Q2 2020 Owens Corning Earnings Call
Good day and welcome to the Owens Corning second quarter 2020 earnings Conference call.
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I'd now like turn the conference over to Scott Cripps, Vice President Investor Relations.
Please go ahead.
Thank you and good morning, everyone. Thank you for taking the time to join US for today's conference call Im review of our business results for the second quarter 2020.
Joining us today or Brian Chambers, Owens, Cornings, Chairman and Chief Executive Officer, Empress Gandhi, our interim Chief Financial Officer.
Following our presentation. This morning, we opened that's one hour call to your questions in order to accommodate as many call participants as possible. Please limit yourself to one question only.
Earlier. This morning, we issued a news release filed the 10-Q that detailed our financial results for the second quarter 2020.
The purposes of our discussion today, we have prepared presentation slides that summarize our performance I'm results and we'll refer to these slides starting to call.
You can access the earnings press release form 10-Q in the presentation slides at our website Owens Corning Dot com refer to the investors link under the corporate section of our homepage.
Transcript a recording of this call and that's supporting slides will 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 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 STC filings for a more detailed explanation of the 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, maybe found in the tax don't financial tables of our earnings press release, some presentation, both of which are available on Owens Corning Dot com.
Adjusted EBIT is our primary measure of period over period comparisons and we believe it's a meaningful measure for investors to compare our results.
Consistent with our historical practice, we have excluded certain items that we believe or 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 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 as measures helpful to investors to evaluate the company's ability to generate cash and utilize that cash to pursue opportunities that enhance shareholder value.
For those of you following along with our slide presentation, well begin on slide four.
And now opening remarks from our chairman and CEO, Brian Chambers, who will be followed by interim CFO Presque R&D and then Brian will cover our outlook before our Q and a session.
Brian.
Thanks, Scott Good morning, everyone and thank you for joining us today.
Throughout this past quarter, our global team has demonstrated tremendous resiliency continuously adapting to changing market conditions, maintaining an incredible focus I'm, taking care of each other supporting our customers maximizing our financial performance relative to the market opportunity.
During our call. This morning, I will provide an overview of our second quarter results and how we're managing the company during this period of uncertainty.
Chris will then provide additional financial details on the second quarter, and then I'll come back to discuss our outlook for the third quarter and the remainder of the year.
I will start with safety and our second quarter results.
And I'm conditional commitment to safety has long been our guiding principle that owns corn and this has served us well to address the challenges of cobot Nike.
In the quarter recordable incident rate was 0.69, a slight improvement compared with the second quarter of 2019.
I'm pleased with this performance than everyone else Cup safety and carry for each other the forefront of everything we do.
Over the past several months our executive team dedicated covered 19 response to have worked with our global enterprise to ensure our operations remained safe and effective for our employees their families and other key stakeholders.
We remain vigilant in our use of personal protective equipment health screenings robust cleaning procedures restrictions on business travel and work from home options as we actively monitor local health conditions and update our operating protocols as risk levels change.
I would like to now move to our financial performance in the quarter.
Through the strength of our market, leading businesses innovative product and process technologies and unique enterprise capabilities. The company delivered financial result, better than what we outlined during our last earnings call as we capitalized on a faster recovery in residential end markets, particularly in the U.S.
Improved manufacturing leverage and strong cost controls.
The second quarter revenues were 1.6 billion.
Down 15%, 14% on a constant currency basis compared with the same period last year and adjusted EBIT was 167 million.
Since the start of the pandemic, we've been focused on four key areas to ensure the strength in continuity of our business.
First keeping our employees and other key stakeholders healthy as safe as I just discussed.
Second thing closely connected to our customers our suppliers and our markets.
Third rapidly adopting our businesses to near term changes in market conditions, while remaining focused on positioning us for long term success.
And fourth ensuring a strong balance sheet with access to capital as needed.
I remain confident that by managing these four priorities well, we will continue to deliver strong performance for the remainder of this year and position the company well for 2021.
During this time of increased demand uncertainty, we have stayed closely connected with our customers and suppliers to understand him respond to shifting market conditions.
After experiencing a significant drop in order volumes at the start of the second quarter. We continued to see our business improved in May and June a shelter in place restrictions began to lift and demand for our products in most of our end markets increased.
As mentioned earlier, we've seen residential markets in the U.S. and also in parts of Europe recover at a faster paced the many had anticipated which positively impacted our second quarter results.
And our roofing business after temporarily curtailing operations early in the quarter, we ramped up production to run at full capacity to service increasing demand.
And then installation we've experienced solid demand in our north American residential fiberglass business due to the strong recovery and U.S. new construction housing.
Within most of our commercial and industrial end markets. The recovery has been slower and we continue to take the necessary actions to balance our production with expected near term demand.
Given the essential products, we provide the localized nature of our supply chain, we've been able to operate our manufacturing network effectively and productively quickly adjusting to the changing needs of our customers, while managing our inventories.
In addition, our team has delivered great results during the quarter around cost control.
We have focused on minimizing are postponing discretionary expenses and reduced operating expenses in the quarter by over 30 million compared with last year.
We're also realizing benefits from the longer term structural changes, we made prior to the pandemic and our insulation and composites businesses.
Insulation, we're clearly seeing the impact of the network optimization actions implemented late last year.
In composites, we've maintained a consistent focus on manufacturing productivity and network optimization to lower our cost which is evident in the results we delivered in the quarter, despite the challenging market conditions.
We maintained a strong balance sheet with access to liquidity and a well structured debt maturity profile.
Well, our financial position at the beginning of the quarter was strong in May we took advantage of favorable capital markets and successfully completed a 10 year 300 million bond issuance.
This along with our working capital management, and Opex and Capex controls led to an increase in our available liquidity to approximately 1.5 billion, including almost 600 million in cash.
During the second quarter, we paid down 210 million on our existing revolving credit facility.
Our only near term debt maturity is the remaining 150 million from our term loan due in February 2021.
Before turning it over to print to discuss our second quarter financial results in more detail. There's one other item I would like to highlight.
Last month Owens Corning ranked number one on the 100 best corporate citizens list for 2020 and is one of only a small number of companies that have earned this honor twice.
Well this French companies in the Russell 1000 index for stand out global environmental social and governance performances.
We were honored by this recognition, which is evidence of our continuing commitment to integrate high U.S.G. standards into all that we do.
We believe our commitment and that of the entire business community to improving environmental social and governance issues is critical to addressing the extraordinary challenges, we all face today with ratio inequalities and other social injustices, which has been compounded by the economic and help uncertainties associated with the cobot 19 pandemic.
These issues have and will continue to have a tremendous impact on how we work in live.
And then once corny, we believe in the power of our diversity and aspire to create an environment were all our employees voices are heard and appreciate it for the unique value.
Our team has been and will continue to be active vocal and promote meaningful reform.
As a company I'm proud of our people the work we've done so far and what I know, we will accomplish in the future.
With that I will turn it over to press and then I'll return to talk about our outlook for the third quarter breadth.
Thank you, Brian and good morning, everyone through the collective agility and resilience of our 19000 colleagues Owens Corning delivered solid financial performance in the second quarter in the face of a challenging environment. We have continued to respond to dynamic market conditions by adjusting production and maintaining discipline on operating expenses.
And capital investments throughout the quarter. In addition, we have taken a number of actions to increase liquidity and reinforce our cash position, which gives us the financial strength and flexibility to navigate uncertainty caused by cobot 19.
Please turn to slide five which summarizes key financial data for the second quarter of 2020 the tables in today's news release in the form 10-Q include more detailed financial information.
For the second quarter, we reported consolidated net sales of 1.6 billion down 14% versus 29 team on a constant currency basis.
Revenues are down in all three segments as a result of the demand decline from cobot 19, although the recovery in residential end markets in the U.S., particularly in May and June has been more robust then what many would have expected from the initial slowdown due to shelter in place restrictions.
Adjusted EBIT for the second quarter of 2020 was 167 million down 64 million compared to the prior year.
Largely driven by $61 million decline in composites net earnings attributable to Owens Corning for the second quarter of 2021 96 million compared to 138 million in Q2 2019 adjusted earnings for the second quarter were 96 million or 88 cents per diluted share compared to.
141 million or 129 per diluted share in Q2 2019.
Depreciation and amortization expense for the quarter was 160 million up slightly as compared to Q2 29 team.
Our capital additions for the second quarter was 47 million down 60 million worse is 2019.
On slide six you will see our adjusting items reconciling our second quarter 2020, adjusted EBIT of 167 million to our reported EBIT of 171 million.
During the second quarter, we took actions to reduce personnel costs in our composite segment and recorded 5 million a restructuring costs associated with these actions. In addition, we recognize 9 million of gains on sale of precious metals used in our production tooling.
As we discussed in last quarter's call our productivity initiatives and further developments in our manufacturing process technology have enabled us to modify the designs of our production tooling by reducing the precious metal needed and thus, allowing us to sell certain precious metal holdings in the second quarter of 22 right.
Please turn to slide seven which provides a high level review a second quarter adjusted EBIT comparing 20 22019, adjusted EBIT of 167 million was down 64 million as compared to the prior year roofing EBIT decreased by 3 million insulation EBIT decreased by 10 million and composite.
EBIT decreased by 61 million General corporate expenses of 19 million were down 10 million versus last year, primarily due to our disciplined cost controls now please turn to slide eight which provides a more detailed review a business results beginning with insulation.
Sales for the second quarter over 595 million down 9% from Q2 2019 on a constant currency basis during the quarter. Our overall volumes were impacted throughout the segment by cobot 90, and selling prices were down 6 million year over year.
Within North American residential fiberglass insulation sales volumes are largely consistent with Q2 2019, and some favorable price realization on the January price increase helped to partially offset negative price carryover from last year in technical and other building insulation volumes were down however.
Before we saw sequential improvement within the quarter.
We were encouraged by the resiliency of our mineral wool businesses in Europe, and in the U.S., which maintain flat volumes year over year.
EBIT for the second quarter was 32 million down 10 million as compared to 29 team primarily due to lower sales volumes, we are continuing to proactively balanced production with expected demand.
In the quarter higher curtailment costs, and technical and other insulation were largely offset by favorable manufacturing performance and better production leverage in North American residential fiberglass insulation, allowing us to see stronger results sources prior downturns.
Now please turn to slide nine for a review of our composites business sales in composites for the second quarter were 398 million down 23% on a constant currency basis, primarily due to lower sales volumes. The remaining declining sales was driven by unfavorable customer mix.
Slightly lower selling prices volumes in our downstream specialty applications, including wind and specialty nonwovens outperformed volumes and other advanced cyber applications.
EBIT for the quarter was 6 million down 61 million from the same period, a year ago, primarily due to lower sales and production volumes the negative impacts from production curtailments or slightly offset by manufacturing productivity improvements in the quarter the benefit of lower transportation costs was more than offset.
Set by lower selling prices and negative foreign currency translation. Despite these difficult global market conditions. The composites business still delivered positive EBIT margins and strong cash flow performance in the quarter due to continued focus on operating performance and initiatives around cost and productivity that we have discussed.
Previously.
Slide 10 provides an overview of our roofing business roofing sales for the quarter was 677 million down 13% compared with Q2 2019 due to lower shingle volumes 23 million lower selling prices and lower third party asphalt sales our shingle volumes try.
Relatively close with the overall U.S. asphalt shingle market.
We believe the market decline was driven by de stocking our distribution early in the second quarter, coupled with lower out the door demand in April.
EBIT for the quarter was 148 million down just 3 million from the prior year and yielding 22% EBIT margin. So the corridor the negative impact of lower sales volumes and early quarter production curtailments, this partially offset by lower marketing and administrative expenses in.
In addition, we realize a 10 million onetime game that benefited our margins by 150 basis points related to an exclusion on certain tire speed over the last two years. The U.S. government recently provided a tariff exclusion covering certain components products that we imported from China dating.
Back to late 2018.
Input cost deflation and lower transportation costs more than offset the negative impact of lower year over year selling prices. As a result, we maintained a favorable price costs relationship in the quarter and cash contribution margins were solid as we exited the quarter.
Please turn to slide 11, where I will discuss significant financial highlights for the second quarter of 2020, given the unpredictable market environment Youre continuing to take actions to manage our working capital balances and reduce both operating expenses and capital investments as a result, first how free cash flow in 2020.
Was 15 million dollar higher as compared to the first half of 29 team.
Lower year over year earnings we are proactively managing inventories and will temporarily curtailed operations that have adequate inventory to service near term market demand.
We continue to be focused on managing our liquidity through this period of high uncertainty in May we took advantage of favorable capital markets to reinforce our cash position and successfully completed a 10 year 300 million bond issuance with the yield below 4%.
Also generated cash in the second quarter, two the sales of precious metals that I discussed earlier and cash settlements related to certain U.S. dollar Euro cross currency swaps near the end of the first quarter, we do 400 million under revolver to increase our cash balance with our good year to date free cash flow and the financial.
Actions I described a moment ago, we paid down 210 million of the revolver balance in the second quarter.
As of June Thirtyth, the company had liquidity of approximately 1.5 billion consisting of $582 million of cash and equivalents and nearly 900 million of combined availability on our revolver and receivable securitization facility.
As a result of the preceding we currently expect interest expense to be between 125, and 130 million in 2020 compared to our previous guidance of 120 to 125 million.
Moving forward, we are focused on ensuring a strong balance sheet with access to capital as needed.
Continue to evaluate the possibility of paying the remaining 150 million term loan balance in 2020 now please turn to slide 12, as I return the call over to Brian to discuss the outlook for our company Brian.
Thank you print.
As we move into the second half of the year, our financial performance will continue to be impacted by the depth and duration of the market disruptions caused by the cover 19 pandemic given the continued uncertainties, we faced with the pandemic and potential government responses I'll focus my comments on our short term outlook based on July trends that could impact the third quarter result.
That's for each of our three businesses I'll, then close with my perspectives on a few key enterprise wide initiatives that will impact our full year performance.
Broadly speaking, we've experienced a faster recovery in our residential end markets, while commercial and industrial end markets are following at a slower pace.
Given this continued recovery, we expect the company to generate sequentially higher revenues and earnings in the third quarter.
I'll provide some additional details by business starting with installation.
Within our North American residential business, we saw the impact from shelter in place restrictions in the second quarter delay the completion of housing start, creating a backlog, which will continue to be worked through in the third quarter.
We expect this backlog of work along with normal seasonal increases could lead to relatively flat volumes in Q3 versus last year, which we're seeing in our order book So far in July.
And our technical another building installation businesses July volumes are down high single digits versus July 2090.
While we anticipate sequential improvement versus Q2, we expect year over year volumes will continue this trend through the third quarter based on a steady but slower recovery in commercial and industrial end markets.
Prices in July have remained relatively stable in both our north American residential and our technical and other insulation businesses.
Given market uncertainties, we continue to proactively balanced production with expected demand into tightly control our inventory levels.
Overall for insulation business in third quarter, we expect to realize incremental margins of approximately 50% versus the second quarter.
In roofing second quarter industry shingle shipments were down about 9% with our volumes tracking relatively close to the market.
We have seen positive momentum in recent months, we believe it will be difficult for demand, which has been delayed due to cover 19 to fully recover in 2020.
Our July shipments have started the quarter higher than prior year based on current trends, we could see market volumes up mid single digits versus the third quarter 2019, depending on store in volume and assuming states remain open.
While the current pricing environment has remained relatively stable in the third quarter, we expect to continue to face an increasing year over year headwind from the lack of a spring price increase.
We have recently announced in August increase that could partially offset some of this impact.
Although there was a significant drop in oil prices in March and April asphalt cost did not trend down at the same level.
Since then w. CCI cost of steadily increased resulting in asphalt costs beginning to increase as well.
While we do expect to realize additional asphalt deflation in Q3.
Low refinery utilization rates combined with strong paving demand will impact asphalt cost as we move through the quarter.
Based on all these factors roofing EBIT margins in the third quarter could be slightly better than our second quarter margins normalized for the 150 basis point benefit from the tariff recovery that print mentioned in his remarks.
In composites, while we expect overall volumes to improve versus the second quarter. The global impact of Copel lighting is having a greater impact on demand than in our other businesses.
Our July volumes are down low double digits versus last year and we expect this trend will continue in the near term.
Volumes in our specialty nonwovens business, which is primarily focused on building and construction applications.
And our wind business have continued performed better than some of our other industrial end markets such as automotive.
In terms of pricing, we came into the you're expecting some headwinds due to contract negotiations completed at the end of last year.
Similar to other businesses transactional pricing has remained relatively stable.
We reported a decline of 5 million in Q2, and expect a slightly higher impact in Q3 based on improving volumes.
We remain committed to tightly managing our inventory levels, which will continue to impact our manufacturing performance in the third quarter as we curtailed production to meet demand.
Sequentially from Q1, Q2, we experienced decremental margins of about 35%.
With our current outlook of sequential volume growth, we expect incremental margins to be in a similar range in the third quarter.
With that view of our businesses I'll discuss a few key enterprise focus areas.
We continue to closely manage our operating expenses and capital investments.
We expect corporate expenses for the company to be in the range of 105 to 115 million in capital investments to be in the range of 250 to 300 million both broadly consistent with prior guidance.
We remain committed to generating strong free cash flow into our target of returning at least 50% to investors overtime.
So far this year, we've returned 133 million through share repurchases and dividends and we'll pay our second quarter dividend of approximately 26 million next week.
As we move through the second half the year, we will continue to evaluate our liquidity needs based on market conditions, and prioritize deleveraging the balance sheet and maintaining our dividend.
As I stated at the beginning of the call. Our current operating environment is extremely dynamics. Our focus is on taking thoughtful decisive actions being responsive to the current conditions and quickly capitalizing on our market opportunities.
Our team remains committed to operating safely servicing our customers and creating value for our shareholders.
With that I'll turn the call back over to Scott to open up for questions Scott.
Thank you, Brian we're now ready to begin to QNX session.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Speakerphone, please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then too.
Your first question today is from Truman Patterson of Wells Fargo. Please go ahead.
Hi, good morning, nice quarter and thanks for taking my question.
So so first on roofing, Brian last time.
We were speaking you know it seems like distributor backlog was a little bit behind where should be exiting April.
How do you think about inventory balances today.
Among the contractor or distributor backlogs shall we see additional load and then three Q.
And then we've also heard that some of the roofing shingle manufacturers might be a little bit behind schedule with production.
Are you hearing about any possible shortages you know this could argue for.
Some of the traction of the recently announced price hikes.
Good morning, Truman. Thanks, Thanks for the comments, yes, if we just kind of walk through kind of the progression of roofing volumes through the quarters. We talked about last time, we really saw a steep decline in order volumes towards the end of March really tied to the shelter in place and and then contractors can get on the jobs and so contractor out the door.
Sales from our distributors that really slowed considerably and at the time I think most distributors went into a destocking mode just because of the.
Uncertainty as we kind of saw the quarter play out April volumes were down significantly we saw the recovery, which is really a testament to the resiliency of our roofing business that I talk about all the time.
And then then into June as we saw shelter in place restrictions being lifted we really saw contractor demand pick up quite a bit. We also have seen quite a few storms.
Later in the second quarter, particularly the Midwest and southwest all that kind of increasing out the door sales. So I think in kind of starting in June.
The volume demand trends, we're becoming apparent that they were really going to become much stronger than originally anticipated I think distributors went into more of a stocking mode. So buying more to service not on the outdoor demand, but trying to get those inventory levels back up.
I think regionally inventory levels are going to vary quite a bit.
But I do think overall.
Distributor inventories are probably below historical averages because again they went through a big de stocking phase had been working to increase their inventory stocks going forward. So I think we did see some of that restocking materialize in our order book in June I think we've seen that continue in July but.
But overall I think that inventory levels are back to kind of normal historical levels for for distributors, but having said that I don't know if I'd expect a big surge tied to inventory build and were towards the end of July.
So I think part of its going to depend on the inventory needs to finish out the season that distributors in front of them and there's still some continued uncertainty around covered 19. So.
I think thats going to kind of play into but overall as we talked about we've seen our July order book up.
We think there's really building contractor backlogs and a lot love the market. So we see a really strong out the door sales, we see some increased storm activity. So I think thats contributing to our view in terms of seen our order book up in an outlook that we could see third quarter volumes increased kind of mid single digits.
And then regards to the pricing side, you normally and historically, we would announce a spring price increase we didn't do that this year and with the strength of the market We've announced in August increase and certainly based on what we're seeing in volumes and where we're at and we think there's a good opportunity to realize some of that increases we go through the back half the year.
Our next question will come from Stephen Kim of Evercore ISI. Please go ahead.
Yes, thanks, very much I appreciate all the color I wanted to talk a little bit about installation in particularly the north American fiberglass business.
This is what we've heard and I'm curious if you could weigh in a little bit on this Brian I'll be here that there was a lot of expectation that there was going to be a cliff in threeq you in volumes because of the April housing starts dip, but that that cliff really hasn't materialized. Some people are thinking maybe it's because of the long construction backlogs.
Right right before the pandemic and also just how violent the V shaped recovery has been I'd how quickly it came on and so basically there. There's there's a lot that this threeq clip really isn't going to materialize after all.
We're also hearing that.
Sure manufactures are running capacity pretty much full out, but the industry still not able to build inventories as it typically does it this time of the year. So in fact shortages are starting to emerge I'm curious as to whether or not use.
Do you think that's an accurate depiction of what's kind of going on in the installation in North American fiberglass business right now.
Hi, Good morning, Stephen Yes, I think overall, yes, I think we kind of saw the same thing progress through the quarter, where we saw because of the initial kind of shelter and place restrictions a lot of the increased and housing starts in the first quarter that generally would create a big light housing start increasing Q2 in resolving some some higher.
Volumes those didn't materialize and we talked about we we kind of soft volumes overall pretty flattish versus the prior year, but we think thats really been driven by because of those those temporary restrictions tied to shelter in place that we just did construction crews just can get to those starts get them completed so we think thats created a a back.
Log of work that's going to now continue on into Q3.
And then with some normal seasonality normally we'd see maybe 10% to 15% volume increases just normal seasonal increases we think that combination of that increased backlog coming into Q3 of starts that need to get completed along with kind of seasonal demand.
Could lead to some pretty flat volumes sequentially quarter over quarter. So we we wouldn't see the to your point that big drop in.
From the air Pocket of housing starts in April kind of rolling through in terms of of volumes.
But it regarding industry capacity tightness, and maybe from a little bit years in roofing.
Because we took curtailments early in the quarter and I think others did as well.
It's been all playing I think catch up to a much stronger residential housing recovery than anticipated so our.
Curtailments that we took early in the quarter were back up and running we're bringing that capacity back online, but we are seat capacity utilization rates tightening.
As we go forward to service that demand. So we haven't been able to get the normal inventory build in Q2 that we would normally have Don.
But we are back up and running and we feel good about our ability to service the near term demand all the investments we've made around productivity process efficiencies that we talked about in the business to get out more throughput through other the existing footprint I think are going to play well for us here in Q3, as we continued to produce to service the near term demand.
Our next question will come from Phil Ng of Jefferies. Please go ahead.
Hey, guys. The recovering your residential focused business is obviously seen great momentum that can you share thoughts Brian.
You are more non Reds industrial focused businesses, whether its insulation and composites, how do you kind of see that recovery materializing, whether it's the next six to nine months and do you need do anything more substantial in terms of optimizing.
The cost your footprint that'd be super helpful. Thanks, a lot.
Thanks So.
I think what we've said is broadly currently or residential markets certainly recovered at a faster pace. We are seeing recovery in our commercial industrial markets and I think that's led to some of our outlook in Q3, where we've talked about sequential volume growth.
In all of our businesses and that would include our commercial industrial applications of all in insulation and composites and let me talk a little bit about inflation, we've been very pleased with our performance in our technical installation business.
This has been a key part of our installation strategy that we wanted to continue to broaden our product offering inside our technical inflation product line and expand our geographic region and with the recent acquisitions organic growth focus we've really been able to build out a very strong product offering serving a variety of kind of commercial industrial and resident.
Actual end markets in that space. So.
In our in our insulation business, our tektronix relation business about half of our business is really tied into commercial applications.
And it's a pretty broad based commercial outlet application pay so not just office buildings in spaces, but data centers airports museum. So our commercial exposure I think is a little more diversified into a lot more end market applications and that gives us better opportunities as the markets are recovering and as we see growth.
Going forward, but about half of the Tech business is also then tied to industrial and some residential application so industrial tied to LNG in oil and gas that clearly seeing a much slower recovery in our installation business, but we are seeing.
That work continue to progress so I think overall.
Projects that were started we're seeing continuing they've been delayed but we are seeing that work restart.
I think if it were going to be looking out more closely into 21 is we look at some of these markets to look at the recovery rate and I think inside composites, where we have that industrials focus I talked a little bit up about that recovery and in our comments were in our building and construction applications like our specialty nonwoven, we've seen that recovered well in our wind energy.
Business, particularly that's a segment that's done well, but there's some other industrial segments like automotive oil and gas again, where where that recovery I think has got to be much slower through the year and probably.
Lag into next year before we see kind of strong volumes coming back to us and those industrial sets.
The next question from Matthew Blair of Barclays. Please go ahead.
Hey, good morning, Thanks for taking my questions.
I wanted to ask on the composite side again, obviously, the a curtailment costs there were I guess, a little more severe than the other segments.
Can you put a little color around the regions and plans I guess that were curtailed enough.
Some of that recovering industrial business.
It's going to allow you to kind of restart some of that production.
Hi, how those curtailment costs are going to flow into the second half. Thank you.
Thanks.
Our composites business.
And really across the company, we talked about this on the last quarter call. We've been very focusing continue to be very focus of managing tight inventories.
Strong working capital controls to generate really great free cash flow and that's been our focus so where we saw near term demand drop off in our composites business and also in roofing and insulation, we took a pretty quick actions to curtail production to minimize inventory builds into really drive free cash flow generation.
In composites, how that impacted the the network was really kind of broad base.
We really took curtailment actions across the board in the quarter I think more heavily focused in terms of countries like India, where we just saw big impact of the coven 19 pandemic shelter in place government restrictions that minimized operations.
We saw that North America, we saw in Europe, So geographically.
We did start to see some improvements in China and operations there as they are a little bit ahead of the recovery curve.
But I think the curtailment actions overall were fairly broad base for us to to manage inventory levels now as we progress into Q3.
We are seeing an uptick in some order volumes and our order book in July and composites is down kind of low double digits. So we've seen that improve.
Sequentially through Q2, and we've seen that and and the start of Q3 here in July so in terms of overall curtailment cost. We expect that we're going to continue to have them in composites, but they should be significantly less than Q2, as we see the volume in the order book increase for US as we go through the quarter.
Our next question is from John Lovallo of Bank of America. Please go ahead.
Hey, guys. Thanks for taking my question, maybe just going back to the North American.
Reggie insulation side housing activity, obviously has been a lot stronger than expected.
By all measures there is a pretty strong wave of starts coming down the Pike I mean does the industry have the capacity in place right now to handle this in your view, we how do you how are you thinking about pricing as we move later into the here and then finally, how quickly could you bring on cold line capacity needed.
Okay, gentlemen, let me kind of walk through those I think we'll try to try to catch a mall here.
In terms of overall capacity started me clearly I guess I'll step back we have seen a very strong and rapid recovery in new construction and housing.
Which is good to see I make the capacity to serve this is in place in our network in the industry. I mean part of this is just a surge of of starts and going back to taking out capacity at a time, we're where we and others would normally be building inventory across the networks.
So I mean, when you look at absolute housing starts there still are forecasted to be down slightly year over year. So we are seeing an improvement of rapid recovery and we're having to play catch up a little bit because we didnt run operations build inventory like we normally would in Q2, but I think overall, there's sufficient capacity to service.
The near term demand that we see coming at US here for the rest of this year and even into 21.
In terms of bringing up cold capacity.
We have that available to us we do have a few lines that are cold.
But again, we talked about this last quarter and kind of last year, our focus around productivity enhancements in process improvements have really allowed us to generate and deliver and manufacture more product through a smaller footprint. So were we would have to see I think a pretty significant uptick.
Longer term for us to want to bring on additional capacity at this point, but it is available to us if we do see that kind of surge as we finish this year and go into 2021.
And then in terms of pricing we came into the year.
Very positive outlook on housing in terms of the strength of the fourth quarter, what we're seeing in the first quarter ahead of the pandemic impact and we announced a January price increase.
We have been able to realize some of that and as we talked about we've seen pricing how relatively stable in the market. So you know historically, where we see a.
Future that sees positive housing start growth good demand utilization I mean that creates an environment for us to to look at additional pricing actions.
Our next question is from Mike Dahl of RBC capital. Please go ahead.
Hi, Thanks for taking my question and just to follow up on insulation more more on the topline commentary to make sure. We have this right I think Brian you said new.
You asked new rates flat year on year highs down high single digit.
Second other impress relatively stable it sequentially, a I guess, if we kind of add that together.
You roll off some of the tougher comps on.
Price in the second half the year, but.
It is am I hearing that right that you're still expecting effectively down.
Mid to high single digit topline in year on year installation birthrate Q.
Yeah, Mike I think it could play out that way in terms of how we've talked about some of the volumes. So.
We would expect in the rest will talk resin then the techno inflation in the Red side, Yes, we believe that we're going to see probably pretty flat volumes industry volumes here in Q3, because of that backlog kind of coming in with some of the seasonal increases and then in our technical insulation business, we have seen in our book that being down kind.
A high single digits and in fact continues through that's going to lead to some volume declines.
Year over year, we do expect to see growth, though sequentially. So the demand growth in Reds, while it's flat on a year over year because basis would be up sequentially in Q3 versus Q2 as well as in technical inflation, we might see a year over year decline, but again sequentially Q2, Q3, we would see that that increase so.
Thats, where kind of we would play out and see the volumes materializing as we sit here today looking at our July order book and then just on the pricing headwind I would I would say, we continue to face a pricing headwind on a year over year basis, because last year, we were.
We made some adjustments in Q2 around our market share position that would have been starting to roll through more prominently in Q3, so on a year over year basis, we're still going to be seeing some pricing headwind on a negative year over year comp, but again the current environment, we would call relatively stable in terms of pricey.
Our next question is from Seldon Clarke of Deutsche Bank. Please go ahead.
Hey, good morning, Thanks, a question.
You mentioned asphalt prices have come back along with the recent rebound in oil, but honestly prices are still well below where they were a year ago. So is it things kind of remain stable from year end demand.
Continues to grow at the rate that you're expecting.
How long do you expect to hold on some of these raw material benefits in the roofing segment.
Yes, Thanks, Sean I, just to kind of talk a little bit about the asphalt environmental coming into the second quarter. We did expect to see some unrealized and asphalt deflation tied to kind of our first quarter buys and some of the more seasonal normal deflation. We saw and then in April and May we did see a bit.
Big disconnect and a drop in Wi Fi costs.
But that didn't materialize in the same magnitude of a drop in asphalt cost and.
And I think the headline in Asphalts for a while as than asphalt cost going to stay stubbornly high relative to W. CCI costs and I've talked in in the past around some of the structural changes of.
Less asphalt suppliers in the use of lighter crudes by refineries that just produce less asphalt. So the asphalt supplies is shorter than it was a few years back.
And then I think the dynamics that we're managing through currently.
Is tied really two refinery utilization rate. So asphalt is a residual product of the refining process. So refiners based on low fuel demands from coven, 19, and jet fuels and gasoline and diesel the refining utilization rates are very very low historically, so if they're not running the not producing asphalt. So were we continue to match.
In agent imbalance and look can watch for what's going on a refinery realization rates it impacts the supply side and then on the demand side paving is the largest driver and consumer of of asphalt and that has stayed pretty solid in terms of growth to your through the through the first half. So we're going to continue to manage that quite a bit but that was to the car.
Events that while asphalt costs dropped in the quarter. They weren't at the same magnitude of Wi Fi and then we've started to see those asphalt costs on a month over month basis increase which is what we would normally expect to see in the season. So.
In terms of our ability we're going to continue to focus on managing that price cost mix.
But we see good volume demand and we certainly see the potential for asphalt costs on a month over month basis due to increase and so given that I think we're going to be trying to balance our pricing as well as our price cost mix to maintain a positive momentum there.
We'll see how that plays out through the rest of third quarter.
Your next question is from Michael Ray Hall of JP Morgan. Please go ahead.
Hi, Good morning, Thanks for taking my question Oswald by all of these guys mid to endemic here.
Yes, good appointed clarity and then and then my real question you know.
I appreciate all all the the color obviously around the asphalt prices I just didn't know if it's possible to kind of breakout perhaps.
What that benefit was in in the second quarter in of itself and you know if you expect asphalt costs go up costs to go up in the third quarter, what that benefit might contract to.
And then secondly, or my core question is just around composite.
Yes, you can give us any sense of where you think.
On the more commodity generic.
Last reinforcement.
Their capacity utilization rates are today and.
How you're thinking about pricing.
You made some comments before but.
Directionally, how should we thinking about pricing over the next.
Three 612 months.
And I just want to make sure on the on the pricing you talked in pricing in our composites business that kind of you.
Correct.
Okay. Okay. Thanks, So just on asphalt cost I mean right.
I didn't realize asphalt deflation to overall about 20.
Yes, my 20 million and I'm looking across here, just trying to get that that would have come through.
I think that's something that allowed us to maintain what we said a pretty close on a positive price cost mix. When we take a look at some asphalt cost deflation against the the 20 to remain pricing headwind, we saw and we saw some some positives on transportation Yeah, we do expect that the the absolute deflation number.
I will increase into Q3, so we would expect given what we're seeing in Q2 purchases that we made that we would see additional deflation.
Some of that additional deflation, though is going to again, depending on the magnitude of some of the things I just talked about is really going to depend on how refinery realization rates play out in kind of the month over month asphalt costs that we see materializing here, so but overall, we would expect to realize more deflation in Q3 than Q2 on an absolute basis and then in from a composite stamps.
Moving again overall I think the business has performed very well given the significant volume declines.
The pricing environment in composites as stayed relatively stable. So we did see some price decline in the quarter, that's really tied back to the pricing headwinds from the fourth quarter pricing negotiations. We made so a large percentage of our composites business is on kind of annualized contracts. So we do those contracts and finish them up general.
During the fourth quarter.
So based on those price points, we expected to see a pricing headwind coming into this year. We did see that in Q2, but I think the positives were even with the volume decline drop overall pricing on the transactional side of business was relatively stable.
In the space So I.
I think we're going to continue to expect some some near term pricing headwinds from that fourth quarter work.
But I think you again, historically, we would want to see.
Probably an increase in volumes and a much stronger demand environment before we would think about pricing actions from our on firm for us.
Your next question is from Catherine Thompson of Thompson Research. Please go ahead.
Hi, Thank you for taking my questions today.
Really when you look at your three segments, given a lot of great color in terms of commodity pricing in utilization.
And different puts and takes for each other segments, but concisely. If you could look at three of your segments and.
Bucket the top categories for drivers for that margin performance in the quarter. So for instance, with rethink how much it looks a little cost versus better production levels. Just so we can help us frame going forward. How we should think about the most important factors impacting margins at least in the near to midterm. Thank you.
Thanks, Catherine and you're talking about Q2 correct.
Correct.
Yeah, I think just roofing I would say broadly it was much better volume leverage so we saw increases in volume.
Through the quarter, and we were able to maintain a positive price cost mix relative to deflation versus the price declines we saw in that those are the big contributors now I will call out there was a 10 million favorable on the tariff recovery.
But even when you pull that out we were we were around 20% margins there, but that was a volume and positive price cost mix that that allowed us to keep very good cash contribution margins in the business in insulation, I would say with better volume leverage.
In raz on a lower cost base over the actions, we took last year to really pull that capacity out do cost optimization through the network benefited us in the quarter because even on flat volumes, we were able to generate positive earnings growth on our red side, and then just the overall strength of our market position on our technical insulation business continued to too.
Generate very good earnings even with some volume declines there, but I think it was volume leverage rate cost leverage and installation were probably the two big drivers in the big part of that was driven by the residential work, we did last year and in composites.
Again very good cost control. So we lost a lot of volume leverage in curtailments about 37 million of curtailment costs in the quarter.
But we were able to offset that through other manufacturing productivity and other opex cost reductions in the business. So I would say the driver was again really good cost controls and manufacturing performance and installation that allowed us to generate positive EBIT, even with 23% revenue drop in the business.
Our next question is from Susan Mcclary of Goldman Sachs. Please go ahead.
Thank you good morning.
Just picking up on.
Last commentary, Brian can you talk about some of the cost controls that you have put in place across the operations, especially maybe early in the quarter. How much of that is more structural versus discretionary kinda give us some sense of how much should benefit the margin even as the volumes start to come back.
Yes, Thanks isn't great question.
Overall, I would say that the bulk of our Opex cost actions I will say that had been more what I would call in the discretionary space. We've really just tightened up spending on on any kind of discretionary projects I mean teeny in travels is obviously going extraordinarily restrictive. So we've been very tight on any kind of those cost controls.
And obviously the majority of that was more discretion as in the space, but I would call out that there have been some structural changes a little bit on Opex and then in our manufacturing costs, both and insulation and composites that are structural in place in will help us get a good earnings leverage on the ups.
Side as we see volumes improve in our installation side, particularly in our Red side. These are the cost actions. We took last year to really optimize the network. We took that restructuring charge were we expected to see about $20 million of cost benefit in the insulation business. This year, that's playing out just as we had expected so thats of.
A structural shift there and then in our composites business, we continue to look for opportunities to streamline our global operation There we've done a lot of work.
Over the last several years in composites, taking out very small inefficient, melters and and getting better capacity leverage and better manufacturing productivity. So thats helped and then in addition of that we continue to take some actions and we announced the.
I have a pretty small restructuring this quarter.
We would expect probably similar costs to come through over the second half.
And that will generate about 5 million of ongoing just structural cost improvements in that business on an annualized basis. So I think it's it has been a mix the near term cost savings primarily discretionary, but we have taken action structurally to just improved the overall cost performance across the company and then then primarily in insulation and composites.
Our next question will come from Gary Smalley, South Loop capital. Please go ahead.
Great. Thank you just unclear on roofing and the comment the volumes will fully recover this year due to covert does that imply that you expect volumes and pent up demand to carry over into next year did I hear that right. It will just on the demand drivers in the business you talked a bit about storms in some markets recently, new housing on so obviously recovery.
But what are you seeing other more traditional reroofing side that makes up the bulk of the business.
Yeah. Good morning, Gary Thanks, Yeah on the on the full year basis, you heard me right. I think you know given the drop off in demand kind of in March and April on a full year basis, we just saying, it's probably going to be difficult to get back to kind of last year's volumes given the loss of a couple of months of of a contracting.
Working the business now I say that because a lot that will depend on storm activity and a lot of that depends on just the weather in the fourth quarter. That's generally what tends to shut down the roofing business in northern climates is if we just get winter weather early in it limits the days that roofing crews can get up and due to work so.
I mean, there's some variables around that I think.
Certainly the demand is there.
But if it doesnt all get done this year, you're absolutely right I mean roofing as a is not discretionary purchase people are buying the ruse, primarily because they need to prepare to replace it. So if the work doesn't get done. This year, we do expect that demand to carry over into the first half of next year overall, and then I think that fundamental demand drivers we've seen recovering I think.
Overall I think this trend in this theme of people, placing a much higher value on their living spaces because of the experiences of shelter in place in so I think we're seeing a lot of opportunity going forward around renovation work remodeling work new construction work in terms of housing, but on the renovation side I think we're seeing some stronger.
Innovation investments in home.
We saw and then we did benefit again as we saw some higher storm demand materialize through the quarter. So thats been I think a couple that the structural demand drivers Gary has really been just reroofing remodeling expansion as people invest in their homes, some stronger storm demand in the quarter that we could begin to realize is certainly into Q3.
Going forward, but again roofing is a very resilient business. It has demonstrated that through previous economic shocks and I think we've seen that down through the last quarter.
Allison. This is Scott I think we have time for one more question.
Thank you.
Our next question is from Ives from had big same BNP Paribas. Please go ahead.
Good morning gets then thank you for taking my questions I just wanted to get us feeding us what are your thinking around European insulation volumes and pricing I think there's been some capacity, which was shut down across Europe.
And as volumes are trying to recover what's your feeling since it's the pricing directions for aged 20.
But also on the buttons that would be really helpful. Thank you so much.
Yeah. Thanks for question I think part of the things we called out in terms of our European insulation business was really the strength of our mineral wool business.
In the quarter and I think a couple of things that have impacted that in terms of overall volumes, one we get a bit of a benefit of our geographic presence. So were more in northern central European countries. So the Nordiques, Germany, Poland, we saw a probably less impacting some of the shelter in place restrictions. So we saw volumes for us all.
Ladies study on a year over year bases the through that.
And I think though if you get into other parts of Europe, UK, France, I mean, clearly, we we would have seen the market conditions worsened terms of.
The shelf in place restrictions it had a little less impact on us because of just where we're at and where were located geographically.
But but clearly we heard and solve some of our other customers that were impacted in those markets a little bit more heavily.
But I think you broadly speaking, we're seeing that recovery materializes as countries reopen and projects get restarted again, so we would expect but some volume sequential improvement in Q3 versus Q2 as countries reopened in these projects get restarted and then overall for the pricing environment again pretty similar comments relatively stable.
Across our product portfolio through the quarter.
Ladies and gentlemen, this will conclude our question and answer session.
And at this time I'd like to turn the conference back over to Brian Chambers for any closing remarks.
Well, thank you and thanks, everyone for your time and your questions.
Throughout the first half of your our team has really been resilient. We've continued to execute well we remain focused on delivers superior customer service and strong results. Despite tough market conditions I'm incredibly proud of how we have worked together through a difficult time, which will ultimately position us to be a stronger company. So thank you for your time. This morning, we look for.
Just speaking with you again during our third quarter call and until then I Hope you and your family's remain healthy and safe.
The conference has now concluded we thank you for attending today's presentation. You may now disconnect your lines.