Thierry J. Denis - Owens Corning Michael H. Thaman - Owens Corning Michael C. McMurray - Owens Corning.

John Lovallo - Merrill Lynch, Pierce, Fenner & Smith, Inc. Keith Hughes - SunTrust Robinson Humphrey, Inc. Michael Jason Rehaut - JPMorgan Securities LLC Kathryn Ingram Thompson - Thompson Research Group LLC Michael Wood - Macquarie Capital (USA), Inc. Robert Wetenhall - RBC Capital Markets LLC Philip Ng - Jefferies LLC Garik S.

Shmois - Longbow Research LLC Scott Rednor - Zelman & Associates.

Good day, and welcome to the Q3 2016 Owens Corning Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Further, please note this event is being recorded. I would now like to turn the conference over to Mr. Thierry Denis, Vice President of IR. Please go ahead..

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 third 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, and our Q&A session.

Mike?.

Thank you, Thierry. Good morning everyone and welcome to our third quarter 2016 earnings call. Third quarter revenue was $1.5 billion, up 5%, and adjusted EBIT was $218 million, up 10%, compared with the third quarter of 2015.

This is a record third quarter for Owens Corning in terms of adjusted EBIT, and 2016 will be a record year as we continue to perform at a very high level. This performance demonstrates the strength of the Owens Corning portfolio, and our ability to generate strong cash flow.

The financial results of the company support a broad capital allocation agenda, including investing in growth projects, pursuing acquisitions, and returning cash to shareholders through dividends and share repurchases. Before I talk about our financial results in detail, I'd like to give you a brief update on our safety program.

As you know, safety is a critical area of focus for Owens Corning. We continue to advance our goal of creating a workplace free of injuries. So far this year, our recordable incident rate is 0.52, which is similar to last year. This performance represents more than 80% fewer injuries in comparison to industry benchmarks.

Overall, the third quarter results are in line with our expectations and we continue to expect 2016 adjusted EBIT of $700 million or more. Further, we expect an environment consistent with consensus expectations for U.S. housing starts and moderate global growth.

In our Composites business, we've said that we expect growth in the glass fiber market driven by moderate global industrial production growth. And we've said that we expect the business to improve by at least $30 million on price and volume growth.

This quarter, Composites reported EBIT of $61 million, essentially flat compared with the same quarter last year, and EBIT margins of 12%. While sequentially our EBIT margins were down about 2 percentage points, this is mostly due to additional plant start-up expenses incurred and contained in the quarter.

In the fourth quarter, these expenses will be over $10 million lower. Given this and our performance to date, we are on-track to deliver EBIT growth of about $30 million. In Roofing, we previously said that we expect low double-digit growth in the U.S.

asphalt shingle market this year with the second-half industry shipments slightly down to flat versus 2015. As a result of continued strong shipments in the third quarter, we now expect low-teen market growth for the year, including some growth in the second-half.

This quarter, Roofing reported impressive results with EBIT of $146 million, up 42% from the third quarter of 2015, EBIT margins were 24%. On the InterWrap business, we continue to expect to deliver at least $30 million of EBIT this year. We remain confident that this business will contribute to our growth next year and beyond.

The Insulation business has been more challenging than anticipated this year. We previously said that we expect to see slightly negative revenue growth and relatively flat margins for the full year. We now expect that 2016 revenue could be down by about 5%, and the EBIT margin rate could be 1 percentage point below 2015.

This quarter, Insulation EBIT declined $20 million, primarily in the U.S. and Canada residential fiberglass building insulation market on lower sales volume and price. Much of the lower sales volume was the result of the change in our share position in the U.S. residential new construction market that we discussed earlier this year.

Over the past two quarters, we have worked to manage our capacity and recover share in the market to mitigate the impact on revenue and margins. During the summer, we experienced a more competitive environment than anticipated, but in the past two months, we believe that prices stabilized.

Overall, our mid-term outlook for the Insulation business remains unchanged and we remain confident that glass insulation capacity will tighten given the U.S. residential construction outlook, craving favorable conditions as early as 2017. The engineered insulation market as well as our business in regions outside the U.S.

and Canada have returned to prior peak EBIT levels and are performing well, which is offsetting some of the previously mentioned shortfall. We look forward to extending this part of the business once our new mineral fiber plant opens early next year. I'd also like to highlight a few other developments.

The board of directors approved a repurchase authorization for up to 10 million additional shares based on our multiyear cash flow outlook. So far this year, we have returned approximately $230 million in dividends and share repurchases to our shareholders.

And for the fourth straight year, we were named the Building Products Industry Leader in the Dow Jones Sustainability World Index. In summary, our strong financial performance builds on the momentum we generated in 2015 and throughout this year.

Owens Corning continues to capitalize on favorable market conditions with strong commercial and operational execution. I continue to be proud of our results, while returning capital to our shareholders. With that, I'll turn it over to Michael, who will further review the details of our business.

Michael?.

Thank you, Mike, and good morning everyone. As Mike mentioned earlier, Owens Corning delivered record third quarter financial performance, with adjusted EBIT of $218 million. Through the first three quarters of 2016, Owens Corning's financial performance has already surpassed our previous full year record.

Year-to-date revenue was 6% higher than the same period last year. Free cash flow and working capital management continue to be bright spots. Year to date operating cash flow totals $679 million, an increase of $269 million over the same period last year.

Also of note, our board of directors approved an additional share repurchase authorization for up to 10 million shares as a result of our strong performance and confidence in our outlook. Now let's start on slide 5, which summarizes our key financial data for the third quarter.

You will find more detailed financial information in the tables of today's news release and the Form 10-Q. Today, we reported third quarter 2016 consolidated net sales of $1.52 billion, up 5% compared to sales of $1.45 billion reported for the same period in 2015.

Net sales in our Insulation business decreased $26 million, primarily on lower sales volumes. Higher sales of $10 million in our Composites business were primarily the result of increased sales volumes. In our Roofing business, net sales were up $101 million or 20% from the prior year on higher sales volumes.

Adjusted EBIT for the third quarter of 2016 was $218 million, up 10% compared to $198 million in the same period one year ago. Again, this represents record third quarter performance. Adjusted earnings for the third quarter of 2016 were $125 million, or $1.09 per diluted share compared to $113 million, or $0.96 per diluted share in 2015.

Depreciation and amortization expense for the quarter was $84 million, up $11 million compared to the third quarter of 2015. Our capital additions for the quarter were $102 million.

So far this year, the company has improved both operating and free cash flow by more than $260 million as a result of improved earnings and better working capital management. Now on slide 6, let me reconcile 2016 third quarter adjusted EBIT of $218 million to our reported EBIT of $207 million.

We have adjusted out $7 million of acquisition-related costs including $2 million of inventory step-up related to the InterWrap acquisition and $3 million in contract termination fees paid to Ahlstrom. In addition, we have adjusted out $4 million related to prior restructuring actions.

Now please turn to slide 7 where we provide a high-level review of our adjusted EBIT performance, comparing the third quarter of 2016 with the third quarter of 2015. Adjusted EBIT increased 10%, primarily as a result of improved performance in our Roofing business, which was partially offset by lower earnings in our Insulation business.

EBIT in our Composites business was flat versus 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 $476 million were down $26 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, which we reviewed on our first quarter call. Lower pricing was largely offset by improved customer mix.

EBIT declined by $20 million to $38 million in the third quarter compared to $58 million in the same period one year ago, primarily on lower sales and production volumes. As a reminder, we highlighted on our second quarter call that the impact of production curtailments would begin to impact our results in the third quarter.

We experienced an unfavorable price environment in the quarter for U.S. and Canada residential fiberglass building insulation. Favorable customer mix largely offset lower prices, as the market share loss in U.S. residential insulation that occurred early in the second quarter was at the low end of the price curve.

Pricing for this portion of the business stabilized in late summer and continues to remain stable into the fourth quarter. We have announced a price increase for this business effective mid-January. We expect the impact from price and production leverage to continue through the remainder of the year and into the first quarter of 2017.

We now expect full year 2016 revenue could be down about 5% with a full year EBIT margin rate one point below 2015. The U.S. residential insulation market continues to grow and our fundamental outlook for the earnings potential of this business remains unchanged. We continue to believe that growth in U.S.

residential new construction will tighten capacity and should create favorable market opportunities as we move into 2017. Our residential fiberglass insulation business continues to perform significantly below historical earnings levels and pricing remains well below the prior peak, even on a nominal basis.

We believe there is significant opportunity as the product is fundamentally useful and undoubtedly valuable. One other item. We continually assess future insulation manufacturing capacity needs against our current outlook for growth and the underlying competitive landscape.

While our view of the macro environment outlook and earnings potential of the Insulation business has not changed, we have approved a plan to permanently exit our manufacturing facility in Candiac, Quebec.

This facility, which has the capability to produce about 200 million pounds annually, was shuttered early in the housing downturn and has now been cold for almost one decade.

As a result of this action, we will incur a charge of about $10 million to $15 million, largely non-cash, that we would anticipate adjusting out of our ongoing results of operations in the fourth quarter of 2016. Finally, we had provided an outlook on industry capacity for U.S. and Canada fiberglass insulation at our November 2015 Investor Day.

As a result of these actions, the capacity associated with this facility will move from mothballed to retired when we update this disclosure in early 2017. Now, I'll ask you to turn your attention to slide 9 for a review of our Composites business.

Sales in our Composites business for the third quarter were $496 million, up 2% compared to the same period in 2015. Price and volume continued to contribute to the performance year-over-year.

EBIT for the quarter was $61 million, flat with the same period last year on continued volume and price improvement offset by higher rebuild and plant start-up costs. These costs were higher than anticipated.

We are pleased with the progress that we have demonstrated in the Composites business over the past couple of years, including 12 consecutive quarters of year-on-year price improvement, although the pace of improvement slowed in the third quarter.

Our European business has been performing at very high levels following the restructuring actions taken in prior years and on strong commercial and operational execution. Pricing peaked in the first half of 2016 in Europe and we have made some adjustments in the third quarter to maintain our market position.

Business performance continues to be very strong for our European business. We expect a significant year-over-year improvement in the fourth quarter, primarily driven by stronger volumes and a relatively soft fourth quarter 2015 comparable. In addition, we expect fourth quarter rebuild and start-up cost to be sequentially lower by about $10 million.

We are on track to deliver about $30 million in EBIT growth for the full year, which would represent record financial performance for the Composites business. Slide 10 provides an overview of our Roofing business.

Roofing sales for the quarter were $603 million, a 20% increase compared with the same period a year ago, primarily on higher sales volumes and the impact of the InterWrap acquisition. Shipments for the U.S. asphalt shingle industry grew 14% in the quarter, supported by continued storm demand and the growth in age-related reroof and new construction.

EBIT in the quarter was $146 million, up $43 million or over 40% compared to the same period in 2015. The increase in EBIT was driven by higher sales volumes and lower asphalt costs. Roofing delivered 24% EBIT margins in the third quarter. The business is delivering very strong operational and financial performance in 2016.

We were pleased to see our pricing improve sequentially in the third quarter as a result of our actions this summer. The overall market dynamic continues to be constructive. We experienced asphalt deflation of $21 million in the quarter. We expect the remaining benefit of asphalt deflation in 2016 to be less than $10 million. We now expect the U.S.

asphalt shingle market to grow low-teens in 2016, supported by storm activity and the continued growth in age-related reroof and new construction. This would translate into growth for the second half of the year, even with a challenging volume comparison from the very strong fourth quarter of 2015.

Many of our investors have asked our point of view on the impact of Hurricane Matthew. While Matthew was a large storm which left many displaced, it appears that flooding and not wind was the most significant driver of damage. From a business impact standpoint, we don't expect to see significant demand as a result of this storm.

One other important related note. The primary driver of increased storm demand in 2016 has been the fact that storm demand in 2015 was a good bit below the long term average. Demand from major storms and other weather events in 2014 and 2015 was approximately 25% below the average of the past 10 years.

Based on our current outlook, we expect these volumes will be up about 10% for 2016 versus the 10-year average. Finally, the InterWrap integration is progressing well. We continue to expect the acquisition to contribute almost $180 million of revenue and at least $30 million of adjusted EBIT in 2016.

In addition, we expect continued top and bottom line growth from this acquisition in 2017 and beyond. Now, let me turn your attention to slide 11. The company's board of directors declared a cash dividend of $0.18 per share, payable on November 2, 2016 to shareholders of record as of October 17, 2016.

In the third quarter under a previously announced share repurchase program, we repurchased 1.6 million shares of the company's stock for $86 million. For the year-to-date, we repurchased 3.4 million shares for $171 million.

On October 24, 2016, the board of directors approved an additional 10 million shares for repurchase as a result of our continued strong performance and confidence in our outlook.

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. During the quarter, the company successfully issued $400 million of 10-year 3.4% notes. It represents the lowest coupon in the company's history.

The proceeds were utilized to permanently finance about 50% of the InterWrap acquisition and to refinance about $160 million of long-term bonds that were maturing in the fourth quarter of 2016. We were pleased to have S&P upgrade us to BBB flat on the day we went to market. Now please turn to slide 12 where I will provide our outlook for 2016.

We are pleased with our performance in the first three quarters of the year and we remain optimistic about the earnings growth potential for Owens Corning in 2016 and beyond. For 2016, the company continues to expect an environment consistent with consensus expectations for U.S. housing starts and moderate industrial production growth.

For the full-year 2016, the company continues to expect adjusted EBIT of $700 million or more, which would represent an all-time record year of financial performance, exceeding our previous record by more than 25%. As a result of improved earnings and working capital reductions, we now expect to generate about $450 million of free cash flow in 2016.

We continue to expect free cash flow conversion averaging about 100% over the years, 2015 to 2018. We had very strong free cash flow conversion in 2015 and we expect another strong result above 100% in 2016. Now please turn to slide 13 where I provide guidance on other financial items for the year.

We expect corporate expenses to be at the bottom half of the $120 million to $130 million range. Capital additions will be about $385 million, including approximately $50 million of spending associated with our new mineral fiber insulation facility. Depreciation and amortization expense is expected to be about $320 million.

Interest expense is now expected to be about $110 million, including interest costs associated with the financing of the InterWrap acquisition. 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 Thierry..

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

Certainly. We will now begin the question-and-answer session. Our first question comes from John Lovallo of Bank of America. Please go ahead..

Hey, guys. Thanks for taking my call. The first question is realizing that the adjusted EBIT outlook is $700 million-plus, it just still seems like that might be a little bit conservative. I mean, even if EBIT was flat year-over-year in the fourth quarter, I think this would imply something like $725 million.

So I mean, is it fair to say there's some conservatism baked in there?.

John, this is Mike. Thanks for your question.

Our guidance philosophy I think has been pretty consistent over the last couple of years, which is to not guide in the first half and then on the second quarter call tried to give some broad parameters that would support guidance for the full year and then update that through the course of the third quarter as we see fit.

Our sense coming into the quarter, we had a very, very good third quarter as obviously we just reported. I think we've got a lot of confidence about the fourth quarter. I think if anything the wild card in our business in the fourth quarter typically is what happens to roofing demands in the months of November and December.

Those are probably the hardest months for us to predict because of early onset of winter and some other things that can affect roofing. So as we look into the fourth quarter, we said that we think roofing demand will be up a bit in the second half. It was obviously up in the third quarter and that the fourth quarter could be slightly down.

Obviously if the fourth quarter weren't down and we were to comp flat or comp well with last year, I think that might create a little bit of upside from where we are, but we're looking into the fourth quarter saying that we do expect to comp negatively to last year. Last year was very, very strong.

In the fourth quarter, we had some late season storms and we also had some very mild weather. So I think the comp from last year in the fourth quarter is a pretty strong comp and we feel good about our $700 million or more a year guidance..

Second question here. It looks like historically you've received a pretty good cash flow bump from receivables in the fourth quarter. It seems like that may have been pulled forward into the third quarter. So just wanted to see first if we're thinking about this right and what the impact could be on fourth quarter working capital..

I'll let Michael take that question..

John, hey, good question. So I mean, A, we're really proud of the free cash flow performance that we've driven, not only this year but also last year. An expectation of free cash flow conversion above 100% this year in addition to what we delivered last year. The year-to-date improvement, as I said in my prepared remarks, is about $262 million.

Specifically talking about working capital, we improved it about 208 basis points in 2015. We've made good progress this year as well. Most of the progress that we've made in working capital has been in the first half of the year. You would have noticed that the progress through the third quarter actually has decelerated.

It would be our expectation it probably decelerates a bit more in the fourth quarter as well. That said as of the third quarter absolute working capital has improved by about $100 million, with sales being up about $240 million. So really pleased with the progress we've delivered.

Again, we'd expect it to decelerate in the fourth quarter as it did in the third quarter..

Our next question comes from Keith Hughes of SunTrust. Please go ahead..

Thank you. Question in Roofing again.

We had the acquisition, which we see creeping into the fourth quarter as well, but given that view on volume, are there any offsetting factors that would continue to lift your EBIT year-over-year in just the existing business? I'm referring here to asphalt or any other positives you have in your business outside the negative volume..

Yeah, the Roofing business obviously had a great quarter and it's in great shape right now. We said in our prepared remarks that we do expect some small additional asphalt cost deflation coming into the fourth quarter. I think the most important factor for the fourth quarter is we came into the quarter with great margins.

So if you look at our third quarter margin performance, we saw price improvement in the quarter, in a quarter where we didn't have a lot of cost pressure. So good volumes, positive price trends, stable to slightly declining costs has produced fabulous margin performance in the business.

And obviously if you carry that into the fourth, the question is how many shingles do you get to sell at that margin rate and if we sell a bunch, we're going to do better. But I think in terms of headwinds as we head into the fourth, we don't see a lot besides the normal kind of onset of winter and when does the roofing season come to an end..

In your non-storm regions in the quarter outside of Texas and places like that, what did business look like? What was the pace there?.

Actually, that's been a real positive, I'm glad you brought that topic up because we look at both sides of it. Obviously, storms this year have been good. They haven't been crazy good. Storm demand is up about 10% versus the 10-year average. Now, it's up a lot versus 2015, but 2015 was 25% below the 10-year average.

So we really have – we're comping very strongly on storms versus 2015, but 2015 was a very, very weak year in terms of storm-related demand. This is a little bit above-average.

What we've seen though is outside of the storm markets, we track those markets pretty carefully, particularly to get a sense of what do you see in terms of large-scale home improvement projects, are people willing to put capital into their homes? And we've seen a good progressive trend there in probably over I'd say the last year-and-a-half, maybe starting in the second half of last year and through this year where in the non-storm markets we are seeing just increased reroof activity.

We're hearing good things from contractors about good backlogs. We're hearing good things from our distribution partners in terms of a good consistent week in and week out demand where contractors are busy. I think part of that is home prices have come back so people have equity in their homes again.

I think part of that is contractors are busy so people are having to make a decision if they want to put a roof on their house, they're going to have to find a contractor, they got to go ahead and make the call to have the roof done.

I think when there's a lot of slack contracting capacity, people tend to put that off and wait but they feel a sense of urgency today to get some of the home improvement projects done if they want to get done.

So I think we've got some virtuous cycle happening there and clearly based on our numbers, reroof demand has been dramatically under invested over the last four or five years relative to where it's been historically. So, we do expect some reversion back in that market and we are seeing it..

Thank you. Our next question comes from Michael Rehaut of JPMorgan. Please go ahead..

Thanks. Good morning, everyone. First question I had was on insulation and kind of looking at the U.S.

portion of it, the new res market where you cited some challenges, just curious on if you can kind of walk us through as the quarter progressed how demand shaped up, in other words, industry shipments or demand pace? And when you talk about pricing stabilizing after maybe more competitive summer months, if you could give us a sense of what was that from beginning to end, what was that type of price competition on a percent basis for that product, and again, maybe thoughts about the stability, the recent worries on stability, any confidence you might have around that continuing into the end of the year into next year?.

Sure. Let me start with our sense of industry shipments and kind of what's going on in terms of overall demand. Insulation could be the new construction segment you're talking about.

We've always had a pretty good macro which is insulation demand when you put geographic mix and single multifamily mix in, tends to track very closely with housing starts lagged on about a 90-day basis. So from the time a start happens, typically the insulation gets shipped to the job site in about 90 days.

Those models have continued to work over the last couple of years as we've seen an uptick in new construction.

What we started seeing I think predominantly last year and then I think we're saying it again this year is maybe because of some labor constraints and some bottlenecks in the marketplace, that lag potentially stretches out a little bit in the second half and then tightens back in a little bit in the first half of the year.

So last year in the second half, we probably saw industry shipments that would be a little bit below what was suggested by housing starts and in the first part of this year, we saw shipments that were probably a bit above what would've been suggested by lagged housing starts. So it seems like there was a bit of a catch up.

And our hypothesis on that would be that's labor related. I think our sense of the second half of this year is we're going to track pretty similarly to what we did last year.

So on a comparable basis, the industry will shift relative to housing starts but on a lag basis we'll probably see some of the housing start demand that was in the second quarter and third quarter of this year won't materialize necessarily for the industry in the second half of this year. Some of that will get serviced in the first part of 2017.

As it relates to pricing, when we were on the call, I guess, 90 days ago talking about the second quarter, we had shared that in order to move our position a bit in terms of market share and we are very clear that we needed to take some action to try to replace some of the share that we lost as it relates to the residential construction market, that we knew that we were going to have to go back to some customers who'd wanted to do some business – more business with us than we are currently doing, and then in some cases, if you're the secondary supplier and you want to move into a more primary role, you're going to have to get a little bit more price competitive than where you've been.

So we were making some price adjustments on our side in order to support moving into a primary supplier role with some key customers in order to take back some of the market share we had lost when we lost a big customer.

We thought that, that was mostly kind of through the system in terms of our outlook to pricing at the time of the second quarter call. We had an August price increase where we actually had some hopefulness that maybe we'd start to see some positive pricing in the second half of the year.

I would say the August price increase was largely not successful, and in fact, we saw some new kind of pricing activity and pricing competition through the second half of the summer.

But I think we relayed on today's call we really saw that kind of come to an end around the end of the summer and I would say for the last six to eight weeks from late August through to today, we have felt much better about the pricing environment. So it does feel like people are busier.

It feels like capacity is more heavily utilized, that the demands being placed on the manufacturers by the contractors are tightening up capacity and as a result of that we think the pricing environment is much more stable. Our hope would be that we would see more success with the January price increase that we have announced.

So we talked about it on the call today that as we go through the second half of the year, we would see a stable demand environment and a stable utilization environment that may be supportive of us being able to improve our pricing in the early part of 2017.

Obviously, as we've said on many calls, that's the key missing variable in terms of the overall performance for Owens Corning. We've got virtually every part of the business operating at very high levels, including the part of the Insulation business that's not new construction. Our Engineered business is great, the regions outside of the U.S.

and North America are great, and this is kind of the last missing piece, is to get price levels of residential insulation to justify continued further investment in the business..

I appreciate that, Mike. That was great, obviously a very comprehensive answer, so I appreciate those thoughts. I guess moving on to Roofing. Also similarly, if you could kind of give us a sense of the pricing environment. Obviously, asphalt deflation continues to be a tailwind in 3Q and you expect a lesser impact in 4Q.

Pricing down I believe slightly year-over-year in 3Q and that's better than the trend in the first half of the year. So just trying to get a sense of pricing maybe on a sequential basis and how you feel in terms of that holding up now that you've gotten the full benefit of the asphalt deflation..

Yeah, I think, one of the really big headlines for the Roofing business in the third quarter is that we did see positive sequential improvement in pricing relative to the second quarter. So with a little bit better demand and with people being busy, we were able to go back and I would say rehabilitate pricing a little bit.

So as asphalt, we had – we have seen asphalt deflation, we had been passing some of that deflation into the marketplace in order to remain competitive and keep our position in the marketplace.

I think through the summer we probably saw those prices stabilize and actually saw some positive sequential pricing, even though we were in kind of a flat asphalt environment. So paving prices did go up during the summer for asphalt. That drove roofing prices for asphalt up a bit as well.

So we weren't seeing quite as much asphalt deflation during the summer. We are gratified to get a little bit of positive pricing sequentially. As we head into the fourth quarter, we would expect as we get into the fall and winter months asphalt tends to trade off a little bit. So we may have the opportunity to capture some deflation.

But our expectation as we head into next year is the sequential positive price trends that we've seen this year will be important to helping us manage either an environment where we don't have any deflation or even an environment where we might start to have some small asphalt cost inflation..

Thank you..

Our next question comes from Kathryn Thompson of Thompson Research Group. Please go ahead..

Hi. Thank you for taking my questions today. I might switch to composites. Given what we see post-Brexit, I just want to get a sense of what you're seeing in terms of fundamental demand drivers in Europe. We've gotten some French feedback that perhaps there's a little bit of softening for composites.

But just wanted to see how your trends are progressing and also what if any impact the new capacity in Egypt is having on Europe. Thank you..

Hey, Kathryn. It's Michael. Great question. What I'd say kind of broadly first, if you look at overall volume momentum, it was 3% in the quarter, it's 5% year-to-date. That's versus a comp for full year last year of about 4%. So I'd say, broadly speaking, this year feels a lot like last year from an overall growth perspective.

And as we look forward into 2017 kind of similar. So that's kind of the high level. From a regional point of view, actually, the market in Europe actually has been pretty good. It's probably one of the bright spots that we've had this year on a year-on-year basis. India continues to track pretty well for us.

And then obviously construction is good in particular as it relates to roofing in the United States. And then the laggards continue to be Brazil, although our Brazilian business from a financial perspective continues to perform quite well. And then obviously anything baked into Oil & Gas, so that would be in North America and also the Middle East.

And you heard me talk a little bit about pricing in my prepared remarks, and so some of those – some volumes from the Middle East as a result of the new capacity, but also just general weakness in the Middle East has caused some of those volumes to move into Europe, and we've had to act to defend our overall position.

That said, again, we expect overall market growth next year. The industry as a whole continues to operate at relatively high rates of utilization. And as we move into 2017, I actually expect Oil & Gas to turn into a tailwind..

Okay. Great. Very helpful. Just one follow-up question on Roofing, I appreciate your comments on Hurricane Matthew impact, perhaps not as great as what we saw early this year.

But how do you manage the balance of meeting demand, even if it is modest demand, versus excessive inventory by – so you can enter 2017 in a good position from an inventory standpoint of distribution? So really how do you balance that – those two factors? Thank you..

Great question. I mean, obviously, we flow with the market. So whether or not inventory gets built in the channel is largely not driven by us as a manufacturer, but it'd be driven by the buying behaviors of our customers.

I think, and I've probably said this on a number of calls about this time of year, the one time of year I have a fair amount of confidence that we get back to an equilibrium spot in the industry typically is at year-end.

So I think it's kind of well – it's a well-oiled machine in the industry that the season tends to be from the beginning part – the later part of the first quarter to the beginning part of the fourth quarter related to the business season, related to weather, related to a whole bunch of reasons.

The season for roofing tends to begin and end with the calendar. A lot of states have inventory taxes, and a lot of our customers manage their year-end inventories very carefully in order to make sure that they don't have excessive inventory taxes. So there's actually a real cost to carrying excess inventory at this time of year and at year-end.

And then typically they rely on the manufacturer to have production available in the first quarter that if they need to ramp up, because the season comes earlier or demand is good, that we have product available for them. And I think, they've gained confidence in our ability to do that.

So of all the times of the year that I probably don't have as high a sense of worry about excess inventory would be at year-end. So our sense would be given that we're getting closer to year-end here that most of our customers are in pretty good shape on managing their inventories to the levels they'd like to be at year-end.

And I think it's both they have good demand, so they're continuing to ship shingles. And as we said in our call, in our earlier remarks, we are expecting they'll start to throttle back in terms of what they've taken from us in order to get to their inventory numbers..

Thank you very much. Our next question comes from Mike Wood of Macquarie. Please go ahead..

Hi. Thank you.

Maybe one more question on roofing, just curious on your thoughts and what you've seen historically about the lasting impact of storm-related demand? Does it peak right after major storm events? Do you see it – what kind of time period before it trails off? And what have you seen in those storm-impacted areas?.

Yeah. It's a good question. Regarding kind of what happens in the year after a storm, and certainly in the modeling that we've done there is a bit of a shadow effect or hangover effect that comes from a market that has a storm.

You go into a particular region of Texas, or you go to some place where there's been a storm, and a lot of roofs that might have got re-roofed over the next four years or five years were impacted by hail and impacted by damage. And so that demand would have shown up in a shorter period of time.

Our sense as we head into next year is that we're pretty balanced. Not all the storm demand that was created this year, particularly some of the big hailstorms down in the southwest, we don't think all that work is going to get done this year.

There's also been some storm demand that's been generated in the third quarter not related to Hurricane Matthew, but in other parts of the country. We're not sure all that work will get done this year either.

So some of the loss of demand that you might see from a little bit elevated storms this year is probably going to be offset by the amount of work we'll carry over from the storms this year that go into next year. So our sense would be going into next year that's a pretty neutral impact on overall demand for us next year.

And that's why when we look at next year the big issue or the big opportunity would be storm demand is around average, which is only a couple million squares or a bit more than that from where we think storm demand will be this year.

You could get enough reroof demand and new construction demand that you might have a flat to slightly down type market. So we think the market is pretty balanced and even though we've enjoyed a pretty good year this year it's really because we're comparing to a very weak year last year more than anything being extraordinary this year..

Great and just to clarify on the general corporate expense the guidance moves to the lower end of the range. Is that productivity driven? Or is it performance comp or some other factor? Thank you..

Yeah, yeah, so the original guidance was $120 million to $130 million, and we said it moves to the lower half and really it's about kind of continued expense and head count cost control. So we've got a pretty good reputation in that space and we've done a really good job this year.

If you're looking at corporate expense just from the seasonal perspective, it tends to be a little bit higher in the fourth quarter and then I'd point out that we had some favorable items in the second quarter and third quarter that were related to accruals.

So and then incentive comp in the fourth quarter is traditionally a little bit higher as well as we true things up..

Our next question comes from Bob Wetenhall of RBC Capital Markets. Please go ahead..

Hey. Good morning. Just wanted to ask a big picture question and maybe you could provide some insight. It sounds like there's some consolidation or at least alignment in terms of the Chinese fiberglass manufacturers and I was hoping you could comment on what that means for your expectations for pricing on a global basis.

And with that question, you guys have outlined $120 million spend on furnace rebuilds. And I was just trying to understand if the industry is taking up and improving dynamics due to consolidation, does that change when you spend and how you spend? And what's your thinking about how the spend then turns into impact D&A? A lot of stuff there.

Just take it how you want..

Okay. Great. Thanks. Thanks for your question, Bob. Let me start by making sure that we just clarify what we said about CapEx related to rebuilds. We said over the four-year period 2013 to 2016 we had, had to rebuild about 50% of our capacity.

And that we expect that over the four-year period 2017 to 2020 so beginning with next year we would only have to rebuild about 20% of our capacity. So a fairly dramatic reduction in the timing of when our fleet comes up for rebuild.

And then as a result of that, the amount of capital that we would have devoted to rebuilds would be about $120 million or less in the four-year period 2017 to 2020 than it's been over the last four years. So about $30 million a year of favorable cash flow in the composites business and that's really just an Owens Corning affect.

That's the impact of how we manage our melter fleet and how we worked our way through kind of restructuring our asset base to be a low delivered cost asset base on a global basis.

Now as it relates to the industry dynamics I think specifically what you're speaking to is the China National Building Materials company, CNBM is merging and they're a very, very large company.

That includes a significant composites competitor, Jushi, is merging with another very large building materials and cement company, Sinoma, who contains and has ownership stake in probably the number two Chinese manufacturer, Taishan Group or CTG as it's often referred to.

We think at the very high level Sinoma going together with CNBM is consistent with what you're hearing out of policy statements from the national government around trying to get industries that are scale and overcapacity to become more efficient to manage overcapacity issues to try to find ways to improve returns on capital as a way of trying to get the Chinese economy less dependent on capital investment for growth and my words recycle some of that capital in the forms of returns back into new investments.

I think we're probably if not quarters, years away from that really giving us clear visibility to how that's going to impact Jushi and CTG. So this merger of CNBM and Sinoma by our reading of it is very focused on the cement industry and getting an overcapacity issue there solved.

Obviously the mindset is a real positive and it's consistent with what we've been saying we think will happen in China, which is continued focus on trying to improve returns with less focus on building new assets. We've obviously put a lot of disclosure out there that says we've seen that behavior very strongly since the financial crisis in 2009.

We've seen that behavior up to now on kind of a as is competitive basis. We may now be entering a next phase where you start to see some consolidation and that consolidation drives further behavior in that direction but I think it's much too early given that one data point to understand how it's going to affect our Chinese competition..

Makes sense, and that's very helpful clarification on the Chinese players.

Switching gears quickly to insulation, you sound very confident that capacity is going to tighten and I'm just trying to understand, I've actually seen one of your insulation fiberglass lines and is it the kind of industry where if you start to see demand pick up because housing accelerates you and the other competitors to just add another shift to service that demand or is there some kind of CapEx gating item which will prevent the industry from responding with supply if demand starts to accelerate?.

Yeah. Great question, Bob. I mean, really, the challenge in insulation and then I think what makes it such a wonderful business in the right conditions is that you don't really operate a glass line on a shift basis. If you turn one on, you're going to operate it 24/7.

I mean once you start melting glass you start making product and the economics of either curtailing that line or shutting that line off and turning it back on are really poor. So that creates a dynamic of when you have a capacity overhang, the capacity overhang wants to run and because it wants to run it puts downward pressure on pricing.

That's kind of the vicious cycle. That's the cycle we've been in over the course of the last five years. And despite that very, very challenging cycle, we've shown great progress in our insulation business. Excluding this year, where obviously we're going much more sideways, we've improved the business by $250 million over the last five years.

So we continue to make progress on the cost side. We continue to make progress on the volume side. We continue to make progress on the pricing side, just not enough. Now the virtuous cycle of that is when demand exceeds your capacity, there really aren't a lot of levers to pull.

I mean, typically in late cycle or mid-cycle when insulation gets tight, some of these other metrics I talk about like a 90-day lag from a housing start to the time it gets insulated, some of those lags start to extend driven by the availability of insulation and the availability of insulation contractors rather than being driven by the availability of labor on the job site to build home.

So there have been times in the past couple of decades that I've been involved in where the construction industry was paced by the availability of insulation.

When you get into that type of environment, obviously that's a very favorable pricing environment for Owens Corning and that's the type of environment as we do the analysis, we think we're obviously closer to that environment today than we were a year ago or two years ago. We think we're close to that environment as we head into 2017.

And then the real question is going to be for us, do we get to a spot where we feel that there's confidence that if we push price, we can sustain our position in the marketplace? And we've been, I think, very, very consistent in both our efforts to raise prices and improve our profitability, but also our desire to compete and our desire to continue to defend our position in the market..

Thank you. Our next question comes from Phil Ng of Jefferies. Please go ahead..

The margin profile insulation for residential of last year I think you guys called out 2% ballpark. Do you have a sense how that stacks up versus your peers? I understand they may be running a little more forward. I just want a little color on that front.

And how does – and I guess what's ultimately holding you back on margin this cycle? Is it largely pricing and just competition? And what gives you little more confidence next year where pricing will firm up?.

Yeah, Phil, it's a great question and obviously it's a question where we do a lot of competitive analysis and soul-searching.

Do we really have a competitive position in that market? Do we know that we have good technology? Is our competitive intelligence right? I mean all of those questions are a part of the content management conversation inside the company. When it comes to benchmarking insulation, we obviously have the ability to buy our competitor's products.

You can reverse engineer the competitor's projects and know how much glass and how much chemicals and packaging and other things are in the product to make estimates of where you think your competitor's costs are. Obviously, we have the ability to do that and we have a lot of confidence in our technology.

We think we make very, very cost competitive products. Generally, I think, we're regarded in the industry as having as good or better quality than some or all of our competitors which typically supports some amount of price premium.

So if you look at it in a macro sense and you say you think you are pricing at or above competitor prices at cost that are at or below competitor's cost, it gives you some confidence that if we're struggling and not making much money, we would conclude that we don't think competitors are making much money either.

So that has been our view to the industry is we are competing and that our business is a very competitive business, it's just not performing at a level today that justifies continued reinvestment.

And I think you heard Michael in the comments today, we did come to the conclusion regarding what is our peaker, our high-cost facility up in Canada, that at least in the near-term outlook the returns in the business and the outlook in the business doesn't justify continuing to believe we will turn that plant on.

So we decided to write the plant off and move that capacity into the permanently retired category, and try to find a way to get to profitability at current market levels and current market share that make sense for our shareholders..

Okay. That's really helpful, Mike. And I guess shifting gears to composites, the last few years you've been hit with higher startup costs and rebuild costs.

Can you kind of help frame what the opportunity would be going to 2017, would that reverse it a bit? And then what type of contribution should we expect from that new non-woven facility that's ramping up more fully now? Thanks..

Yeah. Phil, it's Michael. I think I can help you out. I'm not going to give specific guidance for 2017, but directionally I think I can help you. So, Mike covered the CapEx point from less rebuilds, right. So over the period 2017 to that's going to be about $120 million less CapEx.

Now if you look specifically at startup and rebuild expense for 2016, it'll be about $25 million higher this year versus last year. And so as we move into 2017, we would expect both lower startup costs but also lower rebuild expense, therefore we think those are two important tailwinds that's going to help drive earnings growth in 2017..

Our next question comes from Garik Shmois of Longbow Research. Please go ahead..

Hi. Thanks. First question is on composites pricing. You continue to get some inflation, but then you also addressed some recent competitive pressures in Europe.

Wondering, as you think about your annual contracts that are coming up for 2017, what the outlook for Composites pricing could be potentially on average as you look out to next year?.

So I'll provide some comments, then Mike, if you want to step in and provide some additional color, feel free to do so. I mean a couple things that I'd say, so you heard me say that from a macroeconomic growth perspective, this year looks a lot like last year. And as we look at 2017, we think that 2017 is going to look a lot like 2016.

The industry as a whole continues to operate at relatively high utilization rates. That said, the business has made tremendous progress over the last three years, 12 consecutive quarters of price improvement, and at the EBIT line we've grown earnings by over $150 million.

So it's our expectation that pricing has moderated a little bit in the third quarter. We're just getting underway at our year-end negotiations. I think at this point it's probably too early to tell just how they're going to play out. But we're going to work hard and try to get as much price as possible..

Yeah, maybe what I'd add is obviously we've made a tremendous amount of progress in our Composites business, and we've gotten the pricing levels that give us acceptable returns in the business. So historically in Composites, the pricing cycle is not nearly as pronounced as what you'd see in Insulation.

And you do get to the point when returns are acceptable that you start to put in additional capacity to support growth in the market. We're in a fairly low inflation environment.

I certainly think it's a reasonable goal that we would recover enough price to offset our inflation, but I think we're heading into a period now where the earnings growth will really be powered by operating leverage. It's a high fixed-cost, low-variable cost business, so growth is very valuable, and we do get operating leverage with growth.

And then obviously we're coming through a period where we've had a lot of activity driven around trying to drive our cost structure down, and a lot of investments in melters and that's going to start to subside. So we'll also get a tailwind that will help us with some EBIT growth associated with not annualizing some of those startup costs.

But it's more I think at this point as an operating leverage story and a reduction in startup cost story. Margin-accretive pricing, which has helped us over the last four or five years, I don't think is as important an expectation for us over the next two or three years..

That's helpful. Last question for me is just on Roofing pricing. As we think about sequentially into the fourth quarter, I think in prior years, the last several years, you've had some rebates that have driven pricing down sequentially Q4 from Q3.

Just wondering if there's any one-offs that we should be thinking about sequentially on Roofing pricing, all else being equal?.

Well, so there's two factors that drive fourth quarter pricing. There's what's happening to transactional pricing in the marketplace and then what's happening with year-end accruals based on the way pricing is structured in the market.

In a couple of the weaker years where volumes didn't live up to expectations from a market point of view, as we got later in the year, we tended to see that transactional pricing, independent of what transactional pricing was doing, some of our customers who had volume-related incentives might get to a gate or to a second gate but they maybe wouldn't get to the highest gate.

And as a result we were accruing that in a way that we were assuming that we would get to some volume numbers that it didn't get to. We did some reversals and from a 10-Q point of view, the way we expose pricing in our SEC filing that would look like we saw price appreciation in the quarter.

From a management point of view, we look much more at transactional pricing. So we look at what is business getting transacted at on a day-to-day basis. And on that basis, we did see sequential improvement through the third quarter.

And I think, given that volumes this year are pretty good, I would expect we'd have less year-end rebate positives where we have accruals that we're reversing out. Most of our customers have had good volumes this year. We've had good volumes this year and we'll be more than happy to pay them the rebate they're owed..

Our next question comes from Scott Rednor of Zelman & Associates. Please go ahead..

Aronson, this is Thierry. This is probably the last question..

Certainly. Our final question comes from Scott Rednor of Zelman & Associates. Please go ahead..

Hey. Thanks for squeezing me in. Wanted to ask a question on InterWrap. Obviously, the margin's there, and now that we can see them a cleaner, very strong. I think we could have our view of kind of what the price/cost dynamic is for your shingles business next year.

But as you think about that business beyond the synergies that you expect on a cost side, is that generally going to be a stabler business trajectory? Is there further opportunities on the margin side there? How do you guys think about the margin profile?.

Yeah, Scott, great question. Obviously, everything we've seen in the first five or six months of having InterWrap as a part of the Owens Corning portfolio, we've been very, very happy with the product line; very happy with the talent; very happy with the people and the business that we're able to do.

The financial results have been right at our expectations or even a bit above our expectations at the time we did the deal.

We liked the company because it had fairly stable margins, so I think with the exception of synergies potentially improving margins because we can do some things on the cost side, we didn't come into this with a thesis of the deal that said we should be able to widen our margins or a goal of widening our margins.

We think that the business does a good job on the cost side and prices competitively, and we're comfortable with that. We think it's much more of a growth story. Synthetic underlayments today only represent about 40% of all the underlayments in North America.

Our history on transitioning the market to fiberglass shingles is, when we got into it, there were zero, and by the time we were done, it was 100% fiberglass. I don't know that our endgame here is to get to 100% synthetic, but we certainly think we can go well above 40%.

And our team is focused on trying to drive that growth of synthetics, which obviously will significantly benefit us as the biggest player. But further to that, there are non-roofing applications in the InterWrap portfolio.

And as we've learned more about that, we see things that our global reach and our technical capability should allow us to grow some of the non-roofing applications faster than they were able to.

So we currently have development teams and we're actually putting some capital into the business to create capacity and to allow us to support some of the other end-use applications at InterWrap services besides underlayment. So it's really a growth story. I think it's a growth story at great and stable margins as opposed to a margin expansion story..

And then once the enhanced facility run on Insulation profitability, maybe just taking a step back between that and InterWrap, you have areas of the business that you're investing in that have maybe not as high peak-to-trough margins, but stabler margins through the cycle.

Is there anything else in the portfolio near-term that you can invest behind organically and maybe just balance out with how you think about the trade-off versus share repurchases?.

Yeah, I think if you look at really what we've been doing over the last five years, we've slowly but surely I think continued to favor in our portfolio the businesses that have better structural margins and sustained competitive advantage and maybe have less demand volatility, and as a result, less price volatility.

So we invested in non-wovens, which is a very engineered and heavily specified product. We invested in InterWrap from an M&A point of view.

Three years ago, we acquired Thermafiber because we wanted to get into mineral fiber business and we liked the nature of that business, in particular the way they ran that business, which was very focused on commercial and highly specified commercial applications.

We now have the investment in Joplin, which is expanding the mineral fiber business where we do think the margin and demand profile is not nearly as volatile as residential insulation. So I think you continue to see us move our portfolio in that direction and favor those types of investments, not because we don't love residential insulation.

And I think through time our investors will learn to love that business as well as we improve its performance, but because we see the opportunity to add to a piece of our business, which can be a real supercharger of earnings growth, a number of other businesses that can support sustainable margins and sustainable earnings, and give us a profile that's investable through the cycle.

And I think we've continued to build that story, and you should expect we'll continue to do that while at the same time buying back shares, paying dividends, and doing other things that are directly shareholder friendly..

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

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

Yeah, maybe I'll just use the closing comments to just elevate a level and talk about where I think the company is in total. I think one of the things we're really proud of that we didn't talk about on the call, I think we talked about it on the last call was this year and actually on an LTM basis we're doing $1 billion of EBITDA.

And we're doing that today at a level of housing starts that was as well below the level that was in the guidance when we talked about the ability of this portfolio and this management team to produce $1 billion of EBITDA.

We had said it's going to take about 1.5 million housing starts to get to that level, because we thought Residential Insulation was a big part of the theme on how we would drive that earnings growth, we find ourselves today performing at that level at 1.2 million housing starts where the Residential Insulation business still hasn't really kicked in.

So we certainly feel like we've made a transition in our portfolio, the earning power of our portfolio to get to a level of performance that we're very proud of. I think we've taken advantage of the opportunities the market presents us.

So when Roofing demand is a little better than what we expected coming into the year, you're seeing that come through in terms of revenue growth and earnings performance.

And I think where we have challenges, our goal is to use this period of time where we're strong to address those challenges head on and make sure that we create really great businesses. Our Insulation business had a 20-quarter streak of earnings improvement that came to an end this quarter.

That's something that nobody on this team feels good about, but I would want to make sure that we don't get lost in not remembering that over a five-year period of time we improved that business by more than $250 million.

So it has a track record of getting its legs underneath it and delivering a lot of growth in a short period of time, and we think we'll get back on that track as we move forward. Similarly, Composites has improved by over $150 million in the last three years.

So as you look at the sources of earnings growth as we head into 2017, it's evident to us with as strong as Roofing is performing that our goal has to be keep Roofing performing at a very high level and continue to put Insulation and Composites in a position to drive additional earnings growth for the company.

And we think we're positioned to do that. We also, as you've heard in Michael's comments, have been very focused on free cash flow.

We told investors three or four years ago it's coming, that we had work that we needed to do, some restructuring-related things, some initiatives to get ourselves positioned for better free cash flow, and I think you've seen over the last couple years and certainly based on our guidance the next couple years that we're going to see this great earnings performance translating into great cash flow and our goal, lot of shareholder value.

So we feel very good about the quarter. I think we're going to feel very good about the fourth quarter and how the year finishes out. And obviously moving forward, the next year we think we have an opportunity to put up another great near next year.

So I appreciate all your support, and we look forward to talking to you again on our fourth quarter call..

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