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

John Lovallo - Bank of America Merrill Lynch Matthew Bouley - Barclays Capital, Inc. Kathryn Ingram Thompson - Thompson Research Group LLC Robert Wetenhall - RBC Capital Markets LLC Michael Wood - Instinet Incorporated Stephen Kim - Evercore ISI Kenneth R. Zener - KeyBanc Capital Markets, Inc. Michael Jason Rehaut - JPMorgan Securities LLC.

Good morning, everyone, and welcome to the Q1 2017 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. Please also note that today's event is being recorded. At this time I'd like to turn the conference call over to Mr.

Thierry Denis, Vice President of Investor Relations. Sir, please go ahead..

Thank you Jamie and, good afternoon, everyone. Thank you for taking the time to join us for today's conference call and review of our business results for the first quarter 2017. 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-Q that detailed our financial results for the first quarter 2017.

For the purposes of our discussion today, we've prepared presentation slides that summarize our performance and results for the first quarter 2017 and we will refer to these slides during this call. You can access the earnings press release, Form 10-Q and the presentation slides at our website, owenscorning.com.

Refer to the Investors link under the Corporate section of our home page. The transcript and recording of this call and the supporting slides will be available on our website for future reference. Please reference slide two before we begin where we offer a couple of reminders.

First, today's remarks will include forward-looking statements based on our current forecasts and estimates of future events. These statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially.

We undertake no obligation to update these statements beyond what is required under applicable securities laws. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent risks and uncertainties affecting such forward-looking statements.

Second, the presentation slides and today's remarks contain non-GAAP financial measures. Explanations and reconciliations of non-GAAP to GAAP measures may be found in the text and financial tables of our earnings press release 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.

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 four.

And now, opening remarks from our Chairman and CEO, Mike Thaman will be followed by CFO, Michael McMurray and our Q&A session.

Mike?.

Thank you, Thierry. Good morning, everyone, and welcome to our first quarter earnings call. Owens Corning is off to a great start in 2017. First quarter revenue was $1.5 billion up 20%. And adjusted EBIT was $171 million up 45%. Both compared with last year. Our three businesses delivered an outstanding result this quarter.

By capitalizing our market growth and executing against our operational priorities. Each business is focused on creating opportunities to grow and generating value for our customers. We are investing in profitable growth initiatives that are producing sustainable returns.

Before I talk about our financial results in detail, I'd like to give you an update on our safety program. As you know, safety is critical to the success of our company and our people. We are advancing our goal of creating a workplace free of injuries.

Our recordable incident rate for the quarter was 0.49, an 11% improvement over the same quarter last year. Now as I do every quarter, I'd like to review our performance as it relates to the expectations we've set and then talk about our expectations for the full year.

Roofing delivered another impressive quarter with EBIT of $125 million, up 71% compared with last year, and EBIT margins of 20%. These results were achieved on significantly higher shingle volume and continued growth in the components business.

Industry shipments grew 37% in the first quarter, supported by strong demand and the timing of a late first quarter price increase. Our Composites business generated EBIT of $71 million, up 11% compared with the prior year driven by increased volume and improved operating performance, primarily from lower rebuild and start-up expenses.

Notably, this is a record first quarter EBIT for the Composites business. Volume growth was strong and was a positive for the quarter. It was broad-based across the business and included the benefit of a strong Roofing market. The Insulation business performed in line with our expectations. Insulation resumed revenue growth, increasing by $14 million.

EBIT declined by $8 million, both compared with the same period last year. The EBIT results were driven by lower production volume in this quarter compared with first quarter 2016. Additionally, we're experiencing normal start-up costs with our new mineral wool facility in Joplin, Missouri.

The engineered insulation business and our businesses in Latin American and Asia have consistently performed at a high level. In our residential insulation business, we implemented a price increase in first quarter and are seeing progress. We've also announced another increase which will take effect on June 1.

We remain optimistic about positive price realizations throughout this year. Now onto our guidance and outlook for 2017. Overall, we continue to expect an environment consistent with consensus expectations for U.S. housing starts and moderate global industrial production growth.

In Roofing, we anticipate that the full year shingle market will be down versus 2016 as growth in new construction and age-related reroof will not be able to offset expected declines in the storm markets, particularly Texas. We expect volumes for the first half of the year to be broadly flat.

We are pleased with our margin performance and believe that we will be able to recover anticipated asphalt inflation from pricing as we shift from a deflationary to an inflationary environment.

In Composites, we expect the third consecutive record year with EBIT growth of about $25 million from improved operating performance, primarily driven by lower rebuild and start-up expenses. Based upon the strong volumes in the first quarter, we believe there may be some additional upside if volume strength persists throughout the year.

In Insulation, we expect revenue to increase by about $100 million with EBIT of $160 million or more. Given our progress through the first quarter, we remain confident in our prior guidance. From a full company perspective, we expect to convert adjusted earnings to free cash flow at a rate of about 100% this year.

Similar to last year, full year company EBIT guidance will be provided on our second quarter earnings call. I'd also like to highlight a few other developments. I'm pleased to share that our mineral wool facility will be operational later this quarter.

Tomorrow at the start of the American Institute of Architects' annual conference, we will announce our plans to produce the first formaldehyde-free mineral wool insulation in North America later this year. This represents an innovation for architects, specifiers and contractors interested in achieving green building standards.

In addition, we announced an expansion of our partnership with Habitat for Humanity to install roofs on the homes of U.S. military veterans as a part of the Roof Deployment Project. We will donate the roofing materials and partner with our platinum contractors to improve the housing of veterans and their families.

Lastly, I'm pleased to note that we ranked in the top 25 of Corporate Responsibility Magazine's 100 Best Corporate Citizens list. We were particularly pleased to be recognized for our environmental performance. In conclusion, the company is demonstrating its ability to deliver on its priorities.

All three businesses are capitalizing on market growth and executing on their plans. We are focused on creating innovative solutions for our customers through strong partnership and execution.

We operate low cost assets that generate a healthy return and our financial strength creates a meaningful opportunity to support growth through targeted investments and acquisitions. I'm excited about the opportunities ahead and the potential for our company. 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 quarter. Commercial and operational execution was strong for all three businesses and we're positioned to deliver another year of strong performance.

We delivered first quarter adjusted EBIT of $171 million, establishing a new record for first quarter adjusted EBIT performance for the company and demonstrating the strength of our portfolio of businesses. Now, let's start on slide five which summarizes our key financial data for the first quarter.

You will find more detailed financial information in the tables of today's news release and the Form 10-Q. Today, we reported first quarter 2017 consolidated net sales of $1.5 billion, up 20% and nearly $250 million compared to sales reported for the same period in 2016.

Insulation, Composites, and Roofing reported increases of $14 million, $38 million, and $198 million respectively, primarily on higher sales volumes. Adjusted EBIT for the first quarter of 2017 was $171 million, up 45% compared to $118 million in the same period one year ago. This represents a record first quarter for the company.

The company also delivered another quarter of double-digit operating margins. Net earnings attributable to Owens Corning were $101 million, up 77% versus the same period last year. Adjusted earnings for the first quarter of 2017 were $97 million or $0.85 per diluted share compared to $62 million or $0.53 per diluted share in 2016.

Depreciation and amortization expense for the quarter was $84 million, up slightly across all three businesses as compared to the first quarter of 2016. Our capital additions for the quarter were $57 million. On slide six, you will see the $1 million of adjusting items in the quarter are related to our acquisition of InterWrap.

Now please turn to slide seven where we provide a high-level review of our adjusted EBIT performance, comparing the first quarter of 2017 to the first quarter of 2016. Adjusted EBIT increased by $53 million. Roofing and Composites EBIT increased by $52 million and $7 million respectively.

Insulation EBIT was down $8 million as compared to the prior year. General corporate expenses were down slightly from the prior year. With that review of key financial highlights, I ask you to turn to slide eight where we provide a more detailed review of our business results beginning with our Insulation business.

Sales in Insulation of $399 million were up 4% from the same period a year ago, primarily on higher sales volumes. The Insulation business resumed revenue growth in the quarter as a result of market growth and disciplined commercial execution, including progress on our January price increase for our U.S. residential business.

We've announced a further price increase for our U.S. Residential business effective June 1 and we are optimistic about realizing additional price given the underlying market growth we are experiencing. As expected, Insulation EBIT declined $8 million as compared to 2016, predominantly on lower production volumes.

In the second quarter of 2017, we experienced continued revenue growth, but – we expect continued revenue growth, but anticipate some margin compression compared to last year driven by lower production volumes in our U.S. residential business and the startup of our new mineral wool facility, which will begin production later this quarter.

For the full year, we continue to expect revenue to increase by about $100 million with EBIT of $160 million or more driven by improved volumes, pricing, and production leverage. With the price realized year-to-date we remain confident in our current outlook.

Additional earnings growth is possible but will be depended upon continued volume growth, realization of our second quarter price increase, and any additional pricing progress in the second half of the year. Now I'll ask you to turn your attention to slide nine for a review of our Composites business.

The Composites business delivered a strong quarter. Sales in our Composites business for the first quarter were $511 million, up 8% as compared to the same period in 2016 on volume growth of 11%. First quarter demand was strong and broad-based across most geographies and product lines, particularly in Roofing.

Composites delivered record earnings and margins for the quarter. EBIT for the quarter was $71 million, $7 million higher than the same period last year on volume growth and improved operating performance. Composites delivered 14% EBIT margins in the quarter.

The achievement of low delivered cost goal and progress on product leadership continue to fuel growth and margin expansion. In 2017, we continue to expect growth in the glass-fiber market driven by moderate global industrial production growth.

We expect to deliver a third consecutive year of record EBIT, with growth of about $25 million from an improved operating performance, driven primarily by lower rebuild and start-up expenses. EBIT growth in excess of this outlook is possible if first quarter volume strength continue throughout the remainder of the year.

Slide 10 provides an overview of our Roofing business. The Roofing business had an outstanding quarter. Roofing sales for the quarter were $627 million, a 46% 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 37% in the quarter, supported by continued strong demand and distributor buying ahead of the mid-March price increase. As a result, we believe that some first quarter shipments will be used to service second quarter demand.

I'm also pleased to report that discounting in the quarter was limited, and was similar to what we experienced in the first quarter of 2015 and 2016. EBIT in the quarter was $125 million up $52 million compared to the same period in 2016.

Roofing delivered 20% EBIT margins on strong shingle volume growth and a significant year-over-year contribution from the components business. We are pleased with the performance in our components business, including the acquisition of InterWrap which celebrated its first anniversary last week. The Roofing business is positioned for a strong 2017.

We expect continued growth in new construction and age related reroof demand. We do not expect this growth to fully offset anticipated declines in storm markets. On a year-to-date basis, storm-related demand estimates are tracking consistent with long-term averages but below what we had seen in 2016 at this point in the year.

We expect the market in the first half of 2017 to be broadly flat. Therefore, we would expect second quarter volumes to be down versus the same period last year. Finally, we continue to anticipate asphalt inflation in 2017 based on the current outlook for crude prices. It continues to be our expectation to recover inflation through pricing actions.

To that end, we have announced an additional price increase effective June 1. Now let me turn your attention to slide 11. In the first quarter, under a previously announced share repurchase program, we repurchased 1 million shares of the company's stock at an average price of $57.45 per share.

As of March 31, 8.8 million shares remain available for repurchase under the company's current authorization. As we balance our priorities for the future deployment of our free cash flow, both dividends and stock repurchases will be important mechanisms to return capital to shareholders. Now I'll provide our outlook for 2017.

For 2017, the company continues to expect an environment consistent with consensus expectations for U.S. housing starts and moderate global industrial production growth. In Composites, we expect to deliver a third consecutive year of record EBIT with growth of about $25 million, primarily from improved operating performance.

EBIT growth in excess of this outlook is possible if first quarter volume strength continues throughout the remainder of the year. For Insulation, we continue to expect revenue growth of about $100 million with EBIT of $160 million or more. For the price realized year-to-date, we remain confident in our current outlook.

Additional earnings growth is possible but will be dependent upon the pace of progress for volume and realization of further pricing. In Roofing, we expect another good year, with growth in age related reroof and new construction. This growth is not expected to fully offset anticipated declines in storm markets, particularly Texas.

We expect the market in the first half of 2017 to be broadly flat and, therefore, we expect second-quarter volumes to be down versus the same period last year.

As previously discussed, improved earnings, better working capital performance, and our advantaged tax position will translate into a high-conversion ratio of adjusted net earnings to free cash flow of about 100% over the years 2015 to 2018. Over 2015 to 2016, we delivered an average conversion of 126%, which is well ahead of this guidance.

In 2017, we expect another strong year with conversion of around 100%. Similar to last year, full-year corporate guidance will be provided on the second quarter earnings call. Now, please turn to slide 12, 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 32% to 34% of adjusted pre-tax earnings. With that, I'll turn the call over to Thierry to lead us to the question-and-answer session.

Thierry?.

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

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. Our first question today comes from John Lovallo from Bank of America. Please go ahead with your question..

Hey, guys. Thank you for taking my call. The first question, I guess, I just want to better understand the pricing dynamics in Insulation. It seems like you're fairly confident that pricing is sticking and going to stick, but it looks like pricing was down $6 million in the quarter, and you're following up with another price increase.

So, I guess, along those lines, I mean, have your competitors announced similar increases for June?.

Yeah, John. Thanks for the question.

So if you look at our 10-Q disclosure, it would show that pricing was down for the quarter, which is in comparison to the first quarter of last year, and I think if you recall in 2016 we disclosed that through the summer of 2016 we did see some sequential price weakening so that, in fact, our prices at the end of 2016 were lower than where they were at the beginning of 2016.

So what you're really seeing there is on a comparable basis to the first quarter of last year, prices are down, but sequentially, from the fourth quarter of 2016 to the first quarter of 2017, our prices improved, which demonstrates success with our January price increase in the first quarter. So we did realize some of that pricing.

We think we've overcome most of the negative headwind that we had associated with price coming into the year. So really any additional price that we get from this point forward would likely be positive price on a year-on-year basis. We have announced the June 1 price increase.

My understanding is that all the manufacturers have announced price increases for around that period of time, so our expectation, as we've said on the call, is we're in an inflationary environment and we should be able to recover some prices here and try to improve the margins of that business..

Okay. Great, and then I guess just a follow-up.

In the Composites business, can you just tell us what the benefit was in the quarter from lower rebuild and start-up costs?.

Yes. Thanks, John. It's Michael. So we said that lower rebuild cost – lower start-up and rebuild costs for the full year would track positive to the tune of about $25 million. If you look at the Q specifically, you can tease out of it that it's probably about $5 million..

Great. Thanks very much, guys..

Our next question comes from Matthew Bouley from Barclays. Please go ahead with your question..

Hi. Thank you for taking my questions. I wanted to start off on Insulation and just follow up about the price increase discussion.

So just as we move into peak production season, would you say capacity utilization is at the point where you feel more confident in a second round of price increases? And then, I guess, just what level of price is embedded in that $160 million EBIT guidance? And just how should we think about your commentary around, as you said, additional price increases later in 2017?.

Okay. Thank you, Matthew. This is Mike. (23:41) narrative of the Insulation business over the course of the earnings calls. I think there's a couple of times that we've commented that we think probably the hardest time of year to give price in the Insulation business is early in the year.

Because of the seasonality of the business as a manufacturer you tend to be busier in the second half of the year than the first half of the year. So typically, the low point of the year in demand is kind of sometime in the first or second quarter. And then demand builds through the summer and kind of peaks in the second half.

So the fact that we were able to get some price in the first quarter is typically a pretty good sign for us that we're in an environment where through the course of the year we may be able to continue to get some positive price in the business. Obviously, that's going to be dependent on the progression of housing starts.

The last couple months, the consensus outlook for housing starts has actually been upgraded slightly, which we've taken as a very positive note.

I think if you look back over the last five or six years, the high point on consensus housing starts estimates was typically January 1 and then they were kind of degraded on a month-by-month basis as we went through the year.

We're in a little different environment this year and that we see economists who forecast these things are feeling a little bit more optimistic in April than they were even four months ago. So we take that as a positive sign.

To your second question regarding how much price is embedded in our guidance, I think we said on the fourth quarter call that we were coming into the year with a little bit of a pricing headwind associated with the softness we saw in the middle and second half of last year that we needed to overcome that headwind in order to get to our guidance.

My prior answer to John's question as I said that I thought with the pricing we got in the first quarter we probably covered off that headwind. So we're in pretty good shape I think relative to the guidance we've given on pricing as long as pricing either stays where it is or continues to progress forward..

Okay. Got it. Thank you for that. I guess, we can shift to just wanted to ask about Roofing and price there. So you have the price increase out there and then the second announcement now for June. And, of course, you've got some support with asphalt prices rising.

So how should we think about the interplay between those dynamics and then your guidance for softer volumes next quarter? So just what kind of confidence do you have in positive price just given a pullback in volumes? Thank you..

Thanks. Well, if you listen to our prepared remarks, we've guided that we think the first half market opportunity in total will be about flat to last year. So as a manufacturer in terms of the opportunity that we see in the first six months of the year, we're not really seeing a pullback.

We've seen a pretty big shift in terms of timing in that we shipped a lot more shingles in the first quarter and expect to ship less in the second quarter. But in terms of how we plan our business, our production volumes and other things in the first quarter were geared towards a certain amount of volume in the first half.

And in fact, we exited the quarter with pretty depleted inventories and we'll need to catch up a little bit on inventory. And our expectation is we'll finish the second quarter about right where we expected to be in terms of production inventory and overall volume. So it's really a timing story. I think it's a good news timing story.

Obviously, the fact that the marketplace was buying ahead of the price increase is indicative of the fact that it's recognized that we're in an inflationary environment and that Roofing prices are going to need to go up a bit in order for us to cover the inflation that we're seeing.

We feel pretty comfortable that the margin rates in the first quarter were great, 20% EBIT in the first quarter is really a very good result for us. And that the margin rates we see coming out of the first quarter into the second quarter, with the pricing we saw in March, would support continued good momentum in the performance of business.

As you get into the second half of the year, obviously, we've got a lot of variables at play now. You're talking about how much additional storm activity we see, which will inform our outlook on overall volumes. We'll see the progression of oil prices over the next three months. And then we'll also see where asphalt trades relative to oil.

As you get into the summer, a lot of times asphalt will gap out a little bit because of paving season and other things and asphalt will become a little bit more expensive relative to oil.

So in that kind of environment if we do see decent demand, if we see oil prices continue to be somewhat stable or strong and asphalt continue to gap out, we would suspect that would support continued price actions for us to recover some of the inflation we might see in the second half.

So in general the year started just where we wanted it to be and we think the first half will shape up exactly where we want it to be. And then as we get into the second half of the year we'll have more visibility..

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

Hi. Thanks for taking my questions today. First on Insulation, admittedly comps in first half would be challenging driven by the start-up of your mineral fiber facility in Joplin, and also just tough comps prior to the mid Q2 curtailment.

In regards to Joplin, how is the Joplin plant ramping up progressing? I know you gave a little color in your prepared comments. And what, if any, impact did that ramp-up have to Q1 results? Thank you..

Well, thanks, Kathryn. As we've said on our prepared remarks, we're expecting Joplin to start up in the second quarter. So in the first quarter, it was really uncovered fixed costs and construction costs that were coming through the numbers.

They had an impact on the first quarter, but materially the impact on the first quarter was lower production volumes in our fiberglass business associated with our 2017 outlook around volumes and share relative to where we were last year at this time, when we were really producing at very high levels and putting very low cost product into inventory.

So in Michael's comments, he did say that we think that probably will persist a little bit into the second quarter. We had pretty good costs in inventory in the first quarter last year, and then when we slowed down production last year in response to some market share loss, we still had fairly good economics coming through in the second quarter.

We're more kind of ratably producing this year, so I think what you'll see out of the business is a little bit worse production economics in the first quarter, maybe a little bit worse production economics in the second quarter, and then we'll start to comp positively in the second half of the year in terms of production economics.

So our outlook for second quarter is we think we're back on a growth trend with Insulation.

We might see a tiny bit of continued margin depression in the second quarter related to production economics, and then hopefully with strong housing starts and good demand in the second half of the year, we'll start to comp positive across the entire business..

Okay. Thanks. And then just a follow up, just a broader question on Insulation, not just for you but broadly speaking for the industry, where do you think you are in terms of effective insulation capacity utilization? And we would define that as lines that are open and are producing now.

What would push a decision to open mothballed capacity? And really, maybe help us fully understand at what point in time does it makes sense to open up mothballed facilities? Thank you..

(30:54). As you know, we're the only public registrant in the insulation industry, so we do our best to publish our analysis of where we think the industry is, but we don't have an industry group that publishes industry analysis on this. So we're using our best efforts to portray to our investors our view of how we think the industry is shaping up.

And if you go to our website in the Investors section, every time we go out on the road we post our new presentation deck, and in there you'll see some slides related to our current estimates of where capacity utilizations are. Our estimates as we head into 2017 would be that the hot lines in the industry are operating north of 90% utilization.

I think we said last year with some of the share shifts that happened, we went from probably operating above the industry average to now operating a bit below the industry average. So we think the industry is somewhere in the 90s.

We're probably a little bit below that, and I think by inference you'd conclude we believe our competitors are operating somewhere a bit above that. In prior calls I've been asked to talk about starting up new lines. We've said there's three degrees of complexity here.

There's starting up a line in a facility that's currently running, there's starting up a plant that's been mothballed, and then there's going back to a plant that's either been permanently retired or building a greenfield. Starting up a line in a plant that's currently operating is certainly the easiest and fastest capacity that can come in.

You have technical staff, you have skilled workforce, you have raw material suppliers. You have all the things you need, engineering teams.

So we've seen through this recovery, ourselves and our competitors bring back capacity in order to service growth in demand, and we would expect that would continue as utilization rates continue to be at relatively high levels.

As you get to a plant that's been shut down or mothballed – we're ten years now into this down cycle, so you're talking about facilities that have been shut down for as much as ten years. In our case, they were typically our highest cost facilities. That's why they got turned off first.

So you're talking about equipment that hasn't been really maintained or invested in for over a decade. So our view of how you would make that decision would be we'd be looking for a simple payback cash on cash.

What would it take us to get the facility up in terms of time and resources? And how much months or years would it need to operate for us to be able to get that investment back? Certainly at the margins we're talking about today in residential insulation, our view would be we're not terribly close to being able to make those economics work because our presumption would be that when we go into the next downturn that's probably the first facility that we would go and take that offline because it's our high cost facility.

So it's not a long-term investment decision. It's a very short term investment decision. Similar, we've said, to the way utilities would look at turning on a peaker.

When you get to the next order of magnitude, which is facilities that have been retired, we're trying to rejuvenate our greenfield facility, I think there you get into long-term investment economics that if we try to push those numbers around, it's virtually impossible for us to see how that could end..

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

Hey, guys. Thanks for the detail. I wanted to switch gears because we beat the horse dead on Insulation and Roofing. Maybe on Composites for a second, it looks like volume was really healthy, but there were headwinds on the price mix side.

And I want to understand, given your kind of modestly positive outlook for global industrial production, how we should be thinking.

And was this soft incremental margin performance due to the pricing dynamics in the quarter? And going forward through the year, if you get a recovery in price, do you think the incrementals go back to that 45% level?.

Hey, Bob. Thanks. It's Michael. So, maybe, let me take it from the top line first. Then we'll talk about some of the headwinds that we experienced in the quarter as well. I think what was encouraging is the volume momentum that we've seen over the last couple of years has continued into the first quarter.

Interestingly, volume growth over the last couple of years was probably mid-single digits and, as you know, the numbers that we reported today, volume strength was about 11%. And as you heard in my prepared remarks it was broad-based both from an end market perspective but also from an application perspective.

But in particular in Roofing, which tends to be a little bit lower calorie business for us. So Roofing – the business that goes into Roofing has smaller margins than the rest of our business. I think what was also encouraging is that we saw nice growth year-on-year in both Europe and North America. In auto, in construction, and also oil and gas.

So oil and gas has turned into a tailwind in 2017 versus a headwind the previous two years. And then from a demand timing perspective, about a third, maybe a little bit more than a third of the growth that we saw within the quarter itself was attributable to Roofing. And that's going to be largely timing related.

So that volume was pulled forward from the rest of the year. And then moving onto to your incrementals and where we actually saw a bit of headwind, we only saw headwind in two areas. The first was inflation. The inflation that we experienced in the Composites business was largely energy or energy derived.

And then lastly, we saw a little bit of a headwind on the price line as well. You'll recall, I hope, that on the third quarter call, in my prepared remarks, I highlighted that the pace of pricing had slowed in the second half of 2016.

And it was primarily related to some adjustments that we had made in Europe, really adjustments to maintain our market position. And then we've seen a little bit of erosion in some proprietary product positions. That said, let me be really clear, the overall market remained stable.

I think quite frankly looking forward when you look at capacity utilization and the inflation that we're experiencing, both of those are probably good catalysts for some pricing actions as we move towards the latter part of this year..

That's encouraging. Thanks for the great color on that. Very helpful. Also, just wanted to ask about Mike's comments about the Roofing price increase that went into March. And I just want to understand how the dynamic works.

Very helpful understanding the pre-buy narrative which is occurring in the marketplace, but you're calling for a sharp decline in volumes in the second quarter. And I wanted to think through that process.

Maybe you can help me understand, if you have weaker volumes in the second quarter, does that prevent price capture off the increase that you announced to the market? How does that interplay work? And also, what's the impact through distribution? Is there a situation here where there was a lot of pre-buy in 1Q then distributors are, kind of, fully stocked in 2Q? You're not forecasting storm activity which is the right thing to do.

But how do we think about sell-through at the distributor level given this prevailing dynamic that you guys are talking about?.

Okay. Thanks Bob. Let me talk about the market in total and kind of work my way back to your question. But I want to make sure that people are hearing our sense of optimism about the overall market for 2017.

We're saying we think the market will be down some versus 2016, but if you look at some of the things we published on the market analysis, 2016 was a fairly large storm year. It was probably 8 million to 10 million squares above the 17-year average or the 10-year average of storm demand. So we've seen some storm activity in the early part of the year.

We would say storm activity this year is probably tracking to something that looks like an average-type storm year, or maybe a tick above that because of some of the storm demand we carried over from last year into this year.

So on a comp basis, if you go back to 2014 or 2015, we expect the market would be dramatically stronger than what we had seen in a couple of those years where the market was actually quite weak.

So we're not looking for a weak market, we're just not looking for a market that's quite as strong as what we saw in 2016, and probably one that doesn't quite sustain as strongly through the second half of the year unless we see significantly more storm activity.

Now at least in our case that was kind of the scenario we painted coming into the year and so in terms of our production economics, in terms of our pricing decisions, in terms of our expectations about inflation, we viewed the year as a year that we needed to service the market as the opportunity came along and we needed to be disciplined about trying to use pricing actions to recover some of the inflation that we were seeing.

I think the dynamic in the first quarter were the people who have the ability to stock inventories took a fair amount of inventory in to service second quarter demand is typical of what we would see in our industry.

Where if you buy ahead of a price increase you can have lower cost in inventory in a rising price environment and maybe see margins that widen out at the distribution level. So that's historically been a dynamic of the business. I mean, I think we're seeing that dynamic this year.

I think, the difference versus maybe a couple of the other years is we are in an inflationary environment and not a deflationary environment. So the expectation would be that we would potentially see continued price actions through the year depending on how asphalt plays out.

But we'll end the first half of the year, we think, with the overall market opportunity about flat to last year which is a good outcome. We think we'll track the market which we think is a good outcome.

We came into the year expecting that the overall market would be down a bit, so our expectations for the second half, therefore, would be that the opportunity for us is going to be down a bit. And we've set our production plans and our margin plans and pricing plans accordingly..

Our next question comes from Mike Wood from Nomura Instinet. Please go ahead with your question..

Hi. Good morning, guys. Maybe I'll just shift to Composites.

Would love your thoughts in terms of where your capacity utilization is there in Composites, if the growth sustains itself, sort of what that industry dynamic means for others to potentially add capacity – yourself to add capacity and what you think will happen on the pricing side in Composites?.

Thank you, Mike. It's Michael. So you know that we've published, I think, for the last three if not four years kind of a historic view on capacity utilization and then kind of a three to four year outlook. And really over the past couple of years, since 2014 actually, capacity utilization has been at or above 90% for the industry and for Owens Corning.

And, really, if you look at it by region it's generally operated above 90% as well. Looking forward, we expect that that's going to continue. So we expect the market to grow, but as has happened over the past couple of years and we expect it to happen over next couple years, new capacity will be added as the market continues to grow.

I think, the important thing, kind of given where we've been in the better part of the last decade, the capacity that has come on has come on in a very, very disciplined way.

I think, thinking about where utilization rates are today and then the potential growth rates going forward, as I said earlier, we saw good growth in the first quarter of this year and if that were to sustain itself for the balance of the year, we actually see some upside to the guidance that we've previously given.

And then given that we're experiencing a bit of inflation as well, I think that's good for pricing dynamic as we move into the latter part of the year..

Great. Thank you.

And then the working capital usage in the quarter, can you just give us some color on what that related to? And does that reverse out next quarter?.

Roofing sales..

Hey, but that – so the working capital usage in the quarter was related to Roofing, but while I have this moment, we have made a lot of progress from a working capital perspective and it's been contributing to the significant free cash flow that we've delivered in 2015 and in 2016 and that we're going to deliver in 2017.

In 2015 we improved working capital as a percent of sales by almost 300 basis points, improved another 170 basis points last year and it's my goal to make some additional progress this year. So what you're seeing in the first quarter is all Roofing related. That will blow back in the second quarter..

And just to add to Michael's comments, obviously because it was Roofing sales related and our guidance in the second quarter is that we expect the market to comp negative with last year, we would expect that to reverse out. I think, it'd be a high-class problem if it didn't reverse out.

That would mean Roofing sales were well above kind of what we're currently seeing. So the working capital performance in the first quarter we think was a good news problem..

Our next question comes from Stephen Kim from Evercore ISI. Please go ahead with your question..

Hey, guys. Thanks very much. Good quarter. Wanted to ask you – I guess, in Insulation, as we think about the pricing commentary that you've given us thus far, it sounds like what you're saying is that you expect to have – you've pretty much recovered the deterioration in pricing that occurred sequentially last year.

And so as we think about where we are excluding any capture of the June price increase, just want to make sure we're thinking about it correctly. We should be thinking that in the second quarter, for example, price would be roughly flat year-over-year. There's no reason to think that pricing will necessarily deteriorate into the second half.

There's not like some natural seasonality that we should be baking in there and that overall, the pricing comments or capture that you expect to get in 2017 as the full year, generally speaking, that should be about normal and sufficient to sustain the incrementals you've talked about historically in that business?.

Yeah. So the – long question, you made a lot of points. Let me go back to kind of the beginning of the question where you talked about what was going on sequentially and whether the first quarter pricing would cause us to kind of start comping flat to prior year in future quarters. And I think that's a reasonable summary of what we said on the call.

So we came into the year with a headwind. We were hoping to get some price earlier in the year that would allow us to capture that headwind and at least get it to a neutral point.

I've said in my earlier comments we think we're kind of now neutral relative to last year, which let's face it, that's good news but it's basically no progress since 2015 in a business that's not earning acceptable margin.

So it's not what we would hope to get to, but I think it's a first step in the direction of trying to get Insulation back on track. There's no real kind of seasonality or channel mix or anything that would cause our comps versus prior year to look somewhat goofy.

So I think you should expect that the progression of price through the year is going to mirror whatever success we have or don't have associated with future price increases. Certainly, there's always the opportunity that we would see some competitive situation that would cause prices to go down.

We can't bar against that, but it doesn't feel like that kind of market. Pricing has been relatively stable since really the third quarter of last year and then now started to turn and trend upward a bit in the first quarter which we think is a positive..

That's great. And turning to Roofing. Kind of two sort of questions, broader theoretical questions I guess one could say. You mentioned that you thought that unusual storm activity was driving about 10 million squares higher.

The industry LTM is running about 30 million squares higher than it was in 2015, which would suggest you've seen a pretty substantial increase in the overall demand excluding the storm effect.

And so I'm curious as to whether you think that the cyclicality in Roofing demand may be greater than we all thought before, given that we've just seen generally better economic data and so forth, whether the cyclicality is greater in Roofing maybe than we had previously thought.

And then lastly, we have been hearing that prices at retail, if you will, to end users from distributors has not been having as much success as you all have been having to distribution.

And I was curious as to whether you thought that it was more – whether you thought that your increases to distribution are sustainable even if distribution is not passing that along as effectively to end customers.

Which is more important? Which is the tail and which is the dog, essentially?.

So I think – I understand how you're getting to your numbers on Roofing four (47:58) quarter LTM, but I think that's going to give you a super distorted view of the marketplace, which is why we tend to talk about the market on an annual basis.

One thing I've said on a bunch of these calls is 12/31 is a pretty good time to measure the industry because typically that's the weakest time of the year, which means everyone is aiming to get to their inventory targets on 12/31.

So kind of as you go through a 12-month cycle you tend to get back to the same base point at the end of every year and then each year kind of has its own dynamic. So you benchmarked back to 2015. 2015 was a very below average storm year. So we would see that as a bad benchmark for the starting point for your analysis.

Then as you look at the shape of this year versus last year, last year we saw a deflationary environment which did not create incentives to buy ahead. And then we saw a lot of late first quarter storm activity that led to a really big and aggressive growth in the second quarter.

So we've already said we think we'll comp negative to that second quarter, but we comp massively positive to last year's first quarter because last year in the first quarter we didn't have some of this price pre-buy and this year in the first quarter we did as distributors were trying to get the price increase.

I don't have good visibility to out-the-door pricing in distribution. I think typically in the industry, because everyone has the ability to buy ahead of price increases, there tends to be a little bit of a lag, I think, from the manufacturer to the distributor.

Because everyone does right now have some pretty cost competitive inventories and they're working on moving their prices. But I'll remind you, and we've said this a number of times, the price of a shingle is – the difference in the price of a shingle is almost an inconsequential amount, value of a reroof job.

So whether a shingle costs $2 or $3 a square more than what it had cost a quarter before on a typical reroof job which might have 25 or 30 shingles on it, you're talking between $75 and $100 of cost inflation on a job that's typically $8,000 to $10,000.

So we don't think there's any impediment besides competition to the shingle achieving the value it should achieve in a reroof job. It's a product with great enduring value. And we don't think that the homeowner would be making decisions at all based on price sensitivity of price of shingles..

Great. Thanks very much..

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

Morning, gentlemen.

Hello?.

Hi, Ken..

Can you hear me?.

I can hear you, Ken.

Can you hear us?.

I can. Thank you. So Mike, my question is on the fiberglass industry cost structure, which is central to your prospects. Based on a recent insulation (50:44) report that we did, can you comment on what is the cost differential between your untapped capacity and greenfield construction, if you can do that on a percentage basis.

I ask because our report shows that OC's capacity – Insulation capacity is down about 20%, we estimate, from 1980. And I wonder if this relates to old versus new cost capacity curves and what the implication, obviously, might mean going forward..

Yes. Thanks, Ken. Not to get too theoretical on this, but if you look at maybe where the cost curve of the industry was a decade ago or two decades ago, you probably had 50% or 75% of the capacity of the industry was what we would consider to be low cost capacity. And then you did have at the tail of the cost curve, some less competitive facilities.

And so as a result, in a downturn, I mean in a typical downturn where maybe housing starts would drop down to a million for a couple quarters and then start to come back up, pricing would drop down to the cost position of some of those high cost facilities and then maybe they would support pricing at that level and you could still make positive margins.

What we saw through this downturn is, obviously, demand dropped so dramatically that we've really been operating in the very flat part of the cost curve for the industry. So most everything that operated through the last decade was what we would consider to be a relatively low cost facility.

And most of the lines that are offline today were high cost and that's why they got shuttered. I think with a fairly flat cost curve, you would expect that until utilizations get relatively high, the support for strong margin growth through price is going be a challenge.

And that's, I think, been our thesis over the last three or four years as we've been watching growth in the industry, attempting to load our facilities and give us a position where we can maybe get margin back.

I don't think if you saw a new greenfield facility come in at the low end of the cost curve that it would have a big impact on the dynamic of the industry. So our view, and I said that earlier when I was talking about reinvestment economics, a new facility would not have dramatically better costs than our existing facilities.

And if you tried to justify a new facility you'd have to justify it over a terminal value and an NPV which means you'd have to believe it's going to operate through every cycle. It may operate through every cycle, but it would probably mean that some other facility you currently have operating would have to be turned off.

So it's tough to make those economics work in the environment we're in today..

And just to be clear, Mike, is that because – so let's not look at today's pricing.

But if you were to see – and I'm just going throw this out there, 10% or 15% price, whatever it is, to get your untapped capacity online, you're suggesting that at that price point it's not, I mean from your analysis, economical to open up a greenfield plant due to the cost curve differential..

I think the issue here, Ken, and I mean, I'm giving you Owens Corning's view and how we look at it, right. You can go look at 50 years of housing data and the housing market typically cycles inside a band.

And then when it gets to the top of that band, not just fiberglass insulation but a lot of other commodities, OSB, gypsum board, other things start to run up against their capacity utilization that typically creates a more expensive construction environment and it's history that typically then a recession follows.

You start to see some downturn in housing because that's a classic definition of the market overheating. I don't think that's where we are today.

But generally, in our history, every time we've gotten to a point in the market where it looked to us like the economics of the housing industry and the economics of the Insulation business could potentially justify a greenfield, we were also pretty close to the next downturn and in effect you would have gone and built a greenfield to come online just when the market turned over.

So that's a 40-year view of this problem. I mean, the facts and circumstances specifically of where we are today are going to be a bit different. But if you actually look at the last 40 years among all the industry competitors, there's not been a lot of greenfield capacity. You've seen expansion of existing facilities if you drive for throughputs.

You've seen productivity gains, but this has not been an industry that's typically built greenfield capacity in the late part of the cycle..

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

Thanks. Good morning, and thanks for taking my question or hopefully questions. First off, I just wanted to again revisit from a clarity perspective Insulation pricing and what's baked into guidance or not. And I apologize. I know that it was asked a couple different ways.

But essentially what you're saying, if I have this right, is with the price increase in the first quarter, you're now by the end of the quarter getting back to about breakeven versus a year ago.

But at the same time given that your full-year guidance was essentially anticipating being price neutral or overcoming the deficit that you were entering the year, it seems to me that you would actually need a little bit of positive price in the back half. The first amount of positive price would still offset the shortfall in the first quarter.

And that is still what's incorporated in your guidance. In other words, some of the net positive price if you got the June price increase, some of that would go towards just achieving the guidance. And if you were to realize a fuller amount, it would – there could be some upside to that.

Is that a fair way to think about it?.

I think the last way you characterized it is closest to what we're trying to say on the call.

On the fourth quarter call when we gave initial guidance we said that we had a headwind on price coming into the year and that we were feeling some amount of confidence of the first quarter price increase, some visibility to that when we were talking in February.

And that good execution of that first quarter price increase would overcome that headwind and support our guidance.

So we were I think relatively clear at that time that where we were hoping to be with the first quarter price increase would overcome that headwind and it supported the $160 million EBIT, $160 million or more of EBIT guidance that we've given for the Insulation business.

I think what we're saying on this call is pretty much mission accomplished that we now have good visibility to what we've realized out of the first quarter price increase.

We feel we have overcome that headwind and that as we move through the year, what we're going to see is depending on the progression of volumes and depending on the progression of additional pricing that will determine where we are in the spectrum of $160 million or more of EBIT.

And those would be the things that would create some upside to the $160 million..

So in other words, Mike, whatever amount you're able to realize off of the June price increase, that entire amount then would represent gravy in other words?.

Yeah. I mean, gravy or upside, but yes..

Right. Okay..

As long as volumes continued to play out the way we would expect they would relative to kind of housing, those volumes supportive of additional pricing in June would create the upside in the second half of the year..

Great. And then just on Composites, also to make sure I'm understanding it right, you're expecting about – and correct me, a $20 million or $25 million benefit from reduced rebuild. That's essentially the year-over-year improvement in EBIT. And with continued volume growth you'd expect some incremental EBIT from that as well.

But is the volume leverage then effectively being offset by the slight slippage in price and mix?.

Yeah. Thanks, Michael. It's Michael. So yes. At the start of the year we said $25 million of EBIT improvement driven predominantly by lower rebuild and start-up costs. So that's point one.

And then volume growth we said would offset inflation and a little bit of price and then possibly some FX, although FX is looking less like a risk as we sit here today maybe other than Mexico for us.

And then I also said in my prepared remarks and also in Q&A that if the strength that we saw in the first quarter for non-Roofing related demand were to persist through the balance of the year, we see upside to the $25 million of guidance that we've given..

Jamie, this is Thierry. It looks like we've reached the end of the Q&A session.

Do you want to announce the end of the session and then we'll close with some closing comments?.

Sure. At this time, we will conclude the question-and-answer session. At this time, I'd like to turn the conference call back over to Mr. 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 to Mike Thaman for a few closing remarks..

Thanks, Thierry. As I said in my opening, we think we delivered an outstanding result for the quarter. We are very happy with the growth in all three businesses. We've made progress on the key priorities that we had for each of the businesses in the quarter.

There's a lot of year left to go, but we've seen the year shaping up in a way that we think is very constructive for us producing another year of outstanding results. We do believe we're capitalizing on the market growth opportunities they we see out there and I think the business is executing well.

Having low cost assets and having financial strength in this kind of market should give us leverage and I think we'll continue to demonstrate that. So good start to the year. We look forward to talking with everyone a quarter from now.

I think we'll have better visibility to a couple of the variables that we talked about at the Q&A session around the outlook to Roofing demand and maybe the outlook a little bit to Insulation pricing and we'll give able to give you a little bit better guidance on how we think the businesses should perform for the full year.

So we look forward to talking to you again then, and thank you for your interest in Owens Corning..

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines..