Q3 2020 Owens Corning Earnings Call
Good day and welcome to the Owens Corning third quarter 2020 earnings Conference call.
All participants will be in listen only mode.
You need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. Please.
Please note this event is being recorded.
I would now like to turn the conference over to Amber Wolfarth.
Director of 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 and review our business results for the third quarter 2020, joining us today are Brian Chambers, Owens, Cornings, Chairman and Chief Executive Officer, and Ken Parks, our Chief Financial Officer.
During our presentation. This morning, we will open this one hour call to your question.
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 and filed a 10-Q that detailed our financial results for the third quarter 2020 for the purposes of our discussion today, we've prepared presentation slides that summarize our performance and result in what we refer to these slides during this call.
You can access the earnings press release form 10-Q, and the presentation slides at our website Owens Corning Dotcom Maria.
Refer to the investors link under the corporate section of our homepage, a transcript and recording of this call and the supporting slides will be available on our website for future reference.
Please reference slide 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.
Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent risks and uncertainties affecting such forward looking statements.
Second the presentation slides and today's remarks contain non-GAAP financial measures explanations and reconciliations of non-GAAP to GAAP measures may be found in the text and financial tables of our earnings press release and presentation, both of which are available on Owens Corning dotcom.
Adjusted EBIT is our primary measure of period over period comparisons and we believe it is a meaningful measure for investors to compare our results.
To start with our historical practice, we have excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT and adjusted earnings.
We adjust our effective tax rate to remove the effect of quarter to quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share we.
We also use free cash flow and free cash flow conversion of adjusted earning 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.
The tables in today's news release and the form 10-Q include more detailed financial information.
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, Brian.
Thanks, Jennifer good morning, everyone and thank you for joining us today I.
I know many of you have had the opportunity to speak with Amber, our new director of Investor Relations.
Want to welcome her to her first earnings call in this role.
I'd also like to take this opportunity to thank Perth Gandhi for serving as our interim Chief financial officer over the past several months and welcome Ken Parks, our new CFO to our call. This morning.
Kind of a proven track record of leading high performing teams and delivering results at several diverse global organization.
We are excited to have churn on our team.
During our call. This morning, I will provide an overview of our third quarter results and how we are positioning the company to capitalize on our market opportunities Kevin.
Ken will then provide additional financial details on the third quarter, and then I'll come back to discuss our outlook for the fourth quarter.
Our global team continues to demonstrate tremendous resiliency adapting to changing market conditions and working hard to service the demands of our customers.
I'm incredibly proud of how our teams have worked together during these challenging times to achieve such strong financial results delivering record quarterly EBIT.
Double digit EBIT margins in all three businesses and record free cash flow.
All of this was accomplished while maintaining our focus on keeping each other as well as our customers and suppliers healthy and safe wrapping.
Wrapping up manufacturing operations throughout the quarter to service, increasing customer demand and supporting our communities as we continue to operate through this global health crisis.
Before discussing our markets and financial results in more detail I'll start with safety.
You know safety is a top priority for our company.
Year to date, 57% of our global facilities remain injury free.
In the third quarter, while we continue to perform at a high level with a recordable incident rate of <unk> 0.73. This result was above our third quarter 29, <unk> performance and reminds us of the daily focus we must have on safety in order to achieve an injury free workplace.
Turning to financial results our performance this quarter was better than what we outlined during our last earnings call as we saw customer demand continue to improve throughout the quarter in most of our end markets.
Revenues were 1.9 billion up 1% compared with the same period last year and adjusted EBIT was 289 million up 4%.
These results continue to demonstrate the strength of our company's market, leading positions broad product offering and improved operating efficiencies to generate substantial free cash flow and deliver sustainable shareholder value.
On our last two calls Ive discussed four key areas. We're focused on this year to ensure the strength and continuity of our business.
First keeping our employees and other key stakeholders healthy and safe.
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.
We've managed these four properties well through the pandemic and expect to finish the year strong while we position ourselves for 2021.
Overall, we continue to see our end markets recover during the quarter, but a different rates are.
Our residential markets, especially in the United States are being fueled by robust demand for new single family housing as well as increased repair and remodeling investments as owners upgrade their homes and expand their living spaces.
Our commercial and industrial markets are also seen improvements, but we continue to expect these to recover at a slower pace as we finished 2020.
In the third quarter, our roofing business delivered revenue and earnings growth.
Increased storm activity and continued remodeling growth drove significantly higher market demand in the quarter.
While our manufacturing and supply chain teams worked hard to service the higher demand our volumes trailed the overall market growth due to limited inventory levels entering the quarter.
We remain focused on improving our service cycles and plan to continue running our facilities at full capacity to meet near term demand, while ensuring we are positioned to support our customers and service expected market demand in 2021.
In composites volume to also continue to improve throughout the quarter with revenues down just 2%.
Our focus on specific end markets, such as building and construction and wind energy combined with our local supply chain model in specific geographic regions continues to pay dividends as we grow our volumes.
This along with our continued focus to drive operational efficiencies through manufacturing productivity and network optimization led to double digit EBIT margins in the quarter.
And then installation revenues also finished down 2% with EBIT margins of 11% driven primarily by the additional growth we saw in our North American residential fiberglass business.
As I stated earlier, we continue to see the U.S. housing mark strengthening with demand around 1.4 million units on a seasonally adjusted basis for the last three consecutive months.
Given the market demand we are currently seeing and that is forecasted for 2021.
We have initiated work to restart our batsmen roll insulation line at our Kansas City facility.
We would expect to have this line back up and running during the second quarter of next year.
Our focus in this business has been to operate the most efficient and most flexible manufacturing network, which positions us to quickly respond to changing market conditions to service, our customers and deliver strong financial performance.
As we continue to adapt our operations to service a changing market environment, we remain focused on generating strong free cash flow and maintaining an investment grade balance sheet.
Last quarter, we discussed our focus on evaluating our liquidity needs prioritizing de leveraging the balance sheet and maintaining our dividend.
In the third quarter, given our cash flow, we were able to execute on all these areas, finishing the quarter with more than 1.7 billion of liquidity.
Before turning it over to Kent to discuss our third quarter financial results in more detail. There was one other item I would like to cover.
This morning, we announced that all the harder our general counsel will be leaving the company at the end of November.
She will become the senior Vice President of corporate Affairs, and General Counsel at Whirlpool Corporation.
During her five years with Owens Corning I played a key role in shaping the direction of our company and driving our success I.
I appreciate the many contributions she made and wish her all the best in her new role.
We are currently exploring alternatives to identify her successor and will make an announcement when our valuation is complete.
With that I'll turn it over to Kent, and then I'll return to talk about our outlook for the fourth quarter.
Yes.
Thanks, Brian and good morning, everyone.
I am excited to discuss our results on todays call and I also look forward to getting to know many of you going forward.
First let me say that I'm honored by the opportunity to join the OFC team and to contribute to the future success of this company.
While only on day number 50, I'm already impressed with the resilience of the company and the dedication of our people.
Everyday reaffirms for me that Oh see is truly global in scope and human and scale.
I also want to express my sincere thanks to Gondi for his service as interim CFO.
His leadership during this unprecedented time was crucial and the company's financial strength as a testament to the quick and decisive decisive actions taken by print and the leadership team.
Now turning to our results on slide five.
The company's third quarter performance demonstrates the strength of Owens Corning and its ability to generate strong financial results in an improving but still challenging environment.
The company has reduced its debt position and retain ample liquidity in light of the continued market uncertainty.
For the third quarter, we reported consolidated net sales of $1.9 billion up approximately 1% over 2019.
In the quarter, we saw solid revenue growth in our roofing business, while revenues in our composites and insulation businesses declined slightly.
Through the quarter the residential recovery in the U.S. has continued to accelerate while commercial industrial and non U.S. residential markets have recovered at a slower pace as expected.
Adjusted EBIT for the third quarter of 2020 was $289 million up $12 million compared to the prior year highlighted by the continued recovery in residential end markets primarily in the U.S.
All three businesses achieved double digit EBIT margins as a result of the company's market leading positions and continued focus on our key operating priorities.
Net earnings attributable to Owens Corning for the third quarter of 2020 or $206 million compared to $150 million in Q3 of 2019.
Adjusted earnings for the third quarter were $186 million or a $1.70 per diluted share compared to $176 million or $1.60 per diluted share in Q3 2019.
Depreciation and amortization expense for the quarter was $120 million up $8 million as compared to last year.
Our capital additions for the third quarter were $68 million down $114 million versus 2019.
On slide six you see adjusted items reconciling our third quarter 2020, adjusted EBIT of $299 million, So our reported EBIT of $296 million.
During the third quarter, we recognized $7 million of gains on the sale of certain precious metals. We've excluded these gains from our adjusted EBIT.
I would also like to highlight one item related to adjusted EPS. We've.
We've adjusted out a $13 million noncash income tax benefit related to regulations that were issued during the third quarter associated with us corporate tax reform.
This adjustment as described in more detail in the notes of our 10-Q.
Slide seven provides a high level overview of the changes and third quarter adjusted EBIT from 2019 to 2020.
Adjusted EBITDA of $289 million increased $12 million as compared to the prior year.
Roofing EBIT increased by $53 million insulation, EBIT decreased by $11 million and composites EBIT decreased by $12 million.
General corporate expenses of $35 million were up $18 million versus last year, primarily due to higher incentive compensation expense associated with our improved financial outlook.
In addition, the timing of smaller onetime items more than offset benefits from our ongoing cost control initiatives.
Now I'll provide more details on each of the business results beginning with insulation on slide eight.
Insulation sales for the third quarter were $681 million down 2% from Q3 2019.
During the quarter volume growth in North American residential fiberglass insulation was more than offset by lower selling prices for the overall segment and lower volumes and technical and other building insulation.
Volumes were down and technical another due to the impacts of COVID-19. However, we saw some sequential improvement within the quarter.
EBIT for the third quarter was $73 million down $11 million as compared to 2019. The decline was driven by lower year over year selling prices the negative impact of lower volumes and technical another and slightly higher delivery costs.
The benefit of higher sales volumes from the recovery in North American residential and favorable manufacturing performance, partially offset these impacts.
For the insulation business overall, our sequential operating leverage from Q2 to Q3 was 48%.
In line with the outlook provided on the Q2 call.
Please turn to slide nine for a review of our composites business.
Sales in composites for the third quarter were $521 million down, 2% as compared to the prior year due to lower selling prices and unfavorable product mix.
Overall sales volumes were flat year over year.
During the third quarter, we saw certain regional markets begin to recover and continued to see strong performance in our wind and roofing downstream specialty applications.
EBIT for the quarter was $55 million down $12 million from the same period, a year ago, but up significantly from EBIT of $6 million reported in Q2 of 2020.
Our results continue to be impacted by COVID-19 demand variability.
The EBIT declined in the quarter was primarily driven by the negative impacts of production curtailments and lower selling prices, partially offset by favorable manufacturing performance.
Unfavorable customer mix and negative foreign currency translation were largely offset by lower selling general and administrative expenses input cost deflation and lower delivery costs.
Sequentially from Q2 to Q3, we generated operating leverage of 40%.
Slide 10 provides an overview of our roofing business.
Roofing sales for the quarter were $761 million up 7% compared with Q3 of 2019, driven by 12% volume growth, which was partially offset by lower year over year, selling prices and lower third party asphalt sales.
In the third quarter, the U.S. asphalt shingle market grew significantly as compared to the prior year, primarily due to continued strength in repair and remodeling as well as increased storm activity.
EBIT for the quarter was $196 million up $53 million from the prior year, producing 26% EBIT margins for the quarter.
The EBIT improvement was driven by higher sales volumes input cost deflation and favorable manufacturing performance, partially offset by lower selling prices.
The current pricing environment has improved sequentially with the realization of our August increase partially offsetting the year over year headwind from the lack of a spring price increase.
In addition, the benefit of asphalt cost deflation and slightly lower delivery costs more than offset the negative impact of lower year over year selling prices.
As a result, we maintained a favorable price cost relationship and the corridor and cash contribution margins were solid as we exited the quarter.
Turning to slide 11, I'll discuss significant financial highlights for the third quarter of 2020.
We continue to manage our working capital balances operating expenses and capital investments.
As a result of disciplined actions taken and the recovery of U.S. residential markets, our third quarter free cash flow reached a record quarterly level and our year to date free cash flow of $514 million was $232 million higher than the same period last year.
In the last earnings call, we highlighted the company's focus on strengthening liquidity deleveraging the balance sheet and maintaining the dividend.
Based on our strong cash flow performance and deleveraging activities, we're operating within our target debt to adjusted EBITDA range of two to three times with ample liquidity.
I'd like to highlight our progress and evolution in this space.
During the quarter, we repaid the remaining $190 million that was drawn on our revolver at the end of the first quarter.
We also repaid the remaining $150 million balance of the term loan in advance of the February 2021 due date.
We maintained our dividend in the third quarter and have returned $159 million to shareholders. So far this year through dividends and share repurchases.
As of September Thirtyth, the company had liquidity of more than $1.7 billion, consisting of $647 million of cash and cash equivalents and nearly $1.1 billion of combined availability on our revolver and receivable securitization facilities.
We continue to focus on maintaining an investment grade balance sheet and are evaluating additional U.S. pension contributions in the range of $50 million to $100 million to further de lever the balance sheet and improve our credit metrics.
Now please turn to slide 12, as I return the call to Brian to discuss our outlook for the company Brian.
Thank you Ken.
Through our team working consistent execution, we are positioned well to capitalize on both the near term market recovery as well as longer term secular trends. However, we continue to face uncertainties with the pandemic and potential government responses and expect our financial performance to be impacted by market disruptions caused by COVID-19.
Broadly speaking, we have experienced a much faster recovery in our residential end markets, while commercial and industrial end markets are following a slower pace.
Given this continued market performance, we would expect the company to deliver revenue and adjusted EBIT in the fourth quarter at or above last year, driven by our innovative product offering and broad market reach.
Based on trends, we're seeing in October I'll provide some additional details by business starting with installation.
Within our North American residential business, we saw continued strengthening in us new residential construction.
Well lagged housing starts in Q4 will be higher versus prior year, we expect our volumes will be relatively flat based on current supply constraints and limited inventories.
And our technical and other building insulation businesses October volumes are trending down mid single digits versus prior year.
We expect year over year volumes will continue this trend through the fourth quarter based on a steady but slower recovery in commercial and industrial end markets.
Prices through the third quarter remained relatively stable in both our north American residential and our technical another insulation businesses. However, we continued to face a negative year over year price carryover.
While we are seeing positive traction from the mid September residential insulation price increase we don't expect to comp positively yet in the fourth quarter.
As we move into 2021, we recently announced an 8% price increase for our us residential insulation business effective January 11th.
Overall for our insulation business in the fourth quarter, we expect results to be slightly better than our EBIT in Q3.
In roofing third quarter industry shingle shipments were up about 25% with our volumes tracking below the market due to supply constraints driven by low inventories entering the quarter.
Our October shipments have started the quarter higher than prior year.
Based on current trends, we could see year over year market volumes for the fourth quarter up a similar percentage to what we saw in the third quarter, depending on the timing of winter weather.
Given our third quarter volumes, we would expect to outperform the market in Q4 to service out the door demand and improve distributor inventory positions of our products.
In the fourth quarter, we should continue to see realization from our August price increase offsetting the year over year headwind from the lack of a spring price increase.
However, we expect to see some continued pricing headwinds in the quarter driven by higher rebates versus 2019 due to this year's increased roofing demand.
Deflation from expected seasonal declines of asphalt cost should result in another quarter of positive price cost mix based.
Based on all these factors roofing EBIT margins in the fourth quarter should remain strong, but could be slightly lower than Q3 due to seasonally lower shipping volumes.
In composites Q3 shipments improved throughout the quarter given this trend we could see volumes in Q4 similar to the first quarter with overall demand continuing to recover.
While transactional pricing remains relatively stable, we continue to expect a similar pricing headwind in Q4 as we realized in Q3.
As we work through our annual contract negotiations with customers, we've announced price increases in most of the regions, we serve which could impact 2021.
We remain committed to tightly manage our inventory levels, which will continue to impact our manufacturing performance in the fourth quarter as we curtail production to meet demand.
Similar to the last several years, we expect to see our overall fourth quarter revenue and EBIT performance similar to what we saw in the first quarter with an additional 5 million headwind related to rebuild cost.
With that view of our businesses ill 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 approximately 125 million, primarily due to additional incentive compensation tied to our earnings outlook.
And we expect capital investments to be at the high end of the range. We previously provided of 250 to 300.
In terms of our capital allocation, we remain committed to generating strong free cash flow into our target of returning at least 50% to investors over time.
So far this year, we returned 159 million through share repurchases and dividends and we'll pay our third quarter dividend of approximately 26 million next week.
In our last call. We said, we would focus on de leveraging the balance sheet and maintaining our dividend we.
We increased liquidity to over 1.7 billion pay down the revolver and term loan and paid our dividend in the quarter.
Going forward, we will continue to manage our liquidity needs remaining focused on supporting the dividend, while evaluating additional pension contributions and potential share repurchases.
As I stated at the beginning of the call. Our team continues to execute very well adapting to changing market conditions, while remaining committed to operating safely servicing our customers and creating value for our shareholders with.
With that I will turn the call back over to Amber and open it up for questions Amber.
Thank you, Brian we are now ready to begin the Q and a session.
Thank you we will now begin the question and answer session.
Ask a question you May press Star and then one on your Touchtone phone. If you are using a speakerphone. Please.
Please pick up your handset before pressing the keys.
Tim for your question. Please press Star then two please.
Please limit yourself to one question.
Our first question today will come from Matthew Blair of Barclays. Please go ahead.
Hey, good morning, Congrats on the results and thanks for taking the question.
Wanted to ask about the restart of bats enrolls capacity at Kansas City that you mentioned Brian.
So I guess to what degree could.
Could that impact the the price increase in January that you mention the 8% and fiberglass.
It was the volume environment simply strong enough such that you can both raise prices and fill that line or how should we suspect that you might have to be a little more careful with a price increase thank you.
Good morning, Matthew Thanks. Thanks for the question, Yes, let me talk about kind of the logic behind the restart and then I can talk a little bit about the pricing environment.
Since Q2, we've clearly seen a strengthening in our house in the housing market and as I said in my comments you over the last three months housing starts trending at or above 1.4 million starts. So when we talked about the decision last year to take the capacity down in Kansas City. We said that was really based on a view of through our product and process.
Technology productivity investments, we've made we can service a market kind of in that 1.3 million start range and and we feel confident and comfortable in doing that certainly when we look at.
But the just the secular trends around housing the belief that housing has been under built for so long and its going to continue to improve the interest rate environment. The the permits that we're seeing we just feel that theres, a strengthening that's going to be beyond that kind of 1.3 million mark in.
And at that point, we want to be able to bring on additional capacity to be able to it to service our customers and thats really been our operational focus within our resident selection business, we want to operate a really flexible.
An efficient network that we can flex with with some of the volume changes in the market, but we certainly want to be always in a position to service the demands of our customers. So we feel good about that in terms of getting that started generally that takes is kind of as I've talked about in the past kind of four to six months, we're going to be doing a little bit of retrofit work to get.
The line ready and then re hiring and training, but we feel comfortable and confident we can be backup and by the second quarter next year in a position to continue to to service the demand growth that we expect to see in the market.
In terms of pricing is as we talked about we announced a September mid September price increase we're seeing good traction on that and.
And we've announced an 8% price increase in January and historically, that's a timeframe for us to do that announcement that gives our customers and build our current customers time to work that into their plan. So.
Historically, that's been a timing that we like to use for for announcements runner insulation business and frankly I think these are two separate.
Issues in terms of the capacity that we're adding on to service. Our customers is what we are seeing because of the strong demand for our products that we are seeing.
And the pricing environment is one that we continue to to talk about in terms of evolving our price points in our products are valuable they're needed. They are in high demand and so we believe it's a it's a good time to get some additional pricing in the market as we start 2021.
Yes.
Our next question is from Stephen Kim of Evercore ISI. Please go ahead.
Yeah. Thanks, a lot guys I was curious about the just sticking on the fiberglass insulation side of the business for a little SEC for a second here.
The capacity, you're bringing on back on in Kansas City.
My guess is thats, probably going to add about 2.5% of industry capacity.
There really isn't any additional capacity much flex capacity it sounds like in the rest of the industry by your competitors. So.
You kind of have it all to yourselves, that's not going to be up and running you said until two Q. The capacity opened by through your competitors isn't going to be online from we understand until the end of next year.
And you said that you have capacity right now for about 1.3 million starts go.
Given the rate at which <unk> housing starts or the housing market in general is ramping and the potential that you might see housing starts up 10% to 15% or something like that next year. If you actually see a housing start number that trends to the higher end of that range looks like about a million five.
What would be the companys, what would be the likely outcome for your company I'm not asking you to predict if starts we'll do that but I'm, saying that if they did what would what do you think the impact would be on your.
On on your segment and your strategy.
Yeah. Thanks Steven.
Just to kind of come back on your calculations around Kansas City, Yeah. We've said historically that when we bring the lines up each line is kind of worth 2% to 3% of the industry capacity. So so you're right in line there and in Kansas City would kind of be at the upper end of that range. So I think weve when we look at our network there.
Theres two things that continue to give us confidence that we can continue to service a market. If we do see that growth clearly we have the opportunity to bring up some idle capacity, which we're demonstrating with the move with Kansas City and that is going to increase our availability to service a market that we see in front of us over the next kind of year. So I think if.
We continue to see housing starts trending up we have some other idle capacity in the network that would be available for us to bring that bring it up we can do that very cost effectively and how we think about the capacity planning and then we would continue to invest and have been investing in productivity initiatives within our installation network and.
Again, we feel very good that we've got line of sight to additional productivity process improvements that can continue to kind of create an increase the throughput through our existing footprint.
So I think that the key for us would be more around the surge of that.
Demand I mean, certainly we've seen such a quick recovery pace year this year.
And this year, we got a low jammed up because of some of the downtime taken kind of in the end of the end of the first quarter beginning the second quarter. So when we think about our full capacity in the network going into 21, we're going to be fully ramped up with full capacity, we're not going to have the downtime in manufacturing that we took this year so that adds into.
[noise] capacity, the restart of Kansas City, the additional productivity and process improvement. So I think Steve when we feel good that we're going to have capacity that we can continue to serve and if the market trends above the 1.4, we'd look at additional capacity adds to be able to service our customer Graham.
Our next question is from Phil Ng of Jefferies. Please go ahead.
[music].
[noise] pardon me there was a poor connection there well move on to the next question and ask Mr. rejoin the queue.
The next question, we will take is from Truman Patterson.
With Wells Fargo. Please go ahead.
Hey, good morning, everyone. Thanks for taking my question I'm, having a little hard time hearing after.
After that prior line, but.
Wanted to touch on roofing.
You know armor shipments were up I think about 25% year olds volume was was up 12.
Ryan you ended up.
Mentioning that there were some limited inventory going into the quarter, which led to some market share shifts.
I believe you commented that you all should get back on track and start to outperform the market in Threeq you could you just elaborate on that a little bit more in.
Explain to us some investors you know what gives you the confidence in your ability to go out and recapture.
You know that that market share you at full capacity now and you know kind of being able to build up some inventory balance if you will.
Yeah, Thanks, Tim and good morning, Yes for sure I think the third quarter.
Roofing demand in the market just kind of shows the resiliency of this business and it was an incredibly strong market in.
In the quarter actually it was one of the strongest quarters in the last decade in terms of manufacturing shipments so quite a remarkable turnaround where we were at trending kind of minus 9% year on year industry shipments in the first half of the year and then went to a positive 25. So.
Sequentially, just an incredibly strong strong quarter for us we we were ramping up all through Q2. So we actually entered the quarter running full capacity in terms of our single manufacturing lines and produced tremendous volumes through the quarter, but given where the inventory positions we had finishing the.
Quarter, and I think I've spoken about this the normal seasonality to our business is that we're running our assets full out in kind of Q1 Q2 in an effort to kind of build some inventory that we maintain in our facilities, but also that we can ship to distributors for their inventory build positions and then that really help service the overall demand.
In the end of Q2, and Q3, which is generally one of the strongest quarters for roofing demand. This year. Unfortunately with the cobot impact in Q2, we entered in Q3, while we were running full out.
We didnt have any inventory to its kind of.
Service the surge that we saw in orders.
So we fell behind even though we worked very very hard in terms of our ability to keep up our shipments.
I do believe this is a timing issue for us when I look at full year capacity that we have in our network.
If we can run our assets in a normal way that we would typically do it on a full year basis. We are very confident we've got enough installed capacity to service a market running at at this level, but.
But it's just when you when you carve out that production time early in Q2 is just impossible for us to make it up so when we look at our overall share position. We certainly we like the market in terms of of shipments into distribution our contractor position, we feel very good about we maintain a regular connection with a network.
Of Owens Corning contractors that they've built their business around our brand and our products and our commercial support and and we don't feel like we've lost share there on kind of that longer term remodeling repair business, we probably gave up a little bit.
In the quarter around some of the storm demand, which needed to get repaired and replaced but as we come into Q4, now we're up and fully running.
We think were services, we are able to service the fourth quarter market and typically we see some winter seasonal declines and kind of November and December. So we believe this quarter Truman we're going to be able to catch up in terms of keeping our assets running full servicing a little less demand that allows us to to service not only the out the door sales, but but hopefully replenish some of the distributor inventory positions.
Of our products that we know are pretty lean right now so thats, where we think we can get on top of this little bit in Q4, and then we're going to continue to run very very strong as we enter in 2021. So.
Again, we feel good that we've got enough installed capacity, where we can run our assets that we can service the market as we turn the corner into 2021 in service first half demand.
Our next question will come from Phil Ng of Jefferies. Please go ahead.
Hey, guys is by line Okay now.
Yes, you are good Phil thanks, Okay, sorry about that Brad.
Just piggybacking off of Steve's question earlier about the insulation market.
In the past you've talked about the industry and yourself, having that enough capacity that need 1.4 million starts certainly there could be a case, we get there.
I believe there is limited supply and Thats overall capacity out there is so is that an opportunity for you take share in that environment.
And coupled with the fact that I think historically when you got back to that one for rage. Your margins have really pop that installation into into that mid teen range I just want to understand the path to getting there and how quickly can get there potentially.
Thanks.
Terms of our our support of the market demand, yes, we do believe and this is something we've been working on for a while just through our commercial actions that we're always out trying to earn our customers business. We feel we've got the best product a great brand great commercial support so.
We think that combined with the capacity to service our customer demand gives us a great opportunity to continue to kind of earn share.
As we go forward. So we're going to work hard to maintain that discipline and commercial focus, but certainly with additional capacity that we have available for us to to bring into the market to service. The demand. We feel we do have some opportunities to continue to gain some incremental share as the market continues to grow so I think that's.
That's going to be how we position the assets to run in terms of the market out outlook for.
For us in terms of our margin performance. The two two big drivers for us are going to be enhanced volume leverage on our asset base. So we are able to run these assets full out and continue to.
Provide great products to our customers that gives us the best leverage in terms of margin enhancement as we go forward to to really optimize the performance of the network. We've taken actions over the last couple of years to really optimize that cost structure. So we think we can get some additional pop off of additional volume leverage as we go forward and then some.
Only pricing is going to be the other big aspect too to margin improvement. So we've we've announced and are implementing the September increase we've announced the January increase so we think that combination of additional volume leverage on top of a.
And improved kind of cost position and then some pricing opportunity gives us the opportunity to expand our margins as we go forward into 2021.
Our next question is from Anthony Pettinari of Citi. Please go ahead.
Good morning.
In insulation I was wondering if you quantify the sequential improvement that you saw in technical and other volumes, maybe talk a little bit more about what you're seeing in those end markets and if there is any view on sort of how long it takes before the sequential recovery translates into kind of year over year improvement.
Yes. Thanks for the question in terms of kind of how we've seen.
Our techno installation business kind of evolved through through the quarter. We at the beginning last quarter, we guided that we we could see volumes tracking down kind of high single digits, if I kind of break that out between some of those products that get used in residential applications commercial and then more industrial.
I think overall, we saw the volumes improved better we kind of wound up I think more down mid single digits. So we saw a continuing improvement through the quarter in all three of those areas and and really we saw that both in the us and in Europe in terms of our businesses. So we kind of saw that sequential improvement.
Comp up through through the third quarter I think overall, our commercial business fared a little better we were probably down.
Mid single digits on commercial industrial was kind of down double digit. So we do see the recovering commercial kind of coming back, but overall I'd say, we saw sequential improvement kind of moving from down high single to mid single.
And our outlook as we kind of come into Q4, as we think that thats going to kind of remain pretty stable in terms of the year over your market outlook.
When we look across the end markets, we see commercial construction recovering and rebounding we've seen most of all of our projects that we're involved in restarting in doing that work.
But certainly theres, a cautiousness for some of the new projects.
And that's going to be something we're going to have to wait and see how that evolves into 2021, but we think the the volume rates were running at now we think should hold pretty consistent through Q4.
And then hopefully we start to see some recovery in terms of 2021.
And that's that's kind of how we're going to be playing that went out we feel very good about the strength of our residential businesses.
Commercial is improving but we think it's going to continue to lay down probably that mid single digits, and then industrial little bit more choppy for us for some of the project work that we do but we think that trends down a little lower and we think those could continue into 21.
Until we start to see some end market recovery.
Our next question will be from John Lovallo from Bank of America. Please go ahead.
Hey, guys. Thank you for taking my question.
Maybe going back to the Kansas City.
You start curious what the cost to restart that line is and then.
Do you have the ability to sort of control line speeds or shifts to make sure your feathering in that capacity.
In line with the overall demand.
Yes, thanks for the question in.
Yes to your second and I'll come back to that that does give us some great opportunity in terms of the cost and restart there.
Theres, a little bit of capital cost a few million dollars that we're going to be putting in to do some refractory upgrades and improvements there.
And then then it's just going to be kind of re hiring and training cost as we over the next couple of months as we as we bring the workforce back on and make sure they're trained and ready to go. So I would say incremental costs are going to be very modest both on the capex side and also the operating costs until we get fully staffed.
And then in terms of how we want to operate the asset yes, it will ramp up that production.
So that will be something that we absolutely feathering that capacity.
Again, hopefully starting in Q2, and then ramping that up in Q3 Q4 and.
And that that tracks pretty well with the seasonality of the business, where generally the first half is a little lighter than the second half so.
We want to be in a position to get the asset started.
Make sure we're running efficiently increase that capacity as we as we enter into the back half of the year, we typically see seasonal demand pickup.
Our next question is from Susan Mcclary of Goldman Sachs. Please go ahead.
Thank you good morning.
Of course is a bit I wanted to talk about the composite segment. Obviously the margin there came back to that double digit level much earlier than we had certainly been expecting there.
Can you talk about the sustainability of that and I know in your comments when you talked about the guide you said that you expected it to be closer in line with the first quarter, which was around 9%. They can I know you have the $5 million of rebuild costs in there, but can you just talk a bit to what the different parts are in that and how you think about getting sustainably back to that double digit range.
[music].
Yes. Good morning, Thank you for the question.
Our composites business again, I think I talked about this a lot, but we had really strong performance in Q3, and I think it's driven partly by our execution and partly by some markets that are that are coming back in terms of our strategy within the business. We've been very focused commercially to to continue to grow our business.
Inside kind of higher value downstream applications like.
Like a building and construction like nonwovens like wind as well as some specific geographies North America Europe, India.
Where we have built out a great market position, we have installed capacity to service local demand.
And that model for us really has been proven out over the last several quarters in terms of our ability to generate very very strong volumes, certainly reg relative to industrial production.
And then give us the opportunity to to get great volume leverage I think that on the commercial focus is where we see that continuing in our focus continuing to show positive results.
I think combined with that we've been focused for many years on just the operational cost efficiencies in this business. We've done network optimizations to in the past to to make sure. We have scalable assets. We continue to look at our cost efficiencies inside the business and the team has really been generating tremendous productivity over the last.
Last year. So in terms of just a continual focus on how we can operate the network and operate on our production lines more efficiently. So we are getting good volume growth in terms of a clear commercial focus and then we are turning our volume growth and we're getting great margin leverage off of the inefficient network and a very.
Robust focus on productivity and cost controls. So those are kind of the two levers I think.
Is allowing us to generate these kind of results so in the quarter.
We just saw kind of sequential volume improvements throughout the third quarter and almost all of our regions and end markets. So.
We were able to get quite a bit of volume leverage in the quarter, which which really helped in terms of bringing these margins up and then overall I think we're very pleased that our transactional pricing has remained relatively stable and I think thats an important piece, where we saw such a sharp decline in demand in Q2.
To be able to go through that and hold that sequential pricing was down for us in the quarter very similar to Q2.
That has allowed us to again CR.
See our margin snap back relatively quickly with just a little bit of volume leverage. So I think going forward. We continue to see our end markets continuing to improve overall.
Not quite at the rate is as some of our residential markets, but certainly we expect to see a continuous improvement and again, we're going to continue to focus on how we can generate good volume leverage that commercial focus and then with our with our cost and productivity initiatives. We feel we can translate that into good margin. So.
We hope we can get back into that double digit range back in to 2020, depending on what the market opportunity in market volumes looked like force.
Our next question will be from Michael Rehaut of JP Morgan. Please go ahead.
[music].
Thanks.
Good morning, everyone and congrats on the results and welcome.
Welcome to turn and congrats amber.
I wanted to focus in a little bit on roofing, obviously lots been discussed around installation.
And the capacity, there and obviously managing a good market improving market over the next year.
But on the routing side, obviously, great results in incredibly strong margins in the third quarter, you had talked about maybe four to margins being a little bit down sequentially, but it seems like still maintaining a healthy 20 plus percent type of.
A level.
But you know I guess two fold question here one.
How much of the demand currently that you're seeing in Threeq, you on a market level and into fourth you.
We feel is being driven by inventory channel rebuild.
As well as maybe storm demand that.
And I'm curious if you think thats strong demand is sustainable into the first half.
And then secondly from a margin perspective.
Certainly you know Twoq threeq typically always the higher margin quarters.
But you know how do you think about it.
Profitability in the ability to maintain at 20% plus pipe a number going forward.
Into the next year or two.
Okay. Thanks, Mike Hogan good morning to you as well.
So, let's talk a little bit about the how we're seeing volumes evolving in the marketplace. So I would say Q3 by our view of.
The robustness of market was really driven by end market demand contractor demand homeowner demand more than distributor replenishment.
So when we talked at the end of last quarter's call that Q2, we saw.
Increased storm activity, primarily hail driven events.
We're really ramping up a storm demand and then in Q3, we've seen several hurricanes and Thats continued so we think we've seen a big step up in kind of year over year storm demand that.
That's kind of led to this is leading to the robust market in Q4, but I'd say that's on top of a really robust remodeling and repair business. We've just seen that as people are investing in their homes and doing remodeling projects and renovation projects.
And so I think we saw in Q3, the strength of that remodeling and renovation if people are investing in their homes combined with.
Higher year over year storm activity and that combination is what drove really robust out the door sales. So I think that distributor inventories may have improved a little bit overall.
But generally speaking.
Our belief would be that distributor inventory levels are still running below historical levels for this time of year and it's more of an out the door strength.
Positive of that is that we think when we rolled through Q4, we're always concerned about winter weather and Thats always the biggest variable to our shipping volumes in Q4, and the contractors ability to do work.
But if they can't get all that we do think there is going to be some carryover, particularly on the storm demand into the first part of next year. So I think thats a robust demand environment, we see playing out certainly over the next few quarters.
On the margin front.
We've said all along that we think long term, 20% operating margins for this business is the right kind of centerpoint through a cycle generally when we go through more inflationary periods. We've seen that we trend a little below that and then in deflationary asphalt environments, we tempt trend above that and I certainly believe that's what we're seeing.
And playing out now so.
I think the overall strength of our.
Business and the earnings power of the business is intact to be at that 20% level and I think we'll see it will bounce around plus minus of those just depending on some of the inflationary environment and some of the depth of the market strength.
Our next question is from Kathryn Thompson of Thompson Research Group. Please go ahead.
Hi, Thank you for taking my question today, and focusing on the composite segment and.
Given some great color just in terms of seeing strong.
Improved demand across a wide create the geographic.
Areas and also end markets, but I wanted to see if you could give a little bit more of an update on certain end markets. It has underperformed this year, particularly the auto end market and industrials what are you seeing trend wise fit those so.
Segments at the segments that have underperformed and also you may have mentioned this if I missed it but any color also in terms of retail cost as we look into 2021. Thank you.
Yes, Thanks, Katharine good morning, so in terms of the end markets.
Well hit a couple of these autohome is as you know, it's a big part of the the overall glass market roughly 25% of the market side up into autos and look at broader and transportation autos, we've seen improved through the quarter, but still trending down probably vehicle production and vehicle man down kind of.
Net 19, 20% so it has gotten better.
A broad statement I'd say, particularly in some of the automotive is is that we've seen in Q3, some restocking of manufacturers that really took inventory levels down in Q2. So.
So I think part of the strength in Q3 was an unload the end markets improving but we did see some some I think restocking of some of our customers through that and automotive that'd be one of those as they are ramping up production in terms of the some of the other industrials oil and gas still it's a smaller part of the the the composites market, but still down double digits. It's.
Slowly gotten a little better, but really not a lot of improvement there I'd say, where we've seen.
Some of the best improvement in that our North American market and it continues to strengthen is around kind of the marine RV segments. I mean that is end market has really popped in and we're seeing some demand in saw those those demand levels really increase for us in Q3, and we see that kind of continuing here as we sit at the end.
Of October so I think Thats broadly and then wind energy is yet to come we talked about that's a big part of the overall market and it's a big part of our business and that is bounced back and and is running very very strong. So we're seeing that strength and expect that to continue here in Q4 as project work getting done.
And then in terms of the rebuild cost yes in in Q4 here, we're expecting we said about $5 million of year over year headwinds tied to some some additional rebuild costs primarily a facility in the us.
That we were taking down for some production curtailment actions and it also coincided with some rebuild that we're going to be doing there to make sure that furnace is ready to come up and be ready to run.
Full out here in 2021, and then a facility in China that we'll be doing a small repair on as well. So those are a couple of the facilities, we're going to be taking advantage of some downtime here to end the year.
Create a bit of a headwind year on year of about $5 million.
Allison we have time for one more question.
All right. Thank you and our next question is from Mike Dahl of RBC capital markets. Please go ahead.
Good morning, Thanks for us.
Just wanted to go back to insulation and a two part question Brian.
I think I heard in your opening comments.
Or you're.
Your ending comments that you expect north American resi flat volumes in Fourq you despite the industry being.
Being up on a lag starts basis and down mid single digits on Tech and other you just put up a zero on a flat.
Volume in total in Threeq, so that kind of imply that decelerating trend in fourq you despite acceleration.
In the end markets so a.
Did I hear that correctly and can you help reconcile that and b. If that's truly driven by your own supply constraints should we expect that as we think about the first half of next year and continued acceleration in black starts and recovery in some of the other markets that until you get your new capacity or your debt.
Idled capacity backup that you'll you'll continue to lag the industry for the first half of 21. Thanks.
Yes, Thanks, Mike Let me, let me try to unpack that a little bit on Q4 outlook, we'll start there yes.
When we take a look at the two businesses.
Last fourth quarter was a very strong residential shipping quarter.
For us in the industry. So we're comping a bit off of a really strong fourth quarter and at the time as you kind of go back we were seeing kind of a strengthening housing market ending last year, we announced the January increase in and we kind of build that over and saw some good strength starting the year and then then covered occurred and everything kind of kind of tracked down so on a year over year comp base.
As we're comping against a pretty strong quarter last year.
And while.
We've ramped up production line.
Last year, we service that growth primarily out of inventory.
As well as the capacity you had in hand, this year, we're coming into the fourth quarter.
That extended service cycle. So we have very little inventories. So while we've ramped up production and we're going to ship everything that we produce it doesn't give a lot of room to to service any kind of growth.
In our demand in the Red side in Q4, so that.
That that combined with and you heard me right kind of a mid single digit decline on on technical is what's offsetting any kind of volume growth. So in Q3, we had strong rest volumes offsetting a little bit of technical decline.
In Q4, we're probably not going to see a lot of rent growth and then we're still going to see a bit of that decline. So thats going to carry a little bit of volume headwind in the quarter for us, but as we move into 21, I'd say that seasonality starts to help us a little bit Q4 seasonally the strongest for resin insulation.
So we're going to we expect to be shipping everything we can produce Q1 generally lags down a little bit so we're going to be ramping up and continuing to produce more on a year over year basis because of the production that we brought up here in Q3, so we're going to actually be producing more in Q1 than last year and so we don't believe thats going to be.
A headwind to us in terms of our share position as we come into 2001 to start the year and then certainly with the additional capacity, we're bringing on in Kansas City. In Q2, we feel we're going to have ample cash.
Yep capacity to service the market demand growth and and art and retain our share position. So I think we're moving through a little bit of a timing in Q4, some of its a little bit of a year over year comp, but we feel very good that overall, we're going to be in a great position coming into 21.
To accelerate growth in the resin business and have the capacity to service that.
Yes.
Ladies and gentlemen, this will conclude our question and answer session.
And at this time I would like to turn the conference back over to Brian Chambers for any closing remarks.
Well well. Thank you very much I want to just thank everyone for your time today and questions. Just in closing I am incredibly proud of our team's execution of resiliency in this unprecedented environment delivering great results, while staying healthy and safe I think we're well positioned to finish this year strong and continue that momentum into 2021. So we look forward to speaking.
Can you do to to you all again during our fourth quarter call and until then I Hope you and your families remain healthy and safe. Thank you.
The conference has now concluded we thank you for attending today's presentation. You may now disconnect your lines.