Q3 2019 Earnings Call
Good day and welcome to the Owens Corning.
Third quarter 2019 earnings conference call.
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I would now like to turn the conference over to Terry to me Vice President of Investor Relations.
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Thank you 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 2019.
Joining us today, our brand Chambers, Owens, Cornings, Chief Executive Officer, and Michael Macquarie Chief Financial Officer.
How do we got presentation. This morning, we were opened this what are called to your question.
In order to accommodate there's many call participants this possible. Please limit yourselves to one question on <unk>.
Earlier. This morning, we issued a news release and saw the 10-Q that detailed our financial results for the first quarter 2019.
For the purposes of our discussion today, we have prepared presentation slides got summarize our performance and results and would refer to these slides. During this call you can access the earnings press release Form 10-Q , and a presentation slides at our website or in screening dot com.
Refer to the investors link under the corporate section of our home page.
Transcript and recording of this call and to supporting slides would be available on our website for future reference.
Please reference slide two before we begin where we offer a couple of reminders first today's remarks would 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 into risk factors identified in our SCC fighting sort of more detailed explanation I mean that rent risks and uncertainties affecting such forward looking statements.
Second the presentation slides and today's remarks contain non-GAAP financial measures.
Explanation center, we calcification itself non-GAAP to GAAP measures may be found in the text and financial tables of our earnings press release and presentation, both of which are available on always calling dotcom.
Adjusted EBIT is our primary measure of period over period comparison, and we believe it is a meaningful measure for investors to compare results.
Consistent with historical practice, we've excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT adjusted earnings.
In the first core there were no adjustments to EBITDA.
We adjust our effective tax rate to remove the effect of quarter to quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share.
We also use free cash flow and free cash flow conversion of adjusted earnings has measure is helpful to investors to evaluate the company's ability to generate cash and you're talking about gas to pursue opportunities that enhance shareholder value.
Most of you following along with our slide presentation that we were beginning on slide four.
And now opening remarks from our CEO , Brian Chambers would be followed by CFO , Michael Mcmurray, and our Q and a session Brian .
Thanks, Jerry Good morning, everyone and thank you for joining us.
I'd like to begin my comments today by recognizing the working contributions of Michael Mcmurray for almost 11 years, what the company last seven as our CFO Michael has been instrumental in driving our success and building a very talented finance organization I want to thank Michael for all he has done to make Owens Corning, a stronger company and wish him the very best.
We are fortunate to have brick Gandhi, who has over 25 years, a financial experience to serve as our interim CFO .
I'll start my review of the third quarter was safety, where we continue to perform at a high level.
Our results this quarter improved versus the second quarter and remained relatively consistent with prior year, where the recordable incident rate a 0.5, htthree almost 60% of our sites or injury free this year and about half of our site to remain injury free for a year or more this reflects the ongoing commitment we all have to maintain the highest levels a safety.
Now onto our financial results or performance. This quarter was driven by continued good commercial and operational execution strong manufacturing productivity and disciplined cost management across the company.
We delivered revenue of 1.9 billion, which generated record adjusted EBITDA of 277 million. These results reflect our continued focus on the three operating priorities I outlined during previous calls to accelerate organic growth to drive improved operating efficiencies and to generate strong free cash flow.
I want to take a few minutes to update you on the progress we've made in each of these key area.
In the third quarter, we delivered organic revenue growth of 4%, 5% on a constant currency basis with adjusted EBIT growth of 4%.
Across the company, we performed well delivering growth at or above market rates.
In roofing, we increased revenues, 11% and delivered EBIT margins of 20% on shingle shipments that track, but the mark.
Our commercial focus to help contractors and distributors grow their businesses with our unique products and brands along with a more favorable geographic mix continues to generate marketshare results consistent with our expectations.
Our revenues in composites increased 5%, 6% on a constant currency basis.
Well, we're experiencing slowing industrial production growth our focus on higher value applications, such as specialty glass nonwovens and wind energy resulted in good demand growth for these products demand for our roofing. That's also increased during the quarter inline with our higher single shipments.
And inflation revenues were down slightly on a constant currency basis, our technical another building inflation businesses continued to perform well in the quarter, Although we do see a more challenging market environment developing in the fourth quarter, especially related to the timing of global projects and slowing markets in Europe .
Our north American residential fiberglass business, we continue to make good progress in restoring our historical share position.
Although lagged housing starts in the quarter still trail prior year, we are encouraged by an improving market outlook and growing builder confidence.
On a priority to drive improved operating efficiencies. We also continued to make good progress.
We delivered manufacturing productivity across the company as we realize the benefits of standardize work practices process improvements and automation.
We also continue to maintain strong cost controls and look for ways to leverage our scale and enterprise capabilities year to date marketing and administrative costs, along with science and technology costs remain relatively flat versus last year and we have further reduced our full year outlook for corporate expenses.
In addition to this work we are taking specific actions within the insulation business to further improve our cost position in our north American residential fiberglass business, while maintaining the ability to service future growth.
Our ongoing productivity and process improvements enables us to further optimize our production capacity, while maintaining our ability to service our current customers and meet future demand needs driven by market growth and share gains Michael will provide additional details on these actions.
On our third operating property generating strong free cash flow, we delivered another quarter of good performance, we remain committed to improving our free cash flow in 2019 through an increased focus on managing working capital and Capex investments in the third quarter, we improved our free cash flow by 129 million versus prior year, keeping us on track to generate significant.
Free cash flow and 29 came.
During the quarter, we continue to balanced production with end market demand across the company, taking appropriate actions to manage our inventory levels.
We also continue to actively evaluate our capital investment and a further reduced our full year outlook by 15 million, bringing our total capital expenditures in line with depreciation and amortization for 2019.
I'm pleased with the work done by our teams in this area. Our continued focus to extend the operating life of existing assets and prioritize new investments to support the best productivity inorganic growth initiatives within the company should allow us to sustain capital spending at the level of depreciation and amortization over the next few years.
For the remainder of the here, we will continue to prioritize free cash flow to the reduction of the product term loan and ongoing dividends. Additionally, free cash flow can be deployed for share repurchases under the company's existing authorization.
As we think about capital allocation moving forward with our continued focus on organic growth operating and capital efficiency and strong cash flow generation, we see the opportunity to return at least 50% of free cash flow to shareholders over the next few years.
Before turning it over to Michael to discuss our financial performance in more detail. There are few other items I would like to comment on.
Last month, we were honored to earn placement on the Dow Jones sustainability World Index for the 10th consecutive year and to be named industry leader for the building products group for the seventh straight year.
We also just released our 2030 sustainability goals.
These are most ambitious goals today, and we'll push us to discover new ways to officially use resources and create more sustainable solutions not only is this the right thing to do is becoming more important to our customers and our employees and in August we were the first U.S. industrial company to issue, a green box, which demonstrates our drive to be a net positive company and roughly.
Next our investments in sustainable products and processes.
Collectively these accomplishments are important external validation of the sustainable way, we run our company, which gives us a competitive advantage as well as recognition the great work our employees do everyday to make a difference in closing I am pleased with our execution and performance in the third quarter delivering strong revenue growth record adjusted EBIT and improved cash flow.
We have a clear set of operating priorities, we have market, leading businesses and attractive end markets innovative products and process technologies and in enterprise model that creates differentiated value and most importantly, we have a talented and energized team dedicated to the success of our customers and our shareholders.
I believe we are well positioned to capitalize on market opportunities as we finished 2019 and enter 2020.
With that I will turn it over to Michael to review, our financial performance and outlook Michael.
Thank you, Brian and good morning, everyone as Brian mentioned earlier Owens Corning had a good third quarter highlighted by revenue of 1.9 billion record adjusted EBIT and significant free cash flow improvement.
We had strong commercial and operational execution in the quarter and we're positioned to deliver another year of strong earnings. Despite some challenging end markets for the quarter, both revenue and adjusted EBIT grew on stronger volumes, good manufacturing productivity and good cost control. In addition, our year to date free cash flow improved by 200 million on strong earnings stream.
Working capital management and disciplined capital spending.
Now, let me start on slide five which summarizes our key financial data for the third quarter, you'll find more detailed financial information and the tables of today's news release and the Form 10-Q today reported third quarter 2019, consolidated net sales of 1.9 billion up 4% compared to sales reported for the same period in 2018.
On a constant currency basis, we delivered consolidated organic revenue growth of 5% highlighted by strong volume growth and roofing and composites.
Adjusted EBIT for the third quarter of 2019 was a record 277 million up 10 million compared to the same period, one year ago on stronger volumes solid manufacturing productivity and good cost control.
Net earnings attributable to Owens Corning for the third quarter were 150 million compared to 161 million for the same period last year adjusted earnings for the third quarter of 2019 were 179 million or $1.63 per diluted share compared to 174 million or dollar 57 per diluted share in 2018.
I would like to mention one item related to adjusted EPS during the third quarter the company incurred a $32 million loss on the extinguishment of debt, which has been adjusted out of our results I'll give more color on this transaction later in my prepared remarks.
Depreciation and amortization expense for the quarter was 112 million up slightly as compared to the same period a year ago.
Capital additions for the quarter or 132 million.
Net cash flow from operations totaled $309 million, a 109 million improvement from the same period one year ago.
Free cash flow improved by 129 million for the third quarter, both benefited from improved working capital performance and disciplined capital spending.
During the third quarter, we had no adjusting items between our 2019 reported and adjusted EBIT up 277 million.
Now please turn to slide six would provide a high level review of our adjusted EBIT performance comparing 2019 to 2018.
Adjusted EBIT increased by 10 million.
Roofing EBIT increased by 16 million as compared to the prior year composites EBIT increased by 3 million and insulation EBIT decreased by 10 million.
General corporate expenses were $17 million down slightly from last year.
That review key financial highlights I ask you to turn to slide seven where we provide a more detailed review of our business results beginning whether installation business.
Sales and installation for the third quarter were 693 million down 2% from the same period, a year ago, the negative impact of lower sales volumes, primarily in our north American residential fiberglass insulation business, along with negative foreign currency translation was partially offset by slightly higher selling prices.
EBIT for the quarter was 84 million down 10 million compared to the same period in 2018, the progress in our technical and other building insulation businesses was more than offset by lower sales and production volumes and our north American residential fiberglass insulation business improved manufacturing offset inflation in the quarter.
Improved performance in the technical and other installation businesses was driven by volume growth and improved pricing, our commercial and operational execution continues to be strong in these businesses despite facing into some weaker markets in Europe .
And our North American residential fiberglass insulation business. We previously highlighted the difficult volume comparison would face this year in this business as a result of some share loss and weaker lagged housing starts the quarter was impacted by 16 million a production curtailment actions the negative impact of production curtailments, we'll continue to be a headwind in the fourth quarter.
Consistent with our goal to restore our market position, we continue to recapture some share during the quarter, while market pricing was broadly stable.
In 2019, we continue to expect earnings growth and the technical and other building insulation businesses. We expect that this earnings growth will be more than offset by lower sales and production volumes in the north American residential insulation business.
The installation business has trailed last year's quarterly results by just over 10 million on average over the past three quarters.
During the fourth quarter, we expect to other items to create additional headwinds of approximately 15 million.
First the North American residential fiberglass insulation business will face into a difficult price comparison in the fourth quarter. The business implemented a number of pricing actions in 2018, these increases, including one which was realized in the fourth quarter of 2018 are expected to create a negative price variance in the fourth quarter.
This will represent the majority of the additional headwind second the technical and other building insulation businesses have delivered good earnings growth in the first three quarters. It will improve for the full year, but is expected to face into a negative comparison for the fourth quarter due to continued weakness in Europe and the timing of some global projects now I'd like to discuss the.
Installation cost improvement actions highlighted in today's press release, and and Brian's prepared remarks.
Enabled by prior investments in productivity and process technologies in the North American residential fiberglass insulation business, we have taken actions to optimize our network as well as other actions to improve our cost structure.
As part of these actions we've taken a line called in Kansas City that manufacturers bats, enrolls, which includes significantly reduced staffing levels. These actions will result in a simpler and leaner facility in Kansas City focused on Lucille production.
These actions will reduce the impact of curtailment by allowing us to run higher utilizations at other facilities.
With these decisions we are confident we can service the current demand outlook with a smaller footprint and improved operating efficiencies. Additionally, we maintain flexibility within our network to serve the needs of our customers under accelerated market conditions. These actions are estimated to generate annual EBIT improvement of approximately 25 million by 2020.
One with about $20 million achieved in 2020.
We expect that the majority of the 2020 benefit will materialize as a reduction of curtailment cost.
These actions will result in restructuring and other related charges of approximately 30 million of which 50 million is noncash we expect to recognize about two thirds of these charges in the fourth quarter of 2019 with the remainder being largely recognized in the first quarter of 2020.
These charges will be treated as adjusting items and excluded from insulation segment results now I ask you to turn your attention to slide eight for a review of our composites business.
Sales in composites for the third quarter or 531 million.
5% compared the same period in 2018.
During the quarter the business delivered volume growth of 7% despite slower global growth our demand outpaced the broader market on growth in roofing wind and glass non woven markets selling prices were down slightly.
Negative foreign currency continued to be a headwind, although less pronounced than in previous quarters revenues were up 6% on a constant currency basis.
EBIT for the quarter was 67 million up 3 million compared to 64 million in the same period last year the benefit of lower furnace rebuild in startup costs and higher sales volumes was partially offset by lower selling prices and higher input cost inflation foreign currency translation continue to have a slightly negative impact on EBIT composites delivered 13 person.
EBIT margins for the quarter. The composites business continues to deliver strong commercial and operational performance and benefited from solid manufacturing performance in the third quarter from a cost perspective, we expect that our recently completed low cost India facility expansion, our high strength glass strategic supply lines with Cpis see in China in our previously announced high cost smelter.
A restructuring actions will drive manufacturing productivity and continue to improve our cost position.
For 2019, we continue to expect growth and the glass fiber market consistent with historic relationship with global industrial production growth.
Global growth expectations have continued to soften, particularly in Europe , and North America as we entered 2019 consensus expectations for global industrial production growth were 3% today consensus expectations around 1% for 2019.
This slowdown coupled with our very strong manufacturing performance has required changes to production in the third quarter, which will continue into the fourth quarter and could continue into 2020 for 2019, we continue to expect volume growth and improved operating performance to largely offset inflation.
Slide nine provides an overview of our roofing business.
Roofing sales for the quarter were 730 million up 11% compared with the same period, a year ago with higher sales volumes driven by strong market growth and shingles. The U.S. asphalt shingle market grew by 16% in the third quarter with our single volumes tracking the market. The volume benefit this quarter was partially offset by lower selling prices.
Yes.
While we did not make progress with our July price increase shingle pricing was broadly stable during the quarter and inline with the prior year the decline in overall pricing in our segment results was primarily the result of the comparison to lower rebates in 2018 rebate adjustments were taken in the third quarter of last year associated with annual customer volume targets.
This negative rebate comp will largely repeat in the fourth quarter.
EBIT for the quarter was 143 million, a 16 million increase from the prior year, primarily due to higher sales volumes lower selling prices were partially offset by lower transportation cost in the third quarter asphalt cost continued to generate modest year over year inflation.
Our year to date price improvement exceeds the net inflationary impact of asphalt and transportation cost our EBIT margins were 20% our cash contribution margins continue to be healthy for the fourth quarter. We expect a seasonal decline of asphalt costs resulted in modest year over year deflation.
The roofing business is positioned to deliver another strong year in 2019 based on the robust third quarter market performance and a tough comparison to the distributor inventory builds in last year's fourth quarter. We expect this year's fourth quarter market size to be lower than the prior year. We continue to expect full year us industry shingle shipments to be relatively.
Flat.
Now please turn to slide 10 review significant financial matters. During the third quarter, we took advantage of favorable capital markets and successfully completed a 10 year $450 million Green bond issuance with a yield below 4%. The proceeds were used to tender portions of our 2022 and 2000.
36 bonds. This was the first evergreen bond issued by US Industrial company again, we incurred a 32 million loss on extinguishment of debt, which has been adjusted out of our results in September the company's board of directors declared a quarterly cash dividend of 22 cents per share in October we took actions to reduce.
Future pension obligations, we entered into a transaction that transferred $89 million a pension benefit obligation by purchasing an annuity contract with 83 million and plant assets or about 93 cents on the dollar the transfer of these obligations settles future liabilities and will generate annual administrative cost savings for the plan in the fourth.
Quarter, we expect to recognize a noncash settlement charge of approximately 45 million associated with this action.
This charge will be treated as an adjusting item and excluded from general corporate expenses, both the bond and pension transactions are detailed further in the notes of our 10-Q.
Now please turn to slide 11, right provide more context on our business outlook for 2019.
The company's outlook is based on environment consistent with consensus expectations for global industrial production growth Us housing starts and global commercial and industrial construction growth. The global growth outlook has continued to soften since our last earnings call. However, our commercial and operational execution to date has been strong.
And then selection for the full year the company expects earnings growth in the technical and other building insulation businesses. The company anticipates. This earnings growth will be more than offset by lower volumes and production curtailments in the north American residential fiberglass business for the fourth quarter weakness in certain markets and a negative price comparison in north.
Actual business will cost you more difficult comparison.
In composites for the full year. The company continues to expect growth and the glass fiber market. Although the macro outlook has continued to soften. The company continues to expect volume growth and improved operating performance to largely offset inflation in roofing for the full year. The company expects us shingle industry shipments to be relatively flat for Owens Corning.
The company still anticipates, a higher share of industry shipments and a favorable geographic mix comparisons to prior year.
Year to date contribution margins positions the business for continued strong performance.
Now please turn to slide 12, right provide other guidance for the year.
Over the last four years improved earnings better working capital performance and our advantage tax position translated into a strong conversion ratio of adjusted earnings to free cash flow in excess of 100%.
In 2019, the combination of our solid earnings continued focus on working capital management and disciplined capital spending has contributed to free cash flow improvement over 200 million for the year day period inventories improve sequentially by about 25 million in the quarter and further improvements are expected in the fourth quarter for the year we.
Confident that we will deliver another year of strong free cash flow conversion.
The company plans to prioritize free cash flow to ongoing dividends and the reduction of the term loan associated with per rock for the remainder of the year. Additionally, free cash flow could be available for share repurchases under the company's existing authorization, which has 3.6 million shares available for repurchase.
As we look forward, we are targeting overtime, returning at least 50% of free cash flow to investors through dividends and share repurchases.
We now expect corporate expenses between 110, and 115 million. This represents a $15 million to $20 million reduction the guidance discussed on our last call as result of strong cost controls and the benefit of some onetime items in the quarter.
Looking ahead to 2020, we expect to sustain some benefit from structural cost improvements, although we expect overall corporate expenses to be more consistent with historical levels. This expected growth is due to the reset of performance based compensation to more normalized levels associated with improved performance and the comparison against this year's onetime benefits.
Depreciation and amortization expense is expected to be about 460 million.
Capital additions are now expected to total approximately $460 million, which represents an additional $15 million reduction to our previous outlook and down 40 million from our guidance at the start of the year going forward. It is our expectation that capital spending should track broadly in line with DNA overtime, including investments in organic growth.
Interest expense is expected to be about a 130 million.
As a result of our tax unwell foreign tax credits and other planning initiatives. We now expect our 2019 cash tax rate to be 9% to 11% of adjusted pre tax earnings.
Our 2019 effective tax rate is expected to be 26% to 28% adjusted pre tax earnings.
Before I close I want to thank Brian for his kind words at the started his prepared remarks, no doubt a difficult decision for me both personally and professionally Brian I will Miss working with you and the rest of the Owens Corning team I think the company has a bright future.
With that I'll turn the call over to tier to lead us into question answer session Jerry.
Thank you Michael Allison, we're now ready to start the Q and a session.
Thank you.
We will now begin my question and answer session.
Ask a question you May press Star then one on your telephone keypad.
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Callers will be limited to one question and at this time, we will pause for a moment to assembler our roster.
The first question today will come from John Lovallo of Bank of America. Please go ahead.
Hey, guys.
My question.
The question is on inflation.
Okay.
Yes.
Third quarter.
Okay.
Can you help quantify how much carry over.
And additional.
Dollars.
Okay.
Pardon me Mr. Labella. This is the operator.
Please pose your question a little bit latter, we're having difficulty hearing you. Thank you sorry that better.
Way better better okay, great sorry about that guys.
So in inflation, you highlighted $16 million of production curtailment charges.
Third quarter with the expectation of some of that carrying over into the fourth quarter. Just hoping you could help us quantify that and then there was an additional 15 million dollar hit I think you talked about from a tough price compare and some some issues other technical side.
Can you.
Just just.
Clarify that that would those were the two big pieces and inflation.
Yes, thanks jobs for the question, let me start with their curtailments and then I'll answer on the back half year, you're hearing right on the 15 made of additional I'll give some more context on that on the curtailments. We finished the first half with about 36 million of curtailments in insulation business in the last call. We said, we thought that was going to continue into the back.
Capital a declining rate so in the third quarter, we saw unrealized 60, many of these absorbed cost.
And we continue to expect to see that into the fourth quarter, but again at a declining rate. So we will be seen some some additional absorption as we finished the year in our resin insulation business, which is why we've taken some of the proactive steps that we talked about in terms of repositioning our cost structure in that business to kind of address these curtailment cost as we go into next year in terms of the other.
Her comments around the headwinds last year, when we look at Canada, the pricing evolution last year, we we implemented three pricing increases so we had.
Prices, increasing throughout 2018, and when we came into the year, we saw our price points for high kind of relative to our historical pricing gaps and we had to make some of those adjustments. We did that broadly through Q2 Q3 pricing has been broadly stable in the market. When you kind of compare the elevated price points that we're increasing through the fourth call.
As of last year to relatively flat pricing year coming into this year on year over year bases that just creates a big negative pricing copper is that we're facing into as we finished the year and that's the piece on that on the technical and other inflation again. This is.
Products that we saw primarily into commercial and industrial applications. So we see these is more project based applications and just when we look at our fourth quarter order book, which we get some better visibility to relative to some of our other short cycle businesses. We're just seeing some of the projects kind of getting pushed out delayed.
That would probably go into the first half of next year. So we just as we look at that order book, we think it's going to be a little less than that creates a little bit of a headwind in terms of year over year comps. So we wanted to bring visibility to all that.
Our next question will come from Stephen Kim of Evercore. Please go ahead.
Yes. Thanks, very much guys you gave a lot of info in those prepared remarks, but I wanted to understand a little bit better about the.
Optimization plan, you talked about in Kansas City that youre going to be curtailing that.
Obviously, you there was a competitor that announced in expansion.
Bill.
Other line that it's going to be coming online in a year or so.
I wanted to understand specifically are you.
Shutting down a line there permanently kind of like what you did in Santa Clara.
These is that the bulk of the savings that we're referring to when you when you when you talked about it in your release.
Or if you could just give us an understanding of exactly what you're doing there that may be different from what you did in Santa Clara and then.
Well that business the insulation segment in North America also has the Payrock Im sorry also has the Joplin facility that ran into some issues a year or so ago.
Can you talk a little bit about what's going on at Joplin, right now and to what degree is the year over year comps in Joplin affecting your results today and what you see into Fourq you.
Okay. Steven Thanks, a lot to unpack here, let me try to kind of walk it through it let me let me start with just the actions, we announced and I guess first and foremost.
These actions are really about at improving our overall cost position within the business. So we have been continually focused on improving our productivity in the business through through number investments advanced process controls automation, we've been very focused on improving our process efficiencies you've heard us talk quite a bit at our last investor day Ron.
Entity efficiency improvements and how that's creating more throughput with our existing lines. So the result of all of this hard work has really given us the opportunity now that where we are producing a lot more through the existing footprint.
So these actions are really about leveraging all of that work and being able to reduce our overall cost position in the business as we go forward and we still believe we can do that and maintain servicing our current customers and also give us the flexibly to service the additional market growth in share growth as we as we go forward. So that's the set up in terms of what's driving this.
These actions now and why we feel confident we can continue to service our customers and service growth through a little bit smaller footprint.
Let me just kind of step back and talking about the actions.
Taking the Youre right, primarily there they're being centered around our facility in Kansas City, and Kansas City, we make bold bathroom roles and lose Phil. So these actions are about taking the bats enrolled line cold very similar to what we did in Santa Clara.
And then the difference is going to be were also streamlining just the overall plant operations and we're really going to be just focused on running that facility as a loose still only plant as we go forward into the network, we continue to keep a great.
Manufacturing position in our Lucille business as well as our Bath role so.
But it's really all around the streamlining that and then we're taking some additional actions and some other facilities related to streamline the operations to be more cost effective. Some of that is included in Santa Clara, where we were maintaining some operating staff to.
Bring that line backup we needed to we just don't see the need over the next few years, given where consensus housing outlook is landing right now so that's kind of broad brush or the of the of the actions.
This will reduce our overall operating costs in the business by about 25 million 20 million of that we expect to realize next year and that's really kind of offsetting the production curtailment cost for taking this year.
Simplest terms curtailment costs are just our fixed operating costs that were absorbing to the piano when we're not producing so one way to reduce that is to really eliminate those operating costs from the business and that's that's what we're doing so those are the actions in Santa Clara, we will hold that line kind of as cold idle and if we see.
Big acceleration in housing starts.
We would need that we would have that available, but we're really going to be focusing our Kansas City plant on just a really cost effective and efficient lewisville manufacturing plant.
And then your last comment I guess on Joplin Joplin as part of our mineral wool business as part of our technical and other insulation business, but I'd share with you just commercially our mineral business and the U.S.
We continue to have good commercial execution, we continue to grow that business.
And the operational performance and Joplin, we made some adjustments in terms of some work that was done maintenance work in some rebuild work that facility is now operating very well as expected. So we expect going into 2020 that our mineral business and the U.S. will be a good driver of revenue and earnings growth.
Our next question today will come from Mike Dahl of RBC capital markets. Please go ahead.
Good morning, Thanks for taking my question.
I have another.
As another follow up on insulation in two parts here I guess, the first with respect to this optimization actions I think one of the questions out there is really.
Understanding you on a position the business as strongly as possible from a cost standpoint.
This is coming at a time when broadly speaking there's been more optimism around housing.
Certainly the homebuilders and reported more encouraging trends. So I guess the to what extent are you baking into improved outlook.
In 2020 housing starts into your forecast here or what is your baseline assumption as as we move forward and then the second part outside of.
North American resi, just on the technical and the European.
Side, given what you're.
Experiencing in terms of some of the weakness, particularly in Europe are there further actions that you're looking at taking there. Thanks.
Okay. Thanks, Mike Let me talk to start with on the optimization side I think we're very encouraged by some of the recent trends.
In terms of some housing starts acceleration.
Builder confidence continues to come and we're seeing good foot traffic so.
Those are all encouraging signs.
Our outlook for the next few years is really based on consensus housing starts estimates and those would show fairly modest growth couple of two or 3% over the next few years and thats quite a bit different from what it was just 12 months ago or we saw kind of housing start estimates with a with mid single digit.
Kind of growth rate. So we're kind of looking at our outlook as improving certainly versus this year. We're encouraged by the signs we're seeing now in terms of starts and we're encouraged by the builder confidence, but we're setting kind of our operational.
Outline in terms of production relative to consensus housing estimates so in terms of the European business you. Yeah. We've seen some of the markets in Europe continue to soften we primarily sell our minimal product there are phone glass business or product line, there and we're very well positioned.
We like that business, we still see structural trends of more people moving to minimal versus phone plastic or other for other products. So we still think that there's a good opportunity for for continued growth in Europe . I think part of this is just a little bit of the headwinds. We're seeing were very strong in the Nordics for example, in our mineral wool business does.
Markets have declined a little more rapidly than than other parts of Europe . So we're starting to see those headwinds come at us during the fourth quarter.
But we don't see any any other kind of operational changes around the market outlook in Europe .
Our next question will come from Matthew Bouley of Barclays. Please go ahead.
Good morning. Thank you for taking my question. So I guess just sticking with installation.
You know you're making these changes on the capacity side in North America ahead of that improving market environment. They just alluded to.
Obviously that new competitor capacity is also focused on lease fell so.
What are your thoughts at this point about pretend potentially regaining pricing momentum in North America residential assuming the market environment does continue to improve is that.
Embedded into your outlook at all next year, and how would that competitor capacity coming online potentially affect the ability to drive price improvement. Thank you.
Okay. Thanks, Yeah, just again coming back on the optimization I do I do want to be clear when we talk about taking these actions now. These actions are really a result of our ability to produce more through our existing manufacturing assets. So it is not a read on a more pessimistic market outlook. It's just a read that we can optimize our core.
Cost structure by taking these actions and still be able to produce similar amounts as we services growth.
So as we look at at loose fill in general, but again, we want to maintain our operational capacity there, that's where we're going to maintain the operation in Kansas City. We continue to see that is a great product line and that that we should see growth and as we as we go forward and and see the housing market continued to improve on the pricing front I'd say, we've been very sick.
Vessel over the last two years in terms of gaining pricing in our residential business overall.
We had to make some of the pricing adjustments to get our price points back to historical competitive gaps that we have had we did that work through the second quarter, we've been able to see our prices being broadly stable in the market. So as we sit here today I'd I'd say, we look at we believe we got price points that are competitive in the market.
Our products very valuable and our customers love working with it.
And we see an outlook for improving housing market. So historically when the on that situation, we've been able to realize some additional pricing gains.
The next question will come from Keith Hughes of Suntrust. Please go ahead.
Thank you.
You talked about more curtailments in the fourth quarter I guess as we looked at next several quarters. When do you think the curtailments and and the restructuring actions you're doing what they can be completed we start seeing the savings from Bose.
Thanks, Keith let me start with the backend the restructuring actions I mean, we're going to be taking those primarily in fourth quarter.
With some of those kind of continuing them, but I'd be completed by the end of the first quarter and Thats why weve kind of stage. We think we out of the 25 million of benefits were going to realize about 20 million of those into next year and then the remainder into 2021 so.
When we think about curtailments.
Going forward again part of this is on on the actions, we're taking which are going to going to remove some some some capacity that we would have had to curtail. This year I mean part of these actions. This year around curtailments is we recruited selling really across our broad network. This allows us to really kind of concentrate that this action around one one bottom roll line.
And allows us to operate the other lines and much more fixed effectively and efficiently as we go forward, but we are again, maintaining the capacity to service market growth and for us to continue to restore our historical share position. So part of the curtailments going into next year is really going to be dependent on the market opportunity in terms of that because.
We do want to hold capacity available for growth and we will.
And we're going just going out the balance that against our share gains and against the market improvements. We see so we could potentially see some additional where we don't bring all these curtailments back through to the bottom line next year, but thats going to be more dependent on the on the market acceleration.
The next question will come from Michael Rehaut of JP Morgan. Please go ahead.
Thanks, Good morning, and thanks for taking my question.
Yes, I just wanted to zero in.
Is it a little bit on the roofing side and.
You know going into the quarter obviously.
Yes, there was solid or during the quarter there was solid shipment demand.
From an industry level.
You said that pricing no load there were lower selling prices year over year, and primarily just called out the fact, they had lower rebate.
In 2018.
So a higher level of rebates. This year just wanted to confirm though from an overall.
Gross pricing.
You know how would you.
Characterized pricing trends as they progress through this year, they've been stable or was there any type of variability.
And then just as a side point of clarification.
You also commented that.
We expect next years.
Corporate expense to me more consistent with historical level that number has actually moved around a little bit over the last few years.
I was hoping to get a little more clarity in terms of what that would that is actually meant that thats something that you would expect perhaps the original expectations this year to be more.
What you'd expect for next year.
Okay.
Okay. Thanks, Mike Let me again try to take him a little bit in order here. Let me first just address your question on rebates and our comments. So again last year I'm going to im going to talk about year over year comps so last year.
And it's not uncommon for for manufacturers, we will have programs with distribution.
And we will we will do certain rebates around volumes and put volume incentives in place. So last year. When we're sitting in the third quarter looking into fourth quarter, we were seeing market volumes decline on a year over year basis, and so where we would have said volume incentives. We were just seeing a lower market evolve last year relative to 2017.
Where we had some pretty high storm demand. So that would have caused us to take back as we look at our rebate accruals and we true those up to the market outlook. We took some of those rebates back in the third quarter.
And took some back in the fourth quarter, which Michael alluded to so the top on pricing is because we're not seeing that does your volumes are stronger.
That we're seeing as we kind of restored our historical share positions in place. So we're just not we're not realizing any benefit from any rebate take backs in this quarter don't expect two in Q4, so just to clarify that that statement in terms of pricing.
I guess I'll I'll evolve the pricing kind of through the year and a little bit relative to asphalt costs. So we came into the year seeing asphalt cost kind of continuing to rise we announced our April price increase relative to that the asphalt inflation, we realized in Q1, we're seeing in Q2.
And on the last call we'd actually.
Just announced in July pricing, because because we thought those.
Our costs were going to continue to increase through the quarter in fact kind of what we would we saw as asphalt cost did kind of increase and then they started to decline through the quarter and we started to realize a little bit of.
Lower cost now, we still realized inflation in the quarter year over year, because we were seeing that inflation Q2 rolling into our Q3 results. So anytime we sourced asphalt that usually going to take us kind of 60 days or so to work that through to the peaking out so.
And so we were not able and weren't successful in realizing much of the July price increase so what I would characterize the pricing environment now here in the third quarter I would say the third quarter pricing was broadly stable to those to those April price points, we didn't realize any of the July pricing, but we've got those broadly stable in place and I think.
We would expect that that pricing dynamic to continue force com, Michael you want to talk about corporate expenses sure. Thanks, Brian .
Mike maybe it maybe a bit more color around corporate expense, maybe to help you think a little bit around 2019, but probably more importantly, thinking about 2020.
As you'll remember the original guide for the year on corporate expense was 140 to 150 million.
On our Q2 call, we actually took that down to 125 to 135 million. Then obviously today further reduction to 110 to 115 million for the full year.
For those of you that have followed the company for some time.
Historically, we've been pretty disciplined around cost and pretty disciplined around around adding heads clearly as we went into the year and got into the year.
Of the level of uncertainty.
Has kind of increase throughout the year. So we've been a bit more cautious this year around discretionary spend but and then a bit more cautious around adding heads as well. So if you kind of look at what we expect him for the full year today and kind of think about it versus the original full year guide the 140 150 million.
Really theres kind of three big buckets that kind of help you think about this as you think about.
What would be kind of a good outlook for next year. So three big buckets. The first two are a little less than a third the final buckets, a little more than a third the first one is just basically good cost control and I'll come back and give it a little bit more color around that.
The second one again, which is a little bit less than third would be performance based compensation expense. So hopefully.
For the team that's in the room with me and others hopefully that comes back next year and people get bonuses and then lastly, the third one which is a little bit more than a third is related to onetime items. So on a year to date basis. There has been about 14 million of onetime items of which about 10 million. We're in the third quarter itself. So.
Those are going to repeat next year now specifically around kind of the good cost control bucket.
There's there's some stuff that is around well call. It just kind of good good cost control and actually managing managing discretionary spend managing headcount that it's actually structural and that will help cost or bring costs down for next year and there's some that's timing and I'd probably put those two kind of about 50 50.
So hopefully that's helpful.
And our next question today will come from Truman Patterson of Wells Fargo. Please go ahead.
Hi, Good morning, guys. Thanks for taking my question.
Just wanted to touch on on roofing, a little bit further im glad to hear that pricing seems a bit stable, but could you guys. Just given an update on your input costs and the outlook. It looks like transportation appears to be rolling over a little bit asphalt seems to finally be heading lower and then you have potential tailwinds from IMO 2020.
Just how we should kind of think about that going forward and if you all have been able to find.
And ability to use the higher sulfur content paid roofing shingle.
If you discovered any technology there.
Yes, thanks treatment.
I think it's a great point, because when we talk about pricing, we're always kind of managing pricing relative to our input cost inflation, primarily asphalt and other pieces.
And really that materializes into what we look at our our cash contribution margins in our cash contribution margins continue to stay very strong.
Relative to some of the some of the deflation we've seen in transportation.
And the other outlook. So if I kind of just talk through at a high level I mean from an asphalt standpoint, we have seen.
Asphalt cost come down in Q3 relative to last year.
But I would say they they remain stubbornly high relative to W. CCI cost so.
So our asphalt cost if you know even though the reducing are still relatively high to other benchmarks and we would expect to see some continued modest lowering of cost as we come through fourth quarter, just really tied to the seasonal declines that we've historically seen the business. So generally we see asphalt cost kind of ramp up through the first half in anticipation of paving season.
And then sometime towards the end of the third quarter and fourth quarter start to ramp down because paving really is the primary driver of asphalt consumption roofing to secondary consumption. So that we would expect to kind of see eve.
Pretty historical.
Declines in reductions as we come through the fourth quarter and then we would expect to see that materialize on a lag basis through our piano transportation I'd say this year on year over year basis has we have continued to see some deflation.
From our carrier base and that's that's been additive, particularly here in the third quarter and.
And we think that trend will probably continue through the rest of this year transportation costs are very dependent on the overall market economy. So I think with some of the industrial slowdown manufacturing slowdown we've seen automotive slowdown we see this year I think thats that's contributed to some of the transportation deflation. So not sure if that repeat next year I think thats going to depend.
But on the.
Economy.
And then in terms of.
About 2020 that the herself content. We can we can operate with a higher sulfur content. It does require us to put some other additives and process a little differently. So does.
It is a little bit more difficult to run, but we can do that but as we sit here today I mean, we are still not getting very good Intel in on the outlook of this relative to our refinery partners. So it continues to be an opportunity as we look at 2020, but we have not seen any.
The real sustainable near term impact in that.
And don't think we start to see that potentially until we get into next year.
Our next question will come from Phil Ng of Jefferies. Please go ahead.
Hey, guys you technical businesses, obviously performed quite well appreciating it's lumpy nature project deprived, but when you think about 2020.
Within that gold environment being a little choppy or do you expect earnings that segment to be up year over year and are there any levers you could.
You got to offset any potential weakness in the medical front.
Yes, thanks, Phil.
As we look how that business has progressed this year.
We have seen good success in a number of the of the applications that we operate in and.
In our North American pipe and mechanical business. For example, we've we've introduced some new products and we've been able to grow that business.
We continue to make good progress and see growth in our North American mineral wool business.
Our phone glass business continues to grow so I think we're we would see opportunity even a more challenging headwind moving forward would be around kind of continued product introductions, where we will continue to bring some new products into the market that gives us an opportunity to grow I think we continue to see some conversion trends again by using these materials and such.
Just to name relative to other products that are on the market, we still see that theres conversion opportunities in in the us in Europe in parts of Asia. So I think we do see opportunities even a more challenging environment. This still see some positive growth in that segment for us.
Our next question will come from Kathryn Thompson of Thompson Research Group. Please go ahead.
Hi, Thank you for taking my question today, and I'll get that break on asking installation questions and focus on composites.
Is encouraged to see it increasing demand for wind energy. Two part question. This is demand primarily to than in the us market versus China and Europe and also for you as demand to what extent do you think this growth is being driven by push to capitalize on tax incentives that will be phased out in 2020. Thank you.
Thanks, Catherine its Michael Yes, you use your question is around around wind energy demand.
Quite quite frankly, and looking at kind of the full year of 19, when dinner wind energy demand actually has been pretty good.
Kind of across the globe.
Whether you look at North America, Europe , and Asia Pacific Im, even even India, which is kind of below our expectations has demonstrated good nice growth kind of quarter on quarter since since last year and then looking at you're looking at the folks that actually estimate.
On a gigawatts that are going to go and next year. The outlook for next year is pretty favorable again across all three regions. So.
Theres that there seems to be some good tailwinds there as we move into 2020.
Our next question today will come from Michael Wood of Nomura Instinet. Please go ahead.
Hi, Good morning, I can you give some color in terms of your roofing volumes versus the arm of data that was out I know you talked about potentially gaining some market share.
Why that didnt occur and.
Potentially what that means in terms of shelf space and and your presence there.
Yes, Michael Thanks for the questions. It just specific to kind of Q3 on our volumes relative to the market yet.
Pharma would have reported manufacturing shipments for shingles up about 16% I've seen some of the numbers out there, but they they kind of report.
Accessory materials and lot of things on the single side. It was up about 16% our reported volumes of 12 really two things impacting our volumes not related to shingle Saar shingles shipments track with the market.
So but.
We will export shingles, we did see quite a bit of softness between Canada and some other markets. If we go to that kind of contributed to to some declining volumes in our roofing business overall, and then little bit of lower shipments in our external asphalt sales so relative to our performance to the arm of market. We were right in line, but we had some headwinds.
A couple of other areas that impacted the volumes overall, I think just relative to kind of the year and in the quarter I think third quarter market shipments were strong.
But our whereas we talked to contractors and distributors.
We think the outdoor sales were strong as well we it was a dry quarter after kind of a wet spring there was good roofing demand so I think.
Distributors shipped out at a pretty consistent rate to what what they bought in the quarter. So we didnt see anybody kind of building inventories, but we do see this progression as we move into Q4 that we do expect to be down in Q4 on market shipments relative to last year, but again when you look at the year over year comps last year there was an.
Three mean squares, we'd estimated of some inventory build in the channel.
We don't expect that to come back this quarter. So when you think about fundamental kind of out the door sales and underlying demand, we think to demand environment stays strong through Q4, it's always a little bit difficult to predict because it's very weather dependent and the northern part of the country to it gets if it gets called the hurried sends to shorten the roofing season, but in terms of just fundamental.
At the door sales demand, we think thats going to stay strong we're talking about a year over year comp being down really because we don't expect to see a big inventory build as distributors just kind of run out their inventories through the ended the year as opposed to pre buying for 2020.
He said it.
Looks like we have time for maybe one more question before we offer some final comment okay. Thank you Sir our next question will come from Gary Gary Smith.
Longbow Research. Please go ahead. Thanks, Thanks for squeezing me in in a best of luck Michael in the future I wanted to ask.
Relation with all the restructuring actions.
In North American insulation, how should we think about incremental margins moving forward.
Just given the expected increase in market volumes should we still think of it as maybe kind of a 50% incremental or just given the restructuring actions or any change in that outlook.
Yes, I think we're certainly taking the cost actions here too is we want to improve the fundamental cost structure the business.
I think thats going to improve certainly some of the earnings potential as we go forward into next year on a red side.
And then we talked about our technical and other inflation continued to generate some strong growth I think.
Some of this is going to depend a bit on the market opportunity because within our residential insulation business. We still have a lot of fixed cost leverage that we need to get out of production in volume growth. So I think our our operating margins and margin improvement is beyond that is going to be a little bit dependent on the market dynamics that we see but we're optimistic into.
Terms of a growing housing market should generate in crude improved volumes and that should improve our earnings within the business.
This will conclude our question and answer session. At this time I'd like to turn the conference back over to Terry Attorney for any closing remarks.
Well very good. Thank you everyone for joining us for today's call and actually I'll turn it back to Brian for closing comments, okay. Thanks, Gerry and thanks, everyone for your questions I think in summary, Im pleased with our overall financial performance in our commercial and operational execution in the third quarter. We've made substantial progress against all three of our operating priorities.
And are seeing the positive results of our work through strong revenue growth, we delivered record adjusted EBIT and improved cash flow all that creating value for our shareholders. So as we finished 2019 and start 2020, I believe we're well prepared to capitalize on our market opportunities and are well positioned to sustain our financial performance. So thank you very much for your interest in our company.
For your time today.
The conference has now concluded we thank you for attending today's presentation. You may now disconnect your lines.