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

Michael Jason Rehaut - JPMorgan Securities LLC Kenneth R. Zener - KeyBanc Capital Markets, Inc. Matthew Bouley - Barclays Capital, Inc. Peter Galbo - Bank of America Merrill Lynch Kathryn Ingram Thompson - Thompson Research Group LLC Keith Hughes - SunTrust Robinson Humphrey, Inc. Collin Verron - Jefferies LLC Garik S. Shmois - Longbow Research LLC.

Good day, and welcome to the Owens Corning Fourth 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 Mr.

Thierry Denis, Vice President of Investor Relations. Please go ahead..

Thank you, Allison, and good morning, everyone. Thank you for taking the time to join us for today's conference call and review of our business results for the fourth quarter and full-year 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 yourself to one question and one follow-up. Earlier this morning, we issued a news release and filed a 10-K that detailed our financial results for the fourth quarter and full-year 2016.

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

Refer to the Investors link under the Corporate section of our home page. 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've excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT and adjusted earnings.

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

We also use free cash flow and free cash flow conversion of adjusted earnings as measures helpful to investors to evaluate the company's ability to generate cash and utilize that cash to pursue opportunities that enhance shareholder value. 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 fourth quarter earnings call. Owens Corning had a great year and delivered record levels of adjusted EBIT and free cash flow, driven by strong commercial and operational execution.

2016 revenue was $5.7 billion, up 6%; and adjusted EBIT was $746 million, up 36%, both compared with the prior year. Fourth quarter revenue was $1.4 billion, up 7%; and adjusted EBIT was $157 million, up 15%, both compared with last year.

Additionally, we generated record free cash flow as a result of improved earnings, strong working capital performance and an advantaged tax position. Free cash flow was $570 million, up 67% versus the prior year.

We converted adjusted earnings to free cash flow at a rate of 126% over the last two years, in excess of the prior guidance of about 100% over the years 2015 to 2018. Our performance reflects the continued improvements we've made to our portfolio of businesses.

We operate low-cost assets that generate healthy margins and allow for a disciplined capital allocation strategy. Before we talk about our financials, I'd like to give you an update on our safety program. As you know, safety is critical to our company. We continue to advance our goal of creating a workplace free of injuries.

Our recordable incident rate for the year was 0.5, a slight improvement over the prior year. Now, as I do every quarter, I'd like to review our performance as it relates to the expectations we've set for the year and then talk about our expectations for the current year.

In our Composites business, we said that we expected to improve EBIT by about $30 million on price and volume growth. Composites generated EBIT of $264 million, up 14% or $32 million compared with the prior year, primarily driven by increased volume. This EBIT increase is in line with our guidance.

Importantly, this is the second consecutive year of record EBIT for this business. In the fourth quarter, Composites reported strong results with EBIT of $65 million, a 48% increase compared with the fourth quarter of last year. For both fourth quarter and full year, Composites delivered 14% EBIT margins.

Product leadership and low-delivered cost operations are fueling revenue growth and margin expansion. In 2016, Roofing delivered EBIT of $486 million, up 83% compared with the prior year; and EBIT margins of 22%.

In the fourth quarter, Roofing reported another quarter of outstanding results with EBIT of $98 million, up 85% compared with the fourth quarter of 2015; and EBIT margins of 20%. These results were achieved on significantly higher volumes, continued growth in the Components business and lower asphalt costs.

Industry shipments grew about 19% in 2016, supported by storm demand and growth in age-related reroof and new construction. Throughout 2016, market growth continued to exceed our expectations. About half of the total market growth came from strong storm demand in Texas.

Additionally, we continue to make great progress integrating InterWrap, which generated $40 million of EBIT over the last eight months of 2016, exceeding the expectations that we've previously communicated. The Insulation business had a challenging year.

Last quarter, we said that we expected that 2016 revenue could be down by about 5% and the EBIT margin rate could be 1 percentage point below 2015. For the year, Insulation revenue declined by $102 million and EBIT declined by $34 million. And in the fourth quarter, EBIT declined $27 million, all compared with the same period last year.

These results were driven by lower sales volumes in the U.S. residential fiberglass building insulation market. 2016 revenue and EBIT margins were slightly below our expectations, primarily related to overall market volume in the fourth quarter. In the second half of the year, we made progress in recovering our market share position in the U.S.

residential market. Additionally, the pricing environment was stable after some midyear weakness, and we feel optimistic about positive price realization this year. The Engineered Insulation business and our businesses in Latin America and Asia are performing at a record level financially. Now, on to 2017 guidance.

Overall, we expect an environment consistent with the consensus expectations for U.S. housing starts and moderate global industrial production growth. In Composites, we expect a third consecutive record year with EBIT growth of about $25 million from improved operating performance, primarily driven by lower rebuild and startup expenses.

In Roofing, we anticipate continued growth in new construction and age-related reroof markets. However, an assumption of more normalized weather-related demand, particularly in Texas, would produce a smaller roofing market opportunity in 2017.

In Insulation, we expect revenue to increase by about $100 million with EBIT of $160 million or more, as we should benefit from new construction growth and the expansion of the Engineered Insulation business. We also expect improvement in our U.S. residential business.

Additional growth is possible, but it is likely dependent upon the progression of pricing and volume in the U.S. residential market. From a full company perspective, we expect to continue to convert adjusted earnings to free cash flow at a high rate. Similar to last year, full company EBIT guidance will be provided later in the year.

I'd also like to highlight a few other developments. Last week, the board of directors declared a quarterly cash dividend of $0.20 per share, demonstrating our continued confidence in the company's financial outlook and cash generation capability, as well as our commitment to enhancing shareholder value.

In 2016, we repurchased 4.8 million shares, representing over 4% of our shares outstanding, for $240 million. Last month, we were recognized as one of the world's most sustainable companies for the fourth consecutive year by sustainability investment specialist, RobecoSAM. Our score earned us Gold Class and Industry Mover distinctions.

And earlier this week, we announced that we received an Asthma and Allergy Friendly certification for our Pure Safety high-performance insulation. We're the first and only company in the building products industry to earn this certification from the Asthma and Allergy Foundation of America.

Our Pure Safety product is an innovation that provides our customers with the unique solution to address what we see as a growing segment in the construction market. In summary, the company continues to exhibit strong momentum. We continue to capitalize on favorable market conditions.

We consistently demonstrate strong commercial and operational execution. We've been disciplined in our approach to capital allocation, and we've managed a strong balance sheet that can support growth through acquisitions and investments.

I'm proud of what we've achieved and excited about the opportunities ahead to generate greater value for 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 had a great year. We delivered fourth quarter and full-year adjusted EBIT of $157 million and $746 million, respectively.

These results establish a new record for full-year adjusted EBIT performance for the company and demonstrate the strength of our portfolio of businesses. Strong earnings and working capital performance, coupled with our advantaged tax position, translated into record free cash flow of $570 million; an increase of 67% over the same period last year.

The company converted adjusted net earnings to free cash flow at a rate of 136%, allowing us to return $328 million to shareholders through buybacks and dividends. Now, let's start on slide five, which summarizes our key financial data for the fourth quarter.

You'll find more detailed financial information in the tables of today's news release and the Form 10-K. Today, we reported fourth quarter 2016 consolidated net sales of $1.4 billion, up 7% as compared to sales reported for the same period in 2015.

In our Roofing and Composites businesses, net sales were up 31% and 5%, respectively, primarily on higher sales volumes. Net sales in Insulation business decreased 9%, primarily on lower sales volumes. Adjusted EBIT for the fourth quarter of 2016 was $157 million, up $21 million compared to 2015.

Adjusted earnings for the fourth quarter of 2016 were $81 million or $0.72 per diluted share, compared to $79 million or $0.66 per diluted share in 2015. Depreciation and amortization expense for the quarter was $101 million, up $25 million compared to the fourth quarter of 2015.

The increase is primarily attributable to accelerated depreciation related to restructuring actions in our Insulation business, which I'll discuss in a moment. Full-year depreciation and amortization expense was $343 million, including accelerated depreciation of $19 million. Capital additions for the year were $414 million.

Now, on slide six, let me reconcile 2016 adjusted EBIT of $746 million to our reported EBIT of $699 million. We adjusted out $19 million of acquisition-related costs, including $10 million of inventory step-up related to the InterWrap acquisition. We adjusted out $28 million of restructuring costs.

The majority of these charges occurred in the fourth quarter and were related to the previously announced plan to permanently exit our insulation manufacturing facility in Québec, Canada. These charges were your largely non-cash.

Now, please turn to slide seven, where we provide a high-level review of our adjusted EBIT performance comparing 2016 to 2015. Adjusted EBIT for the year increased by $196 million or 36% over last year, led by significant improvements in our Roofing and Composites businesses of 83% and 14%, respectively.

For the full year, the company delivered 13% operating margins, another record. General corporate expenses were $130 million. With that review of key financial highlights, I ask you to turn to slide eight, where I provide a more detailed review of our business results, beginning with our Insulation business.

Sales in Insulation for the quarter of $473 million were down 9% for the same period a year ago. EBIT for the quarter was $43 million, compared to $70 million in the same period one year ago. These results were broadly in line with expectations that we set on the third quarter call, with slightly weaker market volumes.

For the full year, Insulation sales were $1.7 billion, down about 6% as compared to 2015. EBIT for the full year of $126 million was $34 million lower than the previous year. The full-year results were driven primarily by lower sales and production volumes.

In the second half of 2016, we experienced stable pricing, and we continue to recover our market position in the U.S. residential insulation business. In mid-January, we implemented a price increase for our U.S. residential insulation business, and we're optimistic about realizing positive price given the current market environment.

I will remind you that pricing for this business remains well below the prior peak, even on a nominal basis. We believe there is further opportunity, as this product is fundamentally useful and undoubtedly valuable. Consensus expectations for U.S.

housing starts are at 1.26 million units for 2017, therefore, we would expect a market growth rate for U.S. residential new construction similar to last year. 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 during 2017. Our Engineered Insulation business and our businesses in Latin America and Asia are also performing at a record level, and we expect further top and bottom line growth from these businesses in 2017.

For the full year 2017, we expect revenue growth of about $100 million, with EBIT of $160 million or more, driven by improved volumes, pricing, and production leverage. Our volumes will benefit both from a growing market and a recovering share position in U.S. residential fiberglass insulation.

We see the potential for additional earnings growth, but it will be dependent on the pace of progress for both volumes and price in our U.S. residential business. As a reminder, we would expect a difficult comparison in the first half of 2017, driven by lower volumes in our U.S.

residential business and the startup of our new mineral fiber facility in Joplin, Missouri. Now, I ask you to turn your attention to slide nine for a review of our Composites business. With the best fourth quarter EBIT performance in its history, the Composites business delivered its second consecutive year of record earnings and margin performance.

Sales in our Composites business for the fourth quarter were $466 million, up approximately 5% from the same period one year ago. Volume growth in the quarter was primarily driven by higher sales in the Roofing industry. EBIT for the quarter was $65 million, up compared to $44 million in the same period last year.

Composites delivered 14% margins in the fourth quarter on continued volume growth and lower manufacturing-related costs. For the full year, sales were $2 billion, up 3% compared to the same period in 2015, primarily driven by higher sales volumes of 6%.

The business delivered $264 million of EBIT for the full year, representing the second consecutive year of record EBIT. The achievement of our low-delivered cost goal and progress on product leadership continue to fuel growth and margin expansion. We delivered 14% full-year EBIT margins in 2016.

In 2017, we expect continued growth in the glass fiber market, driven by moderate global industrial production growth. We expect to deliver a third consecutive year of record financial performance, with EBIT growth of about $25 million from improved operating performance, primarily driven by lower rebuild and startup expenses.

We expect that the positive impact of volume growth will be largely offset by inflation and foreign exchange translation. Slide 10 provides an overview of our Roofing business. The Roofing business had an outstanding year.

Roofing sales for the quarter were $483 million, a 31% 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 market grew 14% in the quarter, supported by continued storm demand and growth in both age-related reroof and new construction.

Pricing was sequentially stable. EBIT for the quarter was $98 million, up 85% compared to the same period in 2015. The increase in EBIT was equally driven by higher volumes, asphalt deflation, and the acquisition of InterWrap. The Roofing business delivered 20% EBIT margins in the fourth quarter.

Sales for the full year were $2.2 billion, a 24% increase over the prior year, primarily on higher sales volumes and the acquisition of InterWrap. For the full year, EBIT increased $220 million in 2016, delivering 22% EBIT margins on higher volumes, continued growth in Components, and lower asphalt cost.

The strong fourth quarter contributed to full-year industry shipment growth of about 19%, supported by strong storm demand and growth in both age-related reroof and new construction. We are pleased with the performance of our Roofing business. We made substantial progress in growing our Components business in 2016, both organically and inorganically.

We saw limited discounting and less inventory build early in the year. We experienced improved volumes and stable to improving pricing throughout the year; and asphalt deflation tracked largely with expectations. The Roofing business is positioned to deliver another strong year in 2017.

We expect continued growth in new construction and age-related reroof demand. This growth is not expected to fully offset anticipated declines in the storm markets, particularly Texas. Industry shipments to Texas were roughly 10 million squares higher in 2016 versus 2015, which represented nearly half the growth of the total market.

As a reminder, this business will also benefit from the full-year effect of the InterWrap acquisition, which closed in April 2016. Finally, we're anticipating modest asphalt inflation in 2017 based on the current outlook for crude prices. It would be our expectation to recover any inflation via pricing actions.

To that end, we've announced a price increase effective in late Q1 in response to these higher costs. Now, let me turn your attention to slide 11, which provides an overview of significant financial matters.

The company's board of directors declared a cash dividend of $0.20 per share payable on April 3, 2017, to shareholders of record as of March 10, 2017. The dividend has grown in average of 8% per year since its inception.

We repurchased 1.4 million shares of the company stock in the quarter and 4.8 million shares for the year, leaving 9.8 million shares available for repurchase as of the end of 2016 under our 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 your attention to slide 12, where I provide our outlook for 2017.

For 2017, the company expects an environment consistent with consensus expectations for U.S. housing starts and moderate global industrial production growth. Composites should deliver EBIT growth of about $25 million. For Insulation, we expect revenue growth of about $100 million with EBIT of $160 million or more.

In Roofing, we expect another good year, with growth in age-related reroof and new construction. This growth is not expected to be fully offset with anticipated declines in storm markets, particularly Texas.

As we discussed at our November 2015 Investor Day, improved earnings, better working capital performance and our advantaged tax position will translate into a higher conversion ratio of adjusted earnings to free cash flow of about 100% over the years 2015 to 2018. We expect another strong year of conversion in 2017, consistent with this guidance.

Similar to last year, full-year EBIT (23:09) guidance will be provided later in the year. 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 $375 million, including the expansion of our Composites facility in India. Depreciation and amortization expense is expected to be about $345 million. Interest expense is expected to be about $110 million. Our $1.8 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 2017 cash tax rate to be 10% to 12% of adjusted pre-tax earnings. Our 2017 effective tax rate is expected to be approximately 32% to 34% of adjusted pre-tax earnings. With that, I'll turn the call over to Thierry to lead us into question-and-answer session.

Thierry?.

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

Thank you. We will now begin the question-and-answer session. Our first question will come from Michael Rehaut of JPMorgan. Please go ahead..

Thanks. Good morning, everyone, and nice quarter..

Thank you, Michael..

First question I had was on the Composites business. It's been a great turnaround and the margin improvement has been something that I think you guys talked to and laid out as you reengineered the low-cost asset base to try and generate these types of margins. So congrats on that.

I guess looking forward, do you kind of view this level as the new normal? And more specifically, on 2017, with the $25 million of EBIT improvement, if you could give us a sense of roughly how much of that is coming from the lower rebuild and startup expenses and how the other Components kind of affect the remaining amount of improvement where you mentioned the production levels and some inflation? That's my first question.

Thank you..

Yeah. Thanks, Mike. It's Michael. Let me kind of take you through what we're thinking about 2017, maybe, in a bit more detail. I mean, one, you're right. The business has made a lot of progress over the last three or four years.

Really great commercial execution, really great operational execution, in particular around our low-delivered cost strategy and getting our asset base to where it needs to be for the long-term.

Kind of thinking about the top line from a top line growth perspective, the last couple of years, the last two, three years, it's been kind of like moderate global industrial production growth. Kind of less than 2% – 2% or less. As we look forward to this year, we've kind of planned our business on something similar.

But at the start of this year, actually expectations are probably about 100 basis points from an overall growth perspective better than what was delivered last year. Again, our expectation, that strong operational, commercial execution is going to continue.

The EBIT improvement that we've guided to, the $25 million, you're right, the bulk of it is coming from lower rebuild cost and lower startup expenses; and that we see a little bit of inflation that's largely related to energy or energy derived and FX with the strong dollar creating some headwinds.

But, again, we're real pleased with the performance of the business. We're positioned for another record year and January's off to a good start..

Great. Thanks, Mike. Appreciate that. And I guess, secondly, just looking at Insulation, the implied incremental margins for 2017 I have it at roughly 33%, which is kind of below that 50% number that you've talked to in the past at this point in the cycle.

I think during your remarks you talked to expectations in the first half of the year with continued lower volumes and startup of mineral fiber facility. So I was curious if those are the kind of drivers that are maybe suppressing that incremental margin relative to your more normal expectations at this point in the cycle.

And if that's something where we'd expect perhaps second half 2017 to better reflect that 50%, or what are some of the puts and takes there?.

Yeah. Mike, it's a great question. This is Mike. So let me start with 2015. I think the operating leverage guidance that we've given for Insulation of around 50% is still very, very good guidance. If you actually look at 2016, our decremental operating leverage in 2016 was about 35%.

So on a $100 million revenue drop, we produced somewhere in the order of magnitude of about a $35 million drop in overall EBIT in the business. So we didn't see that the operating leverage in 2016 was quite as great as what you might have expected.

And I think partly that was because our production economics in the first half of last year were kind of better than what would've been sustainable based on our entire volume for the year.

So we had high levels of production in the first half, curtail through the second quarter, saw worse production economics in the second half; and coming into this year, we're actually going to carry a little bit worse production economics into the year out of inventory than when we carried in last year.

So that helped us on the decrement of operating leverage in 2016. I think it's going to hurt us in terms of producing the 50% operating leverage in 2017. That said, we're certainly not ruling out the possibility that we could produce 50% operating leverage in 2017. If you listen to the comments we made, we obviously have some headwind from Joplin.

We gave some indication that we feel good about where pricing is in the first month of the quarter with the January price increase, feeling like we got some realization out of that, and that maybe some of the headwind we had coming into the year where we lost a little price last year that we can overcome that headwind.

I think our ability to get back to that 50% leverage this year is going to be driven by where volumes play out in the residential side, and then how much additional price we get through the year.

And certainly as we look at the year, we feel like continued growth in new construction and then the dynamics that we're feeling in our own business would suggest that there may be some opportunity to get some additional price as we move through the year..

Our next question will come from Ken Zener of KeyBanc. Please go ahead..

Good morning, gentlemen..

Good morning, Ken..

Morning..

Going to be a compound question, I'm warning you. So, Mike Thaman, last year you were very vocal about Insulation and industry dynamics. So I would understand if you're being cautious.

Could you be explicit on this inventory headwind that you're facing dollar value and the Joplin headwind dollar value in the first half? Because there seems to be a very large disconnect between first half and second half operational performance..

Okay. Sure, Ken.

The biggest difference – and I think Michael laid it out because it's important we want our investors to understand kind of what the shape of the performance in Insulation will be this year – is we're going to come negative on volume through the first part of the year, certainly in the first quarter, as last year in the first quarter we had a significantly higher market share than what we carried through the balance of 2016.

So we're going to come into this year with improved market share position. I'm very happy with the commercial execution of the team in the second half of 2016. I think we've positioned ourselves in the market effectively. But we're certainly entering this year with still lower share than we would have had this time last year.

And as a result of that, I think you're going to see two things. We'll have a little bit less volume obviously, and then also our production economics won't be as good.

So that, combined with the first half Joplin startup, piled in a few things in the first half that I think rightfully we gave you (32:06) guidance that said, we think we've got tough comps in the first half.

As we head into the second half, we would expect Joplin to begin to contribute, we would expect the cumulative effect of pricing, and we would expect that we're comping against easier volume numbers with overall market growth.

As it relates to the dynamic, I mean, I think the biggest difference at this time this year than where we were at this time last year is overall industry utilization is another increment higher based on 2016 growth in the new construction market. And our market share is quite a bit lower or has been adjusted lower.

So as a result, we do believe we're operating below the overall level of utilization of the industry. And I think by just simple math we believe our competitors are operating at above the overall industry level of utilization. So we would expect that this is a year where we would see some tightness and, therefore, some pricing opportunity..

Okay. So, it didn't sound like the question about the dollar value for inventory headwind or Joplin, you guys are willing to be a little explicit – more explicit about. Is that correct, Mike? That was my question..

Yeah. I think that, in aggregate, I think, we've given a very good guidance for the business. We're looking for $100 million of revenue growth or more. And we certainly think the business in total will get back to the $160 million, and that would include all the puts and takes you're looking for in your question..

Okay. I understand your willingness to answer. So my point was going towards the fact that industry utilization rates keep going up. There was new capacity last year. When you're hitting peak demand early summer, plants are going to be running a lot higher than that average utilization, and it seems like pricing has to be moving in your favor.

And that's the dynamic that I'm trying to get to. And I don't know if you want to verbally comment on your view on 2016 utilization rates for the industry on average, as it relates to your last slide that had it for 2015? Thank you..

Yeah. Thanks, Ken. We have not updated our industry analysis, and we'll do that as we get a little later in the year here. But I think your observation that there is seasonality to the business and that, in fact, the first half of the year typically has a little bit lower shipment levels than the second half of the year.

And as a result, even if you look at average utilizations for the year, utilizations tend to be a little bit lighter than that in the first half, and then tighter than that in the second half, is a very good observation.

I think the way we've expressed that in terms of our pricing announcements is, when we announced our price increase for January, we're holding those prices through the end of April.

But unlike some prior years where there has been some full-year price guarantees that were given early in the year, which we thought maybe took away the opportunity to come back later in the year when utilizations are a bit higher.

I think this year, we're set up to potentially be able to move price through the year if we see the kinds of utilizations you're describing..

And our next question will come from Matthew Bouley of Barclays Bank. Please go ahead..

Hi. Thank you for taking my questions. I just wanted to ask a little further on the Insulation guidance. I was hoping you could parse through some of the inputs a little bit further.

So just, if you could give a sense for the growth in the commercial and engineered businesses that's embedded in your guidance and how the Joplin ramp that you mentioned plays into that? And I wanted to understand how that balances with mix, if the assumption is that residential fiberglass is re-accelerating?.

Sure. I think as you look through the businesses that are inside our Insulation segment, we've tried to lay out kind of what are the dynamics that are involved in that. Our Engineered Insulation business tends to grow, I would say, at some mix of residential construction and commercial construction and industrial production.

So it's a mixed bag of types of products we have in there. But we've been seeing kind of low to mid-single digit type volume growth in that business through the cycle. So I think we would expect to see continued progression in our engineered and industrial businesses tracking that market. Latin America and Asia have been good markets for us.

And we've said the three of those businesses in aggregate, industrial, Asia, and Latin America, are currently operating at a record level. We would expect continued progress in both Asia and Latin America, where we have good profitability. So I think all of those will be contributing and positive. Joplin, on balance.

I mean, if you startup a facility in the first half of the year and you can cover your startup costs with some profits by the time you get to the end of the year, you've probably done pretty well.

So, in aggregate, I don't think it has much material impact on the business in 2017, with the exception of, it will hurt operating leverage a bit because we will ship some revenue out of Joplin and because the startup costs and other things probably won't produce what would be midterm or sustainable margin rates in the first year of production.

So I guess in the (37:04) operating leverage story, I don't think it's material to the overall level of EBIT dollars we produce in 2017, which gets you all the way back to res. I think that's the piece of the business that's been most volatile. That's the piece of the business that's been performing well below our expectations.

I think our team's been very diligent about trying to move the performance of that business. We've certainly taken a view that there's enough volume out there that we should be getting the levels of profitability that are acceptable to us.

But that today, at least, we don't have pricing that would support the levels of profitability we think we need through the cycle.

So we're continuing to focus on getting the business positioned to be able to get margin accretive pricing, because we do think the margin rate in the business is too low today to kind of justify continued reinvestment in the business; and that's really been our theme, and we've been working hard at that.

We obviously had a disappointing 2016 in that regard, but we expect that we'll turn the corner here in 2017..

Okay. Thank you for that. And then, I just wanted to move to Roofing and ask about the price environment there.

Because it seemed like pricing was about stable sequentially in the fourth quarter – and correct me if I'm wrong there – and now you have this price increase out for the first quarter, which I think is a little bit earlier in the year than you typically do.

So, just wondering what you're seeing in the market differently this year? Whether it's demand or channel inventories, or just the asphalt environment, that is giving you the confidence in this early year price increase?.

Yeah. Thanks for your question. Actually, if you go back a number of years, I mean, we've had a number of different first quarter dynamics in Roofing.

The one good dynamic we're not seeing is, we're not seeing the broad-based national discounting of shingles in the first quarter that we were seeing three or four years ago, which was leading to big distortions in terms of the timing of shipments and also big distortions in terms of margins.

So we are seeing, as you said, pricing coming out of the fourth quarter that was relatively stable. I would characterize the market today as being relatively stable in terms of pricing.

The reason why I think we saw a little bit earlier pricing action in the industry this year than maybe what we've seen in a couple of the prior years is, I think we are expecting an inflationary environment.

So in prior years, we saw the ability to maybe build margins a bit through the year by seeing some input cost deflation on relatively flat pricing. I think this year, for us, to build margins through the year, we're going to have to capture some price in order to offset the inflation that we do expect.

We don't think the inflation is going to be material, but we do think we will comp year-on-year with higher costs than what we had last year. So, getting some price earlier in the year is actually consistent with the history of the industry.

It was not uncommon, many years back, to see kind of an April 1 price increase as the way of giving distribution some incentive to stock some inventory in the first quarter ahead of a price increase.

And I think that's pretty close to the environment we'll be in this year with maybe some of our customers trying to bring in some inventories in advance of a late first quarter price increase so that they have lower cost inventories as we go into the Roofing season in the second quarter..

And our next question will come from John Lovallo of Bank of America. Please go ahead..

Hey, guys. This is actually Pete Galbo on for John..

Hi, Pete..

How are you? Just had a quick question kind of around M&A strategy going forward, obviously, with the success you had with InterWrap.

Just anything that you're looking at in the pipeline or any high level thoughts for 2017?.

Yeah. Maybe let me reflect on 2016 for a second, and then I'll give you some thoughts about 2017. But I really think 2016 was a benchmark year for the company in terms of capital allocation. I think it starts with the really great cash conversion. Michael mentioned that in his prepared comments.

I mean, our cash conversion was over 130% of adjusted income. So we had 500-plus-million dollars worth of cash to work with. We had, I think, a very balanced approach of share buybacks, where we bought back over 4 million shares; dividend and dividend increases, which have been growing at about 8% a year; the InterWrap acquisition at $450 million.

Half of that we paid for out of cash flow. The other half we did a very nice refinancing on our balance sheet. Did a 10-year deal that pushed out about $200 million of incremental long-term debt. So we finished the year still below $2 billion in total debt.

All of our debt with very good maturities, investment-grade credit rating and basically integrated the entire InterWrap acquisition financially in an eight-month period of time from May until the end of the year while getting all the rest of those things done.

I think our biggest goal for 2017, from a capital allocation point of view, would be to repeat something similar to that. So we'd love to be in a position where we have a balanced approach to capital allocation that included some share repurchase, some dividends, and another nice tuck-in acquisition that was kind of immediately accretive.

I think you'd expect that we're not going to comment on specific activities, but the themes that we've been working on are expanding the Components business in our Roofing operation. And I think we've had good success there.

We've talked about a desire to increase the portfolio of product technologies and geographic diversity for our Insulation business. We've been looking at some downstream opportunities in our Composites business where maybe you can add more value to the glass than just a pallet of glass production, but actually more of a product form.

We had an effort at an acquisition last year that we weren't able to get regulatory approval on, but we like the way (42:43) we continue to look in that area. So I think we've got a pretty broad agenda and we're looking across a good frontier of opportunities.

All of them, I think, in description, if we were able to get something done would sound a lot like what we said with InterWrap though, which is a belief that we paid a reasonable price and that we had real synergies that made the business more valuable to the Owens Corning shareholder and therefore was a useful allocation of our capital..

Okay. Yeah. And then, just kind of moving back over to Insulation and I know kind of Ken asked this earlier.

But is there a industry capacity or Owens Corning capacity number that typically you would need to see before you really did see an upward inflection in pricing, at least, historically that you'd be willing to kind of discuss?.

Yes. I mean, I think we've said in the past at some of our Investor Days when we've had more complete disclosure on this, we tend to not try to update all that industry stuff on a quarterly basis. We step back kind of once a year and gather all our information together and make sure that we can do it as accurately as possible.

History has shown that the two things that have the most positive impact on pricing are overall level of industry capacity utilization and then rate of change.

So the best scenario is if you have utilizations in the 90s, and I'd say probably somewhere from the low to mid-90s, let's call it 92% to 95%, and utilizations are increasing, you tend to have a positive price environment.

If you have either utilizations below 90% or you have utilization declining, that tends to be an environment because of the high fixed cost nature of the business that you see more price competition.

I think as we head into 2017 on full-year basis, we would certainly expect that we would both see an increasing utilization environment and utilizations of the operating plants in the system at or above that 90% level. That's consistent with our prior disclosure on our industry utilization numbers.

And we don't see activities today that would cause us to believe that mothballed or shuttered facilities are coming back online. We've not seen any announcements that cause us to believe that we should be doing this analysis off of any other footprint than the current footprint of operating plants. So that's the environment we're in.

That's the environment that I think we've been talking about for the last couple years as being the advantageous environment. But it continues to be a very competitive market, and we're going to feel confident in pricing when we're able to report it..

Our next question will come from Kathryn Thompson from Thompson Research Group. Please go ahead..

Hi. Thank you for taking my questions today. This is really going to focus on the Composites group, but could really be spread across all your other business categories.

But any thoughts on bid activity post-election? And, in particular, any geographic differences in terms of what is driving demand? So really have you seen any type of change in momentum of bid activity for larger type projects? Thank you..

Yeah. Hey, Kathryn. It's Michael. Yeah, I presume you're talking kind of post-election..

Correct..

Yeah. Here's what I'd tell you. Just kind of thinking about 2016 and then maybe playing it forward into 2017. For 2016, the things that we spoke about throughout the year kind of held up through the end of the year. From a geographic perspective, Europe was pretty good. India was pretty good from an application point of view.

Auto, construction, in particular, Roofing in the U.S. were pretty strong. And then, obviously, Brazil was a bit weak, although our Brazilian business is performing pretty well.

And then, North American and Middle East oil and gas was weak for the bulk of the year, but actually started to turn positive late year, and certainly has turned more positive this year, where the actual rig count in the United States is about up 50% from the bottom. Listen, I think generally, the expectation for growth in the U.S.

today is better than it was in kind of pre-election. But we're not really seeing any of that come to the bottom line, although you did hear me say earlier that our January was off to a good start. We expect growth consistent, if not maybe a little bit better than what we experienced last year..

Okay. Helpful. And just one follow-up question on the Insulation segment. On an inflation-adjusted basis, by your estimation, how much off are Insulation prices today versus the prior peak? And are price increases in the market, in your opinion, enough to keep up with inflation? Thank you..

Yeah, thanks. Let me start with just nominal pricing and then we can inflation adjust it. But the last time we saw the peak in kind of the residential new construction segment was the 2006 timeframe. And prices today are off of those levels by about 20% on a nominal basis.

So, even though it's been a low inflation environment, even at a 1.5% inflation a year over the last decade, that number's probably closer to 35% or 40% in real terms. So we get a lot of productivity in that business. I think peak to peak, historically, we've seen peak to peak nominal pricing about flat than we've typically seen trough to trough.

Nominal pricing about flat, because our team does do a very good job on the productivity side on offsetting most of that inflation. But certainly we don't have enough productivity, and have not had enough productivity to offset a 20% decline in nominal pricing. We probably have bounced off of the bottom.

I'd say, at the bottom, nominal price was as much as 35% below where we were at the prior peak.

So we've climbed a third of the way up that wall, but obviously we're at point in the cycle where we're now 10 years into – or seven years into a housing recovery, that we'd like to see a quicker improvement to getting back to levels of profitability that we would recognize or are consistent with our history..

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

Yes. Question back to Insulation.

Are you currently – well, in the forecast, do you have any large chunks of market share wins that you've been working on that you can talk about? Or is that something in the future that could come into play as 2017 progresses?.

Yeah. It's a great question, Keith. I think we've tried to be pretty open, because we did see a material change in the business and its market share in the second quarter of last year. And how we would respond to that, and how the business responded to that, was something I think that's relevant and important for investors to understand.

Obviously, there's some concentration of big customers at the top of the market, but it is also a fragmented market. And given our history, we know just about everybody in the industry and have done business, through time, with just about every player in the industry.

So, we've tried to be very thoughtful about rebuilding and diversifying our customer base in a way that would be the customer base that would serve us best through the cycle. I think we've done a good job of that through the second half of last year. So we're comfortable that we're positioned well with a good, broad set of customers.

Our goal is not to go try to find all that volume back in one particular place. And I think our goal would be to get a little bit more diversified and a little less dependent on one customer, and we've been successful in doing that.

If our thesis is correct, that we're running today at a little bit lower utilization than maybe the overall industry, that would suggest, as the industry gets tighter, we should disproportionately benefit in terms of the incremental market share.

So if our incremental share of capacity is a little bit higher than average, then our incremental market share should be a little bit higher in terms of growth. And we would expect, to a certain extent, that volume will come to us seeking a home and seeking some volume, and then we're obviously prepared to service that volume as it comes our way.

So, as the year progresses, if see that kind of environment, I think we're set up well to see kind of good increments on volume growth with growth in the market, and also hopefully good increments on margin and profitability, related to both operating leverage as well as improved pricing..

Okay. Thank you..

Our next question will come from Phil Ng of Jefferies. Please go ahead..

Hello. This is actually Collin on for Phil. Just going back to the Insulation business. In your guidance, it looks like there isn't too much pricing baked in on a year-over-year basis, just given where the incremental margin is falling out in that mid-30% range.

Can you talk about what your expectation is, just in terms of pricing on a year-over-year basis, granted that the pricing seemed to slide from where it stood at the beginning of 2016 versus the end?.

Yeah. I think your characterization of the things we've said in our guidance is well done. So I think we've gotten our messages across clearly on the call. We're really, I think, focused right now on what we have in hand.

And we came into the year with some headwind related to price, on some pricing we lost, really through the middle part of last year as we adjusted our position in the market. We're feeling confident that we're going to see positive price realization out of the January price increase.

We feel that there's enough positive price realization that maybe we've overcome that headwind. But I don't know, at this point, we're ready to give forward-looking guidance in terms of margin accretive pricing.

I think in the questions that we've gotten on the call, we've obviously laid out the business case on where margin accretive pricing might come from. But that's a lot of months ahead of us and a lot of competitive activity between here and there to get the business back to the kinds of profitability and margin rates that we'd like to see.

So I don't know that I have anything else I'd want to say about where we think prices will progress through the year, besides hoping that we see good growth in the market, and that brings good volumes to Owens Corning, at good margins..

Thank you.

And then, just on the Roofing side, can you just talk about the impact that the lower – your expectations for lower volumes because of this storm demand not being in there in 2017, what that would do to your ability to realize prices in 2017?.

Yeah. Thanks for the question. We try to be very visible in our guidance today, specifically around the state of Texas. So we saw good growth in the overall market. We said the market was up about 19%. We put out overall industry slides as a part of our investor and we will do that and update those slides.

But, in aggregate, if you look back at some of our prior disclosure with the market last year being about 112 million squares in 2015, 19% growth would produce about 20 million squares of growth year-on-year from 2015 to 2016. We said about half of that came in Texas and about half of that was storm-related demand in Texas.

I think the good news and bad news of that is, the good news is there was 10 million squares of additional growth outside of Texas on a base that's probably closer to 100 million squares. So we saw 10% growth broadly across the market, if you exclude Texas. The market doesn't really operate at the national market.

I mean, we have national customers and there are a bunch of national players. But a lot of regional dynamics play into pricing and margin and share dynamics. And, generally, what we saw last year is most of the country grew at a nice pace and that we saw broad-based growth outside of Texas in new construction, in age-related reroof.

Just a good old-fashioned, my roof is getting old and I should put a new roof on my house, which we hadn't seen for a while. And then also some additional storm activity outside of Texas. So we feel like the non-Texas market has shown growth and should continue to show growth. We also feel that we saw a fairly extraordinary year of storms in Texas.

There's probably some carryover demand, where the work that came from those storms probably didn't all get done in 2016. And so, we expect in the early part of the year that we'll see decent demand out of Texas as we continue to ship into service 2016 storms.

But if we don't see a big storm year in Texas, you then kind of flip over into what's often referred to in the industry as the hangover effect, which is after the end of a big storm period there tends to be a lot of houses that got pulled forward in terms of demand.

And then you see a little bit of an air pocket where those houses or not out in the market today needing a reroof. So we think, on balance, Texas probably entered the year decently well. And then, depending on how weather plays out, we could actually see what would feel like weakness in Texas. I don't think that has a big national impact.

I think that's how does Texas play and how does the rest of the country play. I think the rest of the country will see good growth, and good market share and margin opportunity for the business. But I think in Texas it's been a great ride for us, and I think we'll continue to do well there as well..

Allison, this is Thierry. I think we have time for one more round of questions..

Thank you. Our next question will come from Garik Shmois of Longbow Research. Please go ahead..

Thank you. First question is just on InterWrap.

Maybe I missed it, but I was just wondering if you could provide some color on revenue and EBIT expectations or maybe incremental contribution in 2017 relative to 2016?.

Yeah, Garik. This is Mike. If you go back to our second quarter call in 2016, I think, we gave a pretty good profile of the business in terms of its contribution to 2016 results. And we updated that today, where we said that the business produced about $40 million of EBIT over a eight-month period of time.

I think as we move forward, we're probably going to be less likely to just break InterWrap out as an entity. It's actually a part of a business unit that sits inside Roofing, which is our Components business; and there's a lot of other product lines inside that Components business.

But I think, suffice it to say, our view at least of the eight-month mark is the business acquisitions have been a home run, that will be seen through the first eight months only gives us confidence in our overall thesis. We think we have significant synergies that are still yet to be realized.

And the market is nowhere close to being 100% converted to coated woven underlayments and, in fact, we think it's probably below 50% converted. So there's a lot of upside opportunity.

Even in a potentially declining Roofing market this year, we'd expect the opportunity for that product to grow in 2017 and we'd expect that we're going to get growth and EBIT growth and revenue growth out of the business this year..

Okay. Thanks so much..

And ladies and gentlemen, this will conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Thierry Denis..

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 a few closing remarks..

Okay. Thanks, everyone, for joining us on the call and for your continued interest in our company.

In the question-and-answer period, I had the opportunity to talk a little bit about kind of how 2016 is a benchmark year for us, not just in terms of overall financial performance, but also strategically in terms of what we're trying to get done in terms of capital allocation and growing our business.

So a really good, broad-based performance across the businesses, record results in many capacities, outstanding cash flow performance, a great acquisition, as well as I think a thoughtful and aggressive approach to returning capital to shareholders; all designed to produce shareholder value. We think we're positioned to do that again in 2017.

On the plus side, we expect continued growth in Composites and record performance. We expect to see Insulation getting back to form and contributing to earnings growth and revenue growth. We expect the full-year impact of InterWrap will be a positive for our business.

And we would expect that the Roofing shingle business will continue to perform at a very high level, with some uncertainty as to what the overall market opportunity will be for us.

So as we get later in the year and have better visibility to how we think the market plays out in Roofing, I think we'll get more definitive on our outlook for the whole company. But certainly, we feel like across all three of the businesses we have the opportunity to demonstrate very, very good performance this year.

The company continues to exhibit strong momentum. We continue to capitalize on favorable market conditions. Our commercial and operational execution is very, very good. We're disciplined in our approach to capital allocation.

And we continue to have a strong balance sheet, so that we can support growth and take advantage of opportunities when we see them in the market. We think that's a great agenda for our company. We enter 2017 excited to play that forward again in what we think will be a good market condition.

So we look forward to updating you through the year and giving you further insight around our results as the year progresses. And we look forward to having you join us on our first quarter call in April. Thank you..

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