Owens Corning (OC) 2017 Q3 法說會逐字稿

Good day, and welcome to the Owens Corning Third Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

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

Thank you, Rachel. Good morning, everyone. Thank you for taking the time to join us for today's conference call in review of our business results for the third quarter 2017. Joining us today are Mike Thaman, Owens Corning's Chairman and CEO; and Michael McMurray, Chief Financial Officer.

(Operator Instructions)

Earlier this morning, we issued a news release and filed the 10-Q that detailed our financial results for the third quarter 2017. For the purposes of our discussion today, we've prepared presentation slides that summarize our performance and results for the third quarter 2017, and we'll refer to these slides during this call.

You can access the earnings press release, Form 10-Q and the presentation slides at our website, owenscorning.com. Refer to the Investors link 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 forecasts and estimates of future events. These statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially. We undertake no obligation to update these statements beyond what is required under applicable securities laws. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of inherent risks and uncertainties affecting such forward-looking statements.

Second, the presentation slides in today's remarks contain non-GAAP financial measures. Explanations and reconciliations of non-GAAP to GAAP measures may be found in the text and financial tables of our earnings press release available 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've excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT and adjusted earnings.

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 adjusted earnings and adjusted earnings per share.

We also use free cash flow and free cash flow conversion of adjusted earnings as measures helpful to investors to evaluate the company's ability to generate cash and utilize that cash to pursue opportunities and 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, and our Q&A session. Mike?

Thank you, Thierry. Good morning, everyone, and welcome to our third quarter earnings call. Owens Corning delivered another strong quarter and is continuing to produce sustainable growth. Revenue was $1.7 billion, up 12% for the quarter; and $4.8 billion, up 11% for the first 9 months compared with the same periods last year. This performance has led to strong adjusted EBIT for the quarter of $239 million, up 10%; and for the first 9 months of $640 million, up 9%.

In addition, this is the first full quarter which includes contribution from the Pittsburgh Corning acquisition. This acquisition has accelerated our growth as well as expanded our insulation product offering and increased our footprint in Europe and Asia. The FOAMGLAS business has contributed from day 1, and we are pleased with the performance and pace of integration.

Before I talk about our quarterly financial results, I'd like to give you an update on our safety program. As I said before, safety is a core value of our company, and safety improvement has been a critical area of focus in onboarding the FOAMGLAS business to Owens Corning.

Overall, our recordable incident rate for the third quarter was 0.45, an 8% improvement over the same period last year. This quarter, we did experience a serious accident involving a worker in one of our plants, a vivid reminder of how important it is that we work safely each and every day. We are determined to achieve 0 injuries, and we won't stop until we get there.

Now I'd like to review our performance as it relates to the expectations we set and then talk about our expectations for the remainder of the year.

Our Roofing business delivered EBIT of $147 million, comparable with last year with EBIT margins of 22%. These results reflect strong shingle and component volumes, continued strong reroof demand and higher storm activity. Year-to-date pricing gains continue to offset the impact of asphalt inflation.

Our Composites business generated EBIT of $62 million, comparable with the prior year with EBIT margins of 12%. EBIT was largely driven by improved operating performance and higher volumes. The business continues to perform at a high level. The operating strength in the quarter-to-quarter was partially offset by a $10 million bad debt charge. We believe this event is isolated and will not affect the remainder of the portfolio.

The Insulation business produced revenue growth for the third consecutive quarter, increasing $92 million or 19% while EBIT increased $26 million both compared with the same period last year. The EBIT results were driven by price improvement in the U.S. residential new construction business, better volumes and the positive contribution of the FOAMGLAS business. Excluding the $73 million contribution to revenue and the $10 million contribution to EBIT from the FOAMGLAS business, the Insulation business produced strong operating leverage. This is particularly notable since our Insulation business was our business most impacted by the hurricanes in Texas and Florida, with an estimated 1% impact to revenue and a $5 million negative impact to EBIT in the quarter.

In our residential insulation business, we are gaining momentum. We successfully implemented 3 price actions this year and announced another to be effective in January. In September, U.S. volume growth slowed, but the business is experiencing recovery in volume growth early in the fourth quarter. Overall, the fundamentals of this business remain strong.

I'd also like to highlight a few other recent developments. So far this year, we've returned $226 million in dividends and share repurchase to our shareholders. I'm pleased to share that we earned placement on the Dow Jones Sustainability Index for the eighth year in a row. Also, we were named the industry leader for the DJSI World building products group for the fifth straight year. DJSI World is an elite listing of the world's largest companies based on long-term economic, environmental and social criteria.

Now on to our guidance and outlook for 2017.

Overall, we continue to expect an environment consistent with consensus expectations for U.S. housing starts and improving global industrial production growth. In Roofing, the market remains strong with growth in shingle and components volume. Through the first 9 months of the year, industry shingle shipments were up about 7%, above our prior expectations, driven primarily by storm activity and replacement demand. Overall, we now expect the market to grow by mid-single digits for the year with relatively flat fourth quarter volumes. Our Roofing margin performance remained strong at 22% for the quarter. We continue to expect that price improvement will offset asphalt inflation for the full year.

In Composites, we expect to achieve our fifth consecutive year of EBIT improvement. Given the $10 million charge in the third quarter that I previously detailed, we now expect EBIT growth of about $20 million versus the previous guidance of about $30 million.

In Insulation, we continue to expect revenue growth of more than $250 million with EBIT of about $185 million. We believe that we will see volume strength through December due to the pricing actions we have announced for early January. This guidance now assumes that our FOAMGLAS business will generate at least $15 million of EBIT this year, an upgrade from our previous guidance.

From a full company perspective, we continue to expect adjusted EBIT of at least $825 million, and we expect to convert adjusted earnings to free cash flow at a rate of 100% or more this year.

In summary, I'm proud of what our organization has accomplished. All 3 businesses are executing well. We have a proven track record of strong financial performance. We've completed the integration of InterWrap, and we're off to a fast start with Pittsburgh Corning. I remain confident in our ability to sustain strong financial performance. We are creating value for our shareholders.

With that, I'll turn it over to Michael, who will further review the details of our business. Michael?

Thank you, Mike, and good morning, everyone. Owens Corning delivered another strong quarter with record net sales of $1.7 billion. For the first 3 quarters, we have grown revenue by 11% and delivered record adjusted EBIT of $640 million. Commercial and operational execution continues to be strong across all 3 businesses, and we are positioned to deliver another record year of financial performance. The integration of our newly acquired FOAMGLAS business within our Insulation segment is off to a strong start, and our ability to generate significant free cash flow continues to be a bright spot.

Now let's start on Slide 5, which summarizes our key financial data for the third quarter. You'll find more detailed information in the tables

(technical difficulty)

and 10-Q. Today, we reported third quarter 2017 consolidated net sales of $1.7 billion, up 12% or $185 million compared to sales reported for the same period in 2016. Insulation, Roofing and Composites reported increased sales of $92 million, $79 million and $18 million, respectively.

Adjusted EBIT for the third quarter of 2017 was $239 million, up $21 million compared to $218 million from the same period 1 year ago. The company delivered adjusted EBIT margins of 14%. This represents record adjusted EBIT for the third quarter despite the isolated market challenges we overcame.

Adjusted earnings for the third quarter 2017 were $141 million or $1.25 per diluted share compared to $125 million or $1.08 per diluted share in 2016. Depreciation and amortization expense for the quarter was $101 million, up $17 million as compared to the third quarter of 2016. The increase was primarily due to the FOAMGLAS business and accelerated depreciation of our Composites business as a result of cost reduction actions announced in the second quarter. Our capital additions for the quarter were $73 million.

On Slide 6, you'll see the detail of our third quarter adjusting items. We recorded restructuring expenses of approximately $7 million in the quarter, primarily related to the cost reduction actions in our Composites business, which we discussed in last quarter's earnings call. We also recorded $7 million in costs related to the Pittsburgh Corning acquisition. Finally, we recorded $2 million in pension settlement gains related to the actions taken in the second quarter.

Now please turn to Slide 7, where we provide a high-level review of our adjusted EBIT performance, comparing the third quarter of 2017 with the third quarter of 2016. Adjusted EBIT increased $21 million. Insulation increased by $26 million. Composites and Roofing EBIT increased by $1 million each. General corporate expenses were up $7 million from the prior year.

With that review of key financial highlights, I ask you to turn to Slide 8, where we provide a more detailed review of our business results, beginning with our Insulation business.

The Insulation business demonstrated continued commercial progress despite slower volume growth in September. Sales in Insulation of $568 million were up 19% from the same period a year ago, primarily on the contribution of the FOAMGLAS business; higher sales volumes; and disciplined commercial execution, including progress on pricing. We recently announced a price increase in the U.S. residential new construction market effective January 2018. We are optimistic about making further progress given the underlying strength in the market.

U.S. volume growth slowed in September, primarily as a result of the impact of hurricanes in Texas and Florida. The top line impact of this slowdown was about 1% of revenue for the quarter. I'm pleased to report that business is currently experiencing a recovery in volume growth and the quarter is off to a strong start.

Insulation EBIT increased $26 million to $64 million for the quarter, primarily on improved manufacturing performance, the contribution of the FOAMGLAS business and improved pricing in U.S. residential new construction. These improvements were partially offset by increased transportation and other supply chain cost as a result of the Texas and Florida storms and higher raw material cost in our extruded polystyrene foam insulation business. The impact to EBIT from the storm-related challenges was about $5 million.

As discussed on the last earnings call, our new mineral wool facility started shipping during the third quarter. We have made significant progress in moving towards stable operations. Volumes are building, and we are approaching breakeven. We continue to be excited about the expansion of this business and expect tailwinds as we move into 2018.

The FOAMGLAS integration is progressing well, and we are enthusiastic about the opportunities and people this acquisition brings Owens Corning. The business delivered $73 million -- delivered revenue of $73 million in the third quarter. We now expect EBIT contribution to be at least $15 million in 2017. As a reminder, we anticipate a run rate of $20 million of operation -- operational and commercial synergies by mid-2019.

For the full year, we continue to expect revenue growth of more than $250 million and EBIT of about $185 million. Our outlook includes the expected benefit of some preprice increase buying late in the fourth quarter related to our January 2018 price increase in our U.S. residential new construction business.

Let me remind you that the Insulation business had delivered 20 consecutive quarters of year-over-year EBIT growth and operating leverage of over 50% during the period that ended in the third quarter of 2016.

Beginning this quarter and looking forward, we are pleased that the Insulation business is back on track and delivering year-over-year quarterly EBIT improvements and strong operating leverage.

Now I'll ask you to turn your attention to Slide 9 for a review of our Composites business. The Composites business continued to perform to expectations with improved operating performance and higher volumes. Sales for the third quarter were $514 million, up 4% as compared to the same period in 2016 on volume growth of 3%. Market demand continues to be strong and broad based across most geographies and product lines.

EBIT for the third quarter was $62 million, a $1 million increase when compared to the same period in 2016. The benefit of stronger volumes and lower furnace rebuild and start-up costs were offset by a $10 million bad debt charge primarily associated with a large Brazilian customer. Without this charge, the Composites business would have grown EBIT by $11 million over the prior year and showed continued margin progression to 14%. Our low-delivered cost position and product leadership actions continue to fuel growth and margin expansion.

One item of note, our Gastonia nonwovens facility is a key contributor to our year-over-year EBIT improvement. We are pleased with the operations of this plant and continue to be excited about the prospects of this business.

In 2017, we continue to expect growth in the glass fiber market driven by improving global industrial production. The underlying performance of the business continues to be strong. But as a result of the bad debt charge, the company now expects EBIT growth of about $20 million for the full year versus the previous guidance of $30 million of improvement.

Slide 10 provides an overview of our Roofing business. The Roofing business delivered another outstanding quarter. Roofing sales for the quarter were $682 million, a 13% increase compared with the same period a year ago, driven by increased sales volume in shingles and components.

Third quarter and year-to-date industry shingle shipments grew approximately 10% and 7%, respectively, with continued growth in age-related reroof and storm activity in the Midwest. Our shingle volume shipments tracked the market, and growth in our Components business helped fuel strong overall sales growth of 13% in the quarter.

The storms in Texas and Florida should have a positive impact on demand in the fourth quarter and into 2018. We now expect full year market growth in the mid-single digits with relatively flat fourth quarter volumes.

EBIT in the quarter was $147 million, up $1 million compared to the same period in 2016. Stronger volumes and higher pricing were primarily offset by input cost inflation and higher logistics costs. Roofing delivered 22% EBIT margins in the quarter on strong commercial execution and continued growth in Components. Year-to-date pricing has offset asphalt inflation, and that continues to be our full year expectation.

We are experiencing higher-than-normal delivery and logistic cost in order to service storm demand and higher transportation rates associated with securing additional transportation. These additional costs totaled about $10 million in the third quarter and are expected to continue into the fourth quarter.

Now let me turn your attention to Slide 11. As I mentioned on last quarter's call, we took advantage of favorable capital markets and completed a 30-year $600 million bond issuance in the second quarter. Proceeds from this transaction were used to fund a portion of the Pittsburgh Corning acquisition and retire $284 million of higher-cost debt. The company incurred a loss on extinguishment of debt of $71 million in the quarter associated with these actions.

Since the second quarter of last year, we have successfully deployed about $1 billion on value-creating M&A with the acquisition of InterWrap in 2016 and Pittsburgh Corning in 2017. We financed both acquisitions with roughly 50% long-term debt and 50% prepayable bank debt. In 2016, we retired all the bank debt associated with the InterWrap acquisition and returned $328 million to shareholders via dividends and buybacks. Through the third quarter of 2017, we have also retired all the bank debt associated with the Pittsburgh Corning transaction and returned $226 million to shareholders via dividends and buybacks. This is a testament to our ability to generate strong free cash flow and allocate capital to drive long-term shareholder value.

In the third quarter, under a previously announced share repurchase program, we repurchased approximately 320,000 shares of the company's stock at an average price of $65.79 per share. As of September 30, 7.5 million shares remained available for repurchase under the company's current authorization.

During the first 9 months of the year, the company paid its shareholders $67 million in dividends. 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 I'll provide our outlook for 2017. For 2017, the company continues to expect an environment consistent with consensus expectations for U.S. housing starts and improving global industrial production growth.

In Composites, we now expect EBIT growth of about $20 million, driven by increased volume and improved operating performance.

For Insulation, we continue to expect revenue growth of more than $250 million with EBIT of about $185 million, including the contribution from our FOAMGLAS business.

In Roofing, we expect another great year. We now expect full year market growth in the mid-single digits with a relatively flat fourth quarter.

We continue to be optimistic about the earnings growth potential for Owens Corning. Year-to-date adjusted EBIT grew 10% over the comparable period in the prior year despite some isolated market challenges. As we look to the fourth quarter of 2017, we continue to expect to deliver full year adjusted EBIT of at least $825 million, representing a growth rate of at least 11% over 2016.

Finally, improved earnings, better working capital performance and our advantaged tax position will translate into a high conversion ratio of adjusted earnings to free cash flow. We expect a third consecutive year with conversion of 100% or more.

Now please turn to Slide 12, where I'll provide guidance on other financial items for the year. We now expect corporate expenses to be approximately $140 million. Capital additions will be about $385 million, including capital expenditures associated with the FOAMGLAS business. Depreciation and amortization expense is expected to be about $370 million. Interest expense is expected to be about $110 million. Our $1.8 billion U.S. tax NOL will significantly offset cash taxes for some time to come. As a result of our tax NOL and other tax planning initiatives, we expect our 2017 cash tax rate to be 10% to 12% of adjusted pretax earnings. Our 2017 effective tax rate is expected to be 32% to 34% of adjusted pretax earnings.

One final item. We are excited to host an Investor Day here in Toledo on November 16. The management team will review our businesses in more detail, including how we will continue to build upon our track record of operational and financial performance.

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

Thank you, Michael. Rachel, we're now ready to begin the Q&A session. (Operator Instructions)

(Operator Instructions) The first question comes from John Lovallo with Bank of America.

I guess the question would be on the bad debt charge. I'm curious if, a, any of this is recoverable. Is this a reoccurring charge? And what percentage of your business does this customer represent?

Yes, thanks for the question. This is Michael. A couple things I'd point out. I think, first and foremost, we do pretty well in Brazil overall despite it being a pretty difficult economic environment right now. So the last 2 years from an overall economic perspective have been pretty rough. This is a long-term customer that we've had in Brazil and we had a good relationship with, and the customer had been profitable for many years. Unfortunately, the customer lost a material sales contract, which represented the majority of their business, so things went south pretty quickly. They're going through a reorganization process, but we thought it appropriate to take a full charge on the outstanding receivable. I think our point of view at this point in time is that recovery is probably pretty low. I would say that from an overall credit perspective, the Owens Corning team has a pretty strong track record. We have strong credit controls and strong review processes. And at this point, we don't see any other really material risk.

The next question comes from Matthew Bouley with Barclays.

So on the Insulation business, you commented on the prebuy expectation in December ahead of the price increase. Could you just elaborate on how that typically plays out in terms of magnitude? And to what degree customer inventory levels into year-ends would typically play into their buying decisions?

Sure, I'm happy to talk about that. This is Mike. We detailed that a little bit in our guidance. I think one of the macro things that we're seeing is housing starts have been a little bit slower through the summer than maybe where the consensus forecast had been for the last earnings call. So as a result, we think kind of the macro market opportunity for us this year may be a little bit less than where we would have been the last time we gave guidance. But I think, today, you heard us reiterate our guidance in terms of our confidence on both revenue growth and EBIT growth. And a part of that is, we do expect that volumes will continue to be strong through the end of the year because the price action for next year has been announced for very early in January. And we announced a sizable price increase, so we've announced a 12% price increase on batt insulation and a 15% price increase on blow-in walls. So with that type of increase, if there's some amount of expectation that we'll realize a portion of that increase, it's in our customers' best interest, obviously, for them to take an inventory position at year-end and buy ahead of that increase. And that's included in the way we're thinking about guidance for the full year. Generally, we see good market conditions in October. I think in both Michael's prepared comments, mine and also the press release, we did say that things slowed down a bit in September, particularly related to the hurricanes. We saw kind of a choppy middle of the month, but we were glad to see business return back to normal kind of early in the fourth.

The next question comes from Mike Wood with Nomura Instinet.

Just wanted to follow up on the residential insulation pricing. Like you had mentioned, you announced several fairly large price increases this year, probably 2 should be in the results in third quarter. It looks like by my math, maybe there's about 20% realization of those residential price increases. It seems like a low realization rate. Just wondering if you could put that in context historically, if there's anything impacting the success of that, other competitors or new capacity.

Sure, happy to take that. We've been happy with the progression of pricing through the year. I think one of the real positives that we would see, which we think is a green light for the business, is that we have been successful now in 3 pricing actions. I think in each of those pricing actions, we had announced relatively sizable increases, and I think the market settled out at a number that was less than what we had announced, which is not uncommon. I think if you look at the timing of the increases, our January increase really was designed to recover the price we had lost in the second half of last year. So that really didn't represent a lot of progress on pricing. It represented kind of reversing the headwinds that we had coming into the year. So most of the price you would see in the business on a year-to-date basis would have come from the pricing action we took late in the second quarter, and we did report a reasonable amount of price realization in the third as a result of that action. We had another price increase, obviously, that was in the September time frame. We saw some amount of that contribute to the third. I think that, that will contribute more significantly to the fourth. So as you roll it through, we would expect that we'll continue to see very strong operating leverage. And I think I commented on that in my prepared remarks. If you pull out the impact of the FOAMGLAS business, which was $73 million of revenue and $10 million of EBIT in the quarter, the underlying business had $19 million of revenue growth and about $16 million of EBIT growth, so again, very, very strong operating leverage. And I think in Michael's comments and mine, we also said we lost about $5 million of revenue and $5 million of EBIT in the quarter associated with the hurricanes. So with that add-back, a little bit stronger revenue growth had we been able to get that revenue and then obviously very strong operating leverage. So our optimism about the fourth comes from kind of the market conditions, where we are in the September price increase, how we felt about volumes coming out of the month of September and also the fact we're not going to carry some of these incremental costs we had in September into the fourth quarter. So we're expecting a strong fourth quarter that'll finish out the year in good shape.

The next question comes from Susan Maklari with Crédit Suisse.

I'm wondering if you could talk a little bit to how you're thinking about the incremental margins in Insulation for next year. Clearly, it seems like the pricing has been pretty effective and FOAMGLAS sounds like it's coming together pretty well and at least with -- in line with your expectations, if not perhaps a little bit ahead of that. So can you just help us think about how we should be sort of projecting that going forward?

Sure, Susan. So we're going to have a fair number of moving pieces in our numbers for next year. Let me kind of talk you through what we see as some of the puts and takes as we look into Insulation. Obviously, we're going to have a full year of Pittsburgh Corning. We'll detail that out and you'll be able to kind of have visibility and transparency through to some of those numbers. So they won't show a tremendous amount of operating leverage, but they will show a nice contribution in terms of revenue and EBIT margins because that business is a very stable and good contributor. I think we'll have a tailwind in our mineral fiber business. I think Michael has detailed the start-up of our Joplin facility. It is up and running now in the third quarter. Our goal is to get it in the range of breakeven by year-end. So the losses that we incurred in that business through the first half of the year -- on the last quarterly call, we said that those were around $11 million. Maybe we'd cut those in half in the second half of this year. So going into next year, we would hope to have a throwback in the Insulation results associated with much better performance in that facility, much better performance of our domestic mineral fiber business, which then gets you back to kind of the residential insulation business, which is where we've had a real focus on trying to get our margins back to historical levels associated with some pricing actions. Historically, we've always said if you kind of get to that remaining piece of the business, 50% operating leverage is a good number for that business. We demonstrated that over about a 20-quarter period of time up to the second quarter of last year. Then we've been a little bit sideways here for the last 4 quarters as we worked our way through some market share disruption. I think now we're back to the right position in the market and the right outlook on operating leverage. So it will be all those pieces combined to kind of get to next year's outlook. But I would say if you come back to that residential new construction piece of the business and our light-density Fiberglas products, which has really been the focal point of our margin improvement efforts, we would expect to continue to show at least 50% operating leverage on that piece of the business.

The next question comes from Robert Wetenhall with RBC Capital Markets.

Business seems like it has a lot of momentum. Glad to see everything working. A couple pieces of noise in the quarter. I hope we could switch gears and talk about Composites in the quarter. I'm just trying to understand a little bit, you had, I'm assuming, a negative mix shift just producing more shingles for the Roofing business, trying to understand better what like-for-like Roofing is. Also, the revenue contribution attributable to the loss of the Brazilian write-off. And just thinking about this big picture, and you might cover this at the Investor Day, could you give us a preview kind of what you're thinking in terms of global industrial production and leverage to that market going into '18?

Yes. So let me take your first -- the Brazil question first, Bob. So it's ostensibly been out of this year's revenue, so you're not going to really see an impact going forward. And then in regards to global industrial production, it's still tracking at roughly 3.5%, which is roughly 2x what we saw last year. Revenue and volume growth for the year has been pretty good. But you're right, it did decelerate a little bit in the third quarter. So volume momentum in the third quarter was up about 3% year-on-year. And on a year-to-date basis, it was up roughly 7%. Now in the first half of the year, we did have customers that were restocking inventory positions in anticipation of better global growth. So I think that's a good thing, but that's kind of eased as we've moved into the second half of the year. And then within U.S. construction, in particular to materials that go into our Roofing business, we had a really easy comp in the first quarter of this year. So again, the momentum has slowed as we moved into the second half of this year. That said, as we look forward, next year should set up to be a pretty good year. We're expecting, I think, decent volume growth. The business has delivered really good operational performance. And as we move forward, we would expect to continue to grow top line and grow bottom line.

The next question comes from Stephen Kim with Evercore.

I wanted to just clean up a little bit here on the cost you'd mentioned in Roofing. I think you had talked about the transportation. I think you called them logistical costs. Was curious if you could give us any sense for if there was a geographic concentration in that and whether or not you've been successful in putting through sufficient price to be able to cover those as we go forward. I know you had mentioned that you thought it would continue into 4Q '17, so I just wanted to understand the interplay, if there was any, basically, hurricane effects and whether that's net of a price commentary. And I guess, I should also say, if it's going to extend into 4Q '17, wouldn't that also extend maybe into the first half of next year? So if you could just give us some -- a broader understanding of the logistics.

Thanks, Stephen. Great question, and happy to talk more about that. This is Mike. I think Michael in his prepared comments said we had about $10 million of incremental costs in the quarter related to storm activity. Just to clean up any confusion, that would not be hurricanes. That would be other types of storms, hailstorms and high wind events where we did see a fair amount of activity through the spring and into the summer. So this is geographically dispersed away from Houston and Florida and is in places like the Upper Midwest and the Mountain states. So when we look at our manufacturing network, we got into a position where our Midwestern facilities were running at very, very high levels of activity. Obviously, the business in Roofing right now is all very good business, so we certainly wouldn't want to walk away from any customer opportunity. So we made the decision to begin shipping some products across regions in order to be able to service demand and support our position in the market. From our point of view, given that this is an opportunity for us to service volume that was probably above and beyond what we had expected coming into the year, we were going to need to incur some costs in order to make sure that we took care of business. Our goal would be, obviously in our pricing actions, to recover any cost inflation we have. And some of this is true inflation, where we're having to pay more for flatbed trucks and the rates are higher because of a lack of availability of trucks. So that certainly would work its way into our pricing thought process as we go into next year. But another part of it, we should be able to unwind these costs next year as we start to see our regional demand balance out with our regional capacity. So a part of it is a timing or a temporal issue and then a part of it is, if we continue to see freight rates that are pushing up against inflation in the business, we would think through all the inflation in the business, not just asphalt, and try to figure out how we can recover inflation in the price of a shingle.

The next question comes from Kathryn Thompson with Thompson Research Group.

On the Insulation segment, from a broad industry term, where are you in terms of insulation capacity utilization? I understand that you control roughly half of the industry's cold lines. What's your appetite for restarting capacity given increased demand, particularly post-storms?

Yes. Thanks, Kathryn. Our view of the insulation capacity situation is relatively unchanged from where we would have been 6 months ago. We continue to believe that the overall industry is operating somewhere in the low-90s. We've said that we -- our utilization rates are somewhat below what we think the industry average is. So I think by inference, you can conclude that we believe our competitors are operating somewhere above that average. So from our perspective, fairly healthy utilization levels and continued growth. So even as we talked about our September, which was a little bit choppier, we still saw growth in the month of September. It was just a little bit slower growth than what we had seen through the first 8 months of the year. So we have seen kind of month-on-month growth in the business, which is very constructive for us. So as a result, we think that we've entered the stage of kind of the recovery where our focus on trying to get improved pricing to restore our margins back to a healthy level is something that justifies reinvestment in the business. That maybe our success in doing that will accelerate a bit. And also, I think you would expect to hear us announce that we would bring whatever capacity we needed to bring to bear in the market to support our position in the market. So at our current utilization levels, we think we can run our network a bit harder. So we probably have a lot of productivity we can get out of the business and a lot of operating leverage we can get out of the business at least over the next 12 months in terms of the amount of volume and volume growth we'd expect to see in our network. So I think we're well positioned to get a lot of operating leverage in our business based on our current utilization levels.

The next question comes from Stephen East with Wells Fargo.

This is actually Truman Patterson on for Stephen East. Jumping over to Composites. I think that you guys have done a good job explaining the Insulation and the Roofing margin side of the business. But on Composites, as we look forward -- as we turn the calendar year, half your business is on year-end contracts. Last year, I believe there was a little bit of supply that came on in Europe that kind of disrupted some of your pricing efforts. But as we turn the calendar year, what are your expectations for this year? And maybe just give a general overview of where you see kind of the supply-demand balance.

Thanks for the question. And so I'm going to give a little bit of history as well. So just as a reminder of the period '14 to '16, we delivered roughly $120 million in mix and price improvements. You highlighted, I think, that in the second half of 2016, we did see a little bit of weakness, primarily in Europe, and we highlighted this on our Q3 earnings call, if my memory serves me correctly. And we were making some adjustments basically to maintain our market position with some of the product flow that was coming from the Middle East. And then we did see a little bit of erosion in some proprietary product positions as well. As we sit here today, I'll tell you that the overall market is stable. So 2017 price has been slightly negative as the adjustments in the second half of '16 have annualized. The good news is that, that's eased in the third quarter of this year. And actually, in the third quarter, we made some minor sequential progress. As we sit here today and think about the annual negotiations and moving into 2018, overall, the market fundamentals are actually pretty good. Capacity utilization remains relatively high at about 90%. There is a bit of inflation. Demand is pretty good. So we think the catalyst for price for the fourth quarter and as we move into '18 is pretty good.

The next question comes from Phil Ng with Jefferies.

Did you see any lift in Roofing volumes during the quarter from hurricane demand? And could you provide a little color how the sell-through is kind of progressing in the fourth quarter? And if you're able to parse out storm demand versus Roofing, that would be helpful.

Sure, Phil. This is Mike. I think in terms of hurricane demand in Roofing, we would say it was probably about a wash in the quarter. We saw some disruption in terms of our ability to ship into places like Houston and Florida during the periods of the storm and then the immediate aftermath, where really the first priority is clearing out debris and trying to get power and other things back to affected neighborhoods. We then saw late in the quarter -- some of the customers in those regions were starting to be able to bring product in. And this is really tough [art] to try to figure out exactly where you stand. But our sense would be that in the quarter, we probably saw about a net 0 impact on volumes associated with the big hurricane events in Florida and Texas. Obviously, we expect we're going to see a little bit of lift in the fourth quarter associated with those storms. We're comping against a very strong fourth quarter last year and also generally across the industry. There is some tightness in supply. I mean, we detailed some of the things we're doing to try to be able to service the market and some of the additional logistics costs we put into our business to try to service the market. So I think there is some speed limits on how much volume will get shipped in the fourth quarter just related to how much capacity is out there and people wanting to get their inventories in a good position at year-end heading into next year. So we're expecting a fairly stable market through the fourth quarter with decent volumes, pretty much flat to last year, as I said, in my comments. We think we'll head into next year with most of our customers in a good inventory position, and we'll head into next year with a decent demand profile. Now in terms of overall storm demand, we're comping about flat this year to a very strong storm year in '16. And the strong storm year in '16 was coming off 2 very weak storm years in '14 and '15. So I give a bit of a history lesson here because I want to remind people that the volumes we saw this year -- we actually came into the year thinking it was going to be tough to comp at the '16 level related to storms. And in fact, between the minor storms, some of the hail and wind events I talked about and now this hurricane, we actually think we'll comp about flat to 2016 storm activity, even with an industry estimate of maybe 4 million or 5 million squares of demand coming out of the Texas and Florida hurricane events with the most of that carrying over into next year, our expectation going into next year is it's likely storms would comp negative to this year just because it is another elevated year and that likely we would not see enough growth in new construction and reroof to offset the negative comps. So we're going into next year thinking that we will probably see a slight downtick in overall demand, and most of that will come from storm-related demand. Having said that, we're now operating in a market that best estimate is probably going to be around 140 million squares this year, up from kind of the low 130s in 2016, but up from numbers that were closer to 110 million in the prior 3 or 4 years before that. So we're operating in a market that's at very high levels of activity. It's a very healthy market. And even if we comp a little bit negative next year, I think it will be a healthy market for us.

The next question comes from Scott Rednor with Zelman & Associates.

Mike, I just want to come back to Insulation. Again, obviously, I think it's super topical today, so apologize for being redundant. But even if you add 1 point back in the quarter for lost demand, you'd be running like [3%] volume growth. I think commercial is a tailwind from the new facility. And just nothing is running that slow, and then you're implying that you have to see a very steep, sharp move in 4Q. So do you guys have a better sense on -- is that the right analysis? Or what would I be missing? And I guess, that's kind of where I want to hear a little bit more.

Well, let me talk a little bit about kind of how we see the fourth quarter ramp in the business. I mean, given our guidance, it's not hard to get to numbers for the fourth quarter that would suggest we think we're going to do EBIT that's roughly double where we were last year. We showed nice progression in the third quarter, so the overall business was up about $26 million, about 65% versus where it was in the third quarter 2013 at the EBIT line. So we've shown that kind of progression. I think if you then look at the fact that we think the third quarter was impacted by about $5 million of hurricane-related costs, we did lose one of our facilities for almost a month in Florida related to flooding and then loss of power. We have another facility in the Houston area in our Insulation business that had some disruption. We've seen a pretty big push in polystyrene costs that came out of the Gulf Coast and some of the inputs that go into polystyrene. We had some freight and logistics costs because, the one thing about an insulation plant is, you have to keep getting raw materials to the plant because the plant runs 24/7. So even in some of the affected areas, we had to pay up significantly in order to keep raw materials coming into the facilities in order to keep our furnaces running. So the third quarter could have been quite a bit better with that additional $5 million, and I think that also would have shown sequential numbers that made the fourth quarter look like a little bit easier target. But we look at all the pieces and where we think volume will be between now and year-end. We think that we'll see enough volume here between now and the end of the year that we'll be able to get to the guidance we've given. Obviously, it's going to help a bit that we're going to get some of the September price now for the full quarter in the fourth. And as I said earlier, given that the pricing action for next year is very early in January, we would expect business to be pretty good all the way through the holidays.

The next question comes from Derrick Shmois (sic) [Garik Shmois] with Longbow Research.

I just wanted to drill in on the implied outlook in Roofing in the fourth quarter. Correct me if I'm wrong, if we look at the assumptions in Insulation and Composites, you can back into what looks like somewhere around a $25 million to $30 million reduction in EBIT in Roofing and somewhere around mid-teens margin, so just wondering, a, is that analysis correct? And b, if we're looking at flat volumes, pricing offsetting asphalt inflation, is the entire delta driven by the higher logistics? I just wanted to be clear on this.

Well, if I'm following your analysis correctly, I think you're kind of footing to our overall corporate guidance and then working it back to each of the divisions. And I think it's fair that the company, certainly, in our guidance philosophy, has always believed that the glass businesses, both in terms of the timing of demand and the nature of the operating leverage and the nature of pricing, makes it a little bit easier for us to give specific guidance in those businesses. And then I think in Roofing, we tend to give a little bit broader guidance because you can see -- from quarter-to-quarter and from year-to-year, we see fairly large shifts in the demand of the business, while overall business performance continues to be very, very good. So if you look at our overall corporate guidance, we've said $825 million or more for the full year. So I wouldn't take a literal peg to the $825 million and try to push all that back onto the Roofing division.

The next question comes from Michael Rehaut with JPMorgan.

Just wanted to circle back for a moment to Roofing and kind of understand -- kind of working off of an earlier question. When you think about the increase in transportation costs, which you expect to persist into 4Q, should -- and on top of that flat -- flattish industry demand against a tougher comp, should we be expecting a similar type of year-over-year margin decline as we've seen in 2Q and 3Q, particularly given that it doesn't appear that you're modeling in or expecting any type of additional price to offset the logistics?

Yes. I mean, certainly, we don't want to get into the business of giving quarterly margin guidance. So I'll talk broadly about some of the questions you asked, but I'm going to be reluctant to answer your question directly. We think with flat volumes, the business is continuing to produce very good cash margins. So the way we think about the businesses and the kind of the overall cash margin we earn on a shingle and the amount of volume we ship in a quarter minus our fixed cost, is how you get to the operating margin number. So if our inflation and our pricing are pretty much offsetting one another, you should expect that, sequentially, we will continue to be pretty confident in our margin performance. I think in terms of overall business performance, I wouldn't want you to overlook. We're starting to see fairly significant contribution from our Components business. So even in a flat roofing market, our shingle volumes, we would expect, would track the market. But certainly, our Components business has been tracking well above market demand as we continue to pursue the conversion of tarpaper to the coated wovens product line, which we call our synthetic underlayment. So I think we have a growth story inside Roofing that goes just beyond market demand in the shingle category.

The next question comes from Ken Zener with KeyBanc.

So one question, volume leverage on starts was less -- 2% volume, some storm-related demand there. But the price flow-through, which -- just reading the Q, you talked about the $9 million benefit of higher prices offset by equally input cost, sounds like foam; start-up cost, it's Joplin, ending $11 million in the first half; and slightly negative customer mix. So to the extent this price isn't flowing through, I assume Joplin -- that's going to be over here. You're talking about breakeven. It sounded like you lost $5 million in the quarter on that, if it was half of the first half drag. $5 million hit in Florida. I think people are really just trying to struggle with why it's not following through. And -- you try to help us there? If you could just try it again because, I mean, with $5 million Florida, whatever, $4 million start-up costs, some of this cost inflation and negative customer mix, that's the one piece I haven't -- I don't understand, I guess. But people are focused on it, if you can try it again.

Sure, Ken. So I think you've got the pieces well thought through, and I think we've detailed a lot of these pieces. So let me see if I can put it back together again. The higher pricing is primarily related to our light-density Fiberglas products, the marquee product there would be the residential new construction product. We also have some products that go into some OEM-type applications, like light commercial buildings, some venting and HVAC-type products. So those asset bases produce a product line that can go across additional markets beyond just residential new construction. So when we talk about the focus of our pricing activity, it's really been that light-density Fiberglas business with the main focus being the portion of that business that faces residential new construction. We think we've made good progress on price specific to that business. When you talk about polystyrene prices, you're correct about that in terms of there's a cost input. That would be an unrelated issue, though, as it relates to our ability to drive margins in residential new construction. So there's a different industry dynamic, there's a different industry structure in our extruded polystyrene business. And sometimes -- the pace or the timing of polystyrene prices relative to our ability to get price in our foam business, sometimes we get a mismatch there. But I don't think that's a long-term investment theme for the business. I think the investment theme for the business that we like to talk to is, when will we see the margin rate in the residential new construction business and the pricing of residential new construction unlock the significant shareholder value that we expected out there? And I think for the quarter, we would say, we showed really good price progress, and that's a really important part of supporting that theme. The customer mix piece is that -- especially related to the storms and the hurricanes, a lot of the products that go into some of the more fabricated or engineered parts of the business, so some of the HVAC products, some of the products that go into the industrial segment where prices have been a little bit better, where margins have been better, margins have been more consistent, that was the part of the business that was more affected by the hurricanes. So what we see in Florida is -- obviously, we have a very large business related to duct and duct insulation. Down there, it's very important to insulate your ducts in Florida because of all the humidity. The Gulf Coast and Houston, there's a lot of industrial business down there, and a couple of our OEMs that manufacture duct-related products were in Houston area. So we saw a pause in demand from a number of those segments during the hurricanes. And those were really the customers that are a part of the $5 million revenue miss, which is a contribution to the negative customer mix that we detailed in the Q.

The next question comes from Keith Hughes with SunTrust.

Just turning back to pricing in Roofing. You made some comments on tightness in the market. And given some of your volume growth, I could understand why you would say that. Do you expect to see more realization of residential roofing price increases over the next couple of quarters because of that?

Thanks, Keith. Our philosophy certainly in the Roofing business, now, I guess, over the last 8 or 10 quarters, has been to try to do a good job of making sure that we manage cost inflation in the business and that we sustain margins. So I think related to your question is also going to be what happens to asphalt prices, what happens to other input cost inflation, is some of the cost that we're seeing in logistics going to continue to persist. I think that would have an impact on how we think about pricing. But certainly, we've said on this call a number of times, what's really constructive for our Roofing business is good and steady demand and not either letting the market get way ahead of us in terms of inventories or us getting way behind in terms of our ability to serve the market. When the market is in good balance, we tend to produce good, stable margins and predictable volume growth. And we think that's the market we've been in now for '16 and '17. And we certainly think with the strength that we're seeing in the market right now, we should enter '18 in a similar condition. So we have quite a bit of confidence today in the margin performance of the Roofing business and certainly feel like the kinds of margins we've seen in '16 and '17 should be our target in terms of sustaining that into '18.

The final question will come from Matt McCall of Seaport Global Securities.

So this is actually, I guess, a follow-up to that last question, make sure I understood it. So you talked about the cost to service the storms, sounds like they were outside the hurricane area. As you look out to servicing those hurricane markets, do you expect the same cost to continue? It sounds like the majority of that might move out into '18. And really, how does that impact the overall margin view when you take into account price cost and you take into account logistics versus overall volume? How do we -- how do you want us to think about all those kind of puts and takes for Roofing margins in '18?

Yes. I think one of the things we did today, and I think it was hopefully helpful to the investors, is we broke that cost out because we didn't want anyone to have an impression that somehow the underlying margin structure of our Roofing business had gone backwards in the third quarter. So by breaking out the $10 million of incremental freight costs, we were hoping to give visibility to the fact that the underlying margin structure of the business is very, very strong. And in fact, even including the $10 million, the underlying margin structure of the business is very, very strong. So there's no way to describe the last quarter for Roofing besides it was a great quarter. It is true that because of the nature of where our capacity is relative to where we've seen demand over the last 6 months, we've had to move product around. I can't comment whether that's industry-wide. I know that, that's an Owens Corning phenomena. Obviously, we want to make sure that we keep our customers in stock and we do a great job at servicing their business. And so we're going to incur that additional cost to make sure that we service their business. And it's producing top line growth for us and it's producing great EBIT performance for us. As I said earlier, it would be our expectation that things will slow down a little bit at the end of the year, particularly in the northern part of the country where the cold weather will set in. Most of our congestion right now is in the northern part of the country. So we've been spending money to try to service that part of the market. My expectation would be that as we get through the winter, if we have a winter and things, in fact, do slow down, which is pretty normal, that we would rebuild a bit of inventories in some of those facilities. We could start reversing a few of our freight lanes. And then going into next year, we start to see this cost go away. We just don't think we can make that cost go away in the fourth quarter, so we wanted to help you understand that we do have some expectations that there will be some margin headwind in the fourth quarter, especially with freight and logistics. However, we're going to produce nothing but a great year in the Roofing business, and it's going to be great margin performance heading into next year.

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

Thank you, Rachel. I think Mike will make some closing comments.

Well, thank you, everyone, for joining the call. Obviously, we are very proud of the quarter that the business produced. It was not without a few challenges. I think some of them very clearly isolated like the bad debt issue in the Composites business and then some of them related to the evolution of the business and the evolution of our business through the year. But in all accords, and I hope you heard that from our commentary both in our prepared remarks and also the question-and-answer, what we're seeing right now is all 3 businesses making significant progress against the very key drivers of shareholder value: so our ability to drive margins, our ability to drive volumes, our ability to drive top line growth. I think we also feel very proud of the progress we've made with a couple of the acquisitions we've done over the last 18 months. We said today on the call the InterWrap integration is largely complete. The Pittsburgh Corning integration is off to a very fast start, and that business showed very nice contribution just in this first month -- first quarter as a part of Owens Corning. So we do think that the combination of dividends, share repurchase and an accretive value -- accretive M&A is working in our company today, and we're really happy with where we are from a balance sheet and debt position. And I think Michael detailed that in his comments. So lot of really good pieces in terms of our posture as we face the market. We certainly feel like we will be able to finish the year out strong and certainly all the indications we would see based on the comments we made, all of the progress we're making in the business positions us for another very strong year as we head into 2018. So proud of the team, I'm proud of the execution of the Owens Corning people.

I will make one last plug for our Investor Day on November 16 in our world headquarters here in Toledo. We think there's a lot to be excited about at our company. We will have broad exposure of our management team and give them a chance to talk about our businesses and what we've done to strengthen the earnings potential of the company. And we think it would be a good day for all the investors who attend to learn more about Owens Corning. So we appreciate your interest and hope to see many of you in Toledo in the next month. Thanks.

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