Hello, everyone, and welcome to the Owens Corning Second Quarter 2022 Earnings Call. My name is Daisy, and I'll be coordinating today's call. [Operator Instructions] I would now like to hand over to your host, Amber Wohlfarth, to begin. So Amber, 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 second quarter of 2022. Joining us today are Brian Chambers, Owens Corning's Chair and Chief Executive Officer; and Ken Parks, our Chief Financial Officer. Following our presentation this morning, we will open this one-hour call to your questions. In order to accommodate as many call participants as possible, please limit yourselves to one question only. Earlier this morning, we issued a news release and filed a 10-Q that detailed our financial results for the second quarter 2022. 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 this call. You can access the earnings press release, Form 10-Q and the 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 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 is 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 helpful to 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 4. And now opening remarks from our Chair and CEO, Brian Chambers. Brian?

Thanks, Amber. Good morning, everyone, and thank you for joining us for today's call. I hope all of you are continuing to stay healthy and safe. During our call this morning, I'll provide a high-level view of our performance and the progress our team is making on several strategic investments to expand our addressable markets, accelerate growth and strengthen the earnings power of our company, all supporting our ability to continue delivering strong results in diverse market conditions. Ken will then provide details on our second quarter financial results, and I'll come back to talk about our outlook for the third quarter and broader business trends. Now I'll turn to our second quarter results, where we delivered another outstanding quarter, in line with the expectations that we shared with you during our April call. As always, we'll begin with a review of our safety performance. As you know, safety is a top priority for our company. Year-to-date, approximately 2/3 of our global facilities remain injury-free and 1/2 of our sites have worked injury-free over the past 12 months. In the second quarter, our recordable incident rate was 0.81. This result was above our second quarter 2021 performance and reminds us of the daily focus we must have on safety in order to achieve an injury-free workplace. Financially, we delivered second quarter revenue of $2.6 billion, a 16% increase over the second quarter of 2021; adjusted EBIT of $525 million, up 29% year-over-year; and adjusted EBITDA of $656 million. This resulted in a record adjusted EBIT margin of 20% and an adjusted EBITDA margin of 25% for the quarter. In addition, we generated free cash flow of $361 million and returned $136 million of cash to investors through dividends and share repurchases. During the quarter, our global teams continue to execute…

Thanks, Brian, and good morning, everyone. As Brian commented, we delivered another record quarter with strong revenue and earnings growth across the enterprise. While demand conditions remain solid in the markets we serve, our ongoing execution was fundamental to driving this performance, allowing us to continue to manage through accelerating inflation and supply chain challenges. As we've talked about in prior calls, inflation continues to impact energy costs, nearly all material input costs as well as transportation. In each of the 3 businesses, positive price more than offset the inflation headwinds in the quarter. Overall, second quarter operating margins reached 20%, an expansion of 200 basis points versus the same period last year. Beginning on Slide 5, we can take a closer look at our results. We reported consolidated net sales of $2.6 billion for the second quarter, up 16% over 2021, with double-digit revenue growth in all 3 segments. Adjusted EBIT for the second quarter of 2022 was $525 million, up $117 million compared to the prior year. Adjusted earnings for the second quarter were $377 million or $3.83 per diluted share compared to $283 million or $2.68 per diluted share in the second quarter of 2021. Slide 6 shows the reconciliation between our second quarter 2022 adjusted and reported EBIT. For the quarter, adjusting items totaled approximately $36 million. We recognized $7 million of gains on the sale of precious metals. We also recognized a $29 million charge associated with the sale of the European portion of our DUCS product line. In addition, we recorded $11 million of restructuring charges associated with our already announced actions. Finally, we recorded $3 million of costs related to acquisitions announced in the quarter. All of these items are excluded from our second quarter adjusted EBIT. Turning to Slide 7. I'll discuss…

Thank you, Ken. Our global teams continue to drive our business forward, focused on servicing our customers, enhancing our market-leading positions and making strategic investments to expand our total addressable markets. As we move through the third quarter, we expect conditions in most of our applications in key geographies to remain positive even in the face of high inflation and rising interest rates. In U.S. residential and commercial markets as well as most of our global construction end markets, we anticipate continued good demand for our solutions. Based on current trends, we also anticipate inflation to continue to significantly impact our costs across all of our businesses. Even with this inflation, we expect to maintain positive price/cost in each of our businesses in Q3 as we realize the benefits from announced pricing actions. We will also continue to closely manage the ongoing impacts of supply chain disruptions and the regional impacts of COVID on our businesses. Overall for the company, we expect to have another quarter of net sales and adjusted EBIT growth versus prior year. Now consistent with prior calls, I'll provide a more detailed business-specific outlook for the third quarter, starting with Insulation. We expect revenue to grow mid- to high teens versus prior year, driven by a combination of continued price appreciation and modest volume growth, partially offset by the continued impact of currency headwinds, which should be similar to Q2. In our North American residential fiberglass business, we anticipate our volumes to be up slightly versus prior year, supported by the start-up of our Eloy facility and ongoing productivity efforts. We expect price realization as a percent of sales to be similar to what we experienced in the second quarter. In our technical and global insulation businesses, we expect volumes to remain relatively flat versus prior…

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

[Operator Instructions] Our first question is from Stephen Kim from Evercore.

Really great results. Thanks for all the information. I've got a bunch of questions, but I'll stick to one. On the Roofing business, where you've continued to just form historical levels. But there was one other time that your [margins] got roughly this [high,] and it was kind of in the late '09 period. And when that happened, your margins quickly collapsed in the following years. And it was caused [advent] of winter discounting, which I assume isn't going to happen again, as well as the economy and the housing market were still recovering from the GFC. So today, when you look at your margins in Roofing and you think about the dynamics that would affect that over the course of the next few years, knowing that there's uncertainty out there but also recognizing that the drop, it seems like it's fundamentally better, I'm wondering if you could talk about why this time, we might see perhaps a more gradual descent back to a normalized level as opposed to something abrupt. And if you could also talk about how storm activity is faring so far this year.

Great. Thanks, Stephen. You were cutting out a little bit, but I think it was all around kind of Roofing margins and how that progresses and storm activity. So let me talk about Roofing margins. You're right in terms of the recollections and how that played out. I think there's a couple of things that are different: one, I think, inside the market; and then one inside of our operations relative to that time period. Inside the market, I think what we're seeing is a step-up in roofing demand, and we've seen that now over the last couple of years. So those margins that collapsed kind of coming out of '09, they were coming into a really -- a secular shift where we saw technology, more laminate installations that were extending the life cycle of roofs. So in that period, we were seeing kind of low market demand relative to that shift to a new and higher replacement cycle. We're on the other side of that shift. So we've seen a pretty steady now replacement cycle. So I think that bodes well in terms of higher roofing demand as we go forward. We also are really coming into a period where we see a pretty good repair and replacement market emerging because when you go back on a 20-year cycle, you look at all of the homes built in the early 2000s that are coming up on that. We think over the next several years, that's going to drive some good replacement opportunities in the market. So I think from a market dynamic, we see good, strong demand trends continuing over the next few years. And then we -- historically, we've seen good ability to kind of maintain price relative to asphalt costs. So even though we've stepped up with…

And let me just add just one thing because I agree with everything that Brian said, obviously, but the other thing to think about in -- I like your question around kind of the gradual descent, right, if that were to happen, is -- and I know that you watch this and the rest of the industry coverage watches it. But housing starts, while we may have a varying view of what those may look like over the next few quarters, we've also been all watching very closely how completions have been tracking. And while new housing isn't the largest piece of the market, it is certainly a piece of the market that drives kind of what's going to happen and how we might see that change as the new housing starts move. We saw one month where housing completions, especially for single-family homes, did kind of almost meet what the new housing starts were. But we still think that this kind of gap between new housing starts and housing completions can provide a little bit of -- to use my term, is a little bit of a soft landing as we move through the next few months, if the market does change.

Our next question is from Matthew Bouley from Barclays.

I have sort of an all-around question on Composites. Looking through the 10-Q, it looked like the natural gas hedges were maybe a $30 million benefit there in the quarter. I guess the overall question is if you could sort of speak to the demand environment, particularly in Europe. And then given what's going on with energy inflation here, sort of what are your thoughts on maintaining the pricing that you'll need to sort of offset what we would think might be a continued, I guess, step-up in energy costs here?

Yes. Great question. Thanks, Matt. The natural gas hedges were certainly a benefit. And I think the actual number is -- the $30 million that you see in the Q is probably a little bit closer to the first half number, but we did see somewhere between $16 million and $20 million in the second quarter itself. But they were certainly a benefit, and we do continue to apply that hedge strategy that I've talked about the last couple of quarters very consistently across our natural gas needs as we look at both the Insulation and Composites business. The demand environment in Europe is continuing to be strong for the Composites business. We called out in the comments that where we did see a little bit of movement was in our China business and our China demand where we saw the impact of some COVID restrictions, which we think is driving a little bit of competitive activity that may be a little bit of a blip while the COVID restrictions are in place. And as they start to be lifted, we think it returns more to a normal scenario because what we're seeing not only in Europe but across the rest of the world for Composites is a continuing desire for our solutions that we're providing and especially as we talk about our local production for local demand. Transportation, whether it's on the water or on the ground, continues to be a pretty significant cost and has inflation to it. So we think the solutions that we're providing and especially as we add new pieces to our portfolio like WearDeck, like our fiberglass rebar, we think that those solutions look a little sticky in the sense that customers see the value and they like to stick with them. But right now, what we're seeing is that Europe remains strong. We do think that energy inflation will continue with -- especially in Europe. And we think that the pricing actions that are both spot pricing as well as what we negotiated coming into 2022 as we did the contract negotiations for the year are sufficient to keep us in a positive pricing to cost ratio. We did call out last quarter that while we contracted pricing anticipating where inflation would be, we're getting the pricing, but we are also seeing inflation continue to step up, not just energy but in some other components. So that spread might narrow a little bit, but we do continue to see a positive pricing/cost spread in the business.

Our next question is from Phil Ng from Jefferies.

Congrats on a really strong performance and really good execution. I think you guys kind of alluded to it, next few months, it's going to be a lookout in terms of how the U.S. market, housing market shapes up with affordability and a more choppy macro backdrop. So I'm just curious, how much visibility do you have? Have you seen any noticeable change in order patterns? And if things do slow down a bit, what's the game plan in managing your business perhaps a little differently going forward?

Thanks for the question and the comments. Yes, as you said, our -- we see these clouds kind of on the horizon, but I'd say to you, demand for our products remains strong. Our volumes, particularly in our res insulation business, was up a little bit here in Q2. We guided to some modest volume growth here in Q3. So we continue to see good demand for our products in the near term. But having said that, as you said, we do believe the housing market is going to have to reset to this higher interest rate environment. We're seeing that occur in front of us. But we continue to see, I think, good tailwinds that are supporting -- that drive our business here in the near term. Certainly, as Ken just alluded to, when you look at the delta between starts and completions, that's been a pretty big delta in the last several quarters. So we think there's quite a bit of backlog to work through over the next several months. While the market resets, that's going to continue to drive demand for our products. And then as we get into '23 and, I think, a little longer term, we still see very good tailwinds just driven by strong demographics that are going to drive the need for more housing. And as we've talked about the last several quarters on this call, the housing in the U.S. has been underbuilt for so many years that I think that there's going to be continued strong demand and requirements for new construction as we go forward. So even as we reset and consumers reset to higher interest rates, now they're in that 6% range. Historically, that's still not out of bounds. But it does create a big shift in a reset…

Our next question is from Kathryn Thompson from Thompson Research Group.

I wanted to focus on the Composites segment in particular. First, just a greater clarification whether mix or pricing was a greater driver for performance in the quarter and get a little bit more color on what that mix is and what it means going forward. And you had some comments on China with lower volumes, which is understandable, and your guidance is helpful just in terms of outlook in that market. But a greater clarification on the differentiation for volume and outlook for both your U.S. business and your European business, understanding that those are very different end markets.

Yes. Thanks, Kathryn. In the quarter, pricing was definitely a larger impact than mix. We have seen over the last 4 quarters and talked about it in most of the calls, that mix wasn't accelerating improvement as we are moving through this period of kind of adjusting the approach and the products to be further down the value stream and providing solutions to our customers. And we saw a nice step up in that. And we anticipated that we would start to see that be a little bit less of an impact quarter-over-quarter, but still holding the positive mix impact that we had seen. And to a favorable extent, it did actually provide some incremental positive improvement in the quarter, but price was a bigger impact. And that difference between price and costs certainly was favorable, and that's driven by the fact that demand is strong relatively across the globe, and we'll take those parts apart a little bit in the next -- in my next comments. But because of that, we're able to kind of see not only good contractual pricing realization as we moved into -- that we negotiated as we move into the year, but also good spot pricing. So the combination of those 2 provide a good benefit in the quarter. Now as far as kind of outlooks for volumes across the U.S. and Europe, I would say U.S. remains very, very strong. Our demand for products look very, very strong, heavily in the building and construction space. In Europe, it is a different mix of business. But I would tell you is that even through the second quarter, demand for European products, our composites products remain very strong as well. The question you had about China, yes, we are seeing a little bit lower volumes of our total Composites business. China accounts for probably $200 million, $250 million a year of revenue. And we saw that step down just a little bit. We attribute that very specifically to the China COVID restrictions and how that's kind of impacted the on-the-ground work within China. But we do also see India remain very strong as a composites market. So we feel good about what's going on in the business. We think that we are seeing good demand for our products because of this continuing focus on moving further down the value chain with higher-value solutions, and we expect that to continue at least through the third quarter. So we'll continue to update it as we see things change. But right now, the order books look solid within all those locations.

Our next question is from John Lovallo from UBS.

It's on the supply chain, you mentioned continued challenges there. We've heard from others that there might be some stabilization or at least signs of stabilization. Are you seeing anything that gives you any encouragement on that front?

Yes. Thanks, John. I think overall, we continue to be impacted by disruptions and -- but I'd say they're getting a little better in many parts of our supply chain. So I'd say, again, as the progression from where we were to start the year to where we are today, yes, I think we're starting to see some improvements in many of the inputs that we have to make our products. But I would tell you that it continues to impact our operations we -- in terms of just having to overcome the minor disruption. So I'd say the other piece of it, I'd say they're getting a little better, and they're getting shorter in duration, but still having -- and having to overcome issues. And I guess I'd say I think our manufacturing, our operation teams, our supply chain teams have just done tremendous work over the last year and continue to do tremendous work to make that seamless in terms of minimizing the impact of the disruptions on our operations, minimizing the impact on our shipments to our customers because we still, as we've talked about, have very high demand for our products. Most of our product areas are still on extended kind of lead times. So the work by the teams to overcome that has been tremendous. But it is something that still is in front of us that we have to manage through here in the quarter and, we think, we're going to have to manage through here in the near term.

Our next question is from Anthony Pettinari from Citi.

This is Asher Sohnen on for Anthony. Can you just talk a little bit more about the strategic rationale behind the Natural Polymers spray foam acquisition? And what kind of synergies are there to unlock with your existing fiberglass insulation business? How do margins on the acquired spray foam business compare to maybe fiberglass insulation?

Great. Thanks for the question. Natural Polymers, we think, is going to be a really great addition to our Insulation business, to our company for a number of reasons. First, it really aligns with our enterprise strategy. So when we talk about our strategy focused on enhancing our core performance in businesses and then expanding into new product and solution applications in building and construction. This fits really well inside our enterprise strategy. It puts us in a new product category, great growth potential, good margin at a much lower capital intensity than some of our other parts of the Insulation business and company. So I think it really supports well our enterprise focus on growth, stable and higher margins and lower capital efficiency. I think it strengthens our Insulation business product offering. This is a product category that we've been evaluating for a long time. Our customers have wanted us to get into this. And so we think we really -- does now complement and broaden our product offering to our customers so they can fit whatever insulation solution they need to fit their customers' needs, and that sets us up well there. And the distribution of this, the sale of this really goes through similar customers, similar channels to how we're operating today. So we believe there's great synergy as we can take this product category now and scale it up. Third, I'd say what attracted us to this was really Natural Polymers, the company, the business. They have a very unique product formulation with very low VOCs. They have application and performance benefits from their formulations that are unique that we think give us a great opportunity to grow and scale up. And I think for us, as I talked about, this has been a product category we've been evaluating in a long time. We did look very diligently at health and safety issues and concerns around this, but there's just been tremendous advancements in product formulations and application standards and insulation guidelines that, we felt, address the health and safety concerns we've had about this product category. So we're very excited to add it to the product line and portfolio, and we think this is a unique product offering and gives us an opportunity to continue to grow the Insulation business and expand our margins with it.

Our next question is from Susan Maklari from Goldman Sachs.

As we think about the near-term uncertainty around housing, can you just talk a bit about capital allocation and how you're thinking about further M&A deals that may come up relative to perhaps shareholder returns, buybacks, things of those nature?

Yes. Thanks, Sue. I think when we -- we've been very, I think, diligent and purposeful in our capital allocation strategy, and we've talked about this. And I think in broad terms, we don't see any changes in our current capital allocation strategy. We're very focused on great free cash flow, generating that. We're focused on an investment-grade balance sheet. We continue to focus on returning about 50% of free cash flow to shareholders over time through dividends and share repurchases. But then we also want to continue to invest in the business through organic growth, through our capital allocation, through CapEx investments that we are going to continue to make and then through acquisitions. But I'd say when we step back and we look at the enterprise strategy that we outlined last November, we said we were going to focus on organic growth through innovation, and that would include investments in organic growth and capital to do that. And we were going to be investing in acquisitions. So I think we want to be very thoughtful and purposeful to make sure that acquisitions that we look at -- are looking at bring uniqueness in terms of product technology or market expansion. We want to be very diligent in terms of the multiples and the price points we pay. And we think we're doing that with these acquisitions. So we're going to continue to evaluate a pipeline. But I would share with you, we're going to be very thoughtful around when we make those decisions, the pricing that we do that to make sure that we are making very good investments. The last thing I'd probably say is one of the things we've been very focused on is building a very strong balance sheet, and we have an incredibly strong balance sheet. And that great companies use the balance sheet to invest in times -- good times and bad because we want to make sure we are strengthening the long-term performance of the company, and so we're going to want to look at that. So while we will make near-term adjustments to that depending on the market, longer term, we feel like we want to be in a position to continue to invest in the growth of the company, and we're going to want to do that.

Our next question is from Michael Rehaut from JPMorgan.

I just wanted to circle back and make clear on maybe a few comments around the topic of inventory and demand patterns. And obviously, you gave the guidance by segment in terms of what you expect for volumes in the third quarter. But I was curious around if you could kind of review where inventory levels are across your 3 different businesses, particularly in the U.S. and as it relates to composites, also Europe. And to the extent that customers do begin to maybe take a little bit more of a cautious approach, reflecting some of the end markets, if there is any type of inventory risk in addition to softer order patterns that might impact the business at least on a temporary basis.

Maybe -- thanks, Mike, and maybe I'll start, and I'm sure Brian may want to jump in a little bit. What I would tell you at the highest level, and you heard in the comments around really good cash generation again in the second quarter, but also on top of the fact that we were building a little bit of inventory. And between the first quarter and second quarter end, we probably added about $100 million of inventory to our own inventory levels. And we believe that the distribution channel in pockets has added a little bit itself. But across the board, what I would tell you is over the last couple of years, we've collectively -- ourselves and the distribution channel have been working with a very thin on-hand inventory level, and we've started to rebuild that. And I think this is true across all 3 businesses. But we are nowhere in a place where we have built up inventory levels that if demand patterns start to change a little bit, which we're actually not expecting much movement in demand in the third quarter. We're not sitting on inventory that has kind of peaked where we would be concerned about it. In fact, as we move through the balance of the year, we would really be focused on all 3 businesses on continuing to deliver to our customer base against these relatively strong and stable demand patterns and having the opportunity to strengthen our inventory levels a bit more from where they are. So no concern with too much inventory level on hand and still more opportunity to get closer to historical norms.

Yes. I would just add, I think that's the same in Roofing, Insulation and Composites. I do think, generally, we're seeing inventory levels get replenished in our customers and points of distribution. So we do see that across the board, but we're not seeing anywhere where there's an overbuild of inventory at our customer level. Now having said that, I think every customer is becoming more concerned with the market environment and the macro environment and demand patterns moving forward. So I think there is more thoughtfulness in what they're buying and how they're buying. But we've not seen any buildup in inventory that would cause a correction at the customer level. And then as Ken said, we've been running with very lean inventories. So if and when we do see demand start to slow, we think we're going to be needing to run our operations in the near term just to refill to get our inventory levels up to be able to get back to normalized service levels. So that would take a few more months to work through.

We will take our final question from Keith Hughes from Truist.

I'll just ask a quick one here with -- as you look into the third quarter and the guidance given, do you expect the raw material dollars that you discussed in the Q, would they be relatively flat in terms of the dollars in the third quarter? Or is there going to be some latent flow-through into the period as you lag some of the commodity indexes?

Keith, clarify a little bit -- if you don't mind, clarify a little bit with what you're asking about raw materials flow-through. If you don't mind, rephrase that a little.

Yes. So in the Q, you discussed the number of dollars that raw materials increased, $92 million, for example, in Roofing. Is that number going to get larger as you flow through some more of the inflation? Or do you -- from what you know today, are you hitting a peak?

No, I think in Roofing specific, Keith, on asphalt, we continue to see asphalt costs escalate, absolute costs. So we saw that through the first quarter. We saw that month-over-month in the second quarter, and we expect to see those costs continue to increase month-over-month in the third quarter. So we are seeing those asphalt costs coming through. And in most of our inflationary numbers that we're looking at, we are seeing absolute dollar increases coming through and impacting the P&L. So again, we think we're in a good position with the price increases that we've got in place to stay and keep a positive price/cost, but we continue to see inflation cost escalating and particularly in roofing and in asphalt and in many other materials for our other businesses.

Yes. And yes, that's right. And thank you for the clarification. So as Brian said, seeing it all, asphalt, specifically in roofing, but we're also seeing chemicals continue to inflate. Obviously, energy, which is going into the production process, continue to inflate. So we're anticipating the environment that we've been living in for the last few quarters to continue into Q3.

Thank you. We have no further questions. So I'll hand back over for the closing remarks to Brian.

Thank you, and thanks, everyone, for your time today and your questions. We appreciate your interest in Owens Corning, and look forward to speaking with you again during our third quarter call. And until then, I hope you and your families have a great, safe rest of the summer. Thanks.

Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.