Owens Corning (OC) 2016 Q1 法說會逐字稿

Good day, and welcome to the Owens Corning first-quarter 2016 earnings conference call.

(Operator instructions)

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

Thank you, Allison, 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 first-quarter 2016. 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 the 10-Q that detailed our financial results for the first quarter. For the purposes of our discussion today, we've prepared presentation slides that summarize our performance and results for the first quarter of 2016, and we will refer to these slides during this call.

You can access the earnings press release from 10-Q and the presentation slides at our website, owenscorning.com. Refer to the Investor's link under the Corporate section of our homepage. A transcript and recording of this call and the supporting slides will be available on our website for future reference.

Please reference slide 2 before we begin where we offer a couple of reminders. First, today's remarks will include forward-looking statements based on our current 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 in 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 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 situations which have the potential to be significant in arriving at the adjusted earnings and adjusted earnings per share.

In the first quarter, we have utilized an effective tax rate of 33% on adjusted earnings, the midpoint of our 2016 range. We also use free cash flow, a measure helpful to investors to evaluate a 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, who will be followed by CFO Michael McMurray. Mike will then provide comments on our outlook prior to the Q&A session. Mike?

Think you, Thierry. Good morning, everyone. Welcome to our first-quarter 2016 earnings call. First-quarter revenue was $1.23 billion, up slightly from $1.2 billion one year ago. Adjusted EBIT for the quarter was $118 million, up from $60 million in 2015. Adjusted earnings for the quarter were $62 million, up $22 million from the prior year.

Owens Corning had a record first quarter with all three businesses demonstrating year-on-year EBIT growth. The Composites business displayed continued momentum in margins and volumes. The Roofing business delivered strong results in the quarter due to growth in the underlying market demand and storm activity that occurred late in the quarter. The Insulation business delivered another quarter of year-on-year EBIT growth.

We also announced strategic acquisitions for our Composites and Roofing businesses. Now as I do every quarter, I'll review our performance as it relates to the expectations we set for the year. We said that we would continue to make progress toward our goal of creating an injury-free work place. Owens Corning continued to maintain a very high level of safety performance in the first quarter, with a 16% improvement in our recordable incident rate as compared to the same period of 2015. Of note, we tied our record performance for safety in March with only two recordables across our global-employee base of nearly 15,000.

In Insulation, we said we expected revenue growth and margin expansion in the business, with the magnitude of the improvement dependent upon progression of pricing and volume in the US-residential new-construction market. First-quarter Insulation results are largely in line with our expectations. Insulation grew revenues in the quarter by 2% with market-based volume growth overcoming the impact of the reduction in contract manufacturing volumes from the prior year. The business delivered $6 million in EBIT improvement over the first quarter of 2016. Early in April, we encountered a contract dispute with a large residential customer that will impact the business for the remainder of 2016. I'll discuss this issue more fully in the outlook section of my remarks.

In Composites, we said we expected continued growth in the glass-fiber market driven by moderate global industrial production growth. We expected the business to improve EBIT by at least $20 million on price and volume growth, which would represent an EBIT improvement of more than $100 million over two years. Composites continued the momentum we saw through 2015 and again posted strong quarter performance. The business grew earnings by $4 million over the first-quarter 2015 and delivered 14% EBIT margins.

Revenues grew 3% on a constant currency basis and we continue to see strong demand in China and India. The year-on-year EBIT comparison reflects continued volume growth and price improvement and more than offset the contributions of the specialty-glass campaign we had in the comparable period in 2015.

In Roofing, we said we anticipated modest market growth, primarily driven by growth in the new-construction market. We said we hoped to see a replay of 2015 with a more balanced distribution of shipments that track end-market activity. We also expected to see additional asphalt deflation in 2016 consistent with the $68 million experienced in 2015. Roofing had a very good quarter with EBIT growth of $53 million and 17% EBIT margin. We saw market dynamics similar to the first quarter of 2015, with limited winter discounting and shipments tracking end-market demand.

The US asphalt shipment industry grew by approximately 17% in the quarter due to underlying market demand and storm activity late in the quarter. Our volume growth was consistent with the market. We also benefited in the quarter from approximately $34 million of asphalt deflation. In addition to the strong business results across the portfolio, I wanted to review other significant accomplishments that position us well for the future.

Last Thursday, we closed on the previously announced acquisition of InterWrap. This acquisition strengthens our capabilities to continue the conversion from organic to synthetic underlayments and accelerate our growth in the roofing components market. The acquisition also provides growth opportunities due to InterWrap's leadership position in lumber and metal packaging. The teams are now actively at work on realizing the more than $20 million in synergies we see from this combination by the end of next year.

In January, we signed an agreement to acquire the glass non-wovens and fabric business of Ahlstrom. This acquisition provides new markets, technology and talent for a growing business. The transaction, which is under regulatory review, is anticipated to close later this summer. I would also like to note that we're pleased with the initial start-up of our non-wovens facility in Gastonia, North Carolina, and have successfully completed the production of several major product lines and commenced customer shipments.

With that, let me now turn to the outlook for the remainder of 2016. We said in today's press release that our updated outlook for Roofing and Composites should offset our lower expectations in Insulation. We also said we expect InterWrap to provide an additional $25 million of adjusted EBIT growth. Let me take a moment to highlight the business drivers that underpin that outlook.

In Composites, we had previously indicated we expected at least $20 million of EBIT improvement in the business for this year. Based on a strong start to the year and continued improvement in price and volume, we now see the potential for EBIT improvements of at least $30 million in 2016.

In Roofing, given the strong start to the year and storm activity late in the quarter, we now see upside to our prior guidance of modest market growth in 2016. In addition, the InterWrap acquisition should contribute at least $160 million of revenue and $25 million of adjusted EBIT this year.

In Insulation, we now expect slightly negative revenue growth and relatively flat margins for the full year. As I would remind you, this business has made significant progress in the last four years, growing revenue by nearly $500 million and improving EBIT by more than $250 million.

The improvement in our US residential business has been driven by strong operating performance and an improving housing market. We've also experienced strong performance in the non-US and non-residential products and markets. While we're pleased by the progress we have made, the residential business is still well below its historical return levels. As we detailed at our Investor Day in the fall, our analysis indicates that the market demand is approaching levels that adequately utilize industry capacity to produce an environment more favorable to achieve our pricing and return goals.

As I mentioned earlier, we are addressing a contract dispute that has reduced our volume expectations for the remainder of the year. For 2016, this situation has required that we moderate our outlook for both volume and share. We are currently curtailing capacity, rebalancing our supply chain, and broadening our positions across the US-residential customer base.

Beyond 2016, we may be able to again accelerate the improvement in the business as we expect the industry capacity utilization at or above the 90% level. Coming into this year, we had expected to operate our assets at rates that were a bit above our estimates of overall industry utilization. Given our outlook to our market position for the remainder of the year, we continue to believe that the overall industry utilizations will be consistent with our prior estimate but that Owens Corning will now operate below those levels.

As a result, we are now positioned to benefit disproportionately from market growth, better pricing, and improved returns beyond 2016. With a strong outlook in Roofing and Composites, our Insulation team knows that there's no better time to get it right in Insulation. Our fundamental outlook for the earnings potential of the business is unchanged.

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 for questions. Michael?

Thank you, Mike, and good morning, everyone. As Mike mentioned earlier, Owens Corning delivered an outstanding quarter, nearly tripling adjusted EPS and almost doubling adjusted EBIT. I'm also pleased to report that we significantly improved free cash flow as a result of better earnings and stronger working capital performance.

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

Today, we reported first-quarter 2016 consolidated net sales of $1.23 billion, up slightly compared to sales reported for the same period in 2015. Net sales in our Insulation business increased $6 million, primarily in higher sales volumes and favorable customer mix partially offset by currency headwinds. In our Composites business, higher sales volumes and higher selling prices were offset by the impact of foreign currency translation. In our Roofing business, net sales were up 9% from the prior year, primarily on higher sales volumes.

Adjusted EBIT for the first quarter of 2016 was $118 million, almost double compared to the $60 million for the same period one year ago. This represents a record first quarter for the Company. Adjusted earnings for the first quarter of 2016 were $62 million, or $0.53 per diluted share compared to $22 million or $0.19 per diluted share in 2015.

In the first quarter, the Company delivered double-digit operating margins. Depreciation and amortization expense for the quarter was $76 million, essentially flat as compared to the first quarter of 2015. Our capital additions for the quarter were $75 million. In the first quarter, the Company improved free cash flow by $170 million as a result of improved earnings, better working capital performance, and our advantaged tax position. Our net-debt position improved by over $300 million in the quarter.

Now please turn to slide 7 where we will provide a high-level review of our adjusted EBIT performance comparing the first quarter of 2016 with the first quarter of 2015.

Adjusted EBIT increased by $58 million with all three businesses showing increases over the prior year. General corporate expenses were higher than the prior year, but are consistent with our guidance for the full year.

With that key review of 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 the Insulation business of $385 million were up 2% from the same period a year ago, primarily on improved volumes and customer mix, partially offset by currency headwinds. Our US residential volumes were strong and grew in line with the market. The business recorded its 19th consecutive quarter of EBIT growth delivering $13 million in the first quarter compared to $7 million in the quarter the same period one year ago, primarily on improved volume, cost deflation, and customer mix.

Mike spoke in his prepared remarks about the recent developments in our Insulation business and its potential impact on our outlook for 2016. I would remind you that our Insulation segment has a profitable portfolio of products and geographies that extends beyond US-residential new construction. We remain confident that these businesses will grow earnings in 2016 while our residential business addresses the near-term challenge.

Now I ask to turn your attention to slide 9 for a review of our Composites business.

Sales in our Composites business for the first quarter were $473 million, flat compared to the same period in 2015. Revenues grew about 3% on a constant currency basis. Volume growth at 5% and improved pricing offset the $16 million contribution of specialty-glass sales in the comparable period, and the impact of foreign currency translation. Volume improvement in China, continued strong demand growth in India, and roofing-related demand in North America were partially offset by weakness in Brazil and the North American oil and gas industry.

EBIT for the quarter was $64 million, $4 million higher than the same period last year. Strong commercial and operational execution more than offset the $12 million of benefit in the comparable period related from specialty-glass sales. Composites delivered 14% EBIT margins in the quarter. In 2016, we expect continued growth in the glass-fiber market driven by moderate global industrial production growth. We are pleased with the progress that we have demonstrated in the Composites business over the last couple of years including improvements in operating margins and return on capital. Strong commercial and operational execution, combined with a low-cost manufacturing network and a tightening capacity environment position this business to continue the momentum we have established. As a result of the strong start to the year, we now expect an EBIT improvement of at least $30 million in 2016.

Slide 10 provides an overview of our Roofing business.

Roofing sales for the quarter were $429 million, a 9% increase compared with the same period a year ago, primarily in higher sales volumes. Shipments for the US asphalt shingle industry grew about 17% in the quarter and our volumes grew consistent with the market. Our components business continued to demonstrate strong growth momentum in the quarter.

EBIT in the quarter was $73 million, up $53 million compared to the same period in 2015. The increase in EBIT was driven by higher sales volumes and asphalt deflation of $34 million. Roofing delivered 17% EBIT margins in the first quarter. Asphalt deflation has largely tracked with expectations. For 2016, we estimate asphalt deflation at or above last year's level with the majority of the benefit occurring the first half of the year.

We are pleased with the performance of our Roofing business. The market dynamics of the first quarter were constructive, as evidenced by limited winter discounting and shipments that tracked end-market demand, similar to last year. This was supported by stronger underlying demand and storm activity late in the quarter. While there were some shipments related to storm activity in the first quarter, we expect the majority of shipments in the current quarter and to continue through the remainder of the year.

The pricing environment was broadly stable, although there were some competitive adjustments. The adjustments occurred late in the first quarter and were similar in magnitude to last year. Prices have since been stable and we have announced a price increase effective May 31. We had previously anticipated modest market growth in 2016 driven primarily by growth in new construction and possibly some growth in reroof. Given the strong start to the year and recent storm activity, we now expect growth in both new construction and replacement markets. We believe the bulk of margin expansion and volume growth has occurred in the first quarter. As a result, we would expect volumes and margin rates similar to last year for the remainder of 2016.

Now let me turn your attention to slide 11.

On April 21, 2016, we closed on the previously announced InterWrap acquisition. InterWrap is the leading manufacturer of synthetic roofing underlayments. The company has an established track record of double-digit revenue growth and should continue to benefit from the conversion of organic to synthetic underlayments. We expect the acquisition to be accretive to earnings and contribute at least $160 million in revenue and $25 million of adjusted EBIT in 2016. We also expect to achieve a run rate of $20 million or more in synergies by the end of next year.

In the first quarter, under a previously announced share repurchase program, we repurchased 817,000 shares of the Company's stock for $36 million at an average price of $44.66. As of March 31, 3.8 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'll provide our outlook for 2016.

We are optimistic about the earnings growth potential for Owens Corning. Consensus expectations for US housing starts are above 1.2 million units and moderate industrial production growth is projected. The updated outlook for Roofing and Composites performance should offset the lower expectations for the Insulation business. In addition, the Company expects the InterWrap acquisition to contribute at least $160 million of revenue and $25 million of adjusted EBIT in the Roofing segment in 2016.

As we discussed at our November 2015 Investor Day, improved earnings, better working capital performance, and our advantaged tax position will translate into a high conversion ratio of adjusted earnings and to 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 provide 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 new mineral fiber insulation facility in Joplin, Missouri. Depreciation and amortization expense is expected to be about $320 million.

Interest expense is now expected to be about $115 million, including interest costs associated with the financing of the InterWrap acquisition. The acquisition was financed with term and revolving bank facilities at closing. We expect to utilize debt capital markets to permanently finance about 50% of the InterWrap purchase price and refinance $160 million of long-term bonds that mature in the fourth quarter of 2016.

Our $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 [plentied] initiatives we expect our 2016 cash tax rate to be 10% to 12% of adjusted pre-tax earnings. Our 2016 effective tax rate is expected to be approximately 32% to 34% of adjusted pre-tax 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 had a record first quarter with all three businesses demonstrating year-on-year EBIT growth. In addition, we announced strategic acquisitions that will complement our Composites and Roofing businesses while delivering value to our shareholders.

As we look to the rest of 2016, the continued improvement in Composites and Roofing will offset the effects of the lowered expectations for Insulation. With our businesses performing well and the continued growth in the US housing and global industrial production, we expect 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. Allison, we're ready to begin the Q&A session.

Thank you.

(Operator Instructions)

Stephen Kim of Barclays. Please go ahead.

Thanks very much, guys. Good quarter. I guess, will probably have to start off with the Insulation question. So your commentary in the release left a lot of room for one's imagination.

So I was wondering if you could provide a little bit more color regarding the nature of the quote-unquote dispute. And just make sure I understand from a bottom line perspective, was this a dispute over performance? Was it just simply price?

Is this a situation where the share that you are [seating] here this year was share that you had recently picked up for some reason or another that it made sense for you to give back rather than start a price war? Can you just give us a little bit more color around that dispute? Thanks.

Sure, Stephen. Thanks for the question and thanks for the nice comments on the quarter. Let me start at the end and then I'll come back to the beginning. But in terms of what we're seeing today, we really said that we think the Insulation businesses is going to have a sideways year. So we said we think revenue will be slightly down. We think operating margins will be relatively flat.

That's different than the guidance we had given on our fourth quarter call where we had said we thought Insulation's growth would be a bit below where we had been in 2015 due to the contract manufacturing decision to not continue forward with contract manufacturing which had been previously in our guidance and I wanted to be really clear, that's not this. So we had incorporated that already, and we had expected some margin expansion associated with operating leverage.

So the reason why we disclosed this effectively, a contract dispute, which we don't want to air this in public, is we had relied upon the belief that this contract was going to provide volumes in 2016 that was consistent with our prior guidance. This is a contract that has been in place for quite some time.

So as you can imagine, given the size of the changed the outlook, it was a sizable amount of volume that we believed was contracted, and given the dispute, we have now taken that our of our outlook and have readjusted our operating levels, readjusted our supply chain, and, obviously, are going back in the marketplace today and trying to rebalance our business a bit more broadly across the customer base. As we look beyond 2016, I don't want to be so overly confident to say this is a bump in the road. But the fact is our view on the residential insulation business has always been predicated on the belief that as we got later in the cycle, share of capacity and share of demand would begin to converge, and then as utilization levels got higher, Owens Corning would begin to have enough of the pricing leverage to be able to get back to historical price levels and return the business to acceptable levels, returns on capital.

In fact, now that our position has flip flopped a bit, where we used to have above industry levels of capacity utilization, we now believe in 2016 we will operate below industry levels of capacity utilization. In effect, we've positioned our assets to benefit disproportionately from the next uptick. So I think as long as we see continued growth in housing, which is the consensus expectation, it is certainly our expectation, we'd expect as we work our way through 2016 overall tightening in the market would provide us the opportunity to replace those pounds at good margins and good prices, and that 2017 and beyond we'd still be a very, very good shape in getting to our goals for the business.

Okay, great. That's helpful. I guess maybe just to follow up on that a little bit. It's been my understanding that your expectation was that the industry, by virtue of housing continuing to grow at a double-digit clip, was likely to reach an equilibrium rate after the capacity was opened by a competitor in September by about mid-year this year. So I wanted to make sure, is that still your view?

Or is it your view that that equilibrium point would happen later this year? And will any of this headwind at the top line impact the early part of 2017?

That's a great question, Stephen, and let me start by saying I think it's a little bit premature for us to talk about how we think it will affect 2017. But let me roll back maybe to the second half of 2015. So at the time of our investor day, which was early fourth quarter last year, we were seeing demand in our business that was pretty well tracking our key macro, which is lagged housing starts, so we lag housing starts by about 90 days.

We use regional and other variables in order to update that in order to get a sense of where we think the market is. And we were tracking that macro pretty well, so we thought we were tracking the market. In fact, as we got into the first quarter of this year, we had some visibility to -- some market share data in the industry that would suggest actually shipments in the second half of last year didn't track that macro. And in fact, we had outperformed the market a little bit in the second half and as a result of our overall market share in2015 was a little bit above where our previous estimates have been.

We think that maybe contributed to some part to the level of volume competition that we saw in the first quarter. So the first quarter was a difficult pricing environment generally. Prices weren't falling but we weren't seeing an acceleration of our ability to achieve price in the first quarter. We were seeing capacity that was available in the market consistent with what we had said at investor day that some capacity to come on and needed to be absorbed in.

We actually saw the first quarter decent volume. So we think what really happened is the lag on new construction, the amount of time it took a builder to go from a start to insulating extended a bit in the second half of last year and we've heard that on some of the builders calls. And we actually think that began to contract a little bit with good weather here in the first quarter, and that our industry caught up a little bit, but during that period of time there was some inventory build and excess capacity that maybe led to a little bit more competitive position early in the year.

None of that changes our outlook for fundamentally how we think the second half of this year works, or as we go into next year. We think our capacity estimates are pretty good, we think that we will see continued growth in housing. It is, obviously, still not a robust market out there, but we have now seen three years of fairly consistent growth in new starts.

We're hopeful that that will be a little bit more biased towards single family, which is good for us, and consistent with what I said earlier, that would cause industry demand growth to come back seeking our capacity because we would be a position to be able to disproportionately serve that demand growth and that would position us well going into 2017 on both price and volume.

Kathryn Thompson of Thompson Research Group. Please go ahead.

Hello, thank you for taking my questions today. One area that we have been focusing all across the value chain acquisition and construction materials is that of capacity utilization at this point of the cycle. And with that in mind, you did have some commentary in your prepared comments about insulation capacity utilization.

I was going to see if you could step back and look at your three key segments, Insulation, Roofing, and Composites and give more clarity where capacity utilization is for each of those segments. Understanding that there will be some regional differences, but if you could at least give us some -- relative to where we are today? Thank you.

Happy to do that for you. Thanks for that question. So I think I have said about everything I would have to say on the Insulation side. So I'll talk a little bit more about Roofing and Composites. On the Roofing side, we've been very clear that in a macro sense we don't think capacity utilization is a big driver of either margin outlook or the mechanism of kind of how the market works. Because of the fact that it's material conversion business and because of the fact you run to demand levels you don't actually run to utilize your capacity.

That said, we are actually seeing for the first time in quite a long time tightness of supply in the roofing industry in a number of regions. So with some of the storm activity, which was particularly in Texas, Texas has started off -- or the Southwest had started the year very strong to begin with, and then on top of that, as Michael said in his comments, late in the first quarter we began to see a lot of violent weather in Texas, which has created roofing demand that we think will primarily serve us here in the second.

So we see some tightness in Texas, we see some tightness throughout the southwest. There are other places in the country where demand is really outstripping supply at this point for both Owens Corning, and based on our competitive analysis, we believe for also some of our competitors in terms of their shipping cycles. So that's given us a little bit of optimism about the May price increase that we've announced in Roofing. We have seen some slippage in price in 2015.

We saw a little bit of additional slippage in the first quarter, late in the first quarter. That's been offset, obviously, by a good deflationary environment on asphalt, but we may be able to recover some of that price here in the second quarter. So that's one of the things we're looking at is how to support the May price increase consistent with that objective.

In Composites, we tend to measure capacity utilization globally. Product does ship across regions, so if you measure it by region you still have to take into consideration the material that moves across regions. We published on this on our investor day, we think the composites industry now is in its third year of operating at 90%-plus utilization levels.

That's been relatively consistent. The addition to capacity over the last couple of years has been at or below the level of demand growth. As we look a couple of years out, and we have pretty good visibility two years out, because it takes a couple of years to build a melter, we believe that with continued slow but steady industrial production growth globally that demand growth would keep up with or outstrip capacity growth.

So we feel pretty good, I don't want to say as far as the eye can see, but certainly over the next couple of years, that the capacity situation in Composites would support what we have seen over the last three which is continued volume growth and continued margin expansion. I was really happy with Composites' quarter without the specialty glass and some of the comps we had in the last first quarter, the business put up 14% EBIT margins, which is kind of double-digit margins, or mid-double-digit margins we've been talking about for Composites for a long time. So we really moved the business now to a very, very high level of performance that we're very proud of.

Great, and the follow-up question is on Composites. Could you give a little bit more color on a regional basis in terms of trends? And in China, just the outlook on when energy [are checks] are showing that despite the slowdown overall in China that wind energy is still doing well there. So if you could give just a little bit more color on Composites on a global basis? Thank you.

Sure, Kathryn. It's Michael. So as I said in my prepared remarks, on a constant currency basis in the quarter, revenue is up 3%. Actually if you adjust for the specialty glass sales, it would have been up about 7%. Also in my prepared remarks, I said that actual volumes were up about 5% in the quarter.

That's generally consistent with the growth rate that we had seen in 2015, as well. Specifically, I called out good growth in China. We've seen some really strong growth in India, starting last year and coming through the first quarter of this year.

Obviously, given what's going on in roofing in North America we've seen good volumes in roofing in the first quarter. And I'd also add that auto and construction end markets have been positive in the start of this year, as well. So China continues to grow for us. We're watching it, but good progress, both from a top line and bottom line perspective.

Mike Wood of Macquarie. Please go ahead.

Hello, thanks for taking my question. First question on the roofing price. Just curious why you think the storm activity didn't help pricing support late in 1Q? And can you confirm whether or not your guidance for the flat roofing margins 2Q to 4Q, does that not include that May 28 price attempt?

Yes, so let me take that. Kind of two separate questions there. The nature of pricing right now in the roofing industry, which we're comfortable with, is it's not big national discounting that's kind of peanut butter spread. We look from market to market, region to region, and there are times that we need to get competitive or do things to maintain our market position.

I think that was true through the first quarter, and as volume was expected to pick up in the second quarter, you typically get to whatever you need to do to maintain your position sometime later in the quarter. So I wouldn't read anything into those comments besides, it's just kind of the timing of the way the year works that we are working with our customers in trying to make sure they've got the right program that's going to make them successful for the year and then some of those adjustments came a little bit later in the quarter and would roll through.

So we gave that caution because we wanted to make sure that as you try to model or roll forward margins you have some understanding that there's a little bit of a price headwind as we roll out of the first and into the second. We will see continued deflation. I think that'll be primarily in the second quarter, with some in the second happen, but if you remember the shape of our deflation last year we had very little in the first quarter, so we comped, obviously, very strongly against that. We actually had little bit more than we had originally guided to last year in the second quarter because volumes were pretty strong, so we dragged a little bit more deflation into the second.

So we're comping against fairly deflationary economics last year, so while we're confident we will have great margins and good volumes in the second quarter, we certainly wouldn't want you to extrapolate off of the first quarter margins and I think that's really the basis of Michael's comments where he said on a year to go basis. We would expect volumes about flat and margins about flat to last year.

I think the one positive we have in today's call is the market was up, we said about 17% in the first quarter. We had originally said we thought the overall market might only be up 1 or 2 points this year, which was basically new construction following through and the entire replacement market about flat. Based on the way the year started, we don't believe that the rest of the year will back up and offset some of the volume growth we saw in the first quarter. We think at a minimum that volume growth for the first quarter will create volume growth for the full year, which is probably more like 3%, 4%, 5% type growth for the overall market, which actually gives us some positive volume numbers that will help our outlook.

Related to the pricing, we don't typically, when we make commentaries about our forward-look for the business, include the outcome of price increases. So I do think if we are successful in May, that would probably give us some optimism and also potentially help us cover what could be some asphalt deflation that starts to back up. We are seeing oil prices a little bit higher, we are seeing asphalt prices start to come back up. So we could see little bit of a headwind in the second half, so some pricing in May would certainly help us offset that potential downside risk.

Great, and then (inaudible) you mentioned rebalancing the Insulation business. Just curious what that entails in terms of penetrating other customers and how you pick up share in those segments? Thanks.

Yes, obviously, we have a pretty strong market-leading position in the insulation business. When you talk about the insulation industry, Owens Corning is the clear share leader in that market. I don't think that's a secret. As result of that and as result of our history in the market, we do business with virtually everybody in the market, and enjoy great relationships with everyone in the market and I do want to stress, when we talk about the revised outlook, this is specific to one customer.

So across the remainder of the market, we're in great shape. We are doing a lot of business, and it would be our supposition that as a lot of the excess capacity that may have existed in the market gets pulled over to meet the needs of a customer, that some of the other customers in the marketplace who have growth ambitions will be increasingly looking to us to make sure that they have got supply security as the market gets tighter. So we, obviously, stand ready to help meet the needs of those customers because we think we're entering a phase where probably the biggest asset that a customer needs from their suppliers is supply security and we think we're in a position to provide that.

Ken Zener of KeyBanc. Please go ahead.

Morning, gentlemen.

Morning, Ken.

Mike, I just -- obviously, I don't know. I'm not at the computer, but I think some of your comments are causing a little bit of uncertainty about what you're saying in Insulation, and, obviously, most respectfully I'm trying to understand this.

But in the fourth quarter, when you sloughed off some third-party volume, the idea was that you were running up against capacity utilizations and you wanted to run it through your brand, higher margins, better pricing so you wouldn't have to do any CapEx in general. And now something happened that looks like its growth was going to be up, and now it is kind of flattish, it was in that $150 million, $160 million range, was the contract.

What do you think led to that insight. Is it an issue of pricing, or was it a regional thing?

Just trying to understand it, because I think people -- and I'm not sure if it's properly interpreting it is that your ceding market share, yes, you're going to focus on margins. But it would undermine your business in the position first where you were three months ago. And could you just clarify, because I don't think that is really what you're saying, but it seems that's how it's getting interpreted?

Well, we would've expected, as we worked our way through the next couple of years, that there probably would have been a rebalancing both in terms of our supply to our customer base, as well as some of the major players in terms of diversifying their supply base. So we had been at a pretty high share position with this customer, and I think they rightfully had visibility to wanting to diversify their supply base.

The issue, the item at issue right now is whether there was the right to effectively do that in an orderly manner or a disorderly manner. We're clearly reporting today, it's happening in a much less orderly manner than we would have liked, and certainly in a less orderly manner than we think was called for under the contract. But that is a separate item. We will handle that issue, we will manage that issue.

We have the ability to produce good results in the insulation business. Obviously, below our executions for the year. We haven't seen anything in all of this that is different than our fundamental view of the business, which is, at the end of the day, in the US residential portion, a capacity utilization driven business and that pricing is going to be the key for us to get back to the returns levels that are acceptable to us.

And that we've got other great businesses inside that segment, which Michael and I both talked about, which continue to move along and make a bunch of money. And while we work our way through this, we're going to keep our eye on the prize which is find a way to get the US residential business back to great levels in margins and great levels of pricing, and we think this is, if anything, an accelerant in doing that. But it's a little bit more disorderly, and we're not terribly happy to have to talk about it on an earnings call.

Understood. Would you say that this was, there's only a handful of customers that are this concentrated to you where this idea of a disorderly adjustment might be impacting your business?

Yes, obviously, for confidentiality reasons and also for a desire that we still believe there may be an opportunity to sort this issue out, I don't want to get any further into any of the specifics.

Understood, that's fine. Mike, I appreciate that within these setting that we're conversing. The flat margins for Roofing, it sounds like for the remaining three quarters we would expect similar sales, and more importantly, similar EBIT dollars to last year. Is that the proper interpretation? It just was a little unclear, I just want to have it restated. Thank you.

Yes, I think that that's a reasonable interpretation on Michael's comments. I want to be really clear, I think we said it this way, but I want to be clear about that. And then in addition to that outlook, we would expect InterWrap to provide another $25 million of EBIT on top of that. So we're really reconciling to our prior outlook, and then the InterWrap would come on top of that.

So the way that would work is, if the market is in fact up 4% or 5% for the full year that would mean that the volumes we saw, the volume growth we saw in the first quarter was effectively the volume growth we will see for the full year, and that the market dynamics for the remainder of the year on a year to go basis would be about flat to last year. Our share and revenue would, therefore, be about flat to last year and given the shape of asphalt cost deflation, which we think is pretty front end loaded, we don't have a ton of sequential asphalt cost deflation coming because asphalt costs were pretty low in the first quarter and so as a result of that, we would expect our margin profile would look pretty similar to what we saw last year.

So there is going to be pluses and minuses in that. This is, obviously, a tough business to forecast, which is why we now hold off until the second quarter to give full-year guidance for that business or full-year guidance for the corporation. But I think that is consistent with what we're trying to say.

Thank you. That was clear.

Scott Rednor of Zelman & Associates. Please go ahead.

Yes, hi, good morning. I want to just dig in a little bit more on the InterWrap acquisition. How should we think about that impacting the volatility of roofing margins? Should that -- is that a steadier margin business looking forward, and should that take out some of the variability we see quarter-to-quarter in the segment?

Yes, it's a great question, Scott. I think one of the things we loved about that business is because it's in the process of material substitution, it's replacing organic growth with -- organic underlayments with engineered synthetic underlayments.

We've been in the business as a Company of doing material substitution for all 80 years that Owens Corning has been around, and typically when you're in the market with material substitution, because you have natural underlying growth as you take overall share of a broader market, you get fairly stable margins and good top lines. So we see this as a business with top line growth, stable margins, and very little volatility in terms of those margins combined with now using our footprint, the ability to grow it faster, and then also combined with our kind of infrastructure and back office, the ability to operate the business at lower costs.

So it's one of those really classic fits that we have been looking for for a while. If you look at the way Michael said we're going to finance it, we're also very happy with our ability to have access to the capital markets. We will go tap the capital markets, we believe, sometime this year in order to take out some maturities we have coming in the second half, and we believe we will put about half of the value of the acquisition on our balance sheet in terms of long-term debt and then we have enough cash flow generation this year that we will pretty much extinguish all the rest of acquisition cost.

So if we can take a deal like this and bring it on to the Company, integrate it, and have it back off the balance sheet in terms of paying for it all within a year I think it's great news for our shareholders.

And then just to quickly follow on, I think there were some pieces of the portfolio that weren't dedicated to Roofing. So maybe you can just talk about whether those are still a strategic fit and potentially a platform going forward?

Yes, we see them as a platform. So some of these underlayments are also used in packaging in the wood and metal business, and actually they have, or we have, some position now in some industrial fabrics and geotextiles in house wraps and things. These are all markets that are very interesting to Owens Corning. Our two fundamental sciences in the Company are material science and building science.

If you go and review our R&D portfolio that's where our people spend a lot of their time thinking. We know a lot about the types of manufacturing processes that InterWrap uses to make these products, actually more from the composites side of the business than from the roofing side. We have kind of our composite technology group looking at material science and fabrication of how these get made, we have our global footprint looking at how do you grow this business in places like Europe, India and China.

We've retained, by and large, the InterWrap team that knows the construction, the wood packaging and metal packaging parts of the business, and we challenged them to grow that. And then we're looking at our core roofing customers and figuring out how we can make InterWrap underlayments a more important part of the product offering for our Owens Corning customers.

Bob Wetenhall of RBC Capital Markets. Please go ahead.

Hey, guys, good morning. And I'm not going to beat the dead horse and kill Insulation. Thanks for addressing that. I was hoping you guys could give Roofing, a lot of moving pieces, yet a really easy comp in the first quarter. And kind of a tough comp in the -- coming up in second quarter.

Operating income last year was about $266 million, and you're up $50 million year-over-year. And then it sounds, I'm thinking you also got the InterWrap acquisition. Just based on your comments, I'm coming out with the idea that on a static basis, based on what you just said, you're looking at like operating income before any price increase realization in the range $345 million.

So I was just trying to understand, obviously, it is a short cycle business with limited visibility, totally with the caveat that things can change quickly and I understand you are not trying to give guidance on this. But is it realistic to assume that you're going to do operating income based on the information that you had given us, somewhere between $340 million and $360 million before any price realization?

Bob, I think your observation we are trying very hard not to give guidance on Roofing was correct, but having said that, let me comment on a few of the things you said in your question. So you are correct that the InterWrap EBIT should be additive to whatever you would come up with on the base business. You are correct that we beat the first quarter by $53 million.

You are correct that we said we think on a year-to-go basis revenue and margins would be similar to last year. So I don't think it's a huge reach to think on a year-to-go basis that overall EBIT would be similar to last year if those two pieces of guidance were correct. So I think you are just adding up that math and I'm not uncomfortable with that. We would say, obviously, there's a lot of moving pieces in that and that's why we lay out the guidance in this business piece by piece.

I would add one thing which is, you're right that the second quarter is a tough comp. Really, it was a tough comp because we had great volumes last year in the second quarter, particularly in the early part of the quarter, so we were really happy and kind of ahead of plan in the second quarter of last year. We feel pretty good, though, about how the quarter has started, so as we look at the second quarter, we do think that we're going to see volumes that are consistent with what we saw last year. So that's where a little bit of the upgrade in our outlook for the business has come from, which is, we had thought with the strong first quarter if the fundamentals underpinning that hadn't supported overall market growth at some point you'd have to give some of that first quarter growth back.

We think the fundamentals support the underlying market growth we saw in the first quarter. We think that those additional squares that were shipped in the first quarter will actually represent growth for the industry this year.

Which makes all the sense in the world. And you guys are commenting that you're getting strong underlying demand complemented by incremental from storm. So I'm just trying to think this out a little bit more. If that's the case, and you're getting this, it sounds like inventory at the channel level is tight right now just because of good sell-through from distributors.

You're thinking about a price increase in May, maybe 5% to 7% range. Wouldn't you be more incrementally confident given a healthy dynamic in contrast a couple of years where you had the dislocation of winter discounting that OC and the industry are in a better position now than previously to realize price? Is that an accurate way to think about this?

And if I could just tie something else on. You mentioned asphalt deflation, the $70 million tailwind in 1H. How much of that do you think if you did mark-to-market today would reverse? There's a lot of stuff in there. I appreciate the color. Thanks and good luck.

Okay, thanks, Bob. Related to your first question, I think your dynamics of what would cause us to have more confidence that we would be able to support a roofing price increase is probably correct. I think that's different from knowing that we're confident we will be able to get a roofing price increase. So there's a number of direction arrows that you pointed to that are now pointing in the right direction, and those things always are helpful.

But as we remind you on every one of these calls, it's a very, very competitive market, and it's a very high velocity transaction-based market. So we're out there pricing it, roofing, everywhere in the country every single day. And how we work our way through that dynamic is going to be something that our team is expert at and is doing a great job, and if there's an opportunity to get price, rest assured, on behalf of our shareholders, we will be going out to get that.

Your second question in terms of mark-to-market, I'm going to kind of dodge that question to be honest. We don't think of the business that way, we tend to think of the business as there is kind of a 90-day lag from the refiner to our asphalt tanks. There's a 90-day lag from our asphalt tanks to our finished goods and wherever oil prices were 180 days ago is the asphalt cost we're working off of now.

And so as result we tend to look at sequential deflation and year-on-year deflation is the way we give our guidance. And I think I've said enough on that topic today in terms of how we see sequential and year-on-year deflation for the remainder of the year.

(Inaudible), this is Thierry. It looks like we have time maybe for one more round of questions.

Phil Ng of Jefferies. Please go ahead.

Hey, guys.

Morning, Phil.

Quick question. You certainly commented about how storm activity picked up towards the end of the quarter, and that should be a nice tailwind in 2Q. I'm surprised volumes would be, and top line would be kind of flattish, but can you give a little bit more color on that, on the roofing front? And historically when there's been a lot of storm activity, if you were able to get pricing, was it really more on a regional basis or more on a national basis?

Yes, so your first question in terms of 2Q, I would go back to the fact that we had a really good second quarter last year. So last year was the year we kind of transitioned back to having more ratable shipments versus end market demand, so if you remember correctly, we comped gigantically negative in the first quarter of last year. We then came out of the first quarter.

We had a very, very tough winter. There wasn't a lot of end use activity in the first quarter. Excuse me, there weren't a lot of shipments in the first quarter, so when spring came we saw the national roofing market turn on last year in the second quarter. We had very good shipments.

So it's no lack of optimism about the strength of the business right now. We are seeing storm demand. We feel very good about the way we started the quarter. But we feel very good about last year's second quarter. So I think it is really more of an issue of we're comping really good to really good, as opposed to some point of view that says somehow the market is slowing down in the second.

And then around pricing in the past when you've seen storm activity, was it more regional, or were you able to get pricing across the board nationally?

It tends to be much more regional and I think also, obviously, we show a fair amount of sympathy or discretion in those storm-related markets. I don't think we want to be seen as being opportunistic. So it's not typically the roofing business, the roofing industry doesn't typically go into a storm torn market and start raising price because we can.

We want to support that market. So I think that's why you would see, consistent with a preannounced May price increase that might give us some support to that price increase. But you don't necessarily just see a market and the minute you see heavy demand go in there with a price increase. It's just not appropriate.

Okay, just one last one for me. The guidance you guys provided for InterWrap today for 2016, does that account for any of the $20 million synergy that you called out flowing through this year, or is that more of a 2017 event? Thanks.

Yes, I would say, we didn't spell it out explicitly, but I am happy to clarify that. The $25 million that we guided to today regarding InterWrap doesn't really include any synergy realization at all. That's the run rate of the business. We bought a great business. We bought a great business with really good margins.

We're going to own it for almost two-thirds of the year. So if you look at some of our previous disclosure at the time of acquisition, we disclosed a bid on total revenue, disclose a bid on EBIT margins. We said EBIT margins are comparable to our Roofing business. So it's reasonable to conclude that we bought a business that we expect to contribute immediately.

Obviously, our hope would be, our teams are out there, day one went very well. We're working very hard on what we believe are our synergy opportunities. We've given those teams all the resources they need to move with speed. And hopefully as we get into the second half of the year, maybe on our second quarter call, we can give you an update on what, if anything, we think we can get done that might get to the bottom line this year. But we are confident in Michael's guidance, which was by the end of next year we believe we will have $20 million of synergy run rate in that business and incorporate it into our Roofing segment

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Denis for any closing remarks.

Excellent. Thank you, Allison, and thank you, everyone, for joining us for today's call. And, actually, I'll turn it back to Mike Thaman for a few closing remarks.

Thank you, Thierry. As I noted at the outset of the call, we just produced a record first quarter. I think Michael characterized it as earnings per share almost tripled, the EBIT almost doubled. It's a great start to the year.

We, obviously, had to work our way through from an investor communication point of view, a somewhat complex story on the Insulation side. But at a very high level it's a very simple story, which is we're in a transition year in 2016. We think the business will largely go sideways for this year, but that the fundamentals that underpin our very strong optimism about what a great business that will be in the future is unchanged and if anything, we believe some of the things that have happened in the early part of this year accelerate our ability to get that business back to the level of health we would like to see.

Obviously, with the strength we're seeing today in Composites, the strength we're seeing today in Roofing, with great optimism about the InterWrap acquisition and how it will impact continued growth in our Roofing business now is the time to get it right at Insulation. We are very eager to get the residential insulation business much more profitable in making returns that we are proud of, and we're coming out of the first quarter, I think, with a very clear game plan of what we need to do through the remainder of 2016 to make sure that we make that happen for Insulation while we deliver great results for Owens Corning.

Let me remind you that with the growth we see in Roofing, with the growth we've seen in Composites, we're still talking about a Company that will have record earnings this year, outstanding cash flow this year, top-line growth and acquisition strategy that continues to expand the footprint of our business. So while I think in the near term there's a bit of a distraction, or a bit of a sideshow related to our discussion of Insulation, the fundamentals of what we talked about in this Company with three great businesses operating at high levels of performance, producing significant shareholder value, that's still the story today as we come out of the first quarter. That will be the story for the remainder of the year.

We're very appreciative of all the support and questions on the call, and we look forward to talking to you on our second quarter call. Thanks for joining.

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