Owens Corning Q4 FY2022 Earnings Call

Hello and welcome to the Owens Corning Q4 Full Year 2022 Earnings Call. My name is Alex and I'll be coordinating the call today. I'll now hand over to your host, Amber Wohlfarth, to begin. 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 fourth quarter and full year 2022. 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 1-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-K that detailed our financial results for the fourth quarter and full year 2022. 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-K and the presentation slides at our website, owenscorning.com. Refer to the Investors link under the Corporate section of our home page. A transcript and recording of this call and the supporting slides will be available on our website for future reference. Please reference Slide 2 before we begin, where we offer a couple of reminders. First, today's remarks will include forward-looking statements based on our current forecasts and estimates of future events. These statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially. We undertake no obligation to update these statements beyond what is required under applicable securities laws. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent risks and uncertainties affecting such forward-looking statements. Second, the presentation slides and today's remarks contain non-GAAP financial measures. Explanations and reconciliations of non-GAAP to GAAP measures may be found in the text and financial tables of our earnings press release and presentation, both of which are available on owenscorning.com. Adjusted EBIT is our primary measure of period-over-period comparisons and we believe it 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-K 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 Chair and CEO, Brian Chambers. Brian?

Thanks, Amber. Good morning, everyone, and thank you for joining us. During our call this morning, I'll start with an overview of our results for the fourth quarter and full year and provide an update on how we are positioning the company for continued success in 2023 and beyond. Ken will then provide details on our fourth quarter and full year 2022 performance and I'll come back to discuss what we're seeing in our markets and our outlook for the first quarter. Owens Corning delivered outstanding results in 2022, achieving record financial performance across all our businesses and consistently outperforming the markets we serve. As the year unfolded, many of our end markets began to reset as the marketplace adjusted to a changing macroeconomic environment that included the war in Europe, significant inflation, labor challenges and ongoing supply chain disruptions. Our global team demonstrated resolve and resourcefulness in the face of these challenges to deliver great financial results driven by our strong customer partnerships, unique product and process innovation, and outstanding manufacturing capabilities. In doing so, we continue to strengthen the earnings power of our company and advance our enterprise strategy in support of our mission to build a sustainable future through material innovation. Moving to our results. I'll begin, as always, with safety. Our commitment to safety remains a critical component of our success and we continue to deliver world-class safety performance in 2022. During the fourth quarter, we achieved a recordable incident rate of 0.41, our best quarter of safety performance in nearly a decade. This lowered our full year 2022 RIR to 0.65 with half of our global sites operating injury-free throughout the year. Financially, in the fourth quarter, we delivered revenue of $2.3 billion, a 7% increase over fourth quarter 2021. Adjusted EBIT of $333 million and adjusted EBITDA of $460 million were both up 2% versus prior year. This resulted in an adjusted EBIT margin of 15% and an adjusted EBITDA margin of 20% for the quarter. These results were driven by our team's strong execution in a number of areas to offset inflation, manage needed production and maintenance downtimes and capitalize on the available market opportunity as volumes declined in most of our product lines as customers adjusted to slowing demand and managed end-of-year inventory levels. For the full year, we delivered record financial performance with revenues of $9.8 billion, a 15% increase over 2021 and net earnings of $1.2 billion. Adjusted EBIT of $1.8 billion was up 25% year-over-year and adjusted EBITDA of $2.3 billion represented a 19% increase. This resulted in adjusted EBIT margins of 18% and adjusted EBITDA margins of 23% for the year. In addition, we generated free cash flow of $1.3 billion and returned $931 million or 71% of free cash flow to investors through dividends and share repurchases. Our full year results highlight the significant progress our team has made in advancing our strategy to strengthen our core building and construction businesses and expand into new product adjacencies that leverage our market knowledge, material science expertise and manufacturing capabilities while increasing our total addressable markets. This progress is reflected in our balanced array of strategic acquisitions and divestitures, targeted capacity additions, and investments in organic growth through new product and process innovation. Over the course of 2022, we expanded into new product lines, acquiring WearDeck, a premium producer of composite decking and structural lumber for commercial and residential applications; and Natural Polymers, an innovative manufacturer of spray polyurethane foam insulation. We also took actions to strengthen and expand existing product lines, announcing a new joint venture with Pultron Composites to produce our industry-leading fiberglass rebar and acquired the remaining 50% interest in a U.S.-based joint venture producing high-value nonwoven fiberglass mat for roofing applications, both of which support the pivot in our Composites business into higher-value, more capital-efficient applications that leverage our core glass fiber technology in building and construction, renewable energy, and infrastructure applications. In addition, we completed the divestiture of the European portion of our dry-use chopped strands product line. And in December, we completed the sale of our operations in Russia. As we begin the new year, we are on track to complete the land sale of our Santa Clara, California fiberglass insulation facility which we closed down in Q4 as part of our network optimization initiative and start up our expanded Nephi, Utah insulation facility in the second quarter. We also continue to make investments to expand our manufacturing capacity in key product lines. Following our successful 2021 launch of FOAMULAR NGX insulation, which provides a significant reduction in embodied carbon, we are adding a new production facility to meet the growing demand for this sustainable building solution. This is one of many product lines we have been investing in as we accelerate our product and process innovation. In 2022, we launched 54 new or refreshed products across our global businesses, a 13% increase over the prior year. These innovations were well balanced across our core product platforms in Roofing, Insulation, and Composites as we focus on increasing the performance, durability, and sustainability of our product offerings which brings additional value to our customers to help them win and grow in the market. Now before I turn it over to Ken, I'd like to provide an update on our sustainability efforts which continue to generate multiple advantages by creating additional growth opportunities and helping to fulfill our company's purpose. In November, we announced enhanced shingle recycling efforts, including a pilot asphalt shingle recycling partnership that will serve to advance our circular economy aspiration by keeping shingles out of landfills. By 2030, we intend to recycle 2 million tons of shingles annually in the U.S. And in December, we earned a place on the Dow Jones Sustainability World Index for the 13th consecutive year, providing further recognition of our leadership in environmental, social, and governance matters. Our strong performance in 2022 demonstrated the resiliency of our team, the strength of our businesses, and the earnings power of our company amid changing and challenging market conditions. Challenging times create great opportunities to differentiate, which we look forward to continue demonstrating in 2023 and beyond. With that view of our performance and strategic initiatives, I will now turn it over to Ken to discuss our financial results in more detail. Ken?

Thanks, Brian and good morning, everyone. As Brian commented, we delivered another solid quarter, resulting in a record year in 2022 with year-over-year revenue and earnings growth across the enterprise. Our disciplined commercial and operational execution continue to be fundamental in driving this performance. As we've talked about in prior calls, inflation continues to impact energy costs and most material input costs, along with transportation. Positive pricing offset these inflation headwinds in the quarter and in the year in all three businesses. Beginning on Slide 5, we can take a closer look at our results. We reported consolidated net sales of $2.3 billion for the fourth quarter, up 7% over 2021. Adjusted EBIT for the quarter was $333 million, up 2% from the same quarter in 2021. Adjusted earnings for the fourth quarter were $235 million or $2.49 per diluted share compared to $224 million or $2.20 per diluted share in the fourth quarter of 2021. For the full year 2022, consolidated net sales reached $9.8 billion, up 15% from 2021. And adjusted EBIT was $1.8 billion, up $347 million over the prior year. Our full year adjusted earnings were $1.3 billion or $12.88 per diluted share compared to $969 million or $9.29 per diluted share in 2021. Slide 6 shows the reconciliation between our full year adjusted and reported EBIT. For the year, adjusting items totaled approximately $39 million. We recognized a $130 million gain from acquiring the remaining 50% interest in an existing joint venture that produces high-quality wet-formed mat for roofing applications and $18 million of gains on the sale of precious metals. We recorded an impairment charge of $96 million on certain indefinite-lived intangible assets as well as $70 million of losses and execution costs related to acquisitions and divestitures. In addition, we recorded $21 million of net charges associated with restructuring actions. All of these items are excluded from our adjusted 2022 EBIT. Turning to Slide 7, I'll discuss our cash generation and capital deployment during 2022. Earnings expansion, along with continued discipline around management of working capital, operating expenses, and capital investments, resulted in strong free cash flow of $535 million for the quarter, bringing full year free cash flow to $1.3 billion, up $227 million from 2021. 2022 free cash flow conversion was 104%. Full year capital additions were $446 million or 4.6% of revenue, up $30 million from 2021. We remain focused on reducing our capital intensity through productivity and process innovations. As a result of this and our earnings growth, our return on capital reached 22% for the year. At year-end, the company had liquidity of approximately $2.2 billion, consisting of $1.1 billion of cash and approximately $1.1 billion of combined availability on our bank debt facilities. During the fourth quarter of 2022, the company repurchased 3 million shares of common stock for $259 million. During the full year, the company returned $931 million to shareholders through share repurchases and dividends, equaling approximately 71% of free cash flow. In December, the Board declared a cash dividend of $0.52 per common share, an increase of approximately 50% compared to prior quarterly dividends. It also approved a new share repurchase authorization for up to 10 million additional shares. As of the end of 2022, 14.4 million shares were available for repurchase under existing share repurchase authorizations. We remain focused on consistently generating strong free cash flow, returning approximately 50% to investors over time, and maintaining an investment-grade balance sheet while executing our business strategies to grow our company. Now turning to Slide 8, I'll provide more details on the performance of each of the businesses. The Insulation business continued to build on the strong performance demonstrated through the first three quarters of the year. Q4 revenues were $956 million, an 11% increase over the fourth quarter 2021. And EBIT grew approximately 20% year-over-year. We continued to see solid realization on announced pricing actions and favorable mix across the business, offsetting ongoing inflation. In technical and global insulation, revenue grew as a result of positive price as well as favorable mix primarily within our global mineral wool business. Volumes were down versus prior year due to demand softening primarily in Europe and China and currency translation continued to be a headwind. North American residential insulation growth was the result of positive pricing and incremental revenue from the Natural Polymers acquisition. Volumes for residential fiberglass were relatively flat in the quarter versus prior year. EBIT for the fourth quarter was $153 million, up $25 million compared to 2021. Positive price and favorable mix more than offset ongoing inflation, the impact of lower volumes, other manufacturing costs, and the previously communicated incremental cost of planned maintenance downtime and production investments. Overall, Insulation delivered EBIT margins of 16% in the fourth quarter. For the full year, Insulation net sales increased 17% to $3.7 billion compared with 2021 as a result of higher selling prices and favorable mix more than offsetting ongoing currency headwinds and slightly lower volumes. EBIT increased $166 million to $612 million with 16% EBIT margins on higher selling prices which offset energy, material, and transportation inflation, planned production downtime, and other manufacturing costs. Now please turn to Slide 9 for a review of our Composites business. In the fourth quarter, the Composites business experienced the impact of an accelerated softening in the demand environment. Sales for the quarter were $589 million, down modestly compared to the prior year as lower volumes and continued headwinds from currency translation were largely offset by higher selling prices. EBIT for the quarter was $64 million, down $34 million from the same period a year ago. The impact of ongoing inflation, lower volumes which stepped down towards quarter end, and the associated production downtime and other manufacturing costs were partially offset by higher selling prices. A substantial portion of our inflation was driven by European energy which is estimated to have had a peak impact on results in the quarter. Additionally, the sale of our DUCS manufacturing assets in Chambéry, France and our operations in Russia contributed to the year-over-year EBIT decline. Overall, Composites delivered 11% EBIT margins for the quarter. For the full year, net sales in Composites increased 14% to $2.7 billion in 2022 compared with 2021. Top line growth was primarily due to higher selling prices and the favorable impact of customer mix, partially offset by lower volumes and ongoing currency headwinds. EBIT increased $122 million to $498 million with 19% EBIT margins on higher selling prices which offset input cost inflation and increased transportation cost as well as lower volumes and other manufacturing costs. Slide 10 provides an overview of our Roofing business. The Roofing business delivered another quarter of strong top and bottom line performance. Sales in the quarter were $799 million, up 12% as compared to the prior year. Strong price realization was partially offset by mid-single-digit volume declines. The U.S. asphalt shingle market on a volume basis was down 20% as compared to the prior year with our U.S. shingle volumes outperforming the market as demand for our products remained strong. For the quarter, EBIT was $168 million, up $17 million with positive price partially offset by ongoing inflation, the impact of other manufacturing costs, and lower volumes. EBIT margins remained strong at 21%. For the full year, Roofing sales increased 14% to $3.7 billion compared with 2021 primarily due to higher selling prices, partially offset by lower volumes. The U.S. asphalt shingle market on a volume basis was down 7% as compared to the prior year with our U.S. shingle volumes outperforming the market as we saw continued strong demand for our products. EBIT increased $78 million to $831 million with 23% EBIT margins mainly due to higher selling prices which offset cost inflation, primarily asphalt and other manufacturing costs. Turning to Slide 11, I'll discuss our full year 2023 outlook for key financial items. General corporate expenses are expected to range between $195 million and $205 million. Interest expense is estimated to range between $95 million and $105 million. Our 2023 effective tax rate is expected to be 24% to 26% of adjusted pretax earnings and our cash tax rate is expected to be 26% to 28% of adjusted pretax earnings. Finally, capital additions are expected to be approximately $520 million which is at or below anticipated depreciation and amortization estimated to range between $520 million and $530 million. Now please turn to Slide 12 and I'll return the call to Brian to further discuss the outlook.

Thank you, Ken. Throughout 2022, our global teams demonstrated great commercial and operational flexibility to respond to changing market conditions and deliver strong financial results. As we move into 2023, we will continue to demonstrate our proven ability to quickly react and respond to shifting market conditions as we see the impacts of ongoing inflation, higher interest rates, and continued geopolitical uncertainties leading to slower global economic growth and lower demand. Given this market environment, we expect volumes to decline in the first quarter versus the prior year in many of our end markets and product categories as our customers continue to have a more cautious view on ordering given the uncertainty in the outlook. Pricing is expected to remain positive in the quarter as we continue to realize the benefits of carryover pricing from previously announced actions. Overall, we anticipate offsetting the impact of ongoing energy and material inflation. We also expect to continue to see modest currency headwinds in our Insulation and Composites businesses as well as an impact from our previously announced divestitures. Overall for the company, we expect to realize a moderate decline in net sales and adjusted EBIT margins of low to mid-teens. Now consistent with prior calls, I'll provide a more detailed business-specific outlook for the quarter. Starting with our Insulation business, we expect revenue to be up modestly versus prior year as continued price realization offsets lower demand and the ongoing impact of currency headwinds. In our technical and global insulation businesses, we expect continued price realization resulting from our previously announced increases to be more than offset by lower volumes primarily in global mineral wool and ongoing currency headwinds. In our North American residential business, we anticipate continued price realization on our previously announced increases with volumes relatively flat versus prior year as contractors continue to work through a solid backlog of homes under construction. Additionally, we expect revenue from the acquisition of Natural Polymers to be partially offset by the sale of our insulation operations in Russia. From a cost perspective, we expect inflation from materials and energy to continue to be a headwind in the quarter with price/cost remaining positive but narrowing. Given all this, we expect mid-teen EBIT margins for the business. Moving on to Composites. We expect several factors that impacted the business in Q4 to continue in Q1 but improve as we move through the rest of the year based on our current market outlook as customer inventory levels get reset and we work through some higher-cost inventory. In Q1, we anticipate revenues to be down considerably versus the first quarter of 2022 and down slightly versus what we saw in Q4. As compared to the prior year, the first quarter will be impacted by lower volumes, the impacts from the exit of the DUCS product line and the sale of the Russian operations. Additionally, we expect currency to remain a headwind. From a volume standpoint, we expect to start the year with demand trends in most of our product lines similar to what we experienced in Q4, adjusting for the impact of Chinese New Year, as our customers continue to evaluate their inventory positions and order patterns. Similar to Q4, we will be proactive in adjusting our production to these reset demand levels. We anticipate ongoing inflation with energy remaining a year-over-year headwind to more than offset a modest overall price benefit as we see favorable contract pricing impacted by reductions in spot pricing. Overall, we expect EBIT margins of high single digits in the first quarter as we absorb the impact of lower volumes, a reduction in spot pricing, and the additional costs related to expected production curtailments as we manage our production in line with lower demand. And in Roofing, we anticipate relatively flat revenue with ARMA market shipments down high single digits versus prior year as distributor inventory levels continue to reset based on regional demand trends and improved product availability. We would anticipate our shingle volumes in the quarter to track largely in line with the market. We anticipate inflation to remain a headwind in many of our materials in Q1. Asphalt costs, which declined through Q4, fairly consistent with normal seasonality, have continued to move up from their December lows and are expected to increase further as we exit Q1 and enter into paving season. From a price/cost perspective, we expect to deliver another positive quarter. Overall for Roofing, we anticipate EBIT margins of approximately 20%. With that view of our businesses, I'll turn to a few enterprise items. While we expect the shifting macro environment to continue to impact our end markets in the near term, the structural improvements made to our businesses, combined with our leading market positions and disciplined execution, position us well to continue generating strong financial results and to outperform previous cycles. In addition, despite near-term challenges, we believe several secular trends around housing growth and renovation, changing construction practices and the demand for more sustainable solutions create new growth opportunities and broaden our market reach. These long-term trends drive our enterprise strategy and investment choices to strengthen our position in core products and markets, expand into new product adjacencies that leverage our material science, market and manufacturing expertise and develop more multi-material and prefabricated construction solutions. Each of these strategic priorities expand our current addressable markets and increase the earnings power of the company. We've also built an incredibly strong balance sheet and plan to leverage our financial strength, as great companies do, to continue investing to strengthen the long-term performance of the company through a balanced capital allocation strategy focused on organic growth and productivity investments; acquisitions which leverage our unique material science, manufacturing, and market expertise; and returning approximately 50% of free cash flow to shareholders over time through dividends and share repurchases. Overall, we are excited about the investments we are making to help our customers win in the market, grow our company, and deliver value for our shareholders. Our team delivered great results in 2022. And as we start 2023, we remain focused on delivering on our financial commitments and strengthening our company for the future. With that, we would like to open it up for questions.

Our first question for today comes from Michael Rehaut from JPMorgan.

I wanted to get a sense for the Insulation business. You mentioned for the outlook in the first quarter continued price realization. I'm curious if that's kind of the result of prior or earlier price increases from earlier in 2022. And if you could comment on the industry's announced price increase for December, January, how that's progressing. And secondly, I know I'm kind of working in a second one here but just on the topic of price, how should we think about capacity additions for the industry as we progress in 2023?

Thanks, Mike. I want to discuss price realization. Overall, we anticipate another quarter of positive price over cost as we previously indicated. Most of this is due to price actions announced earlier in 2022. We did implement a price increase in December that is currently reflected in the market, and we are seeing good realization from that increase as well, but it primarily stems from those prior announcements. In regard to capacity additions in the industry, the earlier announced expansions in loosefill have been successfully launched. We are observing strong demand for both loosefill and batts and rolls, along with favorable price realization. These increases have been absorbed in the market without any significant impacts. For batts and rolls, one expansion announced earlier is not expected to come online until 2024, so there will be no effect from those capacity increases in 2023. Regarding our network, we have made progress as discussed last quarter. The Santa Clara facility was shut down in Q4 as planned, and we are currently upgrading our Nephi facility to produce batts and rolls. This project is on schedule, with Santa Clara closing as expected, and Nephi is down with plans for a start-up in the second quarter.

Our next question comes from Stephen Kim of Evercore ISI.

Appreciate the color here. On the Composites business, you talked about weakening demand. Was curious if you could give us a little bit of a sense for how that weakness may have been different by product segment within Composites or regions. In particular, I'm wondering whether some of the higher value-add products that you've been moving more into, whether they saw a similar kind of a deterioration in their end markets or not. And then in a similar vein, I know the Insulation business has a very large technical business. So curious if you could comment a little bit about whether you're seeing the trends in the technical side, I'm thinking particularly your Pittsburgh Corning business. Is that holding up better than maybe some of the more commodity-oriented products?

Thanks, Stephen. I’d like to address the Composites question first, and then Brian will likely cover the Insulation question. Regarding Composites, we experienced lower volumes across all regions and products during the quarter, which we had anticipated. As the quarter progressed, we noticed that North American volumes weakened, especially in the latter half, impacting our performance compared to our initial outlook. Essentially, all regions and products, including higher value-added items, saw a decline in volumes, with North America showing a slowdown towards the end of the fourth quarter. Consequently, customers began to evaluate their inventory levels in a more uncertain market and adjusted their purchasing patterns, particularly in North America. We’re pleased that our team responded to this by reassessing production needs to maintain desired inventory levels across the business. This proactive approach contributed to the decline in operating margins we experienced in the fourth quarter. In simple terms, we dealt with lower volumes by implementing measures to reduce production where necessary. This strategy will carry over into the first quarter, and as we indicated, we expect operating margins to be slightly lower moving forward. As we consider Composites in 2023, we will continue to take curtailment actions, particularly in the first quarter, due to trends observed in the fourth quarter, which will put some pressure on margins. Additionally, energy costs are impacting both the Composites and Insulation businesses, with Composites being affected more due to natural gas usage. I mentioned in my scripted comments that energy costs peaked in the fourth quarter for us, and our hedging program helps to manage fluctuations in gains and losses. We expect the energy cost impact in Q1 to be similar to what we saw in Q4, based on our hedging program. However, we anticipate that, given market conditions, we may start to see some improvement in both European and U.S. natural gas costs as we move from Q1 into Q2. I hope this provides insight into the demand within Composites and how our team is proactively addressing the situation. Now, I’ll turn it over to Brian to discuss Insulation.

Thank you, Ken. In the technical and global insulation business, we continue to observe positive trends in our U.S. commercial sector. Our product offerings are quite diverse, serving data centers, airports, hospitals, and various other areas. While high-rise office construction is experiencing some weakness, overall, we are pleased with this category and are seeing solid strength. One specific area of strength is our FOAMGLAS product line, particularly for LNG applications, where we've noticed a significant increase in quoting activity over the past six months. This product is extensively utilized in LNG terminals around the base tank and piping. We believe the uptick in quote activity will translate into increased orders as we move forward. These projects span multiple years, and we see this as a promising segment for future growth.

Our next question comes from John Lovallo from UBS.

The first, really, it's focused on the divergence in OC's roofing volume versus the industry. I know you mentioned that demand for the product remained very strong. I guess the question really is, how are inventory levels right now in the channel? And do you expect any destocking as we move forward?

Yes. Thanks, John. What we saw in Q4, I would characterize as really kind of a continuation of what we saw in Q3 from a standpoint of distributors becoming much more selective on the products and brands they were buying based on local demand trends and more available product to them. So we saw these trends emerge in Q3. We talked about that. In Q4, we saw it much more acutely as I think all distributors were looking to rightsize their inventories. And outside of a couple of storm markets, particularly Florida and the upper Midwest, we saw manufacturing shipment volumes down considerably in that area. So I think there is a big push from distributors to rightsize their inventories to what they're seeing in terms of local demand. And certainly, product availability is more available widespread than we were a few quarters ago. So I think that's impacted Q3 and Q4. I would say just to characterize, though, the fourth quarter volumes, even though they stepped down considerably, if you look over the last seven or eight years of average volumes in the fourth quarter, they were more in line with the average volume. So I think still good purchasing activity, just a pretty significant step-down from the last couple of years. And I would characterize that's what we're seeing in Q1. So we're guiding to a step-down in inventory or in manufacturer purchases in the market in Q1, again, as distributors keep rightsizing their inventory. I think the divergence is really the continued strong demand for our products based on our strength of our contractor network. So this is a key part of our strategy in our Roofing business. The team has been executing incredibly well for the last several years which is to focus on converting contractors and helping to build their businesses through our unique products, our brand, our commercial skills and capabilities, and digital tools. And so I think we just continue to see that in terms of drawing great strength in our product. And so while we were seeing some markets getting softer and some of those step-downs in purchases overall from a distributor standpoint, demand for our products remained strong through the quarter. And I think that was a bit of the disconnect and divergence that you talked about in Q4. And we think that strength for our products is going to continue here into Q1. And we think we're set up for a good year in Roofing.

Our next question comes from Joseph Ahlersmeyer from Deutsche Bank.

Congrats on the residential business results, guys.

Thank you.

Could you discuss the resilience in volumes in North America? Some might be surprised that despite the changes in starts since last summer, your fourth quarter volumes were flat and your first quarter volumes are also expected to be flat. My question is, although I understand you usually only provide guidance a quarter ahead based on visibility, could you help us think hypothetically about the impact on your North America residential volumes if single-family starts are bottoming in the first quarter?

Yes. Joe, let me maybe talk a little bit about Q4, Q1 volumes because you're right, they've held up very strong. Demand for our products has been strong. And this is where we've seen, I think, starting last year, demand for our products being more driven by completion rates than on starts. So we saw that kind of emerge back half of 2021 coming into 2022 that even as starts grew, when you look at completion rates, they seemed to top out at around 1.4 million units and really driven by what we believe are constraints in labor availability and material availability. And so while starts continued to grow, completion rates didn't and that has created a backlog and elongated the construction cycle. So in the back half of last year, even though we saw starts coming down, they were still above completion rates and therefore, still building the backlog. And I think what we've seen in Q4, that finally kind of evened out. We saw November and December starts kind of roughly in line with completion rates, about 1.4 million units. And that's what's driven great strength to finish the year in our residential business, great strength to start the year. Now, we do expect that starts continue to trend down and they start falling below those completion rates, that this backlog is going to get worked through. And I think regionally, I would say we'd expect some of that to work through as early as the end of the first quarter. Some markets might see a continuation into the second quarter. But clearly, if starts continue to come down below that 1.4 million rate, we think that's going to start to impact future demand. When we look at how much that's going to depend on, I think, where starts kind of bottom out, as you said, relative to where they're running today, one key element we've talked about in the past are mortgage rates. And we continue to believe that consumers are resetting with the higher mortgage rates. They continue to kind of sit on the sidelines in terms of wanting to get into the market. But once we see rates stabilize, we think that consumers will reset. They're going to come into the market. So we think any kind of slowdown should be shorter in duration given that there's a high demand for housing. We've been underbuilt for so many years. There is very little inventory to no inventory in the channel to work through. Demographics and household formations still require housing. So we think the depth and duration of any slowdown is going to be more shallow than previous cycles and shorter. And I think once we start seeing interest rates stabilize, we're going to see people coming back into the market pretty quickly. We saw a glimmer of that here in January when interest rates, even when they kind of hovered around that 6%, a little above 6%, we've seen a lot more positive comments from builders and some more foot traffic in looking at homes. So we hope that that's going to play out, interest rates stabilize and any kind of a slowdown would be shorter and shallower. So it might get a little choppy for the next couple of quarters. But long term, we feel very good about the fundamentals of the business.

Our next question comes from Truman Patterson of Wolfe Research.

This is Trevor Allinson on for Truman. Can you talk about how you're thinking about roofing industry volumes and pricing for the full year 2023? Appreciating you're not giving full year '23 guidance but just looking at where housing starts are or existing home sales are, where we expect there to be some softness. But you're guiding shipments being down high single digits in 1Q and ARMA comps become progressively easier throughout the year. So just curious if you're thinking maybe 1Q represents the bottom on a year-over-year basis and maybe how you're thinking about industry volumes for the full year.

Thank you for the question, Trevor. The demand for our Roofing business primarily comes from repair and remodeling, which accounts for over 80%, while new construction makes up just under 20%. This indicates that new construction starts have only a minor influence on demand drivers. We've observed a slowdown in housing over the past year that could lead to reduced roofing volumes, particularly in markets more focused on new construction. However, we still see strong fundamental drivers in the repair and remodeling segment as people continue to invest in their homes. Contractor backlogs are variable by region, but overall, we are seeing sustained demand for remodeling efforts, likely to remain stable, though it may experience slight fluctuations. Storm demand adds another layer of uncertainty, representing approximately 30% of annual demand, and we won't have a clearer picture of this until we progress further into Q2. At the beginning of the year, our distributors are cautious in their purchasing, and we anticipate first-quarter volumes aligning more with historical averages compared to the last couple of years. We will need to monitor how remodeling investments and new construction develop as the season progresses, along with any storm demand. In storm-affected areas like Florida, repair work is proceeding as expected, with solid demand anticipated throughout the year. The Upper Midwest, such as Minnesota, is challenging for roofing in February, but we expect activity to pick up as spring arrives. Some storms in California have also led to increased quoting activity. We foresee strong demand in these storm pockets at the year's onset and will watch how the rest of the year unfolds concerning renovations and additional storm events. Overall, we anticipate a robust roofing market in 2023.

Our next question comes from Mike Dahl of RBC Capital Markets.

I wanted to follow up on the pricing dynamics for composites. You noted that while there are still some benefits from contract pricing, you anticipate these will be countered by lower spot prices. Considering the balance between your contract and spot pricing, could you clarify what you are observing regarding spot prices and how we should approach this as your contracts transition throughout the year?

Yes. Thank you, Mike. That’s a great question. I want to provide some additional insight on Composites pricing. To clarify, in the first quarter of 2023, similar to each quarter in 2022, we expect overall pricing for Composites to be positive. We are seeing neutral to positive pricing on existing multiyear contracts and newly negotiated contracts. In our last quarter call, we mentioned that we were working through contract renegotiations for those up for renewal and that discussions have been favorable. Therefore, we anticipate contract pricing to be positive in the first quarter of 2023. However, we also mentioned that there is some pressure on spot pricing. While we don’t expect this to completely negate the positives from contract pricing, it will likely slightly reduce the contract pricing figures. In 2022, we started with strong contract pricing coming out of negotiations in late 2021, which benefited from robust spot pricing, especially in the first half. As the markets begin to soften and reset in certain areas, we expect to see additional pressure on spot pricing as we progress through the year. Specifically, the most notable adjustments in spot pricing are occurring in our Asian markets. We are not experiencing significant pressure on contract or spot pricing in North America and Europe, but it does appear to be a shift primarily affecting Asia. This is largely due to the Chinese economy not fully reopening yet, leading to some product being redistributed to other markets, particularly India, which is where we are noticing the most spot pricing pressure.

Our final question for today comes from Adam Baumgarten of Zelman & Associates.

Regarding Roofing, considering the rise in inflation you're observing, do you anticipate needing to increase prices further to counteract some of the inflation in asphalt and other materials?

Adam, as we sit today, we're still seeing positive price/cost mix to start the year. So we'll continue to watch the inflation trends as we go forward and we'll make adjustments as needed. But I think we've got a very good track record of being able to manage price relative to inflationary environments or deflationary environments. So we'll continue to manage that closely and make those decisions as we see the year play out.

That concludes the Q&A session for today. So I'll hand back to Brian Chambers for any further remarks.

Okay. Thanks, Alex and thanks, everyone, for your time today and your questions. We really appreciate your interest in Owens Corning and look forward to speaking with you all again during our first quarter call. Hope you all have a great day.

Thank you all for joining today's call. You may now disconnect your lines.