Owens Corning Q1 FY2020 Earnings Call

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

Thank you, and good morning, everyone. Thank you for taking the time to join us for today's conference call and review of our business results for the first quarter 2020. Joining us today are Brian Chambers, Owens Corning's Chairman and Chief Executive Officer; and Prith Gandhi, our Interim Chief Financial Officer. Following our presentation this morning, we will open this 1 hour call to your questions. Earlier this morning, we issued a news release and filed a 10-Q that detailed our financial results for the first quarter 2020. For the purposes of our discussion today, we've prepared presentation slides that summarize our performance and results, and we will refer to these slides during the call. You can access the earnings press release, Form 10-Q and presentation slides at our website, owenscorning.com. Refer to the Investors link under the Corporate section of our home page. A transcript and recording of this call and the supporting slides will be available on our website for future reference. Please reference Slide 2 before we begin, where we offer a couple of reminders. First, today's remarks will include forward-looking statements based on our current forecasts and estimates of future events. These statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially. We undertake no obligation to update these statements beyond what is required under the applicable securities laws. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent risks and uncertainties affecting such forward-looking statements. Second, the presentation slides and today's remarks contain non-GAAP financial measures. Explanations and reconciliations of non-GAAP to GAAP measures may be found in the text and financial tables of our earnings press release and presentation, both of which are available on owenscorning.com. Adjusted EBIT is our primary measure of period-over-period comparisons, and we believe it's a meaningful measure for investors to compare our results. Consistent with our historical practice, we have excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT and adjusted earnings. We adjust our effective tax rate to remove the effect of quarter-to-quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share. We also use free cash flow and free cash flow conversion of adjusted earnings as measures to help investors evaluate the company's ability to generate cash and utilize that cash to pursue opportunities that enhance shareholder value. For those of you following along with our slide presentation, we'll begin on Slide 4. And now opening remarks from our Chairman and CEO, Brian Chambers, who will be followed by interim CFO, Prith Gandhi. Then Brian will cover our outlook before the Q&A session. Brian?

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

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

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

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

The first question today comes from Kathryn Thompson of Thompson Research.

First focusing on Composites and understanding that it will significantly impact the company's results for the remainder of this year and into 2021. Could you provide more details regarding the geographic impact in terms of volumes and relative earnings challenges? Additionally, what insights do you have from Asia as they are further along in the recovery? Lastly, could you also discuss Europe’s response to lower demand and how that affects Composites?

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

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

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

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

The next question comes from Matthew Bouley of Barclays.

I wanted to ask for more details regarding the decremental margins across the business, especially looking beyond the second quarter. I'm trying to grasp what level of costs is more fixed in the near term, considering the rapid decline in volume. What can you adjust in the coming months, and what could that imply for decremental margins after the second quarter as you manage your costs?

Thank you, Matt. Our outlook for decremental margins in Q2 largely hinges on the volume declines we're experiencing in April, which may persist through the quarter. These margins will be heavily influenced by the volume and demand that our business generates. In the short term, much of the margin decline is linked to our fixed cost structure. While every business will feel the effects of volume drops in the second quarter, our Composites and Insulation segments, as well as our glass melting operations, are more susceptible due to higher fixed cost absorption, leading to greater margin erosion. Currently, we are considering reducing operations to cut costs related to energy and raw materials during this idle period. However, we will still carry most of the energy and labor costs since we plan to keep these assets in a hot idle state as we assess conditions for the second half of the year. In the near term, these fixed costs will remain a burden on the P&L. Longer term, we have options to take certain furnaces or lines offline entirely, which would help eliminate a significant portion of our energy and operational costs. For now, the margins reflect our expectations for the second quarter amid the current volume decline and our decision to keep many assets actively at hot idle while we gauge the volume situation for the latter half of the year.

Your next question comes from Stephen Kim of Evercore ISI.

Thank you for the insights. It’s clearly a challenging environment, and your outlook captures that well. However, there were a few points in your Q that I’d like you to elaborate on, particularly regarding the strong manufacturing performance in all three divisions: Insulation, Composites, and Roofing. Could you provide more details on this? Specifically, I’m interested in how the current COVID situation might impact these improvements, whether you anticipate seeing reduced benefits or if there’s a chance those manufacturing enhancements could actually increase as we progress through the quarter. Any additional information you can share on this and what we should expect moving forward would be appreciated.

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

Next question comes from Mike Dahl of RBC Capital Markets.

Regarding the commentary from April about the volume declines and increments you're mentioning for the second quarter, it appears that the consolidated business is likely at or slightly above breakeven from an EBIT perspective. I would like to confirm if that interpretation aligns with what you're indicating. Furthermore, building on Steve's question, considering the last cycle where high fixed cost sectors like Insulation and Composites experienced some downturns in adjusted EBIT, it’s important to note the significant changes that have occurred in those businesses since then. However, we are currently facing a synchronized downturn across various regions and end markets. I would appreciate your thoughts on the ability of the Composites and Insulation sectors to remain profitable in this current environment.

Yes, that's a great question. Thank you. For the quarter, in terms of consolidated performance, I believe that overall operating profitability will heavily rely on the volumes that emerge and how quickly markets open up. This will be the main factor affecting profitability within Insulation and Composites related to volume. Our priority this quarter and moving forward is focused on generating robust free cash flow by managing the factors under our control, which include significant operational expense reductions, minimizing capital expenditures, and tightly managing our working capital inventories. This approach will help us generate strong free cash flow throughout this quarter and into the latter half of the year. Although EBIT performance will depend on volumes, we are optimistic about our free cash flow performance being solid as we progress through the quarter and into the second half of the year. Regarding your other question, reflecting back on Stephen's comments about changes, our glass melting businesses in both Composites and Insulation have seen substantial improvements in our cost position since the last downturn. In our residential insulation sector, we've implemented cost actions from last year, such as reducing capacity and enhancing manufacturing productivity. We have effectively restructured the residential segment of the Insulation business, allowing us to operate profitably even at a lower housing start base compared to the previous housing recession. This positions us much better now. Additionally, our investments in the technical side of the Insulation business have significantly enhanced our earnings potential by diversifying into higher value products across a broader geographic range. Overall, the Insulation business is now more equipped to navigate a downturn than in the last cycle. A similar situation exists for the Composites business. Looking at our current operations compared to a decade ago, we are now more focused, and we have strengthened our market shares in key areas such as North America, Europe, India, and Brazil. Significant progress has been made in increasing our market shares, particularly in nonwovens and downstream applications like wind energy. Furthermore, during the last downturn, we had many subscale melters, but we have since removed those from our network. We now possess higher-performing, scalable assets, and our manufacturing productivity has improved along with unit costs. In summary, we are in a much more advantageous position to weather this volume downturn and achieve better results than we did in the last recession.

The next question comes from Phil Ng of Jefferies.

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

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

The next question comes from Truman Patterson of Wells Fargo.

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

Thank you for the question, Truman. Regarding pricing, as I mentioned earlier, we have experienced relatively stable pricing in the residential business through April. We started the year with a slight increase in housing starts and a favorable volume environment. After announcing our price increase in January, we began to see some of that reflected in our financial results in the first quarter, and prices have remained stable so far this month. Looking ahead for the rest of the year, we will continue to assess the markets carefully, remain competitive, and adjust as necessary. Currently, prices have stayed relatively stable. As for the supply and capacity additions coming online, I do not have any clear insights on how they will be managed. The environment has changed significantly since those capacity increases were originally announced, so we will need to observe any developments regarding those additions as we move forward. I cannot predict how this might affect 2021 without confirmation on when those additions will actually become operational.

Next question comes from Justin Speer of Zelman & Associates.

Could you provide some insight into what you're experiencing in April regarding volume and pricing on the Roofing side, as well as any information on the current inventory situation in Roofing?

Yes, thank you. At the beginning of the year, we anticipated another strong performance in Roofing, expecting overall volumes to remain relatively flat compared to last year. Throughout the quarter, we experienced a slight decrease in volumes year-over-year, as anticipated, due to a reduction in storm carryover. We mentioned this in our previous call, as we believed it would affect volumes. We noticed a greater decline in March, which we attribute to the shelter-in-place restrictions being implemented in the U.S. This situation led our distributors to reduce their purchases and manage their inventories as they awaited a clearer demand outlook for the quarter. Consequently, we observed a drop in our order book towards the end of March. In April, conservative buying trends continued as our distribution customers were closely managing their inventories based on expected demand. Therefore, we anticipate that our shipments as manufacturers will lag behind the out-the-door sales of distributors. However, our contractors have indicated that their business remains active. Many shelter-in-place restrictions classified construction as essential, allowing project work to proceed, although there are concerns about lead generation in May and June. We expect a brief slowdown in Q2 as distributors manage their inventories, but as we move into the latter half of the year and markets begin to reopen, we anticipate improved conditions. Roofing has shown to be a resilient investment for homeowners, and as storm demand leads to a greater need for repairs and replacements in the second and third quarters, we believe contractors will return to work more actively, resulting in volume improvements. In the short term, however, we expect continued inventory management, leading to a projected 30% decline in our order outlook. This estimate is highly dependent on storm activity and the pace of state reopenings, both of which could positively influence our performance as the quarter progresses.

The next question comes from Michael Rehaut of JPMorgan.

I hope everyone is doing well. I wanted to revisit the comments regarding the Insulation business, specifically about the volume trends. I appreciate the insights on pricing. However, I noticed you mentioned that North American residential volumes were down about 10% year-over-year, alongside a global decline of 10% to 15%. You suggested these numbers could drop further as the second quarter progresses. Can you clarify what is driving those statements? Is it more related to reduced production due to facility shutdowns in Europe and other regions, rather than a decrease in end demand? Additionally, could you provide some perspective on the potential further decline as we move into May and June?

To clarify, my comments primarily address the pace of market recovery and demand, not production issues. We're closely monitoring how demand might develop in May or June. Any potential declines in demand are largely contingent on how quickly states and countries in our technical insulation sector are able to reopen and start recovery efforts. If the current shelter-in-place restrictions are extended into May and June, we could face some reductions in demand for both our residential and technical businesses. This perspective assumes that market reopening takes longer than expected, which would impact recovery speeds. Regarding residential demand, any potential decline is closely linked to whether these restrictions are lifted and the extent to which housing projects, from starts to completions, are delayed due to limited construction crew access, resulting in longer build times. This could affect demand if project initiation is postponed until buyers are ready, thereby limiting speculative building. However, in contrast to the last recession, housing hasn’t been overbuilt, which sets us apart this time. Recent weeks have shown some positive signs, like a major homebuilder reporting weekly sales improvements and rising mortgage application rates. Thus, there's reason to hope that lifting restrictions could boost housing recovery, potentially at a quicker rate due to the current lack of overbuilding. Our outlook hinges significantly on when those restrictions are removed and the subsequent pace of recovery. In terms of technical insulation, we see varied performances depending on regional shelter-in-place and construction restrictions, with some areas in Europe, like the Nordic mineral wool sector, showing relatively better volume performance. If restrictions are lifted, we could witness improvements; otherwise, demand may remain stagnant through the quarter.

The next question comes from Ken Zener of KeyBanc.

Thank you for your comments. I wanted to ask about the fiberglass situation. In the U.S., we are experiencing very different regional trends, especially in the San Francisco area, where we have the most stringent shelter-in-place and no construction mandates. Could you explain how these hot idles are affecting your network? I assume the Northern California plant is not operational due to the construction ban, unlike some other plants that might be in more favorable locations, such as South Central Texas or parts of Florida. Could you elaborate on how the hot idle affects your management of the system and provide some context regarding your demand in relation to your pricing? Additionally, Prith, could you provide more details on the impairment?

Yes, thanks, Ken. I'll begin and then hand it over to Prith. In terms of our operations, it highlights the value and essential nature of our products. Our facilities continue to run, even in places like Santa Clara, California. What we are discussing are curtailment actions related to the current demand environment. We are focused on controlling what we can regarding our cost position, managing tight inventories, ensuring good working capital, and reducing CapEx to generate strong cash flow. We're being proactive about curtailments across our Insulation, Composites, and Roofing businesses to avoid building excess inventory ahead of anticipated demand. We are temporarily idling some operations to minimize inventory, which gives us the flexibility to quickly ramp up production when the market recovers. We will make adjustments based on the demand fluctuations we observe. Our operations remain essential, and we’ve kept them running. The costs tied to hot idling are linked to our production curtailment actions aimed at inventory management. Prith, I’ll pass it over to you to discuss the impairment further.

Thank you for the question, Ken. As we noted in our 10-K in February, there was a small cushion of about 10% between the fair value of our Insulation business and its carrying value during our annual testing. We also mentioned that any worsening of the macroeconomic conditions affecting Insulation could lead to a higher chance of an impairment charge. In March, following a decline in our market cap below our book value, we needed to conduct some interim testing. There were two significant changes in our parameters between the October test and the March evaluation. First, due to the COVID-19 pandemic, financial market uncertainty has risen considerably, leading to a much higher equity risk premium, which impacted our discount rate significantly. The second major factor was the pandemic's effect on near-term cash flows. Together, these two factors contributed to the bulk of the impairment charges.

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

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

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

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

Thank you for the question. This is truly an unprecedented situation. In our Roofing business, normally, replacement or repair needs are non-discretionary, so even during previous recessions, while demand for shingles has decreased slightly due to some discretionary projects like new construction or remodeling, the essential repair work has remained strong. The significant decline we’re seeing this quarter is primarily due to the global health crisis rather than just an economic downturn. The shelter-in-place orders have restricted contractors' access to job sites and has led homeowners to delay these projects as everyone stays at home. Therefore, this drop in demand is quite unusual. However, as restrictions are lifted, we anticipate a resurgence in demand since these repairs are necessary. We expect business performance and demand patterns to return to levels similar to past recessions, which have shown resilience. Given that roofing is an outdoor activity, it aligns well with social distancing practices. While the current demand drop is atypical and primarily related to the health crisis, we are confident that demand will recover, mirroring trends from historical downturns.

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

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

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

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