Q2 2019 Earnings Call
Yeah.
Good day and welcome.
Of our going operations when calculating adjusted EBITDA Justy earnings.
We adjust our effective tax rate to remove the effect of quarter to quarter fluctuations.
Which have the potential to be significant interacting as adjusted earnings and adjusted earnings per share.
We also use free cash flow and freak ask slogans version of adjusted earnings as measures helpful to investors to evaluate the company's ability to generate cash and utilize that gas to pursue opportunities that enhance shareholder value.
For those of you following along with our slide presentation, we will be getting on slides before and now opening remarks from our C. O. Brian Chambers who'd be followed by see if I can make Mary and R.Q. and a session.
Right.
Thanks, Terry and good morning, everyone. Thank you for joining us today.
In the second quarter, we delivered record revenues of 1.9 billion.
Generating adjusted D. bit of 231 million.
These results were driven by good commercial execution strong manufacturing performance and disciplined cost controls across the company.
In addition.
Typically increase our free cash flow and a quarter through targeted working capital improvement in cap ex management.
Before I talk further about our second quarter results.
I want to provide a brief update on the progress we're making on our key focus areas to continue delivering strong financial performance.
Coming into the C.E. overall, I outlined three operating priorities for our company.
Accelerate organic growth.
Drive improved operating efficiencies and generate strong free cash flow.
Over the past few months I've spent a significant amount of time visiting our facilities around the world to review our initiatives assess our market opportunities and meet with our customers.
I came away from these interactions with increased confidence that we are focused on the right priorities.
And that we have additional opportunities to grow revenues and strengthen the through the cycle earnings power of our company.
Within each business, we are implementing specific initiatives to drive or performance.
And installation, we're delivering solid growth in our technical another building insulation businesses through geographic and product expansion as we continue to drive cost synergies do our integration work from recent acquisitions and then our north American residential fiberglass business.
<unk> utilizing automation and further investments in process technology to improve manufacturing efficiency and reduce costs.
As we position ourselves commercially to capitalize on the housing market.
And composites, we're generating volume growth as we focus our commercial efforts on higher value applications, such as glass nonwovens and specific markets like India, and we continue to improve our low cost manufacturing position draw strategic supply agreements completed large scale furnace investments and additional productivity.
In roofing, we're leveraging our vertical integration.
Material science capabilities in commercial strength to design and market unique roofing shingles, and components that appeal to contractors homeowners and distributors.
And across all our businesses.
We continue to utilize our enterprise model to strengthen our market leading positions through shared customers served by integrated commercial operation.
Core material science in manufacturing technology.
Cost effective and scale of a corporate functions.
And a global infrastructure that allows us to expand our geographic reach efficiently.
Now I'd like to discuss our second quarter results, starting let's safety.
Our performance this quarter improved versus quarter, one and remained consistent with prior year with a recordable incident rate of 0.65 versus 0.61 in the second quarter of 2018.
64% of our sights or injury free this year and it was half of our sites have remained injury free for a year or more.
Our financial results for the quarter reflected good commercial and operational execution across the company.
Leading to organic revenue growth, a 5%, 7% on a constant currency basis.
With adjusted even growth of 8%.
Revenue grew by $94 million and adjusted even improve 17 million I'm increased volumes higher prices and improved manufacturing performance.
And installation our technical another building insulation businesses continue to produce strong results. Despite some softer market conditions and parts of Europe .
In our North American residential fiberglass business.
Lower sales volumes and continue production contaminants more than offset pricing games, which were primarily the result of carry over from last year.
And composites, we increased volumes through our commercial efforts, however, negative currency translation impacted both our top and bottom line.
Our operational focus continued to deliver a strong manufacturing performance, which more than offset the impact of higher inflation.
And the roofing, we delivered volume growth above the market consistent with the expectations, we outlined during our first quarter call.
Based on strong customer demand for our products and more favorable geographic mix.
We were successful in realizing price from our April increase. However, this was offset by asphalt costs, which continued to rise throughout the quarter. We continue to maintain strong cost controls across the entire company.
Overall operating expenses in the first half or below last year, and we have reduced our full year I'll look for corporate expenses.
In addition, coming into the year, we highlighted our commitment to improve our free cash flow and 2019 through an increased focus on managing our inventory and Catholics investments.
In the second quarter, we improved our free cash flow by 130 million versus prior year, putting us on track to generate significant free cash loan 2019.
We're also actively manage in our capital investments and reduced our full your expenditures by 25 million.
We continue to prioritize free cash flow to ongoing dividends reduction of the product term loan and share repurchases.
Before turning it over to Michael to discuss our financial performance in more detail.
There are a few other items I would like to comment on.
First we were honored to earn the number one ranking on corporate responsibility magazines 100, best corporate citizens list for 2019.
This is the fifth consecutive year, we rename to the top 100 list.
Which recognizes stand out environmental social and governance performance in companies in the Russell 1000 index.
Additionally, I encourage you to review our 13th annual 2018 sustainability report.
It highlights are significant sustainability advancements in progress toward our 2020 goals.
I'm very proud of what our 20000 employees have accomplished to make a positive difference and everything we do.
Second as we announced earlier this month June Francis step down to become the president and C.O.B. can roofing supply.
During made numerous contributions to Owens Corning over the nine years who's with the company and I wish him all the best in his new role.
Todd Pfister, who most recently, let our European mineral wool and global phone glass businesses was appointed president of the installation business.
Given tides background and experiences I'm confident he's the right leader to continue driving the growth in performance of our global installation business.
In closing.
I am pleased with our execution performance in the second quarter delivering record revenue strong earnings growth and improve cash flow. We have a clear set of operating priorities, we have market, leading businesses and an enterprise model that creates unique value and we have a strong and energize team dedicated to the success of our customers and our shareholders.
I believe we are well positioned to capitalize on our market opportunities in the second half and be on.
With that I will turn it over to Michael to review, our financial performance and outlook Michael.
Thank you, Brian and good morning, everyone as Brian mentioned earlier.
Owens Corning had a good second quarter delivering record quarterly revenue of 1.9 billion and net earnings growth of 14%.
We had strong commercial and operational execution in the quarter and we're position to deliver another year of strong earnings performance. Despite some challenging markets.
For the quarter revenue grew by nearly 100 million and adjusted either grew by 17 million on stronger volumes higher pricing.
Solid manufacturing productivity and good cost control.
Operating cash flow performance for the quarter was very strong at 438 million included progress on working capital.
Now, let's start on slide five which summarizes our key financial data for the second quarter, you'll find more detail financial information in the tables of today's news release in the Form 10-Q .
Today, we reported second quarter 2019, consolidated net sales of 1.9 billion up 5% compared to sales reporter for the same period in 2018, driven by higher sales volumes and roofing on a constant currency basis, we delivered consolidated organic revenue growth of 7%.
[noise] adjusted even for the second quarter of 2019 was 231 million.
Up 17 million compared to the same period, one year ago as good commercial and operational execution across the enterprise generated volume growth price gains in manufacturing productivity.
[noise] net earnings attributable to Owens Corning for the second quarter were 138 million.
Compared to 121 million in the same period last year.
Adjusted earnings for the second quarter of 2019 were 143 million or $1.31 per diluted share compared to 132 million or $1.18 per diluted share in 2018.
Depreciation amortization expense for the quarter was 112 million up slightly as compared to the same period a year ago.
Our capital additions for the quarter or 107 million.
On slide six you'll see the detail of our second quarter adjusting items reconciling our 2019 reported even have 230 million two are adjusted EBITDA of 231 million.
For the second quarter or Justine items amount to to a 1 million dollar change related to the previously announced composites low delivered cost actions.
Now please turn to slide seven.
Provide a high level review are adjusted either performance comparing 2019 to 2018.
Adjuster leave it increased 17 million ruffini that increased by 24 million as compared to the prior year.
Composite's Eve it decreased by 4 million and installation even decreased by 7 million.
General corporate expenses were 29 million, a 4 million improvement versus the prior year on discipline cost management.
Well that reviews key financial highlights I ask you to turn to slide eight work about it more detailed review of our business results beginning with her installation business.
Sales and installation for the second quarter or 661 million down 3% from the same period a year ago.
The negative impact of lower sales volumes, primarily in our north American residential fiberglass insulation business, along with negative foreign currency translation was partially offset by higher selling prices.
Even for the quarter was 42 million down 7 million compared to the same period in 2018, the progress in our technical and other building insulation businesses was more than offset by lower sales and production volumes and our north American residential fiberglass insulation business, which is consistent with the expectation we set on our last call.
Improved manufacturing overcame inflation in the quarter.
Improve performance and the technical and other installation businesses was strong as a result of solid commercial and operational execution. Despite some weaker markets in Europe .
We continue to expect this portfolio businesses to generate revenue and earnings growth in 2019, driven by improved operating performance in our <unk> business in growth in global construction and industrial markets.
And our North American residential fiberglass insulation business. We previously highlighted the difficult volume comparison, we would face in the first half of this year in the business as a result of some share loss and weaker housing starts.
As expected lower demand in the quarter and the impact of production <unk> actions in this business more than offset positive pricing.
For this business, we've made significant progress in our production containment plan in the first half of the year.
Curtailment cost in the second quarter should represent the high Mark for the year, we expect additional curtailment actions in the second half.
At a lower rate than the first half the price improvement that we realized in the second quarter for North American residential fiberglass insulation business was primarily the result of carry over from 2018 pricing actions consistent with our goal or recovering our market position, we made pricing adjustments to become more competitive with prevailing market prices.
This improved our share position, but as impacted our full your outlook for price in 2019.
Current consensus estimates for US housing starts would suggest that 2019 full your lack starts will be down to about 3%, which is relatively unchanged from the time of our last call.
As a reminder, because of weaker fourth quarter in first quarter housing data lags starts for the first half of the year, we're down to about 7% year on year for the second half of the year lag starts are expected to be relatively flat you over a year.
For 2019, we continue to expect growth and the technical and other building insulation businesses. We expect that this earnings growth will be more than offset by lower sales and production volumes in the north American residential insulation business our outlook for the second half the installation business is stronger than in the first half based on the expectation of improving U.S. housing starts in normal seasonality.
Although we made progress in the second quarter versus the first quarter, we would expect to comp negative and the remaining two quarters. In 2019 now I'll ask you to turn your attention to slide nine for review of our composites business sales and composites for the second quarter were 535 million down 1% compared to the same period in 2018.
During the quarter the business delivered volume growth of 4% despite slower global growth, particularly in Europe , North America, and global automotive markets.
This revenue growth was largely offset by negative foreign currency translation.
Even for the quarter was 67 million down compared to 71 million in the same period last year.
Manufacturing productivity gains and higher sales volumes, largely offset input cost inflation and negative foreign currency.
It would have been flat on a constant currency basis.
Composite's delivered 13% EBIT margins for the quarter.
The composites business continues to deliver strong commercial and operational performance and we were particularly pleased with manufacturing performance in the second quarter.
From a cost perspective, we expect that our recently completed low cost India facility expansion.
Our high strength glass strategic supply lines with C.P.I.C. in China.
In our previously announced high cost Melter restructuring actions will drive manufacturing productivity and improve our costs position in the second half, which will further build in 2020.
[noise] for 2019, we continue to expect growth in the glass fiber market consistent with the historical relationship with global industrial production growth.
Global growth expectations have moderated as compared to the same time of our last earnings call.
Our confidence and improved operational performance has strengthened during the quarter. As a result, we continue to expect volume growth and improved operating performance to offset inflation.
Slide 10 provides an overview of our roofing business.
Roofing sales for the quarter, where 778 million up 18% compared with the same period, a year ago, primarily driven by higher sales volumes and higher selling prices.
The U.S. asphalt shingles market grew by 4% in the second quarter as a result of accelerated storm activity and distributors replenishing inventories.
As we discussed in our recent earnings calls are volumes trailed the market. The last two quarters due to the timing of distributors shipments and unfavorable geographic mix.
This quarter are roofing segment volumes grew by 13% are volumes outperformed the market on a higher share of industry shipments with better geographic mix, which puts our market share in line with their historic position on a rolling 12 month basis.
Even for the quarter was 151 million, a 24 million increase from the prior year, primarily due to higher sales volumes.
<unk> margins of 19% Red line with last year as production volumes remained relatively flat and pricing kept pace with inflation. The roofing business as consistently offset inflation with price are cast contribution margins continue to be healthy and support EBIT margin consistent with our long term guidance.
<expletive> costs remain high with inflation expected to persist to the third quarter.
We implemented a successful April price increase and we announced a further increase effective in July to offset expected asphalt inflation.
The roofing businesses position to deliver another strong year in 2019.
Based on the second quarter market performance, we have improved our full your market outlook and now expect U.S. single industry shipments to be relatively flat.
[noise] now please turn to slide 11, rubber, but more context, nor business outlook for 2019.
The company's outlook is based on an environment consistent with consensus expectations.
For global industrial production growth <unk> housing starts and global commercial industrial construction growth.
The global growth outlook has softened since our last earnings call. However, our commercial and operational execution to date has been strong.
[noise] insulation, the company expects earnings growth and the technical and other building insulation businesses. The company anticipates this earning growth will be more than offset by lower volumes in production curtailments in the north American residential fiberglass insulation business.
In composites. The company continues to expect growth in the glass fiber market, although at a lower rate than our previous outlook. The company continues to expect volume growth and improved operating performance to offset inflation.
In roofing the company has improved its outlook and now expects us shingle industry shipments to be relatively flat ruins Corning, the company's still anticipate a higher share of industry shipments and several geographic mix comparison to the prior year contribution margins through the first half of 2019 position the business for continued strong performance.
Now please turn to slide 12, Y. provide guidance on other financial items for the year.
Over the last four years improved earnings better working capital performance in our advantage tax position translated into a strong conversion ratio of adjusted earnings to free cash flow in excess of 100%.
In the second quarter are free cash flow performance with strong at 323 million.
Inventory's improve sequentially by about 50 million in the quarter further prove bits are expected and the second half for the year. We are confident that we will deliver another strong year or free cash flow conversion.
At this time the company plans to prioritize free cash flow ongoing dividends, and making progress and paying down our bank term loan.
Sequentially reduce net debt by over 300 million and a quarter, which included paying down the <unk> term loan by 100 million, Romania balance on the term loan is now 400 million. Additionally, free cash flow could be available for share repurchases under the company's existing authorization, which has 3.6 million shares available for purchase.
We now expect corporate expenses of 125 to 135 million.
This is a 15 million reduction to our prior guidance as a result of strong cost controls in the impact of performance based compensation.
Capital additions are now expected to total approximately 475 million, which represents a 25 million improvement from our previous guidance.
Depreciation and amortization expense is expected to be about 460 million.
Interest expense is expected to be about 130 million.
As a result of our tax unwell foreign tax credits and other planning initiatives, we expect our 2900 cash tax rate to be 10% to 12% of adjusted pretax earnings.
Our 2900 effective tax rate is expected to be 26% to 28% of adjusted pretax earnings.
With that I'll turn the call over to cheery to lead us in the question to answer session Jerry.
Thank you Michael we are now ready to begin to Q. and a session.
Thank you we went out again the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speaker phone please pick up your handset before pressing the keys.
If at any time. Your question has been address and you would like to withdraw your question.
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My first question today will come from Stephen Kim the other car I assign please go ahead.
Yeah.
Nice guys appreciate the commentary here.
I wanted to ask you about eat eat at guide insulation and comment about automation in process improvement in that segment in the quarter you did a pretty nicely here on a in a tough environment.
Looked like with good cost control and and relatively low tech or metal margins.
But your Guy if I heard you correctly, Michael was for eat it to be down year over year in insulation in both three q. and four Q. I wanted to make sure I heard that right.
By our numbers a book like four Q. could actually swing you know be flat to positive thoughts wondering if there's anything that's going to people landing and four q.
That could be depressing that outlook and four q.. If there's any if you're assuming volume will be sort of flat to down or or not and if you could talk about the automation in process improvement for a little bit more that you alluded to at the very beginning of the call.
Hey, Stephen I'll I'll take the question in regards to what the guide was for Q3 Q4 in your right I did guide that the third quarter in the fourth quarter would cop negative to last year.
And I'm, a handed to Brian to talk a little bit about.
Automation.
Yeah. Thanks, even for the question morning, Yeah.
Yeah, we'd take a look over all in in the installation business I think we've talked about you know the two parts of the businesses.
In terms of our outlook in the back half we continue to see growth in revenue and earnings in our technical another inflation businesses.
You know we're seeing good progress air we continue expect better volumes and pricing as we move into the to the second half on the Red side, you know we've talked about some of the adjustments we've made in our in our pricing in the quarter to in terms of getting our prices competitive in the market that started to restore some of our share position in the quarter in our residential inflation businesses, we kind of walk into the back half you know we continue to <unk> expect to perform better than first have a we think there's a better market outlook was starts increasing the normal seasonality the business.
We're starting to see some of that volume come back to us in terms of restoring our historical share position.
And we think we're we're better positioned over all in terms of some of the manufacturing performance that I talked about in terms of automation in in process improvement. So specifically, we're making investments.
In in our inflation business in or other businesses around automation tied to packaging, we see that generating a unit cost improvements as we go forward. We also continue to invest in just process technologies that are improving our density efficiencies and and other capabilities in our in our cost in our manufacturing efficiency. So as you know productivity when we get that rolling into the into the our our manufacturing facilities. It takes a little bit to kind of translate through the piano, we've seen some of that come through in the second quarter with good strong manufacturing performance in the business. We think that continues to trend well in in the back half of the year. So we think we see growth in our technical another inflation business in terms of revenue and earnings.
We do think <unk> negatively and our residential business tied to the volume outlook and Anna price outlook. That's you know.
We're probably going to camp negatively so that's why we wanted to guide overall that we think we make continued earnings improvement versus the first half, but down a quarter over quarter basis to prior year. We think we're still going to cop negativity as we finished year.
The next question will come from it's on the ball out of Bank of America. Please go ahead.
Hey, guys I think he for taking my question.
Brian more of a strategic question you know given that you're a new C.E.O. here, though see.
Is your vision for the company, you'll flexible enough to explore opportunities that could unlock value within the portfolio. So along those lines really I'm asking you know have you or do you plan to engage with some of these current investor groups that have focus on pursuing a path that could lead to to rationalization in the portfolio.
Yeah, John Thanks for the question you know as I look at our company I believe the best way to create value for our shareholders is to drive revenue growth improve earnings.
Generate strong free cash flow and to have a thoughtful cap capital allocation strategy. In these are all the things that we're focused on.
As I talked about in my prepared comments I you know I've spent a lot of time traveling around the globe visiting in our sights reviewing our operations reviewing our initiatives meeting with our customers.
You know and I'm confident we have the right agenda in the company right now to drive growth earnings cash flow and and we've got the the right initiatives in place so and I think our second quarter earnings performance in our our revenue growth and overall financial performances is evidence of of this strategy in this focus generating great value for our shareholders. So.
You know I feel really good about our strategies and our businesses. I think we are we are positioned very well in this performance. I believe is is not just been one quarter. It's been you know over the last four or five years. If you look at our our continued revenue growth we've grown top line about 6%, we've grown or even about 16%. We've expanded our operating margins over 400 basis points. So I think a lot of work that that is coming to fruition, that's generating great results and that's going to translate into great value for our shareholders. So we we like our businesses, we like our strategy. We think we're on the right track.
Our next question will come from Katherine Thompson.
10 Research group. Please go ahead.
Hi, Thank you for taking my question today.
Focusing on the composite segment and.
Slightly softer outlook understanding that about 48% of your resonates in the U.S. with a decent.
Push and tied to building products, particularly with with thing.
Europe has more for transportation this year, China regionally focused on men and <unk> diversified.
You help us understand what region.
And which in markets, where the primary drivers for this slightly lower.
Thank you.
Sure Cat Catherine Good morning, It's Michael I mean, I mean here, here's what I'd say overall I'd say that you know the overall you know composites market remains remains constructive.
And and global growth remains positive.
That said you know global industrial production growth or the outlook for global industrial production growth for this year as kind of softened as the year has gone on.
At the start of the year you know the expectation was for about 2.5%.
I'm on our last earnings call. It was about 2% then as we sit here today, you know the expectations for global industrial production growth.
About appointing to have you know we did see decent growth both in the first quarter and the second quarter about 4%.
In a in in in in both and both quarters.
We've seen really good growth and Enron wovens business, so kind of high single digits.
Our our business in India is performing well and I would tell you that you know China, China's okay, where we have seen some kind of overall, what I'll call kind of regional or in market weakness would be clearly Europe is slower this year versus last year North America has slowed slowed a bit and then as you mentioned in your question you know I'd say global automotive is down euro year year over year, probably most pronounced in in Europe , a manned in China.
I'd I'd point to that you know industry utilization rates continued to remain you know pretty high.
You know our assets are running running well and while we've kind of lowered our overall outlook for global growth. We we think that we're actually going to you know runner assets better then maybe we had thought the beginning of the year and then with a little bit of lower inflation, we think kind of the guy that we had given last quarter is largely intact, maybe just getting there and a little bit different way.
The next question well <unk> <unk> of Barclays. Please go ahead.
Hi, Thank you for taking the question on the on the installation guidance. You know you guys talked about having made the price adjustments and and you know recovering some share position so I guess.
Going forward to you know what what are your thoughts on the ability to kind of maintain residential price levels, where they are at this point <unk> do you find that the market and you know utilization levels are recovered enough to perhaps limit any additional competitive adjustments that could be necessary or you know or is there still any I I guess the fluidity there to to monitor thank you.
Yeah, Matt. Thanks. Thanks for the question is you know we talked about on our last call. I think you know we came into the year with with a pricing actions. We took in 2018 and when we faced a much sophomoric and we took a look at our our pricing relatives are historic I seen gaps.
In the market and we knew we needed to make some adjustments and that's really the the work we've done over this quarter to get our make our adjustments to pricing get us competitive market get our price gaps back to the store levels as we look to restore share position. So.
They actions, we took through the quarter I would say I think we feel we're in a good spot in terms of of price competitiveness and and we've begun to see some of those volumes come back to us.
I think overall in the market you know the it's there's regional natures to it there's different channels, but overall I'd I'd say, we think the market pricing is broadly stable. So as we look at it in terms of an outlook into the back half of the year. You know, we think that with starts now legs starts getting more flat.
We saw earlier, we saw housing starts in Q2, finally post kind of a year over year flat number after two quarters of decline. So I do think we're more optimistic on an outlook that we're going to continue to see housing start growth that's going to create a additional demand. We we always come back into seasonality in the second half a little stronger.
So I think there is enough kind of market growth out there that are we hope that the the price environment stays stay solid. So we're we're pleased with our pricing performance in in the quarter we delivered.
We we think we've completed those actions a lot of the so we're going to look into the back half of the year. We we think we should be in a good spot.
The next question well come from Mike already Hot J.P. Morgan. Please go ahead.
Good morning, everyone.
Is that a question on the adjustments that you made to corporate expense and kept back.
You know Michael if you could just kind of give us a sense on the corporate expense.
You know you said you had some you know cost containment actions, but also some reduce the incentive com.
Wanting to get a sense of of the 15 million how that break down and also on the cost containment.
If that temporary or structural.
And then on the Catholic side, the 25 million reduction is that kind of a shift the timing or.
You know, it's a 2020 or also just more of a you know what you thought you needed to do in 2019 <unk>. You know now you're just realized <unk> you don't have to do as much.
Good morning, My cool good to hear from you Yeah, I mean, maybe maybe at a a high level as it relates to both of them I think no doubt you know kind of sitting here today versus you know sitting at the start of the year the expectations for global growth. You know generally has slowed also expectations for new U.S. residential construction is lower today than what it was at the start of the year, you know, which caused us to take a a good look at at cost as you would expect us to do but but also the level of of capital capital spend on the on the cost side of the house I'm. It's really the the the new guide was basically down about $15 million.
And it's really made up of kind of half.
On that it's just what I call discretionary costs side and the other half related to performance based compensation.
And then your question on whether it's you know kind of temporary or structural I'd say, it's probably probably have a bit of both you know throughout the throughout the you know the recovery over the last decade, we've been super disciplined I'm around costs generally and I've been very very cautious around adding new heads you know we forget it kind of kind of put the brakes on a little bit harder yeah. This year, just kind of given the overall uncertainty around bringing new heads into the organization. So I think some of its structural I think some of it's probably temporary.
Assuming global growth starts to accelerate again.
On the capital side, you know kind of a a similar a similar story you know the growth expectations are a little bit less than we entered the year. So you know we gave we gave our you know portfolio of projects a hard look and made some choices again kind of similar to the costs I think some of it is structural.
And then some of it is probably temporary as well and you you can expect that it's we're going to continue to work at heart.
Yeah, maybe I just had my guy coming back to our big operating properties for the company. You know one is is driving improved operating efficiencies and and the third is generating strong free cash flow. So I think I think we're going to continue to look at how we optimize our operation how we look for structural opportunities to be more efficient and I think that's going to be embedded in our in our manufacturing performance is going to be embedded in our opera, x. and and and <unk> investments.
And I think that's a in on the Catholic side, we're going to continue to focus on how we're making really good investments on to cap ex probably pivoting a little bit more towards you know productivity initiatives and those things in the in the near term. So I think some of this will will come through is more structural as we move forward.
And then my just you have full visibility with the new guide capital will be down about 65 million versus last year.
Our next question will come from Scott's Fryer City. Please go ahead.
Hi, good morning.
And yet filing you talked about some transportation costs being a a towel and you mentioned some other input cost inflation I'm case, if he can parse that out a little bit more and talk about some of the buckets and also what your expectations are on the on the cost side in the back half of the year.
Total company, you're talking to specific business.
You could take it through to total company and then anything that you should call out within the segment also.
Yeah, I'm I'm happy to take it from a total company I'll give some color around the segments and I'll, let Brian come in.
And add anything that he thinks that that he should add so at a at a total company perspective, you know the inflation headwind that we're going to face. This year is I'd say, a good bit different than what we faced last year. So.
And last year in particular, we face a significant amount of asphalt inflation. We also faced a significant amount of inflation in north American transportation trucking to be specific.
Kind of fast fast forwarding to this year.
You know the trucking the trucking market has loosened significantly.
Actually its lucent as the year has gone on we'll probably see some some modest inflation overall across all three businesses, we're actually in pockets, we've actually seen some deflation.
So transportation is going to be down significantly we will see asphalt inflation you heard in my prepared remarks, and Brian's prepared remarks that we've seen asphalt inflation in the first two quarters, we expect it to continue through the third quarter at some point, we will see benefit from IMO 2020, but it's probably late late this year at the earliest probably at some point in the first half.
More realistically.
Other than that I, probably wouldn't call out any any big trends from an inflation perspective anything going to add Brian .
No I think overall I think more modest inflation across the board. We are seeing some improvements on some of the energy cost asphalt remains the biggest inflation input headwind that costs through the quarter continued to climb they've remained stubbornly high we think they're going to continue to be high.
In the near term.
So thats something were going to be working on in our roofing business and that's the reason for our July price increase, but I think they see more moderate environment and having good good controllables and I think also part of the.
The focus areas around our sourcing initiatives I think we're starting to see some leverage in terms of how we're working through and making some really great headway into some of our key initiatives in that space.
Our next question will come from Keith Hughes of Suntrust. Please go ahead.
Thank you.
A follow up on that last question on particularly the asphalt inputs or are you expecting some more sequential increases in asphalt prices in the second second half of the year or is this or your expectation is just more what you see.
Kind of year to date.
Yes, Keith Thanks for the question, yes on asphalt cost.
We have seen them kind of continually rising month over month.
And we see that kind of continuing into the third quarter.
As we as we go forward.
And then fourth quarter, we still think it's going to be higher and higher on a year over year basis, but we generally start to see a little seasonal change in asphalt costs and we would expect to see that.
Similar this year, although it just a higher rate. So I think asphalt costs to again have remained high.
There is a lot of talk on the IMO 2020, we maintain a regular contact with our refiners to try to get their outlook and views.
But we just haven't gotten a lot of real information how that is potentially going to materialize into reduced cost as we go into next year.
In theory, it should in terms of creating more supply with high sulfur content that should find its way into the paving and roofing markets.
But we certainly haven't seen any of that.
In the first part of the year and don't expect that in the near term so.
We would expect asphalt costs to continue to move a little higher as we move through the quarter.
Through paving season, and then see a little seasonal decline, but that's that's our best outlook for the year.
Our next question will come from Michael Eisen of RBC. Please go ahead.
Good morning. Thank you guys for taking the questions just following up on some of those comments around what you're expecting from asphalt pricing and then taking that into account with the share gain you guys saw in the quarter and the strong volumes can you help us think about.
What level of pre buy there was in that number if there was any pull forward you're expecting ahead of those price increases and how we should think about the volume price dynamic going forward.
Yes, Thanks, Michael I think look we were very pleased with our with our volume performance in the quarter.
And I and I talked about a little bit on the last call. We've kind of went through Q4 Q1, where are our volumes were trailing the market really we felt based on just timing of distributor purchases of inventory.
In a little bit of negative Geo mix, where where there was business in parts of the market were were little bit under shared to our national average and we expected that that was going to play a catch up in the first half so.
We ended our first quarter volumes really strong we start to see a lot of work order volume come to us in the back half of the of the first quarter volume strength continued in quarter, two and that led to our to our increase so I think it was more around just the catch up that we expected in quarter two to get distribution inventories of our products.
Right in terms of servicing the out the door demand and then we saw a little bit of improvement around the Geo mix in terms of where distributors were buying from us across the board. So I think that was expected in terms of that volume and we feel like we're in a good spot now we tend to look at our share position not on quarter to quarter, but over a six month over a 12 month lag and on a rolling 12 month now we look at our share position and we really feel were were in line with kind of our historical averages. So as we go forward into the back half of the year I think our volume expectation would be that we track pretty close to the market.
As we move forward in terms of the price volume mix I mean again, we were successful with an April realization.
And we saw a continued purchasing through that April price increase so I don't think there was a lot of inventory stocking ahead of that ahead of that number I think it was more just timing of when distributors were buying our product.
We have seen asphalt cost continue to climb we have announced and are implementing a July increase right. Now. It's it's early days and the increase so too early to tell where that lands, but I don't think there was a lot of pre buying when we look at the distributor inventory levels of our products we feel it is.
At a good level relative to the second half market outlook for out the door sales.
And so we just think it was kind of a natural catch up put our historic share positions in line with historic averages.
And we feel as we go forward, we're going to be able to maintain a good balance in terms of volume and share and again, we're going to be implementing the price increase to try to recapture of the expected asphalt inflation, we're looking to see.
Our next question will come from Truman Patterson of Wells Fargo. Please go ahead.
Hi, good morning, guys and nice quarter.
Just wanted to follow up on insulation, you know it seems like the January price hike didn't stick.
So you guys are getting a bit more aggressive on market share you guys discussed that you guys have recaptured some could you guys. Just discuss some of these early gains a little bit further and possibly quantify some of the recaptured market share.
And then there's also been some discussion of a competitor, adding loose fill inflation.
To the industry, what kind of impact could this have to your bottom line and possibly could you just give your thoughts on.
You all potentially adding some loose fill capacity over the next several years.
Yeah. Thanks, Sherman, let's unpack that let me, let me try to work a little bit.
I think we said around the price adjustments in Q2 on the last call that that given the weaker market environment, we saw our price gaps really.
Inflate over historical averages, we want to get our pricing right in the market and relative to our historic pricing gaps we did that work.
And I think the proof point of the of the value of our products and our brand and our commercial strength is.
Competitive pricing, we started to see volumes come back to us and we expect that that's going to continue to grow as we move into the back half, but a lot of those adjustments were made through the quarter and we really were starting to see the benefits of that towards the towards the end of the quarter.
I think we'll see more of that as we go into the to the second half. So we feel we're in a good spot in our current price points and we think we're in a good position to continue to recover and restore our share position as we as we move through the year. So I think that was a pivot relative to the market environment. We're operating in today.
There was an announcement on a competitor I didn't loose fill there's been a lot coverage there I'm not going to comment on their strategy their position I think overall loose fill continues to be a.
Running at pretty high capacity utilization is demand for Lou still continues to grow.
So we don't think in terms of the timing of when this capacity would come on in a few years, that's going to have a meaningful impact on any demand capacity utilization factors.
Given the growth outlook for loose fill in the market.
And we feel in terms of our capacity our position we feel we're in a very good spot. We've got great products, We've got a great cost position we got.
Good supply position. So we feel we're in a great position with our our current assets to to service that growth.
Our next question will come from Phil Ng of Jefferies. Please go ahead.
Hey, guys.
No. It doesn't sound like you saw much pull forward into Q for roofing comps are relatively easy in the second half due to weaker storm dynamic.
Appreciate your you expect outpaced the market given the strength you saw in the first half would imply a pretty noticeable deceleration.
Just curious.
You know what we should think about the next few quarters are you just being kind of conservative just because storm to just tougher deck any color would be helpful.
Is your question more on the market outlook or our volumes within the market just so I'm clear.
A little bit of both Red because you, obviously outpaced the market pretty noticeably into Q.
And for.
Your trends to be.
I mean, the market be flattish for you can be a little bit above that.
Imply flat on his back add just seemed like comps are relatively easy and if there is no pull forward.
We could see a little more growth than that.
Yeah, Phil No I. Appreciate your question, let me start a little bit with the market I mean, we came into the year.
With some of the image within expectation in terms of manufacturer shipments at the manufacturing shipments for the year would probably trail out the door sales because of some of the fourth quarter inventory build that we saw.
I think in the second quarter volumes the market volumes were very strong.
And after a pretty wet spring.
I think we saw when their dry days there is theres a lot of activity and out the door sales are strong we're seeing our retail customers have strong out the door. When we talk with our contractors. Their backlogs are in a very good spot. So I think overall, we feel like.
We were able to kind of see look into the back half and think we're probably gonna have a little bit stronger market based on good repair remodeling activity and through the first half, particularly in the second quarter, we've seen quite a lot of smaller storms, we call pockets storms in local communities.
And if that pace of storm activity continues into the back half I think we could see a little bit stronger storm activity than than average.
So those are kind of at a market level, we continue to see strong out the door sales tied to repair remodeling growth, we've seen storm activity through the second quarter.
That puts us on a pace to be slightly above averages and thats, where we raised the overall market outlook in terms of.
Our our volume opportunity I think in terms of our opportunity.
Q2 was a big catch up for us. So I think we we still would expect that theres. Some opportunities in terms of Q3, Q4, where we're going to track a little bit better given some of the Geo mix headwinds, we faced last year and some of the customer positions. We have so I think we're we're probably dialing down that I think the our volume opportunities to outperform the market are less clearly since we had a pretty big catch up in Q2, but I still think there is some opportunities as we move forward in the back half.
Our next question will come from Ken Zener of Keybanc. Please go ahead.
Good morning, gentlemen.
Right based on your comments it sounds like rest price.
Kind of decline sequentially.
Just if you could kind of confirm that and maybe give a baseline for what.
Commercial is doing and then Michael.
You talked about most of the curtailment costs.
Being in the first half versus second half could you perhaps be explicit to how much.
Occurred in the first half is at 80%.
Thank you and did the volume you gained from price.
Absorb the 4% of your capacity that was curtailed. Thank you.
So Ken let me, let me sort of talk a little bit about the price decline through the quarter. You are absolutely right I mean, as we we came into the quarter in our resin inflation business, we were making pricing adjustments through the quarter.
So we we clearly kind of what we saw good price performance in Q2.
As we exited Q2 I think the pricing adjustments are going to are going to turn into a negative comp for us as we move through the back half of the year. So I think the January increase we pretty much have not seen any realization on that.
And the price momentum in the business for the full year is really going to be tied now to just to carry over pricing.
And then Ken in regards to your curtailment cost question, maybe just to set a baseline so in the first quarter.
We had incremental cost of 16 million related to our north American residential insulation business for the second quarter that was 20.
So a total of 36 year to date.
What I said in my prepared remarks that as we look to the second half.
It would be our expectation that the second half is less than the first half clearly the second quarter was the high market at 20 20 million, we will still have meaningful amounts of curtailment, both in the third and fourth quarter, but it will be I'd say modestly modestly less.
Than what we experienced in the first half of the year.
Our next question will come from Justin sphere, Zelman and associates. Please go ahead.
Thank you I wanted to see if you could dig in with US on these margins or roofing because you when you when I see a 13% increase in volumes in front of a price increase makes me think that the distribution inventories maybe a little bit Fuller ahead of that price increase that maybe it was the case in front of the April increase.
And with that being the case and the jury is still out on that success or not of the July price increase.
Can you help us understand how margins look in the back half in a.
If you're not successful snapping relied on asset call asphalt costs, which are clearly higher if you're not successful and the price increase how the margins cadence and Conversely, if you are.
How do you think the margins cadence.
Okay. Thanks, Justin Let me, let me kind of take them in order and we'll try to catch up I think in terms of volume comps again in terms of pre buy or inventory levels.
We do our best in terms of customer checks to look at our inventory levels relative to their outdoor sales of our products. So.
I think distributors through the second quarter were buying our product in anticipation of the demand that they were seeing in the quarter. They didn't buy a product is heavy in the previous two quarters. So I think they were playing a little catch up on their inventory positions with our product.
And as I look at volumes and the order book in July we've we've kept pretty solid so.
That that's my reference to when we do our channel checks around inventory positions relative to out the door sales and and the buying patterns. We continue to see in July .
We feel pretty good that that was that was buying two to expected near term demand not a big piling of inventory against the July increase so.
I think in terms of margin outlook as we as we go through the back half the year in roofing.
We would we would continue to expect to see some improvement across I mean on a first half versus second half basis, we're going to see the impacts of the price increase in April kind of rolling through the back half.
And we're going to see some improvements in production and manufacturing performance with some of the productivity efforts that we've put in place in Q1 and Q2.
Are going to generate meaningful performance benefits in the back half of the year.
And we get little bit of volume leverage as we move in the back half of the year. So I think that we feel very good on the margin improvement performance in roofing, even if we don't get to July increase, but I would share with you I mean look we we look at our asphalt cost inflating and believe that that price increases is needed to offset that and we're going to push hard for that.
And just and I know you get this but theres some simple math at work as well in regards to EBIT margins.
So you know our contribution margins remain healthy.
We're offsetting inflation with price, but as price goes higher.
And you deliver the same level of absolute EBIT margins get compressed, but I'm sure you understand that.
Got it so its tier yet it looks like we have time, probably for one more question.
Okay. Thank you and the next question will come from Gary its noise of Longbow Research. Please go ahead.
Great. Thanks for sneaking me I had a question on technical installations will look at the.
Q and how you're breaking out the results by geography.
It looks like there was a decline on the installation.
Site in pretty much all regions in the second quarter. So I'm just trying to square.
If you're expecting the softness to continue in the second half of the year.
In non residential markets and if thats contemplated in your statements expecting full year growth on technical.
Hi, guys. Thanks for the question a little bit more about our technical and other building insulation business mean across the board I'd say that we do expect to see continued revenue growth and earnings growth as we as we move through the back half the year.
And that was.
Part of it a big part of our insulation strategy too.
Really grow our business globally for product platforms that that service low medium high temperature applications and markets around the world move more into industrial and commercial applications.
And that with with more stable margins.
And Thats, what Weve, what we're seeing in terms of market performance. So I think a little bit in the first half what we saw and I spoke about.
Our mineral wool business in Europe . There are a few countries that that we have high share positions that we've seen the market headwinds b a little worse in terms of.
Particularly in Finland, and Sweden, So I think thats impacted a little bit of the performance that you see in the European I think the other big thing, though is across the portfolio. It's a global portfolio, we saw quite a negative impact of currency translation in the second quarter and that really impacted in terms of the revenue and even the earnings inside of this but we think that that kind of flattens out as we go forward on eight on a year over year comps. So overall in the technical another insulation businesses I think we're well positioned in terms of we're seeing growth in our mineral wool business, our phone glass business positioned well in the back half.
Our pipe and mechanical our distribution business in North America, we are bringing on new products and growing the business. There in our regions are performing well. So overall I think we we do expect an outlook in the back half to grow revenue and earnings and our technical another installation business.
And then Gary maybe just add a few specifics for for clarity so within the insulation segment for FX at the revenue line.
For the quarter about $20 million headwind largely all in Europe .
Thanks.
Ladies and gentlemen, this will conclude our question and answer session. At this time I'd like to turn the conference back over to Terry Denny for any closing remarks.
Very good well. Thank you everyone for joining joining us for today's call and with that I'll actually turn it back to Brian Chambers for a few closing remarks. Thank you Terry and thanks, everyone for your questions today.
As I stated at the beginning the call I'm pleased with our overall financial and operational performance in the second quarter, I think weve executed well against our three operating priorities really all aimed at strengthening the earnings power of the company and creating value for our shareholders I believe the the progress we've made in the first half of the year puts us in a good position to capitalize on market opportunities in the back half.
So I want to thank you for your interest in our company and for your time today.
The conference has now concluded we thank you for attending today's presentation. You may now disconnect your lines.