Earnings Call Transcript - OC Q1 2025

Operator, Operator

Hello, everyone, and welcome to Owens Corning's First Quarter 2025 Earnings Call. My name is Lydia, and I'll be your operator today. After the prepared remarks, there'll be an opportunity to ask questions. I will now hand you over to Amber Wohlfarth, Vice President of Corporate Affairs and Investor Relations to begin. Please go ahead.

Amber Wohlfarth, Vice President of Corporate Affairs and Investor Relations

Good morning. Thank you for taking the time to join us for today's conference call and review of our business results for the first quarter of 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 one-hour call to your questions. In order to accommodate as many call participants as possible, please limit yourselves to one question only. Earlier this morning, we issued a news release and filed a 10-Q that detailed our financial results for the first quarter 2025. For the purposes of our discussion today, we have prepared presentation slides summarizing our performance and results, and will refer to these slides during this call. You can access the earnings press release, Form 10-Q and the presentation slides at our website, owenscorning.com. Refer to the Investors link under the corporate section of our homepage. A transcript and recording of this call and the supporting slides will be available on our website for future reference. Please reference slide two, 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. And, 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 reinforcement until the closing and sale of the business. For those of you following along with our slide presentation, we will begin on slide four. And now, opening remarks from our Chair and CEO, Brian Chambers.

Brian Chambers, Chair and CEO

Thanks, Amber. Good morning, everyone, and thank you for joining us today. During our call, I will provide an update on our overall performance in the first quarter, including some context on the operating environment we are navigating, as well as the progress we are making on our strategic priorities and the actions being taken to position us for future success. Todd will then provide a more detailed review of our quarterly performance. After that, I will come back and discuss our outlook for Q2. Our team delivered another strong quarter to start the year, demonstrating the durability of our earnings and the power of the enterprise to outperform in any operating environment. Our results continue to reflect the positive impact of the structural changes we have made to focus Owens Corning on high-value building product categories where we can build market-leading positions for our unique commercial capabilities and disciplined operational execution. As always, underpinning our performance is our ongoing focus on the safety of our people. Our team's commitment to working safely resulted in a recordable incident rate for the first quarter of 0.54, which is 80% lower than the manufacturing industry average. Our enterprise safety results now include our Doors business, which has been on a journey of continuous safety improvement. I'm pleased with how quickly our Doors team has integrated the OC Safer Together operating framework to build on a strong safety culture. Turning to other first quarter performance highlights, we delivered revenue of $2.5 billion, an increase of 25% year-over-year compared to the prior year's revenue of $2 billion. Adjusted EBITDA in the first quarter totaled $565 million for an adjusted EBITDA margin of 22%. This marks our 19th consecutive quarter of delivering adjusted EBITDA margins above 20% as we continue our track record of sustaining strong and resilient margins in any operating environment. We also remain focused on our operating cash flow, delivering results in the quarter consistent with the seasonality we historically see to start the year. Given the cash generative power of each of our businesses throughout the year, we continue to fund high-return organic investments. These phased investments in our Roofing and Insulation businesses coming online over the next three years will add needed capacity to support our long-term growth, as well as provide network flexibility with improved cost positions. In addition to these strategic investments, we return significant cash to shareholders through our dividend and share repurchases. Looking to the broader building products market in North America and Europe, we entered 2025 with a mixed environment. Overall demand for repair and remodel has remained challenged with the exception of non-discretionary repair activity, which has remained solid. New residential construction, which accounts for about a quarter of our enterprise revenue, started the year slower as interest rates remained elevated. Lastly, our non-residential markets, which account for about 20% of our business, remained fairly stable overall. Like all companies, we continue to evaluate and adjust to the impact of tariffs on our business. Given the localized nature of our production to meet demand and the fact that our products are USMCA compliant, we would expect to see modest direct impact from current tariffs. The impact of future tariffs, however, and the potential impact on North America and European economies, remains uncertain. Todd will provide additional information on potential impacts on our financial results and the mitigation actions we are implementing. Against this backdrop, our first quarter results once again demonstrated the strength of our businesses and the resiliency of our earnings. As we move through the year, we will remain focused on the areas we can control: our customer share positions, operating costs, and our capital allocation. Regarding our longer-term organic investments to strengthen our market-leading positions, we continue to make good progress on all fronts. In Roofing, we are on track to start our laminate shingle production line in Medina, Ohio, at the end of the second quarter, to provide needed capacity to service our contractors and distributors. We are also narrowing our site selection for our new shingle manufacturing plant in the southeastern U.S. Both of these investments complement our broader effort to enhance needed roofing capacity with a winning cost position as we further modernize our U.S. roofing manufacturing network. In installation, we made good progress on our major investments to meet residential and commercial customer needs, as we look to strengthen our flexible, cost-effective fiberglass network with a new line in Kansas City, expand our FOAMULAR XPS capabilities with our new facility in Arkansas, and improve our mineral wall manufacturing efficiency and capability by converting our plant in Sweden from co-fired furnaces to electric melting. In Doors, we are actively driving margin improvement in the near-term through our integration efforts, which are on track to exceed $125 million in cost synergies, as we position the business for future growth by applying the broad Owens Corning Playbook. In addition to these growth investments, progress on our two strategic divestitures continues to track in line with our expectation to close both transactions later this year. The sale of glass reinforcements in our building materials business in China and Korea allows us to streamline our operations and focus on geographies and applications where we can build market-leading positions. The combination of these growth investments and strategic divestitures demonstrates how we are reshaping the company into a branded building products leader and operating as a new Owens Corning, driving higher, more consistent returns and long-term value creation. Overall, our company is well-positioned for future growth and performance, supported by key secular trends, including the age of existing U.S. housing stock and the significant amount of homeowner equity, the need for heightened investment in new housing capacity, and the continued strength in U.S. commercial construction applications and market opportunities emerging in Europe. In summary, our strategic investments and decisions, combined with our disciplined operational execution, create multiple paths to drive organic growth, deliver 20% or more adjusted EBITDA margins, and generate significant cash flow and strong returns. Before I close, I'd like to highlight a few other important recognitions. Last week, we announced the promotion of Rachel Marcon to President of our Doors Business. Most recently, she led our glass nonwovens business, which has delivered significant revenue and earnings growth for the company. We are excited to bring Rachel's leadership capabilities and operational experiences to our Doors business. Additionally, this quarter, we published our 19th annual Sustainability Report that highlights our efforts to keep employees safe, reduce greenhouse gas emissions and waste to landfill, and advance our portfolio of products that help customers save energy and lower emissions. I am also proud to share that Owens Corning was once again recognized by Barron's as one of the 100 most sustainable companies in the U.S., ranking fourth on the annual list and showcasing the strength of our iconic brand and commitment to sustainable growth. Finally, I would like to remind everyone that we will host our 2025 Investor Day on May 14th at our World Headquarters in Toledo, Ohio. Todd, myself and other senior leaders look forward to sharing more about our vision, strategy, and longer-term financial goals for the new Owens Corning. With that, I'll turn it over to Todd.

Todd Fister, Chief Financial Officer

Thank you, Brian, and good morning, everyone. As Brian mentioned, we had a strong start to the year. Our performance in the quarter demonstrates the strength of the enterprise as we sustain higher and more resilient earnings in mixed markets. I'd now like to turn to slide five to discuss the results for the quarter. As a reminder, these results are for continuing operations. We started the year with revenue growth of 25% driven by the addition of our Doors business. Adjusted EBITDA was $565 million, up 10% from the prior year, and adjusted EBITDA margin was 22%. Adjusted earnings per diluted share for the first quarter were $2.97. In the quarter, adjusting items did not materially impact EBITDA. Turning to slide six and moving on to our cash generation and capital deployment during Q1. Free cash flow for the quarter was a net outflow of $252 million driven by the timing of working capital from seasonality in the business and by capital additions. Capital additions for the quarter were $203 million, up $51 million from the same quarter in the prior year. At quarter end, the company had liquidity of $1.9 billion consisting of approximately $400 million of cash and $1.5 billion of availability at our bank debt facility. In Q1, we established a commercial paper program and completed issuance of $500 million of short-term notes. During the first quarter, we returned $159 million to shareholders through share repurchases and dividends. We repurchased common stock for $100 million and paid a cash dividend totaling $59 million. In February, the Board declared a cash dividend of $0.69 per share. Our commitment to our capital allocation strategy remains focused on generating strong free cash flow, returning approximately 50% to investors over time and maintaining an investment-grade balance sheet, all while executing on our business strategies to grow the company. Now turning to slide seven, I'll provide additional details on our segment results. As a reminder, the Roofing segment now includes our vertically integrated glass nonwovens business and our structural lumber business. Additionally, the two glass fiber plants that supply nonwovens and external customers now operate in the Insulation segment. The Roofing business started the year delivering a great first quarter as demand for our shingles remained strong. Sales in the quarter were $1.1 billion, up 2% from the prior year on a like-for-like basis. Positive price realization from previous announcements and strong demand for our nonwovens products more than offset the impact of lower components volumes due to normalized attachment rates. We expect Q1 to be the last quarter of a negative year-over-year comp from attachment rates. The U.S. asphalt shingle market on a volume basis was down slightly compared to the prior year. Lower demand in areas of the country impacted by winter weather was largely offset by growth in the Southeast. Our U.S. shingle volume was in line with the market. EBITDA was $332 million for the quarter, down slightly versus the prior year. We saw higher manufacturing costs as we continue to invest in our assets to meet the high level of demand for our products and absorb the cost of maintenance. We also experienced modest cost inflation. Overall for the quarter, we delivered EBITDA margins of 30%. Now please turn to slide eight for a summary of our Insulation business. The Insulation business started the year strong, expanding margins and delivering its sixteenth consecutive quarter of 20-plus percent EBITDA margins. Q1 revenues were $909 million, a 5% decrease from Q1 last year. In North America Residential, volume was down due to market uncertainty tied to the broader U.S. macro environment. During the quarter, we continued to realize positive price from our mid-2024 increase. In North America non-residential, volume was down in line with the market. In Europe, volume was relatively in line with the prior year as we've continued to see market stabilization. These businesses both recognized positive prices in the quarter. Insulation EBITDA for the first quarter was $225 million, up slightly compared to the prior year. Strong operational performance in the quarter resulted in favorable manufacturing costs. As expected, we incurred input cost inflation, but maintained a positive price-cost for the business overall. Insulation delivered EBITDA margins of 25% in the first quarter. Moving to slide nine, I'll provide an overview of the Doors business. Overall, the business performed well in a challenging market. In the quarter, the business generated revenue of $540 million in line with the outlook we provided on our last call. Revenue was down modestly from Q4, primarily on lower volume in North America and Europe. EBITDA for the quarter was $68 million with EBITDA margins of 13%. The integration is progressing very well. When we closed the acquisition, we had line of sight to delivering $125 million of enterprise synergies by the end of year two with about half hitting the Doors business. We are on track to exceed the enterprise commitment, and we'll share more at our upcoming Investor Day. Overall, for the company, there was minimal impact from tariffs on our financial results in Q1. Our sourcing and supply chain teams responded immediately to the tariff announcements and focused on negotiating with our suppliers, shifting sources of supply and purchasing additional inventory ahead of tariffs. As a result, we expect to reduce the approximately $50 million gross tariff exposure in the second quarter 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 USMCA compliant product portfolio, but we do expect a step-up in net tariff exposure in the second-half of 2025. The net impact of tariffs in the second-half of the year could be in the range of 1% to 2% of the cost of goods sold assuming current tariff policies. 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. This year-over-year increase includes our best view of expenses for the glass reinforcements business that will not be included in discontinued operations. As a reminder, our corporate eliminations changed with the re-segmentation. The $39 million in revenue eliminations we saw in Q1 should serve as a good proxy for the remainder of the year. Capital additions are expected to be approximately $800 million. This level of capital investment reflects the strategic investments Brian mentioned in his opening. We have several multiyear organic investments to bring on new manufacturing capacity and drive long-term growth. This CapEx continues to include glass reinforcements. We expect CapEx to remain elevated in the near term as we work towards completing the high-return, capital-efficient projects we've discussed on this call. Now please turn to slide 11, and I'll turn the call back to Brian to further discuss our outlook.

Brian Chambers, Chair and CEO

Thank you, Todd. Our first quarter results highlight the impact of the structural changes and strategic choices we've made to generate higher, more resilient earnings within very dynamic markets. As we move through Q2, we expect our building products end markets in North America and Europe to provide solid, but mixed opportunities. In North America, we expect near-term demand for non-discretionary repair activity to remain solid, while residential new construction and other remodeling activity is expected to remain weaker through the first half of the year as interest rates remain elevated and consumers remain cautious. With non-residential construction in North America, we are starting to see some market headwinds emerge, but in Europe, we expect market conditions to gradually improve throughout the year. Given this near-term outlook, we anticipate second quarter revenue for continuing operations to grow high single digits compared to the prior year's revenue of $2.5 billion. For adjusted EBITDA, we expect to deliver another strong quarter with margins in the low to mid-20% range for the enterprise. Now, consistent with prior calls, I will provide a more detailed business-specific outlook for the second quarter. Earlier this week, we provided updated historical financials that reflect the re-segmentation by quarter for 2024, which serves as the baseline for the year-over-year changes I will discuss. Starting with our Roofing business, we anticipate revenue growth of low single digits. While demand for shingles remains solid as we enter peak roofing season, we expect ARMA market shipments to decline by low to mid-single digits compared to the prior year due primarily to more normalized storm demand. We expect our shingle volumes to track largely in line with the market. We anticipate normalized attachment rates and components with growth in nonwovens partially offsetting lower shingle volumes. Compared to Q2 of last year, we expect higher manufacturing costs as we invest in our assets to continue to meet the high level of demand for our products and absorb the necessary maintenance costs. We also anticipate moderate cost inflation during the quarter. 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 slightly below the prior year. Moving on to our Insulation business, we anticipate revenue to decline mid-single digits compared to the prior year with ongoing price realizations slightly offsetting lower volumes and currency headwinds. In our North American Residential Insulation business, we expect revenue to be down low to mid-teens versus the prior year due to lower demand as we work through a step down in light housing starts and customers adjust to ongoing market uncertainty. For North American non-residential, we expect revenue to remain relatively in line with the prior year, driven by steady demand for our products. In Europe, we anticipate revenue to be similar to the prior year. Overall for the Insulation business this quarter, we expect cost inflation to be offset by positive pricing. Given all this, we expect EBITDA margin for Insulation near the mid-20% range. Turning to our Doors business, we continue to perform well relative to market conditions and expect Q2 revenue to increase low single-digit sequentially, driven by slightly stronger seasonal demand. Additionally, we anticipate ongoing synergies and cost controls to largely offset the impact of announced tariffs. In the near term, Doors faces the most tariff exposure due to cross-border product moves into Canada, which we are actively working to mitigate. Overall for Doors, we expect EBITDA margin in the low double-digits to low teens for the quarter, similar to Q1. As Todd mentioned, another factor that could impact our enterprise results in Q2 is the implementation of additional tariffs. While most of our products are made with local materials and sold in local markets, our integrated supply chain spans Canada, Mexico, and the U.S., which could result in additional costs. We will continue to look for opportunities to mitigate the impact of tariffs as they unfold. In summary, our team continues to deliver strong results in the first quarter within a very dynamic marketing environment. As we progress through the year, we will remain focused on delivering value to our customers and shareholders as we invest to further strengthen Owens Corning as a building products leader. We are well-positioned to capitalize on key secular trends that provide significant long-term growth opportunities for our company. Although we anticipate mixed near-term market conditions, we are confident in our ability to continue outperforming the market. With that, we would like to open the call up for questions.

Operator, Operator

Thank you. Our first question today comes from Michael Rehaut with J.P. Morgan. Please go ahead. Your line is open.

Michael Rehaut, Analyst

Thanks. Good morning, everyone. Thanks for taking my question. Wanted to start off, I think there's some concern in the marketplace with some of the scheduled capacity additions in the Insulation sector over the next year to two years. And I was hoping if you could kind of review not just your plans, but maybe more broadly the industry as you see it today, particularly as at least for the last few years, single-family starts have been relatively steady, not showing too much growth. And in the near-term, you could argue, it's still somewhat uncertain from a macro standpoint?

Todd Fister, Chief Financial Officer

Good morning, Mike. This is Todd. I appreciate the question. Let me start with a little bit of context about where we're at overall with capacity. We clearly have seen the new capacity in McGregor, Texas come online, and we're seeing that capacity even now in the market. And we've seen other competitors announce capacity that will come online in future years. It is important in insulation to differentiate between capacity that produces batts and rolls and capacity that produces loose fill. Batt and roll capacity is what analysts typically think of when they think of insulation capacity. These tend to be larger assets. They tend to be assets that you run consistently; you can't turn them on and off frequently. Loose fill assets are very different. Loose fill assets, you can turn on and off as needed to meet market demand. We've said historically we thought the insulation industry could support a market between 1.4 million and 1.5 million starts depending on single-family mix, depending on code growth, and depending on other factors. We also know that over time, consistently, code growth has driven greater volume per unit for residential housing, increasing demand. The third thing we know is that housing in the U.S. has been underbuilt now for well over a decade. So, long-term, we do see a rising need for insulation materials. In the short run, the market will bounce around. We know this is an industry that has a wide range of cost structures. Some assets are very cost-effective, while other assets are less cost-effective, and presumably other manufacturers continue to work through how they balance capacity to supply in any market condition that we're in. But long-term, we continue to see North America housing as being underbuilt and the secular demand for insulation to be good and provide support for incremental capacity additions. Thank you, Mike.

Operator, Operator

Our next question comes from John Lovallo with UBS. Please go ahead.

John Lovallo, Analyst

Good morning, guys. Thanks for taking my question. Sticking on the Insulation side, if North American Residential Insulation revenue is expected to be down low to mid-teens in the second quarter, how are you thinking about fiberglass insulation pricing? Is that going to be down year-over-year?

Todd Fister, Chief Financial Officer

Thank you, John. This is Todd. I'll take that one as well. When you look at the shape of pricing last year and this year, we did have a mid-year increase in 2024 that drove pricing in the back half of last year, but then also into the first half of this year as we have a good year-on-year comp. We're watching market dynamics closely to make sure we're staying on top of share positions and where we're placed. But certainly, in the second half, we still benefit from that favorable year-on-year comp and when we got the price increase last year. You have certainly seen analyst reports that suggest limited uptake on the 2025 increase, and that's consistent with what we're seeing in the market. But as you saw in the first quarter, we did have positive price. And even in the second quarter, we're guiding overall for positive price in the Insulation segment. Thank you, John.

Operator, Operator

Next in queue, we have Stephen Kim with Evercore ISI. Please go ahead.

Unidentified Analyst, Analyst

Hi, this is Satish on for Steve. Thanks for taking the question. I just want to touch on some of the tariff exposure that you spoke to, specifically, what mitigation efforts will be used to offset the impact in Q2 and in the back half that are mostly pricing? If you could expand on that a little bit, that would be helpful.

Todd Fister, Chief Financial Officer

Thanks, Satish. I'll take that one as well. Let me go back to what we shared on the last call on tariffs and then bring it forward to the guidance and then the mitigation actions. So, in the last call, we shared that we thought less than 5% of our total cost could be impacted by tariffs. We also said it would disproportionately impact our Doors business with about two-thirds of the impact and then Insulation with about one-third of the impact and little net impact on Roofing. Since then, we've seen a couple of things move around. As Brian shared in his prepared comments, we've got a lot of goods movement that occurs between the U.S., Canada, and Mexico. The good news is our products are largely USMCA compliant, so those tariffs are no longer impacting us. We also saw higher tariffs on Chinese imports, which are now around 145%, which is higher than what we knew of on the last call. So, when we look at the shape of the quarters and the impact of our mitigation efforts, we saw very little impact in the first quarter from tariffs in the results that we just shared. In the second quarter, we expect to see a $50 million gross tariff impact. But when we look at all the mitigation steps that we've taken, the net impact is down to about $10 million, mostly in the Doors business. Now, what did we do to go from $50 million of gross to $10 million of net exposure? Our sourcing and supply chain teams stepped in immediately on the announcement of the tariffs to do a few things. Where we could, we positioned inventory in the U.S. in advance of the tariffs taking effect. So, you do see a bit more cash use in the first quarter than we typically have as a result of us building inventory to make sure we're well-positioned in advance of the tariffs. We also did other things. We worked with our suppliers where possible to reduce the impact of tariffs on us. We're also seeking sources of supply outside of China. Obviously, with China at 145% tariffs, that's a big number on anything we're importing from China. So, we're doing what we can to offset that. With all of those moves, some of which are longer term, the work we're doing to move supply out of China, the work that we're doing in negotiation with our suppliers, that tends to be longer term. The work to position inventory in advance of tariffs is clearly short-term. When we guide to the back half of the year, we talked about the exposure, net exposure from tariffs under current policies ranging between 1% and 2% of cost of goods sold. You can think of the high end of that range, the 2% number is our current mitigation plans tracking into the back half of the year. You can think of 1% as being we take additional mitigation steps, everything I described, as well as working in Canada to address some of the reciprocal tariffs that we're still facing in our Doors business and looking very closely at our supply chain and product portfolio to make sure we mitigate tariff exposure. We're looking at all of that to try to offset as much of the gross tariff exposure as we can in the back half, but those are plans in progress, which is why we guided to that 1% to 2% range. Clearly, it's a dynamic environment. Tariffs could move before the next time we connect on our next call. Our teams have proven over the last five years through very dynamic market conditions, whether it's COVID, supply chain challenges, inflation, or now the tariff scenario that we react very quickly to address this. Brian and I are both proud of what our teams are doing in this environment to deliver the lowest cost we can. Thank you.

Operator, Operator

Our next question comes from Brian Biros with Thompson Research. Your line is open. Please go ahead.

Brian Biros, Analyst

Hey, good morning. Thanks for taking my question. How are you thinking about balancing taking market share versus defending margins in the current environment of rising prices and trying to pass on price increases into the challenging market conditions that are out there? Thank you.

Todd Fister, Chief Financial Officer

Yes. Thanks, Brian. I think we continue to operate with the same playbook in terms of how we balance price and share. We want to invest in the items that can bring value for our customers and help them win and grow the market. We make investments in innovation and marketing tools, our brand, our commercial teams, all that helps them grow their businesses that results in a value that then we can charge for our products in the market. We continue to be value-focused in terms of bringing more to our customers that they want to partner with us and do more business with us. When we come into environments that we start to see demand challenges or we start to see pricing pressures, we clearly want to retain and maintain our competitiveness in the market. Most of our product categories we are able to maintain some price premiums relative to the value we bring over other manufacturers and we look to maintain that. But we are going to be competitive in the market with the market dynamics we're facing here. So, we continue to work on the value side with our customers and we continue to work on the cost side internally to optimize our network, we are sourcing in the best way, and we are being the most efficient with a winning cost position that allows us to flex our pricing and still maintain high and sustainably strong margins for each of the businesses we operate in. That's generally been our philosophy in all economic conditions, and that's one we certainly are going to continue and the playbook we're going to run in the market conditions we're facing here in the near term.

Operator, Operator

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

Matthew Bouley, Analyst

Hey, good morning, everyone. Thank you for taking the question. I wanted to follow up on the insulation capacity side. In the context that you guys in the past have been really disciplined and I would say flexible around capacity, it's not easy to do, but you both opened and closed capacity where it's right to do so over the years. So, I wanted to press on your thoughts around being flexible with capacity decisions here. I guess, not knowing how your competitors may act, but at what point would you make a decision to adjust your capacity investments, or are there other higher-cost facilities in the network today or lines where you could be more flexible? So, really what I'm asking is what is the risk of the industry becoming over-capacitated for a period? Thank you.

Todd Fister, Chief Financial Officer

Thanks, Matt. I appreciate the question. Let me add a bit more color here. We've made a number of operating choices and strategic choices in the Insulation business over the last five years to position our business for exactly market conditions like these. We have created a business that can do well whether housing starts are at 1.5, 1.4, 1.3, or 1.2 based on the moves that we've made, which includes the work to build a more flexible network and the exit of our Santa Clara facility in favor of a much more flexible facility in Nephi to support the West Coast. We believe we're well-positioned to deal with a market like this. We're also entering this market environment with low inventories. We've been largely in sold-out conditions in our insulation business for an extended period of time. We intend to rebuild our inventories to better serve our customers going forward. This market condition allows us to do that, positioning us better for both customer service and future growth coming out of this. We're always very disciplined about understanding the market, understanding our inventory levels, and how we want to be positioned. As I alluded to earlier, we continue to have high-cost and low-cost assets within our network. In markets like this, there are always opportunities to ensure low-cost assets continue to operate and produce. We mix manage on the cost side to have the most cost-effective network that we can. That's our plan going forward. What I would say is certainly we're in two quarters now of relatively weak leg starts. But this is also a market that can change quickly as we think about the future. We want to make sure we're well-positioned, not just for today but to serve our customers effectively in what could be a strengthening market in future quarters. Thank you.

Operator, Operator

Our next question comes from Sam Reid with Wells Fargo. Please go ahead.

Sam Reid, Analyst

Awesome. Thanks so much. I actually wanted to drill down a little bit on insulation just to keep on that topic. Could you disaggregate the pricing that's embedded in your guidance for Q2, specifically between residential insulation and commercial and market insulation? It sounds like overall price is going to be positive based on what you're telling us. But are there any deviations between expected pricing on the residential side versus the non-residential side that we should be contemplating here? Thanks.

Todd Fister, Chief Financial Officer

I appreciate the question. I'll add a bit more color on our Q2 outlook. Let me start with our non-residential in Europe piece of the business, which actually now is the majority of our business in insulation. We're seeing good pricing dynamics in both of those markets. We've talked about the improving conditions in Europe, and certainly, starting with the Ukraine conflict, Europe has been a relatively weak market overall for insulation. But we're seeing green shoots in the market for volume growth, and Europe has a lot of pent-up demand for both new construction as well as repair and remodeling, which should be constructive for future volume trends in Europe. We're also seeing a strong pricing environment for our products in Europe. The same is true in non-residential for North America. We're witnessing a good backdrop for our products. There's a somewhat inconsistent market in North America, but pockets of real strength in manufacturing due to onshoring, as well as sectors like data centers that continue to be robust. Both of these sectors use many of our insulation products for the buildings and process technologies occurring within those structures. However, there are pockets of weakness in residential around retail and some areas of commercial and healthcare. However, within that backdrop, we're still seeing positive pricing in non-residential for North America in a constructive pricing environment. In residential, as I shared earlier, we are seeing carryover price from the mid-year increase. Some of that is the comp, as we have an easier comp against Q1 and Q2 last year where we don't have a price increase in that number. The comp gets harder as we get into Q3 and Q4 when we start to lap that increase, and we did not see a lot of traction on the 2025 price increase that was in the market. So, we're not guiding to Q3 and Q4 today, but certainly, we're considering that as we look at the back half of the year. We're following starts and starts closely to understand pricing dynamics in the residential market.

Operator, Operator

The next question comes from Philip Ng with Jefferies. Your line's open.

Philip Ng, Analyst

Hey, guys. A question for Brian, I mean, a lot of focus on Insulation and Doors. Give us an update on what you're seeing on the Roofing side. It sounds like demand's pretty resilient there. Give us some color on carryover storm demand and any storm activity this year. And certainly, you got a price increase out there. Roofing for spring, do you see any traction in that? And just lastly, on the Medina ramp, how should we think about that impact, whether it's a demand sample or any headwinds from startup costs standpoint? Sorry, a lot to unpack here for sure.

Brian Chambers, Chair and CEO

All right, Phil. Thanks. Let me take them kind of one at a time. To start with the overall roofing market, we continue to see very good demand in the business. We started with the first quarter in our guide for Q2, even down a little, but this is down off of very strong market conditions in the first half of last year. So, overall, a very good demand environment for our Roofing business, and I think this highlights the non-discretionary nature of this business when you look at the repair and re-roof activity that is still needed out there and the work that's still being done. So, overall, good demand, and we think that continues into Q2 here. Around storm volumes, if I break that out, we talked on the last quarter's call that we were coming into the year with a little less carryover than the prior year, but still good carryover from some of the storms that were taking place in the back half of last year. We saw some of that materialize in terms of stronger demand in Florida and North Carolina as they continue to do that storm repair work. We think a lot of that gets done here through the second quarter. A little bit of that carries over into Q3. When we think about Q2 now in terms of overall opportunity and the market, we think repair work that's ongoing is strong. Contractor backlogs are still pretty strong in most parts of the country, so that underlying repair and re-roof business is staying solid. For storm demand into Q2, we're just kind of coming into the season, but we've seen a pickup in some activity here over the last few weeks. A big part of our guide for Q2 could be down low to mid-single digits, which really depends on how the storm season materializes. Q2 and Q3 are typically when we see the bulk of the storms coming through the U.S. market, and our expectation is that they trend toward a more normalized storm environment, however, that could change and fluctuate over the next four to five weeks depending on how the hail season materializes and any other storm damage we see. But I think we are set up relatively well in terms of how we're positioned in the market. For price realization, given that market demand and the strength of our contractor engagement model, we announced an April increase. We're seeing good realization of that to start the quarter, and we would expect that to continue as we carry on into Q3 and the back half of the year. Lastly, on Medina, we are really excited to bring up this new capacity. The laminate growth we've seen in the market and within our business over the last few years has exceeded our ability to continue to optimize and expand capacity on our existing network. This will be a new laminate line that we're going to be starting up at the end of the second quarter. We're excited to bring that capacity online starting in Q3 and really ramping up through Q3 and Q4 to service our customers with additional laminate products. Part of the operating costs and manufacturing costs that are a little higher as we entered the year, we talked about this as well last quarter, that we expected to see a step-up in some of the manufacturing costs in the business. That's really set up in two buckets: ongoing maintenance of existing assets that we've continued to run full out and have to take some downtime in the first half of the year to make needed updates and modernizations to service that equipment. The second part is tied to the startup of some new assets, and Medina is one of them. This is going to create a little bit of a manufacturing cost headwind in Q2, probably spilling over into Q3 as we start that lineup. The teams have done a great job bringing that asset in line. We're on track to start that up at the end of the quarter, and we're excited to bring some needed capacity into the market.

Operator, Operator

Our next question comes from Mike Dahl with RBC Capital Markets. Your line is open.

Mike Dahl, Analyst

Good morning. Thanks for taking my question. I guess I'll stick with roofing, but maybe broaden that a little bit. Can we talk about non-tariff related costs on the input side? Obviously, it still seems like you're absorbing some higher costs in Q2, but you've seen a big decline in oil. You've seen some pullback in natural gas. Walk us through the timeline and magnitude of how that may impact roofing, and then, in your Insulation business, maybe how the pullback in natural gas would impact you as we look out over the next couple of quarters.

Brian Chambers, Chair and CEO

Yes, thanks. When we look overall at the inflation we're seeing inside the Roofing business, big buckets are one large material input cost. A major bucket has historically been asphalt. Traditionally, we see asphalt costs rise through the first and second quarter, which is expected again this year. We're currently seeing that in Q2, expecting to realize the increased costs as we come into this quarter. With asphalt costs trending higher seasonally, we haven't seen any dramatic decreases related to WTI oil cost reductions. We must note that, over the last couple of years, there has been a disconnect between asphalt market pricing and WTI. Partly due to lighter crudes being processed, there is less asphalt being done, and asphalt inventory levels have been running low over the last 12 months. Therefore, we haven't seen WTI costs impact asphalt costs significantly. However, assuming oil costs stay low, that will keep our asphalt costs at similar levels, so we might see seasonal inflation but not as high as in previous years. I see that as a net positive regarding moderating asphalt inflation on the horizon, contingent on WTI trends. In terms of natural gas, I'll ask Todd to address that regarding its impact on insulation.

Todd Fister, Chief Financial Officer

Sure, Brian, happy to. Mike, when we analyze natural gas, the market is currently quite volatile. The effect of liquefied natural gas exports and tariffs is making its way through the market. We do hedge on a go-forward basis, so any benefits from a decline in natural gas costs would benefit us in the second half of this year, and that would roll into 2025 as we think about those hedge positions just changing over time. There could be some impact; however, we don't foresee it being significant based on current market status, but we continue to monitor the costs closely.

Operator, Operator

Our next question is from Trevor Allinson with Wolfe Research. Your line is open.

Trevor Allinson, Analyst

Good morning. Thank you for taking my question. Todd, I want to follow up on your comments on tariff mitigation. You mentioned several strategies, but I didn't hear you mention price. Last year in Doors, you guys took some price adjustments in channels. Is it your expectation that you don't use price as a primary offset, and perhaps can you talk about the current demand environment in Doors and how that may be playing a role in that decision?

Brian Chambers, Chair and CEO

Yes, I can jump in on this one, Trevor. Overall, we look at a lot of mitigation strategies when it comes to offsetting the impact of tariffs, and we lean hard on optimizing our supply chains in terms of where we're sourcing and what types of materials suppliers we work with; that's always our primary focus on optimizing production costs for the company. Price is certainly a lever we can use, potentially needing to use it in product categories or specific situations if we cannot find more offsets in terms of supply chain choices and material costs. While that's not on the table, we always try to utilize a range of levers in that space to mitigate operating costs. We have indeed used that and considered it in the past. Looking at the Doors business overall, the key impact right now is coming from some retaliatory tariffs on interior doors we ship to Canada. Some of these have rolled off, as Canada relaxed many of the tariffs imposed when the U.S. initially brought in the 25% tariffs on all products. We're in active discussions with Canadian officials; we hope to have doors included in the next round of roll-offs, allowing us to return to USMCA-compliant materials flowing across borders without affecting pricing.

Operator, Operator

Our next question comes from Susan Maklari with Goldman Sachs. Please go ahead.

Susan Maklari, Analyst

Thank you. Good morning, everyone. I want to focus on the synergies in Doors. In your comments, you mentioned that you were on track to exceed those targets. Can you talk a bit more about the sources of some of those, how we should think about the ramp, and any implications of the weaker macro and some of the implications of the tariffs that you're seeing relative to achieving some of those targets?

Brian Chambers, Chair and CEO

Yes, thanks, Su. Our teams are making excellent progress on the integration front by bringing the two businesses together. As I indicated in my earlier comments, we aim to surpass $125 million. We have looked back since the year began, observing a fairly balanced split on OPEC synergies, particularly in non-customer-facing operations that we can integrate and consolidate. Furthermore, a large part of our sourcing and supply chain synergies have yielded encouraging results as well. Progress on those fronts has spurred our confidence in exceeding the $125 million target, and we plan to elaborate more on that at our Investor Day next week. We are in the early stages of examining our overall network and optimizing operations. We have a solid track record of managing manufacturing networks effectively, ensuring timely responsiveness to customer demands regarding service, quality, and capabilities while also doing so cost-effectively and efficiently. Although we are well-placed to gain from these cost synergies, the near-term tariff impacts are offsetting some of the gains we're making, evident in Q2. However, we're optimistic that as we continue observing these dynamics throughout the year, more gains will materialize positively for our P&L. Ultimately, we aim to create a more optimized cost structure, which will enable robust margin growth as we start to witness an uptick in volumes in the market.

Operator, Operator

Our next question comes from David MacGregor with Longbow Research. Please go ahead.

Joseph Nolan, Analyst

Hi, good morning. This is Joe Nolan on for David. Thanks for taking my question. You guys are guiding the positive price-cost in the second quarter. I was hoping you could talk through on a higher level about some of the puts and takes of how you're thinking about price-cost into the second half of the year. Thanks.

Brian Chambers, Chair and CEO

Yes, let me revisit my earlier comments. We always assess the balance of price points relative to demand and the value we're securing. We've chosen to focus on high-value product categories where we can command a premium through our commercial efforts around innovation and customer growth. We emphasize the importance of maintaining that premium over time. When it comes to costs, we adopt an equivalent mindset about optimizing operations, reviewing this across our OpEx, manufacturing network, and sourcing and supply chain teams, continually looking for ways to drive efficiency. It’s this combined focus that positions us well in the market. It’s challenging to navigate through the quarterly fluctuations between price and cost; however, we’re dedicated to helping our customers, providing them with innovative, quality products that garner a price premium while optimizing costs to ensure a winning cost position moving forward.

Operator, Operator

The next question comes from Rafe Jadrosich with Bank of America. Your line is open. Please go ahead.

Rafe Jadrosich, Analyst

Hi, good morning. Thanks for taking my question. I just wanted to follow up just on the roofing margins in the second quarter. You're guiding for it to be down a little bit year-over-year, but it sounds like volume is pretty consistent and you have positive price costs. Can you quantify the startup cost or maintenance that we should expect in the first half and into the third quarter? And then excluding those, would you have expected margins to grow year-over-year?

Brian Chambers, Chair and CEO

Yes. If you look inside the MDA, we quantify out some of the manufacturing costs that we were impacted by in Q1, totaling around $19 million that we saw come through the P&L. We think that's a cost run rate that carries into Q2. That could give you a good expectation of what we're anticipating for Q2. You're right; it's essentially a temporary step-up we're noticing in some of these costs as ongoing maintenance and necessary downtime for manufacturing lines to service them. We will continue that into Q2 on a couple of factories where we've had this step-up. We also have expected startup costs arising from Medina, contributing to a similar impact. Therefore, it appears that manufacturing costs will likely create a headwind for margins compared to the previous year. However, it’s not from price or volume mix; it’s just a manifestation of elevated manufacturing costs. The resilience of the business remains strong.

Operator, Operator

Our final question comes from Collin Verron with Deutsche Bank. Please go ahead. Your line is open.

Collin Verron, Analyst

Hi, thanks for taking my questions. In the doors outlook, you noted that you're performing well relative to the market. Can you give a bit of color on what the market's doing, either sequentially or year-over-year, and sort of the drivers of that performance? And then, why do you expect a better-than-normal seasonal step-up in demand, which you called out in that outlook as well?

Brian Chambers, Chair and CEO

Yes, thanks. We are experiencing some demand headwinds coming into the business, as discussed. Overall, however, yes, the business continues to perform well despite encountering declines connected to weaker light housing starts and reduced investments in the remodeling market. Our wholesale distribution business has been somewhat more impacted by this than our retail segment, which is somewhat tied to repair and remodeling. While we're still experiencing volume headwinds, we have seen stability starting to return at lower levels, which gives us confidence as we look toward Q2. We're expecting seasonality to positively contribute as we get into the warmer weather, where remodeling activity typically picks up, and we tend to see new construction activities increase. This expectation leads us to anticipate a slight seasonal uptick this year, albeit at a slower pace than in the past. While year-over-year volumes may be down, we are capturing some stability that supports our projections for Q2.

Operator, Operator

Thank you. We have no further questions in queue. I would like to turn the call back over to Brian Chambers for any closing comments.

Brian Chambers, Chair and CEO

Thanks, Lydia. I'd like to thank everyone for making time to join us on today's call, and for your ongoing interest in Owens Corning. We hope to see many of you at our Investor Day next week in Toledo. Thanks, and have a great day.

Operator, Operator

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