Owens Corning Q3 FY2021 Earnings Call

Good day. And welcome to the Owens Corning Third Quarter 2021 Results 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. 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 2021. Joining us today are Brian Chambers, Owens Corning’s Chair and Chief Executive Officer; and Ken Parks, our Chief Financial Officer. Following our presentation this morning, we will open this one-hour call to your questions. In order to accommodate as many call participants as possible, please limit yourselves to one question only. Earlier this morning, we issued a news release and filed a 10-Q that detailed our financial results for the third quarter 2021. For the purposes of our discussion today, we have prepared presentation slides that summarize our performance and results and we’ll refer to these slides during this call. You can access the earnings press release, Form 10-Q and the presentation slides at our website, owenscorning.com. Refer to the Investors link under the Corporate section of our homepage. A transcript and recording of this call and the supporting slides will be available on our website for future reference. Please reference slide 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 comparison and we believe it is a meaningful measure for investors to compare our results. Consistent with our historical practice, we’ve excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT and adjusted earnings. We adjust our effective tax rate to remove the effect of quarter-to-quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share. We also use free cash flow and free cash flow conversion of adjusted earnings as measures helpful to investors to evaluate the company’s ability to generate cash and utilize that cash to pursue opportunities to 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 four. And now, opening remarks from our Chair and CEO, Brian Chambers. Brian?

Thanks, Amber. Good morning, everyone, and thank you for joining us for today’s call. I hope all of you are staying healthy and safe. Owens Corning posted strong third quarter results today, consistent with our July outlook and building on the momentum of an outstanding first half of the year. Our global team continued to execute extremely well in a very dynamic environment, overcoming higher inflation, as well as some supply chain disruptions to deliver another great quarter. Our results continue to demonstrate the resiliency of our team, the strength of our commercial and operational execution, and the durability of the earnings power of our company. During the call this morning, I’ll start with an overview of our third quarter performance, before turning it over to Ken, who will provide additional details on our financial results. I will then come back to talk about our business outlook for the remainder of the year. As always, I will begin my review with safety. During the third quarter, our commitment to safety resulted in an RIR of 0.64, which is a significant improvement compared to the same period last year, with more than half of our facilities operating injury-free for more than a year. While we are generally encouraged by the recent decrease in COVID cases and gradual increase in vaccinations, it’s clear the impacts of the pandemic will persist in the near-term. We will continue to follow enhanced safety protocols and operate our facilities with a strong focus on working together to keep each other, our customers, and our suppliers healthy and safe. Financially, we delivered record third-quarter revenue of $2.2 billion, an increase of 16% compared with the same period last year and adjusted EBIT of $400 million. Our performance during the quarter was again a combination of strong market volumes and outstanding execution, with each business delivering a positive price-cost mix and great manufacturing performance. This resulted in an adjusted EBIT margin for the company of 18%, with all three of our businesses posting double-digit EBIT margins for the fifth consecutive quarter. Demand for our U.S. residential products, which account for about half of our enterprise revenues, as well as our commercial and industrial products remained strong in Q3, and we continue to operate with extended lead times for many of our products. Within this tight supply chain environment, our global teams, especially in supply chain, manufacturing, customer service, and sales, continue to work extremely hard to increase our production and meet the needs of our customers. In addition to our focus to finish the year strong, we continue to make strategic choices to enhance the earnings power of the company and create additional growth opportunities by allocating resources to product lines where we can strengthen our market position and provide a sustainable solution. I would like to take a few moments now to share more about the work we’re doing with two of our product lines to position us for the future. As part of our focus to build market-leading positions, we continuously evaluate the strength of our products and position in the market. Based on this analysis, we have decided to explore strategic alternatives for one of our glass reinforcements product lines within our Composites business, thermoplastic dry-use chopped strands. The DUCS product line is primarily used in automotive and electronic applications and generates annual revenues of approximately $270 million. The focus of our evaluation will include divesting or repurposing these assets to manufacture other products. With its material science capabilities and relationships across a variety of core markets, applications, and geographies, our Composites business is an integral part of our company and a key contributor to our growth strategy. The decision to explore alternatives for these production assets and product line is consistent with our approach to focus on high-value material solutions, where we can develop market-leading positions, such as in building and construction, renewable energy, and infrastructure. Product and process innovation continues to be key to how we drive growth, improve our operating performance, and create value for our customers. A great example of this ongoing work is our PINK Next Gen Fiberglass Insulation launched in August. This latest product innovation leverages advanced fiber technology to create a sustainable product that is faster and more comfortable to install compared to existing products in this space. This is particularly important given the performance expectations and tight timelines of today’s contractors and builders. Given our commitment to sustainability, I’m pleased to note that PINK Next Gen Insulation is made with 100% wind-powered electricity and sets an industry standard for recycled content. Our launch of PINK Next Gen Fiberglass Insulation is the most recent example of how our industry leadership and innovation is expanding growth opportunities for our customers and Owens Corning. We’re also excited to see how our sustainability leadership and mission to build a sustainable future through material innovation is creating new growth opportunities across the enterprise as we engage with more and more customers to develop solutions, which achieve their key sustainability goals. The priority topics for collaboration focus on decarbonization, including product-specific embodied carbon reduction, circular economy, which includes both recycled content and end-of-life recycling solutions, and product design transparency, specifically related to the impact of our products throughout their lifecycle. We look forward to sharing more details about these exciting developments to help our customers and grow our company during our upcoming Investor Day. With that, I will now turn it over to Ken to discuss the financial results in more detail. Ken?

Thanks, Brian, and good morning, everyone. As Brian commented, Owens Corning delivered another outstanding quarter with strong revenue and earnings growth across all three businesses. While demand conditions remain strong across the markets we serve, our ongoing execution was fundamental to driving this performance, allowing us to manage through supply chain challenges and accelerating inflation. As we talked about in our second quarter call, inflation continues to impact almost all material input costs, especially asphalt and other petroleum-based materials, along with transportation and energy costs. Overall positive price realization more than offset the inflation headwind in all three businesses in the quarter and year-to-date. As a result, third-quarter operating margins reached 18%, nearly 300 basis points higher than the same period last year. The expanded earnings combined with focus on working capital management and capital investments drove healthy free cash flow generation in the quarter and strong free cash flow conversion year-to-date. Now, beginning on slide five, we can take a closer look at our results. We reported consolidated net sales of $2.2 billion for the third quarter, that’s up 16% over 2020 and produced double-digit revenue growth in all three segments. Our commercial and operational execution were instrumental in delivering these results, as demand conditions remain strong in the markets we serve and we overcame supply chain disruptions with limited inventories. Adjusted EBIT for the third quarter of 2021 was $400 million, up $111 million compared to the prior year. Earnings grew year-over-year in all three businesses resulting in double-digit EBIT margins for the fifth consecutive quarter. Adjusted earnings for the third quarter were $262 million or $2.52 per diluted share, compared to $193 million or $1.76 per diluted share in the third quarter of 2020. Depreciation and amortization expense for the quarter was $129 million, up $9 million compared to Q3 2020. Our capital additions for the third quarter were $90 million, up $22 million compared to the third quarter of last year. 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 six reconciles our third-quarter adjusted EBIT of $400 million to our reported EBIT of $394 million. During the quarter, we recorded $20 million of restructuring costs associated with previously announced auctions, which includes $19 million for the Santa Clara facility sale. Those charges were partially offset by a $15 million gain on the sale of land related to a previously announced facility closure. In addition, we had $1 million of acquisition-related charges for Vliepa, which was acquired during the quarter. These items are excluded from our adjusted third-quarter EBIT. Slide seven provides an overview of the changes in third-quarter adjusted EBIT from 2020 to 2021. Q3 adjusted EBIT increased to $111 million over the prior year reaching $400 million. Despite supply chain challenges and accelerating inflation, all three segments delivered year-over-year EBIT growth. Now, turning to slide eight, I’ll provide more details on the performance of each of the businesses. The Insulation business continued to build on the strong performance demonstrated in Q2, delivering double-digit year-over-year EBIT growth and 400 basis points of EBIT margin expansion. Q3 revenues were $815 million, a 20% increase over the third quarter of 2020. We saw solid realization on announced pricing actions, as well as volume growth across the business, reflecting continued strength in both U.S. new construction and the commercial end markets we serve globally. In North America Residential Fiberglass Insulation, we saw year-over-year growth driven by positive pricing and stronger volumes benefiting from incremental capacity additions over the past year. In technical and global insulation, demand remained strong for our highly specified products, with the most notable year-over-year growth coming again from North America and Europe, with growth in both foam glass and mineral wool. Pricing was positive versus the prior year and more than double what we achieved in Q2. For the Insulation business, overall positive price more than offset the impact of accelerating energy, material, and transportation inflation. In residential insulation, we continue to maintain a positive price-cost mix in the face of accelerating inflation. While technical and global insulation price lagged inflation, the price-cost gap narrowed considerably versus Q2. We continue to execute well in our manufacturing operations and benefited from the recovery of $18 million of fixed cost absorption on higher production. We delivered margins of 15% and EBIT of $124 million, a quarterly record and up from $73 million in the third quarter of 2020. Now please turn to slide nine for a review of our Composites business. The Composites business produced another record earnings quarter. Sales for the third quarter were $591 million, up 13% compared to the prior year. The top-line growth was driven by strong commercial performance with our ongoing strategy in the business to focus on higher-value applications, driving favorable mix, which more than offset slightly lower volumes. We continue to see strength in demand for our higher-value applications, as well as demand in key geographies where our local supply for local demand model is being valued by customers. We also continue to see positive pricing in Composites, resulting from contract negotiations, as well as price increases for non-contractual business. In the quarter, positive pricing more than offset the inflation headwinds from materials, energy, and higher transportation costs. Operationally, we continue to execute well with solid manufacturing performance and recovery of $29 million prior year curtailment costs. In the third quarter, Composites delivered record EBIT of $101 million, up $46 million over last year and EBIT margins reached 17%. Slide 10 provides an overview of our Roofing business. The Roofing business produced a strong third quarter. Sales in the quarter were $869 million, up 14% compared to the prior year. The U.S. asphalt shingle market was down 9% in Q3 compared to the prior year, while our U.S. shingle volumes were up slightly year-over-year. We continue to see good realization on our announced price increases more than offsetting accelerating asphalt, other material, and delivery inflation. Contribution margins remain strong. For the quarter, EBIT was $212 million, up $16 million from the prior year, achieving 24% EBIT margins. Turning to slide 11, I’ll discuss significant financial highlights for the third quarter and full year 2021. Earnings expansion along with continued discipline around management of working capital, operating expenses, and capital investments resulted in strong cash flow. Free cash flow for the third quarter of 2021 was $400 million, bringing year-to-date free cash flow to $925 million, up $411 million over the same period last year. Year-to-date free cash flow conversion remains strong. With this cash flow performance, we further strengthened our already solid investment-grade balance sheet by repaying in the quarter the remaining $184 million due on our 2022 senior notes. At the quarter's end, the company had ample liquidity of approximately $2 billion, consisting of $920 million of cash and nearly $1.1 billion of combined availability on our bank debt facilities. During the third quarter of 2021, the company repurchased 1.7 million shares of common stock for $160 million. Through September 30, 2021, the company returned $516 million to shareholders through share repurchases and dividends, equating to approximately 56% of year-to-date free cash flow. 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 our 2021 outlook for key financial items. General corporate expenses are expected to range between $150 million and $155 million. Capital additions are expected to be approximately $460 million, which is below expected depreciation and amortization of approximately $500 million. For interest expense, we’ve narrowed our estimated range to be between $125 million and $130 million. And finally, we expect our 2021 effective tax rate to be 26% to 28% of adjusted pre-tax earnings and our cash tax rate to be 18% to 20% of adjusted pre-tax earnings. 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. During the third quarter, our company continued to perform well, giving us great momentum as we finish the year. In the fourth quarter, we expect U.S. residential repair and remodeling and new construction end markets, as well as our global commercial and industrial end markets to remain strong. Based on current trends we are seeing across the enterprise, we anticipate the impact of inflation to be at or slightly above what we experienced in Q3. Given our pricing actions throughout the year, we expect each of the businesses to maintain a positive price-cost mix in Q4. Moving through the quarter, we will continue to closely monitor and manage inflation, supply chain disruptions, and the regional impacts of COVID on our businesses. Through the first three quarters of the year, our commercial and operational execution has generated strong financial results and we expect this to continue in Q4, delivering earnings in the quarter close to last year. Now consistent with prior calls, I’ll provide a more detailed business-specific outlook for the fourth quarter. Starting with Insulation, we expect year-over-year growth in our North American Residential Fiberglass Insulation business and anticipate our volumes to be up mid-to-high single digits versus prior year. We expect price realization similar to what we experienced in Q3, with the recently announced December increase having more impact as we get into the first quarter of next year. In our technical and global insulation businesses, volumes should grow low-to-mid single digits, with ongoing demand for our products in global building and construction applications. Similar to residential insulation, we would expect price realization in these businesses to be similar to what we saw in Q3. In terms of inflation, we expect material and energy cost increases in the fourth quarter to be higher than what we experienced in Q3, and anticipate that continued price realization will result in a positive price-cost mix in the quarter. Additionally, we expect our fixed costs absorption to improve by approximately $5 million versus the prior year. Given all this, we expect to see strong earnings growth in Q4 versus the prior year with EBIT margins of approximately 15%. Moving on to Composites, in the fourth quarter, we expect revenue to improve year-over-year, primarily driven by continued price realization and favorable mix, which we would expect to more than offset volume declines of mid-single digits for the quarter. We anticipate Composites pricing will improve by mid-single digits, offsetting the impact of additional inflation and that we should benefit from the recovery of $15 million to $20 million of curtailment costs versus the fourth quarter of 2020. Overall, we expect to realize strong earnings growth in the quarter versus the prior year, with EBIT margins of approximately 14%. And in Roofing, we anticipate the market to finish up for the year, but expect a more difficult comparison to the fourth quarter of prior year with market volumes down mid-teens, driven by the expectation for a more normal winter season, lower storm demand, and the likelihood of ongoing supply chain disruptions. We would expect our volumes to track largely in line with the market. Roofing pricing is expected to be favorable in Q4, based on the continued realization of our previously announced pricing increases, although less than what we saw in Q3 due to the lower volumes. Additionally, in terms of revenue, we expect a headwind from mix in the quarter, similar to what we saw in Q3. Overall, we anticipate fourth-quarter Roofing EBIT margins of approximately 20%, with lower volumes and a narrowing, but positive price-cost mix. With that view of our businesses, I’ll close with a couple of enterprise items. 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 continue to evaluate investments and acquisitions that leverage our commercial, operational, and geographic strengths, and expand our building and construction material product and system offering. One last note before moving on to the Q&A session, I’d like to remind everyone we will be hosting a virtual Investor Day on Wednesday, November 10th. Ken and I will be joined by members of our executive leadership team to discuss the company’s strategic priorities, financial objectives, and initiatives to drive long-term stakeholder value. Please reference the earnings press release for more details around this important event. We hope you’ll join us in two weeks. In closing, our team is proud of the outstanding operational and financial performance we delivered in the third 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. Amber?

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

Our first question today comes from Matthew Bouley with Barclays.

Good morning, everyone. Thanks for taking the question and congrats on the results here, operating in a pretty challenging environment. Just the question on the Roofing business and particularly price, you gave that comment about price in Q4 being a little less than Q3 due to lower volumes. I’m just curious if that’s a comment that pricing is actually slipping a little bit sequentially alongside lower volumes? And really the broader question is, if you do see volumes continue to normalize into 2022, how should we think about pricing alongside that? Thank you very much.

Well, thanks, Matt, for your comments and the questions. Just let me clarify. In Roofing pricing, we expect in Q4 to continue to see good realization of our price points. So we’re not seeing things slip in the market. I think that was more commentary around total price realization being a little less based on lower volumes, not anything that would be a reflection on the strength of the pricing in the market today of our product. So we continue to see good realization and expect that to continue into Q4. So overall, in terms of volumes, I think, we’ll probably talk more about this. But we see that volumes are going to be up on a year-over-year basis. I think what we’re seeing here in Q3 a little bit in Q4 is just a difficult comp comparison to last year, where if you look at last year, Q2 was very low with COVID shutdowns and uncertainty in demand, and we saw distribution build and buy a lot more in the back half of the year. We saw contractor work really increased dramatically as homeowners invested in their homes. So I think we’re still in a very strong Roofing market overall. We’re just seeing a little bit of comp comparisons in the third quarter and then that we’re guiding you in Q4. So we think we’re in a very strong market. Historically, in our Roofing business, we’ve been able to recover asphalt and other inflation through pricing actions. Over time, we’ve been able to demonstrate that for the last several quarters and we expect in a good strong market we’ll be able to continue to operate in that fashion moving forward.

Our next question comes from Stephen Kim with Evercore ISI.

Thank you, everyone. I appreciate the good results. I wanted to ask about the price mix across your business. Can you provide insight into what is influencing the relative mix effects in percentage terms? I noticed that Insulation and Roofing had some mixed benefits, and Composites also seemed to perform well. Specifically, within Composites, you experienced strong pricing. Historically, this segment has relied on annual pricing contracts, which you mentioned. I'm curious about what we observed in the third quarter. How much of this was attributed to spot pricing in that segment compared to successful renegotiations?

Thanks, Stephen. Thanks for the question. Let’s talk about composites first and then maybe we can talk about price mix across the business. You’re correct, Composites has driven another very strong quarter delivering well. And I think, before answering the specific question, what I would say is this is really the result of what we’ve been talking about for a couple of years, which is driving the business more towards higher value solutions for our customers and actually kind of with the environment that we’re operating in today, which is a pretty high capacity utilization environment. We’re able to focus a bit more on those higher value applications because the market demand is so strong. As a result, what you’re seeing is this mix benefit, which is, as we deliver more of the higher value solutions as falling out in our mix calculation and you’re seeing shifting to those higher value applications, and therefore, driving positive mix. I think that’s something that’s here to stay. I mean, I think that, as we continue to shift the business, that’s really going to be a part of what we are continuing to focus on. You’ve seen it for the last couple of quarters, and we would expect that to continue. On the price side, you’re correct on that as well, that we do have about two-thirds of our Composites business, which is tied to contracts and then, I would say, about a third of it, in general, is tied to spot pricing. As we moved into 2021, when many of the contracts were in the process of being negotiated, because some of them are annual contracts, we were moving into a strong demand environment and that allowed us to build in some good pricing dynamics within those contracts and then as we came into 2021, the situation even strengthened further. So what I would tell you is that on the pricing side, we are seeing the carry-through positive contract price negotiations that came through from our negotiations last year. We are also seeing equivalently good pricing on a spot basis. And I think that comes from the fact that we are benefiting from what we call our local production for local demand environment where within this environment customers are really looking for good quality solutions that are readily and closely achievable geographically. So I think that benefit from pricing comes both from the contract negotiations, as well as from the spot pricing.

And then maybe Stephen, this is Brian. I’ll add that if we look at price costs across the enterprise, you’d see in our third quarter results that we likely maintained a positive $50 million price-cost mix across the enterprise. This applies to each of the businesses and I think it’s really attributed to our team doing a fantastic job of recognizing inflation trends as they’ve emerged throughout the year. We’ve acknowledged the impact and translated this into action, which has resulted in another positive price-cost mix for the enterprise and for each of the businesses. In this inflationary environment, we will continue to need to do this as we look forward to the inflation headwinds anticipated in Q4 and, unfortunately, we believe these will probably persist into the first part of 2022. I think the teams are performing well in terms of identifying, seeing, and implementing pricing actions, and our price realization reflects the value of our products and services that we’re offering to our customers.

Our next question comes from Yves Bromehead with Exane BNP Paribas.

Hi. Good morning. Thank you for taking my question. I just wanted to get a bit of a better understanding on the inflation, especially on the energy side with what’s happening in gas and other types of inputs in the U.S. and Europe. Could you maybe help us to understand and what’s the sort of Owens Corning support to that and if there’s any hedging strategy, and if so, if that’s more into Europe or more into the U.S., any comment on that would be appreciated?

Thank you, Yves, for the great question. We are all grappling with inflation, and at Owens Corning, we are actively working to manage it. We're consistently monitoring the inflation situation and ensuring we have the right pricing strategies in place to address it. In terms of energy, we've primarily noticed the impact in Europe and North America, with the most significant effects seen in the third quarter. We expect this trend to continue into the fourth quarter, with the second half of the year showing greater energy inflation impacts compared to the first half. We manage this by utilizing hedges, primarily in Europe, where we hedge most of our anticipated energy needs. In the United States, we do not hedge since the market is generally less volatile.

Our next question comes from Phil Ng with Jefferies.

Hey guys, congrats on a really impressive quarter in a tough backdrop. I guess, with growth flattening out a little bit and lapping tougher comps in Roofing, there is this fear that you’ll see a big correction in your performance next year. Your comments on Roofing sounds pretty benign here, but any color on channel inventory and when you see that normalizing, this product still on allocation, and just how you’re thinking about growth when you look at 2022?

Thank you, Phil, for your comments. Overall, I believe the demand for Roofing remains very strong. While we anticipate a significant decrease in our Q4 guidance compared to last year, it's important to remember that last year set a historic high driven by robust market demand, efforts to rebuild inventory, and a series of strong storms combined with unseasonably warm winter weather. When we consider our guidance stepping down from these levels, looking back at the fourth-quarter averages from 2017, 2018, and 2019, which average about 28 million square feet, our current guidance represents a mid-teens increase compared to that historical average. Although the guidance reflects a decline year-over-year, we believe the overall strength in Roofing demand will continue through Q4 and set the stage for a strong start to 2022 based on several fundamentals. We see that contractor backlogs are still very strong within our network, and there continues to be investment in home remodeling and repairs as homeowners focus on enhancing their living spaces. This trend is expected to persist, though storm demand may be lower when compared year-over-year, especially in some areas like the Midwest and Rocky Mountains. However, regions such as the southeast and southwest that have experienced recent storms will carry that demand into 2022. I would describe the demand for our products as exceptionally strong. We are producing and shipping everything we can. Inventory levels among distributors are improving in some areas, but generally, our manufacturing facilities see lean inventory levels due to consistent demand. Distributors are becoming more selective regarding the products, brands, and colors they are purchasing as the year comes to a close, which may impact manufacturing shipments. That said, we are dealing with a backdrop of strong repair and remodeling demand, good storm activity, and we expect a solid end to Q4. This should lead to a promising start to 2022. Additionally, we are achieving good price realization despite the inflation we're facing, and we will continue to monitor the situation. Overall, we feel confident about navigating any inflationary pressures moving into 2022 given the robust demand environment and the strength of our product offerings.

Our next question comes from Deepa Raghavan with Wells Fargo Securities.

Hi. Good morning. Thanks for taking my question. Let me tag along that Roofing and just ask you if you have any thoughts on the ARMA data that came out, that was down 10% in the quarter. Your roofing pretty held up nicely. That’s one part of the question. Second, can you talk to any benefits from Hurricane Ida and if you’re able to quantify, I do appreciate that, it translates to revenue later on, but you’re probably seeing some autos coming in based off of that, so that’s my first question.

Thanks for the question. Regarding our third quarter performance, ARMA was down 10%, which reflects the market situation. In Roofing, we observed some regional variations, with a few areas experiencing declines, likely due to reduced storm demand and lower storm volumes compared to last year, particularly in the Midwest and Rocky Mountain regions. We’ve also faced supply chain disruptions, although we have managed to minimize their impact. However, we encountered transportation bottlenecks, especially after a major carrier that transported asphalt materials went out of business during the quarter, affecting us and possibly others. We continue to face mat supply tightness, which we see reflected in our business and order book. These factors impacted some manufacturing shipments despite a strong market environment. In terms of our performance, we were comparing to last year's figures, and we estimate that we lost a bit of ground this year. Other manufacturers had more inventory available to ship last year, which is why our numbers look different now. We anticipated that this was mostly a timing issue with orders, and we saw this reflected in our order book as we maintained our market share and strong contract relationships, which is a positive aspect for us. Additionally, our vertically integrated supply chain gives us an advantage since we produce our own fibers and mats and process our own asphalt at many sites. This integration helped us in production and shipping during the quarter. Looking at Hurricane Ida, we’ve started to see repair work begin. Estimates suggest the storm could have impacted between 2 million to 3 million squares, though we believe the number is likely on the higher side. Due to the scale of these repairs, we expect most of the related demand will carry over into next year, with work continuing into the first half of 2022 to complete these efforts.

Our next question comes from Kathryn Thompson with Thompson Research Group.

Hey. Good morning. This is actually Brian Biros on for Kathryn. Thank you for taking my question. Yeah. Can you talk about how you came to the decision around looking at the alternatives for the glass asset and I guess this is just driven by market position or certain metrics like margins or ROI. And I guess maybe why now first decision, like if something happened to trigger the decision now versus decisions from a year or two ago? Thank you.

Sure. Thanks. Thanks for the question. It is absolutely a market positioning decision. So I think over the past few years you’ve heard me talk a lot about our focus within Composites to build out a very flexible cost-effective manufacturing network, investments in automation we’ve made, investments in process controls, and productivity, and we see that coming through in our results that Ken talked about. I think the other aspect commercially is we’ve been focused on growing in higher value material solutions where we can differentiate with our innovation and specification work. And we’ve talked about areas of focus for us in Composites around building and construction applications, renewable energy, infrastructure. These are applications that we’re doing very well and continue to invest and grow. So in looking at our DUCS product line, and this is a chop fiber that gets mixed with resins and used in automotive applications and electronics and small appliances. It’s a good business for us, but we don’t believe that we have a market-leading position in the business and it would require a significant investment to build that. So it’s not a reflection of our talent or teams or our product positions or manufacturing capabilities, it’s really a strategic decision we’ve made to focus our investments in other areas of Composites where we see higher growth opportunities for us and that fits within our enterprise strategy to build and expand our building and construction material offerings. So we made the decision. We thought now is the right time to do it. Our evaluation and process were really focused on either divesting the business or repurposing those manufacturing assets to produce other Composites products that we see fitting into our strategy going forward and give us better growth and margin opportunity going forward. So we’ll be working through that process over the next several months. But that was really a driver of being just evaluating where we’re at as a market leader. And I’d say, I probably add, that’s consistent with kind of how we look at things continuously within the company and we assess our product positions, we assess our market positions, we assess the investments to build and grow and make these choices and we just felt now is the right time to make this decision around the DUCS product line in moving forward with the Composites and the company strategy.

Our next question comes from Garik Shmois with Loop Capital.

Great. Thank you. You announced another Insulation price increase you mentioned for December, I just wondered if you could speak to your confidence in pushing even more pricing next year, just given the number and magnitude of price increases in Insulation you had secured this year?

Thank you, Garik. As we've discussed, we are operating in an inflationary environment and are closely monitoring the inflation challenges. We are assessing their impact and deciding how to counter these rising costs. This is a consistent process across our Insulation business and other sectors. This trend has prompted us to announce another price increase for December, which we believe is necessary given the input costs we are facing. With the strength of demand and current market conditions, we think it's the right time to notify our customers so they can incorporate this into their plans for 2022 as they sell and support builders. The market remains strong, particularly in housing construction, and we expect that demand for our products will continue to support the expanding housing market. We have successfully implemented the previously announced price increases throughout this year, and considering the demand environment and the strength of our product lineup, we feel confident that we will achieve positive results from this upcoming increase.

Our next question comes from Michael Rehaut with JPMorgan.

Hi. Good morning. Thanks for taking my question. I was hoping if you could give us a sense across each of your businesses, kind of an update on where inventory levels are in their respective channels. Obviously, through most of this year, inventory has been pretty tight and many product categories have been on allocation, I believe, in particular Insulation. If you can give us any update in terms of, again, just where inventory levels are, if you’re still rebuilding them, if they’ve started to increase on their own. We’ve heard, for example, in Roofing, that inventory started to come up in the channel and how our lead times and if anything is still on allocation?

Thanks, Mike. My general question is about the ongoing lean inventories we see across many of our customers and product lines. The inventory levels we maintain as a company are also quite low historically. We are beginning to see some rebuilding in both our inventory and distribution levels. Speaking specifically about our businesses, in Roofing, our inventory levels for roofing materials remain very lean. We are producing as much as possible and shipping everything we can to meet customer demand. Overall, in the roofing markets and channels, there is a slight inventory build, but it varies by geography and product lines. Some specific product lines, brands, and colors are starting to see a rebuild, but not across our entire product line. In Insulation and Residential, we also maintain very lean inventories, which can affect our ability to service customers during supply disruptions. We remain committed to producing as much as we can and have made capacity additions that will change as we move into next year. We are trying to increase production quarter-over-quarter, but our inventory levels are low, and customer channel inventories for Residential Insulation products are historically low as well. On the technical Insulation side, the situation is mixed, but overall, inventory levels are still very low historically. Moving to Composites, I’ll let Ken comment…

Sure.

The situation with Composites remains largely unchanged. As we compare year-over-year, moving from the second to the third quarter last year, we entered a period with a good amount of inventory on hand, and the end market began to improve significantly in the latter half of 2020. This enabled us to produce and deliver our products, along with utilizing existing inventory. Throughout 2021, we have been operating at high capacity utilization, achieving strong production levels and fulfilling our deliveries. However, similar to what Brian mentioned regarding Roofing and Insulation, we are delivering nearly all that we produce in any given quarter, which keeps our inventory levels relatively low. Overall, Composites inventory levels at the end of the third quarter are still lower than they were at the end of 2020. As we progress through 2021 and into 2022, we have the opportunity to begin replenishing our inventory levels, but we continue to operate with a lean inventory, similar to our position in Insulation and Roofing.

Our next question comes from Truman Patterson with Wolfe Research.

Good morning, everyone. Thank you for my question. I want to delve a bit more into the U.S. Residential Insulation business. It seems you are still operating at full capacity. Inventories are quite low. However, there are several factors to consider with your capacity coming on and off over the next couple of years. Builders have a significant backlog of homes, and if housing starts continue to rise in 2022, I would like to know if you have the capacity to meet that demand.

Thanks for the question, Truman. We feel well positioned to meet the current demand and the expected housing starts as we head into 2022. Our ongoing efforts are focused on creating a flexible and cost-efficient network, allowing us to increase market capacity effectively while maintaining operational efficiency through various cycle conditions. We believe we will produce significantly higher insulation volumes this year compared to last year, and we expect to boost production even more next year due to our capacity adjustments. We are on track with developments such as the Eloy manufacturing facility expected in the first quarter and the work with Nefa anticipated around the third quarter next year. Our productivity and process improvements, along with investments in automation, enhance our throughput within our current facilities, which is essential to our strategy. This work supports us in the current environment of up to 1.6 million housing starts. We also have the ability to add significant capacity cost-effectively and promptly if necessary, although we would need to see housing starts exceed 1.6 million to justify additional capacity. Overall, we are optimistic about our quarter-over-quarter production increases and believe we will effectively address this market environment and return to more typical lead times for our products. We will monitor the situation closely, and if we determine we need to expand our capacity further, we have the means to do so.

And I think I would just add to that. I think it’s worth making the point after we made the announcement about Santa Clara in the last call, that the team and the local employees of Santa Clara have done an incredible job at continuing to operate the business. As we all know, decisions like this are tough and they’re tough on the people that are going to ultimately be impacted. But it’s a great opportunity to be able to shout out to the team for the good work that they continue to do there.

Our next question comes from Keith Hughes with Truist.

Thank you. A question on Roofing, you called out mix as a negative in the third quarter and heading into the fourth quarter, and we talked a lot about mix in this call. Can you just give some more details specifically what’s happening there that’s turning into a headwind?

Sure, Keith, thank you for your question. The mix impact observed in the third quarter primarily relates to our Components segment. As previously mentioned, we are continually growing and expanding our Roofing components, which are essential for constructing roofs. These include underlayments, ventilation products, hip arrays, and starters—essentially all the items required for roof installation. Within our Components business, we specifically identified two product lines, hip and ridge and starter, which are closely associated with our Owens Corning shingles. The rest of our Components offerings can be utilized with other shingle brands or various Roofing products. Hip and ridge and starter are somewhat more aligned with our Owens Corning product line. Earlier in the year, we noted that distributors purchased a significant amount of both shingles and component materials to meet market demand. However, in the third quarter, we observed distributors rebalancing their inventory levels of our hip and ridge and starter products in relation to our shingle inventories. This adjustment created a mixed headwind due to those inventory decisions. Looking ahead to the fourth quarter, we anticipate a similar situation when comparing year-over-year data on hip and ridge and starter purchases from last year's fourth quarter to our expectations for this year, considering our shingle shipments. I want to emphasize that there are no structural issues affecting our mix or Components offering; it's primarily a timing issue and an adjustment of our hip and ridge and starter products in relation to our shingle products in the distribution inventory that influenced the third quarter and is expected to impact the fourth quarter as well.

Thank you. This is Amber. We have time for one last question.

Our final question today comes from Susan Maklari with Goldman Sachs.

Thank you. Good morning. Thank you for squeezing my question. And as you look across the three segments and you think about 2022, can you talk about where you see the best opportunity to kind of expand profitability and any areas that we should think about potentially kind of staying flat or maybe even going down a bit next year?

Thank you, Susan. We will provide more details on our 2022 outlook during our next quarterly call. Overall, we believe we are well positioned to start 2022 strongly across all areas of the business. We have discussed the demand in Roofing and the strength in the markets, along with some carryover effects that we anticipate will continue into 2022. On the residential side, we see sustained strength in housing starts for Insulation. In our technical and global insulation sectors, we are experiencing rising commercial demand and increased project work, leading to higher volumes and positive price realizations. In Composites, we are focusing on higher-value multi-material systems and solutions related to building construction, renewable energy, and infrastructure. We observe significant growth trends that affect housing, the demand for more sustainable solutions, energy efficiency, and infrastructure investments. These major trends align well with our current product offerings and our growth investments moving forward. We believe we are positioned to continue growing our revenues, as well as generating strong earnings and cash flow. Therefore, we are optimistic about our company’s outlook and the favorable market and growth trends we are observing.

This concludes our question-and-answer session. I’d like to hand the call back over to Brian Chambers for any closing remark.

Well, thank you very much, and thanks, everyone, for your time today and your questions. In closing, I’d say we’re very pleased with our execution and performance of the first three quarters of the year. We look forward to building on this momentum as we close 2021 strong. And then we hope to connect with many of you again in two weeks at our virtual Investor Day event on November 10th. So, until then, I hope you and your families remain healthy and safe. Thank you for joining us today.

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