Owens Corning

Good morning and welcome to the Owens Corning first quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Amber Woolforth, 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 first quarter 2021. 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 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 first quarter 2021. 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 homepage. A transcript and recording of this call and the supporting slides will be available on our website for future reference. Please reference Slide 2 before we begin, where we offer a couple of reminders. First, today's remarks will include forward-looking statements based on our current forecasts and estimates of future events. These statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially. We undertake no obligation to update these statements beyond what is required under applicable securities laws. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent risks and uncertainties affecting such forward-looking statements. Second, the presentation slides in today's remarks contain non-GAAP financial measures. Explanations and reconciliations of non-GAAP to GAAP measures may be found in the text and financial tables of our earnings press release 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've excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT and adjusted earnings. We adjust our effective tax rate to remove the effect of quarter-to-quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share. We also use free cash flow and free cash flow conversion of adjusted earnings as measures helpful to investors to evaluate the company's ability to generate cash and utilize that cash to pursue opportunities that enhance shareholder value. The tables in today's news release in the Form 10-Q include more detailed financial information. For those of you following along with our slide presentation, we will 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. I hope all of you on the call are staying healthy and safe. During this call one year ago, as we were all contending with the unprecedented challenges from the onset of a global pandemic, I noted that extraordinary times create the opportunity for extraordinary actions. Over the past year, I'm pleased to say that our team has consistently risen to the challenges that fundamentally impacted not only our businesses and markets, but the ways we work and live. While many of those challenges continue to affect our daily lives, they are no longer unprecedented. We've learned to be more agile, to adapt and respond to changing market conditions, demonstrating that strong execution and an uncompromising commitment to our people and our customers can drive exceptional performance, even against this backdrop. We certainly demonstrated this in the first quarter, delivering great operational and financial results by leveraging our market-leading positions, unique product and process technologies, and enterprise operating model, to capitalize on strong or improving market conditions. During our call this morning, I'll start with an overview of Owens Corning's first quarter results before turning it over to Ken, who will provide additional details on our financial performance. I will then come back to talk about our business outlook for the second quarter and share our perspective on key markets. As always, I will begin my review with safety, where our collective focus remains working together to keep each other, our customers, and our suppliers healthy and safe. During the first quarter, we maintained a very safe environment with an RIR of 0.64, which is in line with our full year 2020 performance. More than half of our facilities across the globe have remained injury-free for more than a year. Financially, we delivered record first quarter revenue of $1.9 billion, an increase of 20% compared with the first quarter of 2020, up 18% on a constant currency basis. an adjusted EBIT of $282 million, which is more than double what we reported for the same period last year and a record for any first quarter historically. Our global teams continue to execute well, delivering outstanding financial results in a dynamic market environment, demonstrating the earnings power of our company. Our performance during the quarter was driven by good volumes, broad price realization, and strong manufacturing efficiencies across all our businesses, resulting in an adjusted EBIT margin for the company of 15%, with all three of our businesses posting double-digit EBIT margins for the third consecutive quarter. During the quarter, we saw broad strength across many of our end markets. Specifically, the U.S. residential housing market continues to run at a robust pace, with both repair and remodeling activity and new construction growth driving strong demand for our products. In addition, we continue to see many of our global markets, as well as our commercial and industrial end markets, improve throughout the quarter. While market conditions have certainly turned more favorable, our operating priorities, investments, and execution have positioned us to deliver these strong financial results. Across the enterprise, we continue to invest in select growth and productivity initiatives to service our customers and improve our operating performance. Within installation, we are investing in automation and process technologies to create a lower cost, more flexible manufacturing network in our residential insulation business as we commercially position ourselves to benefit from a strong housing market. In addition, we continue to invest in new insulation materials and systems in non-residential applications to expand our global product offering. In our composites business, we are investing to grow in higher value downstream applications, such as building and construction, wind energy, and infrastructure. And we remain focused on optimizing our low-cost manufacturing network to serve as key markets such as North America, Europe, and India. And in roofing, we continue to leverage our vertical integration model to develop innovative products and systems while expanding our roofing components offering and strengthening our partnerships with contractors and distributors to help grow their businesses with our products and brand. All of this work is enabled by our enterprise operating model, which leverages our commercial strength, material science capabilities, and global operating scale to expand our growth opportunities, improve our operating efficiencies, and generate strong free cash flow. Before I turn it over to Ken to walk through our financial performance in more detail, I'd like to share a few additional enterprise updates. On the talent front, we recently announced the appointment of two great executives. First, I'd like to congratulate Dr. Jose Mendez Endino on his recent promotion to Chief Research and Development Officer. Material science research and product and process innovation are fundamental to what we do and how we deliver value as a company. Jose will play a key role in leading our efforts to increase our innovation pipeline and ensure we are helping our customers win and grow in the market. Additionally, I'm excited to welcome Gina Barreto to our company as our next General Counsel and Corporate Secretary, effective June 9th. She joins us from Nordstrom Corporation, where she served for eight years, most recently as their General Counsel. Gina brings more than two decades of experience working across multiple industries and will be a valuable partner to both me and our entire executive team. Another highlight I would like to share is the recent publication of our 15th Annual Sustainability Report, titled Beyond Today, Shaping Tomorrow. We began our sustainability journey nearly two decades ago, and over the years, our goals have evolved and expanded well beyond environmental sustainability. Today, they are built on three key pillars, expanding the positive impact of our products, reducing our environmental footprint, and increasing our social impact. We are proud of our progress and our accomplishments over the past decade across all of our 2020 sustainability goals, particularly our progress on climate action, where we have reduced absolute greenhouse gas emissions from our operations by 60% since our peak year, despite adding several material acquisitions along the way. In our recently published 2030 goals, we are committed to further reduce these emissions by another 50%. This will result in 2030 absolute greenhouse gas emissions being 75% below our peak. At the same time, We are also committed to a 30% reduction in our Scope 3 emissions as we focus on making a positive impact throughout our supply chain. Sustainability is core to our purpose and will continue to be an important driver and differentiator for our company moving forward. With that, I will now turn it over to Ken to discuss our financial results in more detail.

Ken? Thanks, Brian, and good morning. As Brian commented, Owens Corning delivered outstanding financial results in the first quarter. Strong top line growth, 400 basis points of gross margin expansion, and continued operating expense discipline drove record first quarter adjusted EBIT along with an adjusted EBIT margin of 15%. The stronger earnings combined with a continued focus on working capital management and capital investments resulted in healthy free cash flow generation in the quarter. While benefiting from market conditions that are broadly stronger than they were a year ago, continued solid execution across the business was fundamental to driving this performance. As anticipated, we're managing a more inflationary environment, primarily related to materials and transportation. Positive price realization and manufacturing productivity more than offset the inflation headwind in the quarter. Maintaining this positive balance remains a focus as we move through this inflationary environment. Now, turning to slide five, we can take a closer look at our results. For the first quarter, we reported consolidated net sales of $1.9 billion, up 20% over 2020, with double-digit revenue growth in all three segments reflecting the robust U.S. residential housing market and the continued strengthening of commercial and industrial markets. Adjusted EBIT for the first quarter of 2021 reached $282 million, up $166 million compared to the prior year, and was highlighted by all three segments continuing to deliver double-digit EBIT margins. Adjusted earnings for the first quarter were $183 million, or $1.73 per diluted share, compared to $67 million, or 62 cents, per diluted share in Q1 2020. Depreciation and amortization expense for the quarter was $119 million, up slightly compared to the prior year. Our capital additions for the first quarter were $60 million, up $6 million as compared to Q1 2020. We'll continue to be disciplined in our capital spending as we focus on delivering strong free cash flow and prioritizing investments that drive growth and productivity. Slide 6 reconciles our first quarter adjusted EBIT of $282 million to our reported EBIT of $301 million. During the quarter, we recognized $20 million of gains on the sale of certain precious metals. Ongoing progress on our productivity initiatives and manufacturing process technology has enabled us to further modify the designs of our production tooling and reduce certain precious metal holdings. In addition, we recorded $1 million of restructuring costs associated with the insulation network optimization actions that we initiated in the fourth quarter of 2020. These items are excluded from our adjusted first quarter EBIT. Slide 7 provides a high-level overview of our first quarter adjusted EBIT, comparing 2021 to 2020. Adjusted EBIT of $282 million was a new first quarter record for the company and increased $166 million over the prior year. Roofing and insulation more than doubled their EBIT and composites grew by 80%. Before turning to the review of each of our businesses, I want to speak to the one-time financial impacts we had from the winter storms in February. Each of our businesses faced operational disruptions related to the storms. However, these were offset in each of the businesses by gains on renewable energy settlements. As we discussed at the time of our year-end call, these impacts were contemplated in our first quarter guidance. Now, turning to slide eight, I'll provide more details on the performance of each of the businesses. The insulation business executed well to deliver strong growth on both the top and bottom lines. Sales for the quarter were $700 million, a 16% increase over first quarter 2020. We saw volume strength across the business as U.S. new construction continued to be robust and many of the commercial end markets we serve globally continued to strengthen. In North American residential fiberglass insulation, we continue to ship all we can produce as the U.S. new residential market remains very healthy. We saw volumes up in line with the expectations we had at the time of our last call and continue to see positive pricing as a result of the actions that we've taken over the past three quarters. I'm happy to share that we started up our bats and rolls lines in Kansas City in February and continue to ramp up production as we move through the quarter. In technical and other insulation, we saw volume up across the business with our highly specified products continuing to see growth in demand in North America and Europe. Pricing continues to be stable, and we saw a benefit from currency translation in the quarter. For the insulation business overall, good execution in our manufacturing operations partially offset continued transportation headwinds and accelerating material inflation. We delivered margins of 12% and EBIT of $82 million, more than double the $39 million of EBIT in the first quarter of last year. Now, please turn to slide nine for a review of our composites business. The composites business had a strong start to the year. Sales for the first quarter were $559 million, up 13% compared to the prior year. Stronger than expected volume growth in the quarter resulted from demand for downstream applications serving the building and construction and wind markets, as well as demand in key geographies where our local supply for local demand model is being valued by customers and drove higher volumes compared to the prior year. We also saw positive price realization in composites, resulting from our most recent contract negotiations and the strength of the markets. Operationally, solid manufacturing performance offset headwinds from material and transportation inflation. For the quarter, composites delivered $79 million of EBIT and EBIT margin of 14%. Slide 10 provides an overview of our roofing business. The roofing business produced its strongest first quarter top and bottom line performance as we continued to operate in a sold-out environment. Sales in the first quarter were $711 million, up 28% compared to the prior year. The U.S. asphalt shingle market grew 26% for the quarter as compared to the prior year with our U.S. shingle volumes slightly outperforming the market. We're seeing strong realization on our announced price increases and price costs remain positive as asphalt depletion continued to narrow through the quarter and we started to face into transportation inflation. Similar to the other two businesses, strong manufacturing performance was a fundamental element of the roofing business results. For the quarter, EBIT was $156 million, up $92 million from the prior year, achieving 22% EBIT margins. Turning to slide 11, I'll discuss significant financial highlights for the first quarter and full year 2021. Continued discipline around management of working capital, operating expenses, and capital investments resulted in strong cash flow. In addition, we didn't experience the seasonal working capital build that we typically see in the first quarter of the year due to robust demand across our businesses. Free cash flow for the first quarter of 2021 at $120 million, up $264 million compared to the first quarter of 2020, was a record for a first quarter. During the first quarter of 2021, we repurchased 1.6 million shares of our common stock and returned $197 million of cash to shareholders through stock repurchases and dividends. With this strong cash performance and last year's deleveraging activities, we maintain a solid investment-grade balance sheet and are operating within our target debt-to-adjusted EBITDA range with ample liquidity. At quarter end, the company had liquidity of approximately $1.7 billion, consisting of $605 million of cash and nearly $1.1 billion of combined availability on our bank debt facilities. We remain focused on consistently generating strong free cash flow, returning at least 50% to investors over time, and maintaining an investment-grade balance sheet. Now, turning to 2021 outlook for key financial items, I'll point out that there are no changes from our initial outlook provided in February. General corporate expenses are expected to range between $135 and $145 million. Capital additions are expected to be approximately $460 million, which is below expected depreciation and amortization of approximately $480 million. We continue to focus on opportunities to support our businesses at a sustained lower level of capital intensity over time. Interest expense is estimated to be between $120 and $130 million. And we expect our 2021 effective tax rate to be 26% to 28% of adjusted pre-tax earnings and our cash tax rate to be 18% to 20% of adjusted pre-tax earnings. We're closely monitoring potential changes to the U.S. tax landscape and will be proactive to mitigate the long-term effect on our cash tax rate. Now, please turn to slide 12, and I'll return the call to Brian to further discuss the outlook for our company.

Brian. Thank you, Ken. Our first quarter performance provided a strong start to the year. As we look forward, we expect the U.S. residential repair and remodeling and new construction end markets to remain robust with our commercial and industrial markets continuing to strengthen. While the COVID-19 pandemic continues to create market uncertainty, our teams are performing at a high level, producing results that demonstrate the earnings power of our company and and position us well to continue building on this outstanding performance. Given the strength of our key markets and our continued operational performance, we expect the company to generate another quarter of significant revenue and earnings growth in the second quarter versus prior year. Consistent with prior practice, I'll focus my business outlook comments on our expectations for Q2. In each business, we expect prior year comparisons to be impacted by pandemic-related market responses, which affected our production and volume shipments last year. Starting with insulation, we continue to see strength in new U.S. residential construction. Given the decline in North American residential fiberglass insulation shipments last year during the second quarter, we expect OC shipments to grow about 25%, with pricing continuing to improve from realization of our April increase. Given our outlook for inflation, we have also recently announced an 8% price increase effective June 28th. In our technical and other building installation businesses, we are seeing volumes recover to pre-COVID levels. In the second quarter, we expect our volumes to be up mid-teens as we see increasing demand for our products in global building and construction applications. Pricing in these businesses is expected to remain relatively stable to slightly up. In terms of inflation, we expect material and transportation cost increases we faced in Q1 to continue in a more meaningful way in the current quarter, partially offset by ongoing strong manufacturing productivity. Additionally, we anticipate benefits of approximately $30 million from better fixed cost absorption on higher production volumes. Given all this, we expect EBIT margins to improve sequentially approaching mid-teens for the quarter. Moving on to composites, we expect our volume growth to continue at a strong pace, up approximately 30% versus the prior year. Pricing is also expected to improve low to mid single digits year over year. Margins should benefit from the reversal of roughly $30 million of curtailment costs we saw in the second quarter of 2020. Consistent with the broader industry trend, inflation will represent a more meaningful headwind for the business, which we would expect to partially offset through productivity gains. On a sequential basis, EBIT margins in Q2 are expected to be similar to the first quarter. And in roofing, we expect the market to be up between 15 and 20%, with our volumes up mid to high single digits. We anticipate our volume growth will trail the market growth due to the strength of our shipments in Q2 of last year. Roofing pricing is expected to improve with the announced increase of 5 to 7% that was effective at the beginning of this month. From an inflation standpoint, we expect to face more significant headwinds in asphalt cost and other material inputs, particularly resin used in our components business. Given this, we have recently announced an additional price increase of 4% to 6% effective in mid-June. Overall, we expect EBIT margins to increase sequentially from Q1, approaching mid-20%. With that view of our businesses, I'll turn to a few key enterprise areas. Our team remains committed to generating strong operating and free cash flow. In terms of capital allocation, our priorities remain focused on reinvesting in our business, especially productivity and organic growth initiatives, returning at least 50% of free cash flow to shareholders over time through dividends and share repurchases, and maintaining an investment-grade balance sheet. In addition, we are also evaluating investments in bolt-on acquisitions that leverage our commercial, operational, and geographic strengths and expand our building and construction product offering. Overall, we are well positioned to capitalize on near-term market opportunities, as well as several longer-term secular trends that provide multi-year growth opportunities, including the demand for new housing in the U.S., which has been underbuilt for several years, and continued remodeling investments as homeowners renovate their living spaces and upgrade their homes. We're also seeing growing opportunities to benefit from the drive for increased energy efficiency in homes and buildings, a greater importance being placed on sustainability and material durability, and additional investments being made in renewable energy and infrastructure. Each of these trends creates opportunities for Owens Corning to leverage our material science, building science, and unique product and process technologies to partner with our customers and help them grow with additional products, systems, and services. As I noted at the beginning of today's call, our team is proud of the outstanding operational and financial performance we delivered in the first quarter and are excited by the opportunities we have to grow our company, help our customers win in the market, and deliver value to our shareholders. With that, I will now turn the call back to Amber to open it up for questions.

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

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2. We ask that you please limit yourself to one question. If you have further questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble the roster. And our first question comes from Mike Dahl of RBC Capital Markets. Please go ahead.

Good morning. Thanks for taking my question. Nice results. The question is around cost. And so, you know, I think you've done a good job of highlighting some of the opportunities that, you know, you have for both realization on current and previous price increases and some of the incremental pricing actions across the segments. Can you help us frame out, just either in percentage or dollar terms, how your current thought process is evolving around what type of cost inflation we should be assuming across the segments, just because there's obviously a lot of moving pieces there.

Thanks, Mike, and good morning. Thanks for the question. As we're thinking about inflation, as we entered this year, we We indicated and truly still believe that we're going to move through an inflationary cycle that will probably accelerate a bit as we move from the first quarter into the later quarters. If you look at our MD&A disclosure in the queue, you'll see us breaking out inflation between each of the three businesses, and you add that up, and it's called around $24-plus million across the three businesses. For a little bit of color on that in the first quarter, it's probably split fairly evenly between material input costs and delivery costs. And then when you think about material input costs, the majority of what we're seeing is starting to be driven by things that are petroleum-based, right? So petroleum-based products that are going into our products and our production process. I will tell you that at this point in time in the first quarter, one of the things that we do anticipate to move directionally more inflationary as we move forward is that we did continue to see a bit of asphalt deflation in the first quarter. And as noted in the earlier comments, that began to narrow as we moved through the quarter, just as we expected. And we expect that to start to move more inflationary as we move through the balance of the year. With that said, between productivity and pricing, you know, continued productivity in our kind of proactive nature at addressing pricing as we're watching very closely these inflationary cost pressures start to develop. We're taking actions that, you know, we'll make sure that we keep the price-cost balance positive as we move through the year.

The next question comes from Catherine Thompson of Thompson Research Group. Please go ahead.

Hi, thank you for taking my question today. I wanted to focus on your composite segment, both for the quarter and the broader outlook. Just for the quarter performance, how much of it was driven by stronger domestic roofing demand versus other factors? And in particular, if you could give an update just to how certain annual pricing discussions progressed given a stronger backdrop in demand and also balancing rising costs. And then in terms of the broader outlook, have you sized the potential opportunity for composites to benefit under the proposed Biden infrastructure plan, given his focus on alternative energy? Thank you.

Thanks, Catherine. And again, good morning to you as well. I'll take the first couple of pieces of that, and I think I'll let Brian kind of talk a little bit about the Biden plan that we're all kind of filtering through ourselves at this point in time. The question around how much of the strength was driven by building and construction, it certainly has continued to be one of the downstream applications that we see with a positive dynamic, especially with the strength in the North America residential markets. But I would say it didn't stand out much greater on a growth rate than some of the other things that we are seeing. For example, wind continues to be strong. In general, as we built out our low-cost manufacturing network around the world over the last several years, built larger kind of opportunities to melt glass and create the product in bigger locations, we're seeing good strength across, I would say, the geographies of North America, Europe, and India as well. So these key geographies that we focus on based upon all the work that's been done in the productivity initiatives as well as building out a low-cost footprint has really driven this business strongly. Your question on pricing, I'll touch on. As you know, we've quoted about two-thirds of our business in the composites business is really tied to pricing, is tied to contracts, and therefore that's where the pricing comes from. We feel like we had good, solid pricing negotiations as we entered this year. That was helped by where we saw the markets going and where our customers saw the markets going. So that has been a positive player in the first quarter that we expect to continue. I will also tell you that for the other part of the business that's not tied to contracts, so it's more transactional pricing, just based upon the strength of the demand across those markets, we're seeing favorable pricing trends as well. And as long as that demand kind of holds up where it is, we would expect to see not only good contract pricing that we've already negotiated, but good transactional pricing as we move forward.

And maybe I'll just come in and comment a little bit on the question on the administration's plan. You know, honestly, I think it's a little too early to get a good sense of how this is going to play out. I know there's going to be a lot of negotiations. But in general, when we look at infrastructure applications in our glass composites business, In the U.S., it'd be probably approximately 10% of glass demand goes into traditional infrastructure applications in the space. When we look at our share position in North America, which is very strong, very high, certainly we would see the opportunity to benefit from any incremental and additional investments above that, given our high share position. I think we'll continue to you know, evolve in our thinking in terms of opportunity as we see how plans shape up, but certainly it creates an upside opportunity for us as it moves forward.

The next question comes from Matthew Bully of Barclays. Please go ahead.

Good morning. Nice quarter, and thank you for taking the question. I wanted to ask about insulation and just given all the strength and North American fiberglass and residential construction. To what extent are you beginning to take a bit of a longer view there? And to the extent any more capacity needs to come online? I know you've talked in the past about being a little more measured about bringing on some of your higher cost capacity, but Presumably, at some point, given the time it takes to get these restarted, you have to take a bit of a view. So I'm just curious your thoughts there on longer-term capacity. Thank you.

Yeah, thanks, Matt. We continue to watch this very closely. So if I go back a few quarters ago when we restarted Kansas City, we said that we felt with Kansas City we'd have enough capacity to service a market of roughly about a million and a half starts per year. And, you know, we feel good about that. We're bringing KC up and between Kansas City incremental capacity, our other productivity initiatives, we feel like that's still the right capacity that we've got to service that market going forward. But clearly we continue to look at out over the next year or two to see what's going to emerge. I think right now starts have been running a little hotter than that the last few months. But when we look at consensus estimates for 21 and 22 years, They still are around 1.5 million starts, which is a very good housing environment to be in. But if we see that continuing to accelerate or we start to get a view of 22 or beyond, moving up beyond that. We certainly do have some options in our network that are capital efficient options that we could bring up some incremental capacity at some different facilities. We could also do some de-bottlenecking initiatives to get out more capacity. That would be not as long of lead times. So we would have some additional flexibility there as we go forward. But I do think that the industry's got to work through, I think, some other constraints and bottlenecks to get above this kind of one, one and a half main start. around land development, labor. There's other construction material shortages. So I think there's a few bottlenecks that we believe would need to be worked through before we could say we think a longer-term trend would be significantly above that $1.5 million start. But again, this is a very good market for us, and maintaining this pace of housing starts would be very good for our business over the next few years.

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

Yeah, thanks a lot, guys. Brian, just if I could make an observation, if you look at where housing starts have actually run for most of the last six months, they've been running at a run rate that would suggest that the consensus is, as it usually does, it's lagging. I would just be curious about any clarity you could provide about how much shorter a lead time are some of your options that you have available to you to sort of bring on additional capacity, sort of as a follow-on to Mike's question, because the consensus has traditionally been wrong on forecasting big moves and starts. But I also really wanted to ask you about your guidance on roofing in ARMA and You sort of suggested that ARMA is going to be up, you know, 15 to 20, but you guys would only be up mid to high singles. I wasn't sure if your mid to high singles is just a shingles commentary, you know, to be comparable to that ARMA, or are you throwing in, you know, maybe some slower growth or even flattened down in, like, components or third-party asphalt sales? So if you could just provide clarity on that, that would be great.

Sure. Thanks, Stephen. Yeah, and on the consensus estimates, I mean, I think – They've been wrong on both sides of the equation, certainly over the past few years. And I think we continue to look at that as a guide, but as important, we continue to talk with our customers and look at their backlogs, their order books, and trying to make those assessments. So we do triangulate our market knowledge with those estimates to try to get a good sense of how things could evolve over the next six to 12 months. To answer your question around some of the timing, I think we've got some de-bottlenecking initiatives that we could bring online within probably three or four quarters. There's a few others that could be a little less, but I mean, more significant volumes would be in, you know, probably under a year if we chose to go do those things. So we do have some flexibility and we'll keep watching the market environment and we'll make those decisions appropriately to see and be able to feed our customers the product they need. But again, we'd want to be looking at some longer term trends at those accelerated rates or those higher rates before we'd be too aggressive, bringing on a lot more capacity. I think on the roofing guide, this is U.S. ARMA shingle shipments, not components, not other elements. And really, this is a bit of a comp issue we have with Q2 of last year. So if you go back last year, we saw our sales in the first quarter of last year kind of lagged the market. When things really started picking up in Q2, we saw our shingle demand really accelerate. So we shipped a lot of product. We saw very strong growth last year, Q2. So when we look at this year's Q2, while we expect to ship a little more sequentially from Q1, when we look at the year-over-year comps, our growth rate for U.S. shingle shipments are just going to be a little less significant. But overall, for the first half, we're going to ship a lot more shingles into the market than the first half of last year, and we feel good about our positions in the market.

The next question comes from Anthony Pateroni of Citi. Please go ahead.

Good morning. Good morning. You indicated your QQ guide still incorporates some volume headwinds from inventory catch-up. I'm just wondering at what point you think that lifts as a headwind. And then apologies if I missed this, but was that a comment on inventories across your businesses? Or just wondering if you'd give any more color on inventories in the three segments.

Yeah, I think inventory levels, I'd say, Broadly in our channels are below historical averages. I think that would be a fair statement across all three of our businesses. So in roofing, we continue to see our manufacturing plant inventory levels at historically low levels. We continue to see most distribution inventory levels below historical averages. I'd say the same in most of our insulation segments, certainly for our fiberglass insulation going into residential applications. And even in our composites business, we saw some inventory try and bind patterns in Q4. We've continued to see that in Q1. And again, I think overall, though, the broad statement would be inventory increases. levels in our channels with our channel partners are below historical averages. And I think that the ability to catch up, the other part of your question, is really going to be a function of out-the-door sales and market demand. Right now in residential applications, we see very strong out-the-door sales. I think the only thing that maybe kind of limited some of that in certain parts of the U.S. in the first quarter was winter weather, but it wasn't a lack of demand from contractors and builders for the products. And I think we're broadly seeing that in our composites and some of our industrial market sets as well as production and manufacturing is ramped up. I think people are playing catch up and the supply chain remains very, very tight. So I think it's going to be potentially a few quarters before we would see any changes in inventory levels in our channel partners.

The next question comes from Michael Rehot of J.P. Morgan. Please go ahead.

Thanks. Good morning, everyone. My question has to do with, you know, price cost as you look out for the rest of the year. You know, a lot of moving pieces in both across the different businesses, you know, If you could just kind of quickly summarize where you were, and apologies for not getting through the queue quickly enough, but where you were in price costs across the businesses in the first quarter, and given the announcement of price increases to the extent that those are realized, how you see the price-cost dynamic progressing is obviously important. you know, inflation will likely accelerate over the next couple of quarters.

Yeah, good morning, Mike. I think what we would have shown in the first quarter was a positive price-cost mix really across the whole company, across all the businesses. And that's been a real focus of us coming into the year. And I think we go back to last quarter's call. You know, we talked about inflation pressures increasing As we entered the year, we thought there was a potential they could continue to escalate. As we sit here now after the first quarter in the books, we're absolutely seeing more material inflation, more transportation inflation. As Ken said, more petroleum-based products that input really all three businesses. So I think our focus has been and will continue to be being able to offset that inflationary pressure through productivity and price increases. And that has allowed us to maintain a positive price-cost mix in Q1. And through our guide, where we are seeing, you know, sequential earnings margin growth, And, you know, we expect that with our current productivity initiatives, current pricing actions, and the expected inflation in Q2, that we can maintain that positive price-cost mix in all the businesses, you know, coming into Q2 and finishing. I think as we move into the back half of the year, this is something we are looking at expected inflation levels, and we're trying to, you know, stay in front of it through some of the recent price announcements that we've made both in insulation and in roofing. So our intent is to try to maintain a positive price-cost mix as we move into the back half of the year. Clearly, that's going to depend on overall market conditions and inflationary pressures we see, but that is our intent. And through the first quarter, we've achieved that, and we expect to achieve that again in the second quarter. So we're going to be looking at this kind of a quarter at a time as we work through the rest of the year.

And to give you the magnitude of numbers in the first quarter, because I know that you haven't had a chance to kind of scour through the queue yet. As I mentioned earlier, we saw about 24, maybe a little bit more than that, of inflation, specifically called out when you look at each of the three segments in MD&A. If you do the same thing across pricing, you would see about $54 million of pricing. So some good positive price-cost mix supporting Brian's statements around where we are today and how we intend to proactively stay ahead of that.

The next question comes from Phil Nick of Jefferies. Please go ahead.

Hey, guys. Brian, I was just curious if you had any perspective on outlook on roofing volumes in the second half as you kind of lap tougher comps, but with products still on allocation, wouldn't you kind of expect lead times to get back to normal for inventory, and does that provide kind of a buffer from a channel fill dynamic in the back half?

Good morning, Phil. I think Second half volumes for us, I think there's going to be two kind of variables that we continue to watch. One is going to be storm demand. As you know, storm volume makes up on average about 30% of overall market demand for roofing shingles. So last year we had a pretty robust storm season and generating some incremental storm demand. So I think part of the third quarter, fourth quarter demand profile is going to depend on kind of how storms evolve and what happens over the next couple of months. So I think we're going to have a better view to that when we get on the next quarter call. And then the second variable is really going to be fourth quarter demand. So, that's generally an opportunity for manufacturers to catch up a little bit of inventory. It's an opportunity for distributors to catch up a little bit on inventory, because generally when winter weather hits, just the season ramps down and out-the-door sales ramp down. We did not see that last year, fourth quarter. We had really warm weather. And with the contractor backlog that was available, I think roofing demand was the strongest kind of fourth quarter we've seen in over 10 or 15 years. So I think those are the two comps in the second half we're going to face into in terms of storm demand and then fourth quarter demand. Now, having said that, I think we expect the market to be very robust through the first half. I would think that even if demand drivers trend down a little bit, given where inventory levels are at, we're going to continue to run. And I think distributors would use it as an opportunity to potentially restock a little bit. So I think the real wild card on the year-over-year comps is probably going to come into the fourth quarter. And that's where the seasonal impact is pretty large. And I think that may just be impacted by weather. But right now, I mean, demand drivers for remodeling, renovation is very, very strong. So, you know, we don't see anything kind of taking the gas off of that demand profile. I think it's more going to be on the storm demand and how that plays out in the back half of the year.

The next question comes from Keith Hughes of Truist. Please go ahead.

Thank you. The question is on insulation, on the technical and other building insulation. You've got a really strong guy here for the second quarter. up mid-teens. If you could give us any sort of feel for trends you're seeing within that U.S. versus Europe, different end-user markets, what's stronger than others?

Thanks, Keith. Right now, I'd say we're seeing broad demand strength across all of our product platforms in our technical insulation business. So that comprises of mineral wool, foam glass, foam insulation products. And just kind of as a reset, so about a third of the revenue in our technical insulation business is driven by residential applications, about two-thirds in non-residential. So the products that touch the residential end markets in the U.S., for example, would be like our FlexDuck materials that go in residential HVAC applications. In Europe, it would be mineral wool, which is more commonly used in residential construction. So about a third of that of our business in technical is really being driven by some of the residential applications and strength we're seeing in both the U.S. and Europe. So that's giving us a good lift. And then in the non-res, we really have a broad set of end market applications around commercial and industrial. So, we see, you know, in commercial, we're in data centers, we're in warehouses, we're in airports, museums, and office settings. So, I think that broad distribution of applications, we're seeing some just emerging strength across all of those. in both U.S. and Europe. Commercial projects, we're really completing. We're starting to see the project pipeline build a little bit. Architectural billing index, which is something that's tracked here in the U.S., is showing some improvement there. So we're seeing that continuing to work And then I'd say the last part of our strength is really where we're seeing the benefits of some recent product launches. So, innovation is critical and product innovation is very important that we keep inventing and bringing new products and new materials to market. I think last quarter I talked about our foam NGX product, which is a more sustainable product solution that is really getting great traction. So, I'd say some of its market strength and some of it is our execution. and some benefits of some product launches that we've seen a nice rebound in business and certainly are guiding to be up pretty significantly here in Q2 going forward. So we think we're very well positioned with these product platforms, and we think with some of the longer-term growth trends in each of these categories, we're well positioned for a few years in this category.

The next question comes from Garrick Chemoise of Loop Capital. Please go ahead.

Great. Thank you. The $30 million fixed cost absorption benefit that you saw in the quarter, is there any way to parse that out between the segments? And how should we think about that figure moving forward? Is this, you know, the base level at these capacity levels that you're operating at, or could that number, you know, flex maybe a little bit higher as demand improves?

Gary, are you talking within insulation or composites or – bolt yeah maybe if you could do a whip around the those businesses yeah okay uh for insulation i mean because ironically they're both in our glass melting businesses both in insulation and composites we're expecting about the same level of of uh production improvement on a quarter over quarter basis uh year over year uh about 30 million dollars in insulation i'd say um it's It's going to be probably a little more heavily centered towards our technical insulation kind of product platforms where, again, we're ramping up quite a bit to service the demand that I just spoke about. And then we are continuing to get a little bit of operating leverage back on some of the residential side. But I think it's in both segments of insulation that are seeing the benefits as we really are trying to run pretty much full out on our assets today. And then in composites, again, it is broad brush. All of our glass-melting furnaces really globally, we are running at high capacity in order to service the demand. So there's no one geography that's really playing out any more significantly than another in terms of where we're ramping up production or not. We're really ramping up production and have ramped up production around the globe in our composites business. So we're seeing that $30 million really across the board.

The next question comes from Ruben Garner of Benchmark. Please go ahead.

Thanks. Good morning, guys. And I had some connection issues, so if you already answered this, apologies. But I wanted to ask about the insulation in the quarter and the outlook. 13% volume growth, I think it said in the queue, would certainly be better than, I think, what the industry expected. So, and, you know, similarly in your outlook for 25% growth, I guess the question is what kind of market assumptions are you baking in there and maybe how and why are you guys able to gain share? Is it mostly, you know, ramping up your production in the fiberglass side or are there other things, geographies or end markets that you're exposed to that are maybe performing better than the market right now?

Yeah, the volume increases you talked about are spot on in terms of what we achieved in Q1 and what we've got to do in Q2. I'd say a couple of things. One is we have ramped up capacity. This is going to be really primarily in our residential insulation business in North America where this volume growth is setting. And it's a function, I think, of some additional capacity that we're bringing on. So, you know, we do have the opportunity now to probably – slightly outstrip the market performance in terms of where we're adding capacity. And then I think it is, though, as much a focus on just our great commercial partnerships, our product quality, and the products that we're bringing to market. So there's some availability that we are bringing on stream that gives us some opportunities. But I'd say with that additional availability of capacity, we're very focused on just improving the service cycles of our customers and trying to help them in the market. So that's where our focus is in terms of, you know, maybe some of the share gains that we potentially will see. I think we'll be, you know, kind of strengthening and working with existing customers around commercial partnerships and making sure we're supporting their growth.

The next question comes from Truman Patterson of Wolf Research. Please go ahead.

Brian, Ken, good morning and thanks for taking my question. So just wanted not to beat a dead horse and, you know, I do have a very favorable, you know, multi-view, multi-year outlook for housing starts as well. But Just want to understand the dynamics a little bit near term. You know, you all in U.S. resi insulation, you brought your KC plant back online. There are a couple of competitors bringing on some loose fill insulation in the back of the year. How do you think about, you know, at year end industry capacity in relation to housing starts? Is it enough to fill 1.5, 1.6 million starts? You know, is there any number you could help us with? And then also, you know, is somewhat embedded in this, you know, with the additional capacity coming online, do you think that likely leads to, you know, maybe not quite as robust pricing? I mean, we've, you know, with the most recent one in June, we've essentially had four hikes in the past year.

Yeah, Truman, I think on the capacity side, if I had to kind of put a dimension on it, You know, we've said that with Kansas City coming up and our productivity, we felt comfortable we could service at this kind of 1.5 million housing starts. I think I've said in the past with some of the loose fill capacity, that's the two facilities you're talking about in the back half of the year would bring on some additional loose fill, that we think given the market strength, that that capacity would just be folded in and consume pretty readily. And that was going to be something that we didn't think was going to be a big event in terms of industry dynamics. I still think that's the case. I think one thing to keep in mind, and it goes a little bit on roofing as well, particularly in insulation, you know, I believe that there's installed capacity to service one fiber a little more. Now, the challenges we're facing is similar to roofing. Last spring, You know, we had to curtail production. There were some production shutdowns we had to take. So, you know, we lost some production that we're going to be able to kind of make up this year with assets running at a higher level than last year. So, on a full-year basis, with the capacity we've added and then the production time that we've added versus last year, you know, we do think there's additional capacity we have to service this market. That's why I keep coming back to we feel pretty good about at the current level. You know, on the pricing front, you know, we've taken on a third price increase in the year, really as a response to the inflationary environment that we're facing into. So I think the market we expect overall is going to remain very, very good over the next few years. I think we're going to be continuing to look at the market opportunities that we have, and then we're going to compare that against inflationary pressures and And that was a big driver of our third increase, just to kind of stay in front of it as we've talked about.

Hey, Andrea, this is Amber. We have time for one last question. Okay, and that question will come from Susan McLeary of Goldman Sachs.

Please go ahead. Thank you. Good morning, everyone. My question is, you know, thinking about the raw material environment for roofing and You know, in the last couple of years, we've seen asphalt kind of decouple from WTI or kind of global oil prices. As you think about some of the dynamics in the oil markets today, do you expect that those two will move closer as we move through 2021? And what does that mean as you think about the asphalt pricing as we move through the year?

Yeah, thanks, Sue. I'm not sure if we're too bullish on them moving a little closer, and you're exactly right. I mean, asphalt costs in relation to WTI have stayed stubbornly high now the last couple of years, and I think probably a bigger driver of that has been really asphalt supply availability. And, you know, that's something we watch in terms of the inflationary pressure we're looking into in Q2. And then for the second half is going to be one underlying WTI costs, which certainly have moved up. But the second is refiner utilization rates, which I've talked about for the last year, have been well below historical averages. And since asphalt is a byproduct of that refining process, with refineries down, it limits the asphalt supply. So I think we would need to see refinery utilization rates get back to kind of historical averages for a time that there could be some inventory building, there could be some more asphalt supply availability put in place And I think at that time, we could potentially see that relationship between asphalt and WTI kind of come back to some more normal ranges. But I don't think we see it in the near term, but certainly longer term, that is the environment that would create that opportunity.

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

Okay, well, thanks, everyone, for your time today, for your questions, and for joining us. You know, in closing, I'd just say our first quarter performance has really provided a strong start to the year. Our teams continue to execute at a very high level against our operating priorities, and we believe we're positioned well to build on this momentum over the balance of 2021. So we look forward to speaking with you again in July during our second quarter call, and until then, I hope you and your families remain healthy and safe. Thanks.

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