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

Matthew Bouley - Barclays Capital, Inc.

John Lovallo - Bank of America Kathryn Ingram Thompson - Thompson Research Group LLC Susan Maklari - Credit Suisse Securities (USA) LLC Michael Jason Rehaut - JPMorgan Securities LLC Stephen Kim - Evercore ISI Justin Andrew Speer - Zelman & Associates Philip Ng - Jefferies LLC Keith Hughes - SunTrust Robinson Humphrey, Inc.

Stephen East - Wells Fargo Securities LLC.

Good day, everyone, and welcome to the Owens Corning Q2 2018 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. And we do ask that you please limit yourself to one question only. Please note that today's event is being recorded.

And I would now like to turn the conference over to Thierry Denis. Please go ahead..

Thank you, William, 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 second quarter 2018. 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. In order to accommodate as many call participants as possible, please limit yourselves to one question only. Earlier this morning, we issued a news release and filed the 10-Q that detailed our financial results for the second quarter 2018.

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

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

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

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

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

Adjusted EBIT is our primary measure of period-over-period comparisons, and we believe it is a meaningful measure for investors to compare our results from period-to-period.

Consistent with our historical practice, we have excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT and adjusted earnings.

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

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 and 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, will be followed by CFO, Michael McMurray, and our Q&A session.

Mike?.

Thank you, Thierry. Good morning, everyone. Owens Corning generated 14% revenue growth in both the quarter and the first half of the year. In the first half, we've achieved several key milestones that have laid the groundwork for another year of strong EBIT.

We expect significant earnings growth as the year progresses and substantial second half improvement over the first half and last year, as we benefit from commercial and operational actions taken so far. Importantly, we've gained price momentum in Roofing and Insulation.

As you recall from last quarter, asphalt and transportation inflation was a headwind for Roofing. Given recent price actions, we have now covered inflation and expect margin improvement for the remainder of the year.

In Insulation, we've made significant progress with multiple price actions across our portfolio and have announced another one for August. Additionally, we're pleased with the acquisition of FOAMGLAS and Paroc, which will continue to power earnings.

We were however challenged by some operational issues in the quarter, which Michael will discuss in more detail during his remarks. We expected some productivity headwinds with two major planned rebuilds in Composites and several manufacturing projects in Insulation.

We did face some additional unexpected challenges, namely a Composites melter failure in May and slower than expected improvements in our mineral wool business. We are also experiencing persistently high inflation.

Despite the fact that second quarter results did not meet our expectations, we continue to expect strong financial results for the second half and the full-year. We are confident in our commercial execution and improvements in our operational performance.

Before I talk about our financial results in detail, I'd like to give you an update on our safety program. As I've said many times, our commitment to safety is unconditional and has been a core value of our company.

For the first half of the year, we maintained a high level of safety with a recordable incident rate of 0.51, a slight increase over the comparable period last year. This quarter, there was a serious accident involving a worker at one of our components facilities.

It's an important reminder that each of us must keep safety in the forefront of everything we do and never stop working toward our goal of a workplace with zero injuries. Now, I'd like to review our performance and then talk about our outlook for 2018.

Revenue was $1.8 billion, up 14% for the second quarter compared with the same period last year on the contribution of our Insulation acquisitions and successful pricing actions in Roofing and Insulation. Adjusted EBIT for the quarter was $214 million, down 7%.

All three businesses continued to be negatively impacted by material and transportation inflation, but the impact was most significant in North America, particularly in Roofing. For the quarter, Insulation grew revenue to $682 million, up 55%, while EBIT increased by $20 million.

This growth was driven by a $21 million EBIT contribution from our acquisitions of FOAMGLAS and Paroc, along with $25 million of price improvement, primarily in the U.S. residential fiberglass building insulation market.

However, the overall EBIT growth was tempered by manufacturing productivity headwinds in both operational performance and rebuild activity, along with continued materials and transportation inflation. In Roofing, we delivered EBIT of $127 million in the quarter compared with $155 million in the prior year quarter, with EBIT margins of 19%.

This quarter, we made substantial progress in offsetting inflation with price, which led to a 4-point sequential margin improvement. Margins improved each month in the quarter, and we exited the quarter with margins in line with our 20% expectation.

EBIT was impacted by a decline in volumes that trailed the mid-single-digit growth in the shingles market. The U.S. Eastern Seaboard, where we have a lower market share, experienced strong growth in the quarter, while other markets where we are stronger contracted. In the years past, we benefited from storm demand and our geographic mix.

This year, we expect geographic mix to be a slight headwind. In addition to geographic mix, our volumes were negatively impacted during the quarter by the timing of shipments. For the first half, we experienced a slight decline in our share position.

But the timing of shipments was not outside normal volatility and customer order patterns, and we expect this to normalize over the remainder of the year. In our Composites business, we generated EBIT of $71 million in the quarter compared with $84 million in the second quarter of 2017 and delivered EBIT margins of 13%.

Results were negatively impacted by planned rebuild and start-up costs, a difficult year-over-year volume comparison, and the melter failure I previously mentioned. Before talking about our outlook for 2018, I'd like to highlight a few developments.

In May, we were honored to be ranked number three on Corporate Responsibility Magazine's Best Corporate Citizens list, which evaluates the 1,000 largest U.S. public companies for standout environmental, social and governance performance.

Also in May, we published our 12th Annual Sustainability Report, which reflects the progress we've made to enhance our global handprint and reduce our environmental footprint. In Asia, we announced several transactions to enhance our competitive position.

We acquired a mineral wool manufacturing facility, strengthening our position in both the mid temperature building and high-temperature industrial insulation markets. We entered into a technology license and manufacturing supply agreement with Taiwan Glass, a leading producer of glass reinforcements, which will extend our supply base.

And we announced a Strategic Cooperation and Supply Agreement with CPIC, a leading Chinese manufacturer of reinforcements, to support growing wind energy demand in China with high-modulus glass fiber. Now, onto our 2018 guidance. Overall, we expect an environment consistent with consensus expectations for U.S.

housing starts and global industrial production growth. In Insulation, we expect to deliver significant earnings improvement in 2018, increasing EBIT by approximately $150 million.

We generated $47 million of year-on-year improvement in the first half, requiring a little bit more than $100 million of improvement in the second half versus 2017 to achieve our outlook.

We believe second half improvement will be even stronger than what we delivered on through the first half due to better pricing, improved manufacturing performance and contributions from our acquisitions. On pricing, our outlook for the year has improved by about $30 million.

However, we have not increased our expectation for EBIT improvement in the business due to persistently high transportation inflation and first half operational challenges. For the second half, for Insulation, operating leverage is expected to be about 50% excluding acquisitions. Michael will discuss this in more detail during his remarks.

In Roofing, we expect growth in both the new construction and remodeling markets. However, we expect a mid-single-digit decline of the overall U.S. asphalt shingle market on the lower storm demand. Given our geographic mix, our volume for the year will likely trail the overall market.

We continue to target to recover asphalt inflation and higher transportation costs through pricing actions, including our recently announced August price increase. In Composites, we expect continued growth in the glass fiber market, driven by global industrial production growth.

For the year, as a result of greater manufacturing costs, a slightly lower volume outlook and higher than anticipated inflation, we expect EBIT to be slightly below last year.

From a full company perspective, given our outlook for our market and our businesses, we expect to generate adjusted EBIT in the range of $925 million to $975 million and are positioned for stronger operating performance in the second half. Lastly, we expect to convert adjusted earnings to free cash flow at about 100%.

We are expecting strong free cash flow in the second half, giving us greater flexibility to deploy capital to maximize shareholder returns. In summary, Owens Corning has achieved strong price realization and executed well on our commercial strategy. Both the global market and U.S. housing starts support growth.

We are going into the second half of the year well positioned to accelerate earnings growth in 2018 and into 2019. We've been challenged with some operational issues, but we've taken the steps in the quarter necessary to address them.

As I said before, market conditions should support a number of milestones in 2018, achieving more than $7 billion in revenue, generating double-digit operating margins for all three businesses and converting 100% of earnings to free cash flow. The underlying fundamentals of our three businesses haven't changed and remain strong.

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, we produced strong top line growth in the second quarter, driven by our acquisitions and robust pricing actions in Roofing and Insulation. But earnings were negatively impacted by planned and unplanned manufacturing costs in Insulation and Composites and lower Roofing volumes.

The inflation trends we experienced early in the year have continued into the second quarter, although the pace of our price improvement has accelerated, and further acceleration is expected in the second half of the year.

The actions we have taken have delivered $83 million of price improvement in the first half of the year, with $47 million of improvement in Insulation and $36 million of improvement in Roofing, and further pricing actions are underway.

These actions, along with a strong macro environment, position the company to deliver strong financial results in 2018. Now, let's start on slide 5, which summarizes our key financial data for the first (sic) [second] quarter. You'll find more detailed financial information in the tables of today's news release and the Form 10-Q.

Today, we reported second quarter 2018 consolidated net sales of $1.8 billion, up 14% and over $200 million compared to sales reported for the same period in 2017. The Insulation business was the primary driver, resulting from our two acquisitions and strong price execution.

Adjusted EBIT for the second quarter of 2018 was $214 million, down 7% compared to $230 million in the same period one year ago.

Net earnings attributable to Owens Corning were $121 million, up 26% compared to $96 million in the same period last year, primarily due to lower restructuring and acquisition-related costs, as well as a lower effective tax rate in 2018.

Adjusted earnings for the second quarter of 2018 were $131 million or $1.17 per diluted share, compared to $135 million or $1.19 per diluted share in 2017. Depreciation and amortization expense for the quarter was $107 million, up $23 million as compared to the second quarter of 2017.

The year-over-year growth was driven by incremental depreciation and amortization from our Insulation acquisitions. Our capital additions for the quarter were $140 million. On slide 6, you'll see the detail of our second quarter adjusting items, reconciling our 2018 second quarter reported EBIT of $206 million to our adjusted EBIT of $214 million.

For the quarter, our adjusting items totaled $8 million, primarily related to the restructuring charges resulting from actions announced last year to strengthen Composites low-delivered cost position.

Now, please turn to slide 7, where we provide a high level review of our adjusted EBIT performance comparing the second quarter of 2018 with the second quarter of 2017. Adjusted EBIT decreased by $16 million. Insulation EBIT increased by $20 million as compared to the prior year.

Roofing and Composites EBIT decreased by $28 million and $13 million, respectively. General corporate expenses were $33 million, a $5 million improvement versus the prior year.

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

Sales in Insulation of $682 million were up over 50% from the same period a year ago, primarily on the contribution of the Paroc and FOAMGLAS businesses, significant price realization and slightly higher volumes. Commercial execution was strong across all businesses in the Insulation segment with particular strength in our U.S. residential business.

EBIT for the quarter was $49 million, up $20 million compared to the same period in 2017. The EBIT improvement was driven by strong price execution and the contribution of Paroc and FOAMGLAS. This earnings growth was tempered by material and transportation cost inflation and higher rebuild and manufacturing costs.

Manufacturing costs were impacted by both planned and unplanned operational headwinds. On our last earnings call, we shared our expectation for weaker operating leverage in the second quarter, mainly due to a Pipe Insulation technology upgrade at our Newark, Ohio facility and other furnace rebuild activity in the quarter.

We took on an aggressive agenda in the second quarter to get our capacity ready for the seasonally strong second half of the year. We expected this to be about a $10 million operational headwind. We successfully completed this agenda, but faced other operational challenges, primarily related to our U.S.

mineral wool business and our Asia and Latin America businesses performing below expectations. These challenges all together about doubled this headwind. We currently expect the U.S. mineral wool business and regions to improve financial performance in the second half of 2018 versus the prior year.

No doubt we were disappointed by the performance of our U.S. mineral wool business. We continue to make progress, but the pace has been slower than expected. Within our North American glass network, we are positioned to support a strong market in the second half of 2018.

I'm pleased to report that both the Paroc and FOAMGLAS integrations are progressing well and delivered solid results in the quarter. The businesses collectively delivered EBITDA margins of 19%. This run rate is consistent with our expectation due to the seasonality of the businesses.

Together, these acquisitions significantly extend our geographic footprint and portfolio of technologies across the insulation temperature spectrum. From a commercial perspective, we have delivered significant price progress in 2018, with further progress in the second quarter, in particular in our U.S. residential business.

Further price actions have been announced for the end of August, and we have high confidence that we'll make continued progress. As a result, we have upgraded our full-year price estimate to $120 million.

In the first half of 2018, EBIT improved by almost $50 million year-over-year, primarily driven by price realization and the contributions from acquisitions. Second half EBIT compared to 2017 is expected to double the first half improvement, producing about $100 million of year-over-year EBIT growth.

Pricing alone in the second half is expected to show more than $70 million of improvement versus 2017, with the balance primarily coming from improved operational performance and the continued benefit from acquisitions. For the full-year, we expect EBIT growth of approximately $150 million.

This guidance includes our full-year outlook for price and operational improvements. We continue to anticipate second half operating leverage of about 50%, excluding the impact of acquisitions.

Although the full-year will track below this goal because of our performance in the first half of the year, we remain confident that 50% operating leverage continues to be good mid-term guidance for this business. Now, I'll ask you to turn your attention to slide 9 for a review of our Composites business.

Sales in our Composites business for the second quarter were $541 million, up slightly compared to the same period in 2017. The benefit of favorable currency translation was largely offset by slightly lower sales volumes. In the first half of the year, we faced a difficult year-over-year volume comparison and some weakness in certain markets.

EBIT for the quarter was $71 million, $13 million lower than the same period last year as a result of higher inflation, higher manufacturing costs including rebuild costs, and slightly lower volumes. These results trailed our expectation.

As highlighted on last quarter's call, we had expected the timing of higher rebuild costs to negatively impact our second quarter results. During the quarter, we also experienced other operational challenges in our manufacturing network, including an unexpected melter failure in Asia.

This melter was quickly repaired and is performing at pre-failure levels. Despite these headwinds, the Composites business still delivered double-digit EBIT margins in the quarter. Our second half EBIT performance should improve versus last year on an easier volume comparison and improved manufacturing performance.

While we expect improved earnings in the third quarter, the benefit of the bad debt charge from last year will be largely offset with costs associated with the start-up of our low-cost melter in India and the completion of two rebuilds. In 2018, we expect continued growth in the glass fiber markets, driven by global industrial production growth.

We had previously expected EBIT growth of about $20 million, with possible headwinds to that guidance. For the full-year, we now expect EBIT slightly below last year on the continued impact of inflation, higher manufacturing costs and a slightly lower volume outlook. Composites continues to face into a constructive environment.

Global growth remains strong, industry utilization rates remain high, and volume growth should accelerate, which should produce strong earnings performance in the second half.

Additionally, we expect that our previously announced subscale melters restructuring actions, low cost India facility expansion and strategic supply alliances will drive manufacturing productivity and support EBIT growth in 2019. Slide 10 provides an overview of our Roofing business.

Roofing sales for the quarter were $659 million, down $25 million compared to the same period a year ago. The decline was primarily driven by lower sales volumes, partially offset by higher selling prices. For the second quarter, shipments for the U.S. asphalt shingle industry grew mid-single-digits. Our volumes trailed the market in the quarter.

For the first half, our volumes were down mid-single-digits versus a flat overall market. We estimate that approximately 50% of our first half volume decline was attributable to geographic mix, with the remainder associated with the timing of shipments, which we expect to balance out in the second half of the year. The U.S.

Eastern seaboard, where we have lower share, demonstrated strong growth in the quarter. Outside of the Eastern seaboard, almost every other market contracted, which impacted our volumes and share negatively in the quarter.

EBIT in the quarter was $127 million, down $28 million compared to the same period in 2017, primarily driven by lower sales volumes. The business delivered very strong price execution in the second quarter to offset asphalt and higher transportation costs.

On our last call, we provided a detailed update on our inflation outlook and our pricing actions for the shingle portion of our Roofing business.

In summary, we expected asphalt inflation to be as much or more than the nearly $40 million we experienced in 2017 and outbound transportation cost to be up about 15% for the year, due to strong trucking demand and the shortage of drivers and equipment.

At that time, we believed that a successful May price increase, along with the successful April price increase, would restore margins for the rest of the year to levels consistent with our long-term guidance.

In fact, the expectation for full year asphalt inflation has tracked higher and we now expect asphalt and transportation inflation to be more than double the asphalt inflation we experienced in 2017. We implemented a price increase in June to offset these costs.

We've announced further actions for August in an effort to offset further anticipated inflation and to recover the margin compression we experienced in the first half. I am pleased that we've demonstrated significant progress in offsetting inflation with price.

For the second quarter, we achieved EBIT margins of 19% which was a four-point sequential improvement. We also exited the quarter with EBIT margins in line with our long-term guidance. The pricing actions we've taken are expected to more than offset asphalt and transportation cost inflation in the second half.

The Roofing business continues to be positioned to deliver another strong year in 2018. We expect continued growth in new construction and remodeling demand for shingles and continued double-digit growth in components. We expect the U.S. shingle market to be down mid-single-digits on lower storm activity.

Owens Corning's volumes will likely trail the market this year because of geographic mix. For the full year, we continue to expect that our pricing actions will cover asphalt inflation and higher transportation costs. Now, let me turn your attention to slide 11, which provides an overview of significant financial matters and our outlook for 2018.

In the second quarter, under a previously announced share repurchase program, we repurchased 250,000 shares of the company's stock at an average price of $80.31 per share. As of June 30, 6.2 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, making meaningful progress in paying down the Paroc term loan in 2018 remains a priority. In addition, both dividends and stock repurchases will be important mechanisms to return capital to shareholders.

The company continues to expect an environment consistent with consensus expectations for U.S. housing starts and global industrial production growth. In Composites, we expect EBIT slightly behind last year. For Insulation, we expect EBIT growth of approximately $150 million.

In Roofing, pricing performance continues to be strong and we expect to offset the impact of persistent asphalt and transportation inflation for the year. We expect the overall U.S. shingle market to decline mid-single-digits on lower storm volumes and we expect our volumes to trail the market due to geographic mix.

For Owens Corning in total, we expect first half price momentum to drive strong second half performance, resulting in a full year adjusted EBITDA outlook between $925 million and $975 million. Now, please turn to slide 12, where I provide guidance on other financial items for the year.

As discussed on last quarter's call, improved earnings, better working capital performance and our advantaged tax position has translated into a strong conversion ratio, adjusted earnings to free cash flow, in excess of 100% in recent years. In 2018, we expect another strong year of free cash flow and a conversion rate of about 100%.

We now expect corporate expenses to be between $135 million and $140 million, which represents an improved outlook. Capital additions will be about $500 million. This includes about $75 million of CapEx related to the Paroc acquisition, which is primarily related to a new line in Poland that began construction in the fourth quarter of 2017.

We expect this new capacity to be available in 2019. Depreciation and amortization expense is expected to be about $450 million. Interest expense is expected to be between $125 million and $130 million. We expect that our U.S. tax NOL, along with other carryforwards and credits, will significantly offset cash taxes for some time to come.

As a result of our tax NOL, foreign tax credits and other planning initiatives, we expect our 2018 cash tax rate to be 10% to 12% of adjusted pre-tax earnings. Our 2018 effective tax rate is expected to be 26% to 28% of adjusted pre-tax earnings, which is a six-point reduction from the prior year, as a result of U.S. corporate tax reform.

With that, I'll turn the call over to Thierry to lead us in the question-and-answer session.

Thierry?.

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

Thank you. We will now begin the question-and-answer session. And our first questioner today will be Matthew Bouley with Barclays. Please go ahead..

Hi. Thank you for taking my question. I wanted to start out with a question on the Roofing side. I think, in the prepared comments, you highlighted an expectation for margin improvement for the balance of the year, given the price you've achieved.

So I just wanted to be clear if that is a year-over-year comment and if Roofing margin improvement is, in fact, embedded in the full year guide.

And really, just how should we think about the ability to kind of get the price that is necessary? It seems there would need to be some incremental price above what you've achieved in the first half, given what you've guided to on the asphalt side. Thank you..

Thanks, Matthew. This is Mike. Let me just walk through a couple of highlights of our prepared remarks and try to use those comments to address your question.

We did say that coming out of the second quarter, we had seen sequential improvement month-by-month in terms of our margin rates and that, while we had 19% margins for the quarter, which is a 400-basis-point improvement over the first quarter, that, in fact, we exited the quarter coming out with margins were above the 19% and consistent with our kind of long-term guidance or midterm guidance of 20% margins.

So we felt like with the June increase. We had a March increase, we had a May increase, and then, we followed that with a June increase.

So with the June increase, as that increase started to come through our numbers that we had gotten on top of inflation and had caught up with what had been a pretty persistent run here in terms of both asphalt cost and transportation cost. As we look ahead, we don't see anything that causes us to feel like we can't sustain that margin rate.

Now, we'll see some changes in margins related to volumes and fixed cost absorption. But the basic economics of making a shingle and selling a shingle today, we're making reasonable good cash margin dollars on the manufacture of shingles.

We are looking ahead, though, and believe that we will see some continued inflation, so that there is an August price increase out there that would help us in terms of offsetting any additional inflation we see for the year.

And, obviously, success in the August increase would also help us repair some of the margin compression we saw in the first half. So our margin outlook for the second half is quite bullish.

I don't know that we're seeing margins in the second half of the year that will allow us to recover some of the margin compression we saw through the first quarter and early part of the second, but we do feel like that the margin structure heading into the second half is in good shape..

And our next questioner today will be John Lovallo with Bank of America. Please go ahead..

Hey, guys. Thanks for taking my question. Maybe just a follow-up on Matt's question sticking with Roofing here. It looks like, I mean, the comps get significantly more challenging in the back half of the year and you're still going to have that geographic mix headwind. It just seems like getting margin expansion here is going to be a big challenge.

I mean, how are you thinking about kind of the flow through or the pull through on incremental sales dollars?.

Yeah, thanks for the comments, John. I mean, first of all, we did say in our remarks, we think the geographic mix issue is probably a persistent issue through the year. So while we trail the market in the first half, market was about flat in the first half. We were kind of down mid-single-digits.

We think that probably half of that was geographic mix and half of that was the timing of shipments. So relative on a geography adjusted basis, our business probably trailed the market by a couple of points in the first half in terms of volumes. We think we'll track the market in the second half on a geographic mix adjusted basis.

So we think our volume outlook for the second half is consistent with our overall outlook for the market. Where we are today is, I think we're not alone in terms of experiencing a significant amount of inflation.

And in an inflationary environment, I think we've seen through the first three increases in the year, March, May and June, that the market is receptive to the idea of manufacturers or Owens Corning recovering our inflation costs in the price of our shingle.

I mean, we said it a number of times in this call, it's a very valuable product that lasts on your roof for a very long time with next to no price elasticity. So us getting a recovery of our inflation and being able to make good margins to produce shingles, we think, is a reasonable thing for us to go acquire (32:55).

So as we look ahead to the second half, we don't see any industry dynamics that would cause us to believe that achieving good margins in the second half is out of reach for us. And in fact, what we're seeing today through kind of the June and July timeframe are that those are the types of margins that we're producing.

So we're relatively confident on the volume side leaving aside geographic mix and we're certainly feeling good about what we've achieved on price and where that leaves us on our margin outlook for the second half..

And our next questioner today would be Kathryn Thompson with Thompson Research Group. Please go ahead..

Hi. Thank you for taking my question today. I was focusing on the Composites segment and wanted to get a little bit more color on the strategic supply agreement that you announced with CPIC.

What does this mean for Owens Corning? How were reported results in Q2 impacted by this move? And would also appreciate your thoughts on the change in the competitive landscape with Jushi and Taishan? I know you've talked about that a little bit more, but given the announcement with CPIC, it would be worth revisiting that subject. Thank you..

Thanks, Kathryn. Maybe – this is Mike. I make a few comments, and then, maybe I'll throw it to Michael for a little more detail.

But if you look at the improvement in our Composites business over the last five or six years, we went through a very strong period of time where we drove our business to a low delivered cost position, where we really reworked our entire product portfolio and came up with a set of market leading products and saw the industry kind of shape up into a much better structure that had relatively high utilizations with a fair amount of consolidation.

That gave us a little bit more confidence in both our ability to invest in the business and confidence in our ability to sustain good returns on capital and good operating margins.

I think what you're seeing here is kind of the next wave of – with these strategic supply agreements, you're seeing the next wave of kind of moves in order to get our asset base and our supply chain network configured at very low delivered cost to kind of power the next wave of earnings growth in the business.

So if you look at what we announced last year, last year, we took out the three smallest melters we had in the network. We took our restructuring action associated with that. These were subscale melters that did not have competitive economics on a world stage.

With some of these supply agreements, we're able to actually replace these subscale melters that had relatively high costs with much better economics and next to no or very limited capital investment.

So we've used our technology and our market position in order to be able to put together some mutually beneficial agreements with some of the manufacturers in Asia and use some of the capacity that's currently in Asia, to help support our growth in that region and also support our growth globally in terms of being low cost.

So it is an important strategic move for us. We're very cognizant of protecting our intellectual property and making sure that we do this in a smart way. We've good success in doing this with our Asian team.

And I think it's a balance sheet light way to both drive down our cost and give us the volume capability to continue to grow the business, get operating leverage and show top line and bottom line growth. Michael, I don't know if you have anything you'd add to that..

I think the only thing I'd add, Mike – I think Kathryn asked if there was any implications for the bottom line in 2018, and there isn't. But both these transactions will come online most likely towards the latter part – second half of next year and really only have implications for 2019..

And our next questioner today will be Susan Maklari with Credit Suisse. Please go ahead..

Thank you. Good morning..

Good morning, Susan..

Focusing on the Insulation piece a little bit, it sounds like the mineral wool facility is continuing to kind of be a little slower in coming up than what you expected.

Can you just give us a little bit more color there? And I guess with the completion of Paroc, is there any knowledge or talent that you can kind of leverage from them to help pull things along over here?.

Sure. Thank you for the question. Let me first start just kind of at a macro level. I think we've been forced to give our investors much more visibility to the mineral wool facility than we would have desired, and the reason being is it has not performed well.

But more importantly, because we have an operating leverage story in our Insulation business, if we have a facility that's going through a start-up and it's not starting up well, it's obviously producing negative operating leverage that would be confusing or confounding to the results of the business.

So, we've had a really good kind of four-year operating leverage story in our Insulation business associated with the volume and price ramp in our North American fiberglass business.

And now, we find ourselves in the situation where kind of over the last four quarters, the start-up of this facility has produced some losses and negative operating leverage that we think could cause people to lose confidence in that important story of what tremendous operating leverage we're going to produce in our Insulation division.

In fact, Michael in his comments said, in the second half of the year, we think we'll be back on track with 50% operating leverage, and fundamentally, the reason that's going to be the case is we think the mineral wool facility will comp either neutral or positively to where it was last year.

And as a result, you'll see pretty clean numbers in the second half in terms of what the rest of the business can do in terms of price and volume. Now, specific to the facility, we've seen specifications in North America going to higher temperature ranges. So, we thought a good response to that was for us to get a little bit bigger in mineral wool.

We acquired technology in order to build our facility in North America. Subsequent to that, we have purchased Paroc, and to your point, we are now basic in the mineral wool technology.

So, we're moving very quickly to get our Paroc team involved in understanding the technology that we deployed here in the States and then getting their ideas and their help in terms of how we improve it.

And we're seeing a real benefit and a real synergy of that acquisition associated with bringing technology back from Paroc to our North American assets. As we look ahead, I think the mineral wool facility in the second half can be anywhere from a slight tailwind to maybe a little bit better tailwind. So, we have made progress in the quarter.

We are expecting to make continued progress in the second half that – progress in the second half. Depending on how rapidly we make it, will either be some amount of tailwind in the second half or could become a reasonable adder (39:09) to our performance. And then, certainly into 2019, we think we probably aren't talking about this anymore.

So, I think operating leverage aside, for the most part, I'd say it's in an okay position. It's not where we wanted it to be.

And obviously, the fact that we did make (39:23) progress in the second quarter caused us to have a second quarter in Insulation that I think does not represent the fundamental and underlying strength that we could see in the business today..

Our next questioner today will be Michael Rehaut with JPMorgan. Please go ahead..

Thanks. Good morning, everyone..

Good morning..

I just wanted to circle back a little bit to Composites for a moment. First, if you could give us any color in terms of what's driving the slightly slower volume growth than anticipated, given I think that you think that the industry itself – or at least the global industrial production backdrop remains steady relative to your prior expectations.

And then, on a bigger picture level, I just wanted to circle back also to the strategic licensing arrangements with CPIC.

Just on a basic level, how do you protect yourself against that technology being used or just ensure that it's being used for exactly what you've agreed to? Obviously, there's concerns over time with intellectual property in China, and sometimes agreements may be going well in the first couple of years and then kind of companies losing control over that technology..

Thanks, Mike. It's Michael. I'll take the first half and then Mike's going to take the second half. But let me start macro and then maybe go a bit micro. But overall, I'd say global growth remains pretty solid. Utilization rates for the industry and for Owens Corning remain relatively high.

That said, I'd say that kind of growth expectations as we stand here today are probably a little bit less than what we had kind of originally anticipated at the start of the year.

I think kind of looking forward, we've seen maybe growth in Europe and growth in China being a little bit less vibrant than maybe what the expectations were at the beginning of the year. But that said, still growing. I think trade policies are also probably creating a bit of uncertainty.

But if you think about our full-year guidance and the change that we've made, probably half of it comes from manufacturing costs. That's why we've kind of lowered it to being slightly less than last year. And that's really due to the melter failure that we had in China.

Again, you heard us say that our team quickly repaired that melter and it's back up and performing at pre-failure levels. And then, we've had a slight delay in the start-up of our India facility, which is going to create a little bit of a drag for the full-year as well.

And then, the other half is related to again the slightly lower volume outlook which we just discussed. A little bit higher inflation. And then, FX is probably going to be a little bit of a headwind in the second half of this year versus being a benefit in the front half of the year if spot rates stay currently where they are.

And then, I'll turn it to Mike to answer the other question..

Yeah. Michael, it's a real good question around technology. We have very, very good technologies. So, it's an important asset of our Composites business. I think we do have market-leading technology.

I think if you divide the technology into process technology and product technology, we have both very good process technology and very good product technology. I think in today's environment, scale and the cost advantages of scale probably overwhelm the advantages we have in terms of process technology.

So, we need to find a way to marry our process technology to scale assets. So, when we looked at the situation we found ourselves in, we had three very small scale melters. We knew we could never get those melters cost competitive.

By taking those melters out and then working with CPIC to build what will be the largest scale high-strength glass facility in the world, we're going to get to a very, very low cost position.

The specific pieces of our process technology that we're contributing to that supply agreement, we have safeguards in very specific pieces of the agreement that allow us to have eyes on and make sure that we know exactly how our technology is being used and it doesn't migrate.

In addition to that though, we also have proprietary product technology that would sit outside of this agreement. So, we have the ability to modify the products or put the products into product forms that our consumers use them that would cause productivity and advantages at the customer.

That is proprietary to Owens Corning and that would cause us to have our own product lines coming out of the strategic supply agreement different and distinct from the CPIC product lines. So, we think we've gone through the chain and looked at it.

But the biggest thing we needed to accomplish to make sure that we continue to drive in the business is that we move to scale assets that are world-class competitive in terms of cost, and this gives us the best of both those worlds. Not a lot of capital, scale assets and protection of our technology..

The next questioner today will be Stephen Kim with Evercore ISI. Please go ahead..

Yeah. Thanks very much, guys. I wanted to turn the question back to Roofing. I just wanted to make sure I heard correctly what you all said. So, if I – I'm going to just position it the way I think I heard it, and then you can correct me if there's anything I heard wrong.

I think you just indicated that the industry was up mid single-digits and that you – it sounds like you missed in the 2Q by something on the order of about 10 percentage points or so and that about half of that was due to geography and half was due to timing of shipments.

So, assuming that that's kind of right, we're talking about a fairly significant 400 basis point to 500 basis point miss in terms of volume from timing of shipments. I wanted to understand what that was and why we should be confident that it's going to recover in the back half.

And then regarding geography, that obviously isn't going to change anytime soon.

And so, would it be right to think that the geography is a headwind to you that is going to be persistent here in the back half of the year? The timing of shipments gets reversed and the net effect is that for the year your volume will slightly trail the industry?.

Yeah.

So, to start at the end of your question and work your way back – my way backwards, the conclusion you came to is exactly the point we're trying to make, which is we do think geography will trail for the full-year, that the timing of shipments will catch up in the second half, but that we won't overcome geography, and as a result, we'll trail the market for the full-year.

We do think that the geography impact in the second half will be a little bit lower than it was in the first half. In particular, Florida was exceptionally strong in the first half of the year related to the hurricanes that came through last year.

We think some of the shipments going into Florida will start to slow down as there's enough product now in Florida to satisfy some of the carryover demand. Obviously, that leaves aside any additional potential future hurricane or storm activity in the fall.

And as a result, the mix between the Eastern Seaboard and the rest of the country will mix a bit back towards us, but we do think we'll have a geographic mix issue for the full-year. Your analysis of the second quarter was pretty much spot on in terms of where we saw the overall market, where we saw our volumes.

The one thing I would add to that, though, to give you a bit of confidence is we were a bit ahead of the market in the first quarter and there was some geographic mix. So, we overcame that headwind and we're a bit ahead of the market.

So, when we talk about timing of shipments, from a timing of shipments point of view, I think we're a little bit ahead of the market in the first quarter. We're a little bit behind the market in the second quarter.

We would expect, based on discussions we're having with our sales team on how they see the third quarter, we'd expect to catch up again in the third quarter a bit. So, we feel pretty good that the normal variation we would see in the timing of shipments when you tear all the data apart through the first half, there's some volatility.

We're a little bit on the wrong side of it, but it's not a material effect..

And our next questioner today will be Justin Speer with Zelman & Associates. Please go ahead..

Hi, this Justin with Zelman & Associates. Appreciate it, guys..

Hey, Justin..

I wanted to talk about Roofing and the industry pricing discipline, and I want to get some context from your perspective of why investors should be confident in your outlook for offsetting costs in view of the margin headwinds and particularly with the expectation for industry volumes to decline in the back half, and couching that with looking at what took place in 2014 when the industry lost discipline.

I think that's something that a lot of people are thinking about. Margins got hit pretty hard when we saw volumes softer, raw materials going against you and then the industry fighting for share with price.

Why is it different this time in your perspective? And a follow-up on that, if the August increase is not successful, how much risk to your full-year guide you think, given the cost inflation that you see?.

Okay. Thanks, Justin. Let me start by maybe addressing 2014. That's potentially the elephant in the room here, and I'd be happy to talk about that. If you look at 2014, 2014 was the smallest roofing market probably in the last 20 years. We had a winter buy activity in the first quarter.

I think everybody was thinking in the first quarter that the market was going to be significantly bigger. The actual activity there was not a failure to follow price increases. It was deep discounting in order to load the channel.

And the channel got loaded with a significant amount of inventory in the first quarter with such a small market opportunity on a year-to-go basis that we actually were presented with very little rebuy activity through the balance of the year, because the industry shipped such a high percentage of the overall volume of the year in the first quarter.

We were in a relatively flat asphalt inflation environment. So, we were getting no cost relief at all in exchange for the price discounting that was going on. So, I would characterize that as a pretty broad-based lack of discipline in the industry in terms of how the industry operated, given the market environment.

I think we're in a remarkably different market environment today. What we're talking about today is probably a market that's going to be the second-best market in the last decade. So, despite the fact it's declined from last year, relative to the last decade, this is a fairly robust market. We are in an aggressive asphalt cost inflation environment.

We did not see big over-shipments in the first quarter. I don't think we saw big over-shipments in the second quarter. We think there's some inventory out in the channels, but that makes sense. This is peak roofing season. This is a time of year where distributors carry inventory, and we're also in an inflationary environment.

I think it's pretty normal for distributors to carry inventory in an inflationary environment as they can make money off of their inventory as prices go up. And we have three price increases where we've demonstrated the ability to get price. So, we're sitting here today.

In Michael's comments, he said we'd come into the year believing we'd have inflation similar to the $40 million we saw last year. Our current call on inflation for the shingle portion of our Roofing business is probably double that, so on the order of $80 million of inflation.

But he also disclosed in his prepared remarks that through the first half, we've gotten $36 million worth of price and that we don't have the full impact of the June price increase in the first half. We only had that for the final month of the first half.

So, on a year-to-go basis, we have the continued impact of the June increase, the possible upside of the August increase and a fair amount of confidence that we see the ability to get back and cover the $80 million of inflation based on the run rate we saw through the second quarter.

So, if there's a view of investors that we're facing an environment that somehow looks like 2014, from my view having sat in this chair at that time and having sat in the chair at this time, I see very few similarities between the marketplace we're in today and the marketplace we saw at that time..

The next questioner today will be Phil Ng with Jefferies. Please go ahead..

Hey, guys. June housing data generally has been a little bit weaker. Curious to get your view on what you're seeing out there, if you've seen order patterns decelerate in 3Q with inflation and rate hikes going up. And certainly, you implied in your guidance for Insulation, you're expecting pricing to accelerate.

Just curious how much of the August increase is baked in to that and if you've baked in any momentum on the retail side as well. Thanks..

Okay. Thanks, Phil. Obviously, we continue to watch housing very carefully and have some nervousness about both house prices and affordability and where interest rates are going.

Having said that, inventories continue to be very, very low and some of the, I think, activity levels in both new construction and existing home sales are probably being driven off of a lack of availability of supply, which is why we're seeing the inflation in house prices. The June print on housing starts wasn't great.

The May print was actually very good. Internally, we tend to kind of look at a three-month moving average. If you look at the three-month moving average, June didn't really create that much movement in the trajectory of housing starts.

So, we continue to be confident that in an environment where there is a slow and steady growth in new construction with some bias towards improved growth in single-family versus multi-family is really the sweet spot for our Insulation business.

Whether we come in a little bit above, at or a little bit below consensus forecast for housing starts, I think we're still in that sweet spot. Industry utilization was very tight in the first half. We mentioned on the last call, we saw some periods of allocation in the first half of the year, which is unprecedented.

We think industry capacities are going to be very tight in the second half of the year because of seasonal demand and that all the starts that we saw in the first half of the year need to get insulated here in the next six months and that seasonal demand is going to power us in the second half to deliver against the $150 million of year-on-year EBIT improvement in our Insulation business..

And the next questioner today will be Keith Hughes of SunTrust. Please go ahead..

Thank you. I just want to go back to your prepared comments on Insulation for the year, I think you reiterated $150 million of EBIT improvement, $70 million of price, but there was also another $30 million of incremental price that was discussed. I think I'm just a little confused on the numbers.

Can you clear that up?.

Sure, Keith. Happy to clear that up. So, we talked about $150 million of improvement. So far, on a year-to-date basis, we've achieved about $100 million (53:52) of improvement versus prior year. I think the exact number is $47 million. So, for us to get to that guidance, we'd have to be $100 million better than last year in the second half.

What we said is in the first half of the year, we delivered about $47 million of price. And if you give – if you look at our overall guidance of $120 million of overall price, that means that in the second half of the year, our pricing is going to have to be more than $70 million of price realization versus prior year.

So, we're just going to see (54:20) $30 million of acceleration from first half to second half in terms of the contribution of price to year-on-year growth. So, where in the first half, $50 million of price and ostensibly $50 million of year-on-year EBIT improvement.

Second half, we're saying probably $70-plus-million of price and $100 million of year-on-year EBIT improvement. So, the price side of it, I think, pretty clear in terms of how that lays out to get an acceleration and get $50 million of additional EBIT improvement. Obviously, we need to get more than just price to grow EBIT in the second half.

We were not successful doing that in the first half. By and large, the reason we were not successful in doing that was operational issues. About $10 million of the operational issues, as Michael said, we were disappointed and frustrated with.

That had a little bit to do with the regional businesses in Latin America and Asia, didn't quite come in where we wanted, and also our mineral wool business in the U.S. didn't quite come in where we wanted.

The rest of it was planned stuff, where we were rebuilding melters, where we're doing major maintenance and turnaround on some of our other facilities in order to get all of our assets kind of hot and ready to go for the second half. So, we think we're going to have much stronger operating performance in the second half.

It's actually going to be a positive contributor on top of price, and then we think the acquisitions will be a positive contributor on top of price and volumes.

So, those three pieces together get you to the $100 million in the second half, and basically with where we think we are on price, we're already kind of $80 million of the way to the $100 million, if you just annualize the first half into the second half and take the price run up.

So, we feel pretty good about that guidance and we need to get operating better in order to make sure that we can deliver against that commitment..

Hey, William. This is Thierry. It looks like we have time for one more question probably..

Okay. And our last questioner today will be from Stephen East with Wells Fargo. Please go ahead with your question..

Thank you, and good morning, guys. Just two bigger questions. I guess, Mike, could you talk about on the cost pressures, the cadence that you're seeing overall.

Are you all assuming that you've seen as far as the increase – the percentage increase in cost that they've peaked this year in the second quarter and will moderate from here or what do you expect? And then the second thing, any impact – any thoughts about impact from tariffs on each of your sections? Particularly the $200 billion incremental here, what you think that would do or not do to your business?.

Sure. Thanks, Stephen. I'll make a few comments about how we see inflation, and then I'll turn it back over to Michael to talk about the tariffs. Given the way the year has played out, I think it would be foolish for us to declare victory and say that kind of inflation has peaked, and then in the second half, we don't expect there to be inflation.

I think at each point through the first six months of the year, when we kind of felt like we were getting on top of inflation, we saw a little bit more creep through in the business. So, we still have an aggressive posture towards continuing to get price to make sure that we stay on top of inflation.

There is an August price increase for the Insulation business. There's an August price increase for the Roofing business. We have a fair amount of optimism that the market dynamics are going to support us getting additional price realization in both those businesses.

I think if you look at Roofing in particular with the asphalt, we have seen asphalt sell at an elevated level to oil. We tend to look at an index of where asphalt is selling relative to oil, and over long periods of time, that has been pretty much at parity. And now, for the last kind of year-and-a-half, asphalt has sustained a premium to oil.

That premium looks relatively stable. So, I think it's really a question of where do oil prices go from here as opposed to kind of where is asphalt going to be relative to oil. Obviously, we have no ability to forecast oil, but we do have a great business and a great industry with a lot of pricing power.

So, I think whatever we see in terms of inflation, our goal would be to go back and make sure that we get fair value for our product, and I think we've demonstrated our ability to do that. With that, I'll turn it back to Michael to talk about tariffs..

Thanks. In regards to tariffs, from a U.S. perspective, there's basically been five different waves of tariffs that have been kind of announced or proposed. The first three waves have been implemented, and they quite frankly have very, very little implications or impact to Owens Corning.

The other thing that I'd remind you is that generally speaking, in all three of our businesses, we manufacture within the regions that we serve. Therefore, a lot of this tariff talk isn't generally going to have a lot of implications for Owens Corning. The wave four announcement, again, it's an announcement. It hasn't been implemented.

China has talked about a response to that as well. It could have some modest implications to us, pretty – when we say modest, on the order of kind of $3 million to $5 million per annum, and that's related to chemicals and insulation facers. That said, we see sourcing alternatives. So, we think we can manage that down pretty quickly.

And then, wave five, which was announced more recently, which is on $200 billion of China imports, so a 10% tariff, again we see some minimal implications that are probably manageable over long-term. Again, this hasn't been implemented. So, there's implications for coated wovens, non-wovens and glass composites.

So, from a glass composites perspective, it's actually kind of a positive tailwind for our North American business, because Chinese composites imports would be subject to a 10% tariff. We do have a piece of our Roofing coated wovens business that would be subject to tariffs.

It's pretty small, again around $5 million or $6 million per year, and we think that we'd be pretty effective in putting waivers in place. We're actually working on it in the event those tariffs were to go into effect. So, again, overall kind of a de minimis impact to overall Owens Corning..

And this will conclude our question-and-answer session. I would like to turn the conference back over to Thierry Denis for any closing remarks..

Well, thank you, William, and thank you everyone for joining us for today's call. And with that, I'll turn it back to Mike Thaman for the closing remarks..

Thanks, Thierry. Thanks for giving me an opportunity to kind of sum this up. I think there were a lot of good questions that I hope helped us clarify how we feel about the quarter, how we feel about the year. There's no denying that there was a disappointment level on the management team in terms of what we saw in the second quarter.

We knew – and I think if you go back and look at what we said earlier in the year, we knew that we had some planned and expected headwinds in the quarter that were going to make this a tough quarter. It was not a quarter that we needed a number of unexpected things to happen. I think that's either bad luck or just the way it works.

But if you look at each of our three businesses, each of them had kind of an order of magnitude about $10 million EBIT problem in the quarter. I think Michael detailed it, in Insulation, combination of the progression of our mineral wool facility and some of the performance we had in the regions.

I think if you've listened to our comments around Composites, it was the melter failure that we had along with the Brazil trucking strike, which we didn't talk about, which was a real challenge for us in Brazil, some of the small operating performance issues.

And I think in Roofing, on balance, our shipments, even adjusted for geographic mix, trailed the market a bit in the first half. Primarily that was in the second quarter. And if you go through and work out the numbers, that was probably about a $10 million hit to our Roofing business.

So, if you came out of the quarter, you can say those are three things we wish we hadn't – hadn't happened. I still won't say we came into the year thinking that second quarter was going to be anywhere near the high watermark for the company in terms of performance.

So, our goal earlier in the year was get through the first half, produce a great second half. We didn't quite get through the first half the way we wanted to. But I don't see any of those issues as getting in the way of how we're going to produce a great second half. We think a number of the operational issues that we talked about are behind us.

The ones that we have in hand, probably the two biggest focal points for us, are going to be getting the melter in India up and running and getting a couple of rebuilds done in our Composites business. By and large, operations in Insulation, I think, is in hand. I think Roofing has continued to operate well from a market point of view.

I think Roofing's got in hand what it needs in terms of margin and volume performance in order to deliver a great second half. We have tremendous momentum in Insulation in terms of pricing, which will produce the operating leverage we talked about.

And we have adjusted our guidance in Composites to, I think, be more in sync with the reality of the market we see today, which is a little bit lighter volumes, a little bit more inflation, and not quite as good a performance in the first half in terms of operations, all of which supports the guidance we offer today, which is $925 million to $975 million of EBIT for the year with very, very strong cash flow performance.

So, we'll come out of the second half – we'll come out of the second quarter and look into the second half, I think our teams are energized and focused on getting the business to perform at very, very high levels in the second half.

And we believe delivering the second half performance will create great shareholder value, and look forward to getting to our next call, so that we can report the progress that we've made. Thanks for joining us and we'll talk to you again in three months..

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