Owens Corning (NYSE:OC) Q1 2024 Earnings Call Transcript

Owens Corning (NYSE:OC) Q1 2024 Earnings Call Transcript April 24, 2024

Owens Corning beats earnings expectations. Reported EPS is $3.4, expectations were $3.04. OC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, all. And welcome to the Owens Corning’s First Quarter 2024 Earnings Call. My name is Lydia, and I’ll be your operator today. [Operator Instructions] I will now hand you over to Amber Wohlfarth, Vice President of Investor Relations to. Please go ahead when you are ready.

Amber Wohlfarth: 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 2024. 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 2024. 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-K and the presentation slides at our website, owenscorning.com. Refer to the Investors link under the Corporate section of our homepage. A transcript and recording of this call and the supporting slides will be available on our website for future reference. Please reference Slide 2 where we offer a couple of 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 Investor section of our website owenscorning.com. For those of you following along with our slide presentation, we will begin on Slide 4. And now opening remarks from our Chair and CEO, Brian Chambers. Brian?

Brian Chambers: Thank you, Amber. Good morning, everyone, and thank you for joining us. During today’s call, I will walk through highlights of our first quarter performance and provide an update on the Masonite acquisition and the review of strategic alternatives for our glass reinforcements business that we announced earlier in the year. After that, Todd will discuss our first quarter financial results in more detail, and I will come back to share our outlook for the second quarter. Owens Corning delivered another great quarter to start the year, highlighting our strong execution and broad capability to deliver robust results within a very dynamic market environment. Our results continue to reflect the strength of our market-leading positions and enterprise focus to capitalize on key secular trends that accelerate our growth and strengthen the earnings power of the company.

Now, I will begin a review of the quarter, as always, with our safety performance. At Owens Corning, our commitment to safety is unconditional. As part of this commitment, we continuously renew and refresh our approach to safety as we strive to eliminate injuries and work safer together. Through this work, I’m pleased to report that a recordable incident rate in the first quarter was 0.31, a more than 50% improvement from the same period last year, and our best start to the year in over two decades. Looking now at our first quarter financial performance, we continue to execute our key strategic and operating priorities, resulting in strong earnings to start the year. The company delivered an adjusted EBIT margin of 19% and an adjusted EBITDA margin of 25%, with net sales that were in line with prior year.

This earnings performance marks the 15th consecutive quarter of mid-teens or better adjusted EBIT margins and 20% or better adjusted EBITDA margins for Owens Corning as we continue to execute our enterprise strategy, leading to higher, more consistent earnings. Our top line and margin performance generated adjusted diluted earnings per share of $3.59 in the first quarter. And consistent with our capital allocation strategy, the company returned $182 million to shareholders through dividends and share repurchases during the quarter. Market conditions for our North American residential and commercial businesses remain favorable to start the year, while our European businesses continue to face more challenging conditions. Within this dynamic environment, all three of our segments performed well, driven by our team’s strong execution and highly valued product offering.

In Roofing, strong margins during the quarter were driven by continued good pricing and favorable product mix within shingles and components as contractors continue to recognize the value of selling our complete roofing system. In Insulation, we continue to see solid demand in North America for both our residential and technical insulation products, while Europe continued to be impacted by a weak macroenvironment. Positive price costs and favorable mix help fuel our results. And in Composites, while overall revenues were down as expected, demand trends within our glass reinforcements business have begun to stabilize in most of our end markets. Volumes in our nonwovens business remained solid in the first quarter due to the strength of the roofing market and continued demand for non-residential building products.

Across the enterprise, we are leveraging our brand leadership, product innovations, focus on sustainable solutions and channel and customer knowledge to differentiate Owens Corning, strategically positioning us to continue driving results and delivering further growth. Let me share a few of our latest updates on product innovation and sustainability. During the first quarter, we launched 13 new or improved products. In our Roofing business, we launched a new weather-resistant barrier house wrap under the PINKWRAP brand. We are excited about this new product and believe the combination of our manufacturing capabilities, service platforms, and existing relationships with contractors and distributors put us in a strong position to create additional value for our customers and grow this product category.

I would also like to share an update on our sustainability progress. In March, we issued our 18th annual sustainability report. This report reflects the global impact of our people and our products and the many ways we work to make the world a better place. We are firm believers that sustainability is not just good for the environment, it’s good business, and we are proud of the progress we’ve made toward our long-term goals. For example, waste and landfill has been a challenge for us over the years, but in 2023, we had a breakthrough, achieving a 14% absolute reduction compared to 2022. Also highlighted in the report, in 2023, 59% of the company’s revenue came from products that help customers save energy and lower emissions, with 14 of our products certified as being made with 100% renewable electricity.

These are products that our customers want and need, and our ability to deliver in a sustainable way creates a competitive advantage. In addition, we achieved a 28% reduction in Scope 1 and 2 emissions from a 2018 baseline, putting us more than halfway toward our goal of 50% by 2030. To further reduce our emissions, I’m pleased to share that we are converting our Hällekis, Sweden insulation plant from coke-fired furnaces to electric [inaudible]. This will help reduce carbon emissions and lower the embodied carbon in the products produced, which brings us closer to reaching the greenhouse gas targets we have set for ourselves. This also strengthens our market-leading position and improves our manufacturing efficiency while ensuring we continue to meet our valued European customers’ expectations.

I am very proud of the commitment by our teams to deliver on our mission to build a sustainable future through material innovation and the progress we continue to make in areas such as circular economy, waste reduction, and employee safety. I encourage you to review our sustainability report if you haven’t already done so. Before turning it over to Todd, I want to provide an update on the two transformational moves we announced in early February. While we are very pleased with our strong and consistent financial results, we are excited about the opportunity to better align our business units with our overall enterprise strategy to focus on building and construction solutions, and to create new opportunities for Owens Corning. Let me start with the Masonite acquisition.

As we shared during our call at the time of the acquisition announcement, the addition of Masonite helps us expand our leadership position in the branded residential building product space and adds a product category that complements our current interior and exterior residential offerings. The acquisition also creates a scalable new growth platform, expanding our total addressable market to $75 billion. Lastly, it enhances our attractive financial profile by growing our revenue and earnings, lowering ongoing capital intensity, and increasing free cash flow generation. The proposed transaction has been well received by our customers. Our strong distribution partnerships combined with our best-in-class contractor engagement model, position us well for further success within this new product category.

Since the announcement, we’ve been working closely together on integration planning and regulatory procedures and continue to work toward a mid-year close of the acquisition. We look forward to welcoming the Masonite team to Owens Corning. Adding this market-leading provider of interior and exterior doors strategically fits into our company, expanding our offering of branded residential building material products with customers, channels, and markets we know very well while providing several opportunities to improve operating efficiencies as a combined entity leading to cost synergies. Owens Corning is a recognized leader in the building and construction material space, and we believe that this acquisition strengthens our position in the near term while creating exciting opportunities for the future.

In February, we also announced the strategic review of our glass reinforcement business, which is part of our composite segment. While the business is a market leader in several regions and applications, the industrial nature of the applications and customers does not fit with our strategic choice to invest in and grow our residential and commercial building materials offering. Given our disciplined capital allocation approach and best owner operating philosophy, we have initiated this process and engaged Morgan Stanley as our financial advisor. We will share more about our progress as new information is available. In closing, I want to thank our global teams for their dedication and commitment to consistently delivering for our customers and shareholders.

Our employees are the driving force that propel our company forward to continue executing on our growth strategy while maintaining our high standards for delivering strong results and winning the right way. With that view of our performance and strategic initiatives, I will now turn it over to Todd to discuss our first quarter financial results in more detail. Todd?

Todd Fister: Thank you, Brian, and good morning, everyone. As Brian mentioned, we had a great start to the year. Our performance in the quarter demonstrates the value being generated by our enterprise strategy and operating model. I’d now like to turn to slide 5 to discuss the results for the quarter. We started the year growing enterprise earnings and margins with adjusted EBIT of $438 million, which was significantly above last year. Adjusted EBITDA was $565 million. Adjusted EBIT margins were 19%, and adjusted EBITDA margins were 25%. Adjusted earnings for the first quarter were $316 million, or $3.59 per diluted share, compared to $257 million, or $2.80 per diluted share in the same quarter prior year. Slide 6 shows the reconciliation between our adjusted and reported EBIT.

For the quarter, adjusting items totaled approximately $35 million and are excluded from our adjusted EBIT. They primarily include $18 million of Masonite acquisition-related costs and $14 million of charges associated with our ongoing cost optimization and product line rationalization actions. Turning to slide 7 and moving on to our cash generation and capital deployment during the first quarter of 2024. Driven by our strong operational execution, we improved free cash flow for the quarter compared to the prior year. Free cash flow for the quarter was a net outflow of $128 million compared to a net outflow of $322 million in the same quarter last year, which was primarily driven by disciplined working capital management. Capital additions for the quarter were $152 million, down $6 million from the same quarter prior year.

Our return on capital was 17% for the 12 months ending March 31, 2024, using a simplified calculation. Additional details can be found in the table in our earnings presentation. At quarter end, the company had liquidity of approximately $5.6 billion, consisting of $1.3 billion of cash. and $4.3 billion of availability on our bank debt facilities, comprised of $3 billion of newly committed short-term financing related to our planned acquisition of Masonite, a $1 billion revolving credit facility, which was amended during the quarter, and a $300 million receivable securitization facility, which also was amended during the quarter. During the first quarter of 2024, we returned $182 million to shareholders through share repurchases and dividends.

We repurchased common stock for $130 million and paid a cash dividend totaling $52 million. In February, the board declared a cash dividend of $0.60 per share. Our capital allocation strategy remains unchanged. We are focused on generating strong free cash flow, returning approximately 50% to investors over time, and maintaining an investment-grade balance sheet while executing our business strategies to grow the company. Now turning to slide 8, I’ll provide additional details in our segment results. The Roofing business started the year by delivering a great first quarter, with revenue growth of 7% and year-over-year margin expansion. Sales in the quarter were $957 million. Revenues were positively impacted by carryover price realization and favorable mix within both shingles and components.

Volumes for the quarter were relatively flat, with growth in shingles and roofing components largely offset by the impact of the strategic decision to exit our protective packaging business. The U.S. asphalt shingle market, on a volume basis, was up 27% in the quarter compared to the prior year, driven by continued strength of the market and carryover storm demand. Our U.S. shingle volume growth trailed the market primarily due to our outperformance versus the market in Q1 2023, as distributors worked to rebuild inventory of OC products. EBIT was $286 million for the quarter, up $77 million versus last year. The increase was primarily due to positive price and favorable mix. Manufacturing costs were also favorable in the quarter as we produced more laminate shingles in the first quarter versus last year.

Lower delivery cost was offset by cost inflation. All of this resulted in EBIT margins of 30% and EBITDA margins of 31%. Now please turn to slide 9 for a summary of our Insulation business. The Insulation business started the year with another solid quarter of greater than 20% EBITDA margins. Q1 revenues were $904 million, a 2% decrease from the first quarter last year, and technical and global revenue was down slightly year-over-year, positive price and favorable mix, primarily in Europe, largely offset lower volumes tied to the overall weaker macroenvironment in Europe. North American residential insulation revenue was down modestly on slightly lower volumes. Insulation EBIT for the first quarter was $161 million, up $5 million compared to prior year.

The impact of positive price and favorable delivery cost more than offset the impact of lower volumes and slightly higher manufacturing cost. Overall, Insulation delivered EBIT margins of 18% and EBITDA margins of 23% in the first quarter. Slide 10 provides an overview of our Composites business. In the first quarter, the Composites business performed well relative to the softer macroenvironment. Sales for the quarter were $523 million, down 11% compared to prior year. The decreased sales resulted primarily from lower glass reinforcement volumes and lower price as we continued to see spot price pressure and lower contract pricing. While overall revenues were down, we continued to see good performance in our nonwovens business. EBIT for the quarter was $46 million, down $3 million from prior year.

Lower selling prices and higher production downtime from lower demand as well as higher startup cost impacted EBIT in the quarter. Deflation for both delivery and input cost primarily related to energy and favorable manufacturing cost nearly offset EBIT headwinds in the quarter. Overall Composites delivered 9% EBIT margins and 17% EBITDA margins for the quarter. Moving on to slide 11, I will discuss our full year 2024 outlook for key financial items, all of which remain unchanged from our guidance provided in February, and which exclude the impacts of acquisitions and divestitures which have not yet been completed. General corporate expenses are expected to range between $240 million and $250 million. Interest expense is estimated to range between $70 million and $80 million.

Our 2024 effective tax rate is expected to be 24% to 26% of adjusted pretax earnings. Finally, capital additions are expected to be approximately $550 million, which is anticipated to be in line with depreciation and amortization. Now please turn to slide 12 and I’ll turn the call back to Brian to further discuss our outlook. Brian?

Brian Chambers : Thank you, Todd. Our first quarter results continue to highlight our strong and consistent enterprise performance driven by the capability of our team and the actions we have taken over the last several years to generate higher or resilient earnings. As we move through Q2, we expect North American building and construction markets to remain favorable with good demand for our products in the near term. We continue to expect repair and remodeling activity, along with storm carryover, to drive demand for our roofing products. In the U.S., ongoing demand for housing and low existing home inventory are creating a positive sentiment for single-family new construction. Outside North America, we anticipate macroeconomic trends and geopolitical tensions will continue to result in slow global economic growth.

Overall for the company, we expect second quarter results to be similar to prior year with relatively flat sales and EBIT margins of approximately 20%. Now, consistent with prior calls, I’ll provide a more detailed business-specific outlook for the second quarter. Starting with our Roofing business, we anticipate our revenue to be up low to mid-single digits while we continue to see good demand across several regions of the country as we enter into peak roofing season. We expect ARMA market shipments to be down this quarter, given the historical high volumes shipped in Q2 of last year. As you may recall, high storm activity in the first half of 2023 resulted in record manufacturing shipments in Q2 of last year. Due to the tough comp, we anticipate ARMA market shipments to be down low double digits for the second quarter in 2024, with demand for our shingles relatively flat.

For the business overall, we anticipate volume to be negative, primarily due to the exit of our protective packaging business. As a reminder, this business has approximately $100 million in revenue annually. We expect realization of the April price increase and favorable mix to more than offset the impact of lower volumes from the exit of protective packaging. Compared to Q2 of last year, we anticipate costs to be slightly inflationary. Overall for roofing, we anticipate EBIT margins in the low 30% range. Moving on to our Insulation business, we expect revenues to be up low to mid-single digits, with higher volumes and price that is slightly positive. In technical and global, we expect revenue to be up modestly versus prior year, driven primarily by higher volumes across most of our business in North America, while Europe continues to be challenged by the overall market environment.

In our North American residential insulation business, we anticipate volumes to be up versus prior year, with additional realization on the price increase that was implemented during the first quarter. For the overall Insulation business, we anticipate input materials to be inflationary for the second quarter, but expect to maintain a positive but narrowing price cost. Also in the quarter, we expect to incur some incremental cost as we evaluate potential manufacturing investments to upgrade and modernize our US fiberglass plans. Given all this, we expect to generate EBIT margins for Insulation similar to Q2 last year. And in Composites for the second quarter, we anticipate overall revenues to be down low double digits as we continue to see pressure in the glass reinforcements market versus prior year.

While we expect volumes and spot price to continue to stabilize sequentially within our glass reinforcements business, we expect overall pricing to step down year-over-year, similar to what we saw in the first quarter, with both contract pricing and spot prices lower than last year. In addition, we will continue to be proactive in adjusting our production to demand. During the quarter, we expect the nonwovens business to continue to perform well with solid demand. For the second quarter, we expect EBIT margins in Composites to be high single digits, similar to Q1. With that view of our businesses, I’ll turn to a few enterprise items. Over the past few years, we have made several strategic choices and operational investments to sharpen our focus, increase our capabilities, and consistently deliver higher, more resilient earnings.

As we look at additional opportunities, we will continue to be disciplined operators, focusing on markets and product lines where we can build leading positions through our customer and channel knowledge, material science and innovation capabilities, and manufacturing and process expertise. We believe our acquisition of Masonite, a leading provider of interior and exterior doors and door systems, and the review of strategic alternatives for our glass reinforcements business are the latest examples of how we are using this disciplined approach to reshape and grow the company. Moving forward, we remain committed to a balanced capital allocation strategy focused on organic growth and acquisitions that support our strategic priorities and leverage our unique operating capabilities, while returning approximately 50% of free cash flow to shareholders over time through our consistently increasing dividend and ongoing share repurchases.

Our team delivered another outstanding quarter to start 2024. As we move through the year, we will continue to stay focused on delivering value for our customers and shareholders while making significant strides to further strengthen Owens Corning’s position as a market leader in residential and commercial building materials. With that, we would like to open the call up for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question today comes from Matthew Bouley of Barclays.

Matthew Bouley: Good morning, everyone. Thank you for taking the question. I’ll ask my question on the insulation business and pricing. You guided to additional price realization here in the second quarter. Is that, I guess, a reflection of sort of the prior price increases building, and if so kind of aware around the business, and maybe if you can comment on some of the additional price increase announcements you’ve made for later in Q2 in that segment? Thanks, everyone. Good luck.

Todd Fister: Thanks, Matt. Appreciate the question. Yes, let me give a little bit of color on what we’re seeing in Q1, Q2, and then a bit on what we expect here in the back half. So you’re exactly right. The impact that we’re seeing in Q2 is still largely the increase that we announced late in 2023 that got pushed a bit in the market, and we started to see really take effect in the first quarter, and we expect that to continue to build as we get into the second quarter of the year. We just announced in market an increase to take effect in June of 2024. There’s really not a whole lot of that in the second quarter results, but we certainly could see some momentum in Q3 and Q4 off of that increase, assuming we see the market continue to be tight and really good demand conditions. So that’s what we were expecting in Q2 and beyond. Appreciate the question.

Operator: Our next question comes from Stephen Kim of Evercore.

Stephen Kim: Yes, thanks very much, guys. Appreciate all the information thus far. I wanted to ask about the roofing business. Obviously, the packaging exit was an offset to the bottom. I’m just trying to get a sense for how much that was in the quarter. Was it about $25 million as you thought or as we thought? And then secondly, with respect to the roofing performance relative to ARMA, you warned us that you were going to underperform the industry and that you would likely do better than the industry in the second quarter. And that sounds like it’s still your plan. My question relates to the geographic mix there. My recollection is that you guys have a pretty strong share in the mountain states and more to the west and kind of weaker in the northeast, through Florida, kind of the east coast.

I want to make sure that’s still true. And if there’s been any sort of changes to your geographic market shares, that’s worth calling out relative to that general understanding that in the past, your mountain and west were stronger and your east was weaker.

Brian Chambers: Thanks, Stephen, yes, good morning. On the packaging piece, yes, you’re right. The $100 million, ratably kind of is about $25 million a quarter. That was a pretty steady business and that’s what we saw in Q1, roughly that amount, and would expect that over the next couple of quarters. We announced that in the third quarter of last year, so we’re going to kind of see that kind of a headwind here over the next few quarters going forward. And then on the ARMA piece, yes, I’d say overall, the year has started very consistent with what we thought. So bigger shipments in Q1 relative to fairly weak manufacturing shipments in Q1 of last year where there’s a little more conservative posture. So that stepped up quite a bit.

And then as we move into Q2, a reminder, Q2 of last year was a historic high for ARMA manufacturing shipments, so we did expect that was going to step back to the lot of that was service through inventory that was being carried that we don’t think repeats because of the strength of the market over the last few quarters. So we expected this kind of a step down and I would say just kind of cutting through a lot of the volatility, maybe just two big takeaways overall for the roofing business, because we have seen the last couple of quarters some volatility year-on-year. Pretty unusual in terms of the magnitude of that, but through all of that volatility, we finished up 2023 with a really good roofing market. The first quarter started strong in, roofing, our first half guide is a strong market.

So I think cutting through kind of the quarter-to-quarter volatility, the underlying demand trends for ARMA work for storm repair work for new construction growth. We expect to maintain into the second quarter into the back half and we think we’re going to have a good roofing market again this year. I think the other big takeaway from that is that our performance quarter-to-quarter in terms of what we’re producing, what we’re shipping, you’ve just seen a continued steady increase in the amount of land capacity that we can service the market. So relative to the market, that’s why we’ve seen some volatility because our performance has stayed pretty steady and demand for our product remains very strong. I think that’s why you saw some outperformance in a couple of quarters when the ARMA shipments slowed down.

We were still shipping to service contractor demand and distributor demand. We’re expecting that in Q2, even though ARMA shipments are stepping back, we expect good performance and we would expect to outperform this quarter. And I think that’s the other familiar theme as we see going forward in terms of the demand for our products. In terms of the geographic mix, I mean, you’re roughly right. I’d say we have good share positions, West Coast, Rocky Mountains, Midwest. I think we’ve seen improving demand conditions for our products in the Southwest, Southeast quite a bit and along the East Coast. So I think we’ve been able to continue to grow our contractor base, we’ve been able to grow our business in those other markets. But nothing that I’d call out to your question is a significant share shift region to region, but I’d say a good improvement and some growth across all those other regions.

But the strength for us, yes, sits in kind of Midwest, Rocky Mountains into that West Coast where we see good demand today, we’re going to see a good share of performance in those regions.

Operator: The next question comes from Kathryn Thompson of Thompson Research Group.