Owens Corning Q1 FY2021 Earnings Call

Good morning, and welcome to the Owens Corning First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. 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 first quarter of 2021. Joining us today are: Brian Chambers, Owens Corning’s Chairman and Chief Executive Officer; and Ken Parks, our Chief Financial Officer. Following our presentation this morning, we will open this one hour call to your questions. Earlier this morning, we issued a news release and filed a 10-K that detailed our financial results for the first quarter of 2021. For the purposes of our discussion today, we have prepared presentation slides that summarize our performance and results, and we’ll refer to these slides during this call. You can access the earnings press release, Form 10-Q and the presentation slides at our website, owenscorning.com. Refer to the Investors link under the Corporate section of our homepage. A transcript and recording of this call and the supporting slides will be available on our website for future reference. Please reference slide 2 before we begin, where we offer a couple of reminders. First, today’s remarks will include forward-looking statements based on our current forecasts and estimates of future events. These statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially. We undertake no obligation to update these statements beyond what is required under applicable securities laws. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent risks and uncertainties affecting such forward-looking statements. Second, the presentation slides in today’s remarks contain non-GAAP financial measures. Explanations and reconciliations of non-GAAP to GAAP measures may be found in the text and financial tables of our earnings press release and presentation, both of which are available on owenscorning.com. Adjusted EBIT is our primary measure of period-over-period comparisons, and we believe it is a meaningful measure for investors to compare our results. Consistent with our historical practice, we have excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT and adjusted earnings. We adjust our effective tax rate to remove the effect of quarter-to-quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share. We also use free cash flow and free cash flow conversion of adjusted earnings as measures helpful to investors to evaluate the company’s ability to generate cash and utilize that cash to pursue opportunities that enhance shareholder value. The tables in today’s news release and the Form 10-Q include more detailed financial information. For those of you following along with our slide presentation, we will begin on slide 4. And now opening remarks from our Chairman and CEO, Brian Chambers. Brian?

Thanks, Amber. Good morning, everyone, and thank you for joining us. I hope all of you on the call are staying healthy and safe. During this call one year ago, as we were all contending with the unprecedented challenges from the onset of a global pandemic, I noted that extraordinary times create the opportunity for extraordinary actions. Over the past year, I'm pleased to say that our team has consistently risen to the challenges that fundamentally impacted not only our businesses and markets, but the ways we work and live. While many of those challenges continue to affect our daily lives, they are no longer unprecedented. We've learned to be more agile to adapt and respond to changing market conditions, demonstrating that strong execution and an uncompromising commitment to our people and our customers can drive exceptional performance even against this backdrop. We certainly demonstrated this in the first quarter, delivering great operational and financial results by leveraging our market-leading positions, unique product and process technologies and enterprise operating model to capitalize on strong or improving market conditions. During our call this morning, I'll start with an overview of Owens Corning's first quarter results, before turning it over to Ken, who will provide additional details on our financial performance. I will then come back to talk about our business outlook for the second quarter and share our perspective on key markets. As always, I will begin my review at safety, where our collective focus remains working together to keep each other, our customers, and our suppliers healthy and safe. During the first quarter, we maintained a very safe environment with an RIR of 0.64, which is in line with our full year 2020 performance. More than half of our facilities across the globe have remained injury-free for more than a year. Financially, we delivered record first quarter revenue of $1.9 billion, an increase of 20% compared with the first quarter of 2020, and up 18% on a constant currency basis; and adjusted EBIT of $282 million, which is more than double what we reported for the same period last year and a record for any first quarter historically. Our global teams continue to execute well, delivering outstanding financial results in a dynamic market environment, demonstrating the earnings power of our company. Our performance during the quarter was driven by good volumes, broad price realization, and strong manufacturing efficiencies across all our businesses, resulting in an adjusted EBIT margin for the company of 15%, with all three of our businesses posting double-digit EBIT margins for the third consecutive quarter. During the quarter, we saw broad strength across many of our end markets. Specifically, the US residential housing market continues to run at a robust pace, with both repair and remodeling activity and new construction growth driving strong demand for our products. In addition, we continue to see many of our global markets as well as our commercial and industrial end markets improve throughout the quarter. While market conditions have certainly turned more favorable, our operating priorities, investments, and execution have positioned us to deliver these strong financial results. Across the enterprise, we continue to invest in select growth and productivity initiatives to service our customers and improve our operating performance. Within Insulation, we are investing in automation and process technologies to create a lower cost, more flexible manufacturing network in our residential insulation business as we commercially position ourselves to benefit from a strong housing market. In addition, we continue to invest in new Insulation materials and systems in non-residential applications to expand our global product offering. In our Composites business, we are investing to grow in higher-value downstream applications, such as building and construction, wind energy, and infrastructure. And we remain focused on optimizing our low-cost manufacturing network to service key markets such as North America, Europe, and India. And in roofing, we continue to leverage our vertical integration model to develop innovative products and systems, while expanding our roofing components offering and strengthening our partnerships with contractors and distributors, to help grow their businesses with our products and brands. All of this work is enabled by our enterprise operating model, which leverages our commercial strength, material science capabilities, and global operating scale, to expand our growth opportunities, improve our operating efficiencies and generate strong free cash flow. Before I turn it over to Ken to walk through our financial performance in more detail, I'd like to share a few additional enterprise updates. On the talent front, we recently announced the appointment of two great executives. First, I'd like to congratulate Dr. Jose Mendez Andino on his recent promotion to Chief Research and Development Officer. Material science research and product and process innovation are fundamental to what we do and how we deliver value as a company. Jose will play a key role in leading our efforts to increase our innovation pipeline and ensure we are helping our customers win and grow in the market. Additionally, I'm excited to welcome Gina Pareto to our company as our next General Counsel and Corporate Secretary, effective June 9. She joins us from Nordson Corporation, where she served for eight years, most recently as their General Counsel. Gina brings more than two decades of experience working across multiple industries and will be a valuable partner to both me and our entire executive team. Another highlight I would like to share is the recent publication of our 15th annual sustainability report titled, Beyond Today: Shaping Tomorrow. We began our sustainability journey nearly two decades ago, and over the years, our goals have evolved and expanded well beyond environmental sustainability. Today, they are built on three key pillars: expanding the positive impact of our products, reducing our environmental footprint, and increasing our social impact. We are proud of our progress and our accomplishments over the past decade across all of our 2020 sustainability goals, particularly our progress on climate action, where we have reduced absolute greenhouse gas emissions from our operations by 60% since our peak year despite adding several material acquisitions along the way. In our recently published 2030 goals, we are committed to further reduce these emissions by another 50%. This will result in 2030 absolute greenhouse gas emissions being 75% below our peak. At the same time, we are also committed to a 30% reduction in our scope 3 emissions as we focus on making a positive impact throughout our supply chain. Sustainability is core to our purpose and will continue to be an important driver and differentiator for our company moving forward. With that, I will now turn it over to Ken to discuss our financial results in more detail. Ken?

Thanks, Brian, and good morning. As Brian commented, Owens Corning delivered outstanding financial results in the first quarter. Strong top line growth, 400 basis points of gross margin expansion, and continued operating expense discipline drove record first quarter adjusted EBIT, along with an adjusted EBIT margin of 15%. The stronger earnings, combined with a continued focus on working capital management and capital investments, resulted in healthy free cash flow generation in the quarter. While benefiting from market conditions that are broadly stronger than they were a year ago, continued solid execution across the business was fundamental to driving this performance. As anticipated, we're managing a more inflationary environment, primarily related to materials and transportation. Positive price realization and manufacturing productivity more than offset the inflation headwind in the quarter. Now turning to slide 5. We can take a closer look at our results. For the first quarter, we reported consolidated net sales of $1.9 billion, up 20% over 2020 with double-digit revenue growth in all three segments, reflecting the robust US residential housing market and the continued strengthening of commercial and industrial markets. Adjusted EBIT for the first quarter of 2021 reached $282 million, up $166 million compared to the prior year and was highlighted by all three segments continuing to deliver double-digit EBIT margins. Adjusted earnings for the first quarter were $183 million or $1.73 per diluted share compared to $67 million or $0.62 per diluted share in Q1 2020. Depreciation and amortization expense for the quarter was $119 million, up slightly compared to the prior year. Our capital additions for the first quarter were $60 million, up $6 million as compared to Q1 2020. We'll continue to be disciplined in our capital spending as we focus on delivering strong free cash flow and prioritizing investments that drive growth and productivity. Slide 6 reconciles our first quarter adjusted EBIT of $282 million to our reported EBIT of $301 million. During the quarter, we recognized $20 million of gains on the sale of certain precious metals. Ongoing progress on our productivity initiatives and manufacturing process technology has enabled us to further modify the designs of our production tooling and reduce certain precious metal holdings. In addition, we recorded $1 million of restructuring costs associated with the Insulation network optimization actions that we initiated in the fourth quarter of 2020. These items are excluded from our adjusted first quarter EBIT. Slide 7 provides a high-level overview of our first quarter adjusted EBIT comparing 2021 to 2020. Adjusted EBIT of $282 million was a new first quarter record for the company and increased $166 million over the prior year. Roofing and Insulation more than doubled their EBIT and Composites grew by 80%. Before turning to the review of each of our businesses, I want to speak to the one-time financial impacts we had from the winter storms in February. Each of our businesses faced operational disruptions related to the storms. However, these were offset in each of the businesses by gains on renewable energy settlements. As we discussed at the time of our year-end call, these impacts were contemplated in our first quarter guidance. Now turning to slide 8. I'll provide more details on the performance of each of the businesses. The Insulation business executed well to deliver strong growth on both the top and bottom lines. Sales for the quarter were $700 million, a 16% increase over first quarter 2020. We saw volume strength across the business as US new construction continued to be robust, and many of the commercial end markets we serve globally continue to strengthen. In North American residential Fiberglas Insulation, we continue to ship all we can produce as the US new residential market remains very healthy. We saw volumes up in line with the expectations we had at the time of our last call and continue to see positive pricing as a result of the actions that we've taken over the past three quarters. I'm happy to share that we started up our batts and rolls lines in Kansas City in February and continued to ramp up production as we move through the quarter. In technical and other insulation, we saw volume up across the business with our highly specified products continuing to see growth in demand in North America and Europe. Pricing continues to be stable, and we saw a benefit from currency translation in the quarter. For the Insulation business overall, good execution in our manufacturing operations partially offset continued transportation headwinds and accelerating material inflation. We delivered margins of 12% and EBIT of $82 million more than double the $39 million of EBIT in the first quarter of last year. Now please turn to slide 9 for a review of our Composites business. The Composites business had a strong start to the year. Sales for the first quarter were $559 million, up 13% compared to the prior year. Stronger-than-expected volume growth in the quarter resulted from demand for downstream applications serving the building and construction and wind markets, as well as demand in key geographies where our local supply for local demand model is being valued by customers and drove higher volumes compared to the prior year. We also saw positive price realization in Composites, resulting from our most recent contract negotiations and the strength of the markets. Operationally, solid manufacturing performance offset headwinds from material and transportation inflation. For the quarter, Composites delivered $79 million of EBIT and EBIT margin of 14%. Slide 10 provides an overview of our Roofing business. The Roofing business produced its strongest first quarter top and bottom line performance as we continue to operate in a sold-out environment. Sales in the first quarter were $711 million, up 28% compared to the prior year. The US asphalt shingle market grew 26% for the quarter as compared to the prior year, with our US shingle volumes slightly outperforming the market. We're seeing strong realization on our announced price increases, and price costs remained positive as asphalt deflation continued to narrow through the quarter, and we started to face into transportation inflation. Similar to the other two businesses, strong manufacturing performance was a fundamental element of the Roofing business results. For the quarter, EBIT was $156 million, up $92 million from the prior year, achieving 22% EBIT margins. Turning to slide 11. I'll discuss significant financial highlights for the first quarter and full year 2021, continued discipline around the management of working capital, operating expenses, and capital investments resulted in strong cash flow. In addition, we didn't experience the seasonal working capital build that we typically see in the first quarter of the year due to robust demand across our businesses. Free cash flow for the first quarter of 2021 at $120 million, up $264 million compared to the first quarter of 2020. It was a record for a first quarter. During the first quarter of 2021, we repurchased 1.6 million shares of our common stock and returned $197 million of cash to shareholders through stock repurchases and dividends. With the strong cash performance and last year's deleveraging activities, we maintain a solid investment-grade balance sheet and are operating within our target debt to adjusted EBITDA range with ample liquidity. At quarter end, the company had liquidity of approximately $1.7 billion, consisting of $605 million of cash and nearly $1.1 billion of combined availability on our bank debt facilities. We remain focused on consistently generating strong free cash flow, returning at least 50% to investors over time, and maintaining an investment-grade balance sheet. Now turning to 2021 outlook for key financial items. I'll point out that there are no changes from our initial outlook provided in February. General corporate expenses are expected to range between $135 million and $145 million. Capital additions are expected to be approximately $460 million, which is below expected depreciation and amortization of approximately $480 million. We continue to focus on opportunities to support our businesses at a sustained lower level of capital intensity over time. Interest expense is estimated to be between $120 million and $130 million. And we expect our 2021 effective tax rate to be 26% to 28% of adjusted pretax earnings and our cash tax rate to be 18% to 20% of adjusted pretax earnings. We're closely monitoring potential changes to the US tax landscape and will be proactive to mitigate the long-term effect on our cash tax rate. Now please turn to slide 12, and I'll return the call to Brian to further discuss the outlook for our company. Brian?

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

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

Operator Instructions. And our first question comes from Mike Dahl of RBC Capital Markets. Please go ahead.

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

Thanks, Mike, and good morning. Thanks for the question. As we're thinking about inflation, as we entered this year, we indicated and truly still believe that we're going to move through an inflationary cycle that will probably accelerate a bit as we move from the first quarter into the later quarters. If you look at our MD&A disclosure in the Q, you'll see us breaking out inflation between each of the three businesses. And you add that up, and it's around $24 million across the three businesses. For a little bit of color on that in the first quarter. It's probably split fairly evenly between material input costs and delivery costs. And then when you think about material input costs, the majority of what we're seeing is starting to be driven by things that are petroleum-based. One of the things that we do anticipate to move directionally more inflationary as we move forward is that we did continue to see a bit of asphalt deflation in the first quarter. As noted in the earlier comments, that began to narrow as we moved through the quarter just as we expected, and we expect that to start to move more inflationary as we move through the balance of the year. With that said, we are taking actions to ensure that we maintain the price cost balance positive as we move through the year.

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

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

Thanks, Kathryn. Good morning to you as well. I'll address the first couple of points and then let Brian discuss the Biden plan that we are currently reviewing. Regarding how much of our strength was due to building and construction, this area remains a positive contributor, especially with the demand in the North American residential markets. However, its growth rate isn't significantly distinct from other sectors, such as wind, which continues to perform well. Over the past few years, as we developed our low-cost manufacturing network globally, we have experienced strong performance across North America, Europe, and India. These are key regions for us, and the enhancements in productivity and cost-effective operations have bolstered our business. On pricing, about two-thirds of our Composites business is linked to pricing, primarily due to contract agreements. We entered this year with beneficial pricing negotiations, influenced by market trends and customer outlooks. This has positively impacted our first quarter, and we anticipate this to continue. Additionally, for the portion of our business not bound by contracts, we are seeing favorable pricing trends due to strong demand. Assuming this demand remains stable, we expect solid contract pricing as well as a healthy pricing environment moving forward. Regarding the administration's plans, it feels a bit premature to accurately gauge their impact. There will be extensive negotiations ahead. Typically, our Glass Composites business sees about 10% of demand directed towards traditional infrastructure applications in the U.S. Considering our strong position in North America, we see potential benefits from any additional investments, but our perspective will evolve as we observe how these plans develop.

I would like to comment on the administration's plans. I believe it's a bit early to fully understand how this will develop. There will be considerable negotiation. Generally, in the Glass Composites business, about 10% of demand in the US is related to traditional infrastructure applications. With our strong market share in North America, we see a good opportunity to capitalize on any additional investments beyond this. Our perspective on these opportunities will continue to change as we observe how the plans unfold, but it certainly presents a potential upside.

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

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

Thank you, Matt. We are monitoring the situation closely. A few quarters ago, when we restarted operations in Kansas City, we mentioned that we believed we would have sufficient capacity to support a market of approximately 1.5 million starts per year, and we remain confident in that assessment. We are increasing capacity in Kansas City along with our other productivity initiatives, and we believe this is the right level of capacity for the market moving forward. However, we will continue to evaluate the market over the next year or two to see what develops. Currently, the number of starts has been slightly higher than we anticipated in recent months, but consensus estimates for 2021 and 2022 are still around 1.5 million starts, indicating a healthy housing market. If this trend continues or if projections for 2022 or beyond increase, we have capital-efficient options within our network to add incremental capacity at various facilities. We can also implement debottlenecking initiatives to increase our capacity. Therefore, we have some flexibility as we progress. However, it is important for the industry to address certain constraints and bottlenecks related to land development, labor, and shortages of construction materials before we can confidently predict a longer-term trend significantly exceeding 1.5 million starts. Nevertheless, this is a strong market for us, and sustaining this level of housing starts would greatly benefit our business in the upcoming years.

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

Thank you, everyone. If you look at the housing starts over the past six months, they have been at a rate that suggests consensus forecasts are typically lagging. I would be interested to know about the lead times for some of your options to increase capacity. This is in relation to Mike's question, as consensus often misjudges major shifts in starts. I also want to ask about your guidance for Roofing in ARMA, which you indicated would be up 15% to 20%, while your forecast is only mid- to high singles. Is this mid- to high singles figure just relating to shingles in comparison to ARMA, or does it also reflect potentially slower growth or stagnation in components or third-party asphalt sales? Any clarification on this would be appreciated.

Sure. Thanks, Stephen. Regarding the consensus estimates, I believe they've been inaccurate on both sides in recent years. We continue to use them as a reference point, but we also maintain communication with our customers, examining their backlogs and order books to inform our assessments. We combine our market insights with those estimates to gauge potential developments over the next 6 to 12 months. In terms of timing, we have some debottlenecking initiatives that could be implemented in about 3 or 4 quarters, while others might be completed sooner. If we decide to pursue more significant volume increases, those would likely take less than a year. We have some flexibility and will keep an eye on the market conditions to make informed decisions that allow us to provide our customers with the products they need. However, I prefer to focus on longer-term trends before aggressively expanding our capacity. Regarding the Roofing guidance, this pertains specifically to U.S. ARMA shingle shipments and not to components or other products. We're facing a comparison issue with Q2 of last year. Last year, our first-quarter sales fell behind the market, but in Q2, we saw a significant increase in shingle demand. For this year's Q2, while we anticipate shipping slightly more than in Q1, the year-over-year growth rate for U.S. shingle shipments will be somewhat lower. Overall, we'll ship significantly more shingles in the first half of this year compared to the first half of last year, and we are confident in our market position.

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

Good morning. You indicated your 2Q guide still incorporates some volume headwinds from inventory catch up. I'm just wondering at what point you think that lifts as a headwind? And then apologies if I missed this, but was that a comment on inventories across your businesses, or just wondering if you could give any more color on inventories in the three segments?

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

Our next question comes from Michael Rehaut from JPMorgan. Please go ahead.

Thanks. Good morning, everyone. My question has to do with price/cost as you look out for the rest of the year. A lot of moving pieces across the different businesses. Can – if you could just kind of quickly summarize where you were. But where you were in price costs across the businesses in the first quarter? And given the announcement of price increases to the extent that those are realized, how do you see the price/cost dynamic progressing? Obviously, inflation will likely accelerate over the next couple of quarters?

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

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

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

Hey, guys. Brian, I was just curious if you had any perspective on outlook on roofing volumes in the second half as you kind of lap tougher comps, but products still on allocation. When you kind of expect lead times to get back to normal for inventory? And does that provide a buffer from a channel fill dynamic in the back half?

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

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

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

Yes. Thanks, Keith. Right now, I'd say we're seeing broad demand strength across all of our product platforms in our technical and insulation business. That comprises mineral wool, FOAMGLAS, foam insulation products. As a reset, about one-third of the revenue in our technical insulation business is driven by residential applications, and about two-thirds in non-residential. The products that touch the residential end markets in the US would be like our FLEX duct materials for residential HVAC applications. In Europe, it would be mineral wool, which is more commonly used in residential construction. So about one-third of our business in technical insulation is really driven by some of the residential applications and strength we're seeing in both the US and Europe. That's giving us a good lift. Then in non-residential, we have a broad set of end market applications around commercial and industrial. So we see strength in commercial, we're in data centers, we're in warehouses, we're in airports, museums, and offices. I think that broad distribution of applications provides us with just emerging strength across all of those in both US and Europe. We’re completing projects, we’re starting to see the project pipeline build a little. The architectural billing index, which is tracked here in the US is showing improvement there. We're seeing that continuing to work. The last part of our strength is the benefits of some recent product launches. Innovation is critical, and product innovation is very important to keep inventing and bringing new products and new materials to market. I think last quarter, I talked about our FOAM NGX product, which is a sustainable product solution that is getting great traction. Overall, we think we're well positioned with these product platforms and with the longer-term growth trends across these categories, we’re well positioned for a few years in this category.

The next question comes from Garik Shmois of Loop Capital. Please go ahead.

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

Gary, are you talking within Insulation or Composites or both?

Maybe if you could do it across those businesses. Yes.

Yes. Okay. For Insulation, I mean because ironically, they're both in our glass melting businesses. Both in Insulation and Composites, we're expecting about the same level of production improvement on a quarter-over-quarter basis year-over-year, about $30 million. In Insulation, I'd say it's probably a little more heavily centered towards our technical insulation kind of product platforms, where again, we're ramping up quite a bit to service the demand that I just spoke about. We're continuing to get a little bit of operating leverage back on some of the residential side. So, but I think it's in both segments of Insulation that are seeing the benefits as we really are trying to run pretty much full out on our assets. And then in Composites, again, it is broad brush. All of our glass melting furnaces really globally, we are running at high capacity in order to service the demand. So there's no one geography that stands out significantly more than another in terms of our ramping up production. So we're seeing that $30 million really across the board.

Our next question comes from Reuben Garner of Benchmark. Please go ahead.

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

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

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

Brian and Ken, good morning and thank you for taking my question. I have a positive multiyear outlook for housing starts as well. However, I would like to understand the dynamics regarding US residential insulation. You have brought your KC plant back online, and some competitors are introducing loose fill insulation later this year. How do you assess the year-end industry capacity in relation to housing starts? Is it sufficient to support 1.5 million or 1.6 million starts? Is there a specific figure you can share? Additionally, with the new capacity coming online, do you anticipate that this might lead to less robust pricing, considering we have seen four price increases in the past year?

Yes, Truman, I think on the capacity side, if I had to kind of put it dimension on it, we've said that we felt comfortable we could service at this kind of 1.5 million housing starts. I think I've said in the past with some of the loose-fill capacity, those two facilities you're talking about in the back half of the year would bring on some additional loose fill. We think given the market strength that capacity would just be folded in and consumed pretty readily. I still think that’s the case. One thing to keep in mind and it goes a little bit on Roofing as well, particularly in Insulation, I believe that there's installed capacity to service one-five or a little more. Now, the challenges we're facing is similar to Roofing. Last spring, we had to curtail production. There were some production shutdowns that we had to take, which means we lost some production that we could be able to make up this year with assets running at a higher level than last year. So on a full-year basis, the capacity we've added and the production time we've added versus last year, we think there are additional capacity to service this market. That's why I keep coming back until we feel pretty good about the current level. I think on the pricing front, we’ve taken on a third price increase in the year, really as a response to the inflationary environment we're facing into. We think the market remains very good over the next few years. We are going to compare that against inflationary pressures, which was a big driver of our third increase to stay in front of it as we've talked about.

Thank you, everyone. We are now ready to conclude the session.

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

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

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