Q4 2020 Owens Corning Earnings Call

Good morning, everyone and welcome to the Owens Corning, Q4, 'twenty and 'twenty earnings call.

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At this time I'd like to turn the conference call over to MS. Amber Wohlfarth Ma'am. 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 of our business results for the fourth quarter and full year 'twenty and 'twenty.

Joining us today are Brian Chambers, Owens, Corning's, Chairman and Chief Executive Officer, and Ken Parks, our Chief Financial Officer.

Following our presentation. This morning, we will open this 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 and filed a 10-K that detailed our financial results for the fourth quarter and full year 'twenty and 'twenty.

For the purposes of our discussion today, we have prepared presentation slides that summarize our performance and results and we'll refer to these slides during this call.

You can access the earnings press release form 10-K, and the presentation slides at our website Owens Corning dotcom.

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 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 sides and today's remarks contain non-GAAP financial measures explanations and reconciliations of non-GAAP to GAAP measures maybe found in the text and financial tables of our earnings press release and 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 is a meaningful measure for investors to compare our results.

Distant 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 and 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.

The tables in today's news release and the form 10-K include more detailed financial information for those of you following along with our slide presentation. We will begin on slide four and now opening remarks from our chairman and CEO, Brian Chambers, Brian.

Thanks, Amber and good morning, everyone I hope each of you and your families are staying healthy and safe.

2020 was certainly an extraordinary year the global pandemic created unprecedented challenges for all of US as we saw the virus impact our family and friends up and markets and disrupt our daily lives on a scale we've never experienced before.

At the year, our company faced into these challenges showing the resolve of our people the strength of our market positions and the value of our enterprise.

As a team our collective focus was and continues to be working together to keep each other healthy and safe to adapt to changing market conditions and service our customers and to provide needed support to the communities, where we work and live.

These efforts are aligned with our company's purpose and resulted in strong operational and financial performance.

During today's call I'll start with an overview of Owens Corning fourth quarter, and full year 2000, and 'twenty results before turning it over to Ken who will provide additional details on our financial performance I will then come back to talk about our outlook for the first quarter and how we are positioning the company to capitalize on both near term market opportunities and longer term secular trends.

I'll begin my review with safety, where we continue to perform at a very high level.

Our commitment to the health and safety of our employees is unconditional.

And the fourth quarter, we achieved a recordable incident rate of <unk>, four zero, representing a 37% improvement over the same period and 2019.

This lowered our full year 2020, our IR to 0.61, which is an 8% improvement over the prior year I'm pleased to note that over half of our global locations worked injury free in 2020.

I'm pleased to note that over half of our global locations worked injury free in 2020.

For the quarter, we delivered revenue of 1.9 day, a 14% increase compared with the fourth quarter of 2019, and adjusted EBIT of $306 million up 50% from the same period one year ago.

All three of our businesses delivered double digit EBIT margin for the second consecutive quarter.

For the full year, we delivered $7 1 billion and revenues down 1% adjusted EBIT was 878 million, a 6% improvement over 2019 and.

Increasing demand for our products combined with strong manufacturing performance and improved operating efficiencies resulted in earnings growth for the year. Despite a slight decline in revenues.

During the back half of the year, we continued to see our end markets recover and improve.

And the U S residential market, which impacts all three of our businesses and accounts for about half of the company's revenue demand grew at a strong pace driven by increased repair and remodeling activity as well as higher new construction starts.

Most of our commercial and industrial markets also strengthened throughout the second half as projects restarted manufacturing activity increased and customers replenished inventories.

And 2020 insulation EBIT margins grew to 10% despite a 2% revenue decline.

In addition to higher residential insulation demand and our ongoing focus on network optimization and manufacturing performance drove the earnings growth and the business.

Our composites business also benefited from increased demand and delivering double digit EBIT margins and both the third and fourth quarters, our focus on higher value downstream businesses and key geographies, where we have strong market positions combined with increased manufacturing productivity continues to drive our financial performance.

And in roofing revenues increased 2% compared to 2019, and EBIT margins grew to 22% driven by strong volumes and a positive price cost mix.

Overall market demand for shingles grew by 10% versus 2019, driven by above average storm demand and the strong second half remodeling market.

Across our businesses rapidly improving markets and high demand for our products have created supply shortages and extended lead times, our manufacturing and supply chain teams continue to work hard to increase the availability of our products and reduce our lead times leveraging the benefits of both improved productivity and capacity expansion and investments.

And installation as I shared with you last quarter, we've initiated work to restart a batch and roll line and Kansas City.

I am pleased to report that this line is on track to start production. This month. We've also increased some additional loose fill production and took actions and our U S mineral wool plant to meet growing customer demand.

And composites, we are expanding our glass and I'm moving capacity, adding a new production line next to our current facility in Fort Smith, Arkansas.

This will add needed capacity to our network and allow us to optimize cost by replacing our existing smaller production line at the site.

We expect to start production mid 2023 to service our growing number of building material applications.

And in roofing capital investments over the past two years have increased incremental capacity at several of our manufacturing facilities.

Our strong earnings performance and 2020, combined with working capital management and disciplined capital investments led to record operating and free cash flow of $1 1 billion and $828 million.

During the year, we also returned approximately $400 million of cash to shareholders through share repurchases and dividend payments.

Before I turn it over to Ken to walk through our financial performance in more detail I'd like to share a few thoughts and our commitment to sustainability.

And I want to Corning sustainability is central to our purpose and represents a competitive advantage for our company.

It also is becoming increasingly important to our customers and other key stakeholders.

Even as we faced near term uncertainties from the pandemic, we continue to invest and achieving our 2030 sustainability goals, one of which is to double the positive impact of our products.

Our new Formula and Gx product line use and a variety of residential and commercial applications is a great example of this commitment and a testament to our teams who found creative ways to continue this important work remotely.

And Jack's launch last month uses a new blowing agent chemistry, with 90% lower global warming potential compared with traditional products without sacrificing performance, demonstrating how product and process innovation can reduce the environmental impact.

In addition, we were honored to be recognized as a leader and ESG, earning a position on the Dow Jones sustainability World Index for the 11th consecutive year and being named industry leader for the D. J S. I World building products group for the eighth straight year.

And early April we'll release, our 15th annual sustainability report and which I invite you to read more about the full scope of our sustainability performance and progress.

With that I will now turn it over to Ken to discuss our financial results in more detail Ken.

Thanks, Brian and good morning, everyone as Brian mentioned Owens Corning delivered solid results and 2020 against the backdrop of global uncertainty from the pandemic.

Our company results were highlighted by record performance across a number of key financial measures.

The actions taken by the company enhanced by the recovery and U S. Residential markets have driven earnings growth robust free cash flow conversion and a strong liquidity position for the company.

Now turning to our results on slide five.

For the fourth quarter, we reported consolidated net sales of $1 $9 billion up 14% over 2019.

And as all three segments delivered revenue growth and the quarter.

Adjusted EBIT for the fourth quarter of 'twenty, and 'twenty was $306 million up $102 million compared to the prior year.

Adjusted earnings for the fourth quarter were $207 million or a dollar and 90 per diluted share compared to a $125 million or $1 13 per diluted share and Q4 2019.

For the full year, 'twenty and 'twenty, our adjusted earnings were $566 million or $5.21 per diluted share compared to $500 million or $4.54 per diluted share and 2019.

The full year EPS comparison was affected by a few below the line items in 'twenty and 'twenty.

In addition to tax items adjusted out and the first three quarters, we adjusted out of $32 million noncash income tax benefit and the fourth quarter, resulting from the intercompany transfer of certain intellectual property rights and to the U S.

Depreciation and amortization expense for the quarter was $141 million up $21 million as compared to last year.

The growth and the fourth quarter of 'twenty and 'twenty was mainly impacted by higher accelerated depreciation from this quarter's restructuring actions.

For 'twenty, and 'twenty, depreciation and amortization expense was $493 million up from $457 million and the prior year, primarily due to higher accelerated depreciation from our restructuring actions and incremental amortization from new finance leases.

Our capital additions for the year were $320 million down a $131 million versus 2019.

Given the uncertain market environment early in 'twenty and 'twenty, we took actions to re prioritize capital investments and preserve liquidity.

Looking ahead, we will continue to be disciplined and our capital spending as we focus on delivering strong free cash flow and we'll prioritize investments that drive growth and productivity.

On slide six you see adjusting items reconciling full year, 'twenty and 'twenty adjusted EBIT of $878 million to our reported EBIT loss of $124 million.

For the year adjusting items to EBIT totaled approximately $1 billion, largely driven by $987 million of noncash goodwill and intangible impairment charges recorded in the first quarter.

And the first three quarters, we recognized $26 million of gains on the sale of certain precious metals.

We've excluded these gains from our adjusted EBIT.

During 2020, we recorded $41 million of restructuring costs with $31 million of cost being recognized in the fourth quarter.

The bulk of these fourth quarter costs are noncash and are primarily associated with restructuring actions and our insulation and composites businesses as part of our ongoing network optimization activity to improve manufacturing productivity and reduce our cost position.

Slide seven provides a high level overview of full year, adjusted EBIT, comparing 'twenty and 'twenty to 'twenty and 19.

Adjusted EBIT of $878 million was a new record for the company and increased $50 million over the prior year.

Roofing EBIT increased by $136 million insulation, EBIT increased by $20 million and composites EBIT decreased by $82 million.

General corporate expenses of $128 million were up $24 million versus last year, primarily due to higher incentive compensation expense associated with improved adjusted EBIT results and the absence of small onetime gains realized in 2019.

Now I'll provide more details on each of the business results beginning with insulation on slide eight.

Installation and sales for the fourth quarter were $728 million up 1% from Q4 2019.

And the North American residential fiberglass insulation business, while lagged housing starts in Q4 were higher than the prior year supply constraints and limited inventories coming into the quarter caused volume speed down slightly year over year.

We continue to be encouraged by U S residential new construction demand and the realization of our September price increase.

And the technical and other insulation businesses volume has improved from the time of our Q3 earnings call and finished the quarter up slightly versus the prior year, driven primarily by strong performance and our U S formula and global mineral wall businesses.

EBIT for the fourth quarter was $106 million up $17 million as compared to 2019.

The EBIT increase was driven by positive manufacturing performance and higher selling prices and North American residential.

Overall volumes for the segment were relatively flat.

For the full year sales and installation were $2 $6 billion down 2% versus 'twenty, and 19 with growth and North American residential more than offset by COVID-19 related declines and the technical and other insulation businesses.

Overall volumes for the segment were flat.

The decline in revenue was driven by lower selling prices unfavorable product and customer mix and the divestiture of a small business and the first quarter.

In 'twenty and 'twenty insulation, EBIT increased by $20 million to $250 million, primarily due to favorable manufacturing performance and strong cost controls, partially offset by lower selling prices and unfavorable product and customer mix.

The business delivered EBIT margins of approximately 10% in 'twenty and 'twenty with increased EBIT on lower revenues.

Please turn to slide nine for a review of our composites business.

Sales and composites for the fourth quarter were $547 million up 14% as compared to the prior year, driven primarily by higher sales volumes.

During the quarter, we experienced robust volume improvements and many regional markets, particularly North America and India.

Additionally, we saw strong performance and our wind and roofing downstream and specialty applications, along with continued improvement and automotive.

EBIT for the quarter was $60 million up $4 million from the same period, a year ago with the benefit of higher sales volumes and favorable manufacturing performance, partially offset by furnace rebuild and production curtailment costs and continued pricing headwinds.

Composites delivered 11% EBIT margins for the quarter.

Full year sales were about $2 billion down 5% as compared to 2019.

The decline was driven by weaker volumes due to COVID-19, primarily and the second quarter lower selling prices from negative year over year carryover and.

Unfavorable customer and product mix and negative foreign currency translation.

In 2020, EBIT declined by $82 million to $165 million for.

For the year favorable by any factoring performance and lower SG&A cost were more than offset by weaker volumes the negative impact of production curtailments and negative pricing carryover.

Slide 10 provides an overview of our roofing business.

Roofing sales for the quarter were $702 million up 33 per cent compared with Q4 2019.

The increase was driven by 36% volume growth, partially offset by lower third party asphalt sales.

Price and in the quarter was flat with favorable transactional shingle pricing on realization of the August increase offset by higher rebates associated with stronger 'twenty and 'twenty shingled demand.

And the fourth quarter and the U S asphalt shingle market grew significantly as compared to the prior year.

The market growth, which was higher than the expectation. We provided in last quarter's call was a result of milder weather that extended the roofing season.

Our volumes trailed the market and the fourth quarter as we continued to operate and sold out conditions with low inventory levels.

EBIT for the quarter was $183 million up $96 million from the prior year, producing 26 per cent EBIT margins for the quarter.

The EBIT improvement was driven by higher sales volumes and both shingles and roofing components and the continued deflationary impact of asphalt.

Roofing sales for 'twenty, and 'twenty were $2.7 billion.

Up 2% versus 2019.

The increase was driven by higher sales volumes of about 6%, partially offset by lower selling prices and lower third party asphalt sales.

And 'twenty 'twenty roofing, EBIT improved by $136 million to $591 million.

The increase was driven by strong market volumes, and both shingles and components and strong manufacturing performance.

We experienced additional EBIT improvement from a price cost perspective, as the benefit of asphalt cost deflation and lower transportation costs more than offset lower selling prices.

For the year the business delivered EBIT margins of 22% up approximately 500 basis points from 2019.

Turning to slide 11, and I'll discuss significant financial highlights for 'twenty and 'twenty.

As a result of disciplined actions taken to manage working capital and operating expenses and capital investments and the recovery of our markets U S. Residential in particular, we delivered record full year levels of operating and free cash flow.

Our free cash flow for 'twenty, and 'twenty was $828 million up $238 million as compared to 2019.

Free cash flow conversion of adjusted earnings was 146% and 'twenty and 'twenty as compared to 118% and 2019.

In December the board of directors approved a new share repurchase authorization for up to 10 million additional shares.

During 2020, we returned $396 million of cash to shareholders through stock repurchases and dividends.

At the end of 'twenty, and 'twenty nine and a half million shares remained available for repurchase under the current authorization.

During 'twenty and 'twenty, we completed several deleveraging activities to further improve our credit metrics.

These actions included repaying the term loan and advance of the February 'twenty 'twenty, one due date.

Repaying the mid 'twenty and 'twenty borrowing on our revolver.

And contributing $122 million to our global pension plans.

Based on our strong cash flow performance and deleveraging activities, we've maintained and investment grade balance sheet.

And our operating within our target debt to adjusted EBITDA range of two to three times with ample liquidity.

At year, and the company had liquidity of approximately $1 8 billion, consisting of $717 million of cash and nearly $1.1 billion of combined availability on our bank debt facilities.

Earlier this month, the company's board of directors declared a quarterly cash dividend of 26 cents per share payable on April 2nd.

Since inception in 2014, the dividend has grown an average of 7% per year.

We remain committed to strong cash flow generation, returning at least 50 per cent to investors over time, and maintaining an investment grade balance sheet.

Now please turn to slide 12, where I will provide our 'twenty 'twenty one outlook for key financial items.

General corporate expenses are expected to range between 135 and $145 million.

Capital additions are expected to be approximately $460 million, which is below expected depreciation and amortization of approximately $480 million.

While we're expecting growth and both capital and operating expenses as conditions begin to normalize over the course of the year, we remain committed to closely managing these investments.

Interest expense is estimated to be between 120 and $130 million.

And finally, our 'twenty 'twenty, one effective tax rate is expected to be 26% to 28% of adjusted pretax earnings we.

We expect our 'twenty 'twenty, one cash tax rate to be 18% to 20% of adjusted pretax earnings the.

The growth and our cash tax rate as compared to our guidance. The last few years approximating 10% is due to the utilization of substantially all of our U S. Federal net operating losses and foreign tax credits by the end of 'twenty and 'twenty.

And now I'll return the call to Brian to further discuss the outlook for our company.

Brian.

Thank you, Ken our 'twenty and 'twenty performance demonstrated the value of our enterprise and the ability of our global teams to successfully execute on our operating priorities even during challenging conditions.

While uncertainties remain we are well positioned to deliver another strong year in 'twenty and 'twenty, one as we see the strength and our residential markets and improving conditions and our commercial and industrial markets continuing into the first half.

And keeping with prior practice I will focus my outlook comments on the current quarter.

Based on trends, we are seeing to start the year, we expect the company to deliver significant revenue and adjusted EBIT growth and Q1 versus prior year.

Starting with installation, we're seeing continued strength and new U S. Residential construction with lag starts and Q1 up 12% versus Q1, 'twenty and 'twenty.

Our north American residential volumes are expected to largely track with the market during the quarter and we continued to see favorable pricing based on positive traction from our January price increase.

We are beginning to see some inflationary pressure and the business, particularly transportation cost and recently announced a price increase for April.

Our technical and other building insulation businesses are expecting modest volume improvement and the first quarter as we continued to experience a gradual recovery and our commercial and industrial end markets across the globe.

Pricing and these businesses is expected to remain relatively stable.

Overall for installation and we expect first quarter EBIT to be about double what we delivered in the first quarter last year.

And composites, we expect Q1 volumes to increase mid single digits vs Q1, and 2020, given our strength and a few key regions and downstream applications supporting the wind and building and construction markets.

We also expect to start realizing price gains from actions implemented as part of our annual contract negotiations.

This along with continued strong manufacturing performance should generate first quarter EBIT generally in line with Q4, 'twenty and 'twenty.

And in roofing January shingle shipments were substantially higher than last year, reflecting the strength and carryover demand from 2020.

Based on this we expect to see market volumes up approximately 25% and the first quarter.

Against this backdrop, we continued to ship our available capacity and would expect our volume to increase in line with this growth.

From a price cost perspective, we expect to deliver another strong quarter with some incremental price realization from our February increase combined with continued asphalt deflation, albeit at a slower rate than in Q4.

We are seeing asphalt cost increasing and expect this to continue through the quarter, turning and inflationary in Q2.

Similar to our other businesses. We are also seeing increased inflation and recently announced a price increase effective the first week in April.

Based on these factors roofing EBIT margins and the first quarter are expected to be up year over year and more in line with the long term operating margins. We've discussed for this business of about 20 per cent.

With that view of our businesses I'll turn to a few key enterprise areas are.

Our team remains committed to generating strong operating and free cash flow in.

In terms of capital allocation, our priorities remain focused on reinvesting in our business, especially productivity and organic growth initiatives.

Turning to at least 50 per cent of free cash flow to shareholders over time through dividends and share repurchases and maintaining an investment grade balance sheet.

In addition, we're also evaluating investments and bolt on acquisitions that leverage our commercial operational and geographic strength and expand our building envelope offering.

Overall Owens Corning is well positioned to capitalize on our near term market opportunities as well as several longer term secular trends that will fuel our revenue and earnings growth moving forward, including the demand for new housing and the U S, which has been under built for several years and continued remodeling reinvestments and homeowners renovate their lives.

And spaces and upgrade their homes.

We also see growing opportunities to benefit from the drive for increased energy efficiency and homes and buildings product safety and sustainability material durability, and performance and investments and renewable energy and infrastructure.

Each of these trends creates opportunities for Owens Corning to leverage our material science building science and unique product and process technologies to partner with our customers and help them win and the market through additional products systems and services.

Our team is proud of the results we delivered in 'twenty and 'twenty and are excited about the opportunities we have in 'twenty and 'twenty one to service our customers grow our company and deliver value for our shareholders.

With that I'll now turn the call back to Albert to open it up for questions.

Thank you, Brian we are now ready to begin the Q&A session.

And ladies and gentlemen at this time, we'll begin the question and answer session to ask a question you May Press Star and then one using a touchstone telephone to withdraw your question you May press star and two.

If you are using a speaker phone and we do ask you. Please pick up the handset before pressing the keys to ensure the best sound quality.

Once again that is star and then one to ask a question.

And our first question today comes from so Eng from Jefferies. Please go ahead with your question.

Hey, good morning, everyone and can walk them and looking to for US looking forward to working with you going forward.

Thanks, and my first one.

You walk up my first question is on the insulation business good to see Kansas City is ramping up nicely.

And volume is tracking more in line with the broader market and <unk>.

But as you kind of ramp that Brian is it and opportunity to.

Catch up and outpaced the broader market and just wanted to get a sense you know theoretically with the capacity you have whats.

Whats your ability to kind of drive growth is it like 10% plus I just wanted to get a sense of theoretical peak volume growth. Thank you.

Yes, Thanks, Phil I mean, clearly we've seen a strong housing market.

Come through with increased demand for installation products. We saw that continue through the back half of the year, which is why we wanted to startup Kansas City.

Currently we're running our residential assets kind of full out to service demand and and so we expect with Kansas City coming up that's going to help us to get in front of that a little bit better as we work through the rest of the first half into the second half, where we can get our service cycles back in line and certainly puts us in a position to continue to service them.

The expected growth, we would see a if if housing plays out against kind of consensus estimates, which are which are tracking closer to that one 5 million starts. So I think we're really pleased with.

And I give hats off and and shout out to our manufacturing team and installation and they've done a fantastic job to get the line ready and prepared to start up this month.

So I think when we talked about Kansas City capacity coming on stream, we kind of talk about and average production line being about 3% of industry capacity I I've said that Kansas is a little bit bigger than that so I think that gives a sense of kind of the production capacity that we're going to be bringing up and the network and we do feel like that would give us and.

<unk> ER to continue to produce at a little bit higher pace than the lagged housing starts percentage. So that does give us a little bit of potential our focus first and foremost is on improving the service cycle to our existing customers, though I would say we want to continue to support them and get that back in and then we'll see as the back half plays out depending on demand starts but we.

Think we've got with Kansas City with our other network optimization actions, our product and process technology, we've got ample capacity to it to service our customers here in 'twenty, one and and puts us and a great position as we move forward into 'twenty two.

Our next question comes from Stephen Kim from Evercore ISI. Please go ahead with your question.

Yes, thanks very much guys. This is Joe on for Steve Good morning.

Good morning, good morning.

Yes, we were looking through your your cash.

And your Q and you mentioned on the call. This morning to the North America price being positive.

Sort of back into about a $6 million tailwind, which.

It implies something in the range of 3% to 4%. If you just assume that's all North America revenue. So first of all my numbers right in terms of what North America revenue pricing was up in the quarter and the.

And then secondly, you mentioned, even even being optimistic about the realization of that.

We're still gonna have to work through backlogs and so it might be some time before the price was coming in but it seems like that's not what we actually saw in the quarter were seeing the realization already.

So yes, if you could just maybe talk about are you pulling even more price forward our people.

And so keen on getting product now that you're actually getting better realization than you were even asking for and the fourth quarter. Obviously, you feel like with that April price increase that the four and eight that you've already asked for it was not quite enough. So yeah, just a lot to unpack there share, but if we could just understand a little bit better there.

Sure, Joe and I'll try to unpack that.

Kind of taking it through the fourth quarter I think we did see some positive realization and price in the quarter that was driven by revenue.

Primarily so we did start to see the realization from from that September increase playing through and strong demand kind of pulls that price increase through the P&L at a faster clip. So we did see that worked through and then our guide for Q1.

And is that we expect to continue to see some positive price realization are really off the January increase and so we think that kind of build some momentum here in the quarter and as we go through the rest of the year, but.

But as we've looked at the business outlook for the rest of the year and this is going to be a broad statement for for our company and we're certainly starting to see some inflationary headwinds and transportation cost material cost inflation and energy. So we wanted to make sure we're staying in front of that as best we could and too.

And do that we announced in April increase.

And that will be effective so we think that that helps kind of keep pace with some of the inflationary pressures and we're working hard now with our customers to make sure that they can get that into their supply chain. So that they can get that realization, but that's kind of how we see pricing right now and the near term. We've got the realization of the January increase building some momentum and then we've got the April income.

<unk> coming out.

And our next question comes from Matthew Bouley from Barclays. Please go ahead with your question.

Hi, This is Ashley can on for Matt This morning.

Could you just comment on where roofing inventory levels exited Q4, and where they stand today and then maybe with that how you are positioned to service demand and in upcoming quarters. Thank you.

Thanks Ashley.

We saw again, our roofing market overall and our shipments in Q4, just a really really strong and fact fourth quarter market shipments were the strongest that we've seen and 15 years.

So that that outpaced what we had talked about last quarter really more driven by just a pretty warm fourth quarter and winter season that extended the roofing season. So when we look at how that's impacted inventory levels. There's there's historically a bit of time at the end of the year and then the beginning of the year where inventory levels get.

Caught up both at the manufacturing level and at the distribution level, but.

But we give.

Given our strong demand and our inventory levels finished the year.

And historically low levels. So we started the year that way. So we're going to continue to be shipping at full capacity here and the first quarter, our when we talk to customers.

And certainly our belief is that our service cycles are pretty representative of what's going on and the industry. So we think it's going to be pretty tight and that would lead us to believe that our distributor inventory levels are also certainly below historical averages at this point and the year. So.

And we believe we're going to continue to to ship at full capacity.

Inventory levels and the channel, we're going to stay relatively low here, probably through the first quarter and.

And potentially through the first half and then maybe we get on top of this a little bit and the second half second half demand for the industry.

Really good remodeling activities is to sustain.

But those are always the wildcard a bit as kind of storm demand and weather events and so we'll have to see how the rest of the year plays out, but certainly first quarter first half. We think demand is going to be strong. We think inventory levels are going to stay pretty low and we're going to ship a although we can produce.

Yes.

Our next question comes from Kathryn Thompson from Thompson Research Group. Please go ahead with your question.

Got it. Thank you for taking my question today.

First focusing on the composite segment expectations were pretty muted for Q4 results, particularly in light of rebuild costs and others, but.

Obviously meaningfully outperformed and appears to volumes and improved as the quarter book.

And that's based on commentary from the last quarterly call.

How much of this upside was driven by strong domestic demand.

And as structural increases and when demand given a change in administration versus other factors like she mentioned and India and then along with that.

Given the inflationary environment, we're seeing now and the likelihood of price and going through and 21.

How much do you think may have been pulled forward demand and and your thoughts on how green initiatives and the current administration and Pax. This segment going forward. Thank you.

Okay.

Thanks for the questions Katherine and I'll try to get through those.

Kenya, and just talk maybe a little bit about fourth quarter.

Without a doubt if I just step back a little bit and our composites business. Our focus has been kind of twofold commercially we've been very focused on key markets and geographies, where we have a market leading position great manufacturing capability, the Americas, North America Europe, India.

And then we've been focused on and kind of these higher value downstream applications wind energy building and construction with nonwovens and.

And so when we look at how that has played out from a demand standpoint, I think we saw in Q4 volumes, just tick up and increase pretty much and all of our major markets and and our downstream applications. So I would say it was a broad base demand.

Driver in the earnings performance in the fourth quarter, and we saw that just continually step up month over month sequentially through the quarter. So candidly, we were a bit surprised by the strength, we saw broadly and all the markets all the downstream applications and.

And that's really kind of fueled the volume B and and the second part of our strategy and composite has been to build out the most cost effective network really focus on productivity and manufacturing performance and so all of that volume just kind of drop through and earnings growth. So it's a great I think just testament to the strength of that business and the model that we've created.

Sure. So I think that's what drove the beat now if we kind of carry that forward into Q1.

We expect that we're going to continue to see a pretty strong demand sequentially in Q1.

Couple of things that impacted Q4, specifically to your question, we did see some customer replenish net rates.

I mean, our best view and maybe be 10% to 15% of that volume in Q4 was customer replenishment says they see kind of their end markets picking up so that we don't think repeats and Q1, but that was a little bit more of a driver that we saw getting completed.

And then as you mentioned wind energy was a big driver and the downstream application. We saw a lot of projects getting completed and Europe and in China for example.

And then we saw automotive strength in the quarter. So those are kind of big end market applications that we saw just sequentially improve through the quarter and now as we roll over into Q1, we expect that that demand is going to stay pretty pretty good for us I think again Q1, we're not going to expect to see the demand replenishment that we saw and some customer.

And we do get the impact of kind of Chinese new year that always steps down demand in Asia Pacific, but overall I would say that the fundamental demand trends that we're seeing wind energy, a building and construction and automotive improving manufacturing and activity, increasing we see that continuing to get stronger and the quarter and we think that sets us up well.

Your last part of your question I guess on the administration.

Certainly theres been a lot of focus more on infrastructure and a sustainability and renewable energy and that plays very well into our composites business in terms of where we put a lot of glass fiber demand and infrastructure projects Telecom roads bridges, and then certainly and the wind energy, which is about 10% to 15 per cent of the overall glass.

Demand that could continue to accelerate that and we have a leading share position. There. So we think some of the trends that we're seeing there and some of the administrative focus areas should be complementary to our business and should give us and some nice tail winds.

And in fact, I would say you know outside the U S. We're already hearing talk that in China, there may be extending some of the credits for the wind energy programs that expired I think at the end of November of last year. So not just a U S comment, but also some positive on the green side internationally.

And our next question comes from John Lovallo from Bank of America. Please go ahead with your question.

Hey, guys. Thank you for taking my questions.

Maybe just dovetailing off Catherine's question on composites Theres been pretty you know pretty well publicized auto production curtailments.

Curtailments given some of the chip shortages were seeing I think the industry is talking about 1 million units.

Being impacted and the first quarter wondering how that's.

Contemplated in your outlook I think it's about I think it's 25 per cent of the glass market, if I remember correctly.

Yes, John.

Youre correct automotive is about 25 per cent and there we're seeing some of that a little bit and Europe and.

But I think those curtailments.

Will probably flow through but it may not flow through this quarter, maybe more into the second quarter because it depends on how our customers kind of buying inventory and produce materials. So that there is a bit of a lag and that supply chain, but not clear in terms of how much that might impact, but I'd say in general we do expect automotive for the full.

A year, just certainly ramp up and increase.

Quarter to quarter, we might see a little bit of variation and that but everything we're hearing from our automotive.

Onstream partners is that they expect our production to to increase and improve throughout the year.

And our next question comes from Mike Dahl from RBC Capital markets. Please go ahead with your question.

Hi, Thanks for taking my question I wanted to ask about roofing on the cost side you talked about.

Clearly, we've got still a tailwind, but diminishing and and <unk> from asphalt costs and flipping to inflation and I think you guys did about $90 million in terms of.

The tailwind and the full year of 2020 from from costs and how.

Should we be thinking about that based on what you can see coming through on asphalt and just ballpark.

And the magnitude of cost inflation, and we spend we're thinking about for the year.

Yeah, Thanks, Mike Yeah.

The asphalt has been a nice tailwind force in 2020, particularly the last kind of couple of quarters as we saw that come through the P&L and and as I as I did talk about in Q4, we actually saw our monthly asphalt costs increase month over month through the quarter and it is a little bit unusual given the fourth quarter and we.

See that trend continuing to start the first quarter that asphalt costs have been moving up month over month January from February. So that was part of the guide in terms of we would expect to see continued deflation through the P&L here in Q1, albeit at a more.

Less than what we saw in Q4, and then given that just kind of sequential month over month increase in prices, we would expect to start getting into an inflationary environment and Q2 and kind of continuing forward. So I would expect that to start hitting us more modestly in Q2, and then ramp up in the back half of the year and the Mac.

<unk> right now is kind of tough to quantify as we sit here today that theres two big drivers to asphalt cost one is gonna be underlying just oil cost and W. Ti costs those have ramped up pretty significantly the last couple of months. So part of this depends a bit on how particularly W. UTI oil prices move up through the year and and asphalt gets played off of.

That I would say that historically the last kind of 18 months, we've seen asphalt cost stay stubbornly high relative to W. Jai So and W. Type move down last year asphalt cost did not move down as much but <unk> seem to be creeping up and a faster rate. So that's something we're watching and the other big driver on asphalt cost for us and will.

Continue to watch as refinery utilization rates asphalt is a byproduct of the refining process to make jet fuels and diesel and gasoline and so right now refinery utilization rates are still running at a below normal levels. So that curbs the amount of asphalt supply and that impacts pricing. So I think those two factors <unk>.

Cost and then refinery utilization rates are going to dictate more in terms of our asphalt costs as we progress through the year and and we'll be able to try to shape that a little bit more on a quarterly basis as we as we move through 2021.

<unk>.

And our next question comes from Michael Rehaut from Jpmorgan. Please go ahead with your question.

Thanks, Good morning, everyone and congrats on the results.

First question I know or I guess my only question is on <unk>.

Roofing.

And.

Tremendous success, there from a margin standpoint.

You know your guide for the first quarter margin.

And down a bit from.

<unk> and from the second half I guess of 26% how should we think about normalized margins and kind of said that you know that characterized the first quarter margin of 20% and kind of roughly your long term view of the business is that still the case.

You know and <unk>.

And understanding that the back half and it.

And from extraordinary.

Volume strength as well as ASP.

Asphalt tailwind and.

And also if I could just sneak in a kind of thinking about the second quarter I know, you've only given first quarter, so far and so as a guide but yeah.

Yeah.

We're expecting more inflation to flow through and the second quarter, and maybe youre not going to get the full impact of pricing.

Is it fair to expect a little bit of sequential margin contraction for roofing and installation in the second quarter relative to the first.

Yeah, great great questions. So let me talk about margins kind of overall and roofing, we think be the long term guide of roofing to be about 20% is still a very good guidance given the strength of our brand product position our components business that we have we still think that works well I think we've said that historically were.

And we get into a little bit more of a deflationary environment. We can see margins move up above that and inflationary environments at times, we lag being able to capture price. So we may lag a bit but ultimately our history of our business and it goes back a little bit about even in an inflationary environment and asphalt we've got a great track record for being able to offset that inflation with price.

Over time and to sustain those margins. So I think we feel good I think youre absolutely right in the back half of the year, we really got the benefit of some asphalt deflation kind of coming through some stronger volumes.

The margins and I think that's always a potential and the business to kind of run at that range, where we get good volume.

Good pricing or some deflation that we can ramp up but I still think the 20% longer term is as a good guide and said I think as we think about Q2.

And we could see some inflationary pressures transportation and and asphalt coming into the business. We do have a February price increase that we've implemented and and that we're getting some good realization and it's also a reason why we announced four and April price increase to try to this curve that kind of impact on any additional asphalt.

The inflation that we might see through the year. So I think we feel good about the margin performance in the business and the long term and certainly we feel like we've taken the appropriate pricing actions, given the inflationary environment, where coming into to kind of stay on top of that and still generate really good margins, even as we go into Q2.

And I think some of the inflationary headwinds that you asked about and installation certainly we're going to start seeing that come through but again and insulation. It's a similar story around the price realization rates. So we've announced and we've implemented a january increase and resin inflation that we're seeing some good realization around and we've announced in April one there given the inflationary headwinds and so.

And where we're going to try to stay in front of some of these inflation headwinds at least keep pace. So we don't see that that margin contraction as some of these inflationary costs hit the P&L in Q2 and and into the back half of the year.

Our next question comes from Garik <unk> from Loop capital. Please go ahead with your question.

Great. Thank you congrats on the quarter you mentioned several one off and capacity projects that you took on last year, but just given how low roofing inventories or do you foresee adding more meaningful capacity over the next one or two years to meet the demand moving forward and then similar question on the installation and I think the KC line got you were.

Do you need to be for about one four to $1 5 billion starts and just remind us how much more cold capacity, you have and installation to bring on if needed.

Yeah.

Thanks.

And roofing when we look at capacity ads. This is something we do on a fairly routine basis.

We did do some projects are late 2019, and early 2020 and.

At four or five of our roofing plants that provided incremental capacity. So given the material conversion nature of that business, we can get productivity throughput with automation with with different pieces of equipment and we tend to look at that and make those investments on a routine basis to try to get incremental capacity kind of every year along with our own.

And productivity initiatives. So we do feel we've stepped up capacity and have more land capacity today than we would have a year ago or two years ago in the network I think broadly I would not think we need to do massive capacity expansion and so when we look at our capacity in our current network and we feel we've got ample.

And he just service, even 150 million for a market like we saw last year. The issue is timing and the seasonality of the business and we need to be able to build inventories at the beginning of the year or at the end of the year and order to.

Service the demand peaks that we see generally in Q2, and Q3 and that just didn't happen 12 months ago, we were facing into the pandemic. We shuttered some production and Q1 last year Q2, we'd never did and inventory build that was on top of distributors Destocking. So we came into the back half of last year with low inventories.

<unk> at our manufacturing facilities, and low distribution inventories and we've been playing catch up ever since to be quite Frank. So I think on a more normalized basis, we have enough capacity to service our share position and I.

At 150 millions per market, but we're going to need to work through that just to rebuild inventory positions to get back to that service level and so on.

And installation, it's a bit of a similar story and we we had some incremental capacity and Casey. That's the immediate one that we chose to ramp up its cost effective and allows us to service kind of the heart of the market we.

We do have some other capacity there, it's a little bit higher cost and and tough to service the market around so I think we'd be very careful in terms of ramping up any additional lines unless we saw and extended period of housing starts climbing above one five I think we believe with Kansas City with other productivity and process improvements we've.

And our network, where and a good position to service our customers at that kind of a $1 5 million market housing market. So I think we'd have to see something well north of that before we think about any additional capacity adds and the network.

And our next question comes from Susan and Macquarie from Goldman Sachs. Please go ahead with your question.

Thank you good morning.

And my question is around how to think about the cadence of the business as we think about 'twenty 'twenty, one and you know you're coming in to the year with very strong backlogs across all three segments. It seems and a lot of volume that's going to be net in there how should we think about the earnings cadence now for first half versus second half given some of the comparisons that you will face as we move through the year.

Year, and I guess with that as well and you see.

And he disruptions recently with the extreme weather that were getting and parts of the southern parts of the country over the last couple of days.

Yeah. Thanks for the questions, maybe I'll start with the disruptions and the short answer is yes, I mean, we we have been impacted it's impacting several of our plants I'd share with you. Our first quarter guide was assuming that this was going to be a very short term and short lived event.

As we sit here today.

<unk> it looks like it's getting and extended a little bit. So we could see some incremental impact, particularly in our residential facilities, where we're in a and a sold out position, where we have to curtail and we've had to shut down from facilities, we've had to curtail production.

And that could potentially impact.

The quarter. If this continues on for another several day. So that's something we're watching very carefully our manufacturing teams. Our supply chain teams are just doing phenomenal work trying to keep our facilities heated our employees safe and and be ready to ramp up as soon as we're able but that that is a concern we're watching and the near term and.

We hope it doesn't have a big impact, but that's something we're going to watch and see.

In terms of the shape of the year I think you make a great call out that.

Given where.

Where we're coming in with strength and our residential markets are improving conditions and our commercial and industrial markets. We do expect to see some meaningful increases in terms of revenue and earnings and the first half of this year versus the first half of 'twenty and 'twenty.

And then when we get into the back half, we're going to face some tougher comps, but I think the demand of our and products is ultimately going to drive if we can continue to see some earnings growth and revenue growth and the back half of the year, We certainly think thats possible given the strength of the markets. We're seeing that that could continue forward, but I would expect the shape of the year to be some some fairly large.

<unk> improvements year over year, and the first half more modest ones and the back half, but we still think we're set up for a very strong 'twenty and 'twenty one.

Okay.

Jamie we have time for one last question.

And our final question today comes from Adam Baumgarten Baumgarten from Credit Suisse. Please go ahead with your question.

Hey, Thanks for taking my questions just on roofing volumes and.

And the business trailed the industry and the second half of 'twenty, you're expecting more in line industry growth and the first quarter and I think historically, you've shown an ability to recapture some of that lost share.

Do you expect that as we move through 2021 beyond the first quarter.

Yeah, we do I think our contractor network position stays very strong our distribution positions are very strong in terms of our share positions I think what we saw in Q4 was.

We had a little bit of a geo mix headwind and some markets that were stronger given our overall national share position and then we probably lost a little bit of discretionary a storm demand.

That business tends to be very short cycle and if you have to replace your roof, you're generally going to use a product you can and that's available to you. So we might have lost a little bit of discretionary share there and the quarter around storm demand, but the fundamentals of our business are very strong. We've got we've got a great contractor network, there and they're focused and their business is built around our brand our products our commercial team we.

That's a long standing and and so we do think as we worked through the year, we get our inventory position set that we would get our share position and back to that historic average.

Yeah.

And ladies and gentlemen.

We have reached the end of today's question and answer session and I'd like to turn the floor back over to management for any closing remarks.

Just very briefly really appreciate everybody's time. This morning, thanks for your questions.

Our team is executing well and we believe we're well positioned for another strong year in 'twenty and 'twenty. One. So we look forward to speaking you again in April.

And until then and I hope your families remain healthy and safe thanks for joining us today.

Yes.

And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending you may now disconnect your lines.

Yeah.