Owens Corning Q2 FY2025 Earnings Call

Hello, everyone, and welcome to Owens Corning's Second Quarter 2025 Earnings Call. My name is Lydia, and I will be your operator today. I now hand you over to Amber Wohlfarth, Vice President of Corporate FP&A, Investor Relations, to begin. Please go ahead.

Good morning. Thank you for taking the time to join us for today's conference call and review of our business results for the second quarter of 2025. Joining us today are Brian Chambers, Owens Corning's Chair and Chief Executive Officer; and Todd Fister, 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 1 question only. Earlier this morning, we issued a news release and filed a 10-Q that detailed our financial results for the second quarter of 2025. For the purposes of our discussion today, we have prepared presentation slides summarizing 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 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 where we offer a few reminders. First, today's remarks will include forward-looking statements that 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 more detail. 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 our earnings press release and presentation available on the Investors section of our website, owenscorning.com. Third, financials and metrics for current and historical periods discussed on this call will be for continuing operations, except for capital expenditures and cash flow measures, which include amounts related to glass reinforcements until the closing of the sale of this business. 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.

Thanks, Amber. Good morning, everyone, and thank you for joining us on our call today. At our Investor Day in May, we detailed how we are a new Owens Corning, a company that has been reshaped into a high-performing building products leader in North America and Europe, and structurally improved to drive above-market growth sustainable and more resilient margins and substantial cash flow, powered by the OC advantage, a set of capabilities that are unique to our company and central to our success. Our team delivered second quarter results that continue to demonstrate how the new Owens Corning outperforms in any set of market conditions. During today's call, I will share highlights of our second quarter results and discuss the strategic actions we're taking to continue to outperform the market and deliver long-term value. Todd will then provide a detailed review of our financial results for the quarter. And I'll come back to share an overview of the current operating environment and our outlook for the third quarter. As always, I will begin with safety. We maintained a very safe operating environment in the second quarter with a recordable incident rate of 0.60. In June, we hosted our first global Safety Week, a best practice adopted from our newly acquired Doors business that has been scaled across the enterprise and build on our Safer Together operating framework connecting processing and systems with behaviors and leadership to create a safer workplace. Turning to our financial results. We continued our strong and consistent performance in the second quarter despite a more challenging environment. For the 20th consecutive quarter, we achieved adjusted EBITDA margins at or above 20%, an incredible milestone. Revenues were up 10% versus prior year, and earnings grew 30% year-over-year. Adjusted EBITDA in the second quarter was $703 million, with an adjusted EBITDA margin of 26%. This performance is a direct result of the structural changes we've made and is another proof point of our ability to deliver higher and more resilient margins even in the face of softening market conditions. We also generated good cash flow and continue to return capital to shareholders through dividends and share repurchases. Through the first half of the year, we returned nearly $440 million of the $2 billion we committed to returning over this year and next. This commitment reflects our disciplined capital allocation strategy and confidence in our cash-generating capabilities. As I shared at Investor Day, our performance is a result of a clear set of strategic choices and investments we've made that have shifted our product and geographic focus to high-value building materials sold in the most attractive markets. In short, we are a different company today than we have been historically, with a track record of growing revenues, increasing our margin profile and returning significant cash to our shareholders over the past 5 years. One key driver of this performance shift is our strategic business mix, which positions us to outperform given our unique product and application exposure. Today, over half of Owens Corning's revenue is generated from North American repair and remodel activity, including more than 1/3 from nondiscretionary reroute, which remained solid in the quarter. In nonresidential markets, which make up about 25% of our revenues, North America demand in the quarter was stable, and we continue to see encouraging improvement in Europe. So while residential new construction demand continues to face pressure, it represents only about 1/4 of our overall revenue. This strategic product mix positions us well to navigate near-term headwinds and to benefit from several longer-term secular tailwinds including an aging and underbuilt housing stock in the U.S. and Europe, growing demand for products that improve energy efficiency and increasing investments in North American manufacturing and infrastructure. A second key driver of our strong performance is the strategic actions we've taken to concentrate resources on geographies and applications where we can build leading positions and deliver above-market growth. In July, we completed the sale of our building materials business in China and Korea to a member of the region's management team. The transaction included 6 insulation manufacturing facilities in China and a roofing manufacturing facility in Korea, and represented annual revenue of approximately $130 million. In addition, the sale of our glass reinforcements business is progressing, and we expect the transaction to close later this year, subject to regulatory approvals. Another key driver to our performance are the strategic investments and choices we are making to strengthen our market-leading positions by expanding capacity, modernizing assets and increasing operating efficiencies. In our Roofing business, we started up our new laminate shingle line in Medina, Ohio during the second quarter. This line adds 2 million squares of capacity and has begun supporting current demand from our growing contractor network. In Fort Smith, Arkansas, we also commissioned a new nonwovens coating line co-located with our existing nonwovens plant. Both of these investments are examples of how we're investing to deliver above-market growth while enhancing our winning cost position. In addition to these capacity expansions, we are investing in leading technology through the use of new pilot lines across our roofing and insulation businesses. These lines accelerate both product and process innovation, enabling us to bring new solutions to the market faster to help our customers win and grow. We are also unlocking value through the integration of our Doors business, where we are leveraging our enterprise scale and capabilities to drive efficiencies. This past May marked 1 year since we closed the Masonite acquisition, and we've made significant progress applying the OC playbook to doors. We are drawing on our unparalleled commercial strength to deepen customer relationships and expand our reach as we structurally improve margins over time, like we have done in our Insulation and Roofing businesses. We have already captured more than 75% of our enterprise run rate synergy target of $125 million, the majority of which we committed to achieve by the end of year 2 of ownership. In addition, we are targeting another $75 million of cost improvements, mostly through our doors network optimization actions that will begin to make an impact in 2026. Through each of these initiatives, we are investing with purpose to meet customer demand, modernize our production lines, improve capital efficiency and sustain strong margins and consistent returns. As we move forward, we will continue to capitalize on our position as a building products leader serving North America and Europe to execute our enterprise strategy to grow the company and deliver durable results across market cycles. Fueling our strategy is the OC advantage, which includes our iconic brand, unparalleled commercial strength, leading technology and winning cost position. These advantages form a playbook that can be scaled across the company to create multiple paths to generate value for our customers and shareholders. Before I close, I want to highlight a few recent organizational moves. In July, we announced the appointment of Nico Del Monaco to the role of Roofing President and named Jose Canovas, President of the Insulation business. Both are seasoned leaders with a proven ability to strengthen customer partnerships and maximize operating performance. Nico most recently led the insulation business and his expertise in leveraging our high-value branded building products and customer engagement model to generate growth. Jose has held leadership roles at OC for more than a decade, most recently leading our nonresidential insulation business, and has demonstrated his ability to deliver value across dynamic markets. We are excited to leverage their expertise to drive strategic growth within their businesses and across the enterprise. I also want to thank and recognize Gunner Smith who is leaving to pursue another professional opportunity for his countless contributions to Owens Corning. Under his leadership, the roofing business achieved outstanding results through an incredibly talented team, broad product offering and durable contractor engagement model, which will leave a lasting impact on our customers and our company. And finally, I want to recognize our team for earning the spot on the Fortune 500 list for the 71st consecutive time, one of only 49 companies to appear on this prestigious list every year since its inception. This achievement reflects the company's depth and breadth of talent, the strength of our iconic branded products and unwavering focus on our customers' success, and a commitment to winning in the right way. With that, I'll turn the call over to Todd to discuss our second quarter in more detail.

Thank you, Brian, and good morning, everyone. As Brian mentioned, our results in the second quarter and through the first half of the year demonstrate the value we are creating through the OC advantage in our overall enterprise strategy. We continue to demonstrate the strength of the enterprise as we sustained higher and more resilient earnings in softening markets. I'd now like to turn to Slide 5 to discuss the results for the quarter. As a reminder, these results are for continuing operations. In the second quarter, we built on our strong Q1 performance. Revenue increased 10%, driven by the strategic addition of our doors business last May. Our unparalleled commercial strength, coupled with our winning cost position, generated adjusted EBITDA of $703 million and an adjusted EBITDA margin of 26%. The sale of our Building Materials business in China and Korea is another step in sharpening our focus on what we do best, building products in North America and Europe. In the quarter, we had adjusting items of $26 million driven by an additional held-for-sale loss of $24 million on this business. Adjusted earnings per diluted share for the second quarter were $4.21, reflecting both the strength of our earnings as well as the continued capital allocation commitment and ongoing share repurchase activity. Turning to Slide 6, to go further into our cash generation and capital deployment during Q2. Free cash flow for the quarter was $129 million compared to $336 million in the same period last year, driven by the timing of working capital, including an increase in inventory as a result of our ongoing tariff mitigation efforts and higher capital additions. As we have shared, we are investing in capital projects at elevated levels in the near term to expand capacity and drive improvement in long-term capital efficiency. As a result, capital additions for the quarter were $198 million, up $41 million from the same quarter prior year. Our return on capital was 13% for the 12 months ending June 30, 2025. At quarter end, the company had debt-to-EBITDA of 2.1x at the low end of our targeted range of 2 to 3x. During the second quarter, we returned $279 million to shareholders through share repurchases and dividends. We repurchased common stock for $220 million and paid a cash dividend totaling $59 million. We also received Board approval for a new share repurchase authorization for up to 12 million shares. This authorization supports our commitment to a $2 billion return of cash to shareholders through 2026. We are still on track for this level of return as we expect seasonality to create a step-up in free cash flow generation in the second half of the year. Our capital allocation strategy remains focused on generating strong free cash flow, delivering mid-teen returns on capital, returning cash to shareholders and maintaining an investment-grade balance sheet while we invest in attractive capital projects for growth. Our capital allocation strategy is focused on compounding long-term value for shareholders. Now turning to Slide 7, I'll provide additional details on our segment results. Our Roofing business continues to exemplify the strength of our enterprise model, leveraging our contractor engagement strategy and vertically integrated cost position to outperform the market and deliver resilient earnings in the second quarter. Sales in the second quarter were $1.3 billion, up 4% from prior year. In the quarter, revenue growth was primarily driven by positive price realization on our April increase. Components volume was in line with prior year, and we saw growth in non-Owens, where we've been investing in capacity. The U.S. asphalt shingle market on a volume basis was down mid-single digits compared to the prior year unless storm-related demand. Our U.S. shingle volume outperformed the market as demand for our shingles continue to be strong. EBITDA was $457 million for the quarter, up 5% versus prior year. Positive price more than offset the impact of modest cost inflation and higher manufacturing costs as we continue to invest in our assets to meet the high level of demand for our products. Overall, for the quarter, we delivered EBITDA margins of 35%. Now please turn to Slide 8 for a summary of our Insulation business. Our Insulation business demonstrated the impact of structural improvements and disciplined execution, sustaining 20-plus percent EBITDA margins despite market headwinds. This highlights our ability to win with customers and deliver results well above historical performance in similar markets. Q2 revenues were $934 million, a 4% decrease from Q2 last year. In North America residential, volume was down due to market uncertainty and a weaker demand in residential new construction. In North America nonresidential volume was up, including demand to service data center construction related to AI, as well as demand for our phone less product being used in commercial and industrial applications. In Europe, we continue to see market stabilization. These businesses both recognized positive price in the quarter. Insulation EBITDA for the second quarter was $225 million, down $21 million from prior year. Strong operational performance partially offset the impact of lower demand and the corresponding production downtime, as we remain disciplined in our inventory management. Additionally, positive price nearly offset the impact of cost inflation. Insulation delivered EBITDA margins of 24% in the second quarter. Moving to Slide 9, I'll provide an overview of the Doors business. Overall, the business continued to perform well in a challenging market. In the quarter, the business generated revenue of $554 million, in line with the outlook we provided on our last call. Revenue was up modestly from Q1, primarily on higher volume in North America. EBITDA for the quarter was $75 million with EBITDA margins of 14%. The integration is progressing well, reflecting our ability to apply our unique capabilities. When we closed on the acquisition, we had line of sight to delivering $125 million of enterprise synergies with about half hitting the doors business. To date, we have seen about 40% of our synergies captured in the business and the other 60% across the remainder of the enterprise. This reflects our ability to scale the OC advantage while applying the same playbook that structurally improved margins in Roofing and Insulation. We are on track to exceed the original enterprise commitment with an additional $75 million of structural cost savings generated through operational improvements. We have already begun taking actions to achieve these savings, including a recent example where we made the decision to close a components facility in Oregon in the second quarter. Overall, for the company, there was minimal impact from tariffs on our financial results in Q2. Our sourcing and supply chain teams have continued to demonstrate agility and discipline mitigating tariff exposure in preserving margins. As a result, we expect the third quarter to be similar to the second quarter with approximately $50 million of gross tariff exposure reduced to a net impact of around $10 million, primarily in the Doors business. This impact is included in the outlook Brian will share in a moment. Owens Corning is well positioned to address rising tariffs with our primarily local for local manufacturing and U.S. MCA compliant product portfolio, but we expect a small step-up in net tariff exposure in the fourth quarter. With the latest round of tariffs in our mitigation efforts, we expect the net tariff impact to be less than 1% of COGS in the second half, favorable to our previous guidance of 1% to 2% COGS exposure. Moving on to Slide 10, I will discuss our full year 2025 outlook for key financial items. General corporate EBITDA expenses are expected to range from $240 million to $260 million. As a reminder, this year-over-year increase includes our best view of expenses for the glass reinforcements business that will not be included in discontinued operations. We expect our 2025 effective tax rate to be 24% to 26% and anticipate a cash tax benefit of more than $90 million in the year from the recent tax bill. Capital additions are expected to be approximately $800 million. This level of capital investment reflects the strategic investments we are making to expand capacity and drive improved efficiency. This CapEx continues to include glass reinforcements, which is expected to be approximately $80 million in 2025. We expect CapEx to remain elevated in the near term as we work towards completing the high-return capital efficient projects we have in process. Now please turn to Slide 11, and I'll turn the call back to Brian to further discuss our outlook.

Thank you, Todd. Our second quarter results reflect the strength of our company and the disciplined execution of our strategy, even as we navigate a more challenging macro environment, with leading positions in roofing, insulation and doors, our product and application diversity continues to support good margin stability even as we face tougher market conditions. In the third quarter, we expect overall market demand for nondiscretionary roofing repair activity to remain solid, but decline versus prior year, driven by lower storm activity. We expect residential new construction and discretionary R&R in the U.S. to remain challenged. In North America nonresidential construction, we expect a relatively stable market. And in Europe, we expect market conditions in the second half to gradually improve with the broader economic recovery in the region. Given this near-term outlook, we anticipate third quarter revenue for continuing operations to be approximately $2.7 billion to $2.8 billion, slightly below to in line with prior year. For adjusted EBITDA, we expect to deliver another strong quarter with margins of approximately 23% to 25% for the enterprise. Now consistent with prior calls, I'll provide a more detailed business specific outlook for the third quarter. Starting with our Roofing business. We anticipate revenue growth of low to mid-single digits. While market demand for shingles in many regions should remain solid, we expect ARMA shipments to decline from prior year, assuming normalized storm demand versus elevated levels in 2024. We expect our shingle volumes to remain relatively stable versus prior year as we continue to see strong demand for the OC brand and our roofing products. We anticipate normalized attachment rates and components to continue and another quarter of top line growth in nonwovens. In the third quarter, we expect moderate cost and delivery inflation. We also anticipate manufacturing costs and SG&A to be up as we invest in our assets and absorb the necessary maintenance costs. For the business, we expect positive price from our previous announcements to drive year-over-year top line growth and positive price/cost. Overall, for roofing, we expect to generate an EBITDA margin similar to prior year, which was 34%. Moving on to our Insulation business. We anticipate overall revenue to decline mid- to high single digits compared to the prior year, primarily due to a volume decline in North American residential and the sale of our building materials business in China. As a reminder, this business had approximately $130 million of revenue annually. In our North American residential insulation business, we expect revenue to be down low double digits versus prior year due to lower demand as we work through a step down in housing starts and lower backlog. For North American nonresidential, we expect revenue to be up slightly versus prior year. And in Europe, we anticipate revenue to be up versus prior year as we see gradual market recovery and currency tailwinds. Overall, for the Insulation business, we expect ongoing cost inflation, resulting in negative price cost in the quarter. Additionally, with the volume pressure in North American residential, we anticipate incremental production downtime, partially offset by productivity. Given all this, we expect EBITDA margin for insulation to be in the low 20% range. Turning to our Doors business. We continue to perform well relative to market conditions as we realize synergies and drive ongoing network optimization. Now that we have operated the Doors business for a full year post-acquisition, we will begin providing guidance versus prior year. In Q3, we expect challenging market conditions to continue, resulting in a revenue decline of low to mid-single digits versus prior year, driven primarily by lower demand and pricing down slightly. While we anticipate synergies and cost control realization to continue, we expect EBITDA to be impacted by inflation, including the ongoing impact of announced tariffs. In the near term, Doors faces more tariff exposure than our other businesses due to the cross-border product moves into Canada, which we are actively working to mitigate. Overall, for doors, we expect EBITDA margin of low double digits to low teens for the quarter. As Todd mentioned, another factor that could impact our enterprise results in Q3 is the implementation of additional tariffs. We expect the net impact of tariffs for Owens Corning in the third quarter to be similar to what we incurred in Q2. In summary, our team delivered strong performance in the second quarter with an outstanding response to a dynamic market, executing with discipline and focus. The strategic choices and structural improvements we've made over the past several years have created a new Owens Corning, a more focused, resilient company that is built to outperform. We remain confident in our ability to deliver higher, more durable margins through a cycle generates strong free cash flow and create long-term value for our shareholders. As we move through the second half of the year, we will continue to invest in our people, our capabilities and our customer relationships while maintaining a sharp focus on execution and operational discipline. With that, we would like to open the call up for questions.

Our first question today comes from John Lovallo with UBS.

The question is on North American industry capacity utilization. I think it was in the low to mid-80% range. I think you guys highlighted that 90% is typically kind of the pricing trigger point. The question is how has capacity utilization trended since last quarter? And how are you thinking about pricing, especially considering the expectation for negative price cost in the third quarter?

John, this is Todd. Happy to provide more color on res pricing and market conditions. Let me start at the highest level for the enterprise because we've done a lot of work over time to grow into the repair and remodel space in roofing with nondiscretionary remodel as well as repair and remodel elsewhere. And we're at a point where the residential exposure on an enterprise basis is a lot smaller than it used to be historically. We're down to about 13% of enterprise revenue in North America residential in Q2. So with that as the backdrop, when we look at the second quarter, we had another quarter of weak leg starts, and that's following a weak quarter that we had in Q1. So we were down about 5% in leg starts in Q1, down 1% in Q2, and then legs start to be down another 1% for Q3. When you look at what TopBuild announced earlier this week, they showed an 11% lower volume in Q2 in their TruTeam business, which is the installation business that handles a lot of the residential fiberglass. And they guided to low double-digit declines in residential for 2025. We're seeing then market volumes be a little worse than leg starts, is a result of a couple of things. One is we're seeing completions decline at a faster rate than leg starts. We're also seeing a shift away from single-family construction towards multifamily in the back half of this year. And we have a higher take per unit for single-family than we do for multifamily. So if I step back up with that context to industry utilization, we still believe the industry can support between 1.4 million and 1.5 million housing starts, depending on the mix of single-family, multifamily and that does imply first half utilization that was below 90%. What we've shared is above 90%, typically has been a market where we're able to get positive price. But there's no conclusive trends below 90%. In some of those markets, we're able to get positive price in other markets, price is neutral and price can decline as well below that 90% utilization level. So what we're seeing right now is we saw limited traction on the price increase that we took this year for residential, fiberglass. We're still seeing a lot of inflation come through in the business. We have inflation on materials, some longer contracts that didn't reset in the peak inflationary period. We're starting to absorb some of that inflation now. We're seeing inflation in labor. We're seeing inflation and warehousing expenses. And we're not seeing much positive price in the market to offset that. We are making very surgical price moves as needed in the market for certain products, in certain markets. But again, they're very targeted and they're very surgical moves to meet competitive situations with pricing. So overall, we are seeing a market where there is free supply. We're not sold out as we have been in recent quarters. We're navigating through that effectively with our teams. We're maintaining a price premium over competitors. We're maintaining a relatively stable share in the market. So we're doing the things we want to do commercially in this market. and we know how to navigate through this. We've seen this multiple times before with utilization at this level. So nothing unusual for us and our teams. Thanks, John, for the question.

Our next question today comes from Anthony Pettinari with Citi.

Maybe sticking with insulation, but nonres in Europe. I think you expect revenue to be up for both of those businesses in 3Q. I'm wondering if it's possible to kind of size that and then talk about the price/cost dynamic that you're seeing in commercial and Europe installation.

Thanks, Anthony. I'd be happy to provide more details on nonresidential in Europe. We anticipate positive growth in revenue for those two markets in the third quarter, although it will be modest in both. I'll discuss North America first and then we can move to Europe. In North America, the general trend shows a decline in construction spending in the nonresidential sector. However, we are noticing growth in certain end markets where the revenue per unit is higher for insulation. We've highlighted data centers in our prepared remarks as a significant area, especially because the revenue per unit is quite high for them. There's substantial construction supporting the boom in AI. We're also observing similar trends in process insulation for manufacturing and insulation for the oil and gas sector, which are currently favorable markets for us. Thus, our products are performing well in the market. It's important to note that in the nonresidential space, our products are often specifically chosen for their applications, and we compete based on various performance attributes. This generally results in more stable pricing for us in this area, which we can see reflected in our Q2 results with positive pricing in nonresidential. While inflation is affecting this market, the pricing dynamics have not mirrored those in the North American residential space. When we turn our attention to Europe, we are starting to see some positive developments, especially in the Nordics and the U.K., with certain areas in Southern Europe also showing strength. Others in the industry are indicating similar trends during their earnings calls. Our revenue in Europe was down in Q2, primarily due to our decision to exit a couple of product lines in the region. Nevertheless, we are optimistic about the trends emerging from a low base in Europe, which has struggled since the Ukraine invasion. Our teams in Europe have done an excellent job cutting costs and improving productivity. We are well-prepared now with the capacity to sell and grow as the market begins to recover, and we expect favorable incremental margins on that business. Although it’s still early in the European recovery, we are encouraged by the signs of improvement. Thanks, Anthony.

Our next question comes from Michael Rehaut of JPMorgan.

Nice results. Wanted to shift gears a little bit to the doors business. You guided for the third quarter low double digit to low teens, which might imply slight improvement, if I'm reading into that correctly from the 2Q performance. Just wanted to get a sense of what's driving that if it's the ongoing cost synergy realization? And kind of bigger picture, when you look at this business, pre-acquisition. If you look at North America, Europe blended, they did about a 19% EBITDA margin. Obviously, over the last year or 2 has taken a real hit from the new res market, but how do you see line of sight back to that? Obviously, the 75 additional synergies may give you another 3 points. But how would you see line of sight back to like a 20-ish type of EBITDA margin?

Mike, I appreciate your comments and questions. Overall, we are quite satisfied with how the business is performing. Every segment appears to be exceeding market expectations, and despite the difficult conditions in the residential sector, our residential business remains strong. Our roofing segment is also performing well, and our doors division continues to thrive in spite of the market challenges. Regarding our Q3 guidance compared to Q2, we expect performance to be consistent with Q2. Although we anticipate a year-over-year decline in volumes, we have seen solid volume stability in the first half of the year, which we expect to continue. This stability is a key reason for our guidance mirroring Q2 performance. We are experiencing favorable market pricing and a steady mix. While there has been a decline in both new construction and repair-and-remodeling segments year-over-year, we have observed stability from month to month and quarter to quarter, which boosts our confidence in maintaining margin performance. We do expect some tariff pressures in Q3, particularly linked to increased rates for steel and aluminum, and we are addressing some pre-purchase inventory issues. However, we believe that our cost optimization efforts will help mitigate this impact. Regarding your second question, we confidently project that our business can achieve long-term EBITDA margins in the high teens, above that level ideally. This potential for margin improvement was a significant factor in our decision to enter this product category, as we believe we can scale up and enhance our margins by leveraging our ownership strengths and applying proven strategies from roofing and insulation. We see the potential for EBITDA margins to exceed 20% in the long term, although there will be considerable effort needed on cost optimization in the near term. Our network integration is on track to deliver $125 million in savings, and we continue to identify opportunities for network optimization, including the recent announcement of a facility closure in Oregon aimed at enhancing productivity and efficiency. We are also making considerable progress in commercial aspects, particularly in integrating our products with roofing and insulation for our larger distribution partners. We are starting to see positive outcomes from this integrated approach, which allows us to offer a more comprehensive product range to contractors, builders, and dealers, further facilitating distribution. While we will navigate a challenging short-term environment, the benefits of our optimized cost structure and enhanced commercial positioning will position us to accelerate earnings growth significantly once market conditions improve.

Our next question comes from Stephen Kim with Evercore ISI.

Appreciate all the color here so far. I wanted to ask you guys about mix. In Insulation, just kind of starting there, I think you'd indicated that there was overall some negative mix, which offset some of your positive pure price. But I think you also indicated that FOAMGLAS sales were stronger, nonres is performing well, and the North American residential was kind of pulling of some softness, which I think everybody understands. But is it nonres and FOAMGLAS kind of higher mix. So I was wondering if you could provide a little more clarity on the negative mix in insulation. And then in Roofing, I wanted to kind of get a sense for what you're seeing there in terms of mix. You've had a lot of really good mix. Some of that was due to the Protective Packaging going away. Some of that was the increase in laminated shingles. Kind of curious what we should be thinking there? And is there any impact from the reclass of nonwovens that might pull out the numbers a little bit. Just help us understand mix broadly in roofing as well.

Stephen, I'll take insulation first, and then Brian can step in on the roofing piece. So we did see negative mix in Q2. We believe it's mostly timing related to some projects and when they hit compared to prior year. So we don't see it as an ongoing dynamic. We don't think this is something that is permanent. Just a little bit of noise in Q2 as a result of that timing.

Yes. And Stephen, on Roofing, we're really not seeing big variations in terms of overall mix that's impacting the results. We've continued to see a step-up of laminate shingle demand in the market, and we've been keeping pace with that, with our investments. It's why we've been investing to increase our laminate capacity at Medina and the new facility in the Southeast. So we've seen that continue to tick up, but continue to support that in components. We've really settled into a really nice attachment rate, so part of that is the branded roofing system we can offer contractors can take into the home where they buy our underlayments, or starter or ridges are all part of a complete system in package, OC branded. And that has really driven a lot of the components volume. But we've seen those attachment rates stay fairly steady, a little bit of positive momentum, but in increments. And then to your other question on the nonwovens and bringing that in, that really is not having any impact in terms of the mix overall. Part of the focus and desire to bring that into roofing is it really is an integral part of the vertical integration strategy in roofing, to have that nonwoven seeding in and gives us great opportunities, driving productivity in our manufacturing processes, driving innovation with the structural design of the shingle. And then the external sales carry a margin profile very similar to our overall roofing business. So it's a great fit in terms of the complements the vertical integration piece and gives us a good margin structure very similar to components and in the roofing business. So really no impact in terms of overall mix with the nonwovens business coming in.

Our next question comes from Sam Reid with Wells Fargo.

It sounds like you're planning to drive roofing volumes ahead of ARMA in the third quarter. maybe just contextualize what you mean by industry single market down. Does it mean down low single digits, down mid-single digits? And then maybe talk through your outperformance. Is that just better execution on your part? Or would you also characterize that as some incremental volumes coming out of Medina, would just love to get a sense of the contribution from that new capacity on roofing and how plays into your guidance?

Yes. Thanks, Sam. Overall, we came into the second quarter expecting to see a step down in market shipments based on a more normalized storm season. And that's really what we think happened in Q2 and what we expect to continue to happen here in Q3. So in the third quarter, while we expect it to be very solid from a historical standard, it could be down mid-single digits depending on storm activity as well. So we could see a similar evolution of that. Again, overall in the market, good conditions, but it's a step down to more normalized storm volume. So the last time we saw this was in the back half of 2022, and this is where you saw the strength of our contractor engagement model. And that's really the success of our business is centered around that model where we go out, we convert contractors to our brand, our products. We help them win and grow in the market through our marketing tools, our digital tools, our commercial and training capabilities, all those things that really drive the contractors' success help them grow their businesses. And then in turn, that creates a loyalty to our product brand and also creates demand for our distribution partners. So it's a win-win across the channel in terms of how we focus that. And we continue to invest to improve and increase that contractor engagement model and add contractors to the network. So when we talk about outperformance relative to the market, what we delivered in Q2 and what we expect to deliver in Q3, we're really not driving volume. We're just responding and servicing the contractor base that has built their business around our products and brands. and are continuing to grow in the market. So it's really servicing that base overall. It is why we've invested in increasing capacity. You mentioned Medina. So we were able to start that up towards the end of the second quarter. That volume is ramping up and getting into the market, but that's going to be a ramp-up over the back half of the year, really won't get to full capacity utilization until we get to the first part of next year when we hit that spring selling season, but it absolutely is a big part of now having more capacity to service that contractor demand that we've seen. And frankly, we have been lagging in service to our distribution partners as well as our contractors. So we expect that even if the market conditions shift down a little bit like we would expect to see, we're going to see good demand for our contractors that's going to drive volume through distribution. We also think across the board, we probably have some lean inventories in several regions of OC product, relative to other brands in the market. So we think there's going to be some inventory buying there. And then lastly, we're going to continue to operate our facilities full out in the quarter because we're operating with very, very low inventory levels. We've been doing this for several years. And we would actually like to be able to rebuild some inventory levels in our facilities just to improve our service and commitments and service cycles to our customers. So that's all work that's kind of going in as we work through Q3 and finish the year.

Our next question comes from Brian Biros with Thompson Research Group.

I guess can you talk a little bit more about the specification in your nonres insulation nonres in our view as a long outlook for good growth. You talked a little bit about it earlier. But if you could expand on, I guess, how your products play into that opportunity in data centers and manufacturing that you mentioned? And maybe if you have any metrics around win rates or market share in those specific end markets would be great.

Thanks, Brian. We don't share a lot on win rates or market share within the verticals. But I can give more context on how our insulation is used on the nonres side. There's 2 major areas that you would see our insulation in, for example, a data center or in a manufacturing facility. One is in the building envelope itself to make sure that we control temperature, but also moisture within a data center, which tends to have pretty extensive HVAC requirements associated with all the equipment that's there. And Insulation plays a really big role in making sure that the building itself performs at a high level. These also are mission-critical facilities. We're making sure that you control moisture, especially in the roofing system is important. In a couple of our products, in particular, our XPS foam product and our cellular glass product perform really well when it comes to moisture performance. So the building is one piece of it. The other piece is process equipment. So when you think about HVAC itself or when you think about hot or cool air liquid in a manufacturing plan or a data center or another facility, it is important to insulate pipes and pieces of process equipment. And you would see our products go into those markets as well, either directly with us selling a final product that goes into the application or indirectly as we sell a product into someone that then converts it into a final product for the application. So we're encouraged with what we see as the long-term secular trends towards onshoring of manufacturing as well as the growth in oil and gas as well as the growth in data centers. All of that plays well to the products that we have. Typically, our products are designed. They're engineered for the application that they're in. So in some cases, we have hard specifications where our product is specified by name. In other cases, our product is designed for that application, which makes it a stickier relationship with the customer going forward and also creates the more stable pricing dynamics we see in that space.

Our next question comes from Matthew Bouley with Barclays.

I wanted to ask about sort of high level on insulation and margins specifically. I'm wondering if you can either quantify or maybe speak directionally to the difference in margins between the residential business and the non-residential businesses within insulation. And I ask because once upon a time when the segment was much heavier residential and you saw these type of double-digit declines in residential revenues, the margins would have been, I'll say, significantly more volatile, but today, you're holding these EBITDA margins at 24% in Q2 and guiding to low 20% range in Q3. So how do you explain that change today versus then? And kind of any color on that relative profitability between residential and nonresidential.

Thanks, Matt. Happy to add more color on why we're delivering stable margins in the business. What you're seeing on the residential side is the culmination of the work we've been doing for really a decade now in restructuring that business. And making sure that we've got a flexible and cost-efficient network to serve our markets and our customers. It was actions like the sale of our Santa Clara plant, starting up a lower cost, more flexible facility in Nephi, Utah to serve that market, leveraging our capacity differently and focusing on both our planned overhead costs as well as our variable costs in our network. So we've done all of that. At the same time, we did a lot of commercial work to make sure we serve customers that we're really happy to be positioned with long term. And all of that has created a business that we believe is more resilient and could perform at higher margin levels than we have historically in similar types of markets. The additional color I would add for the second quarter is while we were able to rebuild inventories in insulation in the quarter, which we sought to do for actually a number of years as we were sold out in that business. We also saw some curtailment impacting our results, our margins in Insulation in Q2, and we would expect to see that again in Q3. So the margin results, you commented on are actually inclusive of taking idle to make sure we remain disciplined from a working capital standpoint in our insulation business around inventory in the quarter. So we're not sharing the margins specifically by subsegment as we have historically. But certainly, all of the work that we've done to position in our residential business, but then also to grow our nonresidential business and create higher and more durable margins there, is paying off in terms of really strong insulation EBITDA margins and what are weakening residential markets, and we're happy with that result.

Our next question comes from Philip Ng with Jefferies.

Another question about Insulation, Todd. Can you elaborate on the downtime in North America? Are you considering taking more extended downtime? What are your carriers doing? I suspect some of the weakness in North American residential markets is related to destocking; where do we stand in that cycle? Lastly, regarding your price gaps for North American residential insulation, have they widened this year? Any additional insight would be appreciated.

Thanks, Phil. Happy to add more color. Let me start with the market and what we're seeing, and then I can work into what we're doing within our business. As I shared before, we are seeing volumes in the market, we believe, for the industry, trend down at a greater rate than leg starts. And in part, that's driven by completions declining at a greater rate than leg starts are declining. It's also the shift towards multifamily away from single family. I also believe it is destocking that we're seeing because we shifted from an industry that was tight in terms of supply, not that long ago, to an industry that now I would characterize as being in free supply. So we are seeing an environment where inventories through the channel, we believe, have been destocked in the quarter. In terms of price gaps, I'd characterize it as we're roughly in line with where historic gaps have been. I don't think we're seeing a real shift in either direction in terms of the gaps. Those gaps are a function of the value we provide to customers, and that value is still there today as it was a year ago and 2 years ago and 5 years ago in terms of what we provide. What we're doing now for curtailment is we have a target inventory that we wanted to rebuild in the second quarter to make sure we can service our customers well. And we were light on inventory quarter after quarter of the last few years. So we wanted to rebuild that and we were able to rebuild that in the second quarter. But we also want to make sure we're disciplined in terms of free cash generation and working capital. So we started to take curtailment. The form that's taking for us now is what we would call hot idle curtailment, which is the lines are still operational, but we're taking longer maintenance downtime. We're slowing down lines. We're doing the normal things we do to build curtailment into our business. We still have optionality to move to what we would call cold idle, which is where we take a line down completely, where it takes a while for that to restart. We tend to look at longer-term supply-demand dynamics within the industry before we make those more permanent or semi-permanent capital and capacity decisions. So that's still possible for us to do. But right now, we're managing curtailment through hot idle and trying to manage it through longer maintenance downtime and other kind of normal course actions. Thank you, Phil.

The next question comes from Susan Maklari with Goldman Sachs.

My question is on the SG&A. You mentioned in your prepared remarks that you are looking to increase there, especially in roofing. When you consider the current operating environment, how do you think about measuring the returns on the investments that you're making in there? And also, what is your ability to flex that spend depending on how things change in the broader housing and macro in the next couple of quarters.

Thanks, Sue. We are seeing some step-up of very specific investments, particularly in roofing, where we've built really a great model. I'll go back to the center of our success is that contractor engagement model we have built. That's really driving the margin performance of the business going forward. So we will continue to invest in the right commercial tools, marketing tools, digital tools and commercial resources to support a growing contractor base. That would be an example of a very targeted investment to drive revenue growth and to support margin growth as well in the business. And that's how we really look at it across the enterprise. We are looking very surgically to where we want to make investments around our commercial strength, our brand, our technology and innovation efforts that we've stepped up to drive product and process investment innovations at a faster rate. So those are investments that we make that really come through then the business returns. So how we measure success is in the margin profile than the business that we're investing in. And do we continue to see opportunities to grow revenues and expand the margin rates inside the businesses based on those investments. We always look at the overall market environment. So we want to be aware of how dynamics are shifting, how that might impact volumes, price, margins, and performance of the business. But the investments we've made on both the CapEx side, you've seen us making, are really focused on productivity investments around automation and modernization of our assets and on growth, that we think supports our market positions over time. And then you're going to see us invest in very specific market commercial initiatives where we can drive again and support that revenue and margin profile within the businesses through those investments going forward.

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

Just wanted to ask on residential pricing. It seems like there was a pretty healthy uptake on the April increase. Our sense is maybe some slight regional variations just given the differences in demand that have emerged. So as you think about the market being down in the back half of the year, how would you characterize pricing sequentially? And what are your expectations embedded in the guide for price maybe more specifically for residential pricing at least through 3Q?

Thanks, Mike. Yes, we have seen good price realization of our April increase. We saw that materialize through Q2. And embedded in our guide is a continued realization of that pricing as we see good demand for our product, as I talked about earlier, in terms of the contractor demand we're still seeing outdoor sales of our products are strong, and we're seeing just good overall market demand. So as the markets play out in terms of the back half of the year, I would expect that we would continue to see good price realization. We are lapping August 24 increase from last year. that will have a little bit of an impact as we go forward. But in terms of the April increase, we continue to see good price realization in the market and expect that to continue through Q3.

Our next question comes from Keith Hughes with Truist.

Thank you. Moving to the domestic commercial industrial insulation, you've made some positive comments regarding several agricultural markets we always monitor. Could you elaborate a bit on the light commercial sector? It seems to be under more pressure compared to the heavy sector. How have your results been in that area? What is your outlook?

When we consider the light commercial sector, we do provide insulation for markets such as retail, health care, office buildings, and warehouses, though the outlook varies depending on the specific segments. The profit per unit for installation in these facilities is significantly lower than in the previously mentioned markets. Despite some mixed results in certain end markets, we are observing sufficient strength in the high-tech sectors, which are experiencing rapid growth. Overall, we are optimistic about our domestic commercial and industrial presence.

Thank you. We're unfortunately out of time for any further questions today. So I'll pass back over to Brian Chambers for any closing comments.

Thanks, Lydia. I'd like to thank everyone for making time to join us on today's call and your ongoing interest in Owens Corning. We look forward to speaking to you again on our third quarter call. Thanks, and have a safe day.

This concludes our call today. Thank you very much for joining. You may now disconnect your lines.