Owens Corning (OC) Q1 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the Owens Corning First Quarter 2020 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Scott Cripps, VP of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Thank you for taking the time to join us for today's conference call and review of our business results for the first quarter 2020. Joining us today are Brian Chambers, Owens Corning's Chairman and Chief Executive Officer; and Prith Gandhi, our Interim Chief Financial Officer. Following our presentation this morning, we will open this 1 hour call to your questions. [Operator Instructions]. Earlier this morning, we issued a news release and filed a 10-Q that detailed our financial results for the first quarter 2020. For the purposes of our discussion today, we've prepared presentation slides that summarize our performance and results, and we will refer to these slides during the call. You can access the earnings press release, Form 10-Q and presentation slides at our website, owenscorning.com. Refer to the Investors link under the Corporate section of our home page. 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 the applicable securities laws. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent risks and uncertainties affecting such forward-looking statements. Second, the presentation slides and today's remarks contain non-GAAP financial measures. Explanations and reconciliations of non-GAAP to GAAP measures may be found in the text and financial tables of our earnings press release and presentation, both of which are available on owenscorning.com. Adjusted EBIT is our primary measure of period-over-period comparisons, and we believe it's a meaningful measure for investors to compare our results. Consistent with our historical practice, we have excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT and adjusted earnings. We adjust our effective tax rate to remove the effect of quarter-to-quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share. We also use free cash flow and free cash flow conversion of adjusted earnings as measures to help 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'll begin on Slide 4. And now opening remarks from our Chairman and CEO, Brian Chambers, who will be followed by interim CFO, Prith Gandhi. Then Brian will cover our outlook before the Q&A session. Brian?

Thanks, Scott. Good morning, everyone, and thank you for joining us. All of us are dealing with the unprecedented challenges and impact of the COVID-19 pandemic. It has and will continue to change how we live and work. But extraordinary times create the opportunity for extraordinary actions, and that is what we are seeing in communities around the world as we work together to take care of those in need, ensure essential businesses are operating and take the necessary precautions to prevent the spread of this devastating virus. Within Owens Corning, our teams around the globe have responded to this crisis with compassion and result. Through the many individual acts of support, including the work of the OC Foundation, we will continue to offer our help as a company. And to everyone who has been directly or indirectly affected by the virus, our sincerest wish is for a full and fast recovery for you and your loved ones. Given the current environment, I will make a few comments on our first quarter safety results and financial performance, but we'll spend a majority of my time on how we are managing our business through the COVID-19 pandemic. Prith will then provide some additional details on the first quarter, and then I'll come back to discuss our views on the second quarter and the remainder of the year. Our commitment to safety is unconditional. In the first quarter, our recordable incident rate was 0.47, a 37% improvement compared with the same quarter in 2019. I'm very pleased with this performance, in that everyone has remained focused on creating an injury-free workplace during this difficult time. Financially, for the quarter, we delivered results in line with the expectations we outlined during our last earnings call, despite the additional market impact from the COVID-19 outbreak and governmental actions in Europe and North America which started in March. Revenues were $1.6 billion, down 4%, 3% on a constant currency basis compared with the same period last year; and adjusted EBIT was $116 million, consistent with last year. I'm very proud of our team's execution in this challenging environment as well as our ability to quickly respond to changing market conditions. As part of our first quarter earnings release, we also announced noncash impairment charges of $987 million, which were triggered by the recent decline in the company's market valuation and near-term economic uncertainties created by the COVID-19 pandemic. Prith will provide more details on this in his comments. If you're following along with the slides, please turn to Slide 5. During this extraordinary time, we are focused on 4 key areas to ensure the strength and continuity of our business. First, keeping our employees and other key stakeholders healthy and safe. Second, staying closely connected to our customers, our suppliers and our markets. Third, rapidly adapting our businesses to near-term changes in market conditions while remaining focused on positioning us for long-term success. And fourth, ensuring a strong balance sheet with access to capital as needed. By managing these 4 areas well, I believe we will come through this crisis stronger than ever. In January, we formed a dedicated COVID-19 response team to assist our Asia Pacific business leaders to manage through the coronavirus outbreak in China. As the virus spread throughout the world, we expanded this team to work in daily coordination with our executive team to ensure our operations remain safe and effective through the many global shelter-in-place restrictions. During this time, we've implemented enhanced operating protocols to ensure the safety and well-being of our employees, their families and our stakeholders. We are taking every precaution, including robust cleaning procedures, use of personal protective equipment, social distancing, employee health screenings, restrictions on business travel and work from home requirements at all of our locations, consistent with the guidance of the U.S. Centers for Disease Control and Prevention, World Health Organization and local state and government mandates. In addition, we've enhanced sick leaves and other health care benefits for our employees to provide assistance and relieve them of financial hardship during this difficult time. And we have recently given our U.S. salaried employees, the opportunity to reduce their work schedules while maintaining health care benefits to balance demands both inside and outside of work. We are also committed to continuing to serve our customers with the high-quality products and services they have come to expect from us. Our operations and products have been deemed essential across the U.S. and other global locations. Our products are necessary to help protect, repair and maintain the safety of our homes and other critical commercial and industrial structures. In addition, our materials are critical to the continuity of other essential businesses in areas such as infrastructure, energy, transportation and construction. We've received numerous letters from customers thanking us for maintaining continuity of supply, and we are thankful to our suppliers for doing the same. We are all working together to solve common issues and keep the essential supply chain operating effectively, and in some cases, providing materials that are essential to the structures and equipment that help in the efforts against COVID-19. By design, the majority of our manufacturing facilities are located within the country or region of the customers we serve. This has proven beneficial and has limited disruptions in our ability to secure raw materials locally and deliver products to our customers. Our teams have remained resilient and work well with our customers, suppliers and community partners to find creative ways to continue to operate safely and effectively. As expected, we have seen customer demand slow dramatically in recent weeks. As a result, we have taken proactive steps to balance production across our network and have temporarily curtailed operations at facilities with adequate inventory to meet near-term demand. Moving forward, we will continue to evaluate the market environment and adjust our manufacturing to meet the needs of our customers and manage our inventories. Over the past several years, we have taken actions to ensure a strong balance sheet with access to liquidity and a well-structured debt maturity profile. We currently have about $900 million of available liquidity, including $234 million in cash. During the first quarter, we borrowed $400 million on our existing revolving credit facility for normal seasonal working capital needs and to strengthen our cash position. Given the uncertain market environment, we are focused on reducing or postponing noncritical expenses, including capital investments. Our only near-term debt maturity is the remaining $150 million from our term loan due in February 2021. While our current financial position is strong, we will continue to evaluate our liquidity needs and options to reinforce our balance sheet as we see trends develop in the market. Throughout the first quarter, our team has demonstrated a tremendous resiliency and positive attitude. This, combined with our strong customer connections and balance sheet, positions us to come through this crisis stronger than ever. Before turning it over to Prith to discuss our first quarter results, there is one other item I would like to highlight. Owens Corning has a longstanding commitment to sustainability. It is central to our purpose and drives our actions on a daily basis. Last week, we published our 14th annual sustainability report, detailing our progress toward our 2020 sustainability goals and introducing new metrics to quantify our progress toward our ambitious 2030 goals. I would encourage you to review our report as it highlights and recognizes the efforts and achievements of our 19,000 employees. With that, I'll turn it over to Prith, and then I'll return to talk about our outlook. Prith?

Thank you, Brian, and good morning, everyone. As Brian mentioned, we find ourselves managing through unprecedented events. I am thankful for the strength of our colleagues across the globe who are all dealing with the difficulties of the COVID-19 pandemic. Driven by their efforts, the company delivered strong performance in the first quarter in the face of challenging market conditions. Please turn to Slide 6, which summarizes key financial data for the first quarter of 2020. The tables in today's news release and the Form 10-Q include more detailed financial information. For the first quarter, we reported consolidated net sales of $1.6 billion, down about 3% versus 2019 on a constant currency basis. Lower Roofing volumes drove the majority of the decline due to lower storm demand carryover and reduced shipments to distributors. Adjusted EBIT for the first quarter of 2020 was $116 million, flat to the prior year as a $24 million performance improvement in Insulation was offset by lower EBIT in Composites and Roofing. Net earnings attributable to Owens Corning for the first quarter of 2020 was a $917 million loss compared to $44 million of net earnings in Q1 2019, primarily due to impairment charges that I will discuss in a moment. Adjusted earnings for the first quarter were $65 million or $0.60 per diluted share compared to $58 million or $0.53 per diluted share in Q1 2019. Depreciation and amortization expense for the quarter was $116 million, up slightly as compared to Q1 2019 due to accelerated depreciation from the insulation restructuring actions announced last October. Our capital additions for the first quarter were $54 million, down approximately $25 million versus 2019. On Slide 7, you will see our adjusting items, reconciling our first quarter 2020 adjusted EBIT of $116 million to our reported EBIT loss of $866 million. During the first quarter, we recorded $5 million of restructuring costs, primarily associated with the insulation network optimization actions we announced last October. The deterioration in our market capitalization in March and near-term economic uncertainty amid the COVID-19 pandemic triggered an interim impairment test of goodwill and intangible assets. As a result of this testing, we recognized $987 million of impairment charges related to our Insulation segment. The impairments were mostly driven by the effect of the COVID-19 pandemic on the valuation discount rates and near-term cash flows. These charges are described in more detail in the notes and MD&A of our Form 10-Q. Finally, we recognized $10 million of gains in sales of precious metals used in our production tooling. As a result of productivity and our manufacturing process technology, we have been able to modify the designs of our production tooling and sell certain precious metal holdings in Q1. There was one below-the-line item that affected EPS. In Q1, we adjusted out $18 million of noncash income tax charges related to valuation allowance adjustments against certain foreign and domestic deferred tax assets due to a lower earnings outlook in these jurisdictions. These adjustments are described in the notes to the Form 10-Q. Please turn to Slide 8, which provides a high-level review of full year adjusted EBIT comparing 2020 to 2019. Adjusted EBIT of $116 million was flat to last year. Insulation EBIT increased $24 million as compared to the prior year. Roofing EBIT decreased by $10 million and Composites EBIT decreased by $13 million. General corporate expenses of $31 million were flat to last year. Now please turn to Slide 9, which provides a more detailed review of business results, beginning with Insulation. Sales for the first quarter were $603 million, up 4% from Q1 2019 on a constant currency basis. During the quarter, we delivered volume growth across all categories except China, which was affected by COVID-19. This volume growth was partially offset by lower selling prices. In our North American residential fiberglass insulation business, favorable price realization from a January increase helped to partially offset negative price carryover from last year. EBIT for the first quarter was $39 million, a $24 million improvement compared to 2019. The earnings growth in this segment was broad-based as we saw improvement in both our residential fiberglass and the technical and other building insulation businesses with the exception of China. The overall EBIT improvement was driven by higher sales volumes, favorable manufacturing performance and lower curtailment costs. Now please turn to Slide 10 for a review of our Composites business. Sales in Composites for the first quarter were $494 million, down 4% versus the same period in 2019 and down 2% on a constant currency basis, primarily on pricing headwinds. Volumes were up slightly, overcoming a further decline in global industrial production as growth in downstream specialty applications more than offset declines in glass demand in Asia Pacific related to COVID-19. EBIT for the quarter was $44 million, down $13 million from the same period a year ago, primarily due to lower selling prices. The negative impacts from balancing production with demand were offset by continued strong manufacturing performance in the quarter. Slide 11 provides an overview of our Roofing business. Roofing sales for the quarter were $555 million, down 10% compared with Q1 2019, with shingle volumes tracking relatively close to the market. Volumes were down due to the lack of storm carryover in Q1 and lower shipments to distributors in March, resulting from the onset of COVID-19. EBIT for the quarter was $64 million, a $10 million decrease from the prior year, primarily due to lower volumes in the quarter. Selling prices were down slightly, but this was more than offset by input cost deflation. We maintained a favorable price cost relationship and strong cash contribution margins as we exited the quarter. We also benefited from favorable manufacturing performance as our demand did not trail off until the end of the quarter. As a result, our EBIT margin performance for Q1 was in line with the prior year. Please turn to Slide 12, where I will discuss significant financial highlights for the first quarter of 2020. Free cash flow improved by over $100 million as compared to the first quarter of 2019. The improvement was driven by lower seasonal working capital growth, mainly lower growth in inventories. We are proactively balancing production against demand and will temporarily curtail operations that have adequate inventories to service markets. We are also very focused on managing our liquidity through this period of uncertainty. We previously indicated our intent to pay down the balance of the Paroc term loan in 2020. And in the first quarter, we paid $50 million towards that loan. We continue to evaluate the possibility of paying the remaining balance in 2020, but are now assuming that we will repay the term loan closer to the due date in February 2021. In addition, we have drawn $400 million on our revolving credit facility and hold $234 million of cash and equivalents. As a result, we currently expect interest expense to be between $120 million and $125 million in 2020 compared to our previous guidance of $115 million. Moving forward, we will continue to evaluate potential options to reinforce our strong liquidity position. Now please turn to Slide 13, as I return the call over to Brian to discuss the outlook for our company. Brian?

Thank you, Prith. As I mentioned earlier, I'm proud of how our team has performed in this very challenging environment. We have clear operating priorities to manage the business in both the near and longer term, all aimed at creating value for our shareholders. We have market leading businesses, innovative products and process technologies and an enterprise model that creates differentiated value. And we have a strong team in place, dedicated to the success of our customers and our shareholders. We have taken decisive actions that will position us to perform well in the various market conditions we could face over the balance of this year and into 2021. As we move through the year, our performance will continue to be influenced by several market factors, including global industrial production, U.S. housing starts and global commercial and industrial construction activity. Our full year financial performance will be impacted by the depth and duration of the market disruptions caused by the COVID-19 pandemic. Given the continued uncertainty we face with federal, state, local and foreign governmental actions in response to managing through the pandemic, I'll focus my comments on our short-term outlook based upon the trends we experienced in April that will impact the second quarter results for each of our businesses. I'll then close with my perspectives on a few key enterprise-wide initiatives and the impact they could have on our full year performance. I'll start with our Insulation business and the impact we are seeing in both our North American residential fiberglass business and our global technical insulation businesses. Within our North American residential business, we expect that the shelter-in-place restrictions will delay completions of builds and extend the normal lag times we see to insulate a home. While we would normally expect strong volume growth tied to increasing light housing starts, we are currently experiencing volume declines of about 10% in April versus prior year, and this could drop further depending on construction activity over the balance of the quarter. Switching to our technical and other insulation businesses, April volumes have declined between 10% and 15%. Given construction project delays due to various state and country governmental actions, we believe orders could decrease further as the quarter progresses. One area showing more resiliency is our mineral wool business in the Nordic and Eastern European markets, where we have seen less volume impact versus other parts of Europe. Given these volume reductions, we are proactively balancing production with expected demand, and have temporarily curtailed several manufacturing facilities. Prices in April have remained relatively stable in both our North American residential and our technical and other insulation businesses. But with reduced volumes and expected curtailment actions, we could see decremental margins in the Insulation business of about 40% in the second quarter. In Roofing, we no longer expect relatively flat U.S. shingle industry shipments for the year, given the impact associated with the various shelter-in-place restrictions, which has limited contractors' ability to complete projects and sign up new business so far this quarter. As a result of this near-term slowdown in demand, we have seen distributors reducing orders to manage their existing inventory positions. In the second quarter, we expect manufacturers' shipments to significantly lag out-the-door sales of distributors. Based on our April volumes, shipments this quarter could be down approximately 30%, depending on storm activity. Similar to Insulation, the current pricing environment has remained relatively stable through the month. And while there has been a significant drop in oil prices recently, we won't realize an additional impact from asphalt deflation in the second quarter as it takes several months for this to flow through our cost of goods. With the recent demand drop, we have temporarily curtailed manufacturing across our Roofing network to manage inventories. And while our shingle cash contribution margins remain strong, overall margins for the business are expected to be negatively impacted by lower volumes and production curtailments, leading to EBIT margins in the second quarter similar to Q1. Our Roofing business has proven to be very resilient in past recessionary cycles, as the business is largely driven by the nondiscretionary needs of homeowners, replacing aged roofs or repairing damage caused by storms. We believe the same is likely to be true as the economy starts recovering from the pandemic. In Composites, the global impact of COVID-19 is having a dramatic impact on demand. Our April volumes are down about 25% versus last year, and we expect this trend will continue in the near term. Volumes in our specialty nonwovens business, which is primarily focused on building and construction applications, are performing better than in our glass reinforcements business, although we expect lower roofing volumes to negatively impact the second quarter. Our wind energy business is also proving more resilient as we see wind blade manufacturing beginning to ramp back up. In terms of pricing, we came into the year expecting some headwinds and reported a price decline of $11 million in the first quarter. We expect this trend will continue in the second quarter. As with our other businesses, we are proactively managing inventory and will curtail manufacturing throughout the quarter. As a result, we could see decremental margins in Composites of approximately 50% in the second quarter. With that view of the businesses, I'll discuss a few enterprise focus areas. Given the uncertain market environment, we are taking actions to reduce operating expenses and capital investments. In the second quarter, we expect total operating expenses for the company to be down $10 million to $15 million versus last year. The full year outlook will be dependent on how the recovery plays out, but the second quarter trend would be a good indicator of the second half reductions we would make if demand has not significantly improved. In addition, we have reprioritized our capital investment plan, and now expect full year capital spending in the range of $150 million to $200 million below last year. Regarding some of our longer-term commitments, we remain committed to generating strong free cash flow and to our long-term target of returning at least 50% to investors over time, and have already returned $133 million so far this year through share repurchases and dividends. For the remainder of the year, we do not anticipate any further share buybacks. Regarding our dividend, we currently do not have plans to modify our dividend policy. Having said that, we will continue to closely monitor market conditions and will respond accordingly. As I stated at the beginning of the call, our current operating environment is extremely dynamic. Our focus is on taking thoughtful, decisive actions to be responsive to the current market environment, while positioning our businesses to quickly regain momentum as we see market conditions improve across our broad set of geographies and end market applications. Our team remains committed to operating safely, servicing our customers and creating value for our shareholders. With that, I'll turn the call back over to Scott to open up for questions. Scott?

Thank you, Brian. We'll now open the call for questions.

[Operator Instructions]. The first question today comes from Kathryn Thompson of Thompson Research.

First focusing on Composites and understanding that's going to have a greater impact to the company's results, most likely for the remainder of this year and into 2021. Could you break out, in terms of -- I appreciate the detail, but if you could break out in greater color from the geographic impact in terms of volumes and relative earnings headwinds? And what have you seen out of Asia as they are a little bit further along in the recovery? And then also give a look, particularly, into Europe and how they're responding to lower demand and how that impacts Composites?

Good morning, Kathryn. Thanks for the question. So on Composites, I guess, when we start talking about our performance outlook for Q2, I guess, I'd want to start by saying, look, this is very going to be volume dependent in terms of our performance in our businesses, and that includes Composites. So our performance in Q2 isn't necessarily indicative of what may materialize through the back half of the year into 2021, but it's certainly our near-term outlook in terms of how we're looking at the business. So as you said, Kathryn, we've got a pretty diverse mix regionally and by end market applications. And I'd say in our Composites business, what has held up very well over the last year and including in the first quarter, is our strategic areas of focus around really focusing in on some key geographies where we have market leadership, great product process technologies, great customer support. And that's in North America, Europe, India. We do have business in China there, but it's to a much lesser extent. But when we take a look at our April volumes in terms of how those materialized, I think North America and Europe for us were performing very well through the first quarter. But clearly, our Composites business and then also our Roofing business was probably the most impacted by some of the March shelter-in-place orders in Europe and then in North America that we saw play out. So when we look at volumes in Composites being down about 25% here in April, I'd share with you, geographically, it started to impact in Europe. And if you look, Europe is about 30% of our business. So we've seen order volumes tracking pretty consistent with the overall outlook we gave in Europe in terms of what those tracked down in April. North America probably tracked a little above that 25% mark as we just saw some of these shelter-in-place restrictions kind of taking hold in the automotive sector and other kind of key end market applications in the U.S. as we went forward. But I think our regional mix, then, I think, gives us some strength on the recovery. You mentioned China. That is actually a place where we look and potentially gives us a blueprint to how other markets will work through as they work through the phases of confinement, reopening and recovery. So our business in China actually in April was returning back to demand levels to about 90% versus prior year. So only about a 10% decline. So we saw that demand profile really track down dramatically in the first part of the quarter. And then gradually, it's recovered in March. And then again in April, trending upwards again. So again, we're down 25% for the month. We said this is what could occur in the near term, and that's very, very dependent again, though, in terms of how markets start to reopen and how the recovery kind of plays out. And I do think our geographic diversity in the business in North America and Europe plays in our favor. India is the one spot where we have seen probably more impact. India locked down in March. It continues to be very contained. So our operations there are slowly ramping back up. But that's going to create probably the biggest headwind in Q2 in terms of our other regions as we go forward.

The next question today comes from Mike Wood of Nomura Instinet.

Thanks for providing all the data on April. I appreciate it. Can you talk about your Insulation and Composite business, the exposure that you have facing energy markets? And perhaps also just Pittsburgh Corning specifically, which I recall has LNG exposure. Just if you could talk about what you're seeing there? What steps you're taking maybe to adjust to potential declines in that business?

Thanks, Mike. Yes, in terms of the energy markets overall, clearly, the dislocation we've seen in oil is going to start to have an impact rolling through both our Composites business and a little bit in the Insulation business. I'd say, in Composites, it's probably more near-term impact in terms of how materials are consumed in the operations. And we would expect that's going to have an impact here in Q2 and then for the foreseeable future until there's some stabilization in the oil markets. With regards to Insulation, and particularly to FOAMGLAS, that is a business that does a lot in the industrial segment. I'd share with you that for the most part, our materials go into projects towards the end stages of those projects. So we've seen some delays in those construction time lines, but not any cancellations. So in the near term, kind of through this year, we would expect that we're going to see those projects get completed. And then what we're going to be watching really is kind of how this could potentially impact as we go into '21, '22 in terms of any capital expenditure changes around oil or natural gas facilities. But for this year, we think it's probably not going to have as big of an impact because those projects are well in place and progressing. And again, we come in at the tail end of that.

The next question comes from Matthew Bouley of Barclays.

I wanted to ask for a little more color around the decremental margins across the business, sort of beyond the second quarter. I'm trying to understand sort of what level of cost is more fixed in the very near term, kind of, amidst this quick volume drop off? What can you flex kind of in the next few months so that -- or at least sort of what could that mean for decremental margins beyond the second quarter as you flex your costs?

Yes. Thanks, Matt. Again, our decremental margins outlook in Q2 is very much depending on kind of looking through at the volume declines that we're seeing in April, that could continue through the rest of the quarter. But our decremental margins, as we go forward, are going to be very dependent on the volume and demands that materialize for our business. So I think in the near term, a lot of these margin deterioration is really being caused by the fixed cost assets that we have. So while every business is going to get impacted by volume declines here in the second quarter, certainly, our Composites and our Insulation business, our glass melting businesses, where fixed cost absorption is so much higher, we're going to see more decremental margin deterioration. And how we're looking at those is for -- right now, we're looking at curtailing these operations, so we can take some cost out in terms of energy and raw materials, while we're idling these facilities. But we're going to maintain the bulk of the energy cost, the bulk of the labor cost as we continue to hot idle these assets and get a clearer view to how the second half is going to materialize. So in the near term, those are going to be pretty fixed costs that are in the business that we're going to absorb to the P&L. Longer term, we can take other actions around taking furnaces cold or taking lines cold, which we've done in the past, and that would remove a lot of the other energy costs and other associated operating costs with that. But right now, these margins are really a good indication of what we would see in the second quarter based on certain volume decline and then based on us holding a lot of these assets hot idle while we see how the second half volume environment materializes.

Your next question comes from Stephen Kim of Evercore ISI.

Appreciate all the color. Obviously, really difficult environment and your outlook, I think, sufficiently paints that picture. But there were some things that were mentioned in your Q that I thought were -- I was hoping you could elaborate on a little bit, in particular, related to favorable manufacturing performance across all 3 of your divisions: Insulation, Composites and Roofing. I was wondering if you could talk a little bit more about that, specifically, what were they related to so that we can get a sense for how the COVID environment that we're in may influence that, whether they were -- whether you would see reductions in the benefits from those improvements or if there was something about the way that going into this COVID environment cause those manufacturing performance improvements to actually increase as you made your way through the quarter? I just -- any more color you can provide on that and what we can expect going forward would be helpful.

Yes. Thanks, Stephen. Our focus really on improving our manufacturing performance was one of the key operating priorities that I talked about last year, which is driving improved operating efficiency. So we have been hard at work for the last several years around improving our manufacturing efficiencies overall across the company through uses of advanced manufacturing techniques, other operating disciplines. And so the results that we delivered in terms of manufacturing performance in Q1 is very indicative of what we were delivering last year. And we think those are not COVID-19 dependent. Those are just good focused actions we are taking every day to improve unit cost productivity, to become more efficient, to reduce maintenance costs across the enterprise. So I think that is actually good solid work that is going to continue. I think that has helped to offset some of the curtailment costs that we are also absorbing because we're able to just generate good unit cost productivity, and that's going to continue going forward. And I think that's going to be a benefit as we start to see volumes improve in terms of incremental operating margin improvement in our glass melting businesses. I think we're going to have a better manufacturing cost base as we go forward, and that's going to help our margin improvements as we come through this and start to see volume improvements across the businesses.

Next question comes from Mike Dahl of RBC Capital Markets.

So just in terms of some of the April commentary when we're thinking through some of these volume declines and incrementals that you're speaking to in 2Q, it seems like it's putting the consolidated business at or maybe slightly above breakeven from an EBIT standpoint. So, a, just wanted to kind of confirm that that's fair based on what you're saying. And then, b, I guess the bigger question is, it speaks to Steve's question as well. When you think about last cycle, obviously, your high fixed cost businesses like Insulation, Composites had some down years for -- from an adjusted EBIT standpoint. There have been significant changes to those businesses over the past cycle. But on the flip side, we're in another kind of synchronized downturn across regions, across end markets today. So just wanted to get your thoughts on just those businesses, Composites and Insulation, their ability to remain profitable in the current environment.

Yes, that's a great question. Thanks. I think on the quarter, in terms of consolidated, I'd say, the overall operating profitability is going to be very, very dependent on the volumes that materialize and how quickly markets reopen. So that's going to be the biggest driver, I think, of some of the profitability inside Insulation and Composites on the volume piece. But our focus is -- in this quarter and going forward is really on generating great and solid free cash flow by managing the items we can control, really good OpEx reductions, minimizing CapEx, really managing our working capital inventories tightly so we can generate good free cash flow through this quarter and going into the back half of the year. So the EBIT performance is going to be dependent on volumes. But our free cash flow performance, we feel, is going to be very solid as we go through the quarter and into the back half of the year. I think with regard to your other question, maybe back to Stephen's a little bit on just how things might have changed. I think the -- our glass melting businesses, both Composites and Insulation, there's been a lot of work in terms of improving our cost position in both the business, certainly since the last downturn. In our residential insulation business, I think some of the cost actions that we talked about last year, where we've reduced capacity, we've improved manufacturing productivity efficiencies, I think we've really restructured the res part of the Insulation business in a way that although has a lower cost base and allows us to produce profitability at a lower housing start base and certainly what we were looking at in terms of the last housing recession. So I think we're better positioned there. I think the investments in our technical side of the Insulation business as well has really strengthened the earnings potential of the business where we've been able to diversify into some higher value and different products for more geographic diverse. So I think the overall Insulation business is in much better position to perform well through this kind of a downturn than in the last cycle. And I'd say, similar is for the Composites business. When I look at the business today versus over a decade ago, we're much more focused, and our share positions are stronger in key markets, which has been a big part of our strategy, North America, Europe, India, Brazil. We're very much focused and have made great progress in growing our share positions, in especially nonwovens, in especially downstream applications like wind energy. And then when you look at the fixed asset base, we had a lot of subscale melters during that last downturn. We have gotten those all out of the network. We have much more higher-performing scalable assets, and our manufacturing performance productivity is better. Our unit costs are improved. So I think we're in a much better position to come through this kind of volume downturn and produce better results than we were positioned during the last recession.

The next question comes from Phil Ng of Jefferies.

Curious how are your inventory levels kind of holding up for your Insulation business? And appreciating starts are probably going to be down pretty noticeably in April, how much backlog do you still have? Because your commentary around April certainly sounded better than most of us probably expected.

Yes. So thanks. I think when you look inside our quarterly just overall inventory levels at a dollar value, we were pretty flat in terms of where we finished the year. I'd say that our inventory positions, we're in very good position in Insulation. We worked some down. I think we saw a little bit of inventories in Roofing really because the volumes and shipments started to decline in the back half of March. And normally, we are running our production in Roofing to build up for the seasonal demand we expect. So when demand kind of dropped off a little bit in Roofing at the end of March, we saw some inventory build that we've corrected with some of the curtailment actions we've taken here in April. So I think that's going to be a continued key focus area for us as we're going to want to manage inventories very tightly. We want to make sure that we're not getting out ahead of demand in terms of building out inventories through the quarter or going into next year. So we're going to continue to manage inventories tightly. So we -- so we're prepared if volumes improve in the back half of the year, which we think there's a good possibility for that to occur, we can ramp up our operations and get good manufacturing efficiencies as we finish out the year.

The next question comes from Truman Patterson of Wells Fargo.

Glad to hear everybody's healthy. So first, with all the productivity initiatives, it's nice to hear that Insulation decremental op margins are only down 40%. We were expecting something a little more severe. But looking at the residential side, clearly, U.S. resi slowed meaningfully. Could you just give an update on April pricing, whether pricing has started to roll back? And then also looking out into late 2020 and 2021, I know some competitors were bringing on some supply. I'm just hoping you can give an update of how you think supply kind of plays out in the next year or two.

Yes. Thanks for the question, Truman. On pricing, again, as I said in my prepared comments, we've seen pricing through April remain relatively stable in the residential business. So we came into the year with light housing starts increasing and a good volume environment. We announced our January increase. We began realizing some of that pricing kind of through the P&L in Q1, and prices have maintained relatively good stability here through the month. So in terms of how this might play out through the rest of the year, we're going to continue to evaluate the markets. We'll keep a close eye. We'll keep competitive. And we'll respond accordingly. But right now, through the month, they've remained relatively stable. So -- and in regards to your question on the other kind of supply and capacity adds that are coming on stream, we really don't have -- I don't have any good feel or commentary on how they're going to be thinking about doing that. It's a very different environment when -- to when those capacity adds were announced. So we're going to have to wait and see in terms of if there are any announcements around what they do with those capacity adds as we get through the rest of the year. But so -- not sure how that could potentially impact '21 without knowing for sure if those adds are going to come on stream.

Next question comes from Justin Speer of Zelman & Associates.

So on the Roofing side, just I'd love some context and color on what you're seeing in April from a volume and pricing perspective, and just any sense -- if you can give us any sense for the inventory situations, how those are shaping up at Roofing currently?

Yes, thanks. So coming into the year, we felt like it was going to be another really strong Roofing year. So we said we thought volumes overall were going to be pretty flat with last year. And through the quarter, volumes were down a little bit year-over-year as we expected because we were bringing in a little less storm carryover. And we talked about that on the last call that that we felt was going to impact volumes. And I think volumes dropped in March more with response to just the shelter-in-place restrictions that were starting to get laid in, in the U.S. So I think that caused distributors that were buying from us, at least, to start to pull back on those purchases, to manage their inventories until there was a clearer picture of what the demand outlook might materialize over the quarter. So we saw that drop in our order book towards the end of March. In April, we've seen continued probably conservative buying as our distribution customers are kind of managing their inventories very tightly to expected demand. So that's why I believe in the quarter, as we sit here today, that our shipments as manufacturers will probably lag out-the-door sales. We have seen some trends that -- from our contractors that, that business is still continuing. A lot of the shelter-in-place restrictions deemed construction as essential, so that's allowed project work to occur, but concern over some of the lead generation and how that materializes in May and June. So again, I think what we're expecting is that we're going to see a bit of a slowdown here in Q2. Distributors manage inventories. But then as we get into the back half, we start seeing markets reopen. Roofing has proven to be a very resilient product. It's a nondiscretionary kind of investment in home. So as storm demand creates more demand for repairs and replacements, as we come into the second quarter or third quarter, and as people -- and as these shelter-in-place restrictions are lifted, we think that contractors are going to get back to work at a more robust level, and we're going to see some improvements in volumes as we come into the second half. But for the near term, I think they're going to continue to manage inventories, and we're expecting that in our order outlook of being down 30%. But again, that's very dependent on storm activity, which could accelerate and improve that, and it's very dependent on the pace of how states reopen and recovery starts, which could also improve that as we work through the quarter.

The next question comes from Michael Rehaut of JPMorgan.

I hope everyone is healthy and safe across your company. I just wanted to circle back to the comments around the Insulation business for a moment. And particularly around the volume commentary, certainly appreciate the prices and such. But when you talked about North American res, April volumes down about 10% year-over-year, and also on a global -- that the global business down 10% to 15%, for both of those businesses, you talked about kind of saying they could fall further as 2Q progresses. And I'd love to get a sense of what was driving those comments in terms of perhaps if a portion was more due to the fact that you're curtailing production in your facilities or facilities are kind of being shut down in Europe or different parts, so more from a production standpoint versus perhaps what you're seeing from an end demand standpoint? And if there's any way to kind of frame what the further drop could be as we look into May and June from that?

Okay. So to be clear, the commentary is more around the rate of market recovery and a demand comment, not anything tied to production. I think we're just looking at very much within the businesses how demand could materialize in May or June. I would say, both commentaries on it could decline further are really very dependent on how quickly states and/or countries in our technical insulation business reopen and the recovery efforts start. So again, the shelter-in-place restrictions that are in place today, if those remain and it get extended into May and into June, that's where we could see some decremental demand declines in terms of our volume outlook if -- in both residential and our technical business. So that's kind of the context for the statement. It's assuming that it takes a little while longer to get markets reopen and that the recovery slows. So on the res side, I'd share with you that the downward decline and where it could get potentially further decline is really tied to, again, shelter-in-place restrictions don't get listed -- don't get lifted, and then we see just the lag from housing start to completion of a home get extended because construction crews are limited to get on site and houses just take longer to build. So we see that extend and that impacts demand. And then I think any potential where there was a start that hasn't begun or isn't far along that might get delayed until a homeowner actually wants to buy the home, so it limits kind of spec building, that could further impact. So those are the possibilities. I would share with you, though, that as we come through this, we're in a different spot certainly than the last recessionary cycle because housing has not been overbuilt. And I think there's been some good early indicators just over the last few days with an announcement by a major homebuilder that started to see some weekly sales improvements, mortgage application rates have started to improve week-over-week. So I think there's an equal opportunity around these shelter-in-place restrictions getting lifted and housing kind of coming back. And because it's not in an overbuilt situation, it could recover even at a quicker pace. So I think our outlook is very dependent on those factors around shelter-in-place restrictions getting lifted, what's the timing of that, and then how fast the recovery begins. And res, it could recover much faster. On the technical insulation side, again, this is kind of a broad view around how shelter-in-place orders get lifted here in the U.S. and then in Europe. So we're actually seeing in parts of Europe, mineral wool business in the Nordics, for example, is performing relatively better in terms of volumes versus other parts in Europe. So I think, again, it's an indicator of where there's different shelter-in-place restrictions, there's different construction restrictions. And if those get lifted out, we could see some improvements. But if they remain in place for the entire quarter, we could see that demand continuing where it is today in terms of the decline. So I hope that helps kind of frame the context of the statement.

The next question comes from Ken Zener of KeyBanc.

Appreciate your comments. I just wanted to ask -- go to the fiberglass comments. Because we have very different regional trends in the U.S., and I'm located in the San Francisco area, which probably has the most extreme shelter-in-place, no construction allowed mandate. Can you talk about how these hot idles impact your network? I assume the Northern California plant is down because there's no construction as opposed to some other plants perhaps that are in better regions, South Central Texas or parts of Florida. That's the first part. So could you talk about how that hot idle works in terms of you managing the system and perhaps give us context in terms of how you think about demand versus your price point? And then, Prith, if you could just comment on the impairment a little further?

Yes. Thanks, Ken. I'll start, and I'll turn it over to Prith. So in terms of our operations, again, really points to the value of our products and how essential they are. I mean our products have been deemed essential in terms of the operations of our facilities. So even in Santa Clara in California, our operations has remained. And what we're looking about -- what we're looking at and talking about are curtailment actions really relative to the demand environment. So again, we're very focused in this environment to control the levers we can control around managing our cost position, maintaining tight inventories, good focus on working capital and maintaining and reducing CapEx to generate good cash flow. So we're being probably more proactive in terms of curtailment actions in our businesses across the board, our Insulation business, our Composites and our Roofing business, to make sure that we're not building inventory ahead of expected demand. So we're hot idling because we want to take temporary actions to minimize inventory, but that allows us the flexibility to ramp back up and get into full production very quickly depending on the market recovery rates that we see. So that's where we're going to balance. And we generally balance the hot idle in our furnaces for near-term demand disruptions. So again, we'll make those choices to manage inventories, and then we would have to -- we could make a different decision if we saw volumes that just weren't going to be recovering at a rate that we would expect. So -- but our operations are essential. We've maintained them. The hot idle costs are really associated with the production curtailment actions we're taking to manage inventories overall. Prith, maybe I'll turn it over to you talk about the impairment.

Yes. Thanks, Ken, for the question. So look, as we described in our 10-K in February, we had a small cushion between the fair value of our Insulation business and its carrying value of about 10% when we did our annual testing. At the time, we also indicated that any deterioration in the macroeconomic factors that influence Insulation could result in an increased likelihood of an impairment charge. And so what happened here in March with our market cap declining to a level below our book value, we had to do some interim testing. And there are 2 big changes. So we -- the impairment testing is based on a DCF methodology in terms of valuing the fair value of the business. And so there were 2 big changes in our parameters between our October test and the current testing in March. So first, because of the COVID-19 pandemic, financial market uncertainty has increased significantly, resulting in a much higher equity risk premium. So that really affected our discount rate that we used in October to the one we used in March by increasing it significantly. That -- and then the effect of the pandemic on near-term cash flows was the second big factor in changing our valuation. And those 2 things together really made the majority of the charge -- the impairment charges caused by those 2 factors.

Thanks, Prith. I guess one item I'd just tack on to that, Ken, is when you look at goodwill in our Insulation business, if you look at where we ended 2019, it was about $1.5 billion of goodwill in Insulation. And about $900 million of that was actually associated with fresh start accounting that we had at emergence coming out of bankruptcy. So a large chunk tied to that. And at that time, that's when back '06 level, that was housing at 2 million starts and Insulation was generating the majority of the earnings. So just to put a little context around the size of the goodwill we were carrying in insulation and what were the key attributes of that.

Elisa, I think we have time for one more question.

The last question today comes from Seldon Clarke of Deutsche Bank.

You talked about Roofing shipments being down 30% range in the second quarter. Could you just remind us how this typically trends in a slowdown? And I realize this is obviously an unprecedented situation. But could you just give us a sense around how you're thinking about the timing dynamics that might help us frame demand in the back half, just given the more resilient nature of the Roofing business? And if we saw an L-shape recovery or Nike shoes type recovery, would down 30% be the worst of it? Or how should we kind of think about that in the back half of the year?

Yes. Thanks for the question. I would say this is a very unprecedented event, and I know that word has been overused, but normally in our Roofing business because it's a nondiscretionary replacement or repair. Even in recessionary cycles, in past recessionary cycles, you can go back, the demand trend for shingles has dropped a little bit because there's a little bit of discretionary work around new construction or remodeling activity, but the core kind of repair work stayed intact. I think the dramatic drop in the quarter is more around, this is a global health crisis, not a recessionary-driven event. So the shelter-in-place restrictions, I think, has just limited a contractors' ability to get to job sites, do the work. And candidly, I think homeowners have been pushing off having to make these projects materialize, so -- in terms of everybody sheltering in place. So I think it's a little bit of unprecedented in the dramatic kind of drop in demand in the quarter. And what we would expect coming back, as the shelter-in-place restrictions get lifted, again, it is a nondiscretionary repair, we expect that demand is going to return. We would expect that the performance of the business and the demand profile would return similar to other recessionary cycles, which it holds up very, very well. And Roofing is an outdoor construction activity. So that certainly helps in the current view in terms of how people are practicing good social distancing and wanting to make sure contractors are outside and doing the work there. So again, I think it's unusual to have this kind of demand drop. I think it's driven by the health crisis. But we would expect that demand would return in this business, and it would perform similar to past recessionary cycles.

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

Thank you, Elisa, and thanks, everyone, for joining today's call. With that, I'll turn it back over to Brian for a few closing remarks.

All right. Thanks, Scott. And thanks, everyone, for your questions this morning. In closing, I'm incredibly proud of our team's strong execution and ability to deliver results in this dynamic environment. We have a clear focus on how we need to manage the business in the face of these challenging market conditions, and I'm highly confident in our team's ability to ensure our company emerges stronger than ever. So I want to thank you for your time this morning. We look forward to speaking to you again during the second quarter call. And until then, I hope you and your families remain healthy and safe. Thank you.

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