Q1 2015 Earnings Script | 04.22.15
Thierry Denis, Vice President of Investor Relations
Thierry Denis – Vice President, Investor Relations
Thank you, Mike and good morning everyone.
Thank you for taking the time to join us for today’s conference call in review
of our business results for the first quarter 2015.
Joining us today are Mike Thaman, Owens Corning’s Chairman and CEO; and
Michael McMurray, Chief Financial Officer.
Following our presentation this morning, we will open this one-hour call to
your questions. Please limit yourselves to one question and one follow-up.
Earlier this morning, we issued a news release and filed a 10-Q that detailed
our financial results for the first quarter.
For the purposes of our discussion today, we’ve prepared presentation
slides that summarize our performance and results for the first quarter of
2015. We will refer to these slides during this call.
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You can access the earnings press release, Form 10-Q and the presentation
slides at our website, owenscorning.com. Refer to the “Investors” link on
the bottom right side of our home page. A transcript and recording of this
call and the supporting slides will be available on our website for future
reference.
Please reference Slide 2 before we begin, where we offer a couple of
reminders:
First, today’s remarks will include forward-looking statements based on our
current forecasts and estimates of future events. These statements are
subject to risks, uncertainties and other factors that could cause our actual
results to differ materially. We undertake no obligation to update these
statements beyond what is required under applicable securities laws.
Please refer to the cautionary statements and the risk factors identified in
our SEC filings for a more detailed explanation of the inherent risks and
uncertainties affecting such forward-looking statements.
Second, this presentation and today’s prepared remarks contain non-GAAP
financial measures. Reconciliations of non-GAAP to GAAP measures may be
found within the financial tables of our earnings release on
owenscorning.com.
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Adjusted EBIT is our primary measure of period-over-period comparisons,
and we believe it is a meaningful measure for investors to compare our
results from period to period.
Consistent with our historical practice, we have excluded non-recurring
items, and items that we believe are not representative of our ongoing
operations when calculating Adjusted EBIT.
We adjust our effective tax rate to remove the effect of quarter-to-quarter
fluctuations, which have the potential to be significant in arriving at
adjusted earnings and adjusted earnings per share. In the first quarter, we
have utilized an effective tax rate of 31 percent, in-line with our anticipated
annual effective tax rate on adjusted earnings for 2015.
For those of you following along with our slide presentation, we will begin
on Slide 4.
And now, opening remarks from our Chairman and CEO, Mike Thaman, who
will be followed by CFO Michael McMurray. Mike will then provide
comments on our outlook prior to the Q&A session.
Mike…..
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Mike Thaman – Chairman and Chief Executive Officer
Thank you, Thierry, and good morning everyone. We appreciate you joining
us today to discuss our first-quarter results.
Owens Corning had a good start to 2015, with first-quarter performance
that was consistent with the expectations we set coming into the year.
Insulation continues to benefit from growth in U.S. housing starts. Results in
Composites reflect strong execution and operational performance. In
Roofing, first quarter revenues and margins were weak. However, the
Roofing business did not experience the discounting and inventory build in
the channel that we saw in the same quarter last year, positioning the
business to deliver higher volumes for the remainder of the year.
The company earned $60 million in adjusted EBIT for the quarter, on
consolidated revenue of $1.2 billion. Adjusted earnings were $22 million.
During our 4th quarter 2014 call in February, I discussed a number of
expectations for sustained or improved performance across our businesses
in 2015.
Let me review them now, starting with Safety:
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We said that we would continue to make progress toward our goal of
creating an injury-free workplace.
The company experienced an increase in recordable injuries in the first
quarter with 25 recordable injuries compared to 21 in the prior year. Safety
performance in March and April has been much improved and we remain
committed to improving our overall safety performance.
In Insulation, we said the business should continue to benefit from growth
in U.S. residential new construction, improved pricing and operating
leverage.
Insulation delivered EBIT improvement of $6 million. The business has
improved EBIT performance for 15 consecutive quarters.
First-quarter operating leverage of 25% was impacted by the timing of
expense items and in-line with expectations.
I also want to highlight that today we announced an investment that will
drive growth in our Insulation business.
In June 2013, Owens Corning acquired Thermafiber, a mineral wool
insulation manufacturer, to support growth in the North American
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construction markets. Thermafiber has been a great addition to our
portfolio, and has been operating close to capacity in a growing market.
Anticipating continued growth, our Board of Directors approved a $90MM
investment for the construction of a new mineral wool plant, to be built in
the United States, and operational in late 2016.
In Composites, we said we expected 2015 EBIT improvement
commensurate with 2014, partially offset by the negative impact of a
stronger U.S. dollar.
First-quarter Composites EBIT was $60 million, an increase of $33 million,
representing the 7th consecutive quarter of EBIT improvement. Selling
prices continued their improvement trend and the business is off to a strong
start. Results reflect strong execution and operational performance. Our
performance in the first quarter has raised our outlook for full-year results
which I will discuss more fully later in my remarks.
In Roofing, we said the outlook would be largely determined by
competitive pricing dynamics, the timing and value of asphalt cost
deflation, and overall market demand.
Roofing performance was consistent with our expectations, delivering midsingle digit EBIT margins on lower sales, lower production volumes, and
lower pricing in comparison to the previous year. Shipments by U.S. asphalt
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shingle manufacturers declined significantly during the first-quarter as we
did not see the broad discounting or channel inventory build that occurred
in 2014. This is in line with our expectation of a more balanced distribution
of shipments throughout the year.
Asphalt cost deflation has largely tracked with expectations. We still expect
full-year deflation of over $50 million, with the bulk of benefit in the second
half.
Now let me summarize the expectations we have for the remainder of
2015:
The Insulation business should continue to benefit from growth in U.S.
residential new construction, improved pricing and operating leverage. We
continue to expect average operating leverage of 50% through the recovery,
with 2015 leverage tracking slightly below that goal. Market momentum is
positive and we are positioned to deliver another year of strong growth.
In Composites, we’re very pleased with our performance in the first quarter
and expect to benefit from continued moderate global industrial production
growth. Based on a strong start to the year, we now anticipate a full-year
EBIT improvement of up to $45 million comprised of up to $70 million in
improvement on a constant currency basis less the foreign exchange impact
of $25 million at current exchange rates.
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In Roofing, we continue to anticipate a flat market for 2015 with a more
balanced distribution of shipments throughout the year. On our call in
February, I indicated that Roofing performance for 2015 would be
determined by the timing of shipments, stability of pricing and timing of
asphalt deflation. That view is unchanged.
With that, I’ll now turn it over to Michael, who will review further details of
our business and corporate performance. I’ll then return to recap and open
it up for questions.
Michael …
Michael McMurray – Chief Financial Officer
Thank you Mike and good morning everyone.
As Mike mentioned earlier, we are off to a good start to 2015. We expect
our Insulation business to continue to benefit from growth in U.S. housing
starts and results in our Composites business reflect strong execution and
operational performance. In Roofing, we are positioned to deliver stronger
volumes at better margins for the remainder of the year.
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Now… let’s start on Slide 5, which summarizes our key financial data for the
first quarter. You will find more detailed financial information in the tables
of today’s news release and the Form 10-Q.
Today we reported first quarter 2015 consolidated net sales of $1.2 billion,
which were down slightly compared to sales reported for the same period in
2014. Net sales in our Insulation business increased $24 million primarily on
higher sales volumes. In our Composites business, higher selling prices and
higher sales volumes were offset by the impact of foreign currency
translation. In our Roofing business, net sales were down 21% from the
prior year primarily on lower sales volumes and, to a lesser extent, lower
selling prices.
In a moment, I’ll review our reconciliation of items to get to adjusted EBIT,
our primary measure to look at period to period comparisons.
Adjusted EBIT for the first quarter of 2015 was $60 million down $17 million
compared to the same period one year ago. Adjusted earnings for the first
quarter of 2015 were $22 million, or $0.19 cents per diluted share
compared to $35 million, or $0.29 cents per diluted share in 2014.
Depreciation and amortization expense for the quarter was $75 million,
essentially flat as compared to the first quarter of 2014. Our capital
expenditures for the quarter were $56 million.
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Now on slide 6, let me reconcile 2015 first quarter adjusted EBIT of $60
million to our reported EBIT of $58 million. We have adjusted out $2 million
related to the closure of two melters we announced last year – one Japan
and one in Canada. As a reminder, these actions will allow us to exceed our
75% low delivered cost goal in the Composites business.
Now please turn to slide 7 where we provide a high-level review of our
adjusted EBIT performance, comparing the first quarter of 2015 with the
first quarter of 2014.
Adjusted EBIT decreased by $17 million. The $33 million improvement in
our Composites business and $6 million improvement in our Insulation
business were more than offset by a $60 million decline in our Roofing
business. General corporate expenses were slightly lower versus the
previous year.
With that review of key financial highlights, I ask you to turn to slide 8
where we provide a more detailed review of our business results, beginning
with our Insulation business.
Sales in Insulation of $379 million were up 7% from the same period a year
ago primarily on improved volumes. The business delivered EBIT of $7
million in the first quarter compared to $1 million in the same period one
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year ago primarily on higher selling prices. This was our fifteenth
consecutive quarter of EBIT improvement in our Insulation business. As
previously disclosed, we anticipated that both EBIT and operating leverage
in the first quarter would be impacted by the timing of expense items. As
we have discussed on previous calls, we expect average operating leverage
of 50% through the recovery, although 2015 operating leverage will track
slightly below that goal.
Looking forward, we continue to expect the Insulation business to benefit
from volume growth, improved pricing and operating leverage.
Now I will ask you to turn your attention to slide 9 for a review of our
Composites business.
Sales in our Composites business for the first quarter were $478 million, flat
compared to the same period in 2014. Higher volumes, improved selling
prices and favorable product mix were offset by the impact of foreign
exchange translation. Selling prices continued their sequential
improvement for the seventh consecutive quarter.
EBIT for the quarter was $60 million, more than double compared to the
$27 million in the same period last year, primarily due to improved selling
prices and favorable product mix. In Composites, this was our seventh
consecutive quarter of EBIT improvement.
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We had some positive contribution from specialty glass sales in the fourth
quarter of 2014. This accelerated in the first quarter of 2015, with stronger
specialty glass sales contributing about $12 million of the year-on-year EBIT
improvement. We expect sales associated with this campaign to end in
April 2015.
Looking forward, we expect the positive momentum delivered in the first
quarter along with higher base glass volumes to drive significant earnings
growth in the second quarter, but we expect results to be slightly down
sequentially as a result of lower specialty glass sales.
For the year, we continue to expect moderate global industrial production
growth. Based on a strong start to the year, we now expect a full-year EBIT
improvement of up to $70 million before the impact of foreign currency
translation. At current spot rates, foreign currency translation is expected
to negatively impact revenue by about $200 million and EBIT by about $25
million.
As a reminder, on the fourth quarter call we said that rebuild expense and
costs associated with the start-up of our U.S. non-wovens facility should
roughly equal 2014 rebuild expenses and that the timing of these costs
would fall in the later two-thirds of the year. As a result of expense timing
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and lower specialty glass sales in the second half of 2015, we would expect
second half 2015 EBIT performance to be broadly in-line with the second
half of 2014.
Slide 10 provides an overview of our Roofing business.
Roofing sales for the quarter were $393 million, a 21% decrease compared
with the same period a year ago. About three fourths of the decline in net
sales was driven by lower sales volumes. Lower selling prices drove the
remaining decline.
EBIT in the quarter was $20 million, down $60 million compared to the
same period in 2014. More than half of the decline in EBIT was driven by
lower sales and production volumes and the remainder was driven by lower
selling prices.
Let me take this opportunity to set some context. Over the period from
2012 to 2014, we experienced aggressive discounting and inventory build
within the channel during the first quarter. During this period, first quarter
industry shipments averaged about 35% of full-year demand and first half
shipments averaged about 60% of full year demand. If you look back over
the previous decade, a time period where we did not experience heavy first
quarter discounting or the related channel inventory build, industry first
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quarter shipments averaged about 25% of the full-year demand and first
half shipments averaged about 53% of full year demand.
On the fourth quarter call, we indicated that if first quarter shipments were
closer to 25% of full-year demand, industry volumes could be down as much
as 25% in the quarter. You will recall that we trailed the market in the first
quarter of 2014. Given our expectation to ship at our historic share for all of
2015, we anticipated our first quarter 2015 volumes could be down more
than 10%.
We believe there was limited discounting and less inventory build in the
channel. As a result, we now estimate that industry volumes were down by
at least 25% in the first quarter, although official industry data has not been
published. Our shingle volumes were down about 20% in the quarter, which
would represent some recovery of first quarter market share.
We continue to expect a flat market for 2015. Based on a more historical
distribution of shipments for the year, we would expect industry volumes
for the first half of the year to be closer to 50% of full-year demand. As a
result, we anticipate second quarter industry volumes to be up about 5-15%
and therefore we would expect Owens Corning’s volumes to be up a bit
more as we trailed the market in the second quarter of 2014.
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During the first quarter, the market environment was constructive as
evidenced by limited winter discounting. Compared to last year, prices
were down mid-single digits primarily as a result of competitive actions
taken in 2014. There were some sequential price movements as we made
some competitive adjustments early in the first quarter. Prices have since
been stable and we have announced a price increase effective May 1st.
We continue to see asphalt deflation as a constructive way to improve our
margins later in the year. Asphalt cost deflation has largely tracked with
expectations, although price declines flattened somewhat in April with
increased paving demand. We expect to see some asphalt benefit in our
financial results in the second quarter with the bulk of the impact in the
second half of 2015. We continue to estimate that this could translate into
asphalt deflation of over $50 million in 2015 based on the current outlook
for crude prices.
Higher sales volumes combined with higher production volumes and some
asphalt deflation would position the business to deliver second quarter EBIT
margins similar to last year.
Now let me turn your attention to slide 11.
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In the first quarter under a previously announced share repurchase
program, we repurchased about 340,000 shares of the Company’s common
stock for $13 million at an average price of $39.21. As of March 31st, 7.4
million shares remain available for repurchase under the Company’s current
authorization.
As we balance our priorities for the future deployment of our free cash
flow, both dividends and stock repurchases will be important mechanisms
to return capital to shareholders.
Our current market outlook is for continued growth in U.S. housing starts
and moderate global industrial production growth. Expectations for 2015
U.S. housing starts range between 1.1 and 1.2 million units.
Now please turn to slide 12 where I will provide other financial guidance for
the year.
We continue to expect full year corporate expenses to be in the range of
$120 to $130 million.
Capital spending will be about $380 million. This includes an additional $25
million related to the construction of our mineral wool plant.
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Depreciation and amortization expense is expected to be about $310
million.
Interest expense is expected to be about $110 million.
Our $2.2 billion U.S. tax NOL will significantly offset cash taxes for some
time to come. As a result of our tax NOL and other tax planning initiatives,
we expect our 2015 cash tax rate to be approximately 10% to 12% of
adjusted pretax earnings.
Our 2015 adjusted effective tax rate is expected to be approximately 30% to
32% of adjusted pretax earnings.
Thank you and I will now hand the call back to Mike.
Mike Thaman, Chairman and Chief Executive Officer
Thank you, Michael.
Owens Corning is a better company when all three businesses are making
meaningful contributions to our financial results. Both Insulation and
Composites showed strong improvement in the first quarter and
contributed materially to our performance, continuing their momentum
from 2014. Both businesses should continue to benefit from growth in U.S.
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housing starts and global industrial production as the year progresses. We
also believe Roofing is positioned to deliver improved performance for the
remainder of the year.
With that, I would like to turn the call over to Thierry who will lead us in the
question and answer session.
Thierry …
Thierry Denis – Vice President, Investor Relations
Thank you, Mike. Mike, we are now ready to begin the Q&A session.
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