owens corning nyse:oc · we adjust our effective tax rate to remove the effect of...

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Owens Corning NYSE:OCFQ2 2020 Earnings Call TranscriptsWednesday, July 29, 2020 1:00 PM GMTS&P Global Market Intelligence Estimates

-FQ2 2020- -FQ3 2020- -FY 2020- -FY 2021-

CONSENSUS ACTUAL SURPRISE CONSENSUS CONSENSUS CONSENSUS

EPS Normalized 0.28 0.88 214.29 1.05 3.00 4.21

Revenue (mm) 1534.93 1625.00 5.87 1684.07 6452.29 6907.59

Currency: USDConsensus as of Jul-28-2020 1:35 PM GMT

- EPS NORMALIZED -

CONSENSUS ACTUAL SURPRISE

FQ3 2019 1.50 1.63 8.67 %

FQ4 2019 1.13 1.13 0.00 %

FQ1 2020 0.53 0.60 13.21 %

FQ2 2020 0.28 0.88 214.29 %

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Contents

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Table of Contents

Call Participants .................................................................................. 3

Presentation .................................................................................. 4

Question and Answer .................................................................................. 11



OWENS CORNING FQ2 2020 EARNINGS CALL | JUL 29, 2020

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Call ParticipantsEXECUTIVES

Brian D. ChambersCEO & Chairman

Prithvi S. GandhiInterim CFO & VP

Scott CrippsVice President of InvestorRelations

ANALYSTS

Garik Simha ShmoisLoop Capital Markets LLC,Research Division

John LovalloBofA Merrill Lynch, ResearchDivision

Kathryn Ingram ThompsonThompson Research Group, LLC

Matthew Adrien BouleyBarclays Bank PLC, ResearchDivision

Michael Glaser DahlRBC Capital Markets, ResearchDivision

Michael Jason RehautJPMorgan Chase & Co, ResearchDivision

Philip H. NgJefferies LLC, Research Division

Seldon T. ClarkeDeutsche Bank AG, ResearchDivision

Stephen KimEvercore ISI Institutional Equities,Research Division

Susan Marie MaklariGoldman Sachs Group, Inc.,Research Division

Truman Andrew PattersonWells Fargo Securities, LLC,Research Division

Yves Brian Felix BromeheadExane BNP Paribas, ResearchDivision





PresentationOperator

Good day, and welcome to the Owens Corning Second Quarter 2020 Earnings Conference Call. [OperatorInstructions]Please note this event is being recorded.

I would now like to turn the conference over to Scott Cripps, Vice President, Investor Relations. Please goahead.

Scott CrippsVice President of Investor Relations

Thank you, and good morning, everyone. Thank you for taking the time to join us for today's conferencecall and review of our business results for the second quarter 2020. Joining us today are Brian Chambers,Owens Corning's Chairman and Chief Executive Officer; and Prith Gandhi, our Interim Chief FinancialOfficer. [Operator Instructions]

Earlier this morning, we issued a news release and filed a 10-Q that detailed our financial results for thesecond quarter 2020. For the purposes of our discussion today, we have prepared presentation slides thatsummarize our performance and results, and we will refer to these slides during the call. You can accessthe earnings press release, Form 10-Q and presentation slides at our website, owenscorning.com. Referto the Investors link under the Corporate section of our home page. A transcript and recording of this calland 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 willinclude forward-looking statements based on our current forecasts and estimates of future events. Thesestatements are subject to risks, uncertainties and other factors that could cause our actual results to differmaterially. We undertake no obligation to update these statements beyond what is required under theapplicable securities laws. Please refer to the cautionary statements and the risk factors identified in ourSEC 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. Explanationsand reconciliations of non-GAAP to GAAP measures may be found in the text and financial tables of ourearnings 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 meaningfulmeasure for investors to compare our results. Consistent with our historical practice, we have excludedcertain items that we believe are not representative of our ongoing operations when calculating adjustedEBIT and adjusted earnings. We adjust our effective tax rate to remove the effect of quarter-to-quarterfluctuations, which have the potential to be significant in arriving at adjusted earnings and adjustedearnings per share. We also use free cash flow and free cash flow conversion of adjusted earnings asmeasures helpful to investors to evaluate the company's ability to generate cash and utilize that cash topursue opportunities that enhance shareholder value.

For those of you following along with our slide presentation, we'll begin on Slide 4. And now openingremarks from our Chairman and CEO, Brian Chambers, who will be followed by interim CFO, Prith Gandhi.And then Brian will cover our outlook before our Q&A session. Brian?


Thanks, Scott. Good morning, everyone, and thank you for joining us today. Throughout this past quarter,our global team has demonstrated tremendous resiliency, continuously adapting to changing marketconditions and maintaining an incredible focus on taking care of each other, supporting our customers andmaximizing our financial performance relative to the market opportunity.





During our call this morning, I will provide an overview of our second quarter results, and how we aremanaging the company during this period of uncertainty. Prith will then provide additional financialdetails on the second quarter, and then I'll come back to discuss our outlook for the third quarter and theremainder of the year.

I will start with safety and our second quarter results. An unconditional commitment to safety has longbeen our guiding principle at Owens Corning, and this has served us well to address the challenges ofCOVID-19. In the quarter, our recordable incident rate was 0.69, a slight improvement compared with thesecond quarter of 2019. I'm pleased with this performance and that everyone has kept safety and caringfor each other the forefront of everything we do.

Over the past several months, our executive team and dedicated COVID-19 response team have workedwith our global enterprise to ensure our operations remain safe and effective for our employees, theirfamilies and other key stakeholders. We remain vigilant in our use of personal protective equipment,health screenings, robust cleaning procedures, restrictions on business travel and work-from-home optionsas we actively monitor local health conditions and update our operating protocols as risk levels change.

I would like to now move to our financial performance in the quarter. Through the strength of our market-leading businesses, innovative product and process technologies and unique enterprise capabilities, thecompany delivered financial results better than what we outlined during our last earnings call as wecapitalize on a faster recovery in residential end markets, particularly in the U.S., improved manufacturingleverage and strong cost controls.

For the second quarter, revenues were $1.6 billion, down 15%, 14% on a constant currency basiscompared with the same period last year, and adjusted EBIT was $167 million.

Since the start of the pandemic, we've been focused on 4 key areas to ensure the strength and continuityof our business. First, keeping our employees and other key stakeholders, healthy and safe, as I justdiscussed. 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 onpositioning us for long-term success. And fourth, ensuring a strong balance sheet with access to capitalas needed. I remain confident that by managing these 4 priorities well, we will continue to deliver strongperformance for the remainder of this year and position the company well for 2021.

During this time of increased demand uncertainty, we have stayed closely connected with our customersand suppliers to understand and respond to shifting market conditions. After experiencing a significantdrop in order volumes at the start of the quarter, we continue to see our business improve in May andJune as shelter-in-place restrictions began to lift, and demand for our products in most of our end marketsincreased. As mentioned earlier, we have seen residential markets in the U.S. and also in parts of Europerecover at a faster pace than many had anticipated, which positively impacted our second quarter results.

In our Roofing business, after temporarily curtailing operations earlier in the quarter, we ramped upproduction to run at full capacity to service increasing demand. And in Insulation, we have experiencedsolid demand in our North American residential fiberglass business due to the strong recovery in U.S. newconstruction housing. Within most of our commercial and industrial end markets, the recoveries has beenslower, and we continue to take the necessary actions to balance our production with expected near-termdemand.

Given the essential products we provide and the localized nature of our supply chain, we've been able tooperate our manufacturing network effectively and productively, quickly adjusting to the changing needsof our customers while managing our inventories. In addition, our team has delivered great results duringthe quarter around cost control. We have focused on minimizing or postponing discretionary expenses andreduced operating expenses in the quarter by over $30 million compared with last year.

We are also realizing benefits from the longer-term structural changes we made prior to the pandemic inour Insulation and Composites businesses. In insulation, we are clearly seeing the impact of the networkoptimization actions implemented late last year. And in Composites, we have maintained a consistent





focus on manufacturing productivity and network optimization to lower our cost, which is evident in theresults we delivered in the quarter despite the challenging market conditions.

We maintained a strong balance sheet with access to liquidity and a well-structured debt maturity profile.While our financial position at the beginning of the quarter was strong, in May, we took advantage offavorable capital markets and successfully completed a 10-year $300 million bond issuance. This, alongwith our working capital management and OpEx and CapEx controls, led to an increase in our availableliquidity to approximately $1.5 billion, including almost $600 million in cash. During the second quarter,we paid down $210 million on our existing revolving credit facility. Our only near-term debt maturity is theremaining $150 million from our term loan due in February 2021.

Before turning it over to Prith to discuss our second quarter financial results in more detail, there's oneother item I would like to highlight. Last month, Owens Corning ranked #1 on the 100 Best CorporateCitizens list for 2020, and is one of only a small number of companies that have earned this honortwice. The list ranks companies in the Russell 1000 index for standout global environmental, social andgovernance performances. We were honored by this recognition, which is evidence of our continuingcommitment to integrate high ESG standards into all that we do.

We believe our commitment and that of the entire business community to improving environmental,social and governance issues is critical to addressing the extraordinary challenges we all face today withracial inequalities and other social injustices which have been compounded by the economic and healthuncertainties associated with the COVID-19 pandemic. These issues have and will continue to have atremendous impact on how we work and live.

At Owens Corning, we believe in the power of our diversity and aspire to create an environment where allof our employees' voices are heard and appreciated for their unique value. Our team has been and willcontinue to be active, vocal and promote meaningful reform. As a company, I'm proud of our people, thework we've done so far and what I know we will accomplish in the future.

With that, I will turn it over to Prith, and then I'll return to talk about our outlook for the third quarter.Prith?

Prithvi S. GandhiInterim CFO & VP

Thank you, Brian, and good morning, everyone. Through the collective agility and resilience of our 19,000colleagues, Owens Corning delivered solid financial performance in the second quarter in the face ofa challenging environment. We have continued to respond to dynamic market conditions by adjustingproduction and maintaining discipline on operating expenses and capital investments throughout thequarter. In addition, we have taken a number of actions to increase liquidity and reinforce our cashposition, which gives us the financial strength and flexibility to navigate uncertainty caused by COVID-19.

Please turn to Slide 5, which summarizes key financial data of the second quarter of 2020. The tablesin today's news release and the Form 10-Q include more detailed financial information. For the secondquarter, we reported consolidated net sales of $1.6 billion, down 14% versus 2019 on a constant currencybasis. Revenues were down in all 3 segments as a result of the demand decline from COVID-19. Althoughthe recovery in residential end markets in the U.S., particularly in May and June, has been more robustthan what many would have expected from the initial slowdown due to shelter-in-place restrictions.

Adjusted EBIT for the second quarter of 2020 was $167 million, down $64 million compared to the prioryear, largely driven by a $61 million decline in Composites. Net earnings attributable to Owens Corningfor the second quarter of 2020 were $96 million compared to $138 million in Q2 2019. Adjusted earningsfor the second quarter were $96 million or $0.88 per diluted share compared to $141 million or $1.29 perdiluted share in Q2 2019.

Depreciation and amortization expense for the quarter was $116 million, up slightly as compared to Q22019. Our capital additions for the second quarter was $47 million, down $60 million versus 2019.





On Slide 6, you will see our adjusting items, reconciling our second quarter 2020 adjusted EBIT of$167 million to our reported EBIT of $171 million. During the second quarter, we took actions to reducepersonnel costs in our Composites segment and recorded $5 million of restructuring costs associatedwith these actions. In addition, we recognized $9 million of gains on sale of precious metals used inour production tooling. As we discussed in last quarter's call, our productivity initiatives and furtherdevelopments in our manufacturing process technology have enabled us to modify the designs of ourproduction tooling by reducing the precious metal needed and thus allowing us to sell certain preciousmetal holdings in the second quarter of 2020.

Please turn to Slide 7, which provides a high-level review of second quarter adjusted EBIT comparing 2020to 2019. Adjusted EBIT of $167 million was down $64 million as compared to the prior year. Roofing EBITdecreased by $3 million. Insulation EBIT decreased by $10 million. And Composites EBIT decreased by$61 million. General corporate expenses of $19 million were down $10 million versus last year, primarilydue to our disciplined cost controls.

Now please turn to Slide 8, which provides a more detailed review of business results, beginning withInsulation. Sales for the second quarter were $595 million, down 9% from Q2 2019 on a constantcurrency basis. During the quarter, our overall volumes were impacted throughout the segment byCOVID-19, and selling prices were down $6 million year-over-year.

Within North American residential fiberglass insulation, sales volumes were largely consistent with Q22019 and some favorable price realization on the January price increase helped to partially offset negativeprice carryover from last year.

In technical and other building insulation, volumes were down. However, we saw sequential improvementwithin the quarter. We were encouraged by the resiliency of our mineral wool businesses in Europe andin the U.S., which maintained flat volumes year-over-year. EBIT for the second quarter was $32 million,down $10 million as compared to 2019, primarily due to lower sales volumes. We are continuing toproactively balance production with expected demand.

In the quarter, higher curtailment costs in technical and other insulation were largely offset by favorablemanufacturing performance and better production leverage in North American residential fiberglassinsulation, allowing us to see stronger results versus prior downturns.

Now please turn to Slide 9 for a review of our Composites business. Sales in Composites for the secondquarter were $398 million, down 23% on a constant currency basis, primarily due to lower sales volumes.The remaining decline in sales was driven by unfavorable customer mix and slightly lower selling prices.Volumes in our downstream specialty applications, including wind and specialty nonwovens, outperformedvolumes in other glass fiber applications.

EBIT for the quarter was $6 million, down $61 million from the same period a year ago, primarily dueto lower sales and production volumes. The negative impacts from production curtailments were slightlyoffset by manufacturing productivity improvements in the quarter. The benefit of lower transportationcosts was more than offset by lower selling prices and negative foreign currency translation. Despite thesedifficult global market conditions, the Composites business still delivered positive EBIT margins and strongcash flow performance in the quarter due to continued focus on operating performance and initiativesaround costs and productivity that we have discussed previously.

Slide 10 provides an overview of our Roofing business. Roofing sales for the quarter was $677 million,down 13% compared with Q2 2019 due to lower shingle volumes, $23 million of lower selling prices andlower third-party asphalt sales. Our shingle volumes tracked relatively close with the overall U.S. asphaltshingle market. We believe the market decline was driven by destocking at distribution early in the secondquarter, coupled with lower out-the-door demand in April. EBIT for the quarter was $148 million, downjust $3 million from the prior year, and yielding 22% EBIT margins for the quarter. The negative impact oflower sales volumes and early quarter production curtailments was partially offset by lower marketing andadministrative expenses.





In addition, we realized a $10 million onetime gain that benefited our margins by 150 basis points relatedto an exclusion on certain tariffs paid over the last 2 years. The U.S. government recently provided a tariffexclusion covering certain components products that we imported from China dating back to late 2018.Input cuts deflation and lower transportation 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, andcash contribution margins were solid as we exited the quarter.

Please turn to Slide 11, where I will discuss significant financial highlights for the second quarter of 2020.Given the unpredictable market environment, we are continuing to take actions to manage our workingcapital balances and reduce both operating expenses and capital investments. As a result, first half freecash flow in 2020 was $15 million higher as compared to the first half of 2019 on lower year-over-yearearnings. We are proactively managing inventories and will temporarily curtail operations that haveadequate inventory to service near-term market demand.

We continue to be focused on managing our liquidity through this period of high uncertainty. In May, wetook advantage of favorable capital markets to reinforce our cash position and successfully completed a10-year $300 million bond issuance with a yield below 4%. We also generated cash in the second quarterthrough the sales of precious metals that I discussed earlier and cash settlements related to certain U.S.dollar-euro cross-currency swaps.

Near the end of the first quarter, we drew $400 million on the revolver to increase our cash balance. Withour good year-to-date free cash flow and the financial actions I described a moment ago, we paid down$210 million of the revolver balance in the second quarter.

As of June 30, the company had liquidity of approximately $1.5 billion, consisting of $582 million ofcash and equivalents and nearly $900 million of combined availability on our revolver and receivablesecuritization facility. As a result of the proceeding, we currently expect interest expense to be between$125 million and $130 million in 2020 compared to our previous guidance of $120 million to $125 million.Moving forward, we are focused on ensuring a strong balance sheet with access to capital as needed. Wecontinue to evaluate the possibility of paying the remaining $150 million term loan balance in 2020.

Now please turn to Slide 12 as I return the call over to Brian to discuss the outlook for our company.Brian?


Thank you, Prith. As we move into the second half of the year, our financial performance will continueto be impacted by the depth and duration of the market disruptions caused by the COVID-19 pandemic.Given the continued uncertainties we face with the pandemic and potential government responses, I'llfocus my comments on our short-term outlook based on July trends that could impact the third quarterresults for each of our 3 businesses. I'll then close with my perspectives on a few key enterprise-wideinitiatives that will impact our full-year performance.

Broadly speaking, we have experienced a faster recovery in our residential end markets, while commercialand industrial end markets are following at a slower pace. Given this continued recovery, we expect thecompany to generate sequentially higher revenues and earnings in the third quarter.

I'll provide some additional details by business, starting with Insulation. Within our North Americanresidential business, we saw the impact from shelter-in-place restrictions in the second quarter delay thecompletion of housing starts, creating a backlog, which will continue to be worked through in the thirdquarter. We expect this backlog of work, along with normal seasonal increases, could lead to relatively flatvolumes in Q3 versus last year, which we are seeing in our order book so far in July.

In our technical and other building insulation businesses, July volumes are down high single digits versusJuly 2019. While we anticipate sequential improvement versus Q2, we expect year-over-year volumes willcontinue this trend through the third quarter based on a steady but slower recovery in commercial andindustrial end markets.





Prices in July have remained relatively stable in both our North American residential and our technical andother insulation businesses. Given market uncertainties, we continue to proactively balance productionwith expected demand and to tightly control our inventory levels. Overall, for our Insulation businessin the third quarter, we expect to realize incremental margins of approximately 50% versus the secondquarter.

In Roofing, second quarter industry shingle shipments were down about 9%, with our volumes trackingrelatively close to the market. While we have seen positive momentum in recent months, we believe itwill be difficult for demand, which has been delayed due to COVID-19, to fully recover in 2020. Our Julyshipments have started the quarter higher than prior year. Based on current trends, we could see marketvolumes up mid-single digits versus the third quarter of 2019, depending on storm volume and assumingstates remain open.

While the current pricing environment has remained relatively stable, in the third quarter, we expect tocontinue to face an increasing year-over-year headwind from the lack of a spring price increase. We haverecently announced an August increase that could partially offset some of this impact.

Although there was a significant drop in oil prices in March and April, asphalt costs did not trend downat the same level. Since then, WTI costs have steadily increased, resulting in asphalt costs beginning toincrease as well. While we do expect to realize additional asphalt deflation in Q3, low refinery utilizationrates, combined with strong paving demand will impact asphalt cost as we move through the quarter.

Based on all these factors, Roofing EBIT margins in the third quarter could be slightly better than oursecond quarter margins, normalized for the 150 basis point benefit from the tariff recovery that Prithmentioned in his remarks.

In Composites, while we expect overall volumes to improve versus the second quarter, the global impactof COVID-19 is having a greater impact on demand than in our other businesses. Our July volumes aredown low double digits versus last year, and we expect this trend will continue in the near term. Volumesin our specialty nonwovens business, which is primarily focused on building and construction applications,and our wind business have continued to perform better than some of our other industrial end marketssuch as automotive.

In terms of pricing, we came into the year expecting some headwinds due to contract negotiationscompleted at the end of last year. Similar to other businesses, transactional pricing has remained relativelystable. We reported a decline of $5 million in Q2 and expect a slightly higher impact in Q3 based onimproving volumes. We remain committed to tightly managing our inventory levels, which will continueto impact our manufacturing performance in the third quarter as we curtail production to meet demand.Sequentially, from Q1 to Q2, we experienced decremental margins of about 35%. With our current outlookof sequential volume growth, we expect incremental margins to be in a similar range in the third quarter.

With that view of our businesses, I'll discuss a few key enterprise focus areas. We continue to closelymanage our operating expenses and capital investments. We expect corporate expenses for the companyto be in the range of $105 million to $115 million and capital investments to be in the range of $250million to $300 million, both broadly consistent with prior guidance.

We remain committed to generating strong free cash flow and to our target of returning at least 50%to investors over time. So far this year, we have returned $133 million through share repurchases anddividends, and we'll pay our second quarter dividend of approximately $26 million next week.

As we move through the second half of the year, we will continue to evaluate our liquidity needs based onmarket conditions and prioritize deleveraging the balance sheet and maintaining our dividend.

As I stated at the beginning of the call, our current operating environment is extremely dynamic. Ourfocus is on taking thoughtful, decisive actions, being responsive to the current conditions and quicklycapitalizing on our market opportunities. Our team remains committed to operating safely, servicing ourcustomers and creating value for our shareholders.

With that, I'll turn the call back over to Scott to open it up for questions. Scott?





Scott CrippsVice President of Investor RelationsThank you, Brian. We're now ready to begin the Q&A session.





Question and AnswerOperator

[Operator Instructions] Our first question today is from Truman Patterson of Wells Fargo.

Truman Andrew PattersonWells Fargo Securities, LLC, Research Division

Nice quarter. So first on Roofing. Brian, last time we were speaking, it seems like distributor backlog was alittle bit behind where it should be, exiting April. How do you think about inventory balances today amongthe contractor or distributor backlogs? Should we see additional load in 3Q?

And then we've also heard that some of the roofing shingle manufacturers might be a little bit behindschedule with production. Are you hearing about any possible shortages? This could argue for some of thetraction of the recently announced price hikes.


If we just kind of walk through kind of the progression of Roofing volumes through the quarter, as wetalked about last time, we really saw a steep decline in order volumes kind of towards the end of March,really tied to the shelter in place and then contractors couldn't get on the jobs. And so contractor out-the-door sales from our distributors really slowed considerably. And at the time, I think most distributorswent into a destocking mode just because of the uncertainty. As we kind of saw the quarter play out, Aprilvolumes were down significantly. We saw the recovery, which is really a testament to the resiliency of ourRoofing business that I talk about all the time.

And then into June, as we saw shelter-in-place restrictions being lifted, we really saw contractor demandpick up quite a bit. We also have seen quite a few storms later in the second quarter, particularly in theMidwest and Southwest, all of that kind of increasing out-the-door sales. So I think in kind of starting inJune, the volume demand trends were becoming apparent that they were really going to become muchstronger than originally anticipated. And I think distributors went into more of a stocking mode. So buyingmore the service not only the out-the-door demand, but trying to get those inventory levels back up.

I think regionally, inventory levels are going to vary quite a bit. But I do think, overall, distributorinventories are probably below historical averages because, again, they went through a big destockingphase, have been working to increase their inventory stocks going forward. So I think we did see some ofthat restocking materialize in our order book in June. I think we've seen that continue in July. But overall,I think that inventory levels aren't back to kind of normal historical levels for distributors.

But having said that, I don't know if I'd expect a big surge tied to inventory build. I mean we're towardsthe end of July, so I think part of it is going to depend on the inventory needs to finish out the season thatdistributors see in front of them, and there's still some continued uncertainty around COVID-19. So I thinkthat's going to kind of play into.

But overall, as we talked about, we've seen our July order book up. We think there's really buildingcontractor backlogs in a lot of the markets, so we see a really strong out-the-door sales. We see someincreased storm activity. So I think that's contributing to our view in terms of seeing our order book upand an outlook that we could see third quarter volumes increase kind of mid-single digits.

And in regards to the pricing side. Normally, historically, we would announce a spring price increase. Wedidn't do that this year. And with the strength of the market, we've announced an August increase andcertainly based on what we're seeing in volumes and where we're at, we think there's a good opportunityto realize some of that increase as we go through the back half of the year.

Operator





Our next question will come from Stephen Kim of Evercore ISI.

Stephen KimEvercore ISI Institutional Equities, Research Division

I wanted to talk a little bit about Insulation, in particular, the North American fiberglass business. Thisis what we've heard, and I'm curious if you could weigh in a little bit on this, Brian. We heard that therewas a lot of expectation that there was going to be a cliff in 3Q in volumes because of the April housingstarts dip. But that cliff really hasn't materialized. Some people are thinking, maybe it's because of thelong construction backlogs right before the pandemic. And also just how violent the V-shape recovery hasbeen and how quickly it came on. And so basically, there's thought that this 3Q cliff really isn't going tomaterialize after all.

We're also hearing that your manufacturers are running capacity pretty much full out, but the industry stillnot able to build inventories as it typically does at this time of the year. So in fact, shortages are startingto emerge. So curious as to whether or not do you think that's an accurate depiction of what's kind ofgoing on in the Insulation North American fiberglass business right now.


Yes. I think overall, yes. I think we kind of saw the same thing progress through the quarter where wesaw, because of the initial kind of shelter-in-place restrictions, a lot of the increase in housing starts inthe first quarter that generally would create a big light housing start increase in Q2 and result in somehigher volumes, those didn't materialize. And we talked about we kind of saw volumes overall prettyflattish versus the prior year. But we think that's really been driven by -- because of those temporaryrestrictions tied to shelter in place, that we just -- the construction crews just can get to those starts, getthem completed. So we think that's created a backlog of work that's going to now continue on into Q3.

And then with some normal seasonality, normally, we'd see maybe 10% to 15% volume increases, justnormal seasonal increases. We think that combination of that increased backlog coming into Q3 of startsthat need to get completed, along with kind of seasonal demand, could lead to some pretty flat volumessequentially quarter-over-quarter. So we wouldn't see that, to your point, that big drop in from the airpocket of housing starts in April kind of rolling through in terms of volumes.

But in regarding industry capacity tightness and maybe trimming a little bit tiers and roofing. Becausewe took curtailments early in the quarter, and I think others did as well, we've been all playing, I think,catch up to a much stronger residential housing recovery than anticipated. So our curtailments that wetook early in the quarter were back up and running, and we're bringing that capacity back online. But weare seeing capacity utilization rates tightening as we go forward to service that demand. So we haven'tbeen able to get the normal inventory build in Q2 that we would normally have done. But we're back upand running. And we feel good about our ability to service the near-term demand. All the investmentswe've made around productivity process efficiencies that we talked about in the business to get out morethroughput through the existing footprint I think are going to play well for us here in Q3 as we continue toproduce to service the near-term demand.

Operator

Our next question will come from Phil Ng of Jefferies.

Philip H. NgJefferies LLC, Research Division

The recovery in your residential-focused business is obviously seeing great momentum. But can you shareyour thoughts, Brian, on your more nonres industrial-focused businesses? Whether it's insulation andcomposite, how do you kind of see the recovery materializing, whether it's the next 6 to 9 months? And doyou need to do anything more substantial in terms of optimizing the cost, your footprint? That would besuper helpful.

Brian D. Chambers





CEO & Chairman

Thanks, Phil. Yes, I think what we've said is broadly, currently, our residential market is certainlyrecovering at a faster pace. We are seeing recovery in our commercial and industrial markets. And I thinkthat's led to some of our outlook in Q3, where we've talked about sequential volume growth in all of ourbusinesses, and that would include our commercial and industrial applications involving insulation andcomposites.

And let me talk a little bit about insulation. We've been very pleased with our performance in our technicalinsulation business. And this has been a key part of our insulation strategy that we wanted to continue tobroaden our product offering inside our technical insulation product line and expand our geographic reach.And with the recent acquisitions, our organic growth focus, we've really been able to build out a verystrong product offering, serving a variety of kind of commercial, industrial and residential end markets inthat space.

So in our Insulation business, our technical insulation business, about half of our business is really tiedinto commercial applications, and it's a pretty broad-based commercial -- application base. So not justoffice buildings and spaces, but data centers, airports, museums. So our commercial exposure, I think, isa little more diversified into a lot more end market applications. And that gives us better opportunities asthe markets are recovering and as we see growth going forward.

But about half of the technical business has also been tied to industrial and some residential applications.So the industrial tied to LNG and oil and gas, that clearly is seeing a much slower recovery in ourInsulation business. But we are seeing that work continue to progress. So I think, overall, projects thatwere started, we're seeing continuing. They've been delayed, but we are seeing that work restart. And Ithink if we're going to be looking out more closely into '21 as we look at some of these markets to look atthe recovery rate.

And I think inside Composites, where we have that industrials focused, I talked a little bit about thatrecovery in our comments. Where in our building and construction applications, like our specialtynonwoven, we've seen that recover well. In our wind energy business, particularly, that's a segment that'sdone well. But there's some other industrial segments like automotive, oil and gas, again, where thatrecovery, I think, is going to be much slower through the year and probably lag into next year before wesee kind of strong volumes coming back to us in those industrial sets.

Operator

The next question is from Matthew Bouley of Barclays.

Matthew Adrien BouleyBarclays Bank PLC, Research Division

I wanted to ask on the Composite side again. Obviously, the curtailment costs there were, I guess, a littlemore severe than the other segments. Can you put a little color around the regions and plants, I guess,that were curtailed? And if some of that recovering industrial business is going to allow you to kind ofrestart some of that production, how those curtailment costs are going to flow into the second half?


Thanks. Yes. In our Composites business, and really across the company, we talked about this on thelast quarter call. We've been very focused and continue to be very focused of managing tight inventories,strong working capital controls to generate really great free cash flow, and that's been our focus. So wherewe saw near-term demand drop off in our Composites business and also in Roofing and Insulation, wetook pretty quick actions to curtail production to minimize inventory builds and to really drive cash flowgeneration.

And in Composites, how that impacted the network was really kind of broad-based. We really tookcurtailment actions across the board in the quarter. I think more heavily focused in terms of countrieslike India, where we just saw the big impact of the COVID-19 pandemic shelter-in-place government





restrictions that minimized operations. But we saw that in North America, we saw it in Europe. Sogeographically, we did start to see some improvements in China and our operations there as they're a littlebit ahead of the recovery curve. But I think the curtailment actions overall were fairly broad-based for usto manage inventory levels.

Now as we progress into Q3, we are seeing an uptick in some order volumes. And our order book in Julyin Composites is down kind of low double digits, so we've seen that improve sequentially through Q2,and we've seen that in the start of Q3 here in July. So in terms of overall curtailment cost, we expect thatwe're going to continue to have them in Composites, but they should be significantly less than Q2 as wesee the volume and order book increase for us as we go through the quarter.

Operator

Next question is from John Lovallo of Bank of America.

John LovalloBofA Merrill Lynch, Research Division

Maybe just going back to the North American resi Insulation side. Housing activity, obviously, has been alot stronger than expected. By all measures, there's a pretty strong wave of starts coming down the pipe.I mean does the industry have the capacity in place right now to handle this in your view? I mean how areyou thinking about pricing as we move later into the year? And then finally, how quickly could you bring oncold line capacity if needed?


Okay, John. Let me kind of walk through those, I think, and we'll try to catch them all here. In terms ofoverall capacity start, I mean, clearly -- I guess, I'll step back. We have seen a very strong and rapidrecovery in new construction and housing which is good to see. I think the capacity to serve this is in placein our network and in the industry. I mean part of this is just a surge of starts. And going back to takingout capacity at a time where we and others would normally be building inventory across the network.

So I mean, when you look at absolute housing starts, they're still forecasted to be down slightly year-over-year. So we are seeing an improvement of rapid recovery, and we're having to play catch-up a littlebit because we didn't run operations to build inventory like we normally would in Q2. But I think, overall,there is sufficient capacity to service the near-term demand that we see coming at us here for the rest ofthis year and even into '21.

In terms of bringing up cold capacity, we have that available to us. We do have a few lines that are cold.But again, when we talked about this last quarter and kind of last year, our focus around productivityand our enhancements and process improvements have really allowed us to generate and deliver andmanufacture more product through a smaller footprint. So we would have to see, I think, a prettysignificant uptick longer-term for us to want to bring on additional capacity at this point, but it is availableto us if we do see that kind of surge as we finish this year and go into 2021.

And then in terms of pricing, we came into the year with a very positive outlook on housing in terms ofthe strength of the fourth quarter. What we're seeing in the first quarter ahead of the pandemic impact.And we announced a January price increase. We have been able to realize some of that. And as we talkedabout, we've seen pricing relatively stable in the market. So historically, while we see a future that seespositive housing start growth, good demand utilization, I mean, that creates an environment for us to lookat additional pricing actions.

Operator

Our next question is from Mike Dahl of RBC Capital.

Michael Glaser DahlRBC Capital Markets, Research Division





Just to follow up on Insulation, more on the top line commentary to make sure we have this right. I thinkBrian, you said new -- U.S. new res, flat year-on-year, down high single digit, tech and other, and pricerelatively stable sequentially. I guess if we kind of add that together, you roll off some of the toughercomps on price in the second half of the year. But am I hearing that right that you're still expectingeffectively down mid- to high single-digit top line year-on-year in Insulation for 3Q?


Yes. Mike, I think it could play out that way in terms of how we've talked about some of the volumes. Sowe would expect in the res -- I'll talk res then the technical inflation. In the res side, yes, we believe thatwe're going to see probably pretty flat volumes, industry volumes, here in Q3 because of that backlog kindof coming in with some of the seasonal increases.

And then in our technical insulation business, we have seen an order book that being down kind of highsingle digits. And if that continues through, that's going to lead to some volume declines year-over-year.We do expect to see growth though sequentially. So the demand growth in res, while it's flat on a year-over-year basis, would be up sequentially in Q3 versus Q2. As well as in technical inflation, we might seea year-over-year decline. But again, sequentially, Q2 to Q3, we would see that increase. So that's wherekind of we would play out and see the volumes materializing as we sit here today, looking at our July orderbook.

And then just on the pricing headwind, I would say we continue to face a pricing headwind on a year-over-year basis because last year, we were -- we made some adjustments in Q2 around our market shareposition. That would have been starting to roll through more prominently in Q3. So on a year-over-yearbasis, we're still going to be seeing some pricing headwind on negative year-over-year comp. But again,the current environment, we would call relatively stable in terms of pricing.

Operator

Our next question is from Seldon Clarke of Deutsche Bank.

Seldon T. ClarkeDeutsche Bank AG, Research Division

You mentioned asphalt prices have come back along with the recent rebound in oil. But obviously, pricesare still well below where they were a year ago. So if things kind of remain stable from here and demandcontinues to grow at the rate that you're expecting, how long do you think you would expect to hold on tosome of these raw material benefits in the Roofing segment?


Yes. Thanks, Seldon. Just to kind of talk a little bit about the asphalt environment. Coming into the secondquarter, we did expect to see some, and realize some, mass haul deflation tied to kind of our first quarterbuys and some of the more seasonal normal deflation we saw. And then in April and May, we did see a bigdisconnect in a drop in WTI cost. But that didn't materialize in the same magnitude of a drop in asphaltcost. And I think the headline in asphalt for a while has been asphalt cost is going to stay stubbornly highrelative to WTI cost. And I've talked in the past around some of the structural changes of less-asphaltsuppliers and the use of lighter crudes by refineries that just produce less asphalt. So the asphalt supply isshorter than it was a few years back.

And then I think the dynamics that we're managing through currently is tied really to refinery utilizationrates. So asphalt is a residual product of the refining process. So refiners based on low fuel demandfrom COVID-19 and jet fuels and gasoline and diesel. The refining utilization rates are very, very lowhistorically. So if they're not running, they're not producing asphalt. So we continue to manage andbalance and look and watch for what's going on in refinery utilization rates and impacts to the supply side.

And then on the demand side, paving is the largest driver and consumer of asphalt, and that has stayedpretty solid in terms of growth through the first half. So we're going to continue to manage that quite a





bit, but that was to the comments that while asphalt costs dropped in the quarter, they weren't at thesame magnitude of WTI. And then we've started to see those asphalt costs on a month-over-month basisincrease, which is what we would normally expect to see in the season.

So in terms of our ability, we're going to continue to focus on managing that price/cost mix, but we seegood volume demand. And we certainly see the potential for asphalt costs on a month-over-month basisto increase. And so given that, I think we're going to be trying to balance our pricing as well as our price/cost mix to maintain a positive momentum there, and we'll see how that plays out through the rest of thethird quarter.

Operator

Next question is from Michael Rehaut of JPMorgan.

Michael Jason RehautJPMorgan Chase & Co, Research Division

Just a point of clarity and then my real question. I appreciate all the color, obviously, around the asphaltprices. I just didn't know if it's possible to kind of break out perhaps what that benefit was in the secondquarter in and of itself? And if you expect asphalt costs to go up -- costs to go up in the third quarter,what that benefit might contract to?

And then secondly, or my core question is just around Composites. If you could give us any sense ofwhere you think on the more commodity generic glass reinforcements, where capacity utilization rates aretoday and how you're thinking about pricing? You've made some comments before, but directionally, howshould we think about pricing over the next 3, 6, 12 months?


And I just want to make sure on the pricing, you're talking pricing in our Composites business, that kind ofview?

Michael Jason RehautJPMorgan Chase & Co, Research Division

Correct.


Okay. Okay, thanks. So just on asphalt cost. I mean we did realize asphalt deflation in Q2 overall about$20 million. And I'm looking across here, just to try to get that set would have come through. I thinkthat's something that allowed us to maintain what we said a pretty close on a positive price/cost mix whenwe take a look at some asphalt cost deflation against the $23 million pricing headwind we saw and we sawsome positives on transportation.

We do expect that the absolute deflation number will increase into Q3. So we would expect, given whatwe're seeing in Q2 purchases that we made that we would see additional deflation. Some of the additionaldeflation note is going to, again, depend on the magnitude of some of the things I just talked about. It'sreally going to depend on how refinery utilization rates play out and kind of the month-over-month asphaltcosts that we see materializing here so -- but overall, we would expect to realize more deflation in Q3 thanQ2 on an absolute basis.

And then in -- from a Composite standpoint, again, overall, I think the business has performed very well,given the significant volume declines. The pricing environment in Composites has stayed relatively stable.So we did see some price decline in the quarter. That's really tied back to the pricing headwinds from thefourth quarter, pricing negotiations we made. So a large percentage of our Composites business is onkind of annualized contracts. So we do those contracts and finish them up generally in the fourth quarter.So based on those price points, we expected to see a pricing headwind coming into this year. We did





see that in Q2. But I think the positives were, even with the volume decline drop, overall pricing on thetransactional side of the business was relatively stable in the space. So I think we're going to continue toexpect some near-term pricing headwinds from that fourth quarter work. But I think, again, historically,we would want to see probably an increase in volumes and a much stronger demand environment beforewe would think about pricing actions for us.

Operator

Next question is from Kathryn Thompson of Thompson Research.


Really, when you look at your 3 segments, you've given a lot of great color in terms of commodity pricingand utilization and different puts and takes for each of your segments. But concisely, if you could look at 3of your segments and buckets, the top categories for drivers for the margin performance in the quarter. Sofor instance, with Roofing, how much of it was lower cost versus better production levels? Just so we can-- help us frame going forward how we should think about the most important factors impacting marginsat least in the near to midterm.


Thanks, Kathryn. And you're talking about Q2, correct?


Correct.


Yes. Yes. I think just Roofing, I would say, broadly, it was much better volume leverage. So we sawincreases in volume through the quarter, and we were able to maintain a positive price/cost mix relative todeflation versus the price declines we saw, and those were the big contributors.

Now I will call out, there was a $10 million favorable on the tariff recovery. But even when you pull thatout, we were around 20% margins there. But that was a volume and positive price/cost mix that allowedus to keep very good cash contribution margins in the business.

In Insulation, I would say it was better volume leverage in res on a lower cost base. So the actions wetook last year to really pull that capacity out, do cost optimization through the network, benefited us in thequarter because even on flat volumes, we were able to generate positive earnings growth on our res side.

And then just the overall strength of our market position on our technical insulation business continue togenerate very good earnings even with some volume declines there. But I think it was volume leverage,great cost leverage in Insulation were probably the 2 big drivers. And a big part of that was driven by theresidential work we did last year.

And then in Composites, again, very good cost control. So we lost a lot of volume leverage andcurtailments, about $37 million of curtailment costs in the quarter. But we were able to offset that throughother manufacturing productivity and other OpEx cost reductions in the business. So I would say thedriver was, again, really good cost controls and manufacturing performance in insulation that allowed usto generate positive EBIT even with 23% revenue drop in the business.

Operator

Our next question is from Susan Maklari of Goldman Sachs.

Susan Marie Maklari





Goldman Sachs Group, Inc., Research Division

Just kind of picking up on some of your last commentary. Brian, can you talk about some of the costcontrols that you have put in place across the operations, especially maybe early in the quarter? Howmuch of that is more structural versus discretionary to kind of give us some sense of how much shouldbenefit the margins even as the volumes start to come back?


Yes. Thanks, Susan, it's a great question. Overall, I would say the bulk of our OpEx cost actions, I will saythat, the more, what I would call in the discretionary space. We've really just tightened up spending onany kind of discretionary projects. I mean T&E and travel has obviously been extraordinarily restricted, sowe've been very tight on any kind of those cost controls. And I would say the majority of that was morediscretion in the space.

But I would call out that there have been some structural changes, a little bit on OpEx and then in ourmanufacturing costs, both in Insulation and Composites that are structural in place and will help us getgood earnings leverage on the upside as we see volumes improve. And in our Insulation side, particularlyon our res side, these are the cost actions we took last year to really optimize the network. We took thatrestructuring charge where we expected to see about $20 million of cost benefit in the Insulation businessthis year. That's playing out just as we had expected. So that's a structural shift there.

And then in our Composites business, we continue to look for opportunities to streamline our globaloperation there. We've done a lot of work over the last several years in composites, taking out very smallinefficient melters and getting better capacity leverage and better manufacturing productivity, so that'shelped.

And then in addition to that, we continue to take some actions, and we announced a pretty smallrestructuring this quarter. We would expect probably similar costs to come through over the second half.And that would generate about $5 million of ongoing just structural cost improvements in that business onan annualized basis. So I think it has been a mix. The near-term cost saving primarily discretionary, butwe have taken actions structurally to just improve the overall cost performance across the company andthen primarily in Insulation and Composites.

Operator

Our next question will come from Garik Shmois of Loop Capital.

Garik Simha ShmoisLoop Capital Markets LLC, Research Division

Just to be clear on the Roofing and the comment that volumes will fully recover this year due to COVID.Does that imply that you expect volumes, the pent-up demand, to carry over into next year? Did I hearthat right?

And then just on the demand drivers in the business. You talked a bit about storms in some marketsrecently, new housing, obviously, recovering. But what are you seeing on the more traditional reroofingside that makes up the bulk of the business?


Yes. Garik, thanks. Yes, on a full year basis, you heard me right. I think given the drop off in demand kindof in March and April, on a full year basis, we just think it's probably going to be difficult to get back tokind of last year's volumes, given the loss of a couple of months of contracting work in the business. Now Isay that because a lot of that will depend on storm activity. And a lot of that depends on just the weatherin the fourth quarter. That's generally what tends to shut down the Roofing business in Northern climatesas if we just get winter weather early and it limits the days that roofing crews can get up and do the work.So I mean there's some variables around that.





I think certainly, the demand is there. But if it doesn't all get done this year, you're absolutely right. Imean roofing is a -- is not a discretionary purchase. People are buying their roofs primarily because theyneed to repair to replace it. So if the work doesn't get done this year, we do expect that demand to carryover into the first half of next year overall.

And then I think the fundamental demand drivers, we've seen recovering. I think -- look, overall, I thinkthis trend and this theme of people placing a much higher value on their living spaces because of theexperiences of shelter-in-place. And so I think we are seeing a lot of opportunity going forward aroundrenovation work, remodeling work, new construction work in terms of housing. But on the renovation side,I think we're seeing some strong renovation investments in home, we saw. And then we did benefit againas we saw some higher storm demand materialize through the quarter. So that's been, I think, a coupleof the structural demand drivers, Garik. It's really been just reroof and remodeling expansion as peopleinvest in their homes, some stronger storm demand in the quarter that we think materializes certainlyinto Q3 going forward. But again, Roofing is a very resilient business. It has demonstrated that throughprevious economic shocks, and I think we've seen that through the last quarter.

Scott CrippsVice President of Investor Relations

Allison, this is Scott. I think we have time for one more question.

Operator

Our next question is from Yves Bromehead of Exane BNP Paribas.

Yves Brian Felix BromeheadExane BNP Paribas, Research Division

I just wanted to get a feeling of what are your thinking around European insulation volumes and pricing.I think there has been some capacity which was shut down across Europe. And as volumes are trying torecover, what's your feel in terms of the pricing direction for H2 '20? But also on the volume side, thatwould be really helpful.


Yes. Thanks for the question. I think part of the things we called out in terms of our European Insulationbusiness was really the strength of our mineral wool business in the quarter. And I think a couple of thingsthat have impacted that in terms of overall volumes. One, we get a bit of a benefit of our geographicpresence. So we're more in Northern Central European countries. So the Nordics, Germany, Poland, wesaw probably less impact in some of the shelter-in-place restrictions. So we saw volumes for us to holdpretty steady on a year-over-year basis through that.

And I think though, if you get into other parts of Europe, the U.K., France, I mean, clearly, we would haveseen the market conditions worse in terms of the shelter-in-place restrictions. It had a little less impacton us because of just where we're at and where we're located geographically. But clearly, we've heardand saw some of our other customers that were impacted in those markets a little bit more heavily. ButI think, broadly speaking, we're seeing that recovery materialize as countries reopen and projects getrestarted again. So we would expect some volume sequential improvement in Q3 versus Q2 as countriesreopen and these projects get restarted.

And then overall, for the pricing environment, again, pretty similar comments, relatively stable across ourproduct portfolio through the quarter.

Operator

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

Brian D. Chambers





CEO & Chairman

Thank you, and thanks, everyone, for your time and your questions. Throughout the first half of the year,our team has really been resilient. We've continued to execute well. We remain focused on deliveringsuperior customer service and strong results despite tough market conditions. I'm incredibly proud ofhow we have worked together through a difficult time, which will ultimately position us to be a strongercompany. So thank you for your time this morning. We look forward to speaking with you again during ourthird quarter call. And until then, I hope you and your families remain healthy and safe.

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





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