Owens Corning (OC) Q1 2016 Earnings Report, Transcript and Summary

Good day and welcome to the Owens Corning First Quarter 2016 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. Please go ahead.

Thank you, Allison, and 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 first quarter 2016. Joining us today are Mike Thaman, Owens Corning's Chairman and CEO; and Michael McMurray, Chief Financial Officer. Following our presentation this morning, we will open this one-hour call to your questions. Please limit yourself to one question and one follow-up. Earlier this morning, we issued a news release and filed a 10-Q that detailed our financial results for the first quarter. For the purposes of our discussion today, we've prepared presentation slides that summarize our performance and results for the first quarter of 2016, and we will refer to these slides during this call. You can access the earnings press release from 10-K and the presentation slides at our website, owenscorning.com. Refer to the Investor's link under the corporate section of our homepage. A transcript and recording of this call and the supporting slides will be available on our website for future reference. Please reference Slide 2 before we begin, where we offer a couple of reminders. First, today's remarks will include forward-looking statements based on our current forecasts and estimates of future events. These statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially. We undertake no obligation to update these statements beyond what is required under applicable securities laws. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent risks and uncertainties affecting such forward-looking statements. Second, this presentation and today's prepared remarks contain non-GAAP financial measures. Reconciliations of non-GAAP to GAAP measures may be found within the financial tables of our earnings release and in the appendix of this presentation 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 first quarter we have utilized an effective tax rate of 33% on adjusted earnings, the midpoint of our 2016 range. We also use free cash flow, a measure helpful to investors to evaluate the company’s ability to use cash to pursue opportunities that enhance shareholder value. For those of you following along with our slide presentation, we will begin on Slide 4. And now, opening remarks from our Chairman and CEO, Mike Thaman, who will be followed by CFO Michael McMurray. Mike will then provide comments on our outlook prior to the Q&A session. Mike?

Thank you, Thierry. Good morning, everyone. Welcome to our first quarter 2016 earnings call. First quarter revenue was $1.23 billion up slightly from $1.20 billion one year ago. Adjusted EBIT for the quarter was $118 million, up from $60 million in 2015. Adjusted earnings for the quarter were $62 million, up $22 million from the prior year. Owens Corning had a record first quarter with all three businesses demonstrating year-on-year EBIT growth. The Composites business displayed continued momentum in margins and volumes. The Roofing business delivered strong results in the quarter, due to growth in the underlying market demand and storm activity that occurred late in the quarter. The Insulation business delivered another quarter of year-on-year EBIT growth. We also announced strategic acquisitions for our Composites and Roofing businesses. Now, as I do every quarter, I will review our performance as it relates to the expectations we set for the year. We said that we would continue to make progress toward our goal of creating an injury-free workplace. Owens Corning continued to maintain a very high level of safety performance in the first quarter, with a 16 percent improvement in our recordable incident rate as compared to the same period of 2015. Of note, we tied our record performance for safety in March, with only 2 recordables across our global employee base of nearly 15,000. In Insulation, we said we expected revenue growth and margin expansion in the business, with the magnitude of the improvement dependent upon the progression of pricing and volume in the U.S. residential new construction market. First quarter Insulation results are largely in line with our expectations. Insulation grew revenues in the quarter by 2 percent, with market-based volume growth overcoming the impact of the reduction in contract manufacturing volumes from the prior year. The business delivered $6 million in EBIT improvement over the first quarter of 2016. Early in April, we encountered a contract dispute with a large residential customer that will impact the business for the remainder of 2016. I will discuss this issue more fully in the outlook section of my remarks. In Composites, we said we expect to continue growth in the glass fiber market, driven by moderate global industrial production growth. We expected the business to improve EBIT by at least $20 million on price and volume growth, which would represent an EBIT improvement of more than $100 million over two years. Composites continued the momentum we saw throughout 2015 and again posted strong quarterly performance. The business grew earnings by $4 million over the first quarter of 2015, and delivered 14 percent EBIT margins. Revenues grew 3% on a constant currency basis and we continue to see strong demand in China and India. The year-on-year EBIT comparison reflects continued volume growth and price improvement, and more than offset the contributions of the specialty glass campaign we had in the comparable period in 2015. In Roofing, we said we anticipated modest market growth, primarily driven by growth in the new construction markets. We said we hoped to see a replay of 2015 with a more balanced distribution of shipments that track end market activity. We also expected to see additional asphalt deflation in 2016 consistent with the $68 million experienced in 2015. Roofing had a very good quarter, with EBIT growth of $53 million, and 17 percent EBIT margin. We saw market dynamics similar to the first quarter of 2015 with limited winter discounting and shipments tracking end market demand. The U.S. asphalt shingle industry shipments grew by approximately 17 percent in the quarter, due to underlying market demand and storm activity late in the quarter. Our volume growth was consistent with the market. We also benefited in the quarter from approximately $34 million of asphalt deflation. In addition to the strong business results across the portfolio, I wanted to review other significant accomplishments that position us well for the future. Last Thursday we closed on the previously announced acquisition of InterWrap. This acquisition strengthens our capabilities to continue the conversion from organic to synthetic underlayments and accelerate our growth in the Roofing Components market. The acquisition also provides growth opportunities due to InterWrap’s leadership position in lumber and metal packaging. The teams are now actively at work on realizing the more than $20 million in synergies we see from this combination by the end of next year. In January, we signed an agreement to acquire the glass non-wovens and fabrics business of Ahlstrom. This acquisition provides new markets, technology and talent for a growing business. The transaction, which is under regulatory review, is anticipated to close later this summer. I would also like to note that we are pleased with the initial start-up of our non-wovens facility in Gastonia, North Carolina and have successfully completed the production of several major product lines and commenced customer shipments. With that, let me now turn to the outlook for the remainder of 2016. We said in today’s press release that our updated outlook for Roofing and Composites should offset our lower expectations in Insulation. We also said we expect InterWrap to provide an additional $25 million of adjusted EBIT growth. Let me take a moment to highlight the business drivers that underpin that outlook. In Composites, we had previously indicated we expected at least $20 million of EBIT improvement in the business for this year. Based on a strong start to the year and continued improvement in price, and volume, we now see the potential for EBIT improvements of at least $30 million in 2016. In Roofing, given the strong start to the year and storm activity late in the quarter, we now see upside to our prior guidance of modest market growth in 2016. In addition, the InterWrap acquisition should contribute at least $160 million of revenue and $25 million of adjusted EBIT this year. In Insulation we now expect slightly negative revenue growth and relatively flat margins for the full year. As I would remind you, this business has made significant progress in the last four years, growing revenue by nearly $500 million and improving EBIT by more than $250 million. The improvement in our U.S. residential business has been driven by strong operating performance and an improving housing market. We have also experienced strong performance in the non-U.S. and non-residential products and markets. While we are pleased by the progress that we have made, the residential business is still well below its historical return levels. As we detailed at our Investor Day in the fall, our analysis indicates that the market demand is approaching levels that adequately utilizes industry capacity to produce an environment more favorable to achieve our pricing and return goals. As I mentioned earlier, we are addressing a contract dispute that has reduced our volume expectations for the remainder of the year. For 2016, this situation has required that we moderate our outlook for both volume and share. We are currently curtailing capacity, rebalancing our supply chain and broadening our positions across the U.S. residential customer base. Beyond 2016, we may be able to again accelerate the improvement in the business as we expect industry capacity utilizations at or above the 90% level. Coming into this year, we had expected to operate our assets at rates that were a bit above our estimates of overall industry utilization. Given our outlook to our market position for the remainder of the year, we continue to believe that the overall industry utilizations will be consistent with our prior estimate, but that Owens Corning will now operate below those levels. As a result, we are now positioned to benefit disproportionately from market growth, better pricing and improved returns beyond 2016. With a strong outlook in Roofing and Composites, our Insulation team knows that there is no better time to get it right in Insulation. Our fundamental outlook for the earnings potential of the business is unchanged. With that, I’ll now turn it over to Michael, who will further review details of our business and corporate performance. I’ll then return to recap and open the call up for questions. Michael?

Thank you, Mike and good morning everyone. As Mike mentioned earlier, Owens Corning delivered an outstanding quarter, nearly tripling adjusted EPS and almost doubling adjusted EBIT. I’m also pleased to report that we significantly improved free cash flow as a result of better earnings and stronger working capital performance. Now let’s start on Slide 5, which summarizes our key financial data for the first quarter. You will find more detailed financial information in the tables of today’s news release and the Form 10-Q. Today we reported first quarter 2016 consolidated net sales of $1.23 billion, up slightly compared to sales reported for the same period in 2015. Net sales in our Insulation business increased $6 million, primarily on higher sales volumes and favorable customer mix, partially offset by currency headwinds. In our Composites business, higher sales volumes and higher selling prices were offset by the impact of foreign currency translation. In our Roofing business, net sales were up 9% from the prior year, primarily on higher sales volumes. Adjusted EBIT for the first quarter of 2016 was $118 million, almost double compared to the $60 million the same period one year ago. This represents a record first quarter for the company. Adjusted earnings for the first quarter of 2016 were $62 million, or $0.53 cents per diluted share compared to $22 million or $0.19 cents per diluted share in 2015. In the first quarter, the company delivered double digit operating margins. Depreciation and amortization expense for the quarter was $76 million, essentially flat as compared to the first quarter of 2015. Our capital additions for the quarter were $75 million. In the first quarter, the Company improved free cash flow by $170 million as a result of improved earnings, better working capital performance and our advantaged tax position. Our net debt position improved by over $300 million in the quarter. Now please turn to Slide 7 where we provide a high-level review of our adjusted EBIT performance, comparing the first quarter of 2016 with the first quarter of 2015. Adjusted EBIT increased by $58 million, with all three businesses showing increases over the prior year. General corporate expenses were higher than the prior year and are consistent with our guidance for the full year. With that key review of 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 the Insulation of $385 million were up 2% from the same period a year ago, primarily on improved volumes and customer mix, partially offset by currency headwinds. Our U.S. residential volumes were strong and grew in line with the market. The business recorded its 19th consecutive quarter of EBIT growth, delivering $13 million in the first quarter compared to $7 million in quarter the same period one year ago, primarily on improved volume, cost deflation and customer mix. Mike spoke in his prepared remarks about the recent developments in our insulation business and its potential impact on our outlook for 2016. I would remind you that our Insulation segment has a profitable portfolio of products and geographies that extends beyond U.S. residential new construction. We remain confident that these businesses will grow earnings in 2016, while our residential business addresses the near-term challenge. Now I will ask you to turn your attention to Slide 9 for a review of our Composites business. Sales in our Composites business for the first quarter were $473 million, flat compared to the same period in 2015. Revenues grew about 3% on a constant currency basis. Volume growth of 5% and improved pricing offset the $16 million contribution of specialty glass sales in the comparable period and the impact of foreign currency translation. Volume improvement in China, continued strong demand growth in India and roofing related demand in North America were partially offset by weakness in Brazil and the North American oil and gas industry. EBIT for the quarter was $64 million, $4 million higher than the same period last year. Strong commercial and operational execution more than offset the $12 million of benefit in the comparable period resulting from specialty glass sales. Composites delivered 14% EBIT margins in the quarter. In 2016 we expect continued growth in the glass fiber market driven by moderate global industrial production growth. We are pleased with the progress that we have demonstrated in the Composites business over the past couple of years, including improvements in operating margins and return on capital. Strong commercial and operational execution combined with a low cost manufacturing network, and a tightening capacity environment, position this business to continue the momentum we have established. As a result of the strong start to the year, we now expect an EBIT improvement of at least $30 million in 2016. Slide 10 provides an overview of our Roofing business. Roofing sales for the quarter were $429 million, a 9% increase compared with the same period a year ago, primarily on higher sales volumes. Shipments for the U.S. asphalt shingle industry grew 17% in the quarter and our volumes grew consistent with the market. Our components business continued to demonstrate strong growth momentum in the quarter. EBIT in the quarter was $73 million, up $53 million compared to the same period in 2015. The increase in EBIT was driven by higher sales volumes and asphalt deflation of $34 million. Roofing delivered 17% EBIT margins in the first quarter. Asphalt deflation has largely tracked with expectations. For 2016, we estimate asphalt deflation at or above last year’s level, with the majority of the benefit occurring in the first half of the year. We are pleased with the performance of our Roofing business. The market dynamics of the first quarter were constructive as evidenced by limited winter discounting and shipments that tracked end market demand, similar to last year. This was supported by stronger underlying demand and storm activity late in the quarter. While there were some shipments related to storm activity in the first quarter, we expect majority of shipments in the current quarter and to continue throughout the remainder of the year. The pricing environment was broadly stable, although there were some competitive adjustments. The adjustments occurred late in the first quarter and were similar in magnitude to last year. Prices have since been stable and we have announced a price increase effective May 31. We had previously anticipated modest market growth in 2016 driven primarily by growth in new construction and possibly some growth in re-roof. Given the strong start to the year and recent storm activity, we now expect growth in both new construction and replacement markets. We believe the bulk of margin expansion and volume growth occurred in the first quarter. As a result, we would expect volumes and margin rates similar to last year for the remainder of 2016. Now let me turn your attention to Slide 11. On April 21, 2016, we closed on the previously announced InterWrap acquisition. InterWrap is the leading manufacturer of synthetic roofing underlayments. The company has an established track record of double-digit revenue growth and should continue to benefit from the conversion of organic to synthetic underlayments. We expect the acquisition to be accretive to earnings and contribute at least $160 million in revenue and $25 million of adjusted EBIT in 13 2016. We also expect to achieve a run rate of $20 million or more in synergies by the end of next year. In the first quarter under a previously announced share repurchase program, we repurchased 817,000 shares of the Company’s stock for $36 million at an average price of $44.66. As of March 31, 3.8 million shares remain available for repurchase under the Company’s current authorization. As we balance our priorities for the future deployment of our free cash flow, both dividends and stock repurchases will be important mechanisms to return capital to shareholders. Now please turn to Slide 12 where I will provide our outlook for 2016. We are optimistic about the earnings growth potential for Owens Corning. Consensus expectations for U.S housing starts are above 1.2 million units and moderate industrial production growth is projected. The updated outlook for Roofing and Composites performance should offset the lower expectations for the Insulation business. In addition, the company expects the InterWrap acquisition to contribute at least $160 million of revenue and $25 million of adjusted EBIT in the Roofing segment in 2016. As we discussed at our November 2015 Investor Day, improved earnings, better working capital performance and our advantaged tax position will translate into a high conversion ratio of adjusted earnings into free cash flow, averaging about 100% over the years 2015 to 2018. As we did in 2015, we will provide corporate EBIT guidance later in the year. Now please turn to Slide 13 where I provide guidance on other financial items for the year. We expect corporate expenses between $120 and $130 million. Capital additions will be about $385 million, including approximately $50 million of spending associated with our new mineral fiber insulation facility in Joplin, Missouri. Depreciation and amortization expense is expected to be about $320 million. Interest expense is now expected to be about $115 million, including interest costs associated with the financing of the InterWrap acquisition. The acquisition was financed with term and revolving bank facilities at closing. We expect to utilize debt capital markets to permanently finance about 50% of the InterWrap purchase price and refinance $160 million of long-term bonds that mature in the fourth quarter of 2016. Our $2 billion U.S. tax NOL will significantly offset cash taxes for some time to come. As a result of our tax NOL and other tax planning initiatives, we expect our 2016 cash tax rate to be 10 to 12 percent of adjusted pretax earnings. Our 2016 effective tax rate is expected to be approximately 32% to 34% of adjusted pretax earnings. Thank you and I will now hand the call back to Mike.

Thank you, Michael. As I noted at the outset of today’s call, Owens Corning had a record first quarter with all three businesses demonstrating year-on-year EBIT growth. In addition, we announced strategic acquisitions that will complement our Composites and Roofing businesses, while delivering value to our shareholders. As we look to the rest of 2016, the continued improvement in Composites and Roofing will offset the effects of the lowered expectations for Insulation. With our businesses performing well, and the continued growth in the U.S. housing and global industrial production, we expect another strong year for Owens Corning. With that, I will turn the call over to Thierry to lead us in the question and answer session. Thierry?

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

Thank you. [Operator Instructions] And our first question will come from Stephen Kim of Barclays. Please go ahead.

Thanks very much guys. Good quarter. I guess we'll probably have to start off with the insulation question. So your commentary in the release left a lot of room for one's imagination. So I was wondering if you could provide a little bit more color regarding the nature of the "dispute" and just to make sure I understand from a bottom-line perspective, was this a dispute over performance, was it just simply price? Is this a situation where the share that you are ceding here this year was share that maybe you had recently picked up for some reason or another that it made sense for you to give back rather than start a price war? Can you just give us a little bit more color around that dispute? Thanks.

Sure Stephen, thanks for the question and thanks for the nice comments on the quarter. Let me start at the end and then I'll come back to the beginning, but in terms of what we're seeing today, I mean we really said that we think the inflation business is going to have kind of a sideways year. So we said we think revenue will be slightly down. We think operating margins will be relatively flat, different than the guidance we had given on our four quarter call, what we had said we thought insulation's growth would be a bit below where we had been in 2015 due to the contract manufacturing a decision not to continue forward with contract manufacturing which had been previously in our guidance and I want to be really clear that is not there. So we had incorporated that already and we had expected some margin expansion associated with operating leverage. So the reason why we disclosed it is effectively contract dispute which we don’t want to air this in public is we had relied upon the belief that this contract was going to provide volumes in 2016 that was consistent with our prior guidance and this is a contract that's been in place for quite some time. So as you can imagine given the size of the change in the outlook, it was a sizable amount of volume that we believe was contracted and given the dispute we've now taken that out of our outlook, and have re-adjusted our operating levels. We adjusted our supply chain and obviously are going back in the marketplace today and trying to rebalance our business a bit more broadly across the customer base. As we look beyond 2016 I don't want to be so overly confident to say this is a bump in the road, but the fact is our view on the residential insulation business has always been predicated on the belief that as we got later in the cycle sheer capacity sheer demand would begin to converge and as utilization levels got higher, Owens Corning would begin to have enough of the pricing leverage to be able to get back to historical price levels and return the business to acceptable levels of returns on capital. In fact, now that our position has flip-flopped a bit where we used to have above industry levels of capacity utilization we now believe in 2016 will operate below industry levels of capacity utilization. In effect, we positioned our assets to benefit disproportionately from the next uptick. So I think as long as we see continued growth in housing which is the consensus expectation is certainly our expectation. We would expect as we work our way through 2016 overall tightening of the market would provide us the opportunity to replace those pounds at good margins and good prices and that 2017 and beyond we'd still be in very, very good shape in getting to our goals for the business.

Okay great, that's helpful and I guess maybe just to follow up on that a little bit, it has been my understanding that your expectation was that the industry by virtue of housing continuing to grow at a double-digit clip, was likely to reach a sort of an equilibrium raid after the capacity was opened by a competitor in September, and by about midyear this year. So I wanted to make sure, is that still your view or is it your view that that would that equilibrium point what happened your later this year and will any of this year headwind at the top line impact the early part of 2017?

That's a great question Stephen and let me start by saying I think it is a little bit premature for us to talk about how we think it will affect '17, but let me roll back maybe to the second half of '15. So at the time of our Investor Day which I think was really fourth quarter last year, we were seeing in our business that was pretty well tracking out key macro which is like housing starts, so we like housing starts by about 90 days. We use regional and other variables in order to update data in order to get a sense of where we think the market is and we were tracking the macro pretty well so we thought we are tracking the market. In fact, as we got into the first quarter of this year we had some visibility to some market share data in the industry that would suggest actually shipments in the second half of last year didn't track that macro and in fact we had outperform the market a little bit in the second half and as a result of market share in 2015 was a little bit above were previewed as previous estimates has been. We think that maybe contributed some part to the level of volume competition that we saw in the first quarter, so the first quarter was it was a difficult pricing environment generally prices falling only once the acceleration of our ability to achieve price in the first quarter. We were seeing capacity that was available in the market consistent with what we had said at Investor Day that some capacity to come on and they needed to be absorbed in. We actually saw in the first quarter decent volumes. So we think what really happened is the lag on new construction, the amount of time it took a builder to go from a start to insulating extended a bid in the second half of last year and we've heard that on some of the builders calls and we actually think that began to contract a little bit with good weather here in the first quarter and that that our industry caught up a little bit, but during that period of time there were some build and excess capacity that maybe led to a little bit more competitive position earlier in the year. None of that changes our outlook for fundamentally how we think the second half of this year works or as we go into next year, we think our capacity estimates are pretty good. We think that we will see continued growth in housing. I mean it is obviously still not a robust market out there, but we have now seen three years of fairly consistent growth in new starts. We're hopeful that that will be a little bit more biased toward single family which is good for us. And consistent with what I said earlier, that would cause industry demand growth to come back seeking our capacity because we would be in a position to be able to just proportionally serve that demand growth and that would position us well going into 2017 on both price and volume.

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

Hi, thank you for taking my questions today. One area that we have been focusing all across the value chain and construction materials is that of capacity utilization at this point in the cycle. And with that in mind you did have some commentary in your prepared comments about insulation capacity utilization. I am going to see if you could step back and look at you three key segments, installation, roofing and composites and give more clarity where capacity utilization is for each of those segments understanding that there will be some regional differences, but if you could at least give us some relative where we are today. Thank you.

Happy to do that, thanks for that question. So I think I've said about, everything that I would have to say on the insulation side. So I'll talk a little bit more about roofing and composited. On the roofing side we've been very clear that macro since we don't think that's utilization is a big driver of the margin outlook or the mechanism, kind of how the market works because of the fact is a material conversion business and because of the fact you run to demand levels you don't have to run to utilize your capacity. That said, we're actually seeing for the first time in quite a long time tightness of supply in the roofing industry and a number of regions. So with some storm activity which was critically in Texas, Texas had started off or the Southwest had started the year very strong to begin with and then on top of that as Michael said in his comments, late in the first quarter we began to see a lot of violent weather in Texas which has created roofing demand that we think will primarily serve us here in the second. So we see some tightness in Texas. We see some tightness throughout the Southwest. There are places, other places in the country where demand is really outstripping supply at this point for both Owens Corning and based on our competitive analysis we believe were also some of our competitors in terms of their shipping cycles. So that's given us a little bit of optimism about the May price increase that we've announced in roofing. We have seen some slippage in price in 2015. We saw a little bit of additional slippage in the first quarter, late in the first quarter. That's been offset obviously by a good deflationary environment on asphalt, but we may be able to recover some of that price here in the second quarter. So that's one of the things we're looking at is how to support the May price increase consistent without objective. In composites we tend to measure capacity utilization globally. Product does ship across regions. So if you measure it by region you still have to take into consideration the material that moves across regions. We publish on this on our Investor Day. We think the composites industry now is in its third year of operating at 90 plus percent utilization levels. That's been relatively consistent. The additional capacity over the last couple years has been at or below the level of demand growth. As we look a couple years out and we have pretty good visibility, two years out because it takes a couple of years to build a melter. We believe that with continued slow but steady industrial production growth globally that demand growth would keep up with or outstrip capacity growth. So we feel pretty good you know, I got to say as far as the eye can see, but certainly over the next couple years the capacity situation the composites would support will be seen over the last three, which is continued volume growth and continued margin expansion. I was really happy with composites quarter without the specialty glass and some of the comps we had in the last first quarter, the business put up 14% EBIT margins which is kind of the double-digit margins or mid double-digit margins we've been talking about for composites for a long time. So we've really moved the business now to a very, very, high level of performance we are really proud of.

Right and my followup question is on composites, could you give a little bit more color on a regional basis in terms of trends in China, just the outlook on when and if your checks are showing that despite the slowdown overall in China wind energy is still doing well there. So if you could give just a little more color and comp composites movable basis? Thank you.

Sure Kathryn it is Michael. So as I said in my prepared remarks on a constant currently basis in the quarter revenue was up 3%. Actually if you adjust for the specialty glass sales, it would have been up about 7%. Also in my prepared remarks I said that actual volumes were up about 5% in the quarter. That's generally consistent with the growth rates that we had seen in 2015 as well. Specifically I called out good growth in China. We've seen some really strong growth in India staring last year and coming to the first quarter this year, obviously getting what is going on in roofing in North America we've seen good volumes in roofing in the first quarter and I also add that auto and construction end markets have been positive in the start of this year as well. So China continues to grow for us. We're watching it, but good progress, both from the top line and bottom-line perspective.

Our next question will come from Mike Wood of Macquarie. Please go ahead.

Hi, thanks for taking my question. First question on the roofing price, just curious why you think the storm activity didn't help pricing support late in 1Q? And can you confirm whether or not you're guidance for the flat roofing margins 2Q, 4Q does that not include May 28, price attempt?

Yes, so let me take that, I mean kind of two separate questions here. The nature of pricing right now in the roofing industry which we're comfortable with is it is not big national discounting that is kind of peanut butter spread. We look from market-to-market, region-to-region and there are times that we need to get competitive or do things to maintain our market position. I think that was true through the first quarter and as volume was expected to pick up in the second quarter you typically get to whatever you need to do to maintain your position sometime later in the quarter. So I wouldn't read anything into those comments besides it is just kind of the timing of the way the year works that we are working with our customers and trying to make sure they've got the right program that is going to make them successful for the year and that some of those adjustments probably came a little bit later in the quarter and would roll through. So we gave that caution because we wanted to remain sure that as you try to model or roll forward margins you have some understanding that there is a little bit of a price headwind as we roll out of the first and into the second. We will see continued deflation. I think that will be primarily in the second quarter with some in the second half, but if you remember the shape of our deflation last year, we had very little in the first quarter. So we comped obviously very strongly against that. We actually had a little bit more than we had originally guided to last year in the second quarter because volumes were pretty strong, so we dragged a little bit more deflation into the second. So we're comping against fairly deflationary economics of last year. So while we're confident we will have great margins and good volumes in the second quarter we certainly wouldn’t want you to extrapolate off the first quarter margins and I think that's really the basis of Michael's comment what he said on a year ago basis. We would expect volumes about flat and margins about flat to last year. I think the one positive we have in today's call is the market was up we said about 17% in the first quarter. We had originally said we thought the markup might only be up one or two points this year which was basically new construction following through and the entire replacement market about flat, based on the way the year started we don’t believe that the rest of the year will back up and offset some of the volume growth we saw in the first quarter. We think at a minimum that volume growth for the first quarter will create volume growth for the full year, which is probably more like 3%, 4%, 5% type growth for the overall market which actually gives us some positive volume numbers that will help our outlook. Related to the pricing, we don't typically when we make commentaries about our forward look for the business include the outcome of price increases. I do think if we are successful in May that would probably give us some optimism and also potentially help us cover what could be some ethanol deflation that surged back up. We're seeing oil prices a little bit higher we're I think ethanol prices start to come back up. So we could see a little bit of a headwind in the second half. So surprising it may even certainly help us offset the potential downside risk.

Great and then a followup, you mentioned rebalancing the inflation business, just curious what that entails in terms of penetrating other customers and how you pick up shares in those segments? Thanks

Yes, you know, I mean obviously we have a pretty strong market-leading position in the insulation business. I mean when you talk about the insulation industry Owens Corning is I think the clear share leader in that market and I don't think that's a secret. As a result of that and as a result of our history in the market I mean we do business with virtually everybody in the market and enjoy great relationships with everyone in the market and I do want to stress, when we talk about the [indiscernible] this is specific to one customer. So across the remainder of the market we're in great shape. We're doing a lot of business and it would be our supposition that as a lot of the extra capacity that may have existed in the market gets pulled over to meet the needs of a customer that some of the other customers in the marketplace who have growth ambitions will be increasingly looking to us to make sure that they've got supply security as the market gets tighter. So we obviously stand ready to help meet the needs of those customers because we think we are entering a phase where probably the biggest asset that a customer needs from their supplier or supply security and we think we are in a position to provide that.

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

Good morning gentlemen.

Good morning Ken.

Mike, I just obviously I don’t know, you are not looking at the computer, but I think some of your comments are causing a little bit of uncertainty about what you're saying in insulation and obviously it is most respectfully I am trying to understand this, but in the fourth quarter when you sloughed off some third-party volume the idea was that you were running up against past utilizations and you want to run it through your brand, higher margins, better pricing. So you wouldn't have to do CapEx in general. And now something happened that looks like its growth was going to be up and now it is kind of flattish. It was in that $150 million, $156 million range was the contract. What do you think led to that, I mean is it initial pricing or was it a regional thing? I mean I'm just trying to understand because I think people and I'm not sure if it is properly interpreting it is that your city market share, yes you are going to focus on margins but it would undermine your position of the business first where you were three months ago and could you just clarify, I don’t think that's really what you are saying, but it seems that's how it is getting interpreted?

Well, we would have expected as we work our way through the next couple of years that there probably would have been a rebalancing both in terms of our supply to our customer base as well as some of the major players in terms of diversifying their supply base. So we had been at a pretty high share position with this customer and I think they rightfully had visibility to wanting to diversify their supply base. The issue right now is whether there was the right to effectively do that in an orderly manner or disorderly manner. We're clearly reporting today that is happening in a much less orderly manner than we would have liked and certainly in a lesser really manner than we think was called for in the contract. But that is a separate item. We will handle that issue. We will manage that issue. We have the ability to produce good results in the insulation business, obviously below expectations for the year. We haven't seen anything in all of this that is different than our fundamental view of the business which is its at the end of the day in the U.S. residential portion capacity utilization driven business and that pricing is going to be the key for us to get back to the returns levels that are acceptable to us and we've got other great businesses inside that segment with Michael and I both talked about would continue to move along and make a bunch of money. And while we work our way through this, we're going to keep our eye on the prize which is find a way to get the U.S. residential business back to great levels of margins of the great pricing and we think this is if anything an accelerant in doing that, but it's a little bit more disorderly and we're not terribly happy to have to talk about it on an earnings call.

Understood, would you say that this was, there is only a handful of customers that are this concentrated to you where this idea of a disorderly adjustment might be impacting your business?

Yes, obviously for confidentiality reasons and also for a desire that we still believe there may be an opportunity to sort this issue out and I don’t want to get any further into any of the specifics.

Understood, no, no, that's fine. Yes, now Mike I appreciate that, yes the setting that we're conversing. The flat margins for roofing, now it sounds like for the remaining three quarters we would expect similar sales and more importantly similar EBIT dollars to last year, is that the proper interpretation, it just was a little unclear, I just want to have it restated? Thank you.

Yes I think that that's a reasonable interpretation of Michael's comments. I want to be really clear. I think we said it this way, but we want to be clear about that. And then in addition to that outlook we would expect InterWrap to provide another $25 million of EBIT on top of that. So we’re really reconciling to our prior outlook and then the InterWrap will come on top of that. So the way that would work is, if the market is in fact up 4% or 5% for the full year that would mean that the volumes we saw in the first quarter was effectively the volume growth we'll see for the full year and that the market dynamics for the remainder of the year-over-year to go basis would be about flat to last year. Our share and revenue would therefore be about flat to last year and given the shape of asphalt cost deflation which we think is pretty front end loaded, we don't have a ton of sequential asphalt cost deflation coming because the asphalt cost were pretty low in the first quarter and so as a result of that we would expect our margin profile would look pretty similar to what we saw last year. So there's going to be plusses and minuses in that. This is obviously a tough business to forecast, which is why we now hold off until the second quarter to give kind of full year guidance for that business or full year guidance for the corporation. But I think that is consistent with what we're trying to say.

Thank you, that was clear.

Our next question will come from Scott Rednor of Zelman & Associates. Please go ahead.

Yes, hi good morning. I wanted to just dig in a little bit more on the InterWrap acquisition. How should we think about that impacting the volatility of roofing margins, should that steadier margin business looking forward and should that take out some of the variability we see quarter-to-quarter in that segment?

Yes, it is a great question Scott. I mean I think one of the things we loved about that business is because it is in the process of material substitution its posing organic growth with engineered organic underlayments with engineered synthetic underlayments. We've been in the business as a company of doing material substitution for all years that Owens Corning has been around. And typically when you're in the market with material substitution, because you have natural underlying growth as you take overall share of a broader market you get fairly stable margins and good top line. So we see this is as a business with top line growth, stable margins and very little volatility in terms of those margins combined with now using our footprint, the ability to grow it faster and then also combined with our kind of infrastructure and back office the ability to operate the business at lower cost. So it is one of those really classic fits that we've been looking for, for a while. If you look at the way Michael said we're going to finance it. We're also very happy with our ability to have access to the to the capital markets. We will go tap the capital markets we believe sometime this year in order to take out some maturities we have come in, in the second half and we believe we will put about half of the value of the acquisition on our balance sheet in terms of long-term debt and we have enough cash flow generation that will pretty much extinguish all the rest of the acquisition cost. So if we can take a deal like this and bring it onto the company, integrate it and have it back off the balance sheet in terms of paying for it all within a year I think is great news for our shareholders.

And then just quickly a follow on, I think there were some pieces of the portfolio that weren't dedicated to roofing. So maybe you could just talk about whether those are still a strategic fit in and potentially a platform?

Yes, we see them as a platform. So some of these underlayments are also used in packaging and the wood and metal business and actually they have or we have some position now in some industrial fabrics and geotextile's InterWrap and things. These are all markets that are very interesting to Owens Corning. Our two fundamental sciences in the company are material science and building science. If you go and review our R&D that's where our people spend a lot of their time thinking. We know a lot about the types of manufacturing processes that InterWrap uses to make these products actually more from the composite side of the business than from the roofing side. So we have kind of a composite technology group looking at the material science and fabrication of how these get made. We have our global footprint looking at how do you grow this business in places like Europe, India and China. We retained by and large the InterWrap team that knows the construction, I mean knows the wood packaging and metal packaging parts of the business and we challenge them to grow that. And then we're looking at our core roofing customers in figuring out how we can make InterWrap's underlayments a more important part of the product offering for our customers.

Our next question will come from Bob Wetenhall of RBC Capital Markets. Please go ahead.

Hey guys, good morning. And I'm not going to beat the dead horse in insulation, thanks for addressing that. I was hoping you guys could give roofing, lot of moving pieces, yet a really easy comp in the first quarter and kind of a tough comp coming up in the second quarter. Operating income last year was about 266 and you are up $50 million year-over-year and then it sounds I'm kind of thinking you also got the InterWrap acquisition. Just based on your comments, I'm kind of coming out with the idea that on a static basis based on what you just said, you are kind of looking at like operating income before any price increase realization in the range of like 345. So I was just trying to understand obviously it is a short cycle business with limited visibility, totally with the caveat that things can change quickly and I understand you're not trying to give guidance on this, but is it realistic to assume that you are going to do operating income based on the information you've given us, somewhere between like 340 and 360 before any price realization?

Bob I think your observations we're trying very hard not to give guidance on roofing was correct. But having said that, let me comment on a few other things you said in your question. So you are correct that the InterWrap should be additive to whatever you would come up with on the base business. You are correct that we beat the first quarter by $53 million. You are correct that we said we think on a year to go basis revenue and margins would be similar to last year or so. I don't think it's a huge reach to think on a year to go basis that overall EBIT would be similar to last year if those two pieces of guidance were correct. So I think you are just adding up that math and I'm not uncomfortable with that, but we would say obviously there's a lot of moving pieces in that and that's why we lay out the guidance in this business piece by piece. I would add one thing which is, you are right that the second quarter is a tough comp. Really it was a tough comp because we had great volumes last year in the second quarter, particularly in the early part of the quarter, so we were really happy and kind of ahead of plan in the second quarter of last year. We feel pretty good though about how the quarter has started. So as we look at the second quarter we do think that we're going to see volumes that are consistent with what we saw last year. So that's where a little bit of the upgrade now for businesses come from which is we had thought with a strong first quarter if the fundamentals underpinning that hadn't supported overall market growth at some point you would have to give some of that first quarter growth back. We think the fundamentals support the underlying market revenues on the first quarter. We think that those additional squares that were shipped in the first quarter will actually represent growth for the industry this year.

Which makes all the sense in the world and you guys are commenting that you are getting strong underlying demand, complemented by incremental from storm. So I am just trying to think this out a little bit more. If that's the case and you are getting this and it sounds like inventory at the channel level is kind of tight right now just because of good sell-through from distributors you are thinking about a price increase in May maybe 5% to 7% range. Wouldn't you be more incrementally confident given a healthy dynamic in contrast with a couple years ago where you had the dislocation of winter discounting that OC and the industry are in a better position now than previously to realize price? Is that an accurate way to think about this and if I could just tie something else on, you mentioned asphalt deflation the $70 million tailwind in 1H. How much of that do you think if you did mark-to-market today would reverse? Just a lot of stuff in there, I appreciate the color. Thanks and good luck.

Okay, thanks, Bob. You know related to your first question, I think your dynamics of what would cause us to have more confidence that we would be able to support roofing price increase is probably correct I think that different from knowing that we're confident we'll be able to get roofing price increase is probably correct. I think that's different from knowing that we are confident we'll be able to get a roofing price increase. So there a number of direction areas, direction that you pointing to that are now pointing in the right direction and those things always are helpful. But as we remind you on every one of these calls it is a very, very competitive market and it is a very high velocity transaction-based market. So we're out there pricing it roofing everywhere in the country every single day and how we work our way through that dynamic is going to be something that our team I think is expert at and is doing a great job and if there's an opportunity to get price rest assured on behalf of our shareholders we will be going out to get that. Your second question in terms of mark-to-market, I'm going to kind of dodge that question to be honest. We don't think of the business that way. We tend to think of the business as there is kind of a 90 day lag from the refiner to all asphalt tanks there's a 90 day lag our asphalt tanks to our finished goods. And wherever oil prices were kind of 180 days ago is the asphalt cost working off of now and so as a result we tend to look at sequential deflation and year-on-year deflation as we have to give our guide and I think I have said enough on that topic today in terms of how we see sequential and year-on-year deflation for the remainder of the year.

Allison, this is Thierry. It looks like we have time maybe for one more round of questions.

Okay, thank you. Our next question will come from Phil Ng of Jefferies. Please go ahead.

Hey guys.

Good morning, Phil.

Quick question, I mean you certainly commented about how storm activity kind of picked up towards the end of the quarter and that should be a nice tailwind in 2Q. I'm surprised volumes would be and top line would be kind of flattish, but can you give a little more color on that on the roofing front? And historically when there has been a lot of storm activity, if you were able to get pricing, was it more on a regional basis or more on national basis?

Yes, so your first question in terms of 2Q I mean I would go back to the fact we had a really good second quarter last year. So last year was the year we kind of transitioned back to having more ratable shipments versus end market demand. So if you remember correctly, we comped gigantically negative in the first quarter of last year. We then came out of the first quarter. We had a very, very tough winter. There wasn’t a lot of end-use activity in the first quarter. There weren’t lot of shipments in the first quarter. So when spring came, we kind of saw the national roofing market turn on last year in the second quarter and we had very good shipments. So it is no lack of optimism about the strength of the business right now. We are seeing strong demand and we feel very good about the way started the quarter, but we feel really good about last year's second quarter. So I think it is really more of an issue where we're comping really good to really good as opposed to some point of view that says somehow the market is slowing down in the second.

And then around pricing in the past when you've seen storm activity was it more regional or were you able to get pricing across the board nationally?

It tends to be much more regional and I think also obviously we show a fair amount of sympathy or discretion in those storm related markets. I don't think we want to be seen as being opportunistic. So it's not typically the roofing business. The roofing industry does not typically go into a storm torn market and start raising price because we can. We want to support that market. So I think that's why you would see consistent with a preannounced May price increase, that might give us some support to that price increase, but you don't necessarily just see a market and the minute you see heavy demand go in there with a price increase is just not appropriate.

Okay and just one last one from me. The guidance you guys provided for InterWrap today for 2016, does that account for any of the $20 million synergy that you called out for through this year or is that more of a tempting event? Thanks.

Yes, I would say, I mean we didn’t spell it out explicitly, but I am happy to clarify that. The $25 million that we guided to today regarding interest doesn't really include any synergy realization all that, that's the run rate of the business. I mean we bought a great business. We bought a great business with really good margins. We're going to own it for almost two thirds of the year. So if you look at some of our previous disclosure at the time of the acquisition we disclosed a bid on, total revenue we disclosed a bid on, either margins we said either margins are comparable to our roofing business, and so it is reasonable to conclude that we bought a business that we expect to contribute immediately. Obviously our hope would be our teams are out there, day one went very well. We're working very working very hard on what we believe are our synergy opportunities. We've given the teams all the resources they need to move with speed and hopefully as we get into the second half of the year, maybe on our second quarter call, we can give you an update on what if anything we can get done if I get to the bottom line this year, although we are confident in Michael's guidance which was by the end of next year we believe we will have $20 of synergy run rate in that business and incorporated into our roofing segment.

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

Excellent, thank you Allison and thank you everyone for joining us for today's call and actually I'll turn it back to Mike Thaman for a few closing remarks.

Thank you, Thierry. As I noted at the outset of the call we just reproduced a record first quarter I think Michael characterized it as earnings per share almost tripled, EBIT almost doubled. It is a great start to the year. We obviously had to work our way through from an investors communication point of view it is somewhat complex story on the insulation side, but at the very high level it is a very simple story which is we are in a transition year in 2016. We think the business will largely go sideways for this year, but the fundamentals are underpinned are very strong optimism about what a great business that will be in the future is unchanged and if anything we believe some of the things that have happened in the early part of this year accelerate our ability to get that business back to the level of health we would like to see. Obviously with the strength we're seeing today in composites, the strength we're seeing today in roofing with great optimism about the InterWrap acquisition and how little impact continued growth in our roofing business now is the time to get it right in insulation. We are very eager to get the residential insulation business much more profitable and making returns that we're proud of and we'll come out of the first quarter I think with a very clear game plan of what we need to do through the remainder of 2016 to make sure that we make that happen for insulation while we deliver great results for Owens Corning. Let me remind you that with the growth we see in roofing, with the growth we see in composites, we're still talking about a company that will have record earnings this year, outstanding cash flow this year, top line growth and an acquisition strategy that continues to expand the footprint of our business. So while I think in the near-term there's a bit of a distraction or a bit of a sideshow related to our discussion of insulation. The fundamentals of what we talk about in this company with three great businesses operate at high levels of performance producing significant shareholder value, that's still the story today as we come out of the first quarter and that will be the story for the remainder of the year. We're very appreciative of all the support and questions on the call and we look forward to talking to you on our second quarter call. Thanks for joining.

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