Owens Corning Q3 FY2020 Earnings Call

Good day, and welcome to the Owens Corning Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Amber Wohlfarth, Director of Investor Relations. Please go ahead.

Thank you and good morning, everyone. Thank you for taking the time to join us for today’s conference call and review of our business results for the third quarter 2020. Joining us today are Brian Chambers, Owens Corning’s Chairman and Chief Executive Officer; and Ken Parks, our Chief Financial Officer. Following our presentation this morning, we’ll open this one-hour call to your questions. In order to accommodate as many call participants as possible, please limit yourselves to one question only. Earlier this morning, we issued a news release and filed a 10-Q that detailed our financial results for the third quarter 2020. For the purposes of our discussion today, we have prepared presentation slides that summarize our performance and results, and we’ll refer to these slides during the call. You can access the earnings press release, Form 10-Q, and presentation slides at our website owenscorning.com. Refer to the Investors link under the Corporate section of our homepage. A transcript and recording of this call and the supporting slides will be available on our website for future reference. Please reference slide two before we begin, where we offer a couple of reminders. First, today’s remarks will include forward-looking statements based on our current forecasts and estimates of future events. These statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially. We undertake no obligation to update these statements beyond what is required under applicable securities laws. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent risks and uncertainties affecting such forward-looking statements. Second, the presentation slides and today’s remarks contain non-GAAP financial measures. Explanations and reconciliations of non-GAAP to GAAP measures 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. The tables in today's news release and the Form 10-Q include more detailed financial information. For those of you following along with our slide presentation, we’ll begin on slide four. And now, opening remarks from our Chairman and CEO, Brian Chambers. Brian?

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

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

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

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

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

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

Good morning, Matthew. Thank you for your question. I’d like to explain the reasoning behind the restart and then discuss the pricing environment. Since the second quarter, we've observed a significant improvement in the housing market. The last three months have seen housing starts trending at or above 1.4 million. When we made the decision last year to reduce capacity in Kansas City, we based it on our assessment that we could effectively serve a market in the range of 1.3 million starts, and we were confident in that approach. Considering the long-term trends in housing, the belief that it has been underbuilt for some time, and the interest rate environment along with the permits we're seeing, we believe there's a strengthening that will surpass the 1.3 million mark. Therefore, we want to add capacity to better serve our customers. This has been a key operational focus for our insulation business. We aim to maintain a flexible and efficient network to adjust to market volume changes while ensuring we can meet customer demands. We are optimistic about starting this process. Typically, this takes about four to six months for us. We will be doing some retrofit work to prepare the line, along with rehiring and training, and we are confident that we can be operational by the second quarter of next year to support anticipated demand growth. Regarding pricing, we announced a price increase in mid-September, which is gaining traction, and we plan an 8% increase in January. This timing typically allows our customers to incorporate the changes into their plans. Historically, it's been a good time for such announcements for our insulation business. I believe that the capacity we are adding to meet customer demand is separate from the pricing environment, which we will continue to evolve. Our products are valuable, needed, and in high demand, and we think it’s an appropriate time to implement additional pricing as we enter 2021.

Thank you for the insights. I'm interested in discussing the fiberglass insulation aspect of the business for a moment. The capacity being introduced in Kansas City is likely to contribute about 2.5% to the overall industry capacity. It appears there is limited additional capacity in the industry from your competitors. This means you essentially have this new capacity to yourselves. However, it's not expected to be operational until the second quarter. Additionally, the capacity expansions by your competitors are expected to be completed by the end of next year. You mentioned having current capacity for approximately 1.3 million starts. Given the current trajectory of the housing market, there's a possibility of seeing housing starts increase by 10% to 15% next year. If the number of housing starts trends toward the higher end of that projection, let's say around 1.5 million, what would be the potential implications for your company? I'm not asking for a prediction on whether that will happen, but if it did, how might it affect your segment and your overall strategy?

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

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

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

Hey, guys. Is my line okay now?

Yes. You are good, Phil. Thanks.

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

Thank you, Phil. Regarding our support of market demand, we believe that we have been actively working to earn our customers' business. We believe we offer the best product, a strong brand, and excellent commercial support. Together, with our capacity to meet customer demand, we see a significant opportunity to gain market share going forward. We will work diligently to uphold our discipline and focus on commercial efforts, and with the additional capacity we have to serve the market, we perceive chances to further capture incremental market share as the industry continues to expand. This will influence how we manage our assets in light of the market outlook. For our margin performance, the two main factors will be improved volume leverage from our asset base and fully utilizing these assets to provide great products. This will enhance our margins as we optimize network performance. Over the past few years, we have taken steps to improve our cost structure, and we expect to see benefits from increased volume leverage moving forward. Pricing also plays a crucial role in margin improvement, and we have announced increases for September and January. We believe this combination of enhanced volume leverage, a better cost position, and pricing opportunities will enable us to expand our margins as we move into 2021.

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

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

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

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

Thank you. Good morning. I want to discuss the Composites segment. The margin returned to the double-digit level much sooner than we had anticipated. Can you explain how sustainable that is? I know you mentioned in your comments that you expect it to align more with the first quarter, which was around 9%, and that there are $5 million of rebuild costs included. Can you talk about the different components of that? How do you plan to achieve sustainable returns in the double-digit range?

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

Thanks. Good morning everyone, and congratulations on the results. Welcome Ken, and congratulations Amber. I wanted to highlight Roofing. There's been a lot of discussion about Insulation and its capacity, as well as managing an improving market over the next year. On the Roofing side, we've seen great results and strong margins in the third quarter. You mentioned that 4Q margins may be slightly down sequentially, but still maintaining a healthy level of over 20%. I have a two-part question. First, how much of the current demand seen in the third quarter and expected in the fourth quarter do you believe is being driven by inventory channel replenishment and storm demand? Do you think that storm demand will be sustainable in the first half of the year? Second, from a margin perspective, the second and third quarters are typically stronger. How do you view profitability and the ability to sustain a margin of over 20% in the coming year or two?

Okay. Thanks, Michael. Again, good morning to you as well. Let's talk a little bit about how we're seeing volumes evolve in the marketplace. I would say Q3 by our view, the robustness of market was really driven by end-market demand, contractor demand, homeowner demand, more than distributor replenishment. We talked at the end of last quarter's call that Q2 we saw increased storm activity, primarily hail-driven events that ramped up storm demand. In Q3, we've seen several hurricanes and that's continued. We think we've seen a big step-up in storm demand that led to this and is leading to the robust market in Q4. That's on top of a really robust remodeling and repair business. People are investing in their homes and doing remodeling projects. In Q3, the strength of that remodeling and renovation as homeowners invest in their homes has driven demand. We've seen a considerable year-over-year storm activity combined to drive robust out-the-door sales. When we roll through Q4, we're always concerned about winter weather, that's always the biggest variable to our shipping volumes in Q4 and the contractors' ability to do work. If they can get to all that, we think there will be some carryover, particularly on the storm demand into the first part of next year. So, a robust demand environment is what we see for the next few quarters. On the margin front, we've said all along that we think long-term 20% operating margins for this business is the right center point through a cycle. Generally, when we go through more inflationary periods, we've seen that we trend a little below that and in deflationary asphalt environments we trend above that. I certainly believe that's what we're seeing. Overall strength of our business and the earnings power of the business is intact to be at that 20% level. I think we'll bounce around plus/minus just depending on some of the inflationary environment and some of the depth of the market strength.

Hi. Thank you for allowing me to ask a question today. Regarding the Composites segment, you've provided great insights about the strong demand growth across various geographic areas and end markets. I would appreciate an update on some of the end markets that have struggled this year, specifically the automotive and industrial sectors. What trends are you observing in those underperforming segments? Additionally, if you previously mentioned it and I missed it, could you provide any information about rebuild costs as we look toward 2021? Thank you.

Yeah. Thanks, Kathryn. Good morning. Auto is a big part of the overall glass market, roughly 25% tied up into autos and a little bit broader and transportation. In Q3, we've seen improvements, but still trending down probably vehicle production and vehicle demand down about 19% to 20%. It has gotten better. A broad statement I'd say particularly in some of the automotive is that we've seen in Q3 some restocking of manufacturers that really took inventory levels down in Q2. A lot of the strength in Q3 was not only the end markets improving, but we saw some restocking of our customers. In terms of some of the other industrials, oil and gas still represents a smaller part of the Composites market, but still down double digits. It’s slowly gotten a little better, but really not a lot of improvement there. A couple of the best improvements are in our North American market, the Marine and RV segments. That end market is really popped, and we're seeing demand, so those demand levels really increased for us in Q3. We expect that to continue here at the end of October. Wind energy is the other one we've talked about; that's a big part of the overall market and a big part of our business, and that's bounced back and is running very strong. We expect that strength to continue in Q4. In terms of rebuild costs, we're expecting about $5 million of year-over-year headwinds tied to some additional rebuild costs, primarily a facility in the U.S. that we were downtiming for some production curtailment actions which coincided with some rebuild planned to ensure our furnace is ready for full operation in 2021, and then a facility in China that we'll do a small repair on as well. Those are the facilities we are going to take advantage of downtime to end the year and create a bit of a headwind year-on-year of about $5 million.

Alison, we have time for one more question.

Thank you. Our next question will be from Mike Dahl of RBC Capital Markets. Please go ahead.

Morning. Thanks for squeezing me in. I just wanted to go back to Insulation and it is a two-part question. Brian, I think I heard in your opening comments, or your ending comments that you expect North American resi flat volumes in Q4, despite the industry being up on a lag starts basis. You just put up a zero on flat volume in total in Q3. So, that kind of implies a decelerating trend in Q4 despite acceleration in the end markets. A, did I hear that correctly? And can you help reconcile that? And B, if that's truly driven by your own supply constraints, should we expect that as we think about the first half of next year and continued acceleration in lag starts and recovery in some of the other markets that until you get your new capacity or you're deiddled capacity back up that you'll continue to lag the industry for the first half of 2021? Thanks.

Thank you, Mike. I’ll clarify that. Starting with our outlook for Q4, last year’s fourth quarter was very strong for residential shipping, which benefited both us and the industry. We are comparing against a solid fourth quarter from last year, when the housing market was showing signs of strength. We announced a price increase in January, which contributed to robust overall volumes throughout the year. Last year, we managed that growth mainly through our existing inventory and available capacity. This year, however, we are entering Q4 with extended service cycles and very little inventory. Although we have increased production and will ship everything we produce, this limits our ability to meet any demand growth in the residential sector during Q4. Additionally, I mentioned a mid-single-digit decline in our technical sector, which is impacting any potential volume growth. In Q3, we experienced strong residential volumes that somewhat offset a modest technical decline in Q4. We don’t anticipate significant residential growth while the decline continues, leading to some volume challenges in Q4. However, as we approach 2021, the seasonal nature of our business will play to our advantage. Q4 is typically our strongest period for residential insulation, and we plan to ship everything we can produce. Q1 may see a slight decline, but we expect production to ramp up on a year-over-year basis due to the increases we've already implemented in Q3. We do not view this as a setback for our market share as we enter 2021. With additional capacity coming online in Kansas City in Q2, we are confident in our ability to meet market demand growth and maintain our share. While there may be some timing challenges in Q4, we feel optimistic about finishing strong and being well-positioned to accelerate growth in our residential business as we move into 2021.

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

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

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