Q4 2022 Owens Corning Earnings Call
Hello, and welcome to the Owens Corning Q4 full year 2022 earnings call. My name is Alex and I'll be coordinating the call stay if you'd like to ask a question at the end of the presentation. You can press star one on your telephone keypad. If you would like to withdraw your question you May Press Star two.
Now I hand over to your house, but will fall to begin please.
Please go ahead.
Thank you and good morning, everyone.
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 2022.
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 questions in order to accommodate as many call participants as possible. Please limit yourself to one question only.
Earlier. This morning, we issued a news release and filed a 10-K that detailed our financial results for the fourth quarter and full year 2022.
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.
Refer to the investors link under the corporate section of our homepage.
Script and recording of this call and the supporting slides will be available on our website for future reference.
Please reference slide two before we begin where we offer a couple of reminders.
First today's remarks will include forward looking statements based on our current forecasts and estimates of future events.
These statements are subject to risks uncertainties and other factors that could cause our actual results to differ materially we undertake no obligation to update these statements beyond what is required under applicable securities laws.
Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent risks and uncertainties affecting such forward looking statements.
Second the presentation 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 Dot com.
Adjusted EBIT is our primary measure of period over period comparisons and we believe it is a meaningful measure for investors to compare our results.
Distant with our historical practice, we have excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT and adjusted earnings.
We adjust our effective tax rate to remove the effect of quarter to quarter fluctuations, which have the potential to be significant 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.
The tables in today's news release in the Form 10-K include more detailed financial information for those of you following along with our slide presentation. We will begin on slide four and now opening remarks from our chairman and CEO, Brian Chambers, Brian.
Okay.
Thanks, Amber good morning, everyone and thank you for joining us.
Our call. This morning, I'll start with an overview of our results for the fourth quarter and full year and provide an update on how we're positioning the company for continued success in 2023 and beyond.
Kevin will then provide details on our fourth quarter and full year 2022 performance and I'll come back to discuss what we're seeing in our markets and our outlook for the first quarter.
Owens Corning delivered outstanding results in 2022, achieving record financial performance across all our businesses and consistently outperforming the markets we serve.
As the year unfolded many of our end markets begin to reset the marketplace adjusted to changing macroeconomic environment that included the war in Europe .
Inflation labor challenges and ongoing supply chain disruptions.
Our global team demonstrated resolve and resourcefulness in the face of these challenges to deliver great financial results driven by our strong customer partnerships unique product and process innovation and outstanding manufacturing capabilities.
In doing so we continue to strengthen the earnings power of our company.
Our enterprise strategy in support of our mission to build a sustainable future through material innovation.
Moving to our results I'll begin as always with safety.
Our commitment to safety remains a critical component to our success and we continue to deliver world class safety performance in 2022.
During the fourth quarter, we achieved a recordable incident rate of <unk> four one our best quarter of safety performance in nearly a decade.
This lowered our full year 2022 to <unk> 65, with one half of our global sites operated injury free throughout the year.
Financially in the fourth quarter, we delivered revenue of $2 3 billion, a 7% increase over fourth quarter 2021.
Adjusted EBIT of $333 million and adjusted EBITDA of $460 million were both up 2% versus prior year.
This resulted in an adjusted EBIT margin of 15% and an adjusted EBITDA margin of 20% for the quarter.
These results were driven by our team's strong execution and a number of areas to offset inflation.
Inflation manage needed production and maintenance downtime and capitalize on the available market opportunity as volumes declined in most of our product lines as customers adjusted to slowing demand and managed end of your inventory levels.
For the full year, we delivered record financial performance with revenues of $9 8 billion, a 15% increase over 2021 and net earnings of $1 2 billion <unk>.
Adjusted EBIT of $1 8 billion was up 25% year over year and adjusted EBITDA of $2 3 billion represented a 19% increase.
This resulted in adjusted EBIT margins of 18% and adjusted EBITDA margins of 23% for the year.
In addition, we generated free cash flow was $1 3 billion and returned $931 million or 71% of free cash flow to investors through dividends and share repurchases.
Our full year results highlight the significant progress our team has made in advancing our strategy to strengthen our core building and construction businesses and expand into new product adjacencies that leverage our market knowledge material science expertise and manufacturing capabilities, while increasing our total addressable markets.
This progress is reflected in our balanced array of strategic acquisitions, and divestitures targeted capacity additions and investments in organic growth through new product and process innovation.
Over the course of 2022, we expanded into new product lines, acquiring where duck premium producer of composite decking and structural lumber for commercial and residential applications and natural polymers and innovative manufacturer of spray polyurethane foam insulation.
We also took actions to strengthen and expand existing product lines announcing a new joint venture with poultry on composites to produce our industry, leading fiberglass rebar and acquired the remaining 50% interest in a U S based joint venture producing high value nonwoven fiberglass mat for roofing applications.
All of which support the pivot in our composites business into higher value more capital efficient applications that leverage our core glass fiber technology and building and construction renewable energy and infrastructure applications.
In addition, we completed the divestiture of the European portion of our dry use Trump's stance product line.
And in December we completed the sale of our operations in Russia.
As we begin the new year, we are on track to complete the land sale of our Santa Clara, California, fiberglass insulation facility, which we closed down in Q4 as part of our network optimization initiative.
And start up our expanded Nissan, Utah insulation facility in the second quarter.
We also continue to make investments to expand our manufacturing capacity in key product lines.
Following our successful 2021 launch of Formula <unk> insulation, which provides a significant reduction in embodied carbon.
We are adding a new production facility to meet the growing demand for this sustainable billing solution.
This is one of many product lines, we have been investing in as we accelerate our product and process innovation.
In 2022, we launched 54, new or refreshed products across our global businesses.
A 13% increase over the prior year.
These innovations were well balanced across our core product platforms, and roofing insulation and composites as we focus on increasing the performance durability and sustainability of our product offerings, which brings additional value to our customers to help them win and grow in the market.
Now before I turn it over to Ken I'd like to provide an update on our sustainability efforts, which continued to generate multiple advantages by creating additional growth opportunities and helping to fulfill our company's purpose.
Yeah.
In November we announced enhanced recycling efforts, including a pilot asphalt shingle recycling partnership that will serve to advance our circular economy aspiration by keeping shingles out of landfills by 2030, we intend to recycled 2 million tons of shingles annually in the U S.
And in December we earned a place on the Dow Jones sustainability World Index for the 13th consecutive year, providing further recognition of our leadership in environmental social and governance matters.
Our strong performance in 2022 demonstrated the resiliency of our team the strength of our businesses and the earnings power of our company amid changing and challenging market conditions.
Challenging times create great opportunities to differentiate which we look forward to continue demonstrating in 2023 and beyond.
With that view of our performance and strategic initiatives 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, we delivered another solid quarter, resulting in a record year in 2022 with year over year revenue and earnings growth across the enterprise.
Our disciplined commercial and operational execution continued to be fundamental in driving this performance.
As we've talked about in prior calls inflation continues to impact energy cost and most material input costs along with transportation.
Positive price offset these inflation headwinds in the quarter and in the year and all three businesses.
Beginning on slide five we can take a closer look at our results.
We reported consolidated net sales of $2 $3 billion for the fourth quarter up 7% over 2021.
Adjusted EBIT for the quarter was $333 million up 2% from the same quarter in 2021.
Adjusted earnings for the fourth quarter were $235 million or $2 49 per diluted share compared to $224 million or $2 20 per diluted share in the fourth quarter of 2021.
For the full year of 2022 consolidated net sales reached $9 8 billion up 15% from 2021, and adjusted EBIT was $1 8 billion up.
Up $347 million over the prior year.
Our full year adjusted earnings were $1 3 billion or $12.88 per diluted share compared to $969 million or $9 29 per diluted share in 2021.
Slide six shows the reconciliation between our full year adjusted and reported EBIT.
For the year adjusting items totaled approximately $39 million.
We recognized a $130 million gain from acquiring the remaining 50% interest in an existing joint venture that produces high quality wet formed Matt for roofing applications.
And $18 million of gains on the sale of precious metals.
We recorded an impairment charge of $96 million uncertain indefinite lived intangible assets as well as $70 million of losses and execution costs related to acquisitions and divestitures.
In addition, we recorded $21 million of net charges associated with restructuring actions.
All of these items are excluded from our adjusted 2020 to EBIT.
Turning to slide seven I'll discuss our cash generation and capital deployment during 2022.
Earnings expansion, along with continued discipline around management of working capital operating expenses and capital investments resulted in strong free cash flow of $535 million for the quarter, bringing full year free cash flow to $1 $3 billion up 227.
From 2021.
2022 free cash flow conversion was 104%.
Full year capital additions were $446 million or four 6% of revenue up $30 million from 'twenty to 'twenty one.
We remain focused on reducing our capital intensity through productivity and process innovations.
As a result of this and our earnings growth.
Return on capital reached 22% for the year.
At year end, the company had liquidity of approximately $2 $2 billion, consisting of $1 $1 billion of cash and approximately $1 $1 billion of combined availability on our bank debt facilities.
During the fourth quarter of 2022, the company repurchased 3 million shares of common stock for $259 million.
During the full year, the company returned $931 million to shareholders through share repurchases and dividends equaling approximately 71% of free cash flow.
In December the board declared a cash dividend of 52 per common share an increase of approximately 50% compared to prior quarterly dividends.
It also approved a new share repurchase authorization for up to 10 million additional shares.
As of the end of 'twenty 'twenty $214 4 million shares were available for repurchase under existing share repurchase authorizations.
We remain focused on consistently generating strong free cash flow returning approximately 50% to investors over time, and maintaining an investment grade balance sheet, while executing our business strategies to grow our company.
Now turning to slide eight 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.
Q4 revenues were $956 million, an 11% increase over the fourth quarter 2021.
And EBIT grew approximately 20% year over year.
We continued to see solid realization on the announced pricing actions and favorable mix across the business.
Offsetting ongoing inflation.
In technical and global installation revenue grew as a result of positive price as well as favorable mix, primarily within our global mineral wool business.
Volumes were down versus prior year due to demand softening, primarily in Europe , and China and currency translation continued to be a headwind.
North American residential insulation growth was the result of positive pricing and incremental revenue from the natural polymers acquisition.
Volumes for residential fiberglass were relatively flat in the quarter versus prior year.
EBIT for the fourth quarter was $153 million up $25 million compared to 2021.
Positive price and favorable mix more than offset ongoing inflation the impact of lower volumes other manufacturing costs and the previously communicated incremental cost of planned maintenance downtime and production investments.
Overall insulation delivered EBIT margins of 16% in the fourth quarter.
For the full year insulation net sales increased 17% to $3 $7 billion compared with 2021, as a result of higher selling prices and favorable mix more than offsetting ongoing currency headwinds and slightly lower volumes.
EBIT increased $166 million to $612 million with 16% EBIT margins on higher selling prices, which offset energy material and transportation inflation planned production downtime and other manufacturing costs.
Now please turn to slide nine for a review of our composites business.
In the fourth quarter, the composites business experienced the impact of an accelerated softening into the demand environment.
Sales for the quarter were $589 million down modestly compared to the prior year as lower volumes and continued headwinds from currency translation were largely offset by higher selling prices.
EBIT for the quarter was $64 million down $34 million from the same period a year ago.
The impact of ongoing inflation, lower volumes, which stepped down towards quarter end and the associated production downtime and other manufacturing costs were partially offset by higher selling prices.
A substantial portion of our inflation was driven by European energy, which is estimated to have had a peak impact on results in the quarter.
Additionally, the sale of our ducks manufacturing assets in Chonburi, France, and our operations in Russia contributed to the year over year EBIT decline.
Overall composites delivered 11% EBIT margins for the quarter.
For the full year net sales in composites increased 14% to $2 $7 billion in 2022 compared with 2021.
Topline growth was primarily due to higher selling prices and the favorable impact of customer mix, partially offset by lower volumes and ongoing currency headwinds.
EBIT increased $122 million to $498 million with 19% EBIT margins on higher selling prices, which offset input cost inflation and increased transportation costs as well as lower volumes and other manufacturing costs.
Slide 10 provides an overview of our roofing business.
The roofing business delivered another quarter of strong top and bottom line performance.
Sales in the quarter were $799 million up 12% as compared to the prior year.
Strong price realization was partially offset by mid single digit volume declines.
The U S asphalt shingle market on a volume basis was down 20% as compared to the prior year with our U S. Shingle volumes outperforming the market as demand for our products remains strong.
For the quarter EBIT was $168 million up $17 million with positive price, partially offset by ongoing inflation the impact of other manufacturing costs and lower volumes.
EBIT margins remained strong at 21%.
For the full year roofing sales increased 14% to $3 $7 billion compared with 2021, primarily due to higher selling prices, partially offset by lower volumes.
The U S asphalt shingle market on a volume basis was down 7% as compared to the prior year with our U S. Shingle volumes outperforming the market as we saw continued strong demand for our products.
EBIT increased $78 million to $831 million with 23% EBIT margins, mainly due to higher selling prices, which offset cost inflation, primarily asphalt and other manufacturing costs.
Turning to slide 11, I'll discuss our full year 2023 outlook for key financial items.
General corporate expenses are expected to range between 195 and $205 million.
Interest expense is estimated to range between 95 at $105 million.
Our 2023 effective tax rate is expected to be 24% to 26% of adjusted pretax earnings and our cash tax rate is expected to be 26% to 28% of adjusted pretax earnings.
Finally capital additions are expected to be approximately $520 million, which is at or below anticipated depreciation and amortization estimated to range between 520 and $530 million.
Now please turn to slide 12, and I'll return the call to Brian to further discuss the outlook Brian .
Thank you Ken.
Throughout 2022, our global teams demonstrated great commercial and operational flexibility to respond to changing market conditions and deliver strong financial results.
We move into 2023, we will continue to demonstrate our proven ability to quickly react and respond to shifting market conditions as we see the impacts of ongoing inflation higher interest rates and continued geopolitical uncertainties, leading to slower global economic growth and lower demand.
Given this market environment, we expect volumes to decline in the first quarter versus prior year and many of our end markets and product categories. As our customers continue to have a more cautious view on ordering given uncertainty in the outlook.
Pricing is expected to remain positive in the quarter as we continue to realize the benefits of carryover pricing from previously announced actions.
Overall, we anticipate offsetting the impact of ongoing energy and material inflation.
We also expect to continue to see modest currency headwinds in our insulation and composites businesses as well as an impact from our previously announced divestitures.
Overall for the company, we expect to realize a moderate decline in net sales and adjusted EBIT margins of low to mid teens.
Now consistent with prior calls I'll provide a more detailed business specific outlook for the course.
Starting with our insulation business, we expect revenue to be up modestly versus prior year as continued price realization offset slower demand and the ongoing impact of currency headwinds.
And our technical and global insulation businesses, we expect continued price realization, resulting from our previously announced increases to be more than offset by lower volumes, primarily in global mineral wool and ongoing currency headwinds.
In our North American residential business, we anticipate continued price realization on our previously announced increases with volumes relatively flat versus prior year as contractors continue to work through a solid backlog of homes under construction.
Additionally, we expect revenue from the acquisition of natural polymers to be partially offset by the sale of our installation operations in Russia.
From a cost perspective, we expect inflation from materials and energy to continue to be a headwind in the quarter with price cost remaining positive but narrowing.
Given all this we expect mid teens EBIT margins for the business.
Moving on to composites.
We expect several factors that impacted the business in Q4 to continue in Q1, but improve as we move through the rest of the year based on our current market outlook as customer inventory levels get reset and we worked through some higher cost inventory.
In Q1, we anticipate revenues to be down considerably versus the first quarter of 2022 and down slightly versus what we saw in Q4.
As compared to the prior year, the first quarter will be impacted by lower volumes the impact from the exit of the ducks product line and the sale of the Russian operations.
Additionally, we expect currency to remain a headwind.
From a volume standpoint, we expect to start the year with demand trends in most of our product lines similar to what we experienced in Q4 adjusting for the impact of Chinese new year as our customers continue to evaluate their inventory positions in order patterns.
Similar to Q4, we will be proactive in adjusting our production to these reset demand levels.
We anticipate ongoing inflation with energy remaining a year over year headwind to more than offset a modest overall price benefit as we see favorable contract pricing impacted by reductions in spot pricing.
Overall, we expect EBIT margins of high single digits in the first quarter as we absorbed the impact of lower volumes a reduction in spot pricing and the additional costs related to expected production curtailments as we manage our production in line with lower demand.
And in roofing, we anticipate relatively flat revenue with arm of market shipments down high single digits versus prior year as distributor inventory levels continue to reset based on regional demand trends and improved product availability.
We would anticipate our shingle volumes in the quarter to track largely in line with the market.
We anticipate inflation to remain a headwind and many of our materials in Q1.
Asphalt costs, which declined through Q4 fairly consistent with normal seasonality.
Continuing to move up from their December lows and are expected to increase further as we exit Q1 and enter into paving season.
From a price cost perspective, we expect to deliver another positive quarter.
Overall for roofing, we anticipate EBIT margins of approximately 20%.
Without view of our businesses I'll turn to a few enterprise items.
While we expect the shifting macro environment to continue to impact our end markets in the near term the structural improvements made to our businesses combined with our leading market positions and disciplined execution position us well to continue generating strong financial results and outperformed previous cycles.
In addition, despite near term challenges, we believe several secular trends around housing growth and renovation changing construction practices and the demand for more sustainable solutions create new growth opportunities and broaden our market reach.
These long term trends drive our enterprise strategy and investment choices to strengthen our position in core products and markets.
Expand into new product adjacencies that leverage our material science market and manufacturing expertise and develop more multi material and prefabricated construction solutions.
Each of these strategic priorities expand our current addressable market and increase the earnings power of the company.
We've also built an incredibly strong balance sheet and plan to leverage our financial strength is great companies due to continue investing to strengthen the long term performance of the company to a balanced capital allocation strategy focused on organic growth and productivity investments Act.
Acquisitions, which leverage our unique material science manufacturing and market expertise and returning approximately 50% of free cash flow to shareholders over time through dividends and share repurchases.
Overall, we are excited about the investments, we're making to help our customers win in the market grow our company and deliver value for our shareholders.
Our team delivered great results in 2022, and as we start 2023, we remain focused on delivering on our financial commitments and strengthening our company for the future.
With that we'd like to open it up for questions.
Yeah.
Thank you as a reminder, if you'd like to ask a question you can press star one on your telephone keypad.
If you'd like to withdraw your question you May press Star two.
Also limit yourself to one question.
Thank you.
Our first question flip stay comes from Michael Rehaut from J P. Morgan.
Your line is now go ahead.
Okay.
Good morning, everyone and thanks for taking my question.
Wanted to get a sense.
For the installation business.
You mentioned for the outlook in the first quarter continued price realization and I'm curious if that's kind of you know.
The result of prior earlier price increases from you.
Earlier in 2022.
And if you can comment on the.
Industry has announced a price increase for December January .
It's progressing and secondly.
I'm kind of.
Working in a second one here, but just on the topic of price how should we think about capacity additions for the industry.
As we progress in 2023, thanks a lot.
Hey, good morning, Mike Thanks, just to talk a little bit about price realization. So overall, we expect to deliver another quarter of positive price cost as we guided to I think the majority of that is carryover on previously announced price actions through 2022, we did announce December increase that is.
In the market I would say, we're seeing good realization on that increase as well, but all of that pricing is coming through from from those previously announced actions from a capacity additions in the industry I'd say the one.
Ones that were announced earlier and brought online in loose fill those have been brought up online. We see continued strong demand in both loose fill and batts and rolls.
And continued good price realization there. So I think those increases have been absorbed into the market based on the demand in and we've not seen really any impact on that from a bathroom rules perspective, the one that was previously announced.
I think is not slated to even come up until we get into 2024. So for 2023, we wouldn't see any impact on any of those additional capacity increases for our network. We have continued to work through our progression as we talked about last quarter. So we shut down the Santa Clara facility in Q4 were in <unk>.
<unk> then.
Breeding our knee five facility to expand to make bathroom roles. There. That's all on track. So those facilities came down Santa Clara came down as planned and EFI is down.
And we're still planning for a startup of that facility sometime in the second quarter.
Thank you.
Next question comes from Stephen Kim of Evercore ISI. Stephen Your line is now open. Please go ahead.
Yeah. Thanks, a lot I appreciate the color here on the composites business talked about weakening demand was curious if you could give us a little.
Bit of a sense for how that weakness may have been different by product segment within composites of regions and in particular, I'm wondering whether some of the higher value add products that you've been moving more into whether they saw a similar kind of a deterioration in their end markets.
Or not and then in a similar vein I know the installation business has that very large technical.
Business.
So curious if you could comment a little bit about weather.
Youre seeing the trends in the technical side, I'm thinking, particularly your Pittsburgh Corning.
Does that is that holding up better.
Then maybe some of the more commodity oriented products.
Thanks, Steve and good morning, let me touch on the composites question and then Brian will probably jump in a little bit on the installation.
Question.
On composites I will tell you that across the quarter across all regions and effectively all products, we did see lower volumes in composites now coming into the quarter, we anticipated that.
What we really saw happen as we move through the latter part of the quarter. We saw some of the North American volumes.
Start to be a bit weaker as we moved into the last half of the quarter, which is really what drove our performance versus our early outlook. So simple point all regions all products, including those higher value added products that you're talking about in general saw lower volumes North America decelerated, a little bit towards the end of the fourth.
Quarter and as a result of that where customers are looking and Brian mentioned this in his comments customers looking at their inventory levels in a more uncertain market environment. They started to adjust their patterns of buying again, specifically in North America. While we were really pleased about is the team actually.
As that started to happen started to actually take a look at where the production needed to be in order to keep inventory levels, where we wanted them to be across the business and that's part of the reason that you saw.
That's part of the reason that you saw operating margin stepped down the way they did in the fourth quarter very simply put lower volumes reacting to that by making sure that we take proactive measures to curtail where we needed to curtail and that'll actually carry a bit into the first quarter, because you heard us guide to maybe even a slight.
The lower operating margin level as we move into the first quarter I'll give you just a color color a couple of color points on that because I think they are important as you think about composites. In 2023. One is we'll continue to take curtailment actions in 'twenty and early 'twenty two 'twenty three specifically the first quarter.
As a result of what the trends were in the fourth quarter, so that puts a little bit of pressure on margins.
I'll also take an opportunity to make a comment about energy costs, which are affecting the composites business as well as the insulation business, but the composite business a little more heavily just because of their use of natural gas you heard me in my scripted comments say that natural gas cost or energy cost kind of peaked in the.
The impact on us in the fourth quarter and the way that our hedging program works is exactly what you would expect hedging programs kind of defer and moderate kind of the fluctuations of hedging gains and losses were expecting energy cost impact on us to be relatively similar in Q1 as what we saw in Q4 just because.
So the way that the hedging program works, but we would anticipate based upon what we're seeing in the market for rates for both European and U S. Natural gas cost that will start to see some benefit from that as we move out of Q1 into Q2. So I think that hopefully gives you a little bit of color on the demand within composite.
And how the team is kind of proactively making sure that we worked through that maybe with that I'll give it to Brian to talk about installation and thanks again.
Technical and global inflation business, Steven we continue to see good trends in our U S. Commercial business I'd say, we've got a very diversified product offering there. We're in datacenters airports hospitals, a lot of different areas. So I'd say that the.
The high rise kind of office construction trends are showing a bit of weakness, but overall for us we like the category and we're seeing some good strength. There one area you mentioned pick warning that we do see a strength in our big strength in big pickup in quoting activity is around our phone glass product line specific.
For LNG applications. So we've seen that pick up quite a bit over the last six months and that product is used extensively in these LNG terminals around the base tank and then all the piping. So we see that order or sorry quote activity picking up and we think that's going to lead to an increase in orders as we go along and so these are multiyear projects.
But I think it is a good segment for us that can grow as we go forward.
Thank you next question comes from a gentleman that left from UBS. John Your line is now open. Please go ahead.
Hey, good morning, guys and thank you for taking my question the.
Really it's focused on the divergence in the OCC roofing volume versus the industry. I know you mentioned that demand for the product remains very strong.
I guess the question really is how are inventory levels right now in the channel and do you expect any destocking as we move forward.
Yeah. Thanks, John .
What we saw in Q4, I would characterize as really kind of a continuation of what we saw in Q3 from a standpoint of distributors, becoming much more selective on the products and brands. They were buying based on local demand trends and more available product to them. So we saw these trends emerging in Q3, we talked.
That in.
In Q4, we saw much more acutely as I think all distributors were looking to right size their inventories and outside of a couple of storm markets, particularly Florida Upper Midwest we.
We saw manufacturing.
Manufacturing shipment volumes down considerably in that area. So I think there is a big push from distributors to right size their inventories to what they're seeing in terms of local demand and certainly product availability is more.
Available widespread than we were a few quarters ago. So I think that that's impacted Q3, Q4, I would say just to.
Characterize though the fourth quarter volumes, even though they stepped down considerably if you look over the last seven eight years kind of average volumes in the fourth quarter. They were more in line with the average volume. So I think still good purchasing activity just a pretty significant step down from the last couple of years and I would characterize that as what we're seeing in Q1, so we're guiding to.
Down in inventory.
Manufacturer purchases in the market in Q1 again as distributors cube right sizing their inventory I think the divergence is really the continued strong demand for our products based on our strength of our contractor network. So this is a key part of our strategy and our roofing business. The team has been executing incredibly well for the last several years, which is to focus on <unk>.
<unk> and contractors and helping to build their business through our unique products, our brand, our commercial skills and capabilities and digital tools and so I think we just continue to see that in terms of drawing great strength in our product and so while we were seeing.
Some markets getting softer.
And some of those stepped down and purchases overall from a distributor standpoint demand for our products remained strong through the quarter and I think that was a bit of a disconnect and divergence that you talked about in Q4, and we think that strength for our products is going to continue here into Q1, and we think we're set up for a good year in roofing.
Yeah.
Thank you. Our next question comes from Joseph <unk> from Deutsche Bank. Joseph Your line is now open. Please go ahead.
Yeah. Thanks for the question and congrats on the residential business results guys.
Thank you. Thank you is if you could just talk about the resilience and the volumes in North America, I think some might be surprised with what starts have done since last summer that your <unk> volumes were flat in your <unk> volumes are expected to be flat.
I guess my question really is I know you tend to only talk quarter had just based on visibility, but if you could just help us hypothetically think about if we are seeing starts single family starts bottoming in the first quarter.
How might that shape up for the rest of the year for your North America resi volumes.
Yes, Joe let me maybe.
Maybe talk a little bit about Q4, Q1 volumes because youre right. They have held up very strong demand for our products have been strong and this is where we've seen I think starting last year demand for our products being more driven on completion rates than on starts. So we saw that kind of emerge.
Back half of 2021 coming into 2022 that even if it starts grew when you. When you look at completion rates they seem to top out at around $1 4 million units and really driven by what we believe are the constraints and labor availability material availability and so while starts continue to grow completion rates didn't.
And that has created a backlog and elongated the construction cycle. So in the back half of last year, even though we saw starts.
Coming down they were still above completion rates and therefore still building the backlog and I think what we've seen in Q4 that finally kind of evened out you saw November December starts kind of roughly in line with completion rates about $1 4 million units and.
And Thats whats driven great strength to finish the year in our residential business great strength to start the year now we do expect if starts continue to trend down and they start falling below those completion rates that this backlog is going to get worked through and I think regionally I would say, we would expect some of that to work through as early as the end of the first quarter.
Some markets might be continuation into into the second quarter, but clearly if starts continue to come down below that one for me right, we think thats going to start to impact future demand when.
When we look at how much that's going to depend on I think where we're starting to kind of bottom out as you said.
Relative to where they are running today.
One key element, we've talked about in the past there are mortgage rates and we continue to believe that consumers are resetting the higher mortgage rates.
Continue to just kind of sit on the sidelines in terms of.
Wanting to get into the market.
But once we see rates stabilize we think that consumers will reset they're going to come into the market. So we think any kind of slowdown should be shorter in duration given that there's a high demand for housing we've been under belt for so many years.
There is very little inventory to no inventory in the channel to work through demographics and household formation is still require housing. So we think that the depth and duration of any slowdown is going to be more shallow than previous cycles and shorter.
And I think once we start seeing interest rates stabilized, we're going to see people come back into the market pretty quickly. We saw a glimmer of that here in January when interest rates, even when they kind of hovered around that 6% a little above 6%, we've seen a lot more positive comments from builders and some more.
Foot traffic and looking at home. So we hope that thats going to play out interest rates stabilize in any kind of <unk>.
Slowdown would be shorter and shallower so it might be a little choppy for the next couple of quarters, but long term, we feel very good about the fundamentals of the business.
Okay.
Thank you.
Next question comes from Truman Patterson of Wolfe Research Truman. Your line is now open. Please go ahead.
Hi, This is Trevor allinson on for Truman. Thank you for taking my question can you talk about how youre thinking about roofing industry volumes and pricing for the full year 2023, appreciating you are not giving full year 'twenty three guidance, but just looking at where housing starts are existing home sales are we expect there to be some softness.
Youre guiding shipments being down high single digits, <unk> and arm, our comps become progressively easier throughout the year. So just curious if you're thinking maybe <unk> represents the bottom on a year over year basis, and maybe how you're thinking about industry volumes for four years.
Yes, thanks for the question.
I look at just the demand drivers of our roofing business, a little over 80% is repair and remodeling demand a little less than 20% into new construction. So when we think about the big demand drivers a small portion is going to be driven by new construction starts. So based on my previous conversation, we have seen a slowdown in <unk>.
Housing over the last 12 months moving forward into 2023, we would expect that could impact.
Lower roofing volumes.
And that's more impactful in certain markets that are more heavily new construction in terms of repair and remodeling.
Still see good fundamental drivers of the remodeling business people are still investing in their homes. When we look at our contractor backlogs it's regionally.
Variable, but overall, we're still seeing good contractor backlogs and demand for remodeling effort. So we think thats going to stay pretty steady could take a step back but still pretty steady.
<unk> always the bigger uncertainty is around storm demand and storm volumes on average that's about 30% of demand in a given year and so that's something that we're really not going to get a feel for it until we get more into Q2 in terms of how that.
Could evolve in terms of demand for the full year. So I think to start the year as I said I think we're seeing distributors.
Pretty cautious in their buying we're probably expecting the first quarter volume purchases more in line with.
Historical averages than what we've seen the last couple of years, but I think a lot of this is going to be a little bit we need to wait and see as we further into the season into Q2, how these remodeling investments continue to play out.
New construction plays out and then ultimately what kind of storm demand, we see going forward I think the last thing I'd say.
Due when we look at store markets like in Florida, I think the repair work is going as we would expect we're seeing good demand still in Florida. We think it probably takes most of the year to get that completed we're still seeing good demand strength in the upper Midwest, Minnesota out, it's a tough market to roofing.
Here in February , but we think that picks back up in the spring and then some storms out west, particularly in California has generated a lot of quote activity and so I think the storm pockets, we're going to continue to see good demand to start the year.
And then we'll see how the rest of the year plays out around room renovation and other storm events as we go forward, but again, we still expect to have a good strong healthy roofing market in 2023 overall.
Okay.
Thank you next question comes from Mike Dahl of RBC capital markets.
Your line is now open. Please go ahead.
Hi, Thanks for taking my question.
I had a follow up on the composite pricing dynamic you mentioned is.
Some tailwind from the from the contract pricing, but you announced but that will be offset by.
Lower spot given given the pieces between kind of your mix of con.
Contract versus spot can you just help us size what that.
What youre seeing on spot prices and then how we should be thinking about that as your contracts roll through the year.
Yes.
Thanks, Mike Great question.
So a little more color on composites pricing.
As mentioned to.
To be very clear in the first quarter of 2023 like in each of the quarters of 2022, we're anticipating pricing for composites overall to be positive the carryover of either existing contracts that are multiyear in nature and or new contracts that.
Were negotiated.
Seeing positive.
Neutral positive pricing on all of those contracts.
Mentioned that in the last quarter call that we were kind of working through the contract renegotiations for those that were up for renewal and we were seeing kind of good pricing discussions on those contracts. So we expect contract pricing to be positive in the first quarter of 2023 now you did also hear us say that we see.
Some pressure on spot pricing.
That we don't expect to fully offset that favorability from contract pricing, but it will kind of bring the contract pricing number down a little bit. If you remember in 2022, we kind of started out with strong contract pricing as we came through the negotiations at the end of 2021 into 2022 and.
Then with the strength of the markets that we're operating in especially in the first half we saw some really good uplift from spot pricing. So as the markets start to soften up a little bit <unk> reset in certain places we are anticipating not just in the first quarter, but probably as we move through the year, a little bit more pressure on spot pricing.
Just I'll also tell you very specifically that where we're seeing most of that spot pricing reset is in our Asian markets, we're not necessarily saying.
Significant pressure on our first of all contract pricing as well as spot pricing in North America, and Europe , but it really is.
In Asia.
Kind of move and a lot of that driven by the fact that the Chinese economy, and the big China producers there.
Chinese economy hasn't fully reopened yet so.
We see some of that some of that product moving into other markets more specifically, India and that's why we're seeing some of the spot pricing pressure, both in China and India.
Thank you next question comes from Phil <unk> from Jefferies. Your.
Your line is now open. Please go ahead.
Hey, guys.
Unexpected it's softened through the year, how do you plan on managing your production and just cost, particularly in your fixed cost intensive businesses in insulation and composites and then you guys did an awesome job last year staying ahead of cost on the price side of things.
US think through that.
Should we expect that to be neutral and do you have the levers in place to kind of deliver that mid teen margin in those two businesses you kind of gave US a framework in terms of the downside scenario at your Investor day.
Yeah, Good morning, Phil Thanks.
On the demand maybe Ken I'll tag team this but on the demand versus production I think we are going to continue to be very proactive in terms of how we balance that out, particularly in roofing and insulation.
And I think the work we have done in terms of our network optimization work. We believe we've got a better cost structure as we manage that we've got more flexible assets as we manage that but that is always going to be our challenge in front of us to try to be in front of that we talked a little bit about that in composites, where we were trying to be proactive in Q4 as.
We saw demand soften because we're very conscious on maintaining great working capital and great cash flow. So.
We want to continue to balance that as we go through the year, but again I think we've made structural improvements to our costs and our operating facilities that are going to give us a more flexible network in a more cost effective network as we manage those curtailments going forward in terms of price and going forward and price cost.
You're right I mean, we've been able to manage it I think our commercial teams did fantastic work throughout 2020 to be in front of these inflation trends in terms of getting price.
Anticipating inflation, we start the year with a positive price cost outlook and that's something we're going to continue to manage in terms of price now in some categories and some businesses, we've gotten price in excess of expected inflation. So we're going to see some inflation trends catch up to us.
But thats still maintaining a balanced view of price over cost and we're going to manage that.
Other piece that we continue to push heavily on is productivity and our focus there on the manufacturing productivity that gives US also the capability to offset inflation is something that remains important will become more and more important is as we go forward.
But I think if you roll all that up we still feel very confident and comfortable in our in our mid teens guides through the cycle of our in our installation and our composites business. We think commercial strategies put in place have given us access to.
More profitable product offering and we think the operational improvements we've made in these businesses, we feel very comfortable with that guidance.
Yes, I think Brian covered.
Everything on that question the only tiny thing I would add is just think about what we're all seeing in the inflation environment, which is softer markets not just ours, but.
The globe in softer markets and by the way resolution of a lot of the supply chain issues that we all were dealing with as we came out of Covid and those two kind of moves gives us some pretty good feeling that we're going to see a better inflationary environment.
As we move through the year, we're still expecting inflation, but we expect it to be significantly less you guys see the numbers you can see the numbers in the 10-K, but I'll just kind of at a at an overall level. We saw about a $1 billion of inflation across all three of our businesses last year and rounded off it's probably about a quarter.
Of that number is tied to.
Energy and asphalt related cost and what we see is we're looking at those trends just based upon the true market conditions right. Now is we should see some relief there, which also helps in that price cost mix.
Thank you our final question flip state comes from Adam Baumgarten of Zelman and associates.
Your line is now open. Please go ahead.
Hey, good morning, everyone just on roofing.
Give me inflation youre seeing pick back up are you expecting to need to raise price further to offset some of that asphalt and other inflation.
Adam as we as we sit today, where we are.
Still seeing positive price cost mix to start the year. So we will continue to.
Watch the inflation trends as we go forward and we'll make adjustments as needed, but I think we've got a very good track record of being able to manage price relative to inflationary environments or deflationary environment. So we'll continue to manage that closely and make those decisions as we as we see the year play out.
Yeah.
Thank you and that concludes the Q&A session for the state.
Brian Chambers for any further remarks.
Okay. Thanks, Alex.
Thanks, everyone for your time today and your questions. We really appreciate your interest in Owens Corning and look forward to speaking with you all again during our first quarter call I Hope you all have a great day.
Okay.
Thank you all for joining today's call you may now disconnect your lines.
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