the earnings release, we expect our revenue growth in 2016, will be slightly weaker than the $100 million of revenue growth we experienced in 2015. While we expect margin expansion, the magnitude of the improvement could fall below the 240 basis point improvement we experienced in 2015, and it is dependent upon the progression of pricing and volume in the US residential new construction market.

Now, let me provide some additional color. First, our revenue will be impacted by third-party contract manufacturing arrangements that we did not extend by mutual agreement at the end of 2015. Second, our margins will be impacted by lower production leverage related to the expiration of these contracts and startup costs associated with our mineral fiber insulation facility in Joplin, Missouri. Third, the magnitude of our earnings improvement for 2016 will be dependent upon competitive dynamics and commercial outcomes related to the US residential new construction market.

As I said earlier in my prepared remarks, price remains well below the prior peak, even on a nominal basis. We believe there is further opportunity as this product is fundamentally useful and undoubtedly valuable. As a reminder, our profitable portfolio of products and geographic diversity extends beyond US residential new construction and we are confident that these businesses will grow earnings in 2016.

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 fourth quarter, were $445 million, down approximately 3% from the same period one-year ago. Volume growth of 5% and improved selling prices were offset by currency headwinds of $42 million.

EBIT for the quarter was $44 million, down compared to $53 million in the same period last year, as expected. Composites continued to deliver double-digit EBIT margins in the fourth quarter on improved pricing and stronger volume.

Full-year sales were $1.9 billion, slightly down compared to the same period in 2014. On a constant currency basis, revenues would have been -- revenues would have grown over 8%. Volume growth of 4%, favorable product mix and improved selling prices were offset by currency headwinds of $182 million.

EBIT for the full-year, was $232 million, an improvement of $83 million, or 56% over the prior year, on strong commercial and operational execution. Composites delivered 12% full-year EBIT margins.

In 2016, we expect continued growth in the Composites market, driven by moderate global industrial production growth. 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. Strong commercial and operational execution combined with a low cost manufacturing network in a tightening capacity environment, positioned the business to continue the momentum we have established.

The financial results we have delivered are roughly one-year ahead of schedule. As a result, we expect an EBIT improvement of at least $20 million in 2016, which would result in $100 million of improvement over the two-year period 2015 and 2016.

One further item to note, in the fourth quarter, we discovered an immaterial error in the elimination of revenue between Composites facilities that impacted 2014 and 2015 revenue. The error did not impact gross margin or EBIT. We have corrected the amounts for the affected years in our 10-K and provided revised segment information by quarter in Table 8 of our earnings press release.

Slide 10, provides an overview of our Roofing business. Roofing sales for the quarter were $368 million, an 8% increase compared to same period a year ago, primarily in higher sales volume. EBIT for the quarter was $53 million, up $21 million compared to the same period in 2014, with margins of 14% on volume growth and asphalt deflation of $24 million.

Pricing was sequentially stable through the fourth quarter, but remains lower than last year's level. Our US asphalt shingle volumes grew about 30%, which was broadly in line with the market. The strong fourth quarter resulted in full-year industry shipment growth of about 5%, which was above our prior expectation of a flat market for 2015. We believe that the favorable weather conditions extended the roofing season and drove some of the growth in the fourth quarter.

Sales for the full-year were $1.8 billion, a 1% increase over the prior year, primarily on higher sales volumes. Full-year EBIT increased $34 million. The business delivered mid-teen operating margins for the full-year, on volume growth and asphalt deflation of about $70 million.

I'm pleased to report that we made substantial progress in growing our Components business in 2015. The Components business delivered record sales and EBIT for the year, and its EBIT growth represented about half of the Roofing segment's overall improvement for the year.

We are pleased with the performance in our Roofing business. 2015 played out generally as we had hoped. We saw limited discounting and less inventory build earlier in the year, we experienced improved volumes and stable pricing in the second, third, and fourth quarters and asphalt deflation tracked broadly in line with expectations. Also, the market grew for the first time in four years.

We anticipate modest market growth in 2016, driven primarily by growth in new construction and possibly some growth in reroof. In 2016, we hope to see a similar distribution of shipments as in 2015, and the same constructive market dynamics as we experienced last year. We continue to see asphalt deflation as a way to improve our margins, although we expect our end markets to remain competitive.

Now, let me turn your attention to slide 11, which provides an overview of other significant financial matters and our outlook for 2016. On January 21, 2016, the Company signed an agreement to acquire the non-wovens and fabrics business of Ahlstrom, subject to regulatory approval. This is a highly complimentary acquisition that will provide new revenue, technology, talent and access to markets.

This transaction will further extend our position in glass non-wovens and it is consistent with a capital efficient growth strategy of the Composites business. The assets to the acquired include operations in Finland and Russia. The EUR73 million purchase price represents a little less than one-times annual revenue. This transaction is expected to close in the second quarter of 2016.

The Company's Board of Directors declared a cash dividend of $0.18 per share, a 6% increase based on the Company's positive financial outlook and strong cash generation. In the fourth quarter, under a previously announced share repurchase program, we repurchased about 1 million shares of the Company's stock for $46 million. For the year-to-date, we repurchased about 3.1 million shares of the Company stock for $134 million.

As of December 31, 4.6 million shares remain available for repurchase under the Company's current authorization. As we balance our priorities for the future deployment of our free cash flow, both dividends and stock repurchases will be important mechanisms to return capital to shareholders.

Now, please turn to slide 12, where I provide our outlook for 2016. We expect all three businesses to grow earnings in 2016. Consensus expectations for US housing starts are above 1.2 million units and moderate global industrial production growth is projected.

As we discussed at Investor Day, improved earnings, better working capital performance and our advantaged tax position will translate into a high rate of conversion of adjusted earnings into free cash flow, averaging about 100% over the years 2015 to 2018. As we did in 2015, we will provide corporate EBIT guidance later in the year.

Now, please turn to slide 13, where I provided guidance on other financial items for the year. We expect corporate expenses between $120 million and $130 million. Capital additions will be about $385 million, including approximately $50 million of spending associated with our mineral fiber insulation facility in Joplin, Missouri. Depreciation and amortization expense is expected to be about $320 million. Interest expense is expected to be about $110 million.

Our $2 billion US tax NOL will significantly offset cash taxes for sometime to come. As a result of our tax NOL and other tax planning initiatives, we expect our 2016 cash tax rate to be 10% to 12% of adjusted pretax earnings. Our 2016 effective tax rate is expected to be approximately 32% to 34% of adjusted pretax earnings.

Thank you, and I'll now hand the call back to Mike.

Thank you, Michael. As I noted at the outset of today's call, Owens Corning achieved record earnings growth, driven by strong commercial and operational execution in each of our three businesses. Insulation, Composites, and Roofing all showed strong year-on-year improvement in 2015, and contributed materially to our performance.

We're confident as we enter 2016. With all three businesses performing well, continued growth in US housing and global industrial production growth, we will see another strong year for Owens Corning.

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

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

(Operator Instructions)

The first question comes from Stephen Kim of Barclays. Please go ahead.

Well, thanks very much, guys. Congratulations. Great result.

Thank you, Stephen.

If we -- lots of questions we could ask. But let's just start with Roofing. One of the things we've heard from people, there's been a little bit of confusion because you don't actually give an actual blended price or anything like that. But your performance in pricing, shingle pricing, appears like it was pretty much in line with our expectations, flat sequentially, but down 5% to 6%, just by way of the fact that Q4 2014, had a more elevated price level.

By our math, though, by the time you get into Q1, the decline in pricing or the headwind from pricing year-over-year should drop into the very low single-digits and really not be that much of an effect. So your comment about having pricing, or I guess, having raw material benefit flow into your margins, would seem to suggest, would seem to dovetail pretty well with what we're looking for.

But I didn't hear you give an actual number for raw mats. So I guess maybe if you could help us? If the asphalt and oil prices remain where they are now, what would your expectation be ballpark for the benefit that you would get on raw mat from the lower asphalt costs?

Sure. Thanks, Stephen. I think we weighed out some pretty useful information for our investors at our Investor Day back in November, and went through some of the relationships that we see between oil and asphalt costs and then also, how long it takes oil costs to come through our economics, about 90 days to get through the refinery, about 90 days to get through our cost of goods. As a result of that, I think we said a number of times last year, we didn't really see much deflation in 2015, until really the middle of the second quarter.

So we have one benefit in 2016, which was we would expect to see really pretty good comps in the first quarter and half of the year on asphalt cost inflation, as we carry what was effectively the big drop from $100 a barrel to the $50 to $60 a barrel. We haven't seen that yet in the first part of the 2015 numbers. We would expect to see that in the first part of the 2016 numbers.

We then have a second effect, which we saw in the second half of 2015, where oil then moved further down off of the $50 to $60 range into where we see it now. Those effects would start to probably come through our numbers a little later in the first half of the year, as they work their way through. So I think it's reasonable to conclude that we're looking at asphalt deflation that could be sizable and not dissimilar to what we saw last year.

I think it's hard to quantify that, given the amount of volatility we've seen in oil that the second half of the year is still yet to be seen in terms of what we would buy now and when it would come through our economics. But we're pretty optimistic that on the cost side, we should have a good profile in roofing and then the real issue is obviously going to be in terms of price and volume, how much of that comes through in terms of our volumes and how much of that we can get to margin, in terms of margin appreciation.

Got it. Certainly that would suggest if you did what you did last year, raw material benefit, it actually sounds like it could be better than that and your price headwind is only a couple percent, sounds like it would be very good for your margins. If -- there are a lot of things we could ask about, but let's talk about the Composites business. We know that you have -- I think it's about half of your business there is on fixed contracts. Most of those, I would think, are -- well, they are, at this point I guess locked in for much of the first three-quarters of the year of 2016.

And you've given guidance for 20% -- sorry, $20 million EBIT or better improvement in 2016. This is the segment that people have a lot of concerns about given the Chinese export threat. So I guess the real question that I have for you is how much of your $20 million improved guidance for the Composites segment is largely a function of the pricing dynamic that you have very high confidence in giving what you've already contracted for? And what kind of assumptions are you making about an evolution of a potential export threat from China?

Thanks, Stephen. It's Michael. How are you?

So, a couple things. You're right. There's about 50% of our volumes that are up for annual negotiation. Those negotiations take place in the fourth quarter and broadly conclude in the first quarter.

As you would have seen in our press release and also in my prepared remarks and Mike's prepared remarks, is that we expect at least $20 million of improvement primarily coming from both growth in pricing and growth in volumes. I can tell you that we're largely through our negotiations that take place on an annual basis and we made good progress. So in line with our expectation.

The next question is from Mike Wood of Macquarie. Please go ahead.

Hi, good morning. Just to follow up on that asphalt deflation. In your prepared remarks, you had mentioned that you'll benefit from a portion of the asphalt deflation. Just wondering in your mind what determines how much of the asphalt benefit you'll be able to hold in terms of pricing or potentially have to give back?

Well, you know, it's -- I think we've said this over and over again as we worked our way through the Roofing business over the last three or four years. It's a very competitive market, and we see regional dimensions, product line dimensions, channel dimensions to the competition. So the nature of the Roofing business is very much a day to day transaction by transaction type pricing environment.

It has been relatively stable over the course of the last year. We think that's a positive for us as a manufacturer. We also think it's probably a positive to most of our channel partners as they have better visibility to their cost of goods, better visibility to their inventory costs, which allows them to distribute or retail the product at good margins.

So we think the way the market played out in 2015, with relatively stable pricing through the year, and with us being able to get a little bit of margin improvement from asphalt cost deflation, was a very good outcome for us in 2015, and got margins back to that mid-teens level, which is where we've historically guided the business. As a matter of fact, we've guided the business kind of to mid-teens or better operating margin.

I think our hope as we look at 2016, would be that we continued to have a good demand environment and we were happy with the way the year finished that really the entire Roofing shipments and Roofing market ran through the finish line and didn't die off in the fourth quarter, but had a good finish to the year. We've seen a relatively good start to this year. So we're expecting that demand and sell-through out there is reasonably good and there's good roofing activity, which typically supports a little bit more stable pricing. And as a result, if that's the environment we're in, it would look a lot like 2015 and then the asphalt cost deflation would help us a bit more in getting our margins back to something that would be above mid-teens.

Great. And the Composite volumes, that growth has really been holding in. I would hope if you can give us some color on what segments are leading that growth? Potentially what end markets are offsetting any of the strong growth that you're seeing?

Yes, thanks. So I would say all regions, all regions are seeing growth. And so, for the full-year, we put up about 4% of volume growth. Really nice progress that we saw in Europe for 2015. Application weakness, one application weakness would be oil and gas, which we experienced in 2015. We'll probably see a bit of weakness in oil and gas for this year as well.

China volumes last year were up. China volumes were up also in the fourth quarter, along with profitability. The Russian economy and the Brazilian economy are pretty difficult, but we have a unique position there and a unique cost position and have actually done quite well from a profitability and commercial point of view as well. I would say we're cautious, but things are progressing pretty well, even as we get off to the start here in 2016.

The next question comes from Kathryn Thompson of Thompson Research Group. Please go ahead.

Hi, thanks for taking my questions today. First, on the Composite position, how much would the Ahlstrom acquisition contribute to your 2016 segment earnings? And if you could give a little bit more color on the potential contribution and answering why now in terms of their willingness to sell? Thank you.

Yes, Kathryn, so I'll take the first part of the question. Then I'll let Mike come in and ask the why now, or answer the why now.

So again, so the acquisition itself is about EUR73 million. A little less than one-time sales. We expect to get the deal closed in the second quarter, so it's still subject to regulatory approval.

From a current year perspective, I think it's not going to be really anything to talk about from an accretive point of view. But as we move into 2017 and get the full-year effect and really start to bring down synergies, it's going to be a nice deal.

And just some comments about why now, I think your question was probably more from the Ahlstrom perspective on why now than from our perspective.

Right.

I think if you look at what Ahlstrom's had to say, I think they are refocusing their business and as a result, decided they didn't want to be in the fiberglass composites business. We obviously, this being a core business of ours and something where we're the market leader, feel like people who want to exit this business, we are the logical home for these assets.

So it was a wonderful opportunity for us to extend our European business to the East and to the North. Our non-wovens business and fabrics business is primarily in Western Europe. This puts us into Finland. It puts us into Russia. It puts us into some new end use markets.

It was a very good fit with our footprint, as well as our expansion of our non-wovens business with the Gastonia investment. So it was really a logical next step for us in terms of building out and strengthening our downstream businesses or our value-added businesses. And I think there was a good meeting of the minds between us and Ahlstrom that now is a good time to do this.

Great. On Insulation, could you give more color on the driver for the decision to discontinue third-party contracts? And how much did pricing or other factors take into that decision? Thank you.

Yes. Thanks for that question. We have from time to time manufactured product for third-parties under other brand names. That's a business that kind of built up over the course of the last three or four years.

When an industry's going through a very challenged time, it's a pretty logical effort to try to optimize your business. That you would try to use some contract manufacturing to maybe load assets that were underutilized and we were the beneficiary of some business in that regard. I think if you look at some of the things we showed at our Investor Day, we think we're in our business in that transition point now on going from looking for the volumes that will load our assets to trying to figure out how we meet growth in the new construction market that should load our assets and potentially produce better margins for us.

So there was going to come a point in time where it made more sense for us to have our capacity available to us in order to support the growth of our customers. We worked our way through some of these agreements at the end of last year and concluded it was in the best interest of our shareholders of our business for us to take that capacity back and make it available to support our own growth.

To give you an order of magnitude, we described a line in the industry as being about 100 million pounds. We had about one line of capacity spread throughout our network that was subject to contract manufacturing. We also said in the last Investor Day that 100,000 units of growth in new starts produces between 150 million and 200 million pounds of end use demand.

So if you work your way through that math, 100,000 units of growth or a little bit more, which is consensus, at our market share levels, would require us to need about a line of available capacity in any given year to support our portion of the growth. So we're looking downstream in terms of 2016, 2017, 2018, and saying how do we want to position our assets and now seems like a good time to do that.

Obviously, the challenge for us is we've been growing the business at about $100 million a year the last three years. I think we gave a little bit more cautious outlook related to contract manufacturing today saying, we expect overall revenue growth this year will be a little bit below what the three-year trend was, but I think get us back on trend as we see new construction growth beyond 2016.

The next question is from Ken Zener of KeyBanc. Please go ahead.

Hello, gentlemen.

Good morning, Ken.

Just sticking with the Insulation, could you comment on -- you talked about perhaps a little lower pricing, which would seem to go to perhaps lower than that 50% leverage, that long-term target. Could you break that -- the pricing, discuss what's happening there? How that relates to perhaps lower new construction than people had initially expected a year ago and/or how much of that price? I would think by not doing third-party contracts, you would actually have a richer margin there rather than it -- obviously, it sounds like you lost some volume leverage there. But could you go into the pricing in the EBIT leverage a little bit more? Thank you.

Sure. Happy to do that. Let me just backtrack for a second and talk just about operating leverage broadly. We've said this on other calls, but there's been three phases to operating leverage. The real depths of the downturn, we had hot assets that were underutilized and basically our marginal costs to production was relatively close to zero.

So any time you saw any growth at all and you could load hot assets, you could get the marginal contribution against really, really good marginal economics. And we were able to get some early operating leverage by doing that, even though the margins in the business were pretty lousy.

As we got into the mid-stage, we started to get back to some level of profitability at the variable cost level and then at the fixed cost absorption level. So you could get some growth that both gave you some cost absorption, actually the growth could contribute some amount of earnings. And then we started to see some pricing that also helped us sustain 50% operating leverage over the last couple years.

We're now entering a stage where our assets are a bit better utilized. The business at the manufacturing level and US new construction is profitable at the manufacturing level. So growth produces some amount of earnings from volume growth. But really, we're at the stage now where to stay on track with our operating leverage guidance, we're going to need to see some acceleration of price.

If you look at 2015, we didn't really see an acceleration of price. We had decent price performance in the first part of the year, but in the middle of the year, where in prior years we had had some decent success on pricing, we did not have as much success in 2015. As a result, we're carrying a bit less price into 2016. We do have a price action in the market today that we've talked about previously on a prior earnings call.

I think we feel pretty good about our ability to realize price in the early part of this year, but obviously given with what happened last year, how price progresses through 2016, how volume progresses through 2016, is going to have a big impact on the rate of improvement in the business on our outlook. So with a little bit weaker top line because of the contract manufacturing a little bit of loss of leverage, what we're guiding to today, would suggest we're going to need to see some acceleration of pricing to really be able to get strong operating leverage in 2016.

We did over deliver our operating leverage a bit in 2015. We had guided to 40% and we came in at 50%. I think over the last four or five years we're at about 53% overall leverage. So I don't think on a multi-year basis, we're at all off-track on where we would have said operating leverage will be. But a little bit of question I think this year, in terms of whether we'll track exactly to that guidance.

Thank you. I do appreciate that clarity. Looking at Composites, with Ahlstrom selling its assets, the success of your Brazil assets despite a very difficult end market, points to the fact that you guys operate well outside your country as opposed to some of your foreign competitors, I would say. With Ahlstrom selling, with your ability to execute better in Brazil and probably in some other markets where people are producing let's say from Chinese assets, what is that really saying?

If we could take a step back about how the overall composite market is consolidating and/or the Chinese inability to really execute very efficiently outside of their home country. I mean, what does that broadly mean? With pricing and volume being very good, your margins indicate that's very good, it seems like we're approaching a point where if there's some new capacity, is there going to be something irrational?

I know there's stuff you talked about with North Carolina, with the Chinese, but it seems that's very well structured industry right now and in fact, it's moving in your favor due to what we're seeing out there. Is there anything that would really concern you if capacity additions were to come on or volume or specifically, the Chinese currency were to devalue? Thank you.

Ken, this is Mike. I think what we've seen over the last couple years is a validation of our strategy, which has been very much of an in country, for country manufacturing strategy. So we never believed when we saw the huge buildup of capacity in China during the 2000s, that there was enough factory cost advantage or relative cost advantage of manufacturing all the world's glass in China and shipping it all over the world.

We obviously got well ahead of ourselves in terms of industry supply, that there was a glut of capacity in China in 2009, and we needed to see industry growth both in China and outside of China, to get back to some level of reasonable balance. Through that period of time, we invested in China to meet the demand that we saw in China. We invested in Russia to meet the demand we saw in Russia.

We continued to invest in Brazil and India to meet the demand we see in those countries. We've been low-cost in Europe and the US. And we think we're returning back to an industry that looks more similar to what we would have seen in the 1980s and the 1990s than what we saw in the 2000s, which is generally glass manufactured and consumed in a regional economy is the best match.

So when you look at where we are today, even in Brazil and Russia, those are tough economies right now. But to Michael's point, we are the largest scale manufacturer in each of those two economies. They were generally import economies. As the economy has weakened and the currency has weakened, it's been very difficult for import manufacturers to compete in those markets.

We have a nice cost position because our costs are denominated in a local currency. As a result, we're able to service the local market and if we have excess capacity, we're able to export.

We see the Ahlstrom deal pretty similar to that, so we're buying assets today in Finland and Russia. Obviously, we took a lot of thought into putting additional capital into Russia, but we have low-cost glass manufacturing in Russia, which will be the feed stock to the Ahlstrom asset that we intend to buy in Russia.

So we do believe we'll have a vertically integrated ruble-denominated asset in Russia. That will give us a good opportunity to serve the Russian market, which is quite big in non-wovens and also give us capacity that could potentially be exported. I would say the same thing about the assets outside of Russia.

Our overall strategic philosophy in global businesses has been in country, for country. I think you've seen over the last four or five years, not without some pain, that that strategy's the right strategy to fit the dynamics of the market we're in.

The next question comes from Al Kaschalk of Wedbush Securities. Please go ahead.

Good morning, guys.

Good morning, Al.

I just want to focus on the Roofing side, just a clarification. It sounded like the sell-through was stronger than expected and there was some explanation, or there was an explanation for some of the benefit for weather. But could you maybe just account for the volume difference by either an end market, whether that's R&R or whether that was storm-related activity?

Well, we do our own analysis which we publish of overall roofing volumes, where we break it down by new construction versus classical R&R versus storm-related demand, either major storms or where we think storm activity or weather has had a contribution to improvement in market conditions. We actually believe what we saw in terms of the growth in 2015, which was about 4% or 5% overall growth in shipments by all roofing manufacturers, including ourselves, is that the bulk of the growth probably came in the new construction segment where we saw housing starts up about 10%. And then in kind of the classic repair and remodel segment of people replacing roofs that have just aged out.

We took some confidence from the fact that business stayed strong through the fourth quarter. I think on the one hand you could say, well, we had favorable weather and the weather was mild and it extended the roofing season. I can tell you probably three of the last four years, this is my estimation.

The roofing season probably stopped just as much because there was no demand out there as it did stop for weather. So we had contractors that were being reported back to us, because they said very weak backlogs at year-end. Even if the weather had been favorable, they didn't have a lot of work to go get done. I think the fact that favorable weather caused more work to get done would suggest that on the other side of the contractor, there are more homeowners who are interested in improving their house.

We do think some of the work that got done in the fourth quarter at some point will come out of 2016. So we're off to a decent start in the first part of this year. Contractors were reporting reasonably good backlogs, but it's possible that as they work their way through the 2016 backlog, the fact they got ahead of the curve at the end of 2015 may suggest as we get to the second half of 2016, we won't see as much growth. But overall, we're looking for probably some growth in the overall market, which would suggest growth in new construction may be flat to a little bit down in that classic reroof market with a stable storm-related or weather-related market.

That's very helpful. Just on Insulation side, this is my read into your commentary, but I would appreciate some additional color on there. It would suggest that maybe there's a slower take-off or sell-in the market over the last couple of months, maybe since the Analyst Day. And then what does that imply in terms of on the volume and pricing side? Are you suggesting that your end market or the builders in particular, are taking a little bit more of a wait and see approach in terms of how the construction season develops, hence the caution on the outlook on that particular sector?

Obviously, our fourth quarter revenue performance in Insulation was probably a bit below the expectations we said either on our third quarter call or on Investor Day. I think that's primarily related to construction cycles maybe gapping out a little bit in the second half of last year. We model our business on the assumption that 90 days after a housing start is when you see insulation demand. And that's been through time, a pretty good relationship.

I think that relationship may be extended a bit in the second half of last year. We've heard that from other sectors of the building materials industry. We track labor growth and if you look at some of the trades, it would be important to insulation demand. You didn't see much labor growth in framing contracting in the second half of 2015, which would suggest maybe there's some bottlenecks out there in terms of framing, some bottlenecks in terms of getting insulation done.

I think the good news would be that suggests there's some demand that we would have expected to see in 2015 that's carried over into 2016. Said the other way, though, once those bottlenecks start to emerge, they can cause the cycle for construction to push out a little bit. So we gave our guidance for 2016 under the assumption that cycle is relatively stable, but maybe a bit elongated in terms of the demand that we would see.

Overall though, we're pretty bullish on housing. Obviously, it's hard in today's environment with as much financial market volatility as we've seen in the last four or five weeks, to make a near-term estimate of how that affects consumer confidence and the confidence of a homeowner to buy a house. But certainly the underlying indicators of traffic, homeowner intention to buy, affordability, some of the other things that drive housing have continued to improve and would suggest that we'll see another year of good housing performance this year.

The next question is from Keith Hughes of SunTrust. Please go ahead.

Thank you. Two questions. First, on the rebuild schedule for 2016, from a cost perspective, how is that going to change incrementally 2016 versus 2015? And then second question on currency, heard Composites a fair amount this year. As you look at currency rates where they are now, what will the impact be in 2016 as well?

Keith, it's Michael. Thanks for that. From a rebuild expense perspective, year-on-year, so 2015 versus 2016, broadly flat. And then from a currency perspective, a significant headwind obviously in 2015. It will be just a slight headwind in 2016.

Let me add one there. The one place we probably will see a bit of currency this year that we'll end up talking about as we go through the year, would be in our Insulation business. The Canadian dollar has gone very weak, as most of you know. We have a decent business in Canada.

So we didn't quite see that through all of 2015, and I think we're going to see a bit more of that in 2016. The euro dollar, which was the big theme for us in 2015, seems like it's primarily in the rear view mirror, but some of the Canadian dollar effects will still come through Insulation business in 2016.

Specifically for Composites, Keith, probably about $9 million, $10 million headwind this year.

Just like to sneak another one in on Composites, the rebuild. You've done a lot of rebuilds by the time we get to the end of 2016. Beyond that, will that ramp down substantially in subsequent years?

Yes. So it will begin to ramp down as we move into 2017.

The next question comes from Garik Shmois of Longbow Research. Please go ahead.

Hi, thank you. I'm just wondering if you could talk a little bit about mix in Composites and how you're viewing that in 2016? And then specifically, to some of the seasonal components, if I remember correctly, the beginning part of 2015 had some significant benefits from product mix that potentially could be a headwind in the first half. Just wondering if I remembered that correctly in how you're viewing mix and the evolution of mix against the comp as you look out over the next several quarters?

No. So that's a great question. So let me talk at a high level and then I'll come down and actually talk specifically to some of the specialty glass sales that we had in 2015.

At a high level, our assets are generally running at a high utilization and that's across regions, but also across product lines. And so we're seeing some tightness. So therefore, our commercial teams are focusing on a business that tend to be higher price and therefore, higher margin products. We also have had a pretty successful pricing and margin enhancement effort that's been underway for the last couple of years, really getting our commercial teams to be better at selling in higher margin products.

And then if you remember from Investor Day, one of the key themes that we brought forward was our focus on new product introductions and those new product introductions tend to carry higher margins than the products that they are replacing. And then lastly, specifically around the specialty glass sales from last year, we don't expect that to repeat and that's about $16 million.

Okay. Thank you. And then secondly, I was wondering if you could comment a little bit on Roofing inventories, just given the strong sell-in in the fourth quarter. Are you seeing any excess channel inventories for Roofing? If I remember correctly, you entered 2015 with relatively low inventories and that turned out to be favorable for yourself and the industry. Just wondering if you could also talk about where you're seeing inventories right now and how you expect the progression to move through 2016.

We don't have great visibility to inventories, but we have good relationships with our customers and have the ability to evaluate what we think is going on out there. Obviously, the fact that we continued to ship relatively good volumes through the fourth quarter, would suggest to us that inventories are in very good shape at the distribution level.

Typically, most of our customers are in calendar year, given the dynamic of shingles, most of them do not have a huge incentive to want to carry excess inventories at year-end. That's when they do their financial results. That's when they report to their borrowers. And then also that's typically when their business is the weakest.

So that would be the time of year where our experience has been the industry tries to drive to low levels of inventory. And yet, we were seeing pretty broad-based shipments geographically and by channel through December, suggesting most of our customers were where they wanted to be on inventories when we entered this year in a solid position.

Okay. This is Thierry. We probably have time for one more round of questions.

Okay. Thank you. The next question comes from Philip Ng of Jefferies. Please go ahead.

Hi, guys. Thanks for squeezing me in. Some of the mothball capacity that came on last year in Insulation may have weighed on pricing. Is that largely absorbed at this point? Can you talk about how the industry is behaving? Is there opportunity for two price increases like in years past?

Phil, this is Mike. I think that we framed our view of the industry and how we see our position in the industry. We do believe and have held to a position that the fact that insulation prices are still so far below where nominal prices were a decade ago is a real problem for our business and that we need to get pricing back to levels that would resemble where we were in the last cycle in order to get profitability back to reinvestment economics.

I think Michael used the phrase that our product is useful and undeniably valuable. I think that's a simple description of how we think about the Insulation business. That said, it's a competitive market and we have not yet seen the real acceleration of pricing that maybe our analysis would suggest should come at some point in this cycle.

We continue to go out there and fight for every order and believe that we can grow our business at the top line and at the EBIT line in 2016 and beyond. But we still have our eye for the long-term, or I guess for the mid-term, on trying to get back to pricing levels that would support higher levels of profitability to give us some return on the challenges that we experienced over the last decade where the business didn't perform very well.

Got you. That's helpful. And I guess bigger picture, in the next leg of growth on starts, I would imagine you're going to have to bring on some higher cost capacity on the mothball side. Are you thinking about bringing that stuff on a function of getting a proper return before you actually pull the trigger and holding back on maybe seeing some volumes and taking the price over volume? Can you talk about how you approach that? Thanks.

We've said it's going to be a difficult decision to want to go back and turn on a facility that's been shut down. I mean, we tend to think of our shutdown facilities the same way the utility industry would think about peakers, which is you're going to bring them on and they'll probably run for a period of time, but then, if the economy rolls over and you start to see a decline in housing, those are also the facilities that are going to get shutdown the quickest. You need to be able to make a quick, simple return cash-on-cash and certainly today, we're not close to that in terms of our valuation.

I think what Michael shared in terms of contract manufacturing has given us some availability to some low-cost capacity that is now back inside our supply chain. So the next tranche of growth that we see is low-cost assets that we were using to service the contract market, which would now be available to us to support growth over the next couple of years.

We backed down there a little bit to make sure that we could have our own low-cost capacity available for us to sell to our customers. We are managing that balance in our supply chain and believe that we've got our assets very well-positioned for how we see the recovery playing out in the next couple of years.

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

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

Sure, Thierry, thanks. Obviously, we're very proud of the results that we reported today. Owens Corning had a great year. We saw all three businesses show very, very good improvement.

As a corporation, it was our all-time record year in terms of EBIT growth. But in addition to strong EBIT growth in all three of our businesses, and strong earnings growth, as Michael noted, we also had very strong free cash flow, which has been a focal point for the Company over the last two or three years of getting onto a little bit better cash conversion.

So from a financial performance and a diversity across our mix of businesses and across our portfolio of companies or businesses, we really feel like 2015 was a great step forward for our Company. We think 2016's going to be another similar big step forward. We expect all three businesses to again show year-on-year improvement in earnings and some growth. We would expect to see Owens Corning show strong EBIT growth as evidenced in some of the conversations we had today about our outlook.

We'll reserve fully quantifying what we think that EBITDA outlook will be until later in the year until we get better visibility. I would say probably to the evolution of the Roofing market through the first half, as well as the evolution of Insulation volumes and pricing as they progress through the first half of the year. So I think we'll get better visibility probably as we get into our second quarter earnings call.

I think we're appropriately cautious, given the uncertainty we see in the global economy today and the volatility of some of the markets. But we're also quite confident that the businesses are performing at high levels and that we can produce very good returns for our shareholders irrespective of the fact that we're in a little bit of a challenging and somewhat choppy marketplace. So we're looking forward to 2016. We appreciate your ongoing support and we look forward to talking to you again on our first quarter call. Thanks.

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