Owens Corning (OC) Q3 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the Owens Corning Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Amber Wohlfarth, Director 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 third quarter 2020. Joining us today are Brian Chambers, Owens Corning’s Chairman and Chief Executive Officer; and Ken Parks, our Chief Financial Officer. Following our presentation this morning, we’ll 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-Q that detailed our financial results for the third quarter 2020. For the purposes of our discussion today, we have prepared presentation slides that summarize our performance and results, and we’ll refer to these slides during the call. You can access the earnings press release, Form 10-Q, and presentation slides at our website owenscorning.com. Refer to the Investors link under the Corporate section of our homepage. A transcript and recording of this call and the supporting slides will be available on our website for future reference. Please reference slide two 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 and today’s remarks contain non-GAAP financial measures. Explanations and reconciliations of non-GAAP to GAAP measures maybe 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. The tables in today's news release and the Form 10-Q include more detailed financial information. For those of you following along with our slide presentation, we’ll begin on slide four. And now, opening remarks from our Chairman and CEO, Brian Chambers. Brian?

Thanks, Amber. Good morning everyone, and thank you for joining us today. I know many of you have had the opportunity to speak with Amber, our new Director of Investor Relations. I want to welcome her to our first earnings call in this role. I'd also like to take this opportunity to thank Prith Gandhi for serving as our Interim Chief Financial Officer over the past several months and welcome Ken Parks, our new CFO to our call this morning. Ken has a proven track record of leading high performing teams and delivering results at several diverse global organizations. We are excited to have Ken on our team. During our call this morning, I will provide an overview of our third quarter results and how we are positioning the company to capitalize on our market opportunities. Ken will then provide additional financial details on the third quarter, and then I'll come back to discuss our outlook for the fourth quarter. Our global team continues to demonstrate tremendous resiliency, adapting to changing market conditions and working hard to service the demands of our customers. I'm incredibly proud of how our teams have worked together during these challenging times to achieve such strong financial results delivering record quarterly EBIT, double-digit EBIT margins in all three businesses and record free cash flow. All of this was accomplished while maintaining our focus on keeping each other, as well as our customers and suppliers healthy and safe, ramping up manufacturing operations throughout the quarter to service increasing customer demand and supporting our communities as we continue to operate through this global health crisis. Before discussing our markets and financial results in more detail, I'll start with safety. As you know, safety is a top priority for our company. Year-to-date, 57% of our global facilities remain injury-free. In the third quarter, while we continue to perform at a high level with a recordable incident rate of 0.73, this result was above our third quarter 2019 performance and reminds us of the daily focus we must have on safety in order to achieve an injury-free workplace. Turning to financial results. Our performance this quarter was better than what we outlined during our last earnings call, as we saw customer demand continued to improve throughout the quarter in most of our end markets. Revenues were $1.9 billion, up 1% compared with the same period last year, and adjusted EBITDA was $289 million, up 4%. These results continue to demonstrate the strength of our company's market leading positions, broad product offering, and improved operating efficiencies to generate substantial free cash flow and deliver sustainable shareholder value. On our last two calls, I've discussed four key areas we have focused on this year 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 forth, ensuring a strong sheet with access to capital as needed. We've managed these four priorities well through the pandemic and expect to finish the year strong while we position ourselves for 2021. Overall, we continue to see our end markets recover during the quarter, but at different rates. Our residential markets, especially in the United States are being fueled by robust demand for new single family housing, as well as increased repair and remodeling investments as owners upgrade their homes and expand their living spaces. Our commercial and industrial markets are also seeing improvements, but we continue to expect these to recover at a slower pace as we finished 2020. In the third quarter, our Roofing business delivered revenue and earnings growth. Increased storm activity and continued remodeling growth drove significantly higher market demand in the quarter, while our manufacturing and supply chain teams worked hard to service the higher demand. Our volumes trail the overall market growth due to limited inventory levels entering the quarter. We remain focused on improving our service cycles and plan to continue running our facilities at full capacity to meet near-term demand, while ensuring we are positioned to support our customers and service expected market demand in 2021. In Composites, volume to also continue to improve throughout the quarter, with revenues down just 2%. Our focus on specific end markets, such as building and construction and wind energy, combined with our local supply chain model in specific geographic regions, continues to pay dividends as we grow our volumes. This, along with our continued focus to drive operational efficiencies through manufacturing productivity and network optimization led to double-digit EBIT margins in the quarter. And in Insulation, revenues also finished down 2% with EBIT margins of 11%, driven primarily by the additional growth we saw in our North American residential fiberglass business. As I stated earlier, we continue to see the U.S. housing market strengthening, with demand around 1.4 million units on a seasonally adjusted basis for the last three consecutive months. Given the market demand we are currently seeing and that is forecasted for 2021, we have initiated work to restart our batt and roll insulation line at our Kansas City facility. We would expect to have this line back up and running during the second quarter of next year. Our focus in this business has been to operate the most efficient and most flexible manufacturing network, which positions us to quickly respond to changing market conditions to service our customers and deliver strong financial performance. As we continue to adapt our operations to service a changing market environment, we remain focused on generating strong free cash flow and maintaining an investment grade balance sheet. Last quarter, we discussed our focus on evaluating our liquidity needs, prioritizing the leveraging the balance sheet and maintaining our dividend. In the third quarter, given our cash flow, we were able to execute on all these areas, finishing the quarter with more than $1.7 billion of liquidity. Before turning it over to Ken to discuss our third quarter financial results in more detail, there was one other item I would like to cover. This morning we announced that Ava Harter, our General Counsel will be leaving the company at the end of November. She would become the Senior Vice President of Corporate Affairs and General Counsel at Whirlpool Corporation. During her five years with Owens Corning, Ava played a key role in shaping the direction of our company and driving our success. I appreciate the many contributions she made and wish her all the best in our new role. We are currently exploring alternatives to identify her successor and we'll make an announcement when our evaluation is complete. With that, I'll turn it over to Ken and then I'll return to talk about our outlook for the fourth quarter. Ken?

Thanks, Brian and good morning, everyone. I'm excited to discuss our results on today's call, and I also look forward to getting to know many of you going forward. First, let me say that I'm honored by the opportunity to join the OC team and to contribute to the future success of this company. While only on day number 50, I'm already impressed with the resilience of the company and the dedication of our people. Every day reaffirms me that OC is truly global in scope and human and scale. I also want to express my sincere thanks to Prith Gandhi for his service as Interim CFO. His leadership during this unprecedented time was crucial and the company's financial strength is a testament to the quick and decisive actions taken by Prith and the leadership team. Now turning to our results on slide five. The company's third quarter performance demonstrates the strength of Owens Corning and its ability to generate strong financial results in an improving, but still challenging environment. The company has reduced its debt position and retains ample liquidity in light of the continued market uncertainty. For the third quarter, we reported consolidated net sales of $1.9 billion, up approximately 1% over 2019. In the quarter, we saw solid revenue growth in our Roofing business, while revenues in our Composites and Insulation businesses declined slightly. Through the quarter, the residential recovery in the U.S. has continued to accelerate, while commercial, industrial and non-U.S. residential markets have recovered at a slower pace as expected. Adjusted EBIT for the third quarter of 2020 was $289 million, up $12 million compared to the prior year, highlighted by the continued recovery in residential end markets, primarily in the U.S. All three businesses achieved double-digit EBIT margins as a result of the company's market-leading position and continued focus on our key operating priorities. Net earnings attributable to Owens Corning for the third quarter of 2020 were $206 million compared to $150 million in Q3 of 2019. Adjusted earnings for the third quarter were $186 million or $1.70 per diluted share compared to $176 million or $1.60 per diluted share in Q3 2019. Depreciation and amortization expense for the quarter was $120 million, up $8 million as compared to last year. Our capital additions for the third quarter were $68 million, down $114 million versus 2019. On slide six, you see adjusted items reconciling our third quarter 2020 adjusted EBIT of $289 million to our reported EBIT of $296 million. During the third quarter, we recognized $7 million of gains on the sale of certain precious metals. We've excluded these gains from our adjusted EBIT. I would also like to highlight one item related to adjusted EPS. We've adjusted out a $13 million non-cash income tax benefit related to regulations that were issued during the third quarter associated with U.S. Corporate Tax Reform. This adjustment is described in more detail in the notes of our 10-Q. Slide seven provides a high level overview of the changes in third quarter adjusted EBIT from 2019 to 2020. Adjusted EBIT of $289 million increased $12 million as compared to the prior year. Roofing EBIT increased by $53 million, Insulation EBIT decreased by $11 million, and Composites EBIT decreased by $12 million. General corporate expenses of $35 million were up $18 million versus last year, primarily due to higher incentive compensation expense associated with our improved financial outlook. In addition, the timing of smaller one-time items more than offset benefits from our ongoing cost control initiatives. Now, I'll provide more details on each of the business results, beginning with Insulation on slide eight. Insulation sales for the third quarter were $681 million, down 2% from Q3, 2019. During the quarter, volume growth in North American residential fiberglass insulation was more than offset by lower selling prices for the overall segment and lower volumes in technical and other building insulation. Volumes were down in technical and other due to the impacts of COVID-19. However, we saw some sequential improvement within the quarter. EBIT for the third quarter was $73 million, down $11 million as compared to 2019. The decline was driven by lower year-over-year selling prices, the negative impact of lower volumes in technical and other, and slightly higher delivery costs. The benefit of higher sales volumes from the recovery in North American residential and favorable manufacturing performance partially offset these impacts. For the Insulation business overall, our sequential operating leverage from Q2 to Q3 was 48%, in line with the outlook provided on the Q2 call. Please turn to slide nine for a review of our Composites business. Sales in Composites for the third quarter were $521 million, down 2% as compared to the prior year due to lower selling prices and unfavorable product mix. Overall sales volumes were flat year-over-year. During the third quarter, we saw certain regional markets begin to recover and continued to see strong performance in our wind and roofing downstream specialty applications. EBIT for the quarter was $55 million, down $12 million from the same period a year ago, but up significantly from EBIT of $6 million reported in Q2 of 2020. Our results continue to be impacted by COVID-19 demand variability. The EBIT decline in the quarter was primarily driven by the negative impacts of production curtailments and lower selling prices, partially offset by favorable manufacturing performance. Unfavorable customer mix and negative foreign currency translation were largely offset by lower selling, general and administrative expenses, input cost deflation and lower delivery costs. Sequentially, from Q2 to Q3, we generated operating leverage of 40%. Slide 10 provides an overview of our Roofing business. Roofing sales for the quarter were $761 million, up 7% compared with Q3 of 2019, driven by 12% volume growth, which was partially offset by lower year-over-year selling prices and lower third-party asphalt sales. In the third quarter, the U.S. asphalt shingle market grew significantly as compared to the prior year, primarily due to continued strength in repair and remodeling, as well as increased storm activity. EBIT for the quarter was $196 million, up $53 million from the prior year, producing 26% EBIT margins for the quarter. The EBIT improvement was driven by higher sales volumes, input cost deflation and favorable manufacturing performance, partially offset by lower selling prices. The current pricing environment has improved sequentially with the realization of our August increase, partially offsetting the year-over-year headwind from the lack of a spring price increase. In addition, the benefit of asphalt cost deflation and slightly lower delivery costs more than offset the negative impact of lower year-over-year selling prices. As a result, we maintained a favorable price cost relationship in the quarter, and cash contribution margins were solid as we exited the quarter. Turning to slide 11. I'll discuss significant financial highlights for the third quarter of 2020. We continue to manage our working capital balances, operating expenses and capital investments. As a result of disciplined actions taken and the recovery of U.S. residential markets, our third quarter free cash flow reached a record quarterly level and our year-to-date free cash flow of $514 million was $232 million higher than the same period last year. In the last earnings call, we highlighted the company's focus on strengthening liquidity, deleveraging the balance sheet and maintaining the dividend. Based on our strong cash flow performance and deleveraging activities, we're operating within our target debt to adjusted EBITDA range of two to three times with ample liquidity. I'd like to highlight our progress and evolution in this space. During the quarter, we repaid the remaining $190 million that was drawn on our revolver at the end of the first quarter. We also repaid the remaining $150 million balance of the term loan in advance of the February 2021 due date. We maintained our dividend in the third quarter, and have returned $159 million to shareholders so far this year through dividends and share repurchases. As of September 30, the company had liquidity of more than $1.7 billion consisting of $647 million of cash and cash equivalents and nearly $1.1 billion of combined availability on our revolver and receivable securitization facilities. We continue to focus on maintaining an investment grade balance sheet and are evaluating additional U.S. pension contributions in the range of $50 million to $100 million to further delever the balance sheet and improve our credit metrics. Now please turn to slide 12, as I return the call to Brian to discuss our outlook for the company. Brian?

Thank you, Ken. Through our teamwork and consistent execution, we are positioned well to capitalize on both the near-term market recovery, as well as longer term secular trends. However, we continue to face uncertainties with the pandemic and potential government responses and expect our financial performance to be impacted by market disruptions caused by COVID-19. Broadly speaking, we have experienced a much faster recovery in our residential end markets, while commercial and industrial end markets are following at a slower pace. Given this continued market performance, we would expect the company to deliver revenue and adjusted EBIT in the fourth quarter at or above last year, driven by our innovative product offering and broad market reach. Based on trends we are seeing in October, I'll provide some additional details by business, starting with Insulation. Within our North American residential business, we saw continued strengthening in U.S. new residential construction. While lagged housing starts in Q4 will be higher versus prior year, we expect our volumes will be relatively flat based on current supply constraints and limited inventories. In our technical and other building insulation businesses, October volumes are trending down mid single digits versus prior year. We expect year-over-year volumes will continue this trend through the fourth quarter based on a steady, but slower recovery in commercial and industrial end markets. Prices through the third quarter remained relatively stable in both our North American residential and our technical and other insulation businesses. However, we continue to face a negative year-over-year price carryover. While we are seeing positive traction from the mid-September residential insulation price increase, we don't expect to comp positively yet in the fourth quarter. As we move into 2021, we recently announced an 8% price increase for our U.S. residential insulation business effective January 11. Overall for our Insulation business in the fourth quarter, we expect results to be slightly better than our EBIT in Q3. In Roofing, third quarter industry shingle shipments were up about 25%, with our volumes tracking below the market due to supply constraints driven by low inventories entering the quarter. Our October shipments have started the quarter higher than prior year. Based on current trends, we could see year-over-year market volumes for the fourth quarter up a similar percentage to what we saw in the third quarter, depending on the timing of winter weather. Given our third quarter volumes, we would expect to outperform the market in Q4 to service out the door demand and improve distributor inventory positions of our products. In the fourth quarter, we should continue to see realization from our August price increase, offsetting the year-over-year headwind from the lack of a spring price increase. However, we expect to see some continued pricing headwinds in the quarter, driven by higher rebates versus 2019 due to this year's increased roofing demand. Deflation from expected seasonal declines of asphalt cost should result in another quarter of positive price/cost mix. Based on all these factors, Roofing EBIT margins in the fourth quarter should remain strong, but could be slightly lower than Q3 due to seasonally lower shipping volumes. In Composites, Q3 shipments improved throughout the quarter. Given this trend, we could see volumes in Q4 similar to the first quarter, with overall demand continuing to recover. While transactional pricing remains relatively stable, we continue to expect a similar pricing headwind in Q4 as we realized in Q3. As we work through our annual contract negotiations with customers, we have announced price increases in most of the regions we serve, which could impact 2021. We remain committed to tightly managing our inventory levels, which will continue to impact our manufacturing performance in the fourth quarter as we curtail production to meet demand. Similar to the last several years, we expect to see our overall fourth quarter revenue and EBIT performance similar to what we saw in the first quarter, with an additional $5 million headwind related to rebuild cost. With that view of our businesses, I'll discuss a few key enterprise focus areas. We continue to closely manage our operating expenses and capital investments. We expect corporate expenses for the company to be approximately $125 million, primarily due to additional incentive compensation tied to our earnings outlook, and we expect capital investments to be at the high end of the range we previously provided of $250 million to $300 million. In terms of our capital allocation, we remain committed to generating strong free cash flow into our target of returning at least 50% to investors over time. So far this year, we have returned $159 million through share repurchases and dividends and we'll pay our third quarter dividend of approximately $26 million next week. In our last call, we said we would focus on deleveraging the balance sheet and maintaining our dividend. We increased liquidity to over $1.7 billion, paid down the revolver and term loan, and paid our dividend in the quarter. Going forward, we will continue to manage our liquidity needs, remaining focused on supporting the dividend, while evaluating additional pension contributions and potential share repurchases. As I stated at the beginning of the call, our team continues to execute very well, adapting to changing market conditions, while remaining committed to operating safely, servicing our customers and creating value for our shareholders. With that, I'll turn the call back over to Amber and open it up for questions. Amber?

Thank you, Brian. We are now ready to begin the Q&A session.

Thank you. [Operator Instructions] Our first question today will come from Matthew Bouley of Barclays. Please go ahead.

Hey, good morning. Congrats on the results and thanks for taking the question. I wanted to ask about the restart of batts and rolls capacity at Kansas City that you mentioned, Brian. So, I guess, to what degree could that impact the price increase in January that you mentioned the 8% in fiberglass? Is the volume environment simply strong enough such that you can both raise prices and fill that line? Or should we suspect that you might have to be a little more careful with the price increase? Thank you.

Good morning, Matthew. Thanks for the question. Yeah. Let me talk about kind of the logic behind the restart, and then I can talk a little bit about the pricing environment. Since Q2, we've clearly seen a strengthening in the housing market. And as I said in my comments, the last three months housing starts trending at or above 1.4 million starts. So, when we talked about the decision last year to take the capacity down in Kansas City, we said that was really based on a view of through our product and process technology, productivity and investments we've made. We could service a market kind of in that 1.3 million start range. And we felt confident and comfortable in doing that. Certainly, when we look at -- just the secular trends around housing, the belief that housing has been under-built for so long and it's going to continue to improve the interest rate environment, the permits that we're seeing, we just feel that there's a strengthening that's going to be beyond that kind of $1.3 million mark. And at that point, we wanted to be able to bring on additional capacity to be able to service our customers. And that's really been our operational focus within our res insulation business. We want to operate a really flexible and efficient network that we can flex with some of the volume changes in the market, but we certainly want to be always in a position to service the demands of our customers. So, we feel good about that in terms of getting that started. Generally, that takes us kind of, as I've talked about in the past, kind of four to six months. We're going to be doing a little bit of retrofit work to get the line ready and then rehiring and training, but we feel comfortable and confident we can be back up by the second quarter next year, be in a position to continue to service the demand growth that we expect to see in the market. In terms of pricing, as we talked about, we announced September -- mid-September price increase. We're seeing good traction on that. And we've announced an 8% price increase in January. And historically, that's a timeframe for us to do that announcement that gives our customers and build our customers' time to work that into their plans. So, historically, that's been a timing that we'd like to use for announcements around our Insulation business. And frankly, I think these are two separate issues in terms of the capacity that we're adding on to service our customers is what we're seeing because of the strong demand for our products that we are seeing. And the pricing environment is one that we continue to talk about in terms of evolving our price points and our products are valuable. They're needed. They're in high demand. And so, we believe it's a good time to get some additional pricing in the market as we start 2021.

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

Yeah. Thanks a lot guys. I was curious about the -- just sticking on the fiberglass insulation side of the business for a little -- for a second here. The capacity you're bringing on back on in Kansas City, my guess is that's probably going to add about 2.5% of the industry capacity. There really isn't any additional capacity, much flex capacity, it sounds like in the rest of the industry by your competitors. So, you kind of have that all to yourselves. That's not going to be up and running, you said until 2Q. The capacity opened by two your competitors, isn't going to be online from we understand until the end of next year. And you said that you have capacity right now for about 1.3 million starts. Given the rate at which housing starts -- or the housing market in general is ramping and the potential that you might see housing starts up 10% to 15% or something like that next year. If you actually see a housing start number that trends to the higher end of that range, let's take about $1.5 million. What would be the company's -- what would be the likely outcome for your company? I'm not asking you to predict if starts will do that, but I'm saying that if they did, what do you think the impact would be on your segment and your strategy?

Yeah. Thanks, Stephen. Just to kind of come back on your calculations around Kansas City, yeah, we've said historically that when we bring the lines up, each line is kind of worth 2% to 3% of the industry capacity. So, you're right in line there. And Kansas City would kind of be at the upper end of that range. I think we've -- when we look at our network, there's two things that continue to give us confidence that we can continue to service a market if we do see that growth. Clearly, we have the opportunity to bring up some idle capacity, which we're demonstrating with the move with Kansas City, and that is going to increase our availability to service a market that we see in front of us over the next kind of year or so. I think if we continue to see housing starts trending up, we have some other idle capacity in the network that would be available for us to bring that -- bring it up. We can do that very cost effectively and how we think about capacity planning. And then we would continue to invest and have been investing in productivity initiatives within our insulation network. And again, we feel very good that we've got line of sight to additional productivity, process improvements that can continue to kind of create and increase the throughput through our existing footprint. So, I think the key for us would be more around the surge of that demand. I mean, certainly, we've seen such a quick recovery pace here this year. And this year, we got a little jammed up because of some of the downtime taken kind of in the end of the first quarter, beginning of the second quarter. So, when we think about our full capacity in the network going into 2021, we're going to be fully ramped up with full capacity. We're not going to have the downtime in manufacturing that we took this year. So that adds into capacity, the restart of Kansas City, the additional productivity and process improvement. So, I think Stephen, we feel good that we're going to have capacity that we can continue to serve. And if the market trends above the 1.4, we'd look at additional capacity adds to be able to service our customer demand.

Our next question is from Phil Ng of Jefferies. Please go ahead. Pardon me? There was a poor connection there. We'll move on to the next question and ask Ng to rejoin the queue. The next question that we will take is from Truman Patterson of Wells Fargo. Please go ahead.

Hey, Good morning, everyone. Thanks for taking my question. I'm having a little hard time hearing after that prior line. But I wanted to touch on Roofing. Army shipments were up, I think, about 25%. Your rolls volume was up 12%. Brian, you ended up mentioning that there was some limited inventory going into the quarter, which led to some market share shifts. And I believe you commented that you all should get back on track and start to outperform the market in 3Q. Could you just elaborate on that a little bit more and explain to us and investors, what gives you the confidence in your ability to go out and recapture that market share? Are you at full capacity now and kind of being able to build up some inventory balance, if you will?

Yeah. Thanks, Truman. Good morning. Yeah. For sure, I think, the third quarter roofing demand in the market just kind of shows the resiliency of this business. And it was an incredibly strong market in the quarter. Actually, it was one of the strongest quarters in the last decade in terms of manufacturing shipments. So, quite a remarkable turnaround where we were at trending kind of minus 9% year-on-year industry shipments in the first half of the year and then went to a positive 25%. So, sequentially, just an incredibly strong quarter. For us, we were ramping up all through Q2. So, we actually entered the quarter running full capacity in terms of our shingle manufacturing lines and produced tremendous volumes through the quarter. But given where the inventory positions we had finishing the quarter, and I think I've spoken about this, the normal seasonality to our business is that we're running our assets full out in kind of Q1, Q2 in an effort to kind of build some inventory that we maintain in our facilities, but also that we can ship to distributors for their inventory build positions. And then that really helps service the overall demand in the end of Q2 and Q3, which is generally one of the strongest quarters for roofing demand. This year, unfortunately, with the COVID impact in Q2, we entered in Q3, while we were running full out. We didn't have any inventory to kind of service the surge that we saw in orders. So, we fell behind, even though we worked very, very hard in terms of our ability to keep up our shipments. I do believe this is a timing issue for us. When I look at full year capacity that we have in our network, if we can run our assets in a normal way that we would typically do it on a full year basis, we are very confident we've got enough installed capacity to service a market running at this level, but it's just when you carve out that production time early in Q2, it's just impossible for us to make it up. So, when we look at our overall share position, we certainly -- we like the market in terms of shipments into distribution. Our contractor position, we feel very good about. We maintain a regular connection with a network of Owens Corning contractors. That they've built their business around our brand and our products and our commercial support, and we don't feel like we've lost share there on kind of that longer term remodeling and repair business. We probably gave up a little bit in the quarter around some of the storm demand, which needed to get repaired and replaced. But as we come into Q4 now, we're up and fully running. We think we're serving -- we're able to service the fourth quarter market. And typically, we see some winter seasonal declines in kind of November and December. So, we believe this quarter, Truman, we're going to be able to catch up in terms of keeping our assets running full, servicing a little less demand that allows us to service not only the out to door sales, but hopefully replenish some of the distributor inventory positions of our products that we know are pretty lean right now. So that's where we think we can get on top of this a little bit in Q4. And then we're going to continue to run very strong as we enter in 2021. So, again, we feel good that we've got enough installed capacity where we can run our assets that we can service the market as we turn the quarter into 2021 in service first half demand.

Our next question will come from Phil Ng of Jefferies. Please go ahead.

Hey, guys. Is my line okay now?

Yes. You are good, Phil. Thanks.

Okay. Sorry about that, Brian. Just piggybacking off of Steve's question earlier about the insulation market. I think in the past, you have talked about the industry and yourself having about enough capacity that meet 1.4 million starts. Certainly, there could be a case we get there. I believe there's limited supply in batts and roll capacity out there. So, is that an opportunity for you to take share in that environment? And coupled with the fact that, I think, historically, when you've gotten back to that 1.4 range, your margins have really popped in insulation into that mid-teen range. I just want to understand the path to getting there and how quickly you can get there potentially?

Thanks, Phil. And in terms of our support of market demand, yeah, we do believe -- and this is something we've been working on for a while just through our commercial actions that we're always out trying to earn our customers' business. We feel we've got the best product, a great brand, great commercial support. So, we think that combined with the capacity to service our customer demand gives us a great opportunity to continue to kind of earn share as we go forward. So, we're going to work hard to maintain that discipline and commercial focus, but certainly with additional capacity that we have available for us to bring into the market to service the demand, we feel we do have some opportunities to continue to gain some incremental share as the market continues to grow. So, I think that's going to be how we position the assets to run in terms of the market outlook. For us, in terms of our margin performance, yeah, the two big drivers for us are going to be enhanced volume leverage on our asset base. So, where we're able to run these assets full out and continue to provide great products to our customers. That gives us the best leverage in terms of margin enhancement as we go forward to really optimize the performance of the network. We've taken actions over the last couple of years to really optimize that cost structure. So, we think we can get some additional pop-off of additional volume leverage as we go forward. And then certainly, pricing is going to be the other big aspect to margin improvement. And so, we've announced -- and are implementing the September increase. We've announced the January increase. So, we think that combination of additional volume leverage on top of an improved kind of cost position and then some pricing opportunity gives us the opportunity to expand our margins as we go forward into 2021.

Our next question is from Anthony Pettinari of Citi. Please go ahead.

Good morning. In Insulation, I was wondering if you could quantify the sequential improvement that you saw in technical and other volumes. Maybe talk a little bit more about what you're seeing in those end markets. And if there's any view on sort of how long it takes before the sequential recovery translates into kind of year-over-year improvement?

Yeah. Thanks for the question. In terms of kind of how we've seen our techno inflation business kind of evolved through the quarter. We -- at the beginning of last quarter, we guided that we could see volumes tracking down kind of high single digits. If I kind of break that out between some of those products that get used in residential applications, commercial and then more industrial, I think, overall, we saw the volumes improved better. We kind of wound up, I think, more down mid single digits. So, we saw a continuing improvement through the quarter in all three of those areas. And really, we saw that both in the U.S. and in Europe in terms of our businesses. So, we kind of saw that sequential improvement ramp up through the third quarter. I think, overall, our commercial business fared a little better. We were probably down mid single digits on commercial. Industrial was kind of down double-digits. So, we do see the recovery in commercial kind of coming back, but overall, I'd say we saw a sequential improvement kind of moving from down high single to mid single. And our outlook as we kind of come into Q4 is we think that, that's going to kind of remain pretty stable in terms of the year-over-year market outlook. When we look across the end markets, we see commercial construction recovering and rebounding, we've seen most of all of our projects that we are involved in restarting and doing that work. But certainly there's a cautiousness for some of the new projects and that's going to be something we're going to have to wait and see how that evolves into 2021. But we think the volume rates we're running at now, we think should hold pretty consistent through Q4. And then hopefully we start to see some recovery in terms of 2021. And that's kind of how we're going to be playing that one out. We feel very good about the strength of our residential businesses. Commercial is improving, but we think it's going to continue to lag down probably that mid single digits and then industrial a little bit more choppy for us for some of the project work that we do. But we think that trend's down a little lower and we think those could continue into 2021 until we start to see some end market recovery.

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

Hey, guys. Thank you for taking my question. Maybe going back to the Kansas City restart, curious what the cost to restart that line is? And then, do you have the ability to sort of control line speeds or shifts to make sure you're feathering in that capacity in line with the overall demand?

Yeah. Thanks for the question. Yes to your second and I'll come back to that. So that does give us some great opportunity. In terms of the costs and restart, there's a little bit of capital cost, a few million dollars that we're going to be putting into to do some refractory upgrades and improvements there. And then, it's just going to be kind of rehiring and training costs as we over the next couple of months as we bring the workforce back on and make sure they're trained and ready to go. So, I would say incremental costs are going to be very modest falls on the CapEx side and also the operating costs until we get fully staffed. And then in terms of how we want to operate the asset? Yeah. We'll ramp up that production. So, that will be something that we absolutely feather in that capacity. Again, hopefully starting in Q2 and then ramping it up in Q3, Q4, and that tracks pretty well with the seasonality of the business where generally the first half is a little lighter than the second half. So, we want to be in a position to get the assets started, make sure we're running efficiently, increase that capacity as we enter into the back half of the year where we typically see seasonal demand pickup.

Our next question is from Susan Maklari of Goldman Sachs. Please go ahead.

Thank you. Good morning. Changing courses a bit, I want to talk about the Composites segment. Obviously, the margin there came back to that double-digit level much earlier than we had certainly been expected being there. Can you talk about the sustainability of that? And I know in your comments you talked about the guide, you said that you expected it to be closer to -- in line with the first quarter, which was around 9%, I think, and I know you have the $5 million of rebuild costs in there. But can you just talk a bit to what the different parts are in that? And how you think about getting sustainably back to that double-digit range?

Yeah. Morning. Thank you for the question. Our Composites business, again, I think, I talk about this a lot, but we had really strong performance in Q3. And I think it's driven partly by our execution and partly by some markets that are coming back. In terms of our strategy within the business, we've been very focused commercially to continue to grow our business inside kind of higher value downstream applications, like building and construction, like non-wovens, like wind, as well as some specific geographies. North America, Europe, India, where we have built out a great market position. We have installed capacity to service local demand and that model for us really has been proving out over the last several quarters in terms of our ability to generate very strong volumes, certainly relative to industrial production. And then give us the opportunity to get great volume leverage. I think that on the commercial focus is where we see that continuing and our focus continuing to show positive results. I think combined with that, we've been focused for many years on just the operational cost efficiencies in this business. We've done network optimizations in the past to make sure we have scalable assets. We continue to look at our cost efficiencies inside the business, and the team has really been generating tremendous productivity over the last year or so in terms of just a continual focus on how we can operate the network and operate our production lines more efficiently. So, we're getting good volume growth in terms of a clear commercial focus and then we're turning our volume growth and we're getting great margin leverage off of the -- an efficient network and a very robust focus on productivity and cost controls. So, those are kind of the two levers, I think is allowing us to generate these kind of results. So, in the quarter, we just saw kind of sequential volume improvements throughout the third quarter in almost all of our regions and end markets. So, we were able to get quite a bit of volume leverage in the quarter, which really helps in terms of bringing these margins up. And then, overall, I think we're very pleased that our transactional pricing has remained relatively stable. And I think that's an important piece where we saw such a sharp decline in demand in Q2 to be able to go through that and hold that sequential pricing was down for us in the quarter, very similar to Q2. That has allowed us to again see our margin snap back relatively quickly with just a little bit of volume leverage. So, I think going forward, we continue to see our end markets continuing to improve overall, not quite at the rate as some of our residential markets, but certainly we expect to see a continuous improvement. And again, we're going to continue to focus on how we can generate good volume leverage through that commercial focus and then with our cost and productivity initiatives we feel we can translate that into good margin. So, we hope we can get back into the double-digit range back into 2020, depending on what the market opportunity and market volumes look like for us.

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

Thanks. Good morning everyone, and congrats on the results. And welcome Ken and congrats Amber. Yeah. I wanted to focus in a little bit on Roofing. Obviously, a lot's been discussed around Insulationand the capacity there and obviously managing a good market -- improving market over the next year. But on the Roofing side, obviously, great results and incredibly strong margins in the third quarter. You talked about maybe 4Q margins being a little bit down sequentially, but it seems like still maintaining a healthy 20%-plus type of level. But I guess twofold question here. One, how much of the demand currently that you're seeing in 3Q on a market level and into 4Q, do you feel is being driven by inventory channel rebuild as well as maybe storm demand that -- and I'm curious if you think that storm demand is sustainable into the first half. And then secondly, from a margin perspective, certainly 2Q, 3Q are typically always the higher margin quarters. But how do you think about profitability and the ability to maintain at 20%-plus type of number going forward into the next year or two?

Okay. Thanks, Michael. Again, good morning to you as well. So, let's talk a little bit about the -- kind of how we're seeing volumes evolve in the marketplace. So, I would say Q3 by our view, the robustness of market was really driven by end market demand, contractor demand, homeowner demand, more than distributor replenishment. So, we talked at the end of last quarter's call that Q2 we saw increased storm activity, primarily hail driven events that were really ramping up storm demand. And then in Q3, we've seen several hurricanes and that's continued. So, we think we've seen a big step-up in kind of year-over-year storm demand that's kind of led to this and is leading to the robust market in Q4. But I'd say that's on top of a really robust remodeling and repair business. We've just seen that as people are investing in their homes and doing remodeling projects and renovation projects. And so, I think we saw in Q3, the strength of that remodeling and renovation as people are investing in their homes combined with a higher year-over-year storm activity and that combination is what drove really robust out the door sales. So, I think that distributor inventories may have improved a little bit overall. But generally speaking, our belief would be that distributor inventory levels are still running below historical levels for this time of year and it's more of an out the door strength. The positive of that is that we think when we roll through Q4, we're always concerned about winter weather and that's always the biggest variable to our shipping volumes in Q4 and the contractors' ability to do work. But if they can get to all that, we do think there is going to be some carryover, particularly on the storm demand into the first part of next year. So, I think that's a robust demand environment we see playing out certainly over the next few quarters. On the margin front, we've said all along that we think long-term 20% operating margins for this business is the right kind of center point through a cycle. Generally, when we go through more inflationary periods, we've seen that we trend a little below that and then in deflationary asphalt environments we trend above that. And I certainly believe that's what we're seeing playing out now. So, I think the overall strength of our business and the earnings power of the business is intact to be at that 20% level. And I think we'll bounce around plus/minus of those just depending on some of the inflationary environment and some of the depth of the market strength.

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

Hi. Thank you for taking my question today. And focusing on the Composites segment. And you've given some great color just in terms of seeing strong improved demand across a wide group of geographic areas and also end markets. But I wanted to see if you could give a little bit more of an update on certain end markets that had underperformed this year, particularly the auto end market and industrials. What are you seeing trend-wise for those segments or the segments that have underperformed? And also, you may have mentioned this -- and if I missed it -- but any color also in terms of rebuild cost as we look into 2021? Thank you.

Yeah. Thanks, Kathryn. Good morning. So, in terms of the end markets we all hit a couple of these. Auto is as you know, it's a big part of the overall glass market. Roughly 25% of the market tied up into autos and a little bit broader and transportation. Autos, we've seen improved through the quarter, but still trending down probably vehicle production and vehicle manned down kind of 19%, 20%. So, it has gotten better. A broad statement I'd say particularly in some of the automotive is that we've seen in Q3 some restocking of manufacturers that really took inventory levels down in Q2. So, I think part of the strength in Q3 was not only the end markets improving, but we did see some -- I think restocking of some of our customers through that and automotive, that'd be one of those as they're ramping up production. In terms of some of the other industrials, oil and gas still, it's a smaller part of the Composites market, but still down double-digits. It’s slowly gotten a little better, but really not a lot of improvement there. I'd say where we've seen some of the best improvement in our North American market and it continues to strengthen is around kind of the Marine, RV segments. I mean, that is -- end market is really popped, and we're seeing some demand and so those demand levels really increased for us in Q3, and we see that kind of continuing here as we sit at the end of October. So, I think that's broadly -- and then wind energy is the other one we've talked about. That's a big part of the overall market and it's a big part of our business, and that has bounced back and is running very, very strong. So, we're seeing that strength and expect that to continue here in Q4 as project work is getting done. And then in terms of the rebuild cost, yeah, in Q4 here, we're expecting we said about $5 million of year-over-year headwinds tied to some additional rebuild costs, primarily a facility in the U.S. that we were taking down for some production curtailment actions and it also coincided with some rebuild that we're going to be doing there to make sure that furnaces ready to come up and be ready to run full out here in 2021, and then a facility in China, that we'll be doing a small repair on as well. So, those are a couple of the facilities we are going to be taken advantages from downtime here to end the year, create a bit of a headwind year-on-year of about $5 million.

Alison, we have time for one more question.

All right. Thank you. And our next question is from Mike Dahl of RBC Capital Markets. Please go ahead.

Morning. Thanks for squeezing me in. I just wanted to go back to Insulation and it is two-part question. Brian, I think, I heard in your opening comments, or your ending comments that you expect North American resi flat volumes in 4Q, despite the industry being up on a lag starts basis and down mid single digits on tech and other. You just put up a zero on a flat volume in total in 3Q. So, that kind of implies a decelerating trend in 4Q despite acceleration in the end markets. So, A, did I hear that correctly? And can you help reconcile that? And B, if that's truly driven by your own supply constraints, should we expect that as we think about the first half of next year and continued acceleration in lag starts and recovery in some of the other markets that until you get your new capacity or you're deidled capacity back up that you'll continue to lag the industry for the first half of 2021. Thanks.

Yeah. Thanks Mike. Let me try to unpack that a little bit. On Q4 outlook, we'll start there. Yeah. When we take a look at the two businesses, last fourth quarter was a very strong residential shipping quarter for us and the industry. So, we're comping a bit off of a really strong fourth quarter. And at the time, as you kind of go back, we were seeing kind of a strengthening housing market ending last year. We announced the January increase and we kind of spilled that out over and saw some good strength starting the year and then COVID-19 occurred and everything kind of track down. So, on a year-over-year comp basis, we're comping against a pretty strong quarter last year. And while we've ramped up production last year, we service that growth primarily out of inventory as well as the capacity we had in hand. This year we're coming into the fourth quarter at extended service cycle, so we have very little inventory. So, while we've ramped up production and we're going to ship everything that we produce, it doesn't give a lot of room to service any kind of growth in our demand in the res side in Q4. So that combined with -- and you heard me right kind of a mid single digit decline on technical, is what's offsetting any kind of volume growth. So, in Q3, we had strong res volumes offsetting a little bit of technical decline in Q4. We're probably not going to see a lot of res growth and then we're still going to see a bit of that decline. So that's going to create a little bit of volume headwind in the quarter for us. But as we move into 2021, I'd say that seasonality starts to help us a little bit. Q4 seasonally is the strongest for res insulation. So, we're going to -- we expect to be shipping everything we can produce. Q1 generally lags down a little bit, so we're going to be ramping up and continuing to produce more on a year-over-year basis, because of the production that we brought up here at the -- in Q3. So, we're going to actually be producing more in Q1 than last year. And so, we don't believe that's going to be a headwind to us in terms of our share position as we come into 2021 to start the year and then certainly with the additional capacity we're bringing on in Kansas City in Q2, we feel we're going to have ample capacity to service market demand growth and retain our share positions. So, I think, we're moving through a little bit of a timing in Q4. Some of it's a little bit of a year-over-year comp, but we feel very good that overall we're going to be in a great position coming into 2021 to accelerate growth in the res business and have the capacity to service that.

Ladies and gentlemen, this will conclude our question-and-answer session. And at this time, I would like to turn the conference back over to Brian Chambers for any closing remarks.

Well, thank you very much. I want to just thank everyone for your time today and your questions. Just in closing, I'm incredibly proud of our team's execution and resiliency in this unprecedented environment, delivering great results while staying healthy and safe. I think we're well-positioned to finish this year strong and continue that momentum into 2021. So, we look forward to speaking to you to you all again during our fourth quarter call. And until then, I hope you and your families remain healthy and safe. Thank you.

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.