Q4 2021 Owens Corning Earnings Call

Good day and welcome to the Owens Corning fourth quarter 2021 earnings call.

All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Albert 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 fourth quarter and full year 2021 .

Joining us today are Brian Chambers, Owens, Corning's Chair, 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 question in order to accommodate as many call participants as possible. Please limit yourselves 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 2020 one.

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-K , and the presentation slides at our website Owens Corning Dot com.

Or to the investors link on 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 in the risk factors identified in our SEC filings for a more detailed explanation of the inherent risks and uncertainties affecting such forward looking statements.

Second the presentation slides and today's remarks contain non-GAAP financial measures explanations and reconciliations of non-GAAP to GAAP measures, 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.

Consistent with our historical practice, we have excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT adjusted EBITDA and adjusted earnings.

We adjust our effective tax rate to remove the effect of quarter to quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share.

We also use free cash flow and free cash flow conversion of adjusted earnings as measures helpful to investors to evaluate the company's ability to generate cash and utilize that cash to pursue opportunities that enhance shareholder value.

And today's news release and the Form 10-K include more detailed financial information for.

For those of you following along with our slide presentation. We will begin on slide four and now opening remarks from our Cherokee and CEO , Brian Chambers, Brian .

Thanks, Amber good morning, everyone and thank you for joining us for today's call.

Hope all of you are continuing to stay healthy and safe.

During the call. This morning, I will start with a broad overview of our performance and how we are investing in key areas to grow our company and deliver additional value to our shareholders.

Ken will provide additional details on our fourth quarter and full year financial results and then I'll come back to talk about our outlook for the first quarter and business trends.

2021 was a year of tremendous accomplishment and record results for Owens Corning.

Like most companies around the world, we faced several challenges throughout the year.

Continuing pandemic supply chain disruptions significant inflation and other regional events, all requiring creativity and adaptability for our company to succeed.

Through it all our global teams continue to elevate their performance overcoming these challenges that impacted our businesses and markets to consistently deliver on our financial targets generate growth in our key products and geographies and outperform the markets we serve.

A critical component to our success is our commitment to safety, where we continued to deliver world class performance.

During the fourth quarter, we achieved a recordable incident rate of <unk> five three.

This lowered our full year 2021, our IR to 0.59, which is an 8% improvement over the prior year.

Over the past two years Covid has added another dimension to our unconditional commitment to safety.

I greatly appreciate the focus and dedication of our teams to improving our safety performance.

Fight the pandemic related disruptions and extremely high production at virtually all of our manufacturing sites.

While COVID-19 case rates remained higher than any of us would like we're encouraged by recent decreases and the severity and number of cases and will continue to operate our facilities with a strong focus on keeping each other our customers and our suppliers healthy and safe.

Our performance in the fourth quarter continued to demonstrate our market and financial strength as we closed out an outstanding year.

Overall demand for our market leading products remains strong as we finished the year, especially for our U S residential products, which account for about half of our enterprise revenues and our global commercial and construction materials.

Against this backdrop, we outperformed the market driven by a combination of strong commercial and operational execution across the company with each business growing volumes staying in front of inflation to deliver a positive price cost mix and overcoming supply disruptions to generate great manufacturing performance.

For the full year, we delivered record financial performance with revenues of $8 5 billion, a 20% increase over 2020.

Adjusted EBIT of $1 4 billion up 61% from the prior year and adjusted EBITDA of $1 9 billion.

This resulted in an adjusted EBIT margin of 17% and adjusted EBIDTA margin of 22% for the year.

In addition, we generated free cash flow of $1 1 billion and returned a significant amount of cash to shareholders consistent with our long term capital allocation strategy.

Throughout the year, we demonstrated that our agility strong execution and commitment to each other and our customers can drive outstanding performance through a variety of market conditions.

As we continue to focus on delivering near term results. We're also investing to build Owens Corning for the future.

During our Investor day in November we laid out a strategy, which further accelerates our growth and strengthen the earnings power of the company by redefining, where we play and dramatically expanding our current addressable markets.

All in service of our mission to build a sustainable future through material innovation.

Moving forward, we are investing in three key areas first to strengthen the company's position in core building and construction products as we continue to pivot our composites business into higher value building and construction materials and expand our insulation and roofing product solutions.

Second to provide more multi material solutions, which leverages, our unique material science strong brand and common channels to market.

And third and more longer term to develop prefabricated building envelope solutions for residential and commercial applications that are more energy efficient more sustainable and more cost effective than those built on site.

This strategy creates a significant growth opportunities by utilizing our unique material science capabilities manufacturing expertise and leading market positions to expand into new product categories and developed new building and construction material solutions.

Key to this strategy is leveraging our core innovation strength and sustainability leadership, where we continue to make investments and progress.

As material innovators.

And process development is key to how we drive growth improve our operating performance and create additional value for our customers.

In 2021, we increased the number of new product launches by more than 30%, creating materials solutions that are more durable more sustainable and more energy efficient.

Including new roofing components are redesigned formula N G X.

Our next generation fiberglass insulation and several new glass nonwoven materials used in a variety of building material applications and.

In 2022, we are planning to increase our R&D investments by 15% to further enhance our material science expertise and accelerate our new product innovations.

Framing. This work is our commitment to sustainability, which is core to who we are and how we operate.

Currently approximately 60% of our revenue comes from products that save energy or reduce emissions.

Our product solutions play a major role in energy efficiency projects housing construction and renovation and supporting renewable energy growth.

Through our work we continue to be recognized as a leader in environmental social and governance matters in.

In November the company earned a place on the Dow Jones sustainability World Index for the 12th consecutive year.

In March we will publish our 16th annual sustainability report, providing insights into our long term goals and approach the progress we've made to date and our work ahead the.

The 2021 report covers our efforts to double our product tampering and have our environmental footprint, while at the same time working to eliminate injuries and lifestyle induced diseases advanced inclusion and diversity and collaborate to make a positive difference in the communities, where we work and live.

Sharing our results and aspirations is an important part of our commitment to all our stakeholders and we are grateful for many people who have inspired our work and pushed us to continually do more.

With that view of our performance and priorities 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 delivered another outstanding quarter and record financial performance for 2021.

While demand conditions remain strong across the markets, we serve our ongoing commercial and operational execution across the company was fundamental to driving this performance.

Despite ongoing supply chain challenges and accelerating inflation, we generated record revenue and adjusted EBIT as well as earnings per share and free cash flow.

Beginning on slide five we can take a closer look at our results.

We reported consolidated net sales of $2 $1 billion for the fourth quarter up 11% over 2020 with revenue growth in all three segments.

Adjusted EBIT for the fourth quarter of 2021 was $325 million up 19 million compared to the prior year.

Adjusted earnings for the fourth quarter were $224 million or $2 20 per diluted share compared to $207 million or $1 90 per diluted share in the fourth quarter of 2020.

For the full year 2020 , one consolidated net sales grew to $8 5 billion up 20% from 2020 and adjusted EBIT for the full year was $1 $4 billion up $537 million over the prior year.

Our full year adjusted earnings were $969 million or $9 29 per diluted share compared to $566 million or $5.21 per diluted share in 2020.

Slide six shows the reconciliation between our full year 2021 adjusted and reported EBIT.

Adjusting items totaled approximately $33 million.

During the year, we recognized $53 million of gains on the sale of precious metals with $12 million recognized in the fourth quarter.

We also recognized a $15 million gain on the land sale related to a previously announced facility closure.

In addition, we recorded $34 million of restructuring charges with $12 million being recorded in the fourth quarter.

$7 million of the charges in the fourth quarter are related to previously announced actions while the remainder relates to a new restructuring action in our roofing components business, which will relocate production assets and further optimize the manufacturing network.

Finally, we recorded approximately $1 million of acquisition related charges for the Lipa, which was acquired during Q3.

All of these items are excluded from our adjusted 2021 EBIT.

Turning to slide seven I'll discuss our cash generation and capital deployment during 2021.

Earnings expansion, along with continued discipline around management of working capital operating expenses and capital investments resulted in strong cash flow.

Free cash flow for the fourth quarter was $162 million, bringing 2021 free cash flow to a record $1 $1 billion up $259 million from 2020.

2021 free cash flow conversion was 112%.

Full year capital additions were $468 million.

$148 million from 2020, but at five 5% of revenue continued to progress towards our targets laid out at our recent Investor day.

We returned to a more normal capital spending level, while continuing to prioritize investments that drive growth and productivity.

At year end, the company had liquidity of approximately $2 billion, consisting of $959 million of cash and nearly $1 $1 billion of combined availability on our bank debt facilities.

During the fourth quarter of 2021, the company repurchased one 5 million shares of common stock for $135 million.

During the full year, the company returned $678 million to shareholders through share repurchases and dividends equating to approximately 62% of free cash flow.

As of the end of 2020 134 million shares were available for repurchase under the existing share repurchase authorization and then February 2022 the board of directors approved a new share repurchase authorization for up to 10 million additional shares.

We remain focused on consistently generating strong free cash flow returning at least 50% to investors over time and maintaining an investment grade balance sheet.

Slide eight summarizes the changes in full year adjusted EBIT from 2020 to 2021 by business.

Full year 2021, adjusted EBIT increased $537 million over the prior year, reaching one $4 billion.

All three segments delivered significant year over year EBIT growth.

Now turning to slide nine I'll provide more details on the performance of each of the businesses.

The insulation business continued to build on the strong performance demonstrated through the first three quarters of the year delivering fourth quarter EBIT growth of 21% year over year.

Q4 revenues were $863 million, a 19% increase over fourth quarter 2020.

We continued to see solid realization on the announced pricing actions as well as volume growth across the business, reflecting continued strength in both U S. New construction and the commercial end markets we serve globally.

EBIT for the fourth quarter was $128 million up $22 million as compared to 2020.

The EBIT increase resulted from volume growth and positive price more than offsetting the impact of accelerating energy material and transportation inflation.

For the full year sales in insulation were $3 $2 billion up 22% versus 2020 with growth in both North American residential and technical and global installation.

North American residential fiberglass insulation growth was a result of positive pricing and stronger volumes benefiting from incremental capacity additions and productivity over the past year.

In technical and global installation demand remains strong for our highly specified products with the most notable year over year growth in North America, and Europe , including global mineral wall foam glass and formula with the launch of our N G X product in 2021.

Pricing was positive versus prior year and improved sequentially each quarter.

For the full year 2021 insulation EBIT increased by $196 million to $446 million as positive price more than offset the impact of accelerating material transportation and energy inflation.

In residential insulation, we continued to maintain a positive price cost mix in the face of accelerating inflation.

While technical and global insulation price lagged inflation, the price cost gap narrowed in the second half.

We continued to execute well in our manufacturing operations benefiting from ongoing productivity and an improvement of $73 million tied to improved production leverage.

Insulation delivered EBIT margins of 14% in 2021.

Now please turn to slide 10 for a review of our composites business.

The composites business finished the year strong sales for the fourth quarter were $608 million up 11% compared to the prior year.

The topline growth was driven by strong commercial performance with our ongoing strategy to focus on higher value solutions, driving favorable mix, which more than offset slightly lower volumes.

We also continued to benefit from positive pricing in composites through contract negotiations as well as favorable pricing trends on non contractual business.

EBIT for the quarter was $98 million up $38 million from the same period, a year ago as a result of favorable mix.

$17 million of improved production leverage and positive price more than offsetting the impact of accelerating energy materials and transportation inflation.

Composites delivered 16% EBIT margins for the quarter.

Full year sales were $2 $3 billion up 19% as compared to 2020, we.

We continued to see strength in demand for our high value applications as well as demand in key geographies, where our local supply for local demand model is being valued by customers, resulting in favorable mix and volume growth.

As in the quarter pricing was positive for the year.

In 2021 EBIT improved by $211 million to $376 million.

For the year, we continued to execute well with solid manufacturing performance and $84 million of improved production leverage.

Favorable mix and volume as well as positive price more than offsetting the impact of accelerating inflation contributed to the year over year EBIT improvement.

Composites delivered 16% EBIT margins for the year.

Slide 11 provides an overview of our roofing business.

The roofing business also delivered a strong fourth quarter sales in the quarter were $712 million up slightly compared to the prior year.

The U S asphalt shingle market on a volume basis was down 9% in Q4 as compared to the prior year with our U S shingle volumes in line with the market.

We continued to see good realization on our announced price increases more than offsetting asphalt other material and delivery inflation.

For the quarter EBIT was $151 million down $32 million from the prior year as a result of lower volumes with EBIT margins remaining strong at 21%.

Roofing sales for 2021 or $3.2 billion up 19% versus 2020 strong.

Strong commercial execution generated positive price realization and volume growth.

In 2021, roofing EBIT improved by $162 million to $753 million.

Operational performance allowed us to serve as strong market demand and positive pricing more than offset asphalt other material and delivery inflation that accelerated throughout the year as a result roofing delivered full year EBIT margins of 23%.

Turning to slide 12, I'll discuss our 2022 outlook for key financial items.

General corporate expenses are expected to range between 160 and $170 million.

Interest expense is estimated to be between 115 and $125 million.

We expect our 2022 effective tax rate to be 25% to 27% of adjusted pretax earnings and our cash tax rate to be 22% to 24% of adjusted pretax earnings.

Finally capital additions are expected to be approximately $480 million, which is below anticipated depreciation and amortization of approximately $520 million.

Now please turn to slide 13, and I'll return the call to Brian to further discuss the outlook for our company Brian .

Thank you Ken.

Our performance in 2021 demonstrated the resiliency of our global teams the strength of our commercial and operational execution and the durability of our earnings power as.

As we move into 2022, we are well positioned to build on our momentum and deliver another strong year.

For the first quarter of 2022, we expect continued strength in U S residential and commercial markets as well as our global building and construction end markets.

Based on current trends, we anticipate inflation to continue accelerating in the first quarter.

Fitting from our pricing actions in 2021 and to date. This year, we expect to maintain a positive price cost mix in each of our businesses in Q1.

Moving through the quarter, we will continue to closely manage the ongoing impacts of inflation supply chain disruptions and the regional impacts of Covid on our businesses.

Overall for the company, we expect to grow net sales and adjusted EBIT in the quarter versus prior year.

Now consistent with prior calls I will provide a more detailed business specific outlook for the first quarter.

Starting with insulation, we expect revenue to grow high teens versus prior year, driven by a combination of price appreciation and volume growth.

In our North American residential fiberglass insulation business, we anticipate our volumes to be up low single digits versus prior year.

This growth is being driven by increased productivity and realizing the full quarter benefit of bringing up a line in our Kansas City plant late first quarter last year, we expect price realization to continue to grow sequentially as we begin to see the impact of our December increase.

And our technical and global installation businesses.

<unk> should be up modestly versus prior year as demand for our products and global building and construction applications remains solid.

Residential inflation, we would expect price realization to improve sequentially from the fourth quarter.

In terms of inflation, we expect material and energy cost increases, especially in Europe to be higher than what we experienced in Q4 and anticipate that continued price realization will result in a positive price cost mix in the quarter.

Given all this we expect to see earnings growth in Q1 versus prior year approaching mid teen EBIT margins.

Moving on to composites in the first quarter, we expect revenue to improve a little over 20% year over year, primarily driven by continued price realization and favorable mix with relatively flat volumes for the quarter.

We anticipate composites pricing will improve significantly as we realize the benefit of carryover pricing and begin to see additional price from recent negotiations.

While we expect inflation to continue throughout the year. We believe we are in a good position to deliver a positive price cost mix for the quarter and first part of the year. Additionally.

Additionally, we should benefit from improved production leverage of approximately $10 million versus first quarter 2021 .

Overall, we expect to realize strong earnings growth in the quarter versus prior year with mid to high teen EBIT margins.

And in roofing, we anticipate revenue growth of low double digits with arm of market shipments up slightly versus a historically strong first quarter in the prior year.

While we would anticipate our shingle volumes to track largely in line with the market, we expect roofing components volumes to lag prior year based on more normalized inventory stocking of these products.

From a price cost perspective, we expect to deliver another positive quarter with additional realization, resulting from our late January increase combined with carryover pricing from 2020 , one more than offsetting continued asphalt transportation and other materials inflation.

Overall, we anticipate first quarter earnings growth for roofing with EBIT margins of low 20% similar to what we realized in Q1 last year.

With that view of our businesses I'll close with a few enterprise 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 organic growth and productivity initiatives.

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

In addition, we are more actively evaluating investments and strategic acquisitions to leverage our unique material science manufacturing and market expertise.

We are also accelerating our product and process innovation and market development and support of our enterprise strategy to grow through expanding our building and construction product and system offerings.

Overall Owens Corning is well positioned to capitalize on our near term market opportunities as well as for longer term secular trends that will fuel our revenue and earnings growth.

First we see opportunities as the premium put on living spaces continues to drive investments for new residential housing and renovation in both the U S and abroad.

Second we continue to see and feel the effects of labor shortages impacting construction practices and construction cycles, creating the need for multi material and prefabricated construction solutions that can drive efficiencies.

Third the demand for sustainable solutions continues to accelerate as the global need to reduce greenhouse gas emissions improve energy efficiency and develop more renewable energy sources increases.

And lastly, we continue to see the need for investments to upgrade and expand infrastructure both in the U S and around the world.

Each of these trends creates new opportunities for our company and we believe our market and material science expertise is essential to developing new solutions that are required to address each of them.

In closing our team delivered outstanding results in 2020 , one and we are excited about the opportunities. We have in 2022 to help our customers win in the market grow our company and deliver value for our shareholders.

With that I will now turn the call back to EVAR to open it up for questions Amber. Thank.

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

To ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Anthony Pettinari from Citi. Please go ahead.

Hi, good morning.

In the release, you talked about margins for the composites business benefiting from favorable mix in the quarter in roofing seeing some unfavorable mix can you just talk a little bit more about what drove those mix shifts and maybe.

The extent to which they continue in one cure or reverse.

Sure. Good morning, Anthony Thanks for the questions, let me start off with composites.

It's really a continuation of what we've been talking about through the year as you heard at Investor Day, we're really pivoting that business and starting to kind of move down higher value applications with our customers. We believe this plays well with our local production for local demand environment and so we've just continued to see our.

Our ability to service, our customers with higher quality products higher value products and shifting more of our business into those areas. We called out at Investor Day that you know approximately 40% of our our composites volumes are really tied to the building.

Construction markets at about 20% are tied to.

Sustainable energy, specifically when that another call it 15% to 20% are tied to infrastructure you had Brian and call out that those are really three three of the key trends that we're watching as we move forward and as we have evolved and continued to pivot the composites business. We've seen the benefit on our volumes that we sell our solutions we provide to our.

Customers and really shifting up in the margin that we that we contribute.

Anthony and then on roofing just come in on the quarter nothing really unexpected in that mix, we talked coming into the quarter about some of our roofing components sales volumes, we thought we're going to trend down a little bit more in the quarter versus the prior year just based on the amount of purchases and so we get a bit of mix shift inside our component.

We have different price points different margin profiles within those in and so we anticipated that coming into the quarter and that did come through pretty much as we thought.

But no major shifts no long term trends inside that mix shift that we saw.

Our next question comes from John Live all of them from UBS. Please go ahead.

Good morning, guys and thank you for taking my question.

Really it's on revenue and the revenue growth outlook, which is really encouraging from from where we sit it seems like a good percentage of that is pricing I'm. Just curious how much of that pricing is already in place and how much still needs to be implemented.

Yeah. Good morning, John Thanks for us coming into the quarter I would say that you're right that a lot of the revenue growth that we're projecting for Q1 is going to be based on pricing realization that we've seen.

Those actions are really accumulation of actions we've taken throughout 2021, we've taken a few increase announcements out into the market in our roofing business some of our composites here to start the year.

But that price realization in that price expectation. We have for Q1 is based on already announced increases and then we will continue to look at that as we move forward throughout the year as we continue to monitor inflation trends.

Yeah.

The next question comes from Matt Bouley from Barclays. Please go ahead.

Hey, good morning, everyone. Thank you for taking the questions. So on that composites Q1 guide of mid to high teens EBIT margins. It's obviously tracking you know a little above the mid teens sort of through cycle target you gave at the Investor Day can you maybe just speak to the sustainability of that Q1 margin.

You know if theres any reason as you go through the year that would normalize at some point or can it be sort of sustained as long as these market conditions remain relatively consistent.

Yeah. Thanks, Matt Great question, you know.

This has been driven I already talked about the mix impact and we also had positive pricing as Brian just talked about across the businesses I think the sustainability of the margins that we're seeing within composites, we're moving to a much more sustainable place and we've just we've continued to talk about that business being kind of in the mid teens operating.

And we think in this environment with strong demand with good pricing actions and executions across the globe and across the teams and watching for inflation to occur and then pricing as we see inflation coming at US we believe that the kind of margins that we're gonna be generating in the fourth quarter are probably pretty sustainable.

At these type of market levels.

And maybe I'd add on that I think it's also just longer term why we see some of that is as Ken talked about really the the repositioning of our composites business overall, we've talked about that in Investor day, but when we look at the end markets. We're playing in today versus a few years ago. When we look at where we're making product.

Innovation investments, we look at our localized supply chain I think all of those things are coming together. So we're not just seeing the benefits of near term price realization, we're seeing the benefits of the shifts we're making in terms of the end market applications. The innovation efforts.

And I think Thats true really across the company when we look at our pricing durability that we're seeing in the market. It is partly driven by the demand environment, but a big part of it is our commercial focus in terms of how we're bringing value to customers. We've invested heavily in product innovation and we continue to bring out new products, we've invested in our service.

We've invested in our quality levels, we've invested in our commercial strength to partner with customers around digital tools and other elements that will help them grow their business. So I think it's it's a it's really a full commercial model that we're implementing in composites and they're really across the company to bring more value to our customers and we see that resulting in better price.

King.

The next question comes from Mike Rehaut from Jpmorgan. Please go ahead.

Thanks, Good morning.

Everyone and congrats on the results.

My question has.

To do with you know volume as you think about it throughout 2022 I was curious if you could opine on.

How to think about roofing industry volumes for the year as well as you know to the extent you're comfortable you know you kind of talked about first your within your own first quarter guide.

Volumes being.

Up modestly and installation.

Flattish in composites, maybe up slightly at least shingle volumes in in roofing.

Given the the comps given.

Industry capacity your own capacity as you're playing out this year.

Hum.

Any kind of forward looking guidance about how to think about 'twenty. Two holistically you know it would be very helpful by segment.

Sure Mike I'll start and then Ken can you can kind of jump in I think overall, we are seeing very good a very good demand environment in most of our product categories. So I mean that.

That would be my general statement, if we start to look inside the end markets are more specifically in roofing.

The demand fundamentals, we are seeing remained very strong when we look at new construction growth. When we look at the core of the roofing market is driven by repair and remodeling business. We see continued investments in the home. We can send you see remodeling activity stays strong.

So I think we believe that we would see a continuation of that through the course of the year in roofing. The wildcard for US always is our storm demand and storm outlook and in that will materialize through through the rest of the year and we'll be able to give a better guide on on our market shipments and the overall industry outlook as we go forward.

But to start the year good demand fundamentals good new construction growth good remodeling investments.

We see contracted backlog strong I think distributors are expecting to see a good year. We continue to see good out the door sales trends, particularly in southern states. So again fundamentally starting off the year strong we think that that could and should continue.

Malaysian all I'll split it between probably our residential outlook I'm. Most expectations are that housing starts will stay in this $1 6 million range for.

For the year and for the foreseeable future. We think that's a good outlook for residential roofing given the big supply demand gap for single single family housing, we see demographics are continuing to drive for new construction. So we do expect that there's going to be potentially some impact on interest rates is there.

Move up through the year, but I think that's gonna be offset through the demographic push in the in the large gap that housing has been under built for so many years in the U S. So we think we're set up for another good res insulation a year given the market demand our global technical businesses, we're seeing good strength in commercial backlogs, particularly in <unk>.

Europe , leading indicators when we look at the architectural Billings Index Dodge Index continued to trend favorably. We we look at our project backlogs there. They continue to trend favorably. So we are set up for a good start to the year and believe that fundamental demand drivers in those markets continue to stay strong so.

Over to composites, I guess I'll, let Ken maybe make some comments, but I think very similar similar trends and outlook, yeah, very similar trends I think.

The part of what we've talked about so far is just kind of the continuation of the pivot to the markets that we see great great opportunity to grow in and where the great secular trends are are supporting it. So you know whether it would be the sustainable parts of the business, which is the.

Kind of the wind power that we support infrastructure rebuilds not only in the U S, but around the world.

As well as building and construction markets and again not only in the U S, but in Europe and in Asia, where we play we see good strength in those markets and we see good pull for our products because we are kind of bringing value to the customer through solutions as opposed to just providing material.

And then the only other thing that I would add just kind of across the company and with kind of a corollary to this volume question is.

We tend to get asked a lot you're running pretty heavily as far as the production out of your facilities and can you get more volume out of your facilities if demand stays strong and I think the point that I would make is we're really really pleased with the performance of our operating organization and their ability to continue to produce not only through the last 18.

18 months of Covid, but as we look forward to continue to drive you know a few points of productivity each year and that provides us additional capacity to meet this growing demand. So by no means do we think the volumes that we're seeing today are kind of the Max that we can deliver on we see good volume projections going forward in each of the three businesses and we see this.

Strength of our operating business being able to continue to keep up through additional product productivity opportunities, but thanks for the question very good question.

The next question comes from <unk> from BNP Paribas. Please go ahead.

Good morning, gentlemen, just a quick question on working capital inventory levels are still relatively low and given the demand outlook that you're putting out there.

Explain to us what you can do there.

Should we expect working capital to increase or are you running a tight levels with the demand coming in it's a it's.

It's just it's straight out ship to the to the door for the customers rather than building.

Venture examples could you maybe give us a view on that.

Sure, we'd actually we'd actually love to be able to build a bit more inventory across the business.

You know we've been running relatively tight over the last.

Couple of years as we've seen the demand step up so strongly but I will tell you I think that Theres a couple of things to think about when you think about working capital a RNA P are gonna be managed very very tightly as they always are in the company inventory, we're going to make a concerted effort across the businesses to go from what we would call today kind of historically low.

Levels of inventory across the business, we have seen a little bit of improvement when I say improvement, meaning they've stepped up across not only our own internal inventory levels were maybe a little bit with our customers as we go into 'twenty 'twenty. One we would anticipate and have have kind of built into our thinking for 2022 that will absorb some of.

<unk> increases some of that inventory increase as you would guess is anticipated to be just volumes of inventory, but just like we've seen in 2020 . One. There's also an impact on working capital of inflation, because as our input costs are going up or our value of inventory does go up for that for that as well, but we have that all built into our outlook.

That is not taking us off of our trends are continuing to deliver strong free cash flow and always trying to kind of already at more than 100%.

The next question comes from Garik <unk> from loop capital. Please go ahead.

I think saying thanks for taking my question you mentioned that you saw inflation accelerating <unk> and it sounds like it's accelerating further here in the first quarter across most of your businesses just any color on the particular drivers of the inflation.

If there is any expectation around moderation at all as we move through the second half of the year.

Okay.

So we are definitely.

I'll give you some comparisons if you look back at our results over the last.

Four or five quarters, you know if you looked at the fourth quarter of 'twenty 'twenty, we were actually still in a deflationary environment and probably saw across the businesses around I'm going to say about $25 million of deflation and and and and all three businesses in aggregate, whereas if you see what we put in the K and then.

In our release, you'll see that that moved to the fourth quarter of $185 million of inflation.

In the fourth quarter alone and the teams have done an excellent job at kind of staying ahead of that both with managing the input cost as well as watching the pricing environment, where we can as far as the buckets of where that's happening you know we do see it I would kind of categorize. It this way anything that's really petroleum based whether it's asphalt.

Some of our input chemical costs that go into our different products, both in roofing insulation as well as composites.

Then there is transportation costs that has been a headwind and we you know we see that kind of continuing whether its domestic transportation or on the water inflation transportation.

Looking out into 2022 I think where we're going into at least the early parts of 2022 anticipating that that will continue and that will continue to see that inflation of car and the the one that I didn't mention which is the one that's kind of on everybody's mind as energy costs. So energy cost you know.

We spend.

There was a call it six or 7% of our total cost of goods sold is tied to energy costs, whether its electricity or natural gas and I would say about a quarter of that maybe a little bit more of a sitting in Europe , even at the inflated rates that happened in 2021. So we continue to manage that we manage it through through obviously continuing to turn.

To get efficiencies out of our facilities, but we do have some hedges in place both in the U S and in Europe to keep that cost in check, but we're expecting that the underlying drivers of what's happening in that in those in those input costs are going to be the same and we're going to manage them through our efficiencies as well.

Through hedging programs.

The next question comes from Phil <unk> from Jefferies. Please go ahead.

Guys. Congrats on a really strong results I guess, you've seen a nice acceleration your technical insulation business. The last few quarters can you provide a little more color on how you're thinking about the demand outlook. This year I think your <unk> guide.

Soon as more.

Flattish type volumes I would imagine you have a fair amount of capacity here. So any color on how you're thinking about demand as you kind of look out through this year and then separately you mentioned you called out an inflation potentially in energy, particularly in Europe , the technical insulation piece I believe.

Normally don't announce as much increases throughout the year on <unk>.

Comfort level to kind of staying front of inflation net technical insulation business.

Thanks, Joe for the comments and the questions.

Yeah, we're starting the year, we see continued demand strength in our technical insulation businesses. So I'll step back just a little bit of reminder, inside our technical insulation portfolio about a third of that business actually goes into residential applications. So for example, mineral wool in Europe goes into residential we have flexed tuck ins.

Solution that goes into each fishy deduction homes, we use our foam products and residential application. So about a third of that business tied there and then about two thirds into very broadened commercial and some industrial applications data centers airports museums office building. So it's a it's a good mix so the demand outlook really cuts across both residential.

And commercial outlook, when we look inside the business in terms of the demand outlook. We're saying you know relatively inc. Modest increases in Q1, I think part of that is tied to what we're seeing in the market. We're seeing good project backlogs and we're seeing increases there.

We do still see a lot of these applications getting impact by construction delays either materials that arent, arriving on site and all of them have to be there in terms of finishing the job or are other elements of construction delays. So.

We think the demand there is there the project backlog is growing and becoming stronger but in terms of how that gets executed and materializes into shipments for us we do see.

You know some some some puts and takes on that as we go through the quarter. So underlying demand drivers. We think are strong I think some of our volume growth is going to be dependent on the construction cycles for the project work, we're doing and then on the residential side, we see that continuing to grow pretty strong in terms of our price realization we have lagged.

In our technical insulation business broadly the cost inflation, we have seen the business. So this set of products and applications generally creates more stable pricing more stable margins. It's more project based it's more specified so the upside is is that the the margin performance stays pretty consistent.

Even where you see some volume moves.

The downside of that is it takes us a little bit longer to catch up on inflation that we're seeing here because these are longer term projects. These are specified.

And so it takes a little time to work through the channel. So we think we're we're getting.

To a point, where we can start to realize a positive price cost mix starting in 2022, a lot of that is dependent on inflation. We you know we continue to see inflationary trends accelerate so we we believe we're in a good position to start getting a positive price cost mix in our technical insulation business.

And as we go through the year and we think demand is going to continue to support those pricing dynamics.

Our next question comes from Deepa Raghavan from Wells Fargo. Please go ahead.

Hey, good morning, Thanks for taking my question.

Congrats on the great results. So this question is probably a little contrary to what you printed today, but just.

Just given the rate environment.

Into latest slowdown concerns T our largest.

Market just residential.

Things do slow down how do we think about which of your segments get impacted first and how many months or quarters with a lag.

And that would be and also how do you how do we think about the defensive characteristics and what active steps you can take should a market slowdown materialize. Thank you.

Thanks, Steve.

When I think about our our kind of our markets, particularly in the U S. On residential I guess I'd say, if we're if we're going to start to see a slowdown in.

And in residential generally impacts us more on the new construction products.

We see versus a dar repair remodeling products, which tend to stay pretty strong through economic cycles, and we've seen that historically, so we would look inside residential products our residential installation.

Our product line is one that has been impacted in the past, where we start to see housing slowdown if we start to see slowdowns in and.

In global IP, and GDP that will tend to impact some of our composites and markets. Although again part of our focus has been to shift into higher value applications more specified products and so when we think about our defensive moves to your question I think the things. We've done is one a very robust product <unk>.

<unk> agenda that continues to innovate products brings value to.

Two even those applications. So even if the demand cycle tends to churn I think the demand for Oc products can stay relatively strong because of the value we bring out through our innovation and that's one big defense mechanism. We have is our core innovation capability and we continue to invest in innovation in good times or bad.

Continue to drive product development that improves performance durability sustainability does key pieces continue to work and invest in digital tools and other applications to partner with our customers. So those are all the things we do commercially.

As good defense mechanisms and I think we're in a much stronger place as a company than we would've been four five years ago in that front I think on the manufacturing performance, we've invested quite a bit to optimize our production networks across the company and we've seen that come through and better efficiencies better productivity and so we've.

Lowered our overall cost position that has put us in a much better position.

As a defensive measure.

If and when we do see a time where demand starts to come down we feel like that work to optimize our networks to invest in automation invest in productivity invest in streamlining our manufacturing operations.

It's going to pay off for us and I think we saw that a little bit.

In the first part of last year, when we saw the first impacts of Covid, having a pretty dramatic impact on our revenues even across our insulation business, our composites business, which is generally been hit a little harder when we see revenues decline we were able to post better results, we were able to post positive earnings through that cycle.

And I think that's a good indication near term indication of the work we've done on the operating cost side and manufacturing performance side of the model to be in a great position as we go forward.

The next question comes from Mike Dahl from RBC. Please go ahead.

Hey, this is actually Chris Clark on for Mike. Thanks for taking my questions.

Two quick follow ups, one on the cost side of things.

I was hoping you could maybe.

Help us understand the structure of your.

Your hedging contracts on the energy side of things, particularly in Europe , I know you guys said.

That's kind of limited the exposure from the headwinds there, but how often do those.

Kind of rollover, what's the what's the duration of those contracts in it.

And if.

Prices were to hold where they are today and when we can.

Help quantify what the incremental headwind would be.

Sure.

Little bit more color on those is that.

First of all I would tell you that they've been in place for a while so it's not that we've started to enter hedging contracts as we've seen.

The inflation occur in Europe , specifically, but we keep them in place because from that from a strategic applause approach. We think it's the right thing to do to kind of keep a constant management on our cost I'll tell you. There are about a year in nature, we tend to hedge the four quarters out and we look at the closer quarter in hedge.

A bit more of the closer quarter, and then hedge a slightly lesser percentage as we move out to the second third and fourth quarter out always rolling a year forward. So imagine us hedging you know call. It 60, 70% over the next quarters needs and then as we move into the next quarter again, we top it up to that.

60% to 70% for that quarter, but we're always kind of moving through that type of cycle and again, that's both for Europe .

And for the U S.

I would tell you that in 2021 the order of magnitude of these hedges because clearly you're driven by the dynamics of what the outlook is for the obviously the commodity that you're hedging at the time that you are putting it in it's probably saving us and that tends to 20 million.

ZIP dollars on our cost overall, and we would expect that to continue that kind of order of magnitude to continue into our hedging environment in 2022, if the costs continue to accelerate as they are now.

The next question comes from Keith Hughes from Truest. Please go ahead.

Thank you given your outlook for the first quarter in roofing and where you ended the year at inventory.

Can you give us an idea of where you think you'll be in terms of your normal seasonal inventory heading into the spring or you'd be caught up or of course caught up over the winter months here.

Hi, Keith Thanks for the question I would say, we are still running with lean inventories internally. So we're going to need to continue to operate as we're operating we're continuing to make some capacity investments.

At our plants to two to try to get more capacity through our production lines here in 'twenty, three we talked a little bit about that investor day that we see opportunities to invest in some process automation and productivity.

Capabilities to get some more capacity through our many of our manufacturing plants, but.

We're looking to operate with a fairly lean inventories for the near term generally with the roofing business, we see a seasonal uptick in demand from our distribution customers coming into the the roofing season. So we expect to have good demand. So it's not going to give us an opportunity to build inventories in the near term.

But I would say we continue to make progress on improving our service levels that is very very important to us.

So we're gonna be able to utilize I think some of this improved capacity that we're continuing to unlock in some of our facilities to help and our inventory positions helped sustain our service cycles.

But I think we're gonna be running with pretty lean inventories for the near term in our roofing business.

Our next question comes from Truman Patterson from Wolfe Research. Please go ahead.

Hey, good morning, everyone. Thanks for taking my question.

So in composites pricing has remained really strong through the fourth quarter could you help us think through what sort of pricing is embedded in your spot business at year end and then historically.

Are there any metrics you can share with how yearend contracted pricing historically follows our prior year kind of spot levels.

Yeah, good morning trim and thanks for the question the.

Pricing in the spot business as we've talked about throughout 'twenty 'twenty. One has continued to be relatively strong you know I think that the demand outlook that we're trying to service and these value applications that we're providing and you know this we keep referring to the local production for local demand as well.

Loud us too.

As you know good pricing in the spot markets. We also talked about as we move through 2021 that even our contractual business, which is about 60% of the business that we have in the composites business is also had some positive pricing beyond where the contract terms were before we went in.

So negotiations at the end of the year. So it's kind of hard to start bifurcated. It because we have seen good positive movement on spot pricing, we've seen even some positive movement on contract pricing based upon watching the inflationary environment and working with our customers and then as we went through the end of the year because of the demand levels.

That we're seeing today and that our customers are expecting to see as we move into 2022 in this inflationary environment. We've seen incremental you know kind of favorable contract discussions that provided incremental contract pricing go up that will take effect as we have started the first quarter of 'twenty.

22, so it's hard to take it apart, but what I would tell you is that is that the pricing across the composites business.

Is healthy and it's probably as healthy as it's been in the recent past and it's been worked really hard with the customers just because we were able to kind of show them, what's happening on the inflationary side and we expect that good pricing to continue as long as we see this demand pattern that we're seeing in the early part.

For the year and hopefully continuing through the end of the year.

This concludes our question and answer session I'd like to turn the conference back over to Brian Chambers for any closing remarks.

Thank you and thanks, everyone for your time today and for your questions. We certainly believe our financial performance in 2021 demonstrates the market and financial strength of the company and are excited by the many opportunities to accelerate our growth and increase our earnings as we execute our enterprise strategy and continue to help our customers win and grow in the market.

We look forward to speaking to you again in April during our first quarter call and until then I Hope you and your families remain healthy and safe. Thanks.

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Conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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