Q2 2021 Owens Corning Earnings Call
Hello, and welcome to the Owens Corning Q2, 2021earnings call.
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Now I would like to turn the conference over to Amber.
The wohlfarth Wohlfarth. 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 second quarter 2021.
Joining us today are Brian Chambers, Owens, Corning, as chair and Chief Executive Officer, and Ken Parks.
Part of our Chief Financial Officer.
Following our presentation. This morning, we will open this 1 hour call to your questions in order to accommodate as many call participants as possible. Please limit yourselves to 1 question only.
Earlier. This morning, we issued a news release and filed the 10-Q that detailed our financial results for the second quarter 2020.
The 1 for the purposes of our discussion today, we've 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-Q, and the presentation slides at our website Owens Corning dotcom.
For it to the investors link under the corporate section of our homepage.
A transcript of recording of this call and the supporting slides will be available on our website for future reference.
Please reference slide 2 before we begin where we offer a couple of reminders first today's remarks will include forward looking statements based on our current forecasts and estimates of future events. These statements are subject to risks uncertainties and.
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.
Other statements.
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.
The 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 consistent with.
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 adjusted our effective.
Tax rate to remove the effect of quarter to quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share.
We also use free cash flow and free cash flow conversion of adjusted earnings as measures helpful to investors to evaluate the company's ability to generate cash and utilize that cash to pursue opportunities.
In 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. We will begin on slide 4 and now opening remarks from our chair and CEO, Brian Chambers, Brian.
Thanks Amber good.
Morning every.
Everyone and thank you for joining us for today's call I Hope all of you are staying healthy and safe.
Corning posted record second quarter results today contributing to an outstanding first half of 2021.
During the quarter, we continued to see broad strength across many of our end markets, but our results are not only being driven by favorable markets.
The conditions.
As Kevin and I will discuss today, our commercial and operational execution continues to accelerate our performance and create new opportunities for growth.
This puts us in a great position to consistently generate strong earnings and cash flow and continue to deliver greater value to our customers and shareholders over the long term.
During our call. This morning, I'll start with an overview of our second quarter results before turning it over to Ken who will provide additional details on our financial performance. I'll then come back to talk about our business outlook for the third quarter.
As always I will begin my review of safety <unk>.
During the second quarter, we maintained a very safe environment.
Within our IR of 0.51 of significant improvement compared with the second quarter last year.
Nearly 2 thirds of our facilities have remained injury free this year and over half of done so for more than a year.
And while we are seeing an increased risk associated with the Delta Varian, we continue to operate all of our facilities.
<unk> with a strong focus on working together to keep each other our customers and our suppliers healthy and safe.
Financially, we delivered record second quarter revenue of $2.2 billion, an increase of 38% compared with the same period last year up 35% on a constant currency basis.
Adjusted EBIT of $408 million, which is a record for any quarter historically.
Our global team continues to perform at a high level executing well in the dynamic market environment.
The outstanding financial results, we are delivering against this backdrop demonstrate the exceptional operational capability of our people and earnings power.
Anybody.
Our performance during the quarter was driven by strong volumes broad price realization and high manufacturing efficiencies across all of our businesses.
This resulted in an adjusted EBIT margin for the company of 18% with all 3 of our businesses posting double digit EBIT margins for a fourth consecutive quarter.
Our current demand for our U S residential products, which account for about half of our enterprise revenues remained robust in Q2, and we continue to see higher demand levels within our commercial and industrial applications.
Many of our end markets are now operating at or above pre pandemic levels as markets have recovered from the challenges of the past 18.
18 months.
While underlying market demand for our products remained strong during the quarter, our operating priorities investments and execution enabled us to capitalize on this volume to deliver record financial results.
Commercially we continue to work hard to meet the needs of our customers and a tight supply environment while.
Implementing needed pricing actions to offset substantial inflation headwinds.
And across the enterprise, we continue to invest in product innovation and select growth and productivity initiatives to service, our customers and enhance our operating performance.
I'll take a few moments now to share our most recent updates.
Within insulation.
Yesterday that we've entered into an agreement to sell our installation site in Santa Clara, California to commercial real estate developer panettone.
This is part of our ongoing strategy to operate of flexible and cost efficient manufacturing network with facilities geographically located to best service our customers.
We plan to continue to.
We are now and through the third quarter of next year and expect to complete the transaction in the first quarter of 2023.
Ken will share some further detail on the transaction during his comments.
I want to emphasize that this action is about optimizing our network assets the net impact will not reduce our production capacity or our ability.
The run them as our customers.
While we continue to operate the plant over the next year, we will be investing in new capacity to service the west coast expanding production at our NEPA, Utah plant and restarting our Eloy, Arizona facility.
Overall these moves allow us to create a more flexible cost effective manufacturing footprint.
To better serve the market.
And we continue to have other capacity expansion options available if we see long term housing demand trend higher and.
In our composites business, we continue to invest to grow in higher value downstream applications, such as building and construction renewable energy and infrastructure.
Earlier this month, we announce.
To serve of acquisition of Lipa G M B, H, which specializes in the coding printing and finishing of glass nonwovens and other materials for the building materials industry.
Based in Germany, sleeper brings technology and the team with great capabilities that complement our significant nonwovens portfolio and will enable us to better serve.
The paying customers and accelerate growth of building and construction market applications in the region.
All of these investments are enabled by our enterprise operating model, which leverages, our commercial strength material science capabilities and global operating scale to expand our growth opportunities improve our operating efficiencies and generates.
Of your own free cash flow.
Before I turn it over to Ken to walk through our financial performance in more detail I'd like to share a brief update on the sustainability from.
In May we were honored to earn the top ranking on the 100 best corporate citizens list for an unprecedented third year in a row.
This is 1 of several recent achievements.
Since the demonstrate the commitment of our 19000 employees to making an impact in ESG.
1 of the most rewarding aspects of this recognition is that it has spurred customers to approach us to learn and collaborate on their goals in this space specifically, our customers are expressing growing interest and reduced embodied carbon products.
The rate structurally of economy solutions, including both recycled content products and the end of life solutions.
This is providing new opportunities for us to deliver value to our customers by collaborating on work that is core to our purpose and increasingly important to them.
We look forward to providing further updates on our progress and outcomes in this.
And so 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 commented Owens Corning had an outstanding second quarter delivering record quarterly results.
Commercial execution led to top line growth of 17.
Area since sequentially and 38 per cent year over year.
Commercial execution, coupled with strong operating performance led to gross margin expansion of over 400 basis points from Q1 and more than 600 basis points from the same period 1 year ago.
Overall in the second quarter.
<unk> per generated record quarterly adjusted EBIT, along with adjusted EBIT margins of 18%.
The stronger earnings combined with the continued focus on working capital management and capital investments resulted in healthy free cash flow generation in the quarter.
While demand conditions.
Are we giants strong across the markets. We serve are ongoing execution across the business was fundamental to driving this performance.
As we talked about in the Q1 call, we're managing an increasingly inflationary environment, primarily relating to asphalt and other petroleum based materials.
Along with transfer.
<unk> relation costs.
Overall positive price realization more than offset the inflation headwind in the quarter.
Maintaining this positive balance remains a focus as we move through this inflationary environment.
Now turning to slide 5 we can take a closer look at our results.
For the second quarter, we reported consolidated net sales of $2.2 billion up 38% over 2020 with double digit revenue growth in all 3 segments, reflecting the robust U S residential housing market and the broadly stronger commercial and industrial markets.
Transfer tested EBIT for the second quarter of 2021 reached $408 million up $241 million compared to the prior year and was highlighted by EBIT margin improvement sequentially across all 3 segments.
Adjusted earnings for the second quarter were 200.
Adjusted the $4 million or $2.60 per diluted share compared to $99 million or of 91 cents per diluted share in the second quarter of 2020.
Depreciation and amortization expense for the quarter was $122 million up slightly.
Third and second paired the Q2.2020.
Our capital additions for the second quarter were $148 million up $101 million as compared to Q2.2020.
We will continue to be disciplined in our capital spending as we focus on delivering strong free cash.
S and prioritizing investments that drive growth and productivity.
Slide 6 reconciles, our second quarter, adjusted EBIT of $408 million to our reported EBIT of $428 million.
During the quarter, we recognized $21 million.
Flow gains on the sale of certain precious metals.
Ongoing progress on our productivity initiatives and manufacturing process technology has enabled us to further modify the designs of our production tooling and reduce certain precious metal holdings.
In addition, we recorded.
<unk> added $1 million of restructuring costs associated with previously announced actions.
These items are excluded from our adjusted second quarter EBIT.
Slide 7 provides the high level overview of second quarter adjusted EBIT comparing 2021 to.
For 2020.
Adjusted EBIT of $408 million was a new quarterly record for the company and increased $241 million over the prior year.
All 3 segments delivered year over year, and sequential EBIT growth and margin expansion.
Before turning to the review of each of our businesses I want to share more details around the Santa Clara transaction, Brian referred to earlier.
This action is part of our ongoing strategy to operate of flexible cost efficient manufacturing network and geographically locate our assets to better service our customers.
We plan to continue operations at our Santa Clara facility for at least a year and expect to complete the transaction in the first quarter of 'twenty to 'twenty 3.
We expect gross proceeds of approximately $240 million.
Cumulative cash pretax charges associated.
Transaction are expected to be in the range of $30 million to $40 million cumulative noncash charges are expected to be in the range of $75 million to $85 million, primarily consisting of accelerated depreciation and the land carrying value.
We intend to invest.
Best of portion of the net proceeds in capacity to serve the market primarily in our existing Nephite, Utah and Eloy, Arizona facilities.
Now turning to slide 8 I'll provide more details on the performance of each of the businesses.
The insulation business continued to build.
On the strong performance, we demonstrated in Q1 with sequential growth and continued margin expansion in the second quarter.
Sales for Q2 were $806 million of 35% increase over second quarter 2020.
We saw volume strength.
As of the business as U S. New construction continued to be robust and the commercial end markets, we serve globally broadly strengthened.
In North American residential fiberglass insulation, we continue to see positive pricing as a result of the actions we've taken over the past 4 quarters.
<unk>.
In the second quarter, we saw volumes up relatively in line with expectations as we continue to see gains from incremental capacity additions.
In technical and other insulation, we continue to build on the strength of demand. We saw in Q1 for our highly specified products with the most notable year.
Year over year growth coming from North America, and Europe, and with growth in both by the phone glass and mineral wall.
Pricing was positive in the quarter and we saw the benefit from currency translation.
For the insulation business positive price nearly offset the impact of accelerating transportation costs.
And material inflation as price cost in residential insulation was positive while price in technical and other insulation lagged inflation in the quarter as a result of the more project based nature of the business and longer lead times.
We continued to execute well in our manufacturing operations.
Cautions and benefited from the recovery of $34 million of fixed cost absorption on higher production.
We delivered margins of 14% and EBIT of $112 million up from $32 million of the EBIT in the second quarter of 2020.
Now please turn to slide 9 for a review of our composites business.
The composites business produced record quarterly EBIT of <unk> sales for the second quarter were $583 million up 46 per cent compared to the prior year.
The business delivered volume growth of nearly.
<unk> per cent in the quarter.
We continue to see strength in demand for our downstream applications as well as demand in key geographies, where our local supply for local demand model is being valued by customers.
We also continued to see positive price realization in composites, resulting from.
From our contract negotiations as well as announced price increases for our non contractual business.
In the quarter positive price nearly offset the inflation headwinds from materials and higher transportation costs.
Operationally, we continued to execute with solid manufacturing.
30, <unk> performance and recover $33 million of curtailment costs.
In the second quarter composites delivered $98 million of the EBIT up $92 million over last year and EBIT margins of 17%.
Slide 10 provides.
The effects of a review of our roofing business.
The roofing business continued to perform at a high level in the second quarter.
Sales in the second quarter were $917 million up 35 per cent compared to the prior year.
The U S asphalt shingle market grew 19% for the quarter as can.
Compared to the prior year with our U S shingle volume slightly trailing the market, although better than expected due to stronger manufacturing performance.
Additionally, our volume performance benefited from favorable attachment rates and components.
We're seeing high realization on our announced.
The price increases and price cost to remain positive as asphalt became inflationary in the quarter and we continued to face into additional materials and transportation inflation.
Contribution margins remained strong.
For the quarter EBIT was 230.
$34 million up $86 million from the prior year, achieving 26% EBIT margins.
Turning to slide 11, I will discuss significant financial highlights for the second quarter and full year 2021.
Continued discipline around management of working.
The capital operating expenses and capital investments resulted in strong cash flow.
We reported record quarterly operating cash flow of $498 million, an increase of $217 million over the prior year.
Free cash flow for the second quarter of 2021.
It was $405 million up $172 million compared to the second quarter of 'twenty 'twenty.
During the second quarter of 2021, the company repurchased 1.3 million shares of common stock for $131 million.
Through June 30th.
On May 21, the company has returned $318 million to shareholders through share repurchases and dividends.
With the strong cash flow performance, we maintain a solid investment grade balance sheet with ample liquidity.
At quarter end the company had liquidity of approximately 2 billion.
Billion.
<unk> of $888 million of cash and nearly $1.1 billion of.
Bind availability on our bank debt facilities.
We remain focused on consistently generating strong free cash flow returning at least 50 per cent to investors over time and maintain.
<unk>, an investment grade balance sheet.
Now turning to our 2021 outlook for key financial items.
General corporate expenses are expected to range between 150 and $155 million.
This is an increase from our prior outlook, which reflects higher.
Performance based compensation driven by our strong results.
Capital additions are expected to be approximately $460 million, which is below expected depreciation and amortization of approximately $500 million.
Our outlook for total depreciation.
Perfect monetization has increased driven primarily by accelerated depreciation related to our Santa Clara, California transaction.
Interest expense is estimated to be between 120 and $130 million.
And we expect our 2021effective tax.
And to be 26% to 28% of adjusted pretax earnings and our cash tax rate to be 18% to 20% of adjusted pretax earnings.
Now please turn to slide 12, and I'll return the call the Brian to further discuss the outlook for our company for.
Brian.
Tax rate. Thank you Ken during the second quarter, we continued to position ourselves to capitalize on near term market opportunities, while investing in longer term growth driven by key secular trends.
As we move into the second half of the year, we expect the U S residential repair and remodeling and new construction end markets to remain robust and our global.
Commercial and industrial end markets to continue to strengthen.
In terms of inflation, we expect material and transportation cost increases we faced in the first half of the year to continue in a more significant way in the second half.
And we will continue to carefully monitor and manage the regional impacts of Covid on our businesses.
Global for the first half the execution of our key operating priorities has generated strong financial results and we expect this to continue in Q3, delivering another quarter of year over year revenue and earnings growth.
Now consistent with prior calls I will provide a more detailed business specific outlook for the third quarter.
Starting with.
The installation, we continue to see strong demand in our north American residential fiberglass insulation business and anticipate our volumes to be up approximately 10% versus prior year.
We expect pricing to continue to improve during the quarter with realization of the increase that went into effect at the end of June.
And our technical and other <unk>.
Throughout Asia businesses volume should also grow approximately 10% with increasing demand for our products and global building and construction applications.
Pricing should also continue to improve through some additional realisation from prior increases.
In terms of inflation, we expect material and transportation cost increases in the third.
Third quarter to be higher than what we experienced in Q2, but anticipate that additional price realization will result in a positive price cost mix in the quarter.
Additionally, we expect our fixed cost absorption to improve by approximately $20 million in the quarter versus prior year.
Given all of this we expect performance in Q3 to be.
The <unk> slightly versus what we delivered in Q2 with EBIT margins approaching mid teens.
Moving on the composites in the third quarter, we expect revenue to improve year over year, even with relatively flat volumes, primarily driven by our commercial work to improve our sales mix and realize additional price.
We anticipate.
<unk> Plaza pricing will continue to improve mid single digits offsetting the impact of additional inflation.
And that we should benefit from the recovery of roughly 30 million of the curtailment cost we saw in the third quarter of 2020.
Overall, we expect EBIT margins to continue to be in the mid teens range close to what we delivered in the second.
<unk>.
And the roofing, we expect both the market and our volumes to be relatively flat in the third quarter versus prior year.
Roofing pricing is expected to improve based on the implementation of our previously announced price increases. In addition, given the more significant inflation headwinds from asphalt and other material inputs we anti.
<unk> in the second half, we recently announced the price increase of 5% to 7% that will take effect at the end of August overall, we expect another strong quarter with roofing EBIT margins of nearly 25% as our price cost mix narrows of remains positive.
With that view of our businesses I'll close with a couple of enterprise items.
Items.
Our team remains committed to generating strong operating and free cash flow.
In terms of capital allocation, our priorities remain focused on reinvesting in our business, especially productivity and organic growth initiatives.
Returning 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, as evidenced by the recently announced the acquisition of Lipa, We continue to evaluate investments in bolt on acquisitions that leverage our commercial operational and geographic strength and expand our building and construction product offering.
Before moving on to the Q&A session.
Session I'd like to highlight 1 other item from this morning's press release, we will be hosting an investor day at our World headquarters in Toledo, Ohio on Wednesday November 10th.
Members of our executive leadership team and I plan to discuss the company's strategic priorities financial objectives and initiatives to drive long term stakeholder value will.
We will be sharing further details with you in the coming months for this important event in the meantime, we hope you will hold the date and plan to join US in November.
In closing our team is proud of the outstanding financial and operational performance. We delivered in the second quarter and are excited by the opportunities we have to grow our company help our customers win.
Okay and deliver value to our shareholders.
With that I will now turn the call back to Amber to open it up for questions.
Thank you, Brian we are now ready to begin the Q&A session.
Yes. Thank you at this time, we will begin the question and answer session.
Asked the question you May Press Star then 1 on your touch.
Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to the try your question. Please press Star then 2.
Time, we'll pause momentarily to assemble the roster.
And the first question comes from Matthew <unk> with Barclays.
Good morning, everyone. Thanks for.
The Martin questions.
So I'll start with the question on the North American fiberglass volume outlook I think you just guided to 10% growth in Q3.
Obviously this is in light of what you're seeing with homebuilders and sort of restricting sales pace and a lot of different places and I'm just curious.
For taking with your embedding.
Some of that into your volume outlook.
Or perhaps some of the effect of beyond Q3 into Q4, just what are you kind of hearing and expecting around U S. New construction. Thank you.
Good morning, and thanks for the thanks for the question I think overall, we expect new construction.
The <unk> to continue at a solid pace through the back half of this year and as we've talked about on previous calls I mean, I think of housing and particularly new construction housing in the U S market has been under built for for several years. So we would expect that we're going to continue to operate in this kind of range of 1.5.
<unk> had <unk> 6 million housing starts we think that debt is very sustainable given demographic trends. So we have seen also of the same kind of reports on builders and when we talk to our contracting customers.
As I've talked about previously I think part of the constrained on building supply is a broader than just.
The 1 point materials or material building material inputs, there around land availability and development around the construction labor. So I do think there are some headwinds to growth in housing.
Above these rates unless some of those kind of fundamental issues get addressed in terms of land development and labor availability I do think.
That material suppliers like ourselves and others will will get caught up in terms of our supply chain to be able to service higher growth, but I do think theres going to be some of those headwinds debt that may impact starts moving a lot higher than where they are today, but I would emphasize that the today's pace of housing is at a very robust.
Rock solid pace, and we think that gives a great environment for our business to continue to grow and so we're going to continue to work hard to service our existing customers. We brought on some additional capacity through this year to produce more overall, we're going to produce significantly more of this year than last year in terms of our volume between capacity.
Past the ads and also the additional operating time some of them, we lost last year with some of the Covid impact.
And we are positioning ourselves to produce more installation next year to service our customers and growth that we're seeing in the market. So we think overall in our network, we're very well positioned and we think housing is going to continue to be of good tailwind for us going forward.
Yeah.
Thank you and then ask for some kind of from Kathryn Thompson with Thompson research.
Hi, Thank you for taking my questions today.
It's really ties into broadly the roofing demand that touches on the.
Outside of your roofing shingle side and 1 of the feedback that we're getting in the field is that.
Given the high demand it just keeping up with the man plants in general have to reduce the number of skus they manufacture.
In order to kind of keep up the man I wanted to get your thoughts on that but also to tie into the composite.
With underlayment.
Your abilities in the capacity.
Cash is high on the composite side.
Has that also the bottleneck in order to meet demand. Thank you.
Yeah. Thanks, Jeff I think you know we've continued to see and hear about material challenges in our roofing business I mean asked.
Fault was was a very supply constrained in the first part of the year.
With low refinery utilization rates, we've seen that kind of improve.
And we've seen other materials inflate quite of bit part of that is some of the capacity constraints. We're working through and then as Youre, saying certainly glass mat in terms of of composite materials.
It has also been a bottleneck. So we are fortunate in that we are vertically integrated and produce our own glass fibers and glass mat. So that does give us a capability in terms of supply as well as design that we've talked about in the past that we have with our internal production, but our composite.
<unk> assets are non woven assets, we are running at full capacity and it's why we've announced a plant expansion and our Fort Smith facility to come on stream in early 2023 too to be able to bring on more of Mac capacity to service, both the roofing market and kind of of our specialty nonwovens that services jipson in polyethylene.
So in other materials. So I think we are working true.
A very tight supply environment.
Through this year and we think that's going to continue to also be an impact in the overall roofing industry and that's I think going to be a bit of a governor on the amount of industry capacity that can be produced.
We saw that kind of materialize in.
Q3, or Q2 and in our guide for Q3, we think that the industry is probably running pretty full out for what can be produced relative to the raw material inputs available. So I think overall again, we see benefits of the vertical integration strategy. We think that's going to continue the service as well going forward. We do have capacity that we will be adding to the network.
Work to address the sum of the growth in these areas that we see so we think were again well positioned near term and longer term in terms of our production capacity.
Thank you and the next question comes from Mike Dahl with RBC capital markets.
Hi, Thanks for taking my questions.
I had a 2.
2 part question on just the capacity of decisions around Santa Clara and correct me, if I'm mistaken, but I think the Illinois plant has been mothballed.
Since 2010, so just wondering if you could take us through kind of the.
The decision and the rationale in terms of why.
Question investing in that plant.
Made more sense than modern Martin modernizing Santa Clara.
And also the second part just anything that we should be thinking about in terms of weather.
Whether it's capex or startup costs associated with that facility as it comes back online.
And also sorry to sneak 1 last in but in the in the answer around kind of the rationale if you could give us any sense of just with newer lower cost capacity of what that relative.
Margin profile of our.
Or return profile is likely to look.
Look like with your OE versus Santa Clara Thanks.
Okay. Thanks, Michael tried to try and hit all of them. Let me, let me start just broadly with the the Santa Clara decision I mean, our installation business delivered another great quarter in Q2 and continues to build momentum and a key part of that success really has been in our residential business, where we have been focused.
Focus on building and operating.
Flexible cost efficient network that can service our customers through a variety of demand scenarios and our team has done just phenomenal work in terms of improving productivity, increasing our process efficiencies increasing our throughput through the entire network. So given all of this work.
We thought it was the best time in the right time to monetize a very valuable piece of real estate debt that sits in the heart of Silicon Valley.
And then better leverage some existing assets that we have in the west coast to service our customers in that region and so that was the premise for this decision.
So we've agreed to sell the property to of real estate developer for $240 million.
As part of this transaction, we plan to continue to operate the facility for at least another year and then use that time to build out capacity in our knee Fi, Utah facility, and then restart our eloy.
<unk> the facility so as you pointed out.
Illinois has been a plant that we have not operated in over a decade. So it's been there and been available to us, but we think that these actions are going to better leverage those 2 facilities. There are little more flexible assets. So we can turn up and down around very cost effectively.
And it also then allows us to balance our capacity in the region to service demand in the region. So we will through these 2 facilities have enough capacity to service our west coast customers.
So that's been the rationale and I think overall, what this allows us to do net net of monetize of very valuable piece of real estate.
Arizona It gives us better leverage on the existing assets that we have in the region in a knee Loy, Andy Fae, and we still retain the ability to.
To invest and add capacity in our other facilities. So I think we retain that Optionality I think part of the challenge is just a little bit in details around Santa Clara.
As I think many of you know it's the 2.
2 furnace operation, but the demand in that local market really is only enough to operate 1 of the furnaces. There efficiently. So the second furnace became very difficult to operate because all of the demand was.
In the central part of the country of the East coast of part of the country. So it's very cost.
And to run that second furnace and ship it so far east. So we wanted to use this as an opportunity to rebalance our west Coast network continue to service our customers. There continue to maintain the amount of capacity that we need to do that and service that customer base, but give us some some better optionality and to monetize our valuable piece of real estate. So that was kind of the.
The inefficient at the heart of the decision I think in terms of Capex startup.
To invest a portion of the proceeds but its a smaller portion of the.
And the Eloy, we can bring that facility up very efficiently. We've maintained the debt facility to produce fats there in <unk>, we're going to put a little more of a of investment there to create.
The expanded facility to be able to produce batch.
Production end products for us to service the West coast, but I think no special callout in large capex. This is gonna be done within our normal capex guidance that we've been operating at and we will have we will see some startup costs, probably with Eloy, we would expect.
And running no later than the first quarter of next year. So we might see some nominal start up costs coming through the fourth quarter.
What can address that in the next quarters call. If we see that being material and then the same thing with <unk>, we'd like to time, the <unk> startup to be kind of later next year. After we complete the shutdown of of Santa.
To be up in the and again, we could address any startup costs as we get into next year, but net net we think this is of great move to rebalance our network monetize our valuable asset and then give us still production capacity expansion options that we retained in our other facilities. So I think that sets us up well for the future and if we see housing starts continue to trend up.
<unk> got options that we can we can continue to pull third part of your question on margins.
We've not given any specific margin guidance I would probably just share with you that when you look at the operating performance in our insulation business over the last 12 months I think you saw Q2 last year, where we saw tremendous volumes of drop off.
Where we've been able to operate and maintain a profitable business, even with that drop off and now you're seeing the margin increases now we're getting to mid teens. So I think youre seeing kind of in our results. The operational cost improvements we've made in our residential business the to be able to operate at lower volume levels and still maintain profitability.
The ability and then as we see volumes increase we're really getting tremendous operating leverage off the assets improving our margin. So I think we're seeing those cost efficiency efforts productivity efforts really coming through the results and I think it's been really demonstrated over the last 12 months with the range of of volumes that we've been shipping.
And in producing inside our insulation facility. So team's done just great work in terms of running the assets and being able to service the growth.
Thank you and the next question comes from Stephen Kim with Evercore ISI.
Thanks, a lot guys.
Lots of things are going.
And but I am going to ask about installation again, Brian.
Brian you made some interesting comments about.
Housing starts in your expectation of 1.5, the 1 matrix in the near term you talked about land constraints and some other things of the builders are talking about.
Which are certainly issues near term however over the next couple of years.
Ask imagine that a lot of those things will dissipate and I guess my question in aggregate is to try to understand net of Santa Clara coming down.
And the restarting of the lawyer potentially expanding capacity within those plants.
Versus what was there before.
For how much of a net capacity change in terms of Sellable product I guess the volumes.
Do you anticipate.
Once all of his set and done from the plants are the capacity additions as you are as you envision them.
1 when the day.
Maybe put that in terms of the housing start.
The growth figure or for the industry that you think could be satisfied and then secondarily kind of part of that I know that you all have ongoing productivity initiatives I think you had talked about that 1.
On average of target about 2% productivity improvement of year in insulation.
I know that you guys. Just recently launched the Nextgen insulation product I was curious as to whether you thought that that had the potential to expand your capacity or add productivity.
By a greater degree than that.
That 2% that you've historically tried to target.
Thanks.
Alright, thanks, Steven So broadly I guess I'm just.
Tried to address the first 1 I mean, when we look at the capacity puts and takes.
For how we've been operating in Santa Clara I think what were adding in capacity in terms of <unk>.
Pi and eloy more than offsets anything that we've been running there with with the single production line in Santa Clara, we retain that operating capacity. So I would say net net of all of the moves all of the puts and takes our net operating capacity is not going to change by this decision.
And when we look.
The adds we have made over the last few quarters, and both loose fill and batts and rolls capacity as well as the additional production time, we're getting this year versus last year.
We really believe we've now got installed capacity.
To service a market I say in the 1.5 to 1.
6 which you can interpret as kind of up to about 1.6 million housing starts we feel like we can service that market.
With the capacity that we've installed so I think we're playing a little bit of catch up as we brought this capacity on so.
So I think we continue to produce more quarter over quarter sequentially as we finished the year.
At then will start going into 'twenty 2.
All of this capacity installed in place for your aren't running and we feel like we're going to be in a good place to service that now look we would like to see housing starts move up beyond 1.6.
We think housing has been under built.
For the last several years.
I.
And it is.
The trajectory wed like to see move beyond that but as I've said and as you.
We're asking about I do think there are some other constraints that builders are facing into that we would have to see get addressed now if those can get addressed over the next few years and we see housing starts moving up beyond that pace, we do have other capacity expansion options in.
Network.
Beyond just productivity that we could pretty cost effectively bring up end of fairly short time frame with some other expansions that we can do at our facility. So I think we continue to plan.
For growth beyond 1.6 we continue to invest in engineering and other other efforts to make sure our assets are ready.
Think that occurs.
But I think we just kind of kind of see how things settle this year with all of the capacity adds we've made and how that fits within the market environment as we go into 'twenty 2 but again, we're we're preparing ourselves if that event occurs but we're ready to service with additional capacity I think on the productivity piece yeah. We've.
We've been running in that range.
We have not yet formally announced the our product launch, but we continue to invest in product innovation and I think the work we're doing in insulation with this product launch we're going to have certainly takes advantage of our process improvements we've made around density.
The efficiency and the other aspects of that produce a better product that's easier to handle easy to cut.
I think contractors will love and really allows us to increase our productivity rates beyond what we've been doing and thats going to be part I think about our capacity expansion adds is looking inside of our network.
We're continuing to get great throughput and we do think this product the new product launch will help support that.
You have a great product of contractors, I think theyre going to love working with as well as giving us better efficiencies through our manufacturing network.
Thank you and the next question comes from Truman Patterson with Wolfe Research.
Hey, good morning, everyone. Thanks for taking my question.
Just quick question on on inflation.
You all had about $120 million of of raw material and transportation inflation for the total company in the second quarter and.
Oil Nat gas transportation costs remain pretty elevated I'm just.
Networking.
Give us an idea of how youre thinking about that balance.
Or thinking.
Through that the balance of the year and when you end up seeing inflationary pressures peak.
So good morning, Truman thanks for the question.
Hoping we are as indicated in our earlier comments kind of anticipating.
The additional inflation above the levels that we saw in the second quarter or 2 to flow into the third quarter I think of big component of that is our outlook and what we're seeing in the.
Area of asphalt so we expect.
That to continue to be inflationary, probably a little bit more in the third quarter. We are seeing inflation as you said on transportation. That's a piece of this as well as anything really petroleum based on the energy cost.
When it peaks.
You know, we do think third quarter is going to be more than Q2, it's hard to call what's going.
In the fourth quarter, specifically, but what I will tell you is that we're pleased with the proactive nature of the businesses in dealing with inflation early on and initiating appropriate price increases to recover it you called out the $120 million that we saw in the second quarter.
For inflation.
Overall for Owens Corning, and very specifically the flip side of that is we actually saw about $140.445 million of positive pricing impacts flow through to the business. Overall, we fully anticipate that we will continue to manage through this inflationary environment and we expect to continue to remain.
The price cost positive as we move through the balance of the year.
Thank you and the next question comes from the fill in with Jefferies.
Hey, good morning, everyone. Congrats on the very strong quarter.
Wanted to get your take Brian on channel inventory in roofing.
And how long would it take the kind of bring that back to a more normalized level and when you look at the 2022 appreciating you are lapping a pretty strong demand in the last few years do you see demand holding up pretty steadily here, how you're kind of thinking about the longer term outlook on roofing demand.
Thanks, Phil and good morning.
Overall.
I think our roofing business continues to perform at a very high level and we continue to see market demand remained very strong so I think.
As we do our contractor surveys we're seeing good leads.
Good backlogs continuing.
That's our best indicator of.
For all of the ongoing strength in terms of contract of work that we think is going to continue here into the third quarter and probably in the back half of the year.
In terms of distributor sales I mean, we continue to hear that out the door sales remained very strong in most parts of the the country I think we've seen a little bit of impact.
Kind of in the Midwest region, with a little bit lower storm volume I think we talked about that on the last call that stormed the bandwidth of tracking a little lighter we actually saw that continue to track a little lighter than prior year.
In the second quarter.
But overall and fundamental kind of re roof repair remodeling that continues Ed.
Packet right. So I think we saw of market shipment of close to 44 million squares in the Q2.
We are guiding that we expect to see a similar amount in Q3, so manufacturers I think pretty much producing all they can and shipping to that and so far we've not seen a lot of channel inventory.
Very high increases.
On a broad basis, so again, maybe some regional pockets here or there, but I think most of the distributors are still running with historically very low inventory. So if we continue to see this kind of robustness and out the door sales, which we expect in Q3.
We think that that's going to continue to keep inventory levels and distribution low.
<unk> go into the fourth quarter.
And then the fourth quarter will be a bit of a wildcard of where we could see you start to see a little bit of inventory build.
If we don't see.
Strong storm season here in the third quarter.
That could impact some of the storm demand for the full year that might impact Q4, and then last year Q4.
For was just seasonally warm so there was a lot of roofing activity done so if we see a more normal.
<unk>.
And get impacted by winter weather in Q4 that could dampen out the door sales and demand a little bit in the quarter and that might give an opportunity for distributors to catch up on a little bit of inventory, but I would suspect.
As we go this year, we're probably going to see distributor inventories finished the year still at low levels and that's going to carryover into 'twenty..2 so to answer the second part of your question I think.
We're expecting that we're going to see pretty robust demand.
In the near term in our roofing business, So I think driven by fundamental out the door sales.
<unk> for the rest of this year and then I think as we get into next year. We would continue to see strong demand and then of desire to start getting inventory built but I think it would take Phil probably a couple of quarters.
In order to get inventory levels, the replenish because in fact, our inventory levels at our manufacturing sites are at historic lows.
That we need to rebuild some inventory and then we also need to work with our distribution partners to be able to rebuild their inventories. So I think that would.
Take a couple of quarters to get that work done to get to more normalized levels of both the manufacturing level for us and then at our distribution level for our for our partners.
Thank.
So the next question comes from of you've all heard with the exam BMP payable.
Hi, good morning, everyone.
Wanted to know if you could provide some additional granularity on the technical and the non residential part of the insulation market. If you may of those maybe help us to understand where we stand versus the levels of 2019 and how are you.
You're thinking about that going forward.
Also anything on pricing here, if you could.
Maybe quantify.
<unk> been able to achieve and split that between Europe and the U S that would be really helpful. Thank you very much.
Yeah. Thanks, I think we've seen broad strength in our technical and other insulation businesses.
So this is a set of businesses that this is going to be our mineral wool our phone glass our foam products.
About a third of that businesses into residential applications for example in Europe.
Our mineral wall is used in the residential applications in the U S. We see some of our like our flex duct insulation in HVAC.
The systems and home so it's about a third residential and about 2 thirds of kind of commercial and industrial and I'd say that the broadly speaking in Q2, we saw product lines across the board ROE on a year over year basis and in fact, we're.
We're operating at or above kind of those 2019 level. So we've seen good recovery in the end market.
I think both in the U S and Europe, so from a demand standpoint, we see that continuing.
I think on the non res piece.
We're seeing a rebound in commercial projects, we're seeing more activity. There I think some of the recent trends in the U S. Abi index and other kind of Dodge momentum reported.
<unk> would show that there's a pretty robust project activity pipeline being built we're starting to see that in our backlogs in this part of our business, where it's a little more project driven so.
So we're seeing net increase in the pipeline, we're seeing an increase in just the.
The project work getting completed.
Porting in so I think we're seeing broad strength in both the product lines and I would say Europe and U S tough to cut the trends I think we're seeing pretty consistent growth in both regions.
For the product lines, and we expect that to continue into Q3 from a pricing standpoint, I mean, what we love about this business.
Now is that the.
For the margins of more consistent over time, we don't see the same pricing cyclicality that we do in some of our residential businesses.
Because it's more project based it's more specified the the downside of that is in an inflationary environment like we're in a.
We're lagging a bit on.
Our price cost mix, we have announced price increases in both the U S and in Europe for these product lines.
I think we are seeing good realization and as Kevin indicated in his comments, we do expect in Q3 with the expected inflation in these businesses with these product lines that we do get to a positive price cost mix.
But it's something we're watching very carefully.
And both of these businesses, we're seeing increased inflation I'm sorry in both of these markets, we're seeing increased inflation and so while our commercial teams have done great work and through the first half to gain price to offset these inflationary headwinds as we go forward we're going to.
We need to watch these costs very carefully and we're going to evaluate if we need to take some additional actions to ensure we maintain a positive price cost mix in these more technical specified our product offerings for us, but I think good work and the through the first half we continue to expect volume growth as we move into the second half and should get the positive price cost realization here in Q3.
And the only thing that I would add to it just to give a.
The little bit more specificity on the price side of of your question is that in the second quarter, while as I said in the earlier comments, we were still kind of lagging behind a little bit versus inflation, we did see positive pricing in technical and other.
The <unk> installation for the quarter overall.
So positive move continuing to step up and as Brian said achieve those pricing actions that we've announced and launched and beginning to recover well on those.
Okay. Thank you and the next question comes from Keith Hughes with Truest.
Please go ahead Mr. Hughes your line is live.
I'm sorry can you hear me now.
Yes, yes, yes, okay.
Okay I'm sorry at the connection problem, just shifting back to a composite of insulation I know, it's some of that business.
And so the inventory some of the more commodity type products.
Are there still shortages on that product and do you anticipate those to continue into the second half of the year.
And Keith, which which product line are you referring to I didn't quite catch within composite that where they can.
The positive on that some of those built almost of the inventory.
As of the less technical products and composite of installation.
Capacity there.
Now, we're seeing that the inventory levels in those channels as well or is is low.
So as demand has picked up in the end markets even for those.
Our product lines.
We are seeing a fairly tight supply chain.
And we're seeing a lot of of our production and our shipments thing going right into use and not in the inventory. So we are we think that there's the channels are still running in those product lines of with pretty low levels as well.
Okay.
And we have time for 1 last question.
Yes, Thank you and that comes from Michael Rehaut with J P. Morgan.
Thanks.
Eaton sneaking me in here.
Just wanted to circle back to.
The production capacity and inventory levels across the businesses.
As you know earlier you talked about.
You know the fact that in roofing.
You're not seeing a lot of channel inventory increases currently and it might take a couple of quarters to rebuild those inventory levels. I know, it's kind of a broad question, but I was hoping at least you know the give some sense across each.
As of the business's installation roofing and composites.
If you of any sense based on your current view of where backlogs are in terms of order backlogs and whatnot your own production rates and any incremental capacity coming online.
When you might.
Of your effect.
You know to be in a more even.
The demand supply dynamic you know in other words today everything is working on a sold out basis inventory levels of very low when you might expect just based on and I'm not asking necessarily of the forecast future demand per se, but.
Except for argument's sake, let's just say that the current demand levels persist.
When might you see things even out of where the industry is getting back to them in the more normalized level in terms of.
Inventory levels and production capacity.
The margin, it's going to be a little difficult for me to probably the answer that directly because it does really depend on the demand environment I would share with you broadly speaking certainly through Q3 and were probably indicating a little bit as we kind of finish the back half of this year, we continue to see broad demand strength in.
The market. So we were not seeing demand trends for our product lines soften in the near term.
And so that's going to create a pretty a pretty great demand environment for us to continue to operate in.
Now we have been and continue to make our capacity adds.
To be able to produce more material that we have been ramping up over the last couple of quarters.
And through this first half.
That would continue in many of our product lines in insulation and composites, where we have some opportunities.
So I think though that right now.
The view is that just keeping up to try to continue to service a pretty robust demand environment. So I My best view would be I think this starts to we get a clearer picture maybe as we go into 'twenty, 2 but I think of as we finish and operating here in Q3 in the back half I think we're going to run with pretty tight supply chains.
And then.
And when you look into 'twenty, 2 we're going to see kind of how the demand environment is.
Is materializing certainly we're going to have some more capacity available on a year over year basis to service that.
And then we'll see how that impacts the overall supply chain.
Thank you.
That does conclude the question and answer session I would like to return the cash.
Florida, Brian Chambers for any closing comments.
Okay. Thanks, everyone for your time and your question today, we very much appreciate it certainly our second quarter performance.
Then outstanding and really it has gotten us off to a great start our global teams continue to execute at a high level really demonstrating the exceptional operational capabilities.
And as the of our people and the earnings power of our company and we expect to deliver another quarter of year over year revenue and earnings growth here in Q3. So we look forward to speaking with you again in October during our third quarter call and at our Investor Day in November 10th and until then I Hope you and your families remain healthy and safe. Thank.
Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Yeah.
Yeah.