Owens Corning (OC) Q4 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the Owens Corning Fourth Quarter and Fiscal Year 2017 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, Vice President of Investor Relations. Please go ahead.

Thank you, Kate 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 fourth quarter and full year 2017. Joining us today are Mike Thaman, Owens Corning's Chairman and CEO; and Michael McMurray, Chief Financial Officer. Following our presentation this morning, we will open this one-hour call to your questions. In order to accommodate as many call participants as possible, please limit yourselves to one question only. Earlier this morning, we issued a news release and filed a 10-K that detailed our financial results for the fourth quarter and full year 2017. For the purposes of our discussion today, we have prepared presentation slides that summarize our performance and results and we will refer to these slides during this call. You can access the earnings press release, Form 10-K and the presentation slides at our web site, owenscorning.com. Refer to the Investors link under the corporate section of our homepage. A transcript and recording of this call and the supporting slides will be available on our web site for future reference. Please reference slide 2 before we begin where we offer a couple of reminders. First, today's remarks will include forward-looking statements based on our current forecasts and estimates of future events. These statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially. We undertake no obligation to update these statements beyond what is required under applicable securities laws. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent risks and uncertainties affecting such forward-looking statements. Second, the presentation slides in today's remarks contain non-GAAP financial measures. Explanations and reconciliations of non-GAAP to GAAP measures may be found in the text and financial tables of our earnings press release available on owenscorning.com. Adjusted EBIT is our primary measure of period-over-period comparisons and we believe it is a meaningful measure for investors to compare our results from period-to-period. Consistent with our historical practice, we've excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT and adjusted earnings. We adjust our effective tax rate to remove the effect of quarter-to-quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share. We also use free cash flow and free cash flow conversion of adjusted earnings, as measures helpful to investors to evaluate the company's ability to generate cash and utilize that cash to pursue opportunities that enhance shareholder value. For those of you following along with our slide presentation, we will begin on slide 4. And now, opening remarks from our Chairman and CEO, Mike Thaman will be followed by CFO, Michael McMurray and our Q&A session. Mike?

Thank you, Thierry. Good morning everyone. Owens Corning had another great year with revenue growth of 12% and record operating cash flow. We build the company with three market winning businesses, all delivering strong sustainable financial results. These results have been achieved through improvements to our portfolio, proven cost leadership, strong operational execution and high performing people. In short, we have a lean strategy. Revenue was $6.4 billion, up 12% for 2017, and $1.6 billion, up 16% from the fourth quarter, both compared with the same periods last year for the first time, all three businesses produced more than $2 billion of revenue. This revenue performance has led to adjusted EBITDA of $855 million, up 15% for the year, and $215 million, up 37% for the quarter. We generated operating cash flow of $1 billion and free cash flow of $679 million. Importantly, we converted adjusted earnings to free cash flow at a rate of 136%. Earlier this month, we completed our acquisition of the Paroc Group. This acquisition expands our geographic scope to Europe and broadens our product portfolio. We now have insulation products across the high, medium, and low temperature ranges in all three major markets, North America, Europe and China. We are excited about the opportunities Paroc will bring, and we are off to a fast start with integration. Before I talk about our business results in detail, I'd like to give you an update on our safety program. As I have said before, safety is critical to our company, as we continue to advance our goal of creating an injury free workplace. Our recordable incident rate for the year was 0.5, a slight improvement over 2016. This is particularly meaningful, given the integration of the Foamglas business, where we moved rapidly to implement more rigorous safety standards, and keep our new employees safe. Now I'd like to review our performance, as it relates to the expectations we set for 2017, and then talk about our expectations for 2018. In our Composites business, we said that we expected to increase EBIT by $20 million or more on improved operating performance and higher volumes. For the year, we met this goal. Composites generated EBIT of $291 million in 2017, up $27 million or 10% compared with the prior year. This is the fifth consecutive year of EBIT growth for this business. In the fourth quarter, Composites reported strong results, with an EBIT of $74 million, up 14% compared with last year. For the full year and fourth quarter 2017, Composites delivered EBIT margins of 14% and 15% respectively, product leadership and low delivered cost operations continued to contribute to the favorable margin profile. In 2017, Roofing delivered EBIT of $535 million, up 10% compared with the prior year, with EBIT margins of 21%. In the fourth quarter, Roofing reported another quarter of strong results, with EBIT of $108 million, up 10% and EBIT margins of 19%. These results were achieved on higher shingle volumes and strong growth in the Components business. We were particularly pleased to achieve the price gains necessary to produce these outstanding results, in an inflationary environment for asphalt. Industry shipments grew by about 8% in 2017. By our estimates, the new construction and remodeling markets grew for the sixth consecutive year. For the year, strong demand was well above average. The Insulation business has been building momentum. We said that we expect revenue growth of more than $250 million in 2017. We also said that based upon this strong top line growth, we expected to generate EBIT of about $185 million. For the year, Insulation grew revenue by $253 million or 14%. This growth, as expected, was driven by higher sales volume, contribution from our Foamglas business, and price improvement in the U.S. residential fiber glass building Insulation market. 2017 EBIT increased $51 million or 40% over 2016, of which $15 million was contributed by Foamglas, consistent with our expectations. In the fourth quarter, EBIT increased $36 million or 84%. Fourth quarter EBIT was below expectations, as the pace of improvement in our new U.S. mineral wool facility has been slower than expected. We are confident that the mineral wool business will deliver substantial earnings improvement in 2018. I'd also like to highlight a few other developments; with the December U.S. tax reform legislation, we recorded a onetime non-cash charge of $82 million in the quarter. Michael will discuss this in more detail during his remarks. But in short, we believe our advantaged cash tax position is broadly unchanged. Last week, we were named to the Ethisphere Institute's list as one of the world's most ethical companies. This honor recognizes companies that demonstrate corporate ethics and culture in achieving business results. Finally, in December, I am proud that we ranked 82nd on the Drucker Institute's Inaugural Management List. This ranking, measured among 700 companies against a core set of five principles to assess corporate effectiveness defined as doing the right things well. Now, on to our 2018 guidance. Overall, we expect an environment consistent with consensus expectations for U.S. housing starts and global industrial production growth. In Roofing, we expect continued growth in both the new construction and remodeling markets. A return of strong demand to historical averages, would result in a mid single digit decline in the overall U.S. asphalt shingle market. We expect our components business to grow at double digit rates. We expect additional asphalt cost inflation that we plan to recover through pricing actions. We are also experiencing higher transportation costs, which we intend to recover through pricing as well. Overall, we anticipate another strong year for roofing in 2018. In Composites, we expect EBIT improvement of about $20 million. This EBIT growth will be driven primarily from growth in the glass fiber market, improved pricing and productivity improvements, partially offset by accelerated inflation and higher rebuild costs. In Insulation, we expect to deliver substantial earnings improvement in 2018, by increasing EBIT by about $150 million, primarily from the realization of previously implemented pricing actions, contribution from the Paroc and Foamglas acquisitions, and improvement in our mineral wool business. These pricing actions include about $20 million from the carryover of our 2017 price increases and about $50 million of annual impact from our January 2018 price increases. This outlook does not include the potential benefit from any additional price actions, primarily in the residential U.S. new construction business in the U.S. We believe market conditions could support further progress on price through the year. From a full company perspective, we expect to convert adjusted earnings to free cash flow at about 100%. Similar to last year, full company EBIT guidance will be provided later in the year. As we enter 2018, we are well positioned to deliver strong results and build value for our company. Market conditions should support a number of important milestones in 2018, achieving more than $7 billion in revenue, generating double digit operating margins for all three businesses, and again, converting 100% of earnings to free cash flow. With that, I will turn it over to Michael, who will further review the details of our business. Michael?

Thank you, Mike, and good morning everyone. Across a broad array of financial metrics, 2017 was an outstanding year for Owens Corning. We set records for revenue, adjusted EBIT, adjusted EPS and free cash flow. Commercial and operational execution was strong across all three businesses, and these results demonstrate the strength of our portfolio. For the full year, we grew revenue by 12%, delivered adjusted EBITDA of $1.2 billion and generated $1 billion of operating cash flow. The company converted adjusted earnings to free cash flow at a rate of 136%, translating into free cash flow of $679 million. We also successfully completed the acquisition of Paroc in early February, for approximately €900 million. Over the last eight quarters, we have successfully deployed about $2 billion on value creating M&A. Looking forward to 2019, these acquisitions are expected to contribute about $1.2 billion in revenue, run rate synergies of approximately $60 million and incremental EBITDA of about $300 million. These are attractive additions to Owens Corning. I will comment more on the Paroc acquisition later in my prepared remarks. Now, let's start on slide 5, which summarizes our key financial data for the fourth quarter. You will find more detailed financial information in the tables of today's news release and the Form 10-K. Today, we reported fourth quarter 2017 consolidated net sales of $1.6 billion, up 16% as compared to sales reported for the same period in 2016. Insulation, Roofing and Composites reported increased sales of $122 million, $77 million and $40 million respectively. Adjusted EBIT for the fourth quarter for 2017 was $215 million, up $58 million compared to $157 million in the same period a year ago. This represents record adjusted EBIT for the fourth quarter. For the fourth quarter, our adjusted EBIT margin was 13.4%, up about 200 basis points year-over-year. Adjusted earnings for the fourth quarter 2017 were $125 million or $1.11 per diluted share compared to $81 million or $0.72 per diluted share in 2016. Depreciation and amortization expense for the quarter was $102 million, which was flat to the prior year. For the full year, depreciation and amortization expense was $371 million, which includes $17 million of accelerated depreciation for our previously announced restructuring actions, in Composites, and $14 million of depreciation and amortization for the Foamglas business. Capital addition for the year, were $402 million. Now, on slide 6, you will see the detail of our full year 2017 adjusted items, reconciling our 2017 reported EBIT of $737 million to our adjusted EBIT of $855 million. For the year, our adjusted items totaled $118 million. About half of these costs were recognized earlier in the year and discussed on our second quarter call. The other half primarily related to new items recorded in the fourth quarter. For the year, we have adjusted out $64 million of non-cash charges related to pension risk mitigation actions, which includes a $36 million non-cash charge in the fourth quarter for actions related to our U.S. plan. We adjusted our transaction integration restructuring expenses of $38 million this year, primarily related to the Pittsburgh Corning acquisition. We adjusted out $30 million of restructuring charges, primarily from actions announced earlier this year to strengthen the Composites low delivered cost position. We also adjusted out $29 million earlier this year for a favorable legal settlement. Finally, in the fourth quarter, we adjusted out a $50 million provision expected to resolve environmental issues for the company owned site that ceased operations over 25 years ago. One more item related to adjusted EPS; we have also adjusted out an $82 million non-cash income tax charge related to the recently enacted U.S. tax reform legislation, which is described in more detail in the notes of our 10-K. I will provide further details later in my prepared remarks about the forward-looking implications of this legislation. Now, please turn to slide 7, where we provide a high level of our adjusted EBIT performance, comparing 2017 to 2016. Adjusted EBIT for the year, increased by $109 million or 15% over last year, fueled by strong top line growth in all three businesses. For the full year, the company delivered record adjusted EBIT margins of 13.4%. General and corporate expenses were $148 million. With that review of key financial highlights, I ask you to turn your attention to slide 8, where we provide a more detailed review of our business results, beginning with our Insulation business. The Insulation business demonstrated continued commercial and operational progress during 2017. Sales and inflation for the quarter of $595 million, were up 26% from the same period a year ago, primarily on the contribution of the Foamglas business, higher sales volumes and progress on pricing. Sales volumes were strong in the fourth quarter, in part driven by prepriced buying related to our January price increase in our U.S. residential business. I am pleased to report, that we made significant progress with our January price increases and that our market strength has continued into early 2018. EBIT for the quarter was $79 million compared to $43 million in the same period one year ago, primarily on the strong execution, the continued recovery in U.S. residential, improved manufacturing performance and the contribution of the Foamglas business. For the full year, Insulation sales were $2 billion, up about 14% as compared to 2016. EBIT for the full year of $177 million was $51 million higher than the previous year, making Insulation the largest contributor to the company's EBIT improvement. The underlying performance for the Insulation business was strong in 2017, with 6% organic volume growth, accelerating price improvement in our U.S. residential business and significant progress on our M&A growth agenda. We finished the year slightly below our expectations and the performance of our new mineral wool facility fell short of the expectation that we set on our third quarter call. We continue to make progress at the facility, and are confident the business will be a meaningful tailwind in 2018, but expect continued headwinds early in the year. On February 5th, we closed on the previously announced acquisition of Paroc, a leading producer of mineral wool insulation for building and technical applications. The acquisition was consistent with our strategy of geographic and product extension for our Insulation business. The acquisition will further expand the company's commercial and industrial product offering and significantly strengthen our global Insulation platform, in the business that produces strong and stable margins through the cycle. The Foamglas integration is progressing well, and together with the addition of Paroc, these two acquisitions significantly extend our geographic footprint and portfolio of technologies across the Insulation temperature spectrum. For the full year 2018, we expect EBIT growth of approximately $150 million, driven by the realization of previously implemented pricing actions, contributions from Foamglas and Paroc and the improvement in our mineral wool business. We see the potential for additional earnings growth, but this will be dependent on the benefit of additional price actions primarily in our U.S. residential new construction business. As a reminder, our outlook includes a partial year of Paroc ownership, as the transaction closed on February 5. One other item to note, Paroc has similar seasonality to our North American Insulation businesses, and as volumes tend to be stronger in the second half of the year. Now, I will ask you to turn your attention to slide 9 for a review of our Composites business. With the best fourth quarter EBIT performance in its history, the Composites delivered its third consecutive year of record earnings and margin performance. Sales in our Composites business for the fourth quarter were $506 million, up 9% for the same period one year ago. Sales volumes were up 6% on a continued broad based market growth. EBIT for the quarter was $74 million, up compared to $65 million in the same period last year. Composites delivered 15% margins in the fourth quarter, on stronger volumes and lower furnished rebuild and startup costs. Full year sales were $2.1 billion; up 6% compared to the same period in 2016, primarily driven by higher sales volumes of 6%. Throughout 2017, we have benefitted from broad based market strength across most geographies and product lines, particularly the U.S. roofing and global non-woven markets. The business delivered $291 million of EBIT for the full year, representing the fifth consecutive year of EBIT growth. Our low delivered cost position and product leadership actions continue to fuel growth and margin expansion and produce 14% operating margins in 2017. In 2018, we expect continued growth in the glass fiber market, driven by global industrial production growth. We expect to deliver a fourth consecutive year of record financial performance with EBIT growth of about $20 million. We expect the benefit for market growth and higher pricing to be partially offset by accelerated inflation and higher rebuild costs. One additional item to note for Composites, we anticipate a difficult EBIT comparison in the first quarter, as results of double digit volume growth we produced in early 2017 and part driven by restocking. Additionally, we experienced a temporary stoppage in the Indian wind market related to regulatory changes. We have confidence this will resolve in the second half of 2018. Outside of the wind market, the overall Indian glass market remains quite strong. Looking ahead, the timing of higher rebuild costs for two major facilities will disproportionately impact our second quarter results. As a result, we expect first and second quarters to comp negatively to last year. With a nice recovery in the second half, producing $20 million of EBIT growth for the full year. Slide 10 provides an overview of our Roofing business. The Roofing business had an outstanding year, delivering it's best ever sales and EBIT. Roofing sales for the quarter were $560 million, a 16% increase compared with the same period a year ago, primarily in higher sales volumes of shingles and components. Fourth quarter industry shipments grew approximately 16%, with continued growth in remodeling, new construction and stronger than anticipated storm demand in the Southeast and Southwest regions. Our shingle volumes track the market. EBIT for the quarter was $108 million, up 10% compared to the same period in 2016. Stronger volumes and higher pricing were partially offset by input cost inflation and higher logistics costs. Sales for the full year were $2.6 billion, a 16% increase over the prior year, primarily on higher shingle volumes and growth in Components. Components delivered strong growth in 2017. Full year EBIT was a record $535 million in 2017, delivering 21% EBIT margins. The $49 million growth in EBIT, was primarily driven by stronger volumes in shingles and components. Throughout the year, we successfully offset asphalt cost inflation, with higher selling prices. In the back half of the year, we experienced higher than normal delivery and logistics costs, in order to serve a strong demand, along with higher transportation rates. Rate based transportation inflation is expected to continue into 2018. The Roofing business is positioned to deliver another strong year in 2018. We expect continued growth in new construction and remodeling demand for shingles. Storm demand at historical long term averages, results in the market being down mid single digits. We also expect the components business to continue to grow at double digit rates. We expect asphalt inflation to be as much or more than we experienced in 2017, based on our current outlook for crude prices. We announced a price increase that will be effective in March. On a full year basis, we expect that our pricing actions will cover asphalt inflation and transportation costs. Now, let me turn your attention to slide 11, which provides an overview of significant financial matters. In January, we took advantage of favorable capital markets and successfully completed a 30 year $400 million bond issuance with a record low credit spread for Owens Corning. These proceeds were used to fund a portion of the Paroc acquisition. Over the last eight quarters, we have successfully deployed about $2 billion on value creating M&A, with the acquisition of InterWrap in 2016, Pittsburgh Corning in 2017 and Paroc in early 2018. Our strong free cash flow generation allowed us to retire the prepayable bank debt associated with our 2016 and 2017 acquisitions and return capital to shareholders. In the last two years, we have returned a total of $522 million to shareholders, via dividends and share buybacks. This is a testament to the company's ability to generate strong free cash flow and our priority to allocate capital that drives long term shareholder value. We repurchased 2.3 million shares of the company's stock in 2017, leaving 7.5 million shares available for repurchase as of the end of 2017 under our current authorization. The company's board of directors declared a cash dividend of $0.21 per share payable on April 3, 2018 to shareholders of record as of March 9, 2018. The dividend has grown in average of 7% per year since its inception. 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. In 2018, retiring the Paroc term loan will be a priority. Now, please turn to slide 12, where I provide our outlook for 2018. For 2018, the company expects an environment consistent with consensus expectations for U.S. housing starts and global industrial production growth. For Composites, we expect EBIT growth of about $20 million. For Insulation, we expect EBIT growth of about $150 million, which excludes the benefits of any additional price actions in the U.S. residential business. In Roofing, we expect another good year, with growth in remodeling and new construction. Storm demand at historical averages would more than offset this market growth. Now, please turn to slide 13, where I provide guidance on other financial items for the year. We had delivered free cash flow conversion of 130% over the last three years, as a result of improved earnings, better working capital performance, and our advantaged tax position. Looking forward we expect another strong year of free cash flow and a conversion rate of about 100% in 2018. Similar to last year, full year EBIT guidance will be provided later in the year. We expect corporate expenses to be between $140 million and $150 million. Capital additions are expected to total $500 million, this includes about $75 million of CapEx related to Paroc acquisition, which is primarily related to a new line in Poland, that began construction in the fourth quarter of 2017. Depreciation and amortization expense is expected to be about $450 million. Interest expense is expected to be between $125 million and $130 million. Now, please turn to slide 14, where I discuss the impact of U.S. tax reforms. We believe that the recent enactment of the Tax Cuts and Jobs act of 2017 will have long term benefits for Owens Corning. The lower effective tax rate will positively impact EPS and other key financial metrics over the long term, including free cash flow. Pre-tax reform, Owens Corning had a large U.S. tax NOL, that was expected to offset cash taxes for some time to come. Post tax reform, we believe that the amount of future income, not subject to U.S. Federal income taxes is broadly unchanged. This is a great outcome for Owens Corning. The reduction of our U.S. tax NOL has been substantially offset by our ability to utilize foreign tax credits, generated by the onetime tax on undistributed foreign earnings. Therefore, we expect that our remaining $900 million U.S. tax NOL, along with other carry-forwards and credit will significantly offset cash taxes for some time to come. As a result of our NOL, foreign tax credits and other tax planning initiatives, we expect our 2018 cash tax rate to be 10% to 12% of adjusted pre-tax earnings, which is consistent with our previous guidance. Our new 2018 effective tax rate is expected to be approximately 26% to 28% of adjusted pre-tax earnings, which is a six point reduction from our historical values. With that, I will turn the call over to Thierry to lead us in the question-and-answer session. Thierry?

Thank you, Michael. Kate, we are now ready to begin the Q&A session.

[Operator Instructions]. The first question comes from John Lovallo of Bank of America. Please go ahead.

Hey guys, thanks for taking my question. I guess, can you maybe talk a little bit about some of the challenges that you experienced at the Joplin facility in 4Q and you know, when do you now expect to be breakeven there?

Sure John, this is Mike. I'd be happy to take that question. So I think it's important to note, that we really did deliver, what we thought, a very good quarter in Insulation in the fourth quarter, with the exception of what was noted in our comments, of the continued struggles we have had at Joplin. So we didn't want that specific challenge to get in the way of being able to recognize that we had very strong revenue growth, and actually very strong operating leverage in the business, if you exclude the impact of that facility and the ongoing impact of our acquisition with Foamglas. Initially, I think when we were ramping the facility up, we just had operational challenges associated with learning curve type stuff, which was to be expected. I think, as we have gotten deeper into it, we actually concluded in the fourth quarter, that we had some process reengineering issues that we are going to have to reengineer parts of the process, in order to hit the production targets and efficiency and cost goals. The capital associated with that is not extensive, but the timing associated with that has dragged a bit. I think we got a good solution in hand, that allows us to get that facility to breakeven, probably as we get into the second quarter this year, I think we will still have a bit of a drag here in the first quarter, and then as we get into the year, we would expect that -- we have that solution fully implemented. If you pour through our numbers, if you go kind of Q-by-Q and then the summary in the K, that was probably in total about a $20 million headwind for us in 2017, and if you look at our guidance for 2018, where we said it was $150 million of improvement in EBIT, we would expect to pretty much reverse that loss within that guidance.

The next question is from Kathryn Thompson of Thompson Research Group. Please go ahead.

Hi. Thank you for taking my question today. This really focuses on acquisitions that were completed early this year, and late last year. Two parts, first, what was the estimated assumption for top line or EBIT contribution for these acquisitions going into 2018? And what did acquisitions contribute in Q4 results? Thank you.

Thank you, Kathryn. So if we focus on the two most recent acquisitions, because at this point, the InterWrap acquisition which we did in 2016 has been kind of fully integrated into our Roofing business and our Components business, and now is a part of our ongoing discussion of our Components business, which we say growth at double digit revenue and operating margin similar to our Roofing business. So obviously, that continues to be very good business for us inside the company. With Pittsburgh Corning, which we now refer to as our Foamglas business, we characterize that business as a business that had about $240 million of revenue on a historical basis, and had adjusted EBITDA margins of kind of 25% to 27%. So on a go forward basis, we had given the expectation that we would expect to see relatively flat revenue in that business, because some of the markets, we are seeing good progress and good growth. One of the critical markets for Pittsburgh Corning, which is the liquefied natural gas market, we know is going through bit of a downturn. We are beginning to see projects coming through the pipeline, and so we are excited to see growth coming out past 2018. But as we head into 2018, we'd expect a continuation of that kind of revenue rate, that kind of margin rate, and then some synergy capture, where we expected about $20 million of synergy capture by the middle of 2019. So I think that helps you frame out Pittsburgh Corning, and I think in our disclosure, we said Foamglas contributed about $60 million of revenue for the fourth quarter and about $5 million of EBIT. So that's specific to the quarter. Paroc, we said about $500 million of revenue on an annual basis or $100 million of EBITDA, on an annual basis and about $50 million of adjusted EBIT on an annual basis. We have a fair amount of purchase accounting, so as we think, that's pretty cash rich EBIT, unlike some of the other situations, where our DA is very -- somewhat capital intensive. In this case, we do have a fair amount of accounting that's going to drop the $100 million of EBITDA down to $50 million of EBIT. So it's a little bit better contributor than that. In terms of cash flow, we will see effectively 11-12 of that this year, because we closed on February 5. And we have said, we have expected a little less than $20 million, about €15 million of synergies on that deal by the end of 2019.

The next question is from Stephen East of Wells Fargo. Please go ahead.

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

Good morning Truman.

Just wanted to touch on the Insulation segment again. I didn't quite hear, did you guys that there was about $15 million from the January price hike included in your EBIT guidance growth of $150 million? I guess, is this the amount that stuck so far, or could there be a little bit more pricing that stuck from the January price hike not included in your guidance, and then could you guys just give us an overview of what's occurred so far with pricing, a three price hike since 2017 and the fourth in January of 2018? Could you maybe just talk about the cadence of the price magnitude sticking, as we move through these -- the past 13 months?

Sure, thank you. Well I hope I am either clarifying or making sure that we got the record correct, because 50 is a bit of a complicated number, and as I heard you, I wasn't sure whether you said 15 or 50. So I am concerned, maybe I heard it 15. So the total pricing that we have in our guidance at this point is $70 million, it's a little less than $20 million of carryover from 2017, and about $50 million of price realization from the January increases, which combined in total, would produce about $70 million of annualized price improvement in 2018, and we are saying that that $70 million of price improvement for 2018 is exclusive of any additional pricing actions. In fact, we did announce another price increase in our [indiscernible] product line earlier this week, before the end of March. So as I had said in my prepared remarks, we think market conditions are supportive of additional pricing actions, and at this point, as we look at the market, it's very early in the year, and this is the time of the year, when the market is typically seasonally somewhat weak, and I would characterize the market today as quite tight. There are product lines that are currently on allocation. Those parts of the market that are on extended shipping cycles. Though we are not on extended shipping cycles, I would say that production is struggling to keep up with demand. So we think we are going to be in this environment through the better part of 2018, even with some announced capacity coming on, we expect that that capacity is going to come on and is needed to meet expected demand through the year. I think most of our investors who follow us, know that we also have some capacity, that's available to be bought online, and we are prepared to do that, if we see a demand environment that would cause us to believe that we can bring that to the market. Our priority in the near term has been to try to improve our margins. Obviously, this business has suffered for a decade. So we need to get the margin profile on our Insulation business right, and I think what you are seeing on today's call is, we are expecting a lot of the earnings leadership in Owens Corning at 2018 to come from our Insulation business. Over the last four or five years, I think it has been broad across all three businesses, producing a lot of earnings leadership. I think with the inflection we are seeing in insulation and the strengthening of that business, we are expecting a big acceleration in earnings improvement and Insulation really powering big improvements in our corporate results this year.

The next question is from Michael Wood of Nomura Instinet. Please go ahead.

Hi. Thanks for taking my question. Wanted to follow-up on Insulation; with regards to pricing, if we look back on 2017, does it reflect any price outside of residential markets? And to clarify, I know the release said that most of the pricing is residential construction; is it correct that the price increases are not similar in remodeling end markets, and why would that channel be any different?

Thanks for the question. So if you look at 2017, the one thing we said last year, is we actually entered the year with a negative price comp. So we actually had a negative carryover coming into 2017. We think we had good price performance in 2017, but I would say it was a struggle, it was a challenge. I mean, we had to really fight for the pricing that we got, and we made good progress through the year, and in fact now, coming into 2017 with a negative carryover, we are carrying a positive into 2018. So I think it's a completely different environment, as we come into 2018, that we are starting with a positive comp. Without being overly complicated, we talk a lot about the U.S. residential Insulation market, that really is the key lever point that drives a lot of our pricing in the Insulation business. In fact, the asset base that we have, that supports that market, also makes some products that go into HVAC markets and like commercial type markets. Really, the pricing tends to follow the product lines made on that asset base, as opposed to just the residential Insulation product. Those other products are not as material as the residential Insulation markets, we tend to talk about it in those terms. But we are seeing the ability to realize pricing, kind of across the product platforms that sit on that asset base. So some of the HVAC product lines, some of the light commercial product lines, some of the residential product lines, in both new construction and remodel, would all be impacted by that. But we would say in the near term, it's the growth in new construction and the improvement in building codes, that's really pulling the additional demand that's causing capacity to get tight, and is creating the environment that's allowing us to improve our pricing and try to get our margins back.

The next question is from Scott Rednor of Zelman and Associates. Please go ahead.

Hey good morning. Mike, not to beat the dead horse on Insulation, but I was hoping you could just clarify a couple of moving pieces. So within the $150 million in guidance, I think the rough math you provided is probably $70 million incremental from the acquisitions, $20 million from Joplin reversing and then $70 million from price. Doesn't seem like there is a whole lot of volume assumption in there, so I was hoping maybe you could just clarify those moving pieces?

So Scott, I think your math is kind of well thought out, I mean, that's very close to what we would have said, we are trying to make sure that we communicated on the call. So I think you got the four pieces. We obviously have some inflation, so as you talk about headwinds, those numbers add, and then we are going to have some inflation. Now I will talk about inflation in Insulation differently than I would talk about it in Roofing. We are seeing kind of ordinary inflation in Insulation and we are also seeing some push on transportation costs which we spoke about specifically in Roofing. It is a bigger issue for us in Roofing, because we are seeing both asphalt inflation costs and transportation costs. That's a key focus of our pricing in Roofing, is to recover that inflation. I think in Insulation, we will have real price realization above inflation, in the way we are thinking about pricing. We have some volume opportunity we believe in 2018. There is always movements in the marketplace in terms of a little bit of movement in market share, little bit of movement in some of the different market segments. We are not relying on a lot of volume growth in 2018 as a part of our outlook for the year. Our priority has been to improve margins, and there is really still not so much margin in the incremental that you would want to go change volume in today's market, you'd really want to try to continue to work on the margin side. As I said though, we put ourselves in a position where we believe we have a bit more than -- or a bit of a disproportionate share of the available capacity that's currently cold. A lot of that is sitting in existing facilities that we can bring up very quickly. So if we do see that volume outstretches the market capacity, or we see a little bit faster volume growth than is in our plan, or we see a competitive environment, where our competitors aren't able to keep up with, what we expect volume growth would be. We are in a position where we can bring volume back to the market through our own manufacturing network. But as we sit here today, we are seeing the year as more of a tepid volume type market for Owens Corning with a much stronger price environment and margin improvement.

The next question is from Matthew Bouley of Barclays. Please go ahead.

Hi. Thank you for taking my question. I guess just to stick on Insulation. So Mike, looking out, call it one, two years, it looks like you can outline a path to where industry utilization is nearly maxed out. You have also had some incentives to invest capital here, following recent tax reform, they are thinking about greenfield and capacity. My understanding is it takes one to two years to even go about that process. So I guess, what is your take on the potential for greenfield and capacity in the industry, at this point in the cycle. Thank you.

It's a great question. So let me just -- let's start with where do we think we have the ability to pace the industry, in terms of where housing starts could get to. We are -- I think consensus forecast this year would be somewhere around $1.3 million. We said, the industry is operating probably in the mid 90s, in terms of hot capacity. There is some additional capacity on the sidelines. Our sense would be, that if everything is turned on hot, running as effectively as it can possibly run, we probably have a couple more years of 7% or 8% growth in housing starts that we could meet the needs of the market. And then truthfully, you start putting a couple more years of 7% or 8% growth in the market, and that wouldn't only be constrained in the Insulation business, but I think gypsum boards, some of the other materials, obviously labor, which we talk about, which the industry is talking about all the time, as well as the availability of land and the entitlement of land. So as we look at, whether we believe we can be a bottleneck to the upside in the housing industry, I don't think we believe that Insulation would solely be the bottleneck. Having said that, greenfield economics in this business are very difficult. You characterize it as maybe one to two years. We would say you are probably a couple of years out from the time you get the permit. Our experience in Joplin, which would be a facility for mineral fiber, a different marketplace, that it would be similar in terms of construction and engineering, to what it would take to build a new Insulation plant. It was probably three years from the approval of the decision to the time -- we got good production, and then you have learning curve and other effects. If you assume that the housing market will continue to grow forever, you can make those numbers work. If you assume that the housing market is cyclical, and that at some point, you are going to have a downturn. You really have to model the economics, as though the brand new facility you just built is the facility you then turn off. So it really operates more like a peaker in the electrical utility industry than the long term based assets. And as a peaker, you'd need to get very quick cash paybacks, two or three year cash paybacks on a sizable investment. So unless our view changed, that somehow because of what has happened on labor and what has happened on land availability, that we are actually in a cycle where housing divorces itself from the economic cycle, and that the need for housing based on demographics and other things, outpaces economic reality. Then you may be getting into a different paradigm than the way we think about it. I am hard pressed at least based on my experience in the industry to imagine, that housing could somehow divorce itself from the economic cycle. So we would expect that we'd see a downturn in the economy, we would at some point see a downturn in housing. Now having said that, we would expect the next downturn in housing to be much less dramatic than the last one, and probably less dramatic than what we have seen historically; because we do think there is pent-up demand demographics, that support the need for ongoing housing. So I think we are much more likely to be in an environment, where there is a sealing, and then there is some small cycles off of that sealing, and I think our asset base supports that view very well.

The next question is from Stephen Kim of Evercore ISI. Please go ahead.

Yeah. Thanks very much guys. Just to follow-up on your commentary, Mike, around volume in Insulation. What I think I am hearing you say, is that your anticipation is that you will be running at very low levels of volume growth or you are prepared to, at least in 2018, if need be. That I think is a pretty significant surprise, given the fact that, if anything, most people expect the industry to grow, starts to be up, nearly double digits on the single family side, for instance. Despite labor constraints and so forth, certainly I wouldn't expect drywall capacity to be anybody's big concern in the near term. And so I was curious if you could talk a little bit about -- why you think that the business that you would be prepared to forsake and not lose some share in Insulation would be more attractive to somebody else, and if this is something that you are actually seeing definitive signs of, currently, or if this is just simply you being conservative in your outlook for 2018 volume?

Thanks Stephen. I will characterize our point of view on this. Our sense is going to be -- market demand is going to be, where market demand is going to be. I mean, we use macros the same way I think most of our investors would, to try to make some estimates of what the market demand growth would be, and we certainly would expect that there is going to be growth in demand in the market this year. Where we are currently, transacting and doing business, we have been, I think good stewards of our market position and good position of our market share. So we certainly are competing in the market every day, to make sure that we get the share of our customer's business that we have talked about and agreed to with them. We are obviously doing that in a way, that we have been very kind of forthright, that rewards our shareholders and produces margins in the business that make this a good business and an attractive business to invest in. I think there is always business in the market that you can chase on price. Our general view would be, that that's not good business for us, and so if there is business in the market this year, that it has to be chased on price, and as a result of that, we don't see as much volume growth, I think what we are saying is, that we would make the decision to continue to use our capacity, which we think is very valuable, in those segments of the market that are paying a price that would justify reinvestment in our assets. So I don't think there is a big story here. If you look at the overall growth of the market, relative to the guidance we have given at our current margin rates, if you threw 5% or 6% volume number into this, I think you'd get marginally better guidance, than maybe the guidance we provided. But I don't think that would sway the guidance, given that our starting point is, our belief that we got $70 million of annualized price in hand and the opportunity to get additional price actions throughout the year.

The next question is from Garik Shmois of Longbow Research. Please go ahead.

Hi, thank you. Just wanted to switch to Roofing. Just wondering if you can talk about your confidence in passing along inflation in what in a normal weather year, would be a down volume environment. And also, in the context of that, your confidence in your 20% EBIT margin target that you had outlined at the Analyst Day. I think the fourth quarter was stronger from a volume perspective, which potentially pulled forward some demand from 2018. So just trying to reconcile your margin targets that you outlined at the Analyst Day, as well as your confidence on price costs?

Garik, great question. I think you know, we said that our estimate or I guess our math on the market, would suggest that the market could be down mid single digits. And I think at this time of the year, we tend to do the math exactly the same way, which is -- we take our sense of where the momentum is in new construction and remodel, and then we add an average amount of storm demand on top of that. And given continued growth in new construction and remodel, we still would see a reversion back to average storm demand, would probably produce a declining market in 2018, and we'd say that's probably mid single digits in a broad sense. If you look at the way the market is currently operating today, we ended the year very strong. We think there is carryover demand from storms from last year. So to the extent the market were to decline, we think that's probably more of a second half effect than a first half effect. Our sense is, that there is enough demand out there right now, that the market will run pretty strong from a manufacturer's point of view, at least through the first half. Given that, I would expect that was never an easy price environment, and we compete for every order, that our ability to pass inflation at this time of the year, should be pretty good, as we said we kind of reframed our thought process around inflation. Historically, we have talked primarily about asphalt. You have heard us today, talking about asphalt and transpiration costs, because the inflation we are seeing on transportation is not diesel related, which we tend to handle through a price inflator. But it's actually base rate related, which is related to the number of trucks that are out there, the number of drivers, and what they are getting paid per mile. So we have work to do, to make sure that that gets into our thought process and our pricing strategy, and we believe that we have got that issue well in hand. So we believe we have got enough pricing visibility that we should be able to recover asphalt cost inflation and transportation costs, and we also believe we have gotten a volume visibility that we would expect business should be pretty business through the first half of the year. So given those two factors, I can kind of see a way clearer [ph] to the second half. Once we get to the second half, the question of what did we see in terms of real storms, what does the second half outlook look like? Are we going to see some declines with the inflationary environment? That could have an impact on where pricing is in the second half. But that's fundamentally the reason why we don't give guidance on our Roofing business in kind of the middle of the year. But generally, we have seen the last couple of years, very-very good performance in our Roofing business, and we have gotten a lot of confidence in our commercial execution and also our product lines and our position in the market. We think we are in a much more stable portion of the market today, where w have better ability to manage margin.

The next question is from Keith Hughes of SunTrust. Please go ahead.

Thank you. Question on Composites; you highlighted earlier on the call, that you kind of passed that EBIT and margins during the first half, stronger in the second half. Will the pace of revenue also follow along with that? Will that be more even during the year?

Keith, it's Michael. I'd say that the pace of revenue should track pretty consistently throughout the year with two exceptions. As you heard in my prepared remarks on the call, the first quarter of last year was unusually strong, so double digit growth rate. And so, we have a pretty difficult comp there. And then you heard in my prepared remarks as well, that within the Indian wind business specifically, things kind of backed up or stopped in the second half of last year, and that's going to have some implications for first quarter revenue as well. Have some implications for the second quarter, but things should start to improve, and we expect it to be kind of fully backed by the time we get into the second half of the year.

The next question is from Phil Ng of Jefferies. Please go ahead.

Hey guys. Sorry to ask you this question in a different way already, but have you lost any business already in the Insulation side of things? Are you seeing any change here in the marketplace since flash [indiscernible] does seem a little surprising, considering market is on allocation, at least parts of the market, and you guys have a price increase out there? Thanks.

Phil, this is Mike. I don't think there is any major trends in terms of business mix that are material to our disclosure on the business. We came out of the 2016 timeframe, where we had to talk a lot about the day-to-day kind of competition in the market, and where we were going to go to get our volumes, and how we were going to restore volumes through the second half of 2016 and then to 2017. I think we talked about being pretty happy with our share position, as we came out of 2017. I mean, as we came out of 2016, heading into 2017, and really with that, our focus has shifted to now trying to make sure that we make the share that we have in the market, more valuable, more profitable. I would characterize our position in the market today as relatively flat, in terms of where we are in market share. It always moves around a little bit. So to the extent that our guidance is creating some concern among investors, that we don't have a volume outlook for the business that's either aggressive or supports our outlook. I would tell you that, certainly internally, that's not a view we have. And I think our team has visibility to a lot of great volume, and a lot of ability to drive the volume in the marketplace where we want to go, in order to make sure we get the margins that support the operational growth and margin growth that [indiscernible] from the business.

The next question is from Susan Maklari of Credit Suisse. Please go ahead.

Thank you. Good morning.

Good morning.

On the Composites again, can you just perhaps give us a little bit more color? I know you highlighted some of the higher rebuild costs that are coming through this year. So maybe just if you could quantify that for us? And then, as we think about those facilities, and I guess sort of the -- almost like the cyclicality that comes through in the rebuild costs, that go with that. Can you just remind us of where you are with that, and how we should be thinking about the cadence of those costs coming through over the next kind of 12, 24 months and going out?

Thanks Susan, it's Michael. I think I can help you. So we had given guidance previously, that over the period, 2013 to 2016, we had rebuilt roughly 50% of our capacity. And so that's some guidance that we had talked about, probably about two years ago, if my memory serves me correctly. And then at the same time, we gave a forward view as well, over the period 2017 to 2020, and we said we had rebuilt about 20% of our capacity during that period of time. We also gave an outlook to CapEx, during that period of time that it would be down as a result by about $120 million, so just as a reminder. So you are right, rebuilds can be a little bit lumpy. In fact, in 2017, we didn't have any rebuilds, and then so looking forward over the period of 2018 to 2020, we have to rebuild about 20% of our capacity. We have two large melters that we are going to rebuild this year, which represents about seven to eight points of that 20%. So hopefully, that kind of gives you a sense, and so that means that we have got -- we will have some rebuilds in 2019, we will have some rebuilds in 2020 as well. But we didn't have any in 2017 of that 20%, we will do two rebuilds this year, which represents about seven to eight points.

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

The next question will come from Michael Eisen of RBC Capital Markets. Please go ahead.

Hey guys, thanks for taking the one more question. Just following up on the Composites comments; thinking about the industry and these rebuild activities, you guys have talked a lot about less competition coming into the market. Have you guys seen any change in that, and is there any way to better think about that over the next few years as well, where you guys are investing?

Yeah. I mean a couple of things. From a capacity utilization perspective, the industry is operating -- continues to operate at 90% plus capacity utilization. New capacity over the last four or five years have come on in a very responsible way. Probably some interesting trends that I'd point out would be on the consolidation front, where the former PPG operations, both in Europe and U.S. were picked up by NEG. So that was a positive consolidated event that occurred over the past 18 months. And then two of the largest manufacturers in China, their parent companies have merged, and they have laid out the intent that, within the next couple of years, they will be merging the composite operations as well. So I think those consolidating events are attractive trends that are occurring in the industry as well.

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

Very good. Well thank you everyone for joining us for today's call. And with that, I will turn it back over to Mike Thaman for a few closing remarks.

Thanks Thierry. Obviously the key messages on today's call, are that we feel very proud and are very pleased with the outcome of 2017. We think we had a great year for the company. Each of the business is really working hard of improving their financial performance and the sustainability of the financial performance, and we think we made great progress on that, both financially and strategically in 2017. I think as you look ahead to 2018, we are building on that strong foundation. We are building on that momentum. The businesses, which have all shown significant improvement over the last five years, we expect will continue to see each of the businesses improve in their competitiveness. I think financially, it's clear that at this moment in time, we are now expecting to see significant leadership from our Insulation business, in terms of moving the company ahead both in terms of revenue, with the big investments we have in the Insulation business from an acquisition point of view, and also in terms of operating margins, with the margin accretive pricing that we have been talking about on today's call. All of that is great news, I think from an investor point of view, and it's all built on the back of, I think a very good balance sheet, which Michael and his team have managed very effectively over the last couple of years, with an acquisition strategy that really caused us to look ahead to 2019, and see continued big growth that can come from that. So we are very bullish on 2018. We see great things happening in each of the businesses. We do believe we have hit an inflection point in Insulation, maybe one that we have been eagerly awaiting for two or three years, is maybe finally upon us, and we know that this company can only reach its full potential, when we see Insulation performing at its full potential, and maybe those days are now within visibility to us. So an exciting year for 2018, we look forward to talking to you again on our first quarter call in April. Thanks for your interest in our company.

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