Thierry J. Denis - Vice President-Investor Relations Michael H. Thaman - Chairman, President & Chief Executive Officer Michael C. McMurray - Chief Financial Officer & Senior Vice President.

Mike Wood - Macquarie Capital (USA), Inc. Keith Hughes - SunTrust Robinson Humphrey, Inc. Scott Rednor - Zelman & Associates Kenneth R. Zener - KeyBanc Capital Markets, Inc. Michael Jason Rehaut - JPMorgan Securities LLC Philip Ng - Jefferies LLC Kathryn Ingram Thompson - Thompson Research Group LLC Alex J. Rygiel - FBR Capital Markets & Co.

Robert Wetenhall - RBC Capital Markets LLC Reuben Garner - BB&T Capital Markets.

Good morning and welcome to the Owens Corning Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Thierry Denis, Vice President of Investor Relations.

Please go ahead..

Thank you, Gary, and good morning, everyone. Thank you for taking the time to join us for today's conference call and a review of our business results for the second quarter 2016. Joining us today are Mike Thaman, Owens Corning's Chairman and CEO; and Michael McMurray, Chief Financial Officer.

Following our presentation this morning, we will open this one-hour call to your questions. Please limit yourselves to one question and one follow-up. Earlier this morning, we issued a news release and filed a 10-Q that detailed our financial results for the second quarter.

For the purposes of our discussion today, we've prepared presentation slides that summarize our performance and results for the second quarter of 2016 and we will refer to these slides during this call. You can access the earnings press release, Form 10-Q and the presentation slides at our website, owenscorning.com.

Refer to the Investors link under the corporate section of our homepage. A transcript and recording of this call and the supporting slides will be available on our website for future reference. Please reference slide 2 before we begin, where we offer a couple of reminders.

First, today's remarks will include forward-looking statements based on our current forecasts and estimates of future events. These statements are subject to risks, uncertainties and 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 available on owenscorning.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 from period to period.

Consistent 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. In the second quarter, we have utilized an effective tax rate of 33% on adjusted pre-tax earnings, the midpoint of our 2016 range.

We also use free cash flow as a measure helpful to investors to evaluate the company's ability to use cash to pursue opportunities that enhance shareholder value. For those of you following along with our slide presentation, we will begin on slide 4.

And now, opening remarks from our Chairman and CEO, Mike Thaman, who will be followed by CFO, Michael McMurray. Mike will then provide comments on our outlook prior to the Q&A session.

Mike?.

Thank you, Thierry. Good morning, everyone. Welcome to our second quarter 2016 earnings call. Second quarter revenue was $1.55 billion, up from the $1.4 billion one year ago. Adjusted EBIT for the quarter was $253 million, up from $156 million in 2015. Adjusted earnings for the quarter were $150 million, up from $90 million in the prior year.

Owens Corning posted a record quarter and our businesses continue to perform at a very high level. The Composites business continued the momentum it has established over the past several years. The Roofing business executed well in favorable market conditions and delivered an outstanding quarter.

The Insulation business delivered its 20th consecutive quarter of EBIT growth. The outstanding profitability in the quarter, along with strong cash performance demonstrates the strength of our portfolio. Now, as I do every quarter, I will review our performance as it relates to the expectations we set on our last earnings call.

We said that we would continue to make progress toward our goal of creating an injury-free workplace. Owens Corning continues to perform at a very high level of safety with a recordable incident rate of 0.53, which is relatively flat with the first six months of 2015.

Nearly three quarters of our facilities have operated this year without a recordable injury. In Insulation, we said last quarter that we expect slightly negative revenue growth and relatively flat margins for the full year. Revenues for the quarter declined $37 million on lower volumes as a result of a change in our share position in the U.S.

residential new construction market that we discussed in our last earnings call. Despite the revenue decline, EBIT increased $7 million over the prior year period. In Composites, we said we expected continued growth in the glass fiber market, driven by moderate global industrial production growth.

We expected the business to improve EBIT by at least $30 million on price and volume growth, which would represent more than $110 million of EBIT improvement over two years. Composites delivered record EBIT in the quarter.

EBIT grew by $7 million, with 14% EBIT margins on continued volume and price improvement, and strong commercial and operational execution. In our press release this morning, we also announced plans to invest $110 million in the expansion of our composites operations in India to serve the growing Indian market.

This investment is consistent with our low-delivered cost strategy and will provide flexibility to minimize future capital investments in higher cost facilities. In Roofing, we had previously indicated that there may be upside to our earlier guidance of modest market growth in 2016.

We also said that the InterWrap acquisition could contribute at least $160 million of revenue and $25 million of adjusted EBIT this year.

Roofing had an extraordinary second quarter, delivering $169 million in EBIT, a $79 million EBIT improvement over the same quarter in 2015, with 25% EBIT margins as a result of higher volumes and lower asphalt costs. The shipments of the U.S.

asphalt shingle industry grew more than 20% in the first half of 2016, supported by strong storm-related demand, as well as continued growth in replacement roofing and new construction. During the quarter, we closed on the InterWrap acquisition. The integration is proceeding very well and providing even more benefit than we had initially projected.

I am impressed by the quality of the InterWrap team and very proud of our execution on the deal. The business didn't miss a beat and had a great quarter as a part of Owens Corning.

For the first half of the year, our strong EBIT performance and continued focus on working capital has produced a $217 million improvement in free cash flow over the same period in 2015. With that, let me now turn to the outlook for the remainder of 2016.

For our Composites business, we expect continued growth in the glass fiber market, driven by moderate global industrial production growth. We continue to expect 2016 EBIT growth of at least $30 million for the business. In Roofing, we anticipate second half industry shipments will be slightly down to flat versus the prior year.

Given growth in shipments of more than 20% in the first half, this would produce full-year growth of low double digits. The integration activities of our InterWrap acquisition continue, and we now expect this business to deliver at least $30 million of EBIT in 2016, which is an increase from our previously announced expectation of $25 million.

In Insulation, we continue to expect slightly negative revenue growth and relatively flat margins for the full year. We are realizing some recovery of market share losses and are adjusting our production plans to match demand. We continue to believe that growth in U.S.

residential new construction will tighten capacity and create more favorable market opportunities for us as we progress further into the second half of this year and continue into 2017. Overall, we anticipate continued growth in U.S. housing starts and moderate global industrial production growth for 2016.

As a result of our business performance, we anticipate Owens Corning will deliver full year 2016 EBIT of $700 million or more. With that, I'll now turn it over to Michael, who will further review details of our business and corporate performance. I'll then return to recap and open the call up for questions.

Michael?.

Thank you, Mike, and good morning, everyone. As Mike mentioned earlier, Owens Corning delivered an outstanding quarter. We delivered an all-time record quarter of financial performance with adjusted EBIT of $253 million, which represents an improvement of almost $100 million.

The company also delivered consolidated operating margins of 16%, another record. In addition, the company surpassed a significant milestone, delivering more than $1 billion of adjusted EBITDA in the trailing 12-months. Now, let's start on slide 5, which summarizes our key financial data for the second quarter.

You will find more detailed financial information in the tables of today's news release and the Form 10-Q. Today, we reported second quarter 2016 consolidated net sales of $1.55 billion, up 10% compared to sales of $1.4 billion reported for the same period in 2015.

Net sales in our Insulation business decreased $37 million, primarily on lower sales volumes, partially offset by favorable customer mix. Higher sales of $20 million in our Composites business were primarily the result of increased sales volumes and higher selling prices.

In our Roofing business, net sales were up 35% from the prior year on higher sales volumes. Adjusted EBIT for the second quarter of 2016 was $253 million, up 62% compared to $156 million in the same period one year ago. This represents a record quarter for the company.

Adjusted earnings for the second quarter of 2016 were $150 million, or $1.29 per diluted share compared to $90 million or $0.76 per diluted share in 2015. Depreciation and amortization expense for the quarter was $82 million, up $6 million compared to the second quarter of 2015. Our capital additions for the quarter were $93 million.

In the first half, the company improved free cash flow by over $200 million as a result of improved earnings and better working capital management. In the past year, we have improved our cash conversion cycle by about 10 days.

Now, please turn to slide 7 where we provide a high-level review of our adjusted EBIT performance, comparing the second quarter of 2016 with the second quarter of 2015. Adjusted EBIT increased by $97 million, with all three businesses showing increases over the prior year.

With that review of key financial highlights, I ask you to turn to slide 8 where we provide a more detailed review of our business results, beginning with our Insulation business.

Sales in Insulation of $414 million were down $37 million from the same period a year ago primarily on lower volumes due to decreases in contract manufacturing and the loss of market share in our U.S. residential business that we discussed on our last earnings call.

In the quarter, residential fiberglass insulation average selling prices were up slightly as a result of the market share loss being at the low end of the price curve.

The business recorded its 20th consecutive quarter of EBIT growth, delivering $32 million in the second quarter compared to $25 million in the same period one year ago, primarily on improved mix and cost deflation. Industry estimates indicate that demand in the U.S.

residential insulation market grew 8% in the first half of the year and we expect continued growth in the second half. We continue to believe that growth in U.S. residential new construction will tighten capacity and create favorable market opportunities as we move into the second half of the year and into 2017.

While our fundamental outlook for the earnings potential of the business remains unchanged, it is unlikely that we will see continued year-over-year improvement in the second half of the year as we begin to see the impact of production curtailments.

For the full year, we continue to expect slightly negative revenue growth and relatively flat margins versus 2015. Now, I will ask you to turn your attention to slide 9 for a review of our Composites business. Sales in our Composites business for the second quarter were $517 million, up 4% compared to the same period in 2015.

Price and volume continued to improve at rates similar to prior quarters. EBIT for the quarter was $74 million, $7 million higher than the same period last year, on continued volume and price improvement as a result of strong commercial execution. Our Composites business set new records for both earnings and operating margins in the quarter.

In 2016, we expect continued moderate global industrial production growth to drive the glass fiber market. We continue to expect an EBIT improvement of at least $30 million in 2016.

We are pleased with the progress that we have demonstrated in the Composites business over the past couple of years, including significant improvements in operating margin and return on capital.

Strong commercial and operational execution combined with a low cost manufacturing network and a high capacity utilization environment, position this business to continue the momentum we have established. As Mike indicated earlier, we have decided to invest in the growth of the Indian market.

We were pioneers in the glass fiber market in India over two decades ago and have been instrumental in developing new market applications. The glass fiber market in India has grown at double-digit rates over the last 10 years and the expectation is for continued strong growth. The company has a leading market position that produces attractive returns.

The $110 million investment will expand capacity at an existing low delivered cost Composites site in India and is expected to begin startup operations in 2018. The expansion will also provide us with flexibility to potentially avoid capital investments in higher cost facilities over the next couple of years. One additional item.

At our Investor Day last fall, we provided an outlook to lower rebuild activities over the four-year period, 2017 to 2020. Over the period 2013 to 2016, we have rebuilt over 50% of our capacity. In the coming four-year period, we expect to rebuild about 20% of our capacity.

Numerous investors have asked us to quantify the benefit of the reduced rebuild schedule. As a result, I am happy to report that we will spend about $120 million less in capital expenditures on rebuilds over the period 2017 to 2020 versus the previous four-year period.

Finally, we had previously announced plans to acquire the non-wovens and fabric business of Ahlstrom. Yesterday, we mutually agreed with Ahlstrom to terminate the acquisition agreement due to challenges associated with obtaining regulatory clearance in Germany. Slide 10 provides an overview of our Roofing business.

Roofing sales for the quarter were $679 million, a 35% increase compared with the same period a year ago, primarily on higher sales volumes, and the impact of the InterWrap acquisition which contributed $56 million in sales for the quarter. Shipments for the U.S.

asphalt shingle industry were up a little over 20% in the first half of the year, driven by significant storm activity in the Southwest and continued growth in age related re-roof and new construction. EBIT in the quarter was $169 million, up $79 million compared to the same period in 2015.

The increase in EBIT was driven by higher sales volume and lower asphalt costs. Roofing delivered 25% EBIT margins in the second quarter due to favorable underlying margin and the benefit of strong fixed cost leverage. We experienced asphalt deflation of $39 million in the quarter, in part driven by strong volumes.

While we do expect incremental asphalt deflation in the third quarter, the bulk of deflation for 2016 has been realized in the first half of the year.

The overall market dynamics continue to be constructive, with prices that were broadly stable in the second quarter with some sequential progress towards the end of the quarter resulting from our June price increase. We are pleased with the performance of our Roofing business and we expect the U.S.

asphalt shingle market to grow low double digits in 2016. We anticipate that the second half market size for 2016 will be slightly down to flat compared to the strong second half experienced in 2015. Second half margin rates are expected to be broadly in line with the second half of 2015.

This is sequentially down from the second quarter, primarily as a result of lower leverage. I would remind you that margin rates in the second half of 2015 were strong and we were pleased with the underlying performance of the business.

Last quarter, we told you that we expected the acquisition of InterWrap to be accretive to earnings this year and contribute at least $160 million in revenue and $25 million of adjusted EBIT in 2016. I'm pleased to report that the acquisition has delivered solid results in the quarter and integration activities are off to a strong start.

As a result, we have improved our outlook for InterWrap with 10% better revenue and at least $30 million in adjusted EBIT. Now, let me turn your attention to slide 11. In the second quarter under a previously announced share repurchase program, we repurchased 1 million shares of the company's stock for $48 million at an average price of $48.63.

As of June 30, 2.8 million shares remain available for repurchase under the company's current authorization. As we balance our priorities for the future deployment of our free cash flow, both dividends and stock repurchases will be important mechanisms to return capital to shareholders.

Now, please turn to slide 12 where I provide our outlook for 2016. We are optimistic about the earnings growth potential for Owens Corning. Consensus expectations for U.S. housing starts are at 1.2 million units and moderate industrial production growth is projected.

For the full year 2016, the company expects adjusted EBIT of $700 million or more, which would represent an all-time record year of financial performance. We expect to generate over $400 million of free cash flow in 2016. We continue to expect free cash flow conversion averaging about 100% over the years 2015 to 2018.

I would remind you that we had very strong free cash flow conversion in 2015 and we expect another strong result in 2016, consistent with our goal. Now, please turn to slide 13 where I provide guidance on other financial items for the year. We expect corporate expenses between $120 million and $130 million.

Capital additions will be about $385 million, including approximately $50 million of spending associated with our new mineral fiber insulation facility in Joplin, Missouri. Depreciation and amortization expense is expected to be about $320 million.

Interest expense is expected to be about $115 million, including interest costs associated with the financing of the InterWrap. Our $2 billion U.S. tax NOL will significantly offset cash taxes for some time to come.

As a result of our tax NOL and other tax planning initiatives, we expect our 2016 cash tax rate to be 10% to 12% of adjusted pre-tax earnings. Our 2016 effective tax rate is expected to be approximately 32% to 34% of adjusted pre-tax earnings. Thank you. And I will now hand the call back to Mike..

Thank you, Michael. Owens Corning had an outstanding quarter, delivering record quarterly EBIT, with EBIT growth in all three businesses. We also delivered outstanding cash performance in the first half. Owens Corning is a stronger company as all three businesses are making meaningful contributions to our financial results.

Given the strong start to the year, we now expect full-year adjusted EBIT of $700 million or more. I will turn the call over to Thierry who will lead us in the question-and-answer session.

Thierry?.

Thank you, Mike. Gary, we're now ready to begin the Q&A session..

We will now begin the question-and-answer session. The first question comes from Mike Wood with Macquarie. Please go ahead..

Hi. Good morning. I just wanted to get some more color on the 10-Q you filed with the Roofing price being down 7%. I just want to understand your comments that pricing was broadly stable in the quarter with some progress at the end.

If you could just bridge what was causing that, if it was mix or something else?.

Sure, Mike. This is Mike. In the Q, we disclose Roofing on a year-over-year basis, so the 10-Q disclosure is 2Q 2016 versus 2Q 2015. Generally, in our management of the business, we tend to think about the business much more in terms of sequential performance. So our comments on the call today are related to first quarter pricing in Roofing.

We saw a pretty good price performance in the second quarter. I think on the last quarter call, we had alluded to the fact that late in the first quarter we had seen a little bit of price erosion coming into the second quarter.

Prices were relatively stable, and then through the quarter we actually got some price associated with the June price increase, so we finished the quarter with better prices than what we had ended the quarter with.

The comp versus last year is really a timing issue versus how pricing played out in the first quarter and the second quarter of last year and it really had nothing to do with the way we see pricing now or really our pricing outlook. We're relatively bullish on pricing here in the third quarter.

There was another August price increase out there today and we think we should have market conditions that would support some realization of that. So we think sequentially pricing through 2016 will be a positive for Roofing..

Great. And can you just provide some color in terms of the methodology of how you think about that low-double digit Roofing shingle industry backdrop for the year.

Just what kind of visibility do you have in the back-half and sort of why it would be down versus being up?.

Yeah. Obviously, in terms of our outlook, that's a very important part of our guidance estimates that we've put together today for the corporation. We have actual data for the first half of the year and we disclosed today that first half shipments were up more than 20%.

The Roofing business – the roofing industry typically ships a little bit more than half of its shingles in the first half than the second. So when you weight average the first half and the second half, plus 20% in the first half would produce greater than 10% in the second half if the second half were in fact flat.

So we've said that we think the overall market based on our estimates would be up low-single digits, call it, 10%. If that were the case, then the second half would have to be slightly down to offset a first half that's more than 20%. Now, if you look at the timing on that, we actually had a very strong second half last year.

There were some late-season storms in the fourth quarter. I think if you listened to our fourth quarter transcript – or read our fourth quarter transcript, we were quite pleased with fourth quarter volumes, and we don't really forecast weather.

So we'd expect that from a market condition point of view, we have momentum carrying out of the first half associated with good growth in reroof demand, decent new construction numbers, and some spring storms that are continuing to drive some demand typically in the Southwest.

So we have the momentum that will carry us into the first part of the second half, but then we'd expect in the late part of the second half, unless we have some late-season storms, we'd start to comp a bit negatively to last year.

So it's really not hard for us to see if we triangulate it a couple different ways that the full year would be up low-single digits; the second half would be flat to maybe down coming off of a very strong first half..

The next question comes from Keith....

But – I'm sorry. I'm sorry. (25:49) I misspoke. Low-double digits in terms of the overall growth of the market for the full year. I'm sorry about that..

The next question comes from Keith Hughes with SunTrust. Please go ahead..

Thank you. My question is in Insulation. You had referred to, I believe, some capacity curtailments that are coming in the second half of the year. Can you give us any sort of feel of how much capacity you think you'll be taking down? And the second question on that would be on the demand.

You talked about tightness coming in the market; picking up market share that way. Now, it feels like more of a 2017 issue than a second half of 2016, but would like any of your views on that topic as well..

Sure, Keith, happy to talk about that. First of all, I just want to clarify some of the comments we made today regarding Insulation. I mean, obviously, Insulation from a margin point of view had a very good second quarter.

I think what you're seeing in the business is we did have a loss of revenue that we talked about on our last call, but the profitability of the U.S. new construction market is still below our expectations and below what we need in terms of performance for that business.

So the loss of revenue really did not produce a significant impact on us in terms of loss of margin in the quarter. As a result, we were able to – margin dollars, we are able to actually grow EBIT in a down revenue quarter.

That's not going to be the case we believe going forward as a lot of the production curtailments we took in the second quarter did absorb some fixed cost in the inventory.

And what we have in terms of cost in inventory today will be higher as it comes through in the third quarter and the fourth quarter than the product we shipped in the second quarter. So we're not going to be able to carry that through into the second half.

And as Michael said, it is our expectation that the second half of the year we'll begin to comp negatively versus prior year. Having said that, we are seeing overall growth in the market. We said today on the call that we think in the first half market demand in U.S. residential new construction was up about 8%. The market is very seasonal.

The second half is always stronger than the first half both on the re-insulation side, people tend to re-insulate when winter is coming, and on the new construction side, all the housing starts that are started in the second quarter and third quarter of the year are insulated in the third quarter and the fourth quarter of the year.

So we expect both the new construction side and the re-insulation side of the year to be quite a bit stronger in the second half than the first, consistent with history. As a result of that, I think if you look at full year capacity utilization for the industry, you can come to the conclusion that we may not see tightness this year.

If you look at it kind of on a quarter-by-quarter basis and look at the seasonality of the second half, capacity doesn't flex with seasonality. Capacity is fixed on a monthly basis. Our estimates would still say it's going to be pretty close in the second half of 2016.

So we don't have a really clear read on that, although we expect that we could see some tightening, and we'll probably know better in the September/October timeframe. So I think by the time we get to the third quarter call, we'd have pretty clear visibility to how the industry has played out for this year.

Obviously, our view has been and continues to be that if we see another year of kind of 10% growth in new construction, that 2017 we would see a year where industry capacity begins to hit up against its limitations and we'd then be in a position where we would have the bulk of available capacity in the industry and we'd be able to benefit disproportionally both in terms of volume and also pricing..

Thank you..

The next question comes from Scott Rednor with Zelman & Associates. Please go ahead..

Hi. Good morning..

Good morning, Scott..

Within the Insulation top-line guidance for the back-half of the year, what's the expectation with – for – you say the customer loss on one end dragging it down, but what's the expectation to kind of get back to a slightly negative full year rate which apply acceleration from what you saw in 2Q?.

Well, obviously, our guidance for the full year is that we think revenue will be about flat. Inside the Insulation segment, we've got a lot more going on besides just U.S. new construction. So we have a very nice business in Asia, nice business in Latin America. We do well in Canada. We've got mechanical and industrial products. We have foam product line.

And as you might expect, consistent with kind of economic growth and particularly growth in housing in the U.S., all those businesses are growing.

So we think that kind of the guidance we've given of slightly down revenue or flattish-type revenue and flattish-type margins that we've said for the business would be that those businesses would give us enough growth to offset the share loss that we've experienced in U.S. residential new construction.

Having said that, our teams are at work trying to improve our share position in U.S. residential construction. We don't believe that we will be able to restore all of our share this year, and that's not really the goal we've given to our team.

We're out there trying to win business and earn business and don't feel that we are in a position where we have to go crashing into the market to try to get all that volume back. We would like to see the market conditions improve in terms of pricing before we move more aggressively in terms of volume.

So as we sit here today, we are working our way back into a market position that would be acceptable to us. But for the remainder of this year, we expect that our market share will be below our historical expectations and our historical performance..

Thanks for that. And then quickly on the CapEx side, I appreciate the additional color on Composites. If you think for the overall corporation, I think there was a guidance at the last Analyst Day that CapEx would trend back closer to D&A overall and now you have the incremental investment in India.

So is that still a fair guidance measure as we think about capital spending overall? It will just be lumpier? Or how should we think about that updated spending for the overall entity?.

Yeah. Scott, hey, it's Michael.

How are you doing today?.

Good. Thank you..

Hey, yeah. So at our fall Investor Day, we gave guidance to 100% of D&A over the next three years, so 2016 through 2018, with being above D&A in 2016 and then trailing below in 2017 and 2018. And that was on the basis of kind of announced and approved growth investments. So obviously the Indian investment wasn't in the number at that time.

By factoring in the Indian investment and our latest outlook we would track slightly above that, but below – certainly below 110% of D&A.

The other thing I would point out is that the company from a free cash flow perspective is generating very strong free cash flow and our conversion of net income has been high and will continue to be high over that period of time..

The next question comes from Ken Zener with KeyBanc. Please go ahead..

Good morning, gentlemen..

Good morning, Ken..

Mike, you said OC has the "bulk of available capacity in the industry" referring to fiberglass and referencing your slide. I believe the majority of what you're referring to is the mothballed units given the 90% utilization for the industry.

If the demand grows 10% next year, if one were to assume that, would that require the industry to be really activating these mothballed units? I mean, if we knew that the new starts were going to grow 10%? Because it seems as though that would put the utilization rate for the industry really into that mid-90% where the industry always had to go into new lines, reactivating the mothballed, or you'll have to go into an allocation mode.

Is that the wrong math? Or can you express that and what you meant by the bulk of available capacity in the industry?.

Yeah. I think generally that was – what you said is consistent with the way we laid out our view of the industry at our Investor Day last year and the way we talk through some of our investor materials that are posted out on our website.

What has happened historically is that all of the existing lines in the operating facilities tend to get turned on to meet demand.

The other thing manufacturers can do is run full out the full year so that you produce inventories in the first half that then get depleted in the second half so that you can increase your effective monthly capacity in the second half of the year when demand is higher.

And then when you run up against real bottlenecks, where you run up against capacity, historically I would say that that's typically a time other building material product lines are also running up against bottlenecks and the pace of construction and the cycle of housing from start to completion tends to extend a little bit because bottlenecks start to appear in the system, insulation being one of them.

If you look through the last cycle, in fact, some of these plants that were mothballed were operating at the peak of the last cycle. Our view, the way we've characterized those plants at least in the Owens Corning network, is similar to how the utility industry would talk about a peaker.

They tend to be relatively high cost plants, difficult to bring up and you have to believe that you've got high levels of profitability that will sustain for at least some period of time to make it worth the effort to put capital into those facilities and put a team in place to get the plant up and running.

So we would expect the industry would probably run up against bottlenecks for a period of time before you'd see any of the mothball capacity come on..

Okay. And then relative to the India capacity, which is probably about similar size to, I believe, your Chinese plant that you opened up three years or four years ago.

Could you – given that China designed for the win, just left off (35:44), you've obviously rebooted where that volume goes now, can you talk about how you're framing the risk to reward of this investment in India? Adding a lot of capacity, obviously, you have a very strong position there.

But how can we think about those risks to rewards being appropriately measured given what happened in China in terms of the end demand product mix shifting? Thank you very much..

Yeah. Ken, it's Michael. I would have you think about the investment that we're making in India as really a network decision versus purely as India for India. Clearly, as I highlighted in my prepared remarks, we have a very strong position in India. It has grown significantly over the past decade and is expected to continue to grow.

And we certainly want to maintain our strong position in India. But again, I would think of it as a network decision. Some of these volumes can and will be exported to other countries in the world..

The next question comes from Michael Rehaut with JPMorgan. Please go ahead..

Hi. Thanks. Good morning and thanks for taking my question. First, I just wanted to hit on the Roofing performance, and congrats on that, obviously..

Thank you..

I think over the last quarter or two, it's certainly been a little bit of a source of upside to say the least, and in terms of taking that into account and thinking about the outlook for the back-half, where would you expect potential upside to come from? You said that essentially your cost deflation on asphalt, you're effectively perhaps anniversarying the benefits there.

Therefore, would you expect it to be coming more from volume or perhaps a little bit better realization of the price increases that have been put out there?.

Sure. This is Mike. I mean, let me just start with – Roofing has really come a long way in the last 18 months. If you remember back to the first half of 2015, we were coming out of a 2014 that had been very challenging.

We had pretty compressed margins in the first half of last year and we were hoping to have more balanced demand and allow asphalt deflation to improve our margins through the course of 2015. And that's in fact what happened.

So if you look out 2015, while the first half results we were kind of working our way back towards what were attractive margins in the second half of 2015, we really had a very, very good second half last year. So the comp that we're heading up against is a comp that we're very proud of and a business that performed at a very high level.

I think if you then look at how that played out this year, we carried those very good margins over into the first half. We had good first quarter volumes that were consistent with what we thought was selling through.

We didn't have the big inventory build in the industry, and then we saw a nice uptick in volumes primarily related to underlying growth in reroof, an early spring as well as some spring storms in the Southwest that powered a very, very strong volume profile in the second quarter.

So as you head into the second half, comping against last year and being able to do that successfully to us is a pretty high water mark. And yet, I think all three places where you talked about some potential for upside to the second half could materialize.

So on the volume side, we are continuing to see good volumes as we get into the early part of the second quarter – third quarter. Obviously, there's a wild card always in terms what we're going to see in terms of third quarter or fourth quarter storm demand.

I had commented earlier that we've seen some sequential price improvement from the first to the second that we exited the second with a little bit better prices than we entered the second. That should lead to some price improvements here in the third quarter as we go through the year.

And then as Michael said in his comments, there is some residual asphalt deflation that's still out there, although not as significant as what we've seen over the course of the last four quarters or five quarters. So we've still got a lot of indicators heading in the right direction. I think for us, the tough one to forecast is volumes.

And I think from a guidance point of view, the reason why we typically wait until the second quarter to give corporate guidance and our guidance tends to have a fairly large range is that's a very difficult variable for us to predict..

Okay. Thanks, Mike. I appreciate that.

And so just to be clear before I hit the second question, to the extent that volume trends and pricing trends continue, it does sound like perhaps there could be a little bit of upside, but obviously still a lot of work – a lot to go through December, correct?.

Yeah, I think – I mean, the big – this one area I'd reiterate would be volume. We would say that for overall growth for the full year of around 10%, that low-double digit type number, that would imply the market is down in the second half.

If you had a different view than that or thought the market was going to be more vibrant, you'd probably be more bullish than what we've talked about today..

Okay. Just on – and the second question on Composites and specifically, Europe, obviously, a lot of noise around the recent Brexit news and concerns around U.K. and Europe.

I was hoping just to get a little detail around how Europe has trended in the Composites business, let's say, first half and even second quarter year-over-year from a volume or revenue growth perspective, what the expectations are perhaps for the back-half, and if you've seen any change in trend – obviously very early on, but if you've seen any change in trend over the last month?.

Yeah, thanks, Mike. It's Michael. And just for clarity, we have de minimis exposure to the U.K. So I want to be clear about that. What I'd frame for Europe overall, so as I said previously, last year probably surprised us to a bit the upside, predominantly, as a result of commercial execution but the market was good.

In the first half of this year, the market has continued to grow and is fairly positive. And thus far we haven't seen any negative implications from Brexit. But we're clearly watching..

The next question comes from Philip Ng with Jefferies. Please go ahead..

Hey, guys.

Do you have a sense if there was any pre-buy or – and how inventory levels are shaking out at the distributor level for Roofing in 2Q? And historically, have you seen, after big storms, do volumes usually taper off right after the quarter, or do you see some follow-through?.

Yeah. It's a really good question, Philip. And we've spent a lot of time thinking about and analyzing that question. Typically, in the storm areas, the initial bottleneck is the manufacturer's ability to keep up with demand.

So what you see when you have a spring storm season is, the affected regions are trying to pull on as much production and as much manufacturer inventory as they can get their hands on, typically because they go to work very, very quickly and a lot of roofs are getting done.

So we saw early in the quarter a surge in buying from the affected storm areas. In fact, that surge was so significant that we began to support the Southwest primarily from other facilities as far away as the Midwest and the West Coast.

So we began to get tight in other parts of the country because of the support that we were offering to the storm related areas in order to keep them going.

That typically then does affect the distributors or the channels in those areas who are concerned about their ability to get product and will maybe buy a little bit ahead and build up their inventory positions in order to ensure availability of product for themselves so that all the product doesn't end up coming out of region and going into the storm regions.

Our sense would be that maybe some of the non-storm regions carried a bit of inventory at the end of the second quarter or carried a bit of inventory out of the second quarter and that the storm regions are probably operating today at a rate consistent with their ability to do jobs on the job site.

So it's not that they worked their way through all the storm demand, but that the bottleneck today would be contracting crews and re-roof crews to go get the work done. So we think we're at an equilibrium in some of the storm areas. We think some of the other areas outside of the storm areas are continuing to see growth from new construction.

They're continuing to see growth in re-roof but that they will probably slow down a little bit relative to where they were in the second quarter, just because of their confidence and availability of supply..

Okay. That's very helpful color. And I guess the question for Michael. It's good to see the cash flow coming through really strong. Now that your agreement with Ahlstrom has been canceled, should we expect buybacks to pick up a little more this year, just because initially you obviously had two bolt-on acquisitions? Thanks..

Yeah. Thanks for the question. Listen, we've been fairly active in the first half of the year.

I think you heard in my prepared remarks that looking forward, both our dividend and repurchases are going to play important parts, maybe just a couple of quick fun facts, since emergence (44:46), we've repurchased 23 million shares, almost $0.75 billion year-to-date, just under 100 million of repurchase.

So I think as we look forward, you can expect us to operate in the way we have in the past. And then clearly, in my prepared remarks, you heard that our outlook for free cash flow both this year and in the next couple is actually pretty bullish..

The next question comes from Kathryn Thompson with Thompson Research. Please go ahead..

Hi. Thanks for taking my questions today. The first really focuses on the dynamic of lower energy costs benefit. Obviously, a lot of focus on the Roofing side, but lower natural gas is then – I show that a tailwind for both your Insulation, Composites businesses from a production standpoint.

First, how much do you estimate lower energy costs benefited Insulation, Composites, and as these inputs are effectively bottoming out now for the company as a whole, what are your expected deflation benefit in the second half? Thank you..

Thanks, Kathryn. We have seen some deflation really over the last couple years as – in particular, natural gas has been very inexpensive in the U.S. So as you go outside of the U.S., you've still got regulated markets and markets don't nearly have the energy advantage of the U.S.

So I think for the natural gas buy in the U.S., we've seen some sequential deflation over the last couple of years. Obviously, we buy a lot of electricity as well, (46:24) electricity markets are both regulated and de-regulated but don't move nearly as quickly as natural gas.

So as a result of that, the portion of our buy that really swings a lot in terms of natural gas prices at today's prices has become a relatively low number.

So while we may see some moves in terms of percentages of the total number of dollars of savings or deflation we get from natural gas today is still relatively low and I would say it's not really material to our outlook..

Okay. Perfect. And then moving to your Roofing segment just – you were able to obviously back into with the implied margins that are for the full year for InterWrap, but maybe a little bit, are there any differences from a seasonal standpoint that we should take into consideration on a quarter-by-quarter basis for the margins.

And then once again on Roofing, any color that you are willing to give regarding pre-buy trends going into the August increase? Thank you..

Okay. Related to InterWrap, I mean, we are still obviously learning the business. So our view at this point is that we should expect to see InterWrap generally mirror the cycle of Roofing.

So in quarters where you have strong Roofing demand, we'd expect to see a little bit better performance in that business and when things slow down at the end of the year, we'd expect to see that business slow down consistent with the shingle business.

So from a margin point of view and a revenue point of view, we would expect that we'll pretty much follow our Roofing business..

The next question comes from Alex Rygiel with FBR. Please go ahead..

Thank you for taking my question. Mike, I was a little confused with your commentary about the CapEx plan over the next couple of years as that compared to sort of your projections a year ago at the Analyst Meeting. And also your commentary about the rebuild CapEx plan having a savings of $120 million.

So could you kind of circle back and compare the view today of CapEx over the next handful of years versus a year ago, and then I have a follow-up..

Yeah. Sure. It actually wasn't a year ago. It was last November just for clarity at our Investor Day in Atlanta. And so we gave an outlook over the next three years. So again, 2016 to 2018 of 100% of D&A, based on approved growth CapEx at that point in time.

So it didn't factor in the India investment but it would have factored in our outlook for lower rebuilds in 2017 and beyond. And so with the new India investment, we're going to track slightly above that guidance with that 110% number in our outlook now but we'll still continue to track below 110% for the three-year period.

So we'll be above that this year clearly and then we'll trend down overall in 2017 and 2018, so below 110% for three-year average..

And this is Mike. Just to add a little bit of color to Michael's comments. One of the questions when we met with investors since the Investor Day was around rebuilds and what is the size of the benefit that we would get from a cash point of view as our rebuild slow down.

So really over the last four years as we were driving a significant rebuild agenda as well as having to put capital into the Composites business to drive our low delivered cost strategy, we effectively were doing some facility expansions, some shutdowns and lots of rebuilds and spending a fair amount of money above depreciation without being able to really increase our capacity.

What we're saying today is over the next four years, we think the amount of capital that goes into rebuilds which is really a maintenance capital expense will be $120 million less than it was over the last four years and that the $110 million we put into India will actually give us capacity that allows us to get top line revenue growth but actually will not create incremental capital investment in our Composites business because it will be funded basically by this rebuild holiday..

And as a follow-up, any commentary on your pace of your buyback activity in the current quarter versus maybe your plans over the next year or two?.

Yeah. This is Mike. We don't comment on current buyback activity.

I think Michael's comments about kind of our optimism around cash flow and really the optimism around the earnings performance of our business would suggest a willingness and a continued demonstrated willingness to buy back shares when we have free cash flow and we have the ability to do that..

Thank you..

The next question comes from Bob Wetenhall with RBC. Please go ahead..

Hey. Good morning..

Good morning, Bob..

I am confused, because I thought you guys had some nice numbers and your stock is off 4%, and I wonder if people understand the guidance, and I think maybe I got my math wrong, so I was hoping you could help me out.

Through the first half of the year, OC has delivered $370 million in operating income or EBIT, and your guidance for $700 million or better for the full-year would imply $330 million in the back half.

And I know that out of the gate you already have another $10 million from InterWrap, and it sounds like based on Mike's commentary that shipments have been really good in July, and there's the prospect of another price increase, and even if you take some puts and takes, or some weakness in the Insulation business, you are still guiding towards a flat margin on lower sales.

And so, that to me would suggest the $700 million number is highly conservative, and there's a lot of potential upside, especially because you are managing the businesses to drive the best incrementals.

So am I missing something here? Or what's the right way to think about this?.

Well, Bob, I think that was a wonderful summary of what we would want the market to believe. But in all seriousness, I think we're probably a bit more conservative than that, primarily related to Roofing. Roofing was up – we do have InterWrap in the second half. We've got a great outlook for the second half.

And we think we're comping against a really stellar second half last year, but we were also up 35% in the second quarter.

So we'd be a little bit reluctant, coming out of a good first quarter where the market was up double digits, a second quarter that contributed to a market being up overall more than 20%, to take the first half numbers and kind of double them as the starting point to look to the second half.

So as we roll forward our Roofing business, we're seeing that, and I think Michael said it in his comments, we expect volumes to be flat to slightly down, and we'd expect margin rates to be pretty similar to last year based on what we know today.

Obviously, InterWrap's going to contribute in a way that we didn't have last year, so we'll get a little bit of revenue from InterWrap that will offset some of the decline in revenue we might see if volumes go negative in the second half.

And then the rest of the pieces, we've been pretty explicit about what we think Composites will do and pretty explicit about what Insulation will do. So I think the market right now is probably trying to sort out their own view of what Roofing's second half and outlook looks like..

So, with that being said then, and usually your third quarter is your peak quarter in terms of EBIT generation, should we think that 3Q is going to be up? And then EBIT will decline in the fourth quarter, but on a year-over-year basis, they will be the same, or is there going to be a shift in EBIT in 3Q and 4Q? So the two quarters will have flat EBIT to get to that $330 million number.

I'm just trying to understand how what happened in 2Q is going to affect EBIT performance in each of the next two quarters, you've obviously guided to a $330 million number, so how should we think about that?.

Obviously, we don't give quarterly guidance. Our view on guidance is at the mid-year mark, which is where we are, to give full year corporate guidance for Owens Corning. So it's a little bit hard for me to give you much more than what we've already given you.

I would say just again coming back to Roofing, we were very happy with Roofing's fourth quarter last year. So we saw really strong volumes through the end of the year.

So I'm not even sure as we get to the end of the third quarter that we'll have a complete view on how we think Owens Corning will perform in 2016 because there will still be a significant piece of our business that generates a lot of cash flow and a lot of EBIT for the company which will be subject to the vagaries of weather and other things at year-end.

So I think the guidance we've given you is consistent with how we view the second half playing out, and we'll know more as we get later into the year..

Hey, Gary, this is Thierry. I think we have time for one last round of questions..

The next question comes from Matt McCall with TBN Capital Markets (sic) [BB&T Capital Markets]. Please go ahead..

Good morning. This is Reuben Garner on for Matt. So I just want to follow up on a question from earlier. You mentioned you thought that there was some roofing inventory, a little bit in the channel exiting the quarter.

Can you talk about product availability on your end, maybe what the lead times are? I think you've said something about adjusting plants to match demand.

Was that a backwards-looking comment, that's what you had to do in the second quarter, or is that a forward-looking comment?.

Well, we were ramping demand through the entire second quarter. So we were bringing on shifts. We were running a lot of overtime. Our supply chain team did a really spectacular job getting asphalt and other raw materials in order to be able to get our production to ramp up.

And through the quarter, we ramped production but still liquidated inventories, and production did not match demand in the second quarter. We got a little bit behind. We actually had some areas of the country where we had extended cycles in terms of deliveries.

We could confirm deliveries, but we would confirm them on a longer delivery cycle than what our customers desired. That was not unique to Owens Corning. We saw some of that as well competitively. So, the industry got very tight. I think today we're probably pretty well matched to where we see demand, so we're catching up.

We'd actually like to build up our inventories a little bit, they are below the levels we need in order to be able to service the market effectively. So, through the third quarter, depending on our outlook for remainder of the year, I'd expect that we'll run a little bit above demand or hope to run a bit above demand.

And then as you get late in the year in the fourth quarter, you make some decisions, at what point do you want to start bringing production down late in the year in order to manage the business through the weaker part of the year which is the late fourth quarter and early first quarter. So I think we're in pretty good shape now.

There was a period of time probably a couple weeks ago where we felt like if we were to see a fall storm, it really could be chaotic out there, that we didn't know how we would get capacity to support that.

I think as we get a little bit later into the fall, we may have some flexibility and some room if demand picks up that we can serve some additional demand this year..

Okay. Perfect. And then your SG&A as a percentage of sales has been ticking up the past couple of quarters, and I think the past couple of years, really.

Can you talk about your expectation for spending there as a percentage of sales for the second half, and maybe just a little bit out into 2017, what your thoughts are there, I mean what the additional spending is for. Just update us..

The last couple of years actually has been broadly stable. In particular on a year-to-date basis, specifically within the second quarter it's trended up just over $20 million. And it's primarily as a result of incentive compensation and then the acquisition of InterWrap..

This concludes our question-and-answer session. I would like to turn the conference back over to Thierry Denis for any close remarks..

Very good. Thank you, everyone, for joining us for today's call. And with that, I'll turn it back over to Mike Thaman for closing comments..

Well, thank you, Thierry. Thank you, everyone, for joining us on today's call. We always appreciate your interest in Owens Corning and your continued support. I think the key themes from our call today is we believe our teams are executing very well. We're proud of the results we've produced in the second quarter.

We're proud of what the Owens Corning team was able to get done. We think our markets today are pretty favorable in terms of growth.

At a minimum, in some of the markets where we've seen good, stable predictable demand and then in some of the markets like Roofing and then new construction we're seeing nice year-on-year growth that we think continues to fuel market conditions that are advantageous to our company. We have a strong outlook for the remainder of the year.

We believe that we'll deliver $700 million of EBIT or more which is well and above the all-time record. So if you look at the footprint of Owens Corning today, this set of assets at one point in time probably delivered EBIT results that were 15% or 20% below where we're currently suggesting we'll produce in 2016.

And so we're very proud of the progress we're making and we don't think that it's a 2016 phenomenon. Most of the things we talked about today in terms of positives that will help the earnings power growth and top line of our businesses or macro trends that we believe will carry on into 2017 and beyond. So we feel good about where we are.

Feel good about our cash flow position and are excited to see what kind of results we can put up for the remainder of the year. So we look forward to talking with all of you again on our third quarter call in October. Thank you..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..