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

Doug Clark - Goldman Sachs & Co. LLC John Lovallo - Bank of America Merrill Lynch Stephen Kim - Evercore ISI Susan Maklari - Credit Suisse Securities (USA) LLC Michael Jason Rehaut - JPMorgan Securities LLC Matthew Bouley - Barclays Capital, Inc. Kathryn Ingram Thompson - Thompson Research Group LLC Justin Andrew Speer - Zelman & Associates Kenneth R.

Zener - KeyBanc Capital Markets, Inc. Truman Patterson - Wells Fargo Securities LLC Michael Wood - Nomura Instinet Philip Ng - Jefferies LLC.

Good morning and welcome to the Owens Corning Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Thierry Denis, Vice President of Investor Relations.

Please go ahead..

Thank you, Andra. Good morning, everyone. Thank you for taking the time to join us for today's conference call in review of our business results for the third 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 third 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 would 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 4.

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

Mike?.

Thank you, Thierry. Good morning, everyone. In the third quarter, we generated 7% revenue growth and 12% adjusted EBIT growth. Adjusted EBIT grew to $267 million, an all-time record quarter despite lower market volumes and persistent inflation.

Overall, we executed well in the quarter with better operating performance, solid market share positions and strong price realization. However, despite the progress, we're not where we expected to be. Inflation has persisted and volume has slowed, both of which we expect will continue through the remainder of the year.

As a result, we've lowered our 2018 outlook. We expect adjusted EBIT to be in line with last year's performance of $855 million. While the year will not meet our prior expectations, we are confident in the continued earnings potential of Owens Corning in our three strong businesses.

Before I talk further about financial results, I'd like to give you an update on safety. Our recordable incident rate for the third quarter was 0.36, a 22% improvement over the same period last year. This performance was among the best ever since we began reporting. Now, I'd like to review our financials and then talk about our outlook for 2018.

Revenue was $1.8 billion, up 7% for the third quarter compared with the same period last year on a contribution of our Insulation acquisition and successful pricing actions in Roofing and Insulation. This was partially offset by a significant volume decline in our Roofing business. Adjusted EBIT for the quarter was $267 million, up 12%.

For the quarter, Insulation revenue grew to $710 million, up 25%, while EBIT increased to $94 million, up $30 million with EBIT margins of 13%. Revenue growth was driven mainly by the Paroc acquisition and $40 million of price improvement, primarily in the U.S. residential fiberglass building insulation market.

This growth was moderated by weaker volumes across both geographies and product lines. In Roofing, revenues declined to $645 million, down 5%, and EBIT declined to $127 million compared with $147 million in the prior-year quarter with EBIT margins of 20%. This quarter, industry shipments were down almost 20% on significantly lower storm demand.

Our volume performance was better than the market. Last quarter, we mentioned that we experienced a slight decline in our share position for the first half of the year, some of which was being driven by the timing of shipments in the second quarter. I'm pleased to report the reversal of this effect in the third quarter.

In Composites, we generated revenues of $508 million, down 1%, and EBIT of $64 million, up 3% compared with the third quarter of 2017. We delivered EBIT margins of 13%. Revenues were negatively impacted by currency headwinds. Volumes were slightly up, but not as much as expected.

Lower Roofing volumes, weaker growth in Europe and a slower-than-expected recovery in India have affected results. EBIT margins were comparable to third quarter 2017. We have started up our new low-cost melter in India and we're performing well in operations. Before talking about our outlook for 2018, I'd like to highlight a few developments.

Last month, we were once again recognized with selection to the Dow Jones Sustainability World Index for the ninth year in a row. We were also named the Industry Leader for the DJSI World Building Products group for the sixth straight year.

DJSI World is an elite listing of the world's largest companies based on long-term economic, environmental and social criteria. In July, we announced two leadership changes, Brian Chambers was appointed President and Chief Operating Officer and Gunner Smith succeeded Brian as President of Roofing.

Both leaders have a proven track record for delivering strong results for the company. Now, on to 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 still expect to deliver significant earnings improvement in 2018.

We expect to increase EBIT by approximately $110 million, below our prior estimate of $150 million. Second-half volumes are now expected to be weaker than previously anticipated. However, we remain confident in achieving $120 million in price improvement over last year based on current price levels.

We have announced a price increase for January of 2019. In Roofing, we expect growth in the new construction and remodeling markets. Based on below-average storm activity this year, we now expect a 10% decline in the overall U.S. asphalt shingle market in comparison to a mid-single-digit decline previously.

Given our geographic mix, our volume is expected to slightly trail the overall market for the full year. Significantly, price has now recovered asphalt and transportation cost inflation. Going into 2019, we believe we are positioned for earnings improvement, given our current margin rates and a more favorable storm comparison.

In Composites, given our lower volume outlook and higher-than-anticipated inflation, we now expect EBIT to be approximately $260 million. Overall, we expect Owens Corning to generate adjusted EBIT in line with the 2017 result of $855 million.

Finally, we expect strong conversion of adjusted earnings to free cash flow, although it'll be below our target of 100%. Michael will speak to cash flow in his remarks. In summary, we still anticipate achieving more than $7 billion in revenue and generating double-digit operating margins for all three businesses.

Despite weaker market expectations for the second half, we believe we are well positioned to finish the year strong. We believe that Owens Corning and all three of our businesses are positioned for EBIT growth in 2019. 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 delivered 7% top line growth in the third quarter, driven by our Paroc acquisition and strong pricing actions in Roofing and Insulation. We had strong operational and commercial execution in the quarter, but we experienced a smaller market opportunity.

This weakness is expected to continue into the fourth quarter. As a result, we have revised our full-year outlook to be flat with last year. The strong execution in the second quarter across all three businesses delivered improved operating margins, despite lower market volumes and persistent inflation.

We made substantial progress from a pricing perspective in the quarter. The actions taken have delivered about $170 million of price improvement in the first three quarters of the year. In the third quarter, pricing outpaced inflation for the first time this year. And as a result, we grew adjusted EBIT and EBITDA margins to 15% and 21%, respectively.

Now, let's start on slide 5, which summarizes our key financial data for the third quarter. You'll find more detailed financial information in the tables of today's news release and the Form 10-Q.

Today, we reported third quarter 2018 consolidated net sales of $1.8 billion, up 7% and over $100 million compared to sales reported for the same period in 2017, primarily driven by our Insulation business. Adjusted EBIT for the third quarter of 2018 was $267 million, up 12% compared to $239 million in the same period one year ago.

Strong pricing execution in Insulation and Roofing and the impact of the Paroc acquisition overcame weaker-than-anticipated market conditions across all three businesses. Adjusted EBIT for the quarter improved to record level despite lower market volumes and persistent inflation.

Net earnings attributable to Owens Corning were $161 million, up 68% compared to $96 million in the same period last year. The net earnings comparison further benefited from the comparison against last year's loss on debt extinguishment as well as a lower effective tax rate in 2018.

Adjusted earnings for the third quarter of 2018 were $171 million or $1.54 per diluted share compared to $141 million or $1.25 per diluted share in 2017. Depreciation and amortization expense for the quarter was $107 million, up $6 million as compared to the third quarter of 2017.

The year-over-year incremental depreciation and amortization from our Insulation acquisition was partially offset by lower accelerated depreciation associated with the prior year's Composite restructuring actions. Our capital additions for the quarter were $173 million. Year-to-date capital additions are up about $150 million versus last year.

On slide 6, you'll see the detail of our third-quarter adjusting items, reconciling our 2018 third quarter reported EBIT of $259 million to our adjusted EBIT of $267 million.

For the quarter, our adjusting items totaled $8 million, primarily related to 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 third quarter of 2018 with the third quarter of 2017. Adjusted EBIT increased by $28 million. Insulation EBIT increased by $30 million as compared to the prior year.

Composites' EBIT slightly increased and Roofing EBIT decreased by $20 million on lower volumes. General corporate expenses were $18 million, a $16 million improvement versus the prior year, primarily due to lower performance-based compensation and disciplined cost management.

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 $710 million were up 25% from the same period a year ago, primarily on strong price realization and the contribution of the Paroc acquisition, partially offset by slightly lower sales volumes and negative foreign currency translation.

The Insulation business experienced a slowdown starting in early September across most markets and product platforms. Volume trends in October have improved, but are tracking below our previous expectation. As a result, we have lowered our full-year outlook for the Insulation business.

EBIT for the quarter was $94 million, up $30 million compared to the same period in 2017. The EBIT improvement was driven primarily by strong price execution and the contribution of Paroc. This earnings growth was tempered by persistent material and transportation cost inflation and planned rebuild costs.

Insulation delivered strong EBIT and EBITDA margins of 13% and 20%, respectively. Although the market opportunity tracked below our expectations in the third quarter, commercial execution continues to be very strong across the Insulation segment with particular strength in our U.S. residential business.

We have delivered significant price progress in 2008 (sic) [2018] (14:58) with further progress in the third quarter. Year-to-date, we have delivered almost $90 million of price improvement, including $40 million in the third quarter.

Pricing through the first three quarters and our current price levels support our guidance for full-year price improvement of $120 million. Additionally, we have announced a further price increase effective January 7 in our U.S. residential business. I'm pleased to report that Paroc integration is progressing well.

Paroc delivered solid results in the third quarter with EBITDA margins of 21%. We had previously expected a full-year EBIT improvement of $150 million. Based on a revised volume outlook, we have revised our full-year EBIT outlook to an improvement of $110 million.

We delivered third quarter operating leverage, which was over 75% excluding the impact of Paroc. We expect second-half performance to track well in excess of our 50% goal, although the full year will track below our goal because of our performance in the first half of the year.

Now, I'll ask you to turn your attention to slide 9 for a review of our Composites business. Sales in Composites for the third quarter were $508 million, down slightly compared to the same period in 2017. Slightly higher sales volumes were more than offset by negative foreign currency translation.

In the third quarter, our volumes improved across most end-markets for Composites, although the rate of growth was below our expectation. One notable exception was the U.S. asphalt shingle market, which is the largest application for Owens Corning's Composites business.

Shipments for shingle manufacturers were down almost 20% in the third quarter, which significantly impacted our demand. Additionally, we experienced lower-than-expected volumes in Europe, which didn't return as expected following the August holiday period.

In addition, while volumes in India have improved in the third quarter, it was at a slower pace than we had originally anticipated. EBIT for the quarter was $64 million, up $2 million compared to the same period for last year.

The benefit of improved manufacturing performance and the favorable comparison against the prior year's $10 million bad debt charge were largely offset by inflation, cost associated with the completion of two large projects and a slightly negative foreign currency impact.

Inflation accelerated by about $5 million in the quarter primarily as a result of higher energy cost in Europe. Despite these headwinds, Composites still delivered strong EBIT and EBITDA margins of 13% and 20%, respectively.

The startup of our new low-cost melter in India is on track and the operational issues that we experienced in the second quarter are behind us. In our last earnings call, we shared our expectation for improved second-half EBIT performance compared to last year based on stronger volumes and improved manufacturing performance.

We're trailing this expectation for the second half of 2018 due to lower-than-expected volumes, in particular in the U.S. asphalt shingle market and higher than anticipated inflation. In 2018, we expect continued growth in the glass fiber market driven by global industrial production. Although growth in the second half has slowed.

Based on our lower volume outlook for the remainder of 2018 and higher inflation we experienced in the third quarter, we now expect full year EBIT to be approximately $260 million. Composites continues to operate in a constructive environment, global growth remains positive overall and industry utilization rates remain high.

Additionally, we expect that our low-cost India facility expansion, strategic supply alliances and our previously announced high-cost melter restructuring actions 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 $645 million, down $37 million compared to same period a year ago. Lower sales volumes partially offset by higher selling prices primarily drove the decline. For the third quarter shipments for the U.S. asphalt shingle industry declined nearly 20% on lower storm-related demands.

Our volumes were ahead of the market in the quarter. As a reminder our volumes were down mid-single digits versus the flat market overall for the first half of the year.

We estimated that approximately 50% of our first half decline was attributable to geographic mix, with the remainder associated with the timing of shipments, which we expected to balance out in the second half of the year.

While continued to experience some headwinds from a geographic mix perspective, our customer share position that was impacted by timing of shipments in the second quarter has now recovered to normal levels. EBIT in the quarter was $127 million, down $20 million compared to the same period in 2017 primarily driven by lower sales volumes.

Through our strong price execution, we delivered EBIT margins in line with our long-term guidance. For the third quarter, we achieved 20% EBIT margins which improved sequentially versus 19% in the second quarter, despite sequentially lower volumes.

For the quarter, higher selling prices more than offset asphalt inflation and higher transportation cost. Our contribution margin dollars per unit have consistently improved since the beginning of the year as we have successfully implemented multiple pricing actions despite a weaker demand environment.

Roofing delivered strong EBIT and EBITDA margins of 20% and 22% respectively. Asphalt and transportation inflation has been persistent throughout the year. Asphalt prices are up about 30% since the start of this year.

Although, asphalt prices appeared to have stabilized in early fourth quarter, we will continue to closely monitor dynamics in the asphalt industry and evaluate the need for further price actions as we enter 2019. The Roofing business continues to be positioned to deliver another strong year in 2018.

We continue to expect healthy demand in new construction and remodeling. We now expect the full year U.S. shingle market to be down approximately 10% on lower storm activity.

Based on the year-to-date market decline of approximately 6%, we would expect fourth quarter year-over-year decline to be similar to the third quarter on a unit basis, but the decline relatively steeper on a percentage basis. As a reminder, Owens Corning's volume will slightly 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 cost. Based on an easier storm volume comparison along with the price actions achieved, the business is positioned to deliver a stronger year in 2019.

Now, let me turn your attention to slide 11 which provides an overview of significant financial matters and our outlook for 2018. In the third quarter under a previously announced share repurchase program, we repurchased 1.7 million shares of the company stock at an average price of $60.34 per share.

As of September 30, 4.6 million shares remained available for purchase under the company's current authorization. As we balance our priorities for the future deployment of our free cash flow, making progress in paying down our term loan 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 to be approximately $260 million.

For Insulation, we expect EBIT growth of approximately $110 million. In Roofing, we expect the overall U.S. shingle market to decline approximately 10% on lower storm volumes and we expect our volumes to slightly trail the market due to geographic mix.

For Owens Corning in total, 2018 adjusted EBIT is expected to be in line with last year's performance of $855 million. Now, please turn to slide 12, where I provide guidance on other financial items for the year.

As discussed in previous earning calls, improved earnings, better working capital performance and our advantaged tax position has translated into a strong conversion ratio of adjusted earnings to free cash flow in excess of 100% in recent years.

In 2018, we expect another good year of free cash flow and conversion; although, the ratio will likely fall short of our 100% goal. Inventories have tracked higher in U.S. earnings expectations where we pay a very little cash tax have come down, primarily on a smaller U.S. shingle market.

Although 2018 will likely track below 100% conversion, we still expect strong conversion for the three-year period of 2016 to 2018 that exceeds 100%. We now expect corporate expenses of $125 million to $130 million which represents an improved outlook primarily due to lower performance-based compensation and strong cost controls.

Capital additions will be about $500 million. 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 planned 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 6 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 our question-and-answer session.

Thierry?.

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

We will now begin the question-and-answer session. Please limit yourself to one question. If you have further questions, you may reenter the question queue. And our first question will come from Doug Clark of Goldman Sachs. Please go ahead..

Hey, great thanks for taking my question, my first one is on the Insulation business and then pricing in particular, you mentioned the expected additional price increase starting January 7 in 2019.

I'm just wondering if you can comment on price realization thus far t-date and kind of how you expect that going forward amid kind of weaker volume environment. And that actually might be a kind of comparable question for Roofing as well.

Thanks?.

Okay thanks Doug. This is Mike. As we look at 2018 Insulation results, I think a real highlight of the year is our pricing performance.

We came into the year I think with very strong expectations that we were in an environment where will be able to achieve a good positive price particularly in our North American residential building Insulation business. And in fact, we've delivered against that expectation.

If you look against 2017, we did have positive pricing in 2017, we carried over negative price and then realized good price, I think in the second half of 2017 in particular, we carried some price into 2018, but I think the price actions in the first part of the year or the middle part of the year were both very positive and constructive to our pricing for this year.

So as we look at the market environment, we continue to see that demand level support high industry capacity utilization, so while we have some disappointment at the second half of the year may not be quite as robust as we've previously thought it would be in res, we do think the utilization levels are still relatively high and that the pricing market – that the pricing environment today is good.

So we're going into next year I think with very much the same posture that we entered this year which is as long as we see reasonable amounts of market demand, we think the opportunity for us to get a recovery of the value of our product and get some margin accretive pricing in the residential Insulation business is an objective for us next year, and that's consistent with the announcement of our price increase in January.

The other thing I'd like to say about Insulation and then I'll flip to Roofing is, we talked about volumes being a little bit weaker in the second half, I want to make sure, the analysts and investors understand, we've seen broad a slowdown in market demand across more than just residential new construction. So Europe's been a little bit weaker.

Latin America and Asia which we've talked about in prior calls, has been a little bit weaker.

We've seen a little bit of inventory correction with some of our North American OEM and technical Insulation type business, I'd say none of it at an alarming level, all of it just kind of at the level of demand growth where demand being a bit more sluggish than we expected.

So the downgrade of our outlook in Insulation, where we don't expect quite as much earnings growth, less than half of that is related to residential volumes the other half is related – or more than the other half is related to volumes in other pockets, either geographic or product lines.

So we're still seeing a very healthy residential Insulation market and we're seeing a very positive price environment. As it relates to Roofing, I mean I think, I couldn't be more proud of the third quarter. We came out of the second quarter saying that margins had gotten back to our targeted levels.

We knew going into the third quarter that we were going to probably be in a down market. The overall shipments for the third quarter were down 20%, so we were in decidedly down market.

I think if you pull back in a macro sense we have been saying all year that we thought the full year would be down mid-single digits, now we're saying we think the full year will be down 10% for shipments.

Given that the first half was flat to last year on shipments, we obviously were expecting as we turned the corner on the year, that the second half is going to be down pretty significantly.

So it didn't come as a surprise as the volumes were down and it didn't come to a surprise to us that given the inflationary environment we were in, that we were able to recover that inflation in price and sell shingles in the third quarter at very good margins. So we think the market environment for shingles allows us to get value for our product.

I think we've got some very good product stories in the Roofing business that also allow us to have some amount of competitive advantage both on the marketing side and some competitive advantage on the cost side, both of which contribute to us being able, I think, to handle cost inflation pressure maybe a little bit better than some of the other industry participants.

So, we feel good in both cases. Roofing's ability to recapture inflation and maintain strong cash margins in the business and again Insulation particularly North American residential to continue to be able to get margin accretive pricing and get prices back to something that represent the value of the product.

Our next question comes from John Lovallo of Bank of America. Please go ahead..

Hey, guys. Thank you for taking my questions. The first one, I just want to make sure that I'm thinking about the math here correctly on the shingle side. So in the third quarter volume for the industry was down 7.5 million units I think or about 19%.

So if we have that same level of volume decline in the fourth quarter that would seem to imply about a 30% year-over-year decline for the industry, does that seem right?.

Yeah John, I think that's probably about right.

As we look at it we said the overall market down 10% for the full year, last year was 144 million units so where our market call would imply around 130 million units given that was flat through the first half, somewhere between the third and fourth quarter we're going to have to see a 14 million square decline or something of that order of magnitude, so I mean you're getting the numbers right.

I think the key point there being that the overall market decline in units that we expect to see is going to be similar to what we managed our way through in the third quarter, so while that's not what we're looking for and we would prefer a stronger market condition in the fourth, I think we've managed through that kind of environment.

The percentages could sound scarier than the unit. So when we talk about a 30% down market, it looks like we're seeing some big acceleration of the decline of the market and in fact in units we are seeing a fourth quarter, that we think will be pretty similar to what we just managed through in the third..

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

Yeah, thanks a lot, guys. I guess I want to ask about the Insulation. I think you had indicated that the half of the reduction was due to residential, but other product lines were also down. So I just wanted to get some clarity on that, that implies I assume that the residential Insulation business was also down 2%.

Can you sort of talk about that relative to a housing starts environment that was still up fairly meaningfully, as call it almost mid-single digits most of the year.

And were there any competitive factors or competitive actions that we need to be thinking about with respect to the Insulation business? And then within that also Pittsburgh Corning is something you didn't specifically call out, but that, we've understood can sometimes be lumpy.

So I was wondering if there was anything particularly meaningful with respect to the slowdown in volumes you saw this quarter from Pittsburgh..

Okay. Thanks Stephen, maybe I'll just go around the horn a little bit, talking about Europe obviously our biggest exposure in Europe today is the Paroc business and I think Michael's addressed that specifically saying, we're really happy with the performance of Paroc in the quarter and that EBITDA margins in that business were quite good.

As you mentioned the FOAMGLAS business the former Pittsburgh Corning business can be a bit lumpy, it also has some exposure to European commercial construction, there's a fair amount of that Insulation that goes into commercial type applications in addition to industrial.

We did see, that the commercial side of the FOAMGLAS business was a little bit slower. We're seeing projects just getting done more slowly, I think you're hearing the same things in Europe as you hear in the U.S., which is labor availability issues, a lot of those are government funded.

So some of that I think would probably go to the pace of government spending as well. So we feel confident that the product is still well valued in the market and that as those projects go forward we'll see that volume come, but I think the timing has been a bit off.

So that is certainly one of the headwinds that we would be talking about in lowering our overall outlook for the full year. We brought Latin America and Asia down a little bit in our outlook as well. I think that's been a theme to the first couple of quarters and we don't see them catching up through the remainder of the year.

Probably the one that has been a little bit more of a new story for us in the quarter, was we did see some of the North American, particularly OEM type businesses where we sell our Insulation to other people who then manufacture a product in which our Insulation is a component, I think on probably weaker housing outlook or at least the weaker expectations of housing growth, we're seeing a little bit of a inventory correction.

So it's been a little bit lumpy where we'll see just a period where demand tails off a bit and then comes back. So more inventory related we think than overall end use demand and we are managing our way through that but, all of these products are very profitable.

When you have 50% operating leverage and you start pulling volume out of your outlook, it comes out of the EBIT line pretty quickly because we have such great operating leverage in the business. So I think the good news of operating leverage is on the way up, it's very, very powerful.

And then I think from an outlook point of view, if you pull some volume out of the business, the operating leverage gets you on the other side and you can't drive nearly the amount of EBIT growth you'd like to drive.

I think on the res side, we came into the year with a view that the industry was probably operating somewhere in the mid-90s and we are operating below that, our competitors were operating above that.

So we thought we had the ability to improve pricing and we thought we had some positive leverage on volume that if we saw some growth and I think growth in housing particularly in the second half that we should capture a disproportionate share of that growth because we were holding some of the excess capacity that was available to meet market growth.

I think now that the housing market, it feels like it's going a little bit more sideways and we are not quite seeing as much growth that kind of disproportionate gain we expected to see from growth in the market is probably not there for us. So we're tracking along well in terms of our overall share of the market overall position.

I think we thought maybe in the backside of the year that we might pick up a little bit of share, because we would be in an available capacity situation. I don't think the overall demand in res is probably going to support that thesis for the second half of 2018..

Our next question comes from Susan Maklari of Credit Suisse. Please go ahead..

Thank you, good morning. I wanted to talk a little bit about inflation. You mentioned that certainly oil prices seem to be moderating a bit in the Roofing side of the business, but as you look across, the three segments Insulation, Composites and Roofing.

How are you thinking about inflation going forward?.

Susan maybe I'll talk about that and then maybe I'll see if Michael has any additional comments. We kind of have three different postures related to inflation across our three businesses.

So I think in Roofing it's a materials conversion business, our view of inflation there is that, our team is – given the objective of recovering inflation in the price of product and I think you've seen this year that is not just asphalt cost inflation, but transportation cost.

I think we have seen in terms of demonstrated performance that we've been quite effective in our ability to do that, albeit we got a little bit behind the curve earlier in the year and it took us kind of six to seven months to get caught up in the pricing, our ability to get the pricing and recover that inflation, I think it's demonstrated a positive for the year.

In Insulation, we've been looking for margin accretive pricing. So we saw a lot of price deterioration that was not supported by deflation in 2006 to 2014, 2015 timeline.

So we really feel like we need to get some price improvement and get prices back to where we saw our pricing levels in 2005, 2006, not just in nominal terms, but in real terms and we're still a pretty significant way off of that number. So, we have more climb to do in terms of Insulation prices.

I think we came into the year expecting a little less inflation in Insulation. So, we expected the $120 million of price realization in 2018 to be more accretive to margin than in fact what it's going to be, just because it's been offset by more inflation than we had planned coming into the year.

So, we're clearly overcoming the inflation in Insulation, but we're not getting as much margin accretion as we like to get in Insulation because of the inflation. And then, in Composites, we've said on prior calls, we'd love to be in a position where we believe we could pretty consistently offset inflation with pricing.

I think the history of our business and the history of the industry is that typically has not been the case. It's an industry that's driven by productivity and great operating cost. We believe we have a really good cost position.

We've been working on that cost position this year, but we came into the year without a lot of price built into the business plan based on year-end negotiations. And then, we've seen more inflation through the year.

And I think Michael particularly pointed out European energy as being a bit of a surprise for us, that the inflation we've seen this year, we haven't had a lot of other levers besides to try to take additional productivity measures and then obviously, we've taken some margin hits as a result of that inflation.

So, as we head into next year, we're hopeful that a couple years of cumulative inflation, maybe the tariffs impacting North America, that we'd be in a bit more of a constructive price environment for Composites, maybe make more headway against inflation next year than we did this.

Michael, I don't know if you have anything additional you want to add against that..

I think that's pretty comprehensive, Michael..

Thanks, Mike..

Our next question is from Michael Rehaut of JPMorgan. Please go ahead..

Thanks. Good morning, everyone. A question I had was on Roofing and the pricing progress. I think there's been a lot of concern during the quarter around the ability for the distributors to pass through price. It appears obviously that, from your standpoint, you finally were able to, in the third quarter, for your own business, achieve price in excess.

So, just wanted to get your sense of, what's going on from a end-market standpoint in terms of your views on the ability for the entire industry to pass through price, if that's still kind of at an acceptable rate.

And then, secondly, on the Insulation EBIT reduction, you had mentioned volume – I was hoping to get a breakdown of that $40 million reduction between volume and greater-than-expected – weaker volume and greater-than-expected cost inflation. Thanks..

Okay. Thanks, Michael. Talking about price, I think the way you characterize it is, in the third quarter, we finally were able to get on top of inflation. I would want to make sure that I point out. We made really good progress in the first quarter. We made really good progress in the second quarter.

So, the pricing story in Roofing is not a story of suddenly in the middle of the year, the pricing environment improved for us. We've been working at this all the way through the first quarter and second quarter. The issue was we were a bit behind the curve.

I can't comment specifically in terms of how the distributors are dealing with the cost inflation, their feeling from the manufacturers and our price increases.

I would say, in most businesses, you faced very similar challenges to the challenges we faced, which is, can you get the timing of the cost inflation and the timing of the price realization to line up, so that you don't get margin compression? And certainly, I think that the market pricing of shingles has moved and I would expect that distributors would eventually be able to pass that through, because the product is a very valuable product.

And if you look at the re-roof market, in a $10,000 to $15,000 re-roof job the price of the shingle and the cost of the shingle as typically about 20% or less of the overall project. So, in terms of price elasticity or elasticity of demand to price, there's virtually none in shingles.

So, cost recovery is going to be the key and I think that's the key for both the manufacturers and the distributors. As it relates to Insulation, I said that less than half of the reduction in the outlook was related to the residential Insulation market in North America, kind of the new construction piece of it.

I said we've seen some OEM and we've seen some European reductions as well. And I think the balance would be inflation-related. I think it's fair to kind of – roughly a third, a third, a third is not a bad way of looking at kind of what we've seen in terms of that reduction of how we're seeing the year..

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

Hi. Thank you for taking my question. I wanted to follow-up on the Composites environment and, Mike, just your thoughts around the 2019 pricing outlook as we look ahead to the year-end negotiations.

I guess, in particular, given the news that I think we've seen the announcement that your large Chinese competitor is close to opening capacity in South Carolina, so, I guess, how do you anticipate that affecting the competitive environment and pricing dynamics in the U.S? Thank you..

Matt, it's Michael. So, I mean I think kind of first and foremost, kind of thinking longer term, we've phased into inflation as other material producers have phased into inflation as well. And so, a big one that I'd call out in particular in the U.S. would be steel. So, if I think from a longer-term perspective, that is a good catalyst.

Also, the market next year, I think, is expected to be decent. So, expectations for global industrial production growth are good. Utilization rates remain high and again, we think, will phase into some reasonable amount of inflation next year and I think all of those are good catalysts.

Also, as you know, Chinese producers, as we sit here today, are phasing into a 10% tariff, which could likely go to 25% if there is an agreement between the U.S. and China by the end of the year. We don't think that 10% tariff is going to have a meaningful influence, because the Chinese currency over the last three or four months has deflated.

That said, within our U.S. business in particular, we're positive that we should make some progress here at year-end negotiations.

And that looking to 2019, with price and productivity, we think that we should be able to offset inflation in regards to the new plant that's coming up in the Carolinas and this has been in our demand model for probably three or four years.

We anticipate that they will import less volumes as they bring that plant up to service, the demand they have here in the U.S..

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

Hi. Thanks for taking my questions today – or a question for today. Just in terms of – I know that you've given a lot of color on pricing for Composites and also the drivers for lower demand in the quarter and looking forward.

But when you look forward into 2019 and when you look at the landscape more from a global standpoint, how should we think about tempering our expectations for both the domestic Roofing side being more realistic in terms of what we can expect with demand, also with what you're seeing in terms of demand for your other markets, both in the U.S.

and Europe?.

Thanks, Kathryn. So, maybe just to put a little bit more color around our reduced outlook for the second half of this year first, then I'll move forward to giving kind of a forward view of 2019.

So, really if you look at our outlook for the second half, the two big drivers were, one, Roofing volumes, secondly, volumes in Europe and India and then, lastly, inflation. So, those three are about a third, a third, a third each. Again, kind of looking forward to 2019, as I said kind of previously, the overall environment is constructive.

Global growth remains positive. I would remind you that this year, we phased into a very difficult comp in the front half of the year. Last year, in the front half of the year, volumes grew at a low-double-digit rate. So, as we move into next year, we phase into a bit easier comp. Again, you heard me say that utilization remains high.

For Owens Corning specifically, we've done a lot on the productivity side, around the small melters that we've taken out, the new facility in India that we brought up, which is a low-cost facility, and then the strategic supply alliances that are getting put in place over the next six to nine months.

And then, looking forward to next year also, better manufacturing in the first half is going to be a pretty easy comp for us as well. So – and then, Chinese tariffs are a positive price momentum, in particular in the U.S. So, kind of rolling that all together, we feel pretty good that the business should be able to grow EBIT in 2019..

Michael, maybe I'll add one more comment just specific to the Roofing market. With our currentness of the Roofing market, you come up with an overall estimate in 2018 of around 130 million squares. 130 million squares is still a very healthy market. We publish in our investor deck the last 10 or 12 years of overall market demand.

You can see over the last three years as we've been in the 130 to 145 range with obviously the high watermark being 2017 where we had a very large storm year. I think more importantly, the new construction and remodel portion of that market has been continuing to grow.

So, when we say we think we've got a little bit easier comp going into next year in Roofing in general, both how it impacts Composites, but also it impacts our Roofing market, we would expect going into next year that there's no reason we wouldn't see growth off of the 130.

We'd expect new construction to show some growth based on housing start forecast. We'd expect the remodel market to continue to get better based on people getting equity in their homes and unemployment being very low and new storms now will be kind of a tailwind in terms of a comp and that storm activity this year was below average.

So, as you go into next year, we think all three segments of the market could potentially show growth. That's good news for our Composites business. It's great news for our Roofing business.

So, we think we've made a transition through 2018 where we really do have a very good market in an historical context, but also a market we can grow off of going into next year..

Our next question comes from Justin Speer of Zelman & Associates. Please go ahead..

Hey, guys. I just wanted to touch base on the Insulation segment and some of the other one-off items you mentioned last quarter in Composites. If you could just walk us through with some of the operational headwinds that you had in those respective businesses and how they're progressing, notably the Joplin facility, I know that's been an issue.

And lastly, as you think to next year, the capital needs of the business and thinking about rebuilds or anything like that, kind of help us map out next year?.

Yeah. Thanks, Justin. Maybe I'll talk a little bit about this year and then maybe Michael can offer some color about next year. I think you'd hear from our comments that we accomplish what we needed to accomplish to get our operating performance turned around coming out of the second quarter.

So, we feel like in the third quarter, the major projects we had going on in Composites are now completed, the melter in India is up and running, some of the disruptions we had had, which were both planned and unplanned, in Composites were really finished out by July.

Same thing on the Insulation side of the business, we had said on the last call that our objective was to get most of our capacity rebuilt in the first half of the year to have it be available for production in the second half of the year.

We had a pretty sizable rebuild that was really completed by the time of the last call, but it carried over a bit into July in terms of the timing on when it hit our numbers. But we were confident on the last call that Insulation was running well, Composites would be running well and that Roofing has been running well.

Specifically, with respect to Joplin and I think we said on the last call that we thought we were going to turn that into a tailwind in the second half and that really was not going to be a big theme in our outlook in Insulation.

I think based on our comments today, you can conclude that that was exactly what happened and that we do now have that position where it should be additive on a quarter-on-quarter basis to our earnings on a go-forward basis, which is the position we wanted to get into.

So, a lot of the operating nuances or drama maybe that we had in the second quarter which was obviously frustrating to us is really behind us and we are back to what we know how to do, which is we are manufacturing well and I think executing well in the marketplace.

Mike, do you have any comments on kind of color for next year?.

Yeah. Justin, so rebuilds, we had two this year. We'll have two next year. So, from a rebuild expense, things should comp relatively similarly. The one difference is, this year, we brought up the large facility in India, which we won't be doing that next year. Obviously, it will be up and running. So, that's bit of a tailwind..

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

Good morning, gentlemen..

Ken..

Kudos to getting Army (52:30) shipments public since July by the way. So, you're facing rising inputs cost, I get it. You're recovering your cost and that's good, right, it goes to industry structure, but it's a mid slowing volumes and the third, a third, a third, I got that, but specific to – and Roofing, it's variable costs.

So I understand that as well.

So, in Insulation and fiberglass, just to kind of cut through the chase, if we say if utilization falls, let's say, 5% and half of that would be new capacities, so a new plant opens up somewhere and just for kicks, housing demand goes down, so that would be the other part of the 5% compression utilization rates, what would kind of happen within a historical context, if you could just give us some of that stuff if you actually have a 5% swing in utilization rates? Thank you..

Thanks, Ken. I mean, obviously, it's a hypothetical question. So, let me try and take it apart into kind of the pieces of our outlook on what we would see that we think would be most likely. We don't see new capacity with the exception of the capacity that we're currently holding. So, there was competitive capacity that came online this year.

I think based on our outlook for the full year and housing starts growing up to kind of 1.3 million, we thought that capacity was going to be absorbed in pretty easily.

I think with the market being a little bit more sideways, that's where you're seeing us have a little bit less volume opportunity in the second half, because our posture was, as that capacity got absorbed in, the growth in the market would create an opportunity for us in terms of some additional demand growth that today we're probably not seeing, because we're not seeing enough growth to give us that.

I think if we were sideways next year, next year would look just like this year, which is the industry capacity would be generally loaded with us holding some additional capacity available to meet demand growth. I think what you'd expect for us to do is, in increases in the market, we'd be prepared to bring that capacity to the market to meet demand.

If we saw some decline in the market, we have rebuilds and other activities that give us the opportunity to adjust our production. So, I think we would adjust our production to the demand outlook as we saw it. Obviously in small changes in demand, that's a good thing for us to be doing.

I think if you saw bigger changes in demand, that gets to a broader set of questions, but at this point, I don't think in consensus, there are many folks who see housing getting into a big decline, I think there is more concern it's going to go sideways.

And I think we're prepared for a sideways environment to continue to deliver great earnings growth in Insulation..

Our next question comes from Stephen East of Wells Fargo. Please go ahead..

Hey. Good morning, guys. This is actually Truman Patterson on for Stephen.

How you're doing?.

Good.

How are you?.

Good. Good. Hey, just first question, wanted to touch on the Roofing industry volumes in 2019. I know you guys are looking for a bit of a snapback if you will or a little bit of an improvement, but back half of 2018 is down pretty materially.

Do you think that industry volumes continue this trend in the first half of 2019, even thinking with a very modest benefit from Hurricane Florence and Michael?.

I think we'd have a pretty balanced outlook to the first half of 2019.

I think likely in our outlook, we're not expecting much impact of Florence and Michael this year just because in the case of Florence, the flooding was so extensive and in the case of Michael, the damage was so extensive that the amount of construction activity that needs to be completed in order to bring Roofing into those markets is real.

Having said that, I think both of them obviously were events that are going to create demand for building materials, including Roofing and Insulation. We'd expect to start seeing that in material terms probably in the first half of next year.

We did have some carryover into the first half of this year related to the storms that were in late 2017, but we also had relatively weak storm activity in the first half of 2018.

So, I think if you go on balance and say it's an average storm year, we'd expect to have some carryover, which would probably comp negatively to the carryover we had this year, but we could potentially have new storms that would comp positively to what we had this year. We would expect though a positive comp on re-roof demand.

We'd expect a little bit more balanced geographic mix, which would benefit Owens Corning a bit more. So, I think we're looking at a good first half next year and then I think we are also looking at probably an overall up-market next year provided we have average storms..

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

Hi. Thanks for taking my question. Your inventory typically falls 2Q to 3Q. Looks like it was up this year quarter-over-quarter about 5% and you are expecting a slower backdrop in fourth quarter.

So, can you talk about where your inventory got heavy, if you're addressing it and whether or not your guidance for fourth quarter includes a de-stock with production inefficiencies?.

Hey. It's Michael. No problem. So, yeah. So, if you look at working capital year-to-date, it's up about $180 million versus last year with the biggest driver being inventories. Of that, the single biggest driver is Roofing, where inventory dollars are up about $110 million versus last year.

I'll remind you, I think, on previous calls, we ended last year with finished goods in Roofing at a level that was too, too low. It was a decade low inventory level. So, we needed to build some inventory back into Roofing this year.

So, just looking at the $110 million build year-over-year, it's about $45 million related to asphalt inflation, that's both in raw materials and in finished goods, and then the balance are $65 million is related that we actually have higher finish goods, half in shingles and half in components.

And then, to answer your question directly, yes, we will be taking some curtailments in the fourth quarter in Roofing to make sure that we have our inventories right-sized. The next biggest driver year-on-year is Insulation not nearly as significant. It's up about $30 million, primarily driven by lower sales in the third quarter.

And again, we'll be taking some curtailments there in the fourth quarter to get our inventories in the right spot.

And then lastly, Composites up just a little bit, mostly planned and largely related to some of the big rebuilds and startup activity that we had where we actually had to move some volumes that had been already certified by our customers.

And so, again, we expect to make some progress in the fourth quarter in getting that back to a more normal level..

Andra, this is Thierry. It looks like we have time for one more question and then we'll close with the final remarks..

And our last question is from Phil Ng of Jefferies. Please go ahead..

Hey, guys. Thanks for fitting me in. Good to see you being caught up from a price/cost standpoint in 3Q, but just curious what you are thinking in terms of inflation going forward. Any outlook on what are freight, asphalt, just some of the inflation category for Insulation and Composites..

Sure, Phil. Obviously, we'd be lousy in forecasting oil prices. So, we saw a pretty good run-up in oil probably from about this time last year through to the May-June timeframe. As we sit here today, it looks like we are in a little bit calmer environment.

I'm not as concerned about that as it relates to Roofing, because we have demonstrated ability to go get material cost inflation in the price of a shingle. Obviously, we buy a lot of chemicals and other things that come off of kind of the oil-based petrochemical complex.

So, oil price inflation would be a real driver of inflation for us across Composites and Insulation related to chemicals. Related to freight, we had kind of two themes on freight early in the year, I think we were down to one.

So, earlier in the year, we were seeing increases in freight rates and we are also seeing some real congestion pricing in the freight market, where certain lanes had gotten very, very expensive. I think we've taken a really good set of management actions to address some of the congestion pricing.

We still have some freight lanes that are very expensive. We've got teams working on some cross-border flows from Mexico to the U.S. and some other places where there are legitimately expensive freight lanes that we are trying to figure out how to manage more effectively.

So, going into next year, I don't think that congestion pricing around freight will be as prevalent for us as it was, say, in the first quarter because of management action. We do expect, though, just based on availability that we are going to see continued inflation in freight laning cost.

So, we are planning going into next year that we'll see inflation certainly on the freight side and we do expect we'll see some inflation across the rest of the business, although not probably as strong as what we've seen this year with the run in oil.

And the one exception I'd call out is we have seen energy prices in Europe make a pretty big move here over the course of the last quarter and I think we're planning going into next year that that's not something that reverses itself..

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

And give, Andra. I want to thank everybody for joining the call today and with that, I'll hand it back over to Mike Thaman for his final remarks..

Thanks, Thierry. I think if you listen to the call and you listen to our prepared remarks, I mean overall, we were satisfied with our execution in the third quarter, so – whereas a quarter ago, I think we called out a few execution issues that we needed to get fixed.

I think, by and large, what you are hearing on this report is both operationally and commercially to the extent there were gaps in our execution in the second quarter, we've reversed those and we're back to operating well.

Our financial outlook obviously was short of our prior expectation, but I think in absolute terms, our financial performance in the third quarter stands up. We had double-digit operating margins in all three of our businesses. We grow EBIT – we grew EBIT faster than revenue. A bit of a novelty I guess.

Michael's comments, all three of our businesses were 20% EBITDA margins in the third quarter, I think just a testament to the strength of our businesses to the strength of their cost positions, the talent of our folks and our ability to get value in the marketplace. Obviously, the market was a bit choppier or weaker in the third quarter.

We anticipate that will continue in the fourth. We think that's some adjusting to maybe a little bit slower growth expectations. We don't think it's a churn in the market that's causing us to believe our markets are getting ready to go negative.

We're in good shape and well positioned to be able to take advantage of any growth, but I think we've also built the company in a way that if we see slower growth, we still have the ability to power earnings across all three businesses as we head into 2019.

Obviously, the big headwind for us this year is the Roofing market that's going to be down 10% overall. That's a big and very profitable business for us.

So, the fact we are going to overcome a reduction in top line and an associated reduction in EBIT in our Roofing business and get the rest of Owens Corning back to 2017 levels is a good achievement given the amount of inflation and the level of demand growth we've seen in other markets.

So, the simple conclusion for the year is despite the fact that we do have weaker expectations for the second half, we do think we'll finish the year strongly and we also believe that Owens Corning all three of our businesses are positioned for EBIT growth in 2019.

With that, I'll conclude the call and that we look forward to talking to all of you after the 1st of the year. Thank you..

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