Owens Corning (OC) Q2 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Owens Corning Second Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Thierry Denis, Director of Investor Relations.

Thank you, Lora. 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 2015. Joining us today are Mike Thaman, Owens Corning’s Chairman and CEO; and Michael McMurray, Chief Financial Officer. Following our presentation this morning, we will open this one-hour call to your questions. Please limit yourself to one question and one follow-up. Earlier this morning, we issued a news release and filed a 10-Q that detailed our financial results for the second quarter. For the purposes of our discussion today, we’ve prepared presentation slides that summarize our performance and results for the second quarter of 2015. We will refer to these slides during this call. You can access the earnings press release from 10-Q and a presentation slide at our website, owenscorning.com. Refer to the Investor’s link on the bottom right-side 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, this presentation and today’s prepared remarks contain non-GAAP financial measures. Reconciliations of a non-GAAP to GAAP measures may be found within the financial tables of our earnings release 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 non-recurring items, and items that we believe are not representative of our ongoing operations when calculating adjusted EBIT. We adjust our effective tax rate to remove the effect of quarter-to-quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share. In the second quarter, we have utilized an effective tax rate of 31%, in line with our anticipated annual effective tax rate on adjusted earnings for 2015. 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 would be followed by CFO Michael McMurray, Mike will then provide comments on our outlook prior to the Q&A session. Mike?

Thank you, Thierry. Good morning, everyone. We appreciate you joining us today to discuss our second quarter results. We are pleased with our second quarter performance as all three businesses made substantial contributions to earnings. Composites had an outstanding quarter driven by continued strong commercial and operational execution. Roofing experienced strong shipments and improving margins throughout the quarter. Insulation continues to make progress with growth expected to accelerate in the second half on the recent improvement in U.S. housing starts. The company delivered consolidated revenue in the quarter of $1.41 billion, up slightly from the same period a year ago. We earned $156 million in adjusted EBIT for the quarter, up from $96 million last year. Adjusted earnings were $93 million, up from $45 million one year ago. At the outset of the year we discussed a number of expectations for sustained or improved performance across our businesses in 2015. Let me review them now beginning with safety. As in the case each year, we said that we will continue to make progress of our goal creating an injury free workplace. We achieved the 90% improvement over the second quarter of last year and we gained momentum in our safety performance. We remained focus on an injury free workplace and are committed to improving our overall safety performance in 2015. In Insulation, we said the business should continue to benefit from growth in US residential new construction, improved pricing and operating leverage. Insulation delivered its 16th consecutive quarter of EBIT improvement. EBIT for the quarter increased $7 million over the second quarter of last year driven primarily by improved pricing. In the first half the business delivered operating leverage of close to 50%. During our previous call I discussed $90 million investment for the construction of a new mineral wool plant to be built in the United States, with capacity available in 2017. We recently announced that the location will be Joplin, Missouri. This new capacity will help us meet the needs of our customers in a growing market. In Composites, we updated our outlook on the first quarter call and said that we expected $45 million EBIT improvement over 2014 including the negative impact of a stronger US dollar. For the quarter, Composites delivered $67 million in EBIT, representing its 8th consecutive quarter of EBIT improvement and its highest quarterly EBIT in seven years. The business grew revenues despite currency headwinds of nearly $50 million. Our year-to-date EBIT improvement is $63 million, exceeding our prior full year guidance of $45 million. Michael will update our outlook and Composites in his prepared remarks. In Roofing, we said the outlook would be largely determined by competitive pricing dynamics, the timing and value of asphalt cost deflation and overall market demand. The second quarter built on the foundation of the first quarter. In the first quarter, we saw lower production; lower shipments, weaker margins and less inventory build in the channel, positioning us for improvement through the remainder of the year. In the second quarter, the improvement we had hoped for was realized. With better shipments, better production, lower costs, and higher prices and significantly better profitability. Before I move to our outlook for the business, we had one other achievement in the quarter that I would like to note. We are proud to release our 2014 sustainability report, continue our industry leadership in this area. As a report highlights, we made good progress towards achieving our 2020 environment footprint goals. For example, we are now leader in the recycling of 2.4 billion pounds of end-of- shingles through our network, representing a 33% increase over the previous year. And this number continues to grow. Currently, there over a 100 major cities with recycling locations covering 60% of the United States population and allowing us to add the label shingles are recyclable to our packaging. I invite you to visit our website in order to review the full details of the progress we've made on sustainability. Now let me review our outlook for the remainder of the year. We expected the insulation business should continue to benefit from growth in US residential new construction, improved pricing and operating leverage. Looking forward, recent housing data and current forecast of 1.1 million starts suggest acceleration in the second half which we expect to result in approximately 10% revenue growth during that period. We continue to expect full year operating leverage to track slightly below 50%. In Composites, our actions to produce low delivered cost assets, strong commercial operation execution and the tightening capacity environment, position this business to continue the momentum we've established. In Roofing, the first half played out generally as we had hoped. First half industry shipments were down mid single digits while our shipments were up mid single digits. As a result, our overall market positioned improved in the first half. We continue to expect a flat roofing market for 2015 and our second half volume should track the market producing mid single digit growth. We now have sufficient visibility to the market demand and competitive dynamics in our roofing business to provide full year EBIT outlook for the company. In today's press release, we provided an EBIT range for the full year between $460 million and $500 million. We feel confident that we should be able to deliver Owens Corning's best EBIT performance since the peak of the housing cycle nearly a decade ago. It has been our goal to get to the $500 million EBIT level, and we think that it may be possible this year with continued fundamental improvement in the markets for each of our businesses. We are pleased with housing they have gone in the first half of the year. And we are optimistic about the opportunity ahead of us for the remainder of 2015. With that I'll now turn it over to Michael who further reviews details of our business and corporate performance. I'll then return to recap and then we will open the call up for questions. Michael?

Thank you, Mike. And good morning, everyone. As Mike mentioned earlier, we are pleased with the performance of our businesses and our second quarter results. Owens Corning is a better company when all three businesses are making meaningful contributions to our financial results. Now let's start on Slide 5 which summarizes our key financial data for the second quarter. You will find more detailed financial information in the table at today's new release and the Form 10-Q. Today we reported second quarter 2015 consolidated net sales of $1.4 billion, up 4% as compared to sales reported for the same period in 2014. Net sales in our Insulation business increased 1% primarily on higher selling prices. In our Composites business, higher selling prices and higher sales volumes were offset by roughly $50 million of foreign currency translation. In our Roofing business, net sales were up 50% primarily on higher sales volumes. Adjusted EBIT for the second quarter of 2015 was $156 million, up $60 million compared to the same period one year ago. Adjusted earnings for the second quarter of 2015 were $93 million, or $0.79 per diluted share compared to $45 million or $0.38 per diluted share in 2014. Depreciation and amortization expense for the quarter was $76 million, down $2 million as compared to the second quarter of 2014. Our capital expenditures for the quarter were $95 million. Cash from operations improved $74 million for the quarter compared to the same period one year ago. On a year-to-date basis, cash from operations has improved by $197 million. For the year, we expect to see strong free cash flow conversion of adjusted earnings, primarily as a result of our advantage tax position and better working capital performance. Now please turn to Slide 6 where we provide a high-level review of our adjusted EBIT performance, comparing the second quarter of 2015 with second quarter of 2014. Adjusted EBIT increased by $60 million or about 60% over the same period last year. Each business showed improvement year-over-year. It is about an 80% or $30 million increase in our Composites business and about 40% increase in both our Roofing and Insulation businesses with improvement of $28 million and $7 million respectively. General corporate expenses were $5 million higher versus the prior year primarily due to an increase in performance based compensation expense. With that review of key financial highlights, I ask you to turn to Slide 7 where we provide a more detailed review of our business results, beginning with our Insulation business. Sales in Insulation of $451 million were up 1% from the same period a year ago on higher selling prices of $7 million. The business delivered EBIT of $25 million in the second quarter compared to $18 million in the same period one year ago, primarily on improved pricing. This was our 16th consecutive quarter of EBIT improvement in our Insulation business. Volumes were relatively flat compared to last year on modest new residential construction growth in an elevated comp in 2014 resulting from increased buying activity ahead of the mid year price increase. In addition, we've seen some gap widened between US residential starts and completions which may have contributed to a somewhat slower market. Over the past three months, we have seen good progress from the starts perspective. Insulation volumes picked up throughout the month of June and we are off to a strong start in July. Looking forward, we expect stronger volumes and financial performance in the second half of the year which should translate into revenue growth with our 10% based on the current consensus for US housing starts. As we have discussed on previous calls, we expect average operating leverage at 50% due to recovery, although 2015 operating leverage will track slightly below this goal. Now I will ask you to turn your attention to Slide 8 for a review of our Composites business. Sales in our Composites business for the second quarter were $508 million, up approximately 1% from the same period a year ago. Revenue grew on higher volumes, improved selling prices and favorable product mix despite currency headwinds of almost $50 million. On a constant currency basis revenues would have grown about 10%. Selling prices continued their sequential improvement for the eight consecutive quarters. EBIT for the quarter was $67 million, almost double compared to the $37 million in the same period last year. These strong results were driven by higher selling prices, higher volumes and strong manufacturing performance. EBIT results were partially offset by the impact of $8 million of foreign currency translation. This represents our eight consecutive quarter of EBIT improvement and the highest quarterly EBIT in seven years. We are pleased with the progress that we have demonstrated in Composites business over the past two years including improvements in operating margins and return on capital. The actions we've taken to achieve a low cost manufacturing network in the tightening capacity environment position this business to continue the momentum we've established over the past eight quarters. Over the past couple of years, we have pursued a strategy to support future growth with supply alliances. We are recently expanding an existing supply line for the China based manufacture which will benefit 2016 and beyond. We will incur some additional implementation cost associated with this agreement in the second half. As a reminder, we previously said that majority of our 2014 rebuild expenses and cost associated with the start up of our US non-wovens facility which falls in the second half of the year. As a result of these items and lower specialty glass sales in the second half of the year, we expect lower EBIT in the second half of 2015 versus the first half, and second half EBIT to be broadly in line with the second half of 2014. For the full year, we continue to expect moderate global industrial production growth. Based on the strong results for the first half of the year, we now expect full year EBIT improvement of about $60 million at current foreign exchange rates. Foreign currency translation is expected to negatively impact revenue by about $200 million and EBIT by about $25 million for the full year. Slide 9 provides an overview of Roofing business. Roofing sales for the quarter were $503 million, a 15% increase compared with the same period a year ago primarily on higher sales volume. EBIT in the quarter was $90 million, up $28 million compared to the same period in 2014. Roofing delivered 18% EBIT margin in the second quarter. Higher than anticipated volumes in the quarter, improved production leverage and accelerated the asphalt deflation which totaled about $80 million. These benefits with some improvement to sequential pricing resulted in higher margins than previously guided. We are pleased with the performance of our Roofing business. And the first half of the year has played out generally as we had hoped. We saw limited discounting and less inventory build early in the year. We experienced improved volumes and better sequential pricing in the second quarter but asphalt deflation tracking broadly in line with expectations. As you recall from our first quarter call, we thought that the industry volumes would be down at least 25% in the first quarter, without the benefit of no industry shipment at that time. In fact, first quarter shipments were down 35% and as a result second quarter shipments were stronger than anticipated. We were pleased to see a strong rebound in the second quarter with market growth of just over 40%. Our volumes slightly trailed the market as a result of geographic and channel mix. For the first half, we are pleased that we improved our overall market position. As a reminder, volume growth as calculated in our 10-Q includes Roofing accessories and the sale of asphalt to third parties and it is not comparable to US asphalt shingle volume growth. We continue to expect the flat market for US shingle shipments in 2015. First half industry shipments were down mid single digits, while our shipments were up mid single digits representing a nice recovery in our position for the first half of 2015. We now expect industry volumes for the first half of the year to be a bit more than 55% a full year demand versus the 50:50 split we discussed in our previous earnings call. We would also expect our second half volumes to broadly track and the market and therefore grow mid single digit versus the last year on a flat full year market. We continue to see asphalt deflation as a constructive way to improve our margins in 2015. As I highlighted on our first quarter call, asphalt price decline flatten in late spring with increased paving demand. Asphalt deflation has largely tracked with expectations and we continue to expect asphalt deflation of over $50 million in 2015. Now let me turn your attention to Slide 10 which provides an overview of significant financial matters and our outlook for 2015. The Company's Board of Directors declared a cash dividend of $0.17 per share payable on August 4, 2015 to shareholders of record as of July 20, 2015. In the second quarter under previously approved announced share repurchase program, we repurchased about 700,000 shares of the company stock for $28 million at an average price of $39.70. As of June 30, 6.6 million shares remain available for repurchase under Company's current authorization. As we balance our priority for the future deployment of free cash flow, both dividends and stock repurchases will be important mechanism to return capital to shareholders. Our market outlook is for a continued growth in US housing starts and moderate global industrial production growth. Expectations for 2015 US housing starts are at 1.1 million units. Now please turn to Slide 11 where I provide financial guidance for the year. Based on results we have delivered today and our outlook for the balance of the year, we expect full year EBIT between $460 million and $500 million with most of the variability driven by the Roofing business. We now expect full year corporate expenses to be at the bottom of the $120 million to $130 million range. Capital expenditures are expected to total approximately $380 million. Depreciation and amortization expenses are expected to be about $310 million. We expect interest expense to be about $110 million. Our $2.2 billion US tax NOL will significantly offset cash taxes for some time to come. As a result of our tax NOL and other tax planning initiatives, we expect our 2015 cash tax rate to be approximately 10% to 12% of adjusted pretax earnings. Our 2015 adjusted effective tax rate is expected to be approximately 30% to 32% of adjusted pretax earnings. Thank you. And I'll now hand the call back to Mike.

Thank you, Michael. As I noted of the outset at today's call, Owens Corning's success in the second quarter was a result of positive execution in all three of our businesses. We are pleased with our progress in Insulation, record EBIT margins and deposits and stronger volumes and improved margins in Roofing. Given the significant progress in Composites and Roofing, combined with our expectation in Insulation we will continue to benefit from growth in US housing starts. We expect full year EBIT in a range of $460 million to $500 million with most of the variability within this range driven by the Roofing business. And now I'd like to turn the call over to Thierry who lead us in the question-and-answer session. Thierry?

Thank you, Mike. Lora, we are now ready to begin the Q&A session.

[Operator Instructions] Thank you. And our first question will come from Mike Rehaut of JP Morgan.

Thanks. Good morning, everyone. First question I had was on Roofing and obviously had nice improvement in the margins there, so congrats on that. Two questions. One if you could describe the pricing environment currently. I believe you said that they were up a little sequentially but on a year-over-year basis it appears that they were down, I believe 10% versus down 5% in the first quarter. And also in terms of the -- secondly in terms of the asphalt deflation, I believe you said that was $18 million for the quarter and that you still expect over $50 million for the full year. So it would seem like the 2Q if you just apply a run rate on that for 3Q -- over the next two quarters apply the same quarterly run rate that it would seem that the third and fourth quarters would be similar to the second quarter, I just want to make sure I am thinking about that correctly.

Okay, thanks, Michael. Let's talk about pricing first and then I'll talk little about asphalt deflation. I think in the context we are in today it is much easier to discuss pricing sequentially than it is versus last year. So Mike a few comments versus the last year but I think it is probably more relevant to talk about pricing sequentially. What we are reporting today is that prices in the second quarter were sequentially improved versus the first quarter. So what we said on the first quarter call was we are looking for better production levels, better shipment levels, higher prices and lower costs and in fact we saw that which really underpin the improvement in operating margins we saw from 5% or so in the first quarter, 18% in the second quarter. We think that's critical, our outlook for the second half and we do think that volumes in total on the second half will probably trail bit volumes in the first half. But we are seeing that the launching point to the second half we have a much better margin rate coming out of the second quarter than what we had at last year or where we ended this year. So we are feeling good about the second half. The comp to last year, it is a little bit complicated because prices did come down in the second half of last year. In fact in our pricing, prices went up in the second quarter of last year because we removed winter dating from our numbers and there were big discounts in the first quarter. So we kind of gave the impression in our 10-Q and in our financial reporting that prices has increased in the second quarter in our books because they but then we went through some price adjustment in the second half a kind of reversed a lot of that pricing back out. So that's why I think the quarter-on-quarter comparisons could give you the impression that prices drop in the second quarter because there is a bigger gap to the second quarter of last year. But in fact the sequential comparison which show the prices are up from the first quarter to second quarter which I think is really constructive dynamic. Particularly in a deflationary environment, you touched on deflation; we had set about $50 million in deflation. We said we thought the bulk of that would be in the second half. At the time we made that in that direction or gave guidance, we had expected candidly volume in the second quarter to be a little bit weaker than what we actually shipped. So we had a lot of good shipments at the end of the quarter where we had low asphalt cost in the shingle that we shipped and our internal planning some of the shingles we had anticipated would be shipped in the third quarter. So that effectively brought some of the deflation we expected to see in the third quarter into the second based on the timing of shipments. We think that's good news, we think the shipments in the second quarter was stronger because market demand was stronger so our senses the roofing market out there is good, the fact that overall the industry ship 5% less in the first half of this year than we shipped last year, would certainly suggest it is not an inventory build situation on the channel but that is actually a replenishment type demand which is very constructive for us as a manufacturer so we feel good about the way the dynamics of the roofing played out. It had not caused us to believe we will see more deflation this year even of this $80 million kind of annualized you might get to a bigger number, we think in fact based on the way the volumes laid out that $50 million or may be little more than $50 million still good guidance on deflation.

That's perfect, Mike, and very comprehensive answer as always. A second question on the back half expectations for Composites. Appreciate the color as to why you think the EBIT will be flattish year-over- year. As you kind list of those components I was hoping to get a sense from you -- obviously every year there's different elements of maintenance, facility maintenance, et cetera, and so this might be difficult. But as you've identified some of the supply lines and the non-woven that might be impacting that back half profitability, what amount of that would you consider, if at all, kind of nonrecurring or more limited in nature? And to contrast that importantly versus what you consider your annual ongoing type of maintenance that you have to perform for the overall Composites footprint?

So, Mike, this is Michael. That's a good question. And I think I can give you some good help from a direction point of view. I don't I will give you any specifics from a 2016 perspective but I think you are on an interesting point. So if you back up the last year, you recall that rebuilds in general were quite elevated and their rebuild expense for the year, if I remember correctly was up about $30 million year-on-year from 2013 to 2014. And as we moved into 2015 we said that rebuild expense in addition to the start up cost that we have associated with our new non-woven facility is going to be broadly the same. So as you move into 2016, you will clearly have some rebuild. But you would expect that we'd have a bit of a tailwind in 2016 from less rebuild expense.

And our next question comes from Stephen Kim of Barclays.

Thanks very much guys. Good strong results and congratulations on that. So my first question just to touch up on Roofing here. With respect to the asphalt deflation, you talked about the $18 million that you could get to from your 10-Q. But some of that deflation I would expect to is probably related to asphalt sales, the liquid asphalt sales, not the shingles. And so I'm wondering if we look at the margin benefit from lower asphalt prices, would we -- what should we be using or thinking was your margin benefit? I wouldn't think it would be all the $18 million, because the stuff -- the asphalt is done on a pass through, I would think, right? So if you could help me think through what the margin benefit was from the lower asphalt?

Stephen, thanks for your question I appreciate because it actually gives me a chance to clarify make sure that everyone understands the convention we used when we talk about pricing. You are in fact right that the asphalt business -- we have a business where we process asphalt and sell it kind of an OEM basis to other shingle manufacture then also into a distribution for things like commercial roofing applications. That business we characterize in the past as being kind of pass through basis we have a processing fee in some cases and other cases we just have price gap of input materials. For purpose of our inflation or deflation reporting when we talk about shingles, we exclude the pass through economics of our asphalt business. So this $18 million deflation number that we are talking about today is in fact the deflation we achieved on the shingles that we sold. One of the things we also try to clarify in today's call is in the reportable segment we have the impact of this asphalt pass through sales, we also have some accessory sales in that segment as well as shingle sales. And because we are in a deflationary environment, our asphalt business while still a good business shrank in the quarter because we sold and pass through at lower prices. So overall top line and the volume growth you would calculate out of our 10-Q, significantly underestimate the actual growth in shipments of shingles, hopefully Michael clarify that effectively in his comments but the overall shingle market was up a little over 40 in the quarter, down 5 for the half, we were up little bit less than 40 for the quarter, up 5 for the half and our shingle business at $18 million of asphalt cost deflation in the second quarter with a little bit of cost inflation actually in the first. So our year-to-date cost deflation is slightly less than $18 million but it was $18 million for the second quarter.

Got it, just writing that down. Okay, all right yes that's an important clarification. So I guess the follow-up question would be how much of the $45 million decline in sales was shingles versus other products? This is all within the Roofing business as well.

The $45 million decline in sales, give me that number because we reported today of 5 or 3 versus prior year revenue for 37.

I can jump on, yes. Can you hear me? Okay, great. So you reported a $45 million impact from price. Yes and so I was wondering how much of that was related to shingles versus other products?

So we would use the same convention there that we used on asphalt cost deflation. So the $45 million price decline that we reported in the second quarter specific to shingles, and then $18 million cost deflation that we reported in the quarter specific to shingles. And I want to be little transparent on this. This -- our financial reporting in our 10-Q, this was a little bit more complex this quarter because it is little bit of an oddity that we see a quarter with such significant increase in shingle volumes while we are seeing asphalt cost deflation and it made some of the numbers that we put into the Q less cleared and we would like them to be while we offer some additional information here on the call.

And now our next question is from Kathryn Thompson of Thompson Research Group.

Hi, thanks for taking my questions today. First is on Composites. I'm looking -- how much of your margin growth in Q2 was driven by outsize results in Europe? And specifically the checks that we have done are the market is structurally better this year because Chinese composite imports are effectively noncompetitive, not only because of the anti-dumping, anti-subsidy tariff, but also because of FX headwinds. So if you look at your composite results as a whole, and looking at more specifically at the margin results, how much was it Europe versus other geographies?

Yes, Kathryn, it is Michael. I will take that question. I think what I said may be at a high level is that we are really pleased with the execution of the Composites business in the quarter but really over the last two years. And as we look at the progress that we've made this year in the quarter specifically we made progress I think broadly across all region. You are right to call out Europe; we had made significant progress in Europe this year. Back over the last year for years we have taken significant amount of restructuring effort in Europe. We had a fair amount or rebuild activity in Europe last year as well. We are seeing the fruits of all that work that we got done over the last couple of years. And then you are right, currency has been our friend and some of the anti-dumping policies that are good in place have been helpful from a pricing perspective as well. And then volumes have been relatively pretty good in Europe as well. So we are really pleased with the progress that we've seen in Europe on a multiyear basis but in particular the first six months of this year.

Thanks and my follow-up question is on Insulation. You pointed out that Insulation volumes some were impacted by the lag between permits and starts. To what extent do you think volumes were at all impacted by very high precipitation seen in certain geographies such as Texas, Oklahoma and Colorado this year?

Well, obviously, we all have views on that but it is very hard for us to get good hard data or to track that. The kind of very high level probably the metric we look at is starts versus completions. And we have seen probably over the course of last three quarter four quarters that there has been an increasing disparity between starts and completions would suggest to us that potentially there is more lag between when a house is started and when that house is completed. And therefore there maybe more lag between the start up the house and the 90 days which we estimated about the time insulation goes into the home. Now some of that could be weather related or some of the dynamics you are discussing. I think if you also look at labor growth in new construction, labor growth has been slower than growth in new construction so we could be also seeing some of the lag extending out to the labor bottleneck. So we think there are a number of factors that are likely contributing to why we are maybe seeing a little bit slower growth in insulation demand than the lag housing start would suggest. I would tell you we think it is with also within rounding error, so while we've been on the low side of housing starts in our macro for the last couple of quarters, we also get some industry data around market share and things and we are pretty confident that we are tracking the market in terms of shipments and really there are just a market phenomenon where they are getting to be some pent up demand in the market that we will eventually see. We are hopeful and we would expect to see fair amount of that start down winds here in the second half and I think in Michael's comments he did say that we saw reasonably good volume in our -- the way June kind of order book and that so far early in the quarter, the third quarter translation looks pretty good. So we are I think expressing some optimism here on the call that we think the second half should be a point where we return the corner base in the last four months to starts.

And the next question is from Garik Shmois of Longbow Research.

Thank you and congratulations on the quarter. Just a follow-up question first off on Insulation. Just wanted some clarification on your 10% revenue guidance for the second half of the year. Is that for the entire Insulation division, or is that just a comment specific to the US residential component?

No. That's for the entire reportable segments. So obviously if you look at second quarter housing starts, I think second quarter housing starts were up about 14% versus the second quarter of last year, somewhere in the mid-teens. So on a lag basis we would expect in the US residential side that we would see both demand to growth that would be better than the 10% and also we are getting positive price there. So we are excited to see volume and price in the US residential segment but if you look across our entire insulation business, that’s still represents less than half of the overall business and some of the other parts of the business kind of grow with industrial production or grow with GDP or grow with the geographies that we are in. So it is a mix issues but as we mix it through we feel the growth there should be -- I think quite a bit stronger than that 10%, for using 10% overall growth in the segment.

Okay, thank you. And then a follow-up question on Roofing. You've talked about your outlook for the second half of the year, for the full year for that matter, for demand. Just given the context in the second half of last year which you had tried to regain your share position, you did so successfully and particularly in the third quarter. How should we think about your volume growth in Roofing on a year-over-year basis in the third and fourth quarters? Should it track relatively similar to the mid single-digit outlook that you have for the industry? Or is there going to be a little bit of variance just given how your volumes progressed a year ago?

Yes. I think Michael gave some commentary on this, let me build on a couple of things that Michael said. Our current estimate based on a flat market for the full year which is still -- I think the estimate we are building our outlook of -- is that the industry has probably shipped about 55% of full year demand in the first half and then we would ship about 45% in the second half. That's really just math and we know first half shipment and if you assume its flat for the year, that would mean we have about 45% to go on a year-to-go basis. In fact, if that the environment we are in, that produced 5% lower shipments in the first half than what we saw last year. And should therefore improve about 5% higher shipments in the second half than we saw last year. So would produce some volume growth to the manufacturers in the second half even in a flat market. Last year in the first half we were not happy with our market share position primarily waiting first quarter and then the early part of the second quarter, I think we expressed last year on our fourth quarter call, I guess earlier this year that we felt we had done what we needed to do there at the second half of last year, our market position was consistent where we have been historically. So we would expect our market share in the second half to be consistent with where we have been historically which would also suggest its consistent where we were last year which why give a guidance that we would expect our volumes to roughly track the market in the second half.

Next wave of question from Mike Wood of Macquarie Securities Group.

Hi, thanks for taking my question. I understand your logic on the asphalt deflation timing, I get a lot of the questions on this topic would like to clarify. I get a lot of confusion from investors basically calculate that what your $50 million guidance assumes is maybe a 10% or 15% asphalt price decline. And there's some industry data out there and PPI data suggesting that decline is 30%. So could you just clarify on that topic? Is it the industry data with the asphalt decline is overstating the impact? Or is it somehow getting mitigated in your $50 million guidance?

Yes. This is Mike. Let me take that and then maybe Michael add anything he would want to build on that, I opened it up over to him. Our $50 million guidance is obviously build up of our cost of goods, the timing of shipments and the timing of asphalt purchases and we said earlier in the year that there is some lag between the time, the crude oil hits the refinery between the refinery moving it through asphalt, the asphalt coming into our system getting into a shingle being sold. And we said it is about three months from the time I think oil to get through the asphalt prices and about three months for asphalt prices to get through our cost to good. Which is why we didn't really seen much deflation until we got into the second quarter of this year because we didn't really see the big break in oil prices until late third and then more pronounced into the fourth quarter of last year. So that supply chain dynamic hasn't really changed. We cautioned I think on the last call that typically in April, May you often see a flattening of the deflation curve because the paving market starts to pick up and so the refiners have alternative uses of the asphalt that they produce and as a result of that we have not seen asphalt come down to the level of pricing that would be suggested by where crude oil move to. So historically a drop in crude, a certain percentage would imply as the same percentage drop or similar percentage drop in asphalt. We have not seen that through this cycle. We got a portion of the way there and then April and May came, caving season started to open up, asphalt prices kind of firmed up and we didn't move all the way down. So part of I think the variance between where we would put asphalt cost deflation and maybe some of the external estimates would be that we don't see asphalt coming all the way down to the prices that would be suggested by crude oil. Maybe until later in the year potentially if at all. The second thing is I think some of the analysts support, I read maybe over estimate the amount of cost to goods that asphalt represents in our shingle business. If you look at our overall Roofing segment, because we have the asphalt processing business, we process and sell a lot more asphalt than actually necessarily goes into our shingles. And so when we look at what goes through our shingles and what goes through our cost to goods, the movement in asphalt price is based on published number that we would track and $50 million guidance pretty much tie-out. So we continue to think it is good guidance and it is just hard place for us to give a lot more information than that because we have to basically a way our entire cost to goods which is -- and we are prepared to do competitively.

Very helpful.

Yes. The only other thing I would add that your 30% probably a bit high from the deflation point of view where we sit today.

Understood. Just as a follow up on Composites, many other industrial companies have been reporting a pretty broad slow down in China including destocking. Just curious what your view is and what's been happening in the China Composites market and if there would be any risk that there would be dumping of capacity from China into any other markets? Thank you.

Yes, thanks Mike, it is Michael again. Yes, I mean our Composites business in China is doing relatively well this year. I say volumes and profitability are up year-on-year. We read the newspaper just like you do so we are cautious and we are watching. But I would characterize that so far this year so far so good.

Yes. Maybe I'll add a point on top of Michael's -- I think one of the things we've been reporting really over the last four or five years is we came out of the very difficult financial performance for Composites in kind of 2011. Is that we've seen a real slowdown in any capacity expansion or capital investment in the overall industry. So growth in China is important to us and it is a very good thing for our industry. And slowdown, I don't think is terribly worrisome provided we still see growth because we believe the overall industry is operating in the 90% level. So there is not a lot of capacity in China that would come out of China looking for new demand unless we actually saw decline in the Chinese market and at least on the Composites applications where we have the more significant positions, we are seeing fairly stable and growing demand. So we think China is stable, our senses is definitely slowing down but we were able to get an industry structure over the course of the last four five years that I think can deal with a bit of slowdown in China without changing our outlook for the business.

And the next question will come from George Staphos of Bank of America Merrill Lynch.

Hi, good morning, this is actually Alex Wong sitting in for George. Congrats on the quarter. First question just on Roofing. I know you touched on the sequential pricing improvement. But can you just talk about what you are seeing in the kind of currently in the market place regarding maybe yield relative to pass attempts that Owens Corning is undertaking and kind of your pricing outlook for the balance of the year especially given the latest round of announcements?

I mean it is generally our practice that we don't talk to specific price increases or talk to the yield on specific price increases. But I think it is suffice to say that because there was very limited discounting in the first quarter than most of the sequential price increase that we would be reporting in the second quarter, if not by product of the elimination of discount but it is actually a by product of some realization of the price increases that were announced in the quarter which we think is a very kind of optimistic note for the industry. I think we talked that most of the distributors and people who buy and resell shingles, rising price environment is the most attractive environment if you are in the business of buying and reselling shingles. No one wants to see their inventories devalued and increase in prices gives our customers the opportunity to also widen out their margins. So we are in an environment today where the sequential pricing that we saw in the second quarter really was a by product of our ability to pass higher prices to the market place. And I think our customers' ability to pass through improves their profitability as well.

Thanks for that. And then just follow up regarding guidance, just the $40 million swing factor between the low end and high end, can you just provide some color around what conditions you need to see to kind of drive both through the low and high end and what you characterize as your biggest concerns entering the second half of the year?

Yes. It is a very good question. I mean obviously we started the year in our Roofing business $60 million behind last year, on the first quarter of 2014 we did $80 million of EBIT this year and first quarter we only did $20 million. I think when you start in $60 million hole your first objective is get out of the hole. We made $30 million as a progress here in the second quarter. So on year-to-date basis, our Roofing business is still $30 million behind last year. I think if you look at our guidance, one of the things that we need to be able to achieve in order to get to the low end of the ranges, we would need to see roofing come back to levels of performance that at least were similar to last year. So I think step by step our goal would be to see roofing make more progress and catching up on last year through the third quarter. Fourth quarter volumes are always a big question mark in roofing so I think a lot of the variability that we would describe the roofing would be, how much volume do we see in the fourth quarter and how that set us up for next year. Obviously, our preference is going to be to see that this year we saw shingle start customers that they resale. We think the big inventory effects that we've seen over the last couple of years either in yearend effects or first quarter discounting have made the market difficult for manufactures like Owens Corning to make money, like it also made difficult for our customers to make money. So our expectations is we -- kind of readable demand through the third, fourth quarter based on what our customer sell out the door, and depending on the timing of that and the margin rates associated with that I think we could be somewhere between the low end and high end of the range.

And our next question is from John Baugh of Stifel.

Thank you and congrats on nice quarter. Two things quickly. One, on asphalt, if we just assume the oil doesn't change or asphalt cost doesn't change appreciably, is there a benefit that goes out into 2016? Could you quantify it? How long doe it go out? My second question on Composites, I was curious what your year-to-date volumes were in that business. And how that maybe tracking relative to the global industrial growth number you talk about or whether you are gaining share, losing share, et cetera. Thank you.

Okay. Related to asphalt cost deflation, effectively with our report today where we say we achieved $18 million of asphalt cost deflation in the second quarter, I think where as we had previously characterize the profile of deflation this year as we need to get some piece of it into the second quarter and then the bulk of it will come in the second half. I would say that today based on the results we are reporting today; it really is much more that we are seeing almost a full portion of deflation in all three of the quarters. Second, third and fourth. So as you go to next year I think we would have a positive comp at asphalt cost stayed where they are today in our first quarter or probably by the second quarter we wouldn't be comping positively so there is some amount of additional deflation, we would expect to see with lower cost at the end of this year than what we had at the end of 2014, but I think by the time you got to the second quarter of next we would be comping about flat on cost. There is a possible additional improvement in our cost position. If at the end of this summer and paving season ends, we would see asphalt prices again begin to come down closer to where they would be historically versus crude oil. And if we were to see that between now and yearend then that would potentially give us some additional deflation next year but that's not something we are counting on, refinery kind of complex is changed dramatically over the last couple of year so we are trying to get a sense of where the crude oil prices and asphalt and I think to this point we've got our arms around it pretty good with the $50 million of guidance we have given. I'll let Michael talk about Composites volumes.

Yes, thanks Mike. Yes quickly on Composites volumes. I think as you would have taken away from our prepared remarks and some of the questions that I answered earlier, I think broadly across pretty much all regions in which we operate across the globe, we've seen positive volume growth year-on-year. Looking at it on the year-to-date basis, if you look at our Q I think you can tease out that roughly that equates about 4% growth year-on-year. We highlight at the beginning of the year we are expecting to see a little bit of weakness in particular within the oil and gas sector which has materialized. But overall volume growth is tracking nicely about 4% on the year-to-date basis.

And our next question is from Keith Hughes of SunTrust.

Thank you. I had two quick questions on Roofing. First, you had talked about the sequential improvement in shingle prices into the second, if price stay where they are at heading into the third quarter would you on year-over-year basis are up in pricing? And there is a lot of calculus involved, I just can't figure out on my own. And then question number two is on manufacturing volumes given your view of the market. What was your capacity utilization rates in Roofing that you are planning right now be versus prior year in the second half?

Okay. Let me come back to your first question, Keith. Your first question was third quarter pricing relevant to second quarter or third quarter relative to the third quarter last year.

Third quarter relative to prior year given where you are as you end the second.

Yes. I mean relative to prior year we would continue to be well below last year. So the entire pricing curve this year is really the shape of it doesn't look a lot similar to last year but its well below it. And that is really when we came out of last year we had the big discounting in the first quarter. We saw some price increases as discounting came out in the second quarter. We then adjusted our pricing in the third quarter, so third and fourth quarter prices were below the overall level of pricing for 2014 as a result when we came into 2015 we are just starting off the lower base. And obviously the number we watch are margin rates and we having been able to adjust to that price level and deliver 18% margins in the quarter which is really constructed number for us. So production was very, very good with some deflation and some sequential pricing, at today's price levels we can make very good money on the roofing business.

And so the production volume to the second half, will those be above the prior year given that the industry, it appears on a path for a decent second half of the year.

Above the prior year, first of all I mean in roofing the timing of our production is not terribly important because our fixed cost are relatively low and absorption is not super important particularly in any given year. We've been pretty careful about inventories this year particularly because it is a deflationary environment so we want to make sure we don't put high cost asphalt into our inventories. So my sense would be that we will producing the second half about what we would ship, and since we are expecting shipments in the second half to be slightly above last year, I would expect production to kind of at about the same level what we saw last year.

Okay. And to go back to the first question on the -- there is various price increase announcement that has been out in the industry for a couple of different periods. Do you have a view at this point on the potential success of those for you or for the industry as a whole in the third quarter?

I think ballpark I don't think I remember whose question I answer on that but we have been very pleased that we saw some positive sequential price in the second quarter. Obviously our hope for the year would be that we continue to see the kind of constructive and progressive pricing for the year that's very good for us. It tends to be good for our customers. But I wouldn't speak specifically to any of the announced price increase or view on them.

All right. And the next question comes from Stephen East of Evercore.

Thank you. Good morning. Mike, if I could just follow up on the Composites, talking about China. What percentage of your business is going into China and you talked about it is more value add, what -- is it just industrial production that you keep your eye on or what's probably the biggest macro metric that you look at for China?

Yes. So in our investor disclosure you will see that China represents about 26%, I believe that the overall global market and percentage of OC revenue is roughly 10%. I think that's in our standard divesture pack that should be out in our website. And again global industrial production is the primary measure that we look at when thinking about the Composites business. Clearly as you go around the globe, there are various pieces of the end market which are more relevant. Obviously thinking about China, their infrastructure is relevant, and automotive though is actually a quite nice growing segment for us as well. So again so that 26% or core of the overall market by 10% of our revenue and we've seen good progress this year on a year-to-date basis.

Okay. And then on Insulation you got some gives and takes in retail. I was interested in where that shaking out right now? Are you getting your -- you think you are growing that segment getting the pricing and then I know it is early for 2016 but just looking at your cash allocation where you are going on CapEx spend et cetera, do you have any big projects that are looming we need to be aware of?

Yes. So on Insulation, when we look at the overall market demand and I spoke to this earlier that we generally think we are tracking the market. If you break it down into some of the segments that exist inside our insulation business, you got some alternative channels but generally the product we sell or retail the product we sell to the new construction contracted the product we sell into distribution is a very similar product, so we get market share, we measure market share data at that level, our sense would be that because of some of the moves at retail maybe a bit more of our volume in the quarter did go through the retail channel, but our overall volume in the corner tracking market, so we think we are doing very well in retail. And obviously with our brand, our trademark colors and other things, we bring a pretty unique value proposition to a retailer so that is a place where we should shine and we should do very well. With respect to capital allocation, I mean the non-woven facility we are building down in North Carolina was obviously big capital spent. We would expect that generally the substantial portion of the spent should be behind us. This year we are expecting to commission that plan, late this year. So it is really the Joplin, Missouri mineral fiber facility that we spoke off earlier in today's call that we would the biggest capital call on next year. We've been pretty heavy rebuild schedule in Composites including two of our very important melters in the US; two very well cost strategic melters, which are the two melters we are rebuilding in the second half of this year. We do have an outlook over the next two to three years that the level of rebuild expenditure that we are going to have in deposits will start to come down a bit with the rebuilds we've done in Europe, with the rebuilds we've done in North America now so generally in terms of our cash flow outlook, the more profitable we are the more valuable our tax position is because our cash tax rate is well below our GAAP tax rate and then obviously as we get through this surge of CapEx that we had in Composites as well as some of these big expansions that we have between non-woven and mineral fiber, we are getting into a period we believe as we get into 2016 and beyond, we are going to have lot of flexibility with free cash flow to pursue growth, to pursue shareholder purchases Michael talked about to support our dividend, to support balance sheet with our investment grade credit rating. So hopefully this is the environment we have been looking to get into with three great businesses operating at high margin levels with great cash flow. And I think we are beginning to demonstrate that here in the second quarter.

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

Well, thank you, Thierry. Obviously I hope you took away from Michael and my comments that we are very pleased with the progress in the second quarter, particularly I think the quarter was a result of positive execution in all three of our businesses. I don't know how many times in my career I am going to have the opportunity to report a quarter, where the corporation EBIT is up 60% and Composites is up 80% and Roofing and Insulation are both up 40%. Those are some pretty heady numbers. I don't know that we can sustain that through all the quarters of my career. But it was a fun to have one where we have all three of the businesses really showing that kind of growth and that kind of improvement at the same time. Obviously that is consistent with the overall strategy we laid out for the company that we have been talking now for two to three years with our investors of getting all three of our businesses and our portfolio operating at very high levels of performance at the same time. I think you are seeing the power of that capability inside Owens Corning and the numbers coming through the second quarter. I'd expect that we would be able to demonstrate through the second half of the year continue progress and I think most importantly that progress that we are demonstrating here in the second quarter and through the second half should continue on into 2016 and 2017 provided we see the kind of macro environment and economic fundamentals that underpin our very, very good businesses. So we are very proud of the quarter. We appreciate the support of all the people on this call and we look forward to talking to you on the third quarter call.

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