Owens Corning : Q3 2023 Earnings Call Transcript

Owens Corning NYSE:OC

FQ3 2023 Earnings Call Transcripts

Wednesday, October 25, 2023 1:00 PM GMT

S&P Global Market Intelligence Estimates

		-FQ3 2023-		-FQ4 2023-	-FY 2023-	-FY 2024-
	CONSENSUS	ACTUAL	SURPRISE	CONSENSUS	CONSENSUS	CONSENSUS
EPS Normalized	3.86	4.15	7.51	2.89	13.73	14.04
Revenue (mm)	2528.26	2479.00	(1.95 %)	2276.90	9705.16	9862.80
Currency: USD

Consensus as of Oct-24-2023 3:23 PM GMT

- EPS NORMALIZED -

	CONSENSUS	ACTUAL	SURPRISE
FQ4 2022	2.35	2.49	5.96 %
FQ1 2023	2.22	2.77	24.77 %
FQ2 2023	3.25	3.85	18.46 %
FQ3 2023	3.86	4.15	7.51 %

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Contents

Table of Contents

Call Participants	3
Presentation	4
Question and Answer	10

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OWENS CORNING FQ3 2023 EARNINGS CALL | OCT 25, 2023

Call Participants

EXECUTIVES

Amber Wohlfarth

Vice President of Investor Relations

Brian D. Chambers

President, CEO & Chair

Todd W. Fister

Executive VP & CFO

ANALYSTS

Adam Michael Baumgarten

Zelman & Associates LLC

John Lovallo

UBS Investment Bank, Research Division

Joseph David Ahlersmeyer

Deutsche Bank AG, Research

Division

Kathryn Ingram Thompson

Thompson Research Group, LLC

Keith Brian Hughes

Truist Securities, Inc., Research Division

Matthew Adrien Bouley

Barclays Bank PLC, Research

Division

Michael Glaser Dahl

RBC Capital Markets, Research Division

Michael Jason Rehaut

JPMorgan Chase & Co, Research

Division

Philip H. Ng

Jefferies LLC, Research Division

Richard Samuel Reid

Wells Fargo Securities, LLC,

Research Division

Stephen Kim

Evercore ISI Institutional Equities, Research Division

Susan Marie Maklari

Goldman Sachs Group, Inc.,

Research Division

Truman Andrew Patterson

Wolfe Research, LLC

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OWENS CORNING FQ3 2023 EARNINGS CALL | OCT 25, 2023

Presentation

Operator

Hello, everyone, and welcome to Owens Corning Third Quarter 2023 Earnings Call. My name is Daisy, and I'll be coordinating your call today. [Operator Instructions]

I would now like to hand over to your host, Amber Wohlfarth from Owens Corning to begin. Amber, please go ahead.

Amber Wohlfarth

Vice President of Investor Relations

Thank you, and good morning, everyone. Thank you for taking the time to join us for today's conference call and review of our business results for third quarter 2023. Joining us today are Brian Chambers, Owens Corning's Chair and Chief Executive Officer; and Todd Fister, our Chief Financial Officer.

[Operator Instructions] Earlier this morning, we issued a news release and filed a 10-Q that detailed our financial results for the third quarter 2023. For the purposes of our discussion today, we have prepared presentation slides that summarize our performance and results, and we'll refer to these slides during this call. You can access the earnings press release, Form 10-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 2 before we begin, where we offer a couple of reminders. First, today's remarks will include forward-looking statements based on our current forecast and estimates of future events. These statement are subject to risks, uncertainties and other factors that could cause our actual results to differ materially.

We undertake no obligation to update these statements beyond what is required under applicable securities laws. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent risks and uncertainties affecting such forward-looking statements.

Second, the presentation slides in today's remarks contain non-GAAP financial measures. Explanations and reconciliations of non-GAAP to GAAP measures may be found in the text and financial tables of our earnings press release and presentation, both of which are available on owenscorning.com. Adjusted EBIT is our primary measure of period-over-period comparisons, and we believe it is a meaningful measure for investors to compare our results.

Consistent with our historical practice, we have excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT and adjusted earnings. We adjust our effective tax rate to remove the effects of quarter-to-quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share. We also use free cash flow and free cash flow conversion of adjusted earnings as measures helpful to investors to evaluate the company's ability to generate cash and utilize that cash to pursue opportunities that enhance shareholder value.

The tables in today's news release and the Form 10-Q include more detailed financial information. For those of you following along with our slide presentation, we will begin on Slide 4. And now, opening remarks from our Chair and CEO, Brian Chambers. Brian?

Brian D. Chambers

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OWENS CORNING FQ3 2023 EARNINGS CALL | OCT 25, 2023

President, CEO & Chair

Thanks, Amber. Good morning, everyone, and thanks for joining us today. I'd like to begin by welcoming our new Chief Financial Officer, Todd Fister, to our call this morning. Some of you had a chance to hear from Todd in his most recent role as President of our Insulation business. He brings more than 25 years of financial, operational and strategic experience to his new role, along with deep industry knowledge and valuable customer perspective. Todd and I have worked closely together over the past several years, and I look forward to continuing to partner with him as our CFO.

During our call this morning, I'll start with a broad overview of our performance, including some of the key focus areas driving our success. Todd will then provide further detail on our third quarter results, and I'll come back to discuss what we are currently seeing in our markets and our near-term outlook.

Overall, Owens Corning delivered another strong quarter as our global teams continued to execute at a high level in response to dynamic market conditions. The sustained quality and consistency of our performance reflects the strength of our team, our market positions and our strategy. I'll speak more about this shortly. But first, I'll begin our review of the quarter, as always, with our safety performance.

At Owens Corning, our commitment to safety is unconditional. During the third quarter, we maintained a very safe environment with an RIR of 0.66, with half of our global locations operating injury-free for a year or more. Financially, we delivered revenue of $2.5 billion, similar to third quarter 2022, with adjusted EBIT of $518 million, up 6% year-over-year and adjusted EBITDA of $644 million, resulting in an adjusted EBIT margin of 21% and adjusted EBITDA margin of 26% for the company in the quarter. In addition, the cash flow of $581 million in the quarter. And consistent with our capital allocation strategy, we returned $187 million to investors through dividends and share repurchases.

Throughout the quarter, each of our segments continue to perform well. In Roofing, the strength of our contract network and product offering drove increased demand with a heightened storm season. In Insulation, we saw sequential stability in our technical and global businesses, while experiencing some near-term buying impact in our residential business as demand track more closely to lag housing starts. And in Composites, as expected, we saw a slower market demand and softer pricing for our glass reinforcement products, while input costs continued to moderate.

With slowing demand, we took additional actions to manage our inventories. Our ongoing ability to deliver strong results within these market conditions demonstrates the progress we've made in structuring our company to generate higher, more resilient earnings through the cycle. This improved level of performance is a result of strategic choices we've made and the operating initiatives being driven by our global teams to more fully leverage our enterprise capabilities.

From a commercial perspective, we continue to operate with a focus on helping our customers win and grow in the market with innovative products, unique sales and marketing capabilities and our distinct brand. We've also enhanced our pricing acumen through the use of digital tools, shifted our product and customer mix to higher-end segments and accelerated our product innovation. For example, over the past 2 years, we have increased investments in R&D by roughly 15% annually to advance our material innovation and development capabilities. Through the first 3 quarters of 2023, our unique product and process innovation has translated to the launch of 25 new or refreshed products across all 3 of our businesses.

Operationally, we have increased our manufacturing performance and operating efficiencies through a combination of network optimization moves, new process innovations and productivity initiatives. This ongoing work is increasing the throughput of our existing assets and improving our margins. We are also making targeted production investments in each of our businesses to increase our capacity to meet the growing demand for our building and construction products.

Over the past few years, we have announced a glass nonwoven plant expansion and new coating line and our Fort Smith, Arkansas composites location; a new FOAMULAR NGX insulation plant in Russellville, Arkansas; a new laminate

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OWENS CORNING FQ3 2023 EARNINGS CALL | OCT 25, 2023

manufacturing capacity at our Medina, Ohio roofing plant. All of these strategic additions are expected to come online between early 2024 and the end of 2025, providing additional capacity to further strengthen our current market positions.

As we look at additional opportunities to grow, we will continue to be disciplined operators, focusing on markets and product lines where we can build leading positions through our market knowledge, material science capabilities and manufacturing expertise. Overall, through our investments and focused execution, we have structurally improved the margin profile of the company and increased our ability to generate significant operating and free cash flow. Our capital allocation strategy continues to prioritize maintaining an investment-grade balance sheet while investing in organic growth and productivity; acquisitions that leverage our unique material science, manufacturing and market expertise; and returning approximately 50% of free cash flow to shareholders over time through dividends and share repurchases.

Over the past 2 years, given the strength of our operations and confidence in future performance, we have doubled our dividend. And over the past 4 years, we have bought back approximately 20% of our outstanding shares. Linking all of these choices, investments and operating priorities together is our enterprise strategy, which we launched 2 years ago. It focuses on strengthening our position in core products and markets, expanding into new product adjacencies and developing more multi material and prefabricated solutions. The result is a company that is well positioned to outperform prior cycles with opportunities for continued growth.

Now before I turn it over to Todd, I'd like to provide an update on another key performance driver, sustainability, which remains core to who we are and what we do at Owens Corning. In September, Owens Corning joined the European Alliance to Save Energy as the newest partner in its mission to advance energy efficiency and contribute to a more sustainable Europe. We look forward to leveraging this new membership to strengthen our partnership with key stakeholders in the region and share knowledge and best practices on sustainability topics across industries.

In addition, we recently announced 2 other sustainability-related developments. Within our Roofing business, we are advancing a pair of initiatives aimed at recycling shingles. The first effort involves deconstructing waste shingles to reclaim 100% of component materials. A recycling pilot, we began with our partners less than a year ago, has now been proven at scale, positioning us to begin plant trials to incorporate the extracted materials into the development of new prototype shingles.

A second initiative focused on recycling shingles into asphalt pavement is also progressing. We've partnered with the National Center for Asphalt Technology to generate life cycle assessment data on shingle use in pavement. We believe the results will provide asphalt contractors with a clear value proposition to incorporate recycled shingles into their paving mixtures, which can lower the carbon footprint while maintaining road performance. Together, these initiatives support our goal of recycling 2 million tons of shingles annually in the U.S. by 2030 and our broader ambition to create a circular shingle economy and divert shingle waste from landfills. We look forward to providing further updates as these programs move forward.

And finally, Owens Corning was honored to again place in the Top 10 of the 100 Best Corporate Citizens List and first within our industry category. This is the sixth year in a row we have ranked in the Top 10. This list recognizes outstanding environmental, social and governance performance and transparency among the largest publicly traded U.S. companies. This achievement is particularly meaningful as it reinforces the work we do and the way we do it. It directly speaks to the commitment of our 19,000 employees that support our mission to build a sustainable future through material innovation.

With that, I will now turn it over to Todd to discuss our financial results in more detail. Todd?

Todd W. Fister

Executive VP & CFO

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OWENS CORNING FQ3 2023 EARNINGS CALL | OCT 25, 2023

Thank you, Brian, and good morning, everyone. I'm excited to be on the call with you today. I've met some of you as Insulation President and look forward to engaging with all of you as CFO. During my time leading Insulation, I worked closely with Brian and our management team as we built the enterprise strategy we shared at our 2021 Investor Day. Over the last few years, I've been executing that strategy to drive structural marginal improvements in insulation, resulting in a stronger and more resilient business. I am thrilled to continue to deliver on that enterprise strategy as CFO.

I'd now like to turn to Slide 5 to discuss the results for the third quarter. As Brian mentioned, we delivered a strong quarter with consolidated net sales of $2.5 billion, in line with the same quarter last year. Adjusted EBIT of $518 million and adjusted EBITDA of $644 million were both 6% higher than the same quarter last year. Overall, we continue to realize the benefit of positive pricing, which tempered the revenue impact of lower volumes in 2 of our segments.

In addition, overall input material and delivery costs were deflationary in the quarter. This, along with ongoing commercial and operational execution, resulted in adjusted EBIT margins of 21% and adjusted EBITDA margins of 26%. Net earnings attributable to Owens Corning for the third quarter were $337 million or $3.71 per diluted share compared to $470 million or $4.84 per diluted share in the same quarter of 2022. The difference was driven primarily by a $130 million gain on our investment in FiberTEK in the third quarter of 2022. Adjusted earnings for the third quarter were $377 million or $4.15 per diluted share compared to $351 million or $3.61 per diluted share in the same quarter of 2022.

Slide 6 shows the reconciliation between our third quarter 2023 adjusted and reported EBIT. For the quarter, adjusting items totaled approximately $55 million and are excluded from our third quarter adjusted EBIT. They include $41 million of charges associated with our ongoing cost optimization and product line rationalization actions, and a $14 million charge related to the recall of certain marine insulation products sold by our Paroc subsidiary, which was initially disclosed in Q2.

Turning to Slide 7. I will comment on our cash generation and capital deployment. The strength of our earnings, along with continued discipline around management of working capital, operating expenses and capital investments, generated free cash flow of $581 million for the quarter. Capital additions for the third quarter were $110 million or 4.4% of revenue, up $16 million from 2022. We remain focused on reducing our capital intensity over time through productivity and process innovations. As a result, our return on capital was 20% for the 12 months ending September 30, 2023.

At quarter end, the company had liquidity of approximately $2.4 billion, consisting of $1.3 billion of cash, and $1.1 billion of availability on our bank debt facilities. During the third quarter, we returned $187 million to shareholders through share repurchases and dividends, bringing the total year-to-date cash return to shareholders to $530 million. In the quarter, we repurchased 1 million shares of common stock for $140 million and paid a cash dividend totaling $47 million. Our capital allocation strategy will remain focused on generating strong free cash flow, returning approximately 50% to investors over time and maintaining an investment grade balance sheet, while executing on our business strategies to grow the company.

Now turning to Slide 8. I'll provide more details on the performance of each of the businesses. The Roofing business delivered another great quarter with revenue growth of 8% and record EBIT. Sales in the quarter were $1.1 billion. Overall volume was up versus last year with a strong attachment rate for our components products. In addition to higher volume, favorable mix and positive price realization drove the year-over-year increase. In the quarter, the U.S. asphalt shingle market on a volume basis was up 14% compared to the prior year, driven by higher levels of storm activity. Our U.S. shingle volumes trailed the market, primarily due to our continued low levels of inventories throughout Q3 and strong demand in prior quarters. For the quarter, EBIT was $343 million, up $114 million versus last year. The EBIT increase was primarily due to positive price cost, higher volumes and favorable mix. We continue to see input costs moderate in the quarter. All of this resulted in EBIT margins of 32% and EBITDA margins of 33% in the quarter.

Now please turn to Slide 9 for a summary of our Insulation business. The Insulation business delivered strong third quarter margins on lower revenue. Q3 revenues were $913 million, a 5% decrease from the third quarter of 2022, with mid-teen EBIT margins. In Technical & Global, revenue was down slightly year-over-year. Positive price and favorable

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OWENS CORNING FQ3 2023 EARNINGS CALL | OCT 25, 2023

mix primarily in Europe were more than offset by lower volumes tied to the overall weaker macro environment versus prior year. Additionally, the sale of our Insulation operations in Russia contributed to the year-over-year revenue decline. North American residential Insulation revenue was down as expected. Volumes were down as demand track closer to lagged housing starts. Insulation EBIT for the third quarter was $150 million, down $23million compared to 2022. Year- over-year, the impact of lower volumes, planned maintenance downtime and production investments were partially offset by realization of previously announced pricing actions and deflation from input cost and delivery. Overall, Insulation delivered EBIT margins of 16% and EBITDA margins of 22% in the third quarter.

Slide 10 provides an overview of our Composites business. In the third quarter, the Composites business continued to perform well despite the weaker macro environment for glass reinforcements. Sales for the quarter were $567 million, down 11% compared to the prior year. The decreased sales resulted primarily from lower volumes and overall negative price as positive contract price was more than offset by negative spot price in glass reinforcements.

Within Composites, while overall revenues were down, we saw growth in higher value building and construction products like nonwovens and OC structural lumber. EBIT for the quarter was $80 million, down $46 million from Q3 2022. The EBIT decline was primarily due to lower volumes and associated production downtime as we maintain discipline around inventory. We continue to experience price pressure in the quarter and had slightly negative price cost as we saw another quarter of inflation moderating and deflation in transportation cost. Overall, Composites delivered 14% EBIT margins and 22% EBITDA margins for the quarter.

Slide 11 summarizes our full year 2023 outlook for key financial items. General corporate expenses are expected to be at the high end of our prior range of $215 million to $225 million, and interest expense is estimated to be in the range of $70 million to $80 million. We continue to expect our full year effective tax rate to be 24% to 26% of adjusted pretax earnings, and we expect our cash tax rate to be similar to the effective tax rate of 24% to 26%. This is down from our prior outlook of 26% to 28%. Finally, our outlook for capital additions is unchanged at approximately $520 million, which is expected to be roughly in line with depreciation and amortization now estimated to range between $510 million and $520 million.

Now please turn to Slide 12 and I'll turn the call back over to Brian to further discuss our outlook. Brian?

Brian D. Chambers

President, CEO & Chair

Thank you, Todd. Our third quarter results continued to demonstrate the sustained quality and consistency of our enterprise earnings. As we move into the fourth quarter, we expect to continue to face a very dynamic market, with the impact of higher interest rates and ongoing geopolitical tensions resulting in slower global economic growth. And looking at our end markets, we continue to see good opportunities in most of our building and construction markets as we finish the year, with increasing pressure in some of our industrial and international markets. We expect U.S. Roofing demand to remain robust driven by storm activity through the first 3 quarters. And many of the key verticals within our nonresidential building and construction businesses in the U.S. and Europe to remain relatively stable.

Overall, for the company, we expect our performance in Q4 to result in net sales slightly below prior year while generating mid-teen EBIT margins. Now, consistent with prior calls, I'll provide a more detailed business-specific outlook for the fourth quarter. Starting with Roofing. We expect revenue to be up mid- to high single digits. We anticipate our volumes to be up mid-single digits, but would expect to trail ARMA market shipments in the quarter due to our strong performance in Q4 of last year.

In the quarter, we expect to realize price from our previous announcements made this year and maintain positive price costs as we finished the year. Consistent with prior years, we also plan to take needed downtimes for maintenance and productivity improvements. Overall for Roofing in the fourth quarter, we anticipate generating EBIT margins of mid- to high 20%.

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OWENS CORNING FQ3 2023 EARNINGS CALL | OCT 25, 2023

Moving on to our Insulation business. We expect revenue to be down mid-single digits versus prior year. Positive price realization, along with favorable mix and currency, are expected to be more than offset by lower volumes. In Technical & Global, we expect revenue to be relatively flat versus prior year. Continued price realization resulting from previously announced increases, which we began to anniversary in Q3 and favorable mix in currency, are expected to be offset by lower volumes tied to the broader macro environment in Europe. We also anticipate softer demand in North America and will realize the last quarter of impact from the sale of our Russian operation. In our North American Residential Insulation business, we anticipate relatively stable volumes sequentially but expect lower demand in the quarter versus prior year as we continue to track closer to lagged housing starts.

For the overall Insulation business, we expect input materials to be inflationary, resulting in another quarter of positive but narrowing price cost year-over-year. Given all this, we expect to generate mid-teen EBIT margins for Insulation in Q4. In Composites for the fourth quarter, we expect revenue to be down high single digits versus prior year, with volumes down versus the fourth quarter last year and price becoming a bigger headwind in the quarter. The year-over- year comparison will also be impacted by mix similar to what we saw in Q3 and last year's exit and sale of the Russian operation. We anticipate Composites pricing will be negative, driven by price declines in Asia that have begun to impact other regions. While we expect the net impact of input and delivery cost deflation to be similar to what we saw last quarter, we anticipate price cost will remain a headwind as we exit the year.

Given the slower demand environment in glass reinforcements versus prior year, we will take additional actions to balance our production to current demand levels as we evaluate market conditions and manage inventory. While we continue to see good demand in pricing for our downstream glass non wovens and structural lumber products, we expect the near-term market outlook for glass reinforcements will remain challenging. Overall, we anticipate margins in the fourth quarter for Composites will be in the mid- to high-single-digits. With that view of our businesses, I'll close with a few enterprise comments.

As I shared at the start of the call, over the past few years, we have made several strategic choices and operational investments to leverage our enterprise capabilities and consistently deliver more resilient earnings. Moving forward, we remain well positioned to capitalize on several key secular trends to create new growth opportunities and broaden our market reach, including the increased level of investments being made in residential living spaces; changing construction practices, driving the need for more multi material systems; and the demand for more sustainable building solutions. And as Todd mentioned, we have built an incredibly strong balance sheet, which we will utilize as we continue investing to strengthen the long-term performance of the company.

We remain committed to a capital allocation strategy with a balanced approach focused on organic growth and productivity investments, acquisitions that complement our strategic priorities and returning approximately 50% of free cash flow to shareholders over time through dividends and share repurchases. As we finish 2023 and turn towards 2024, and we will remain focused on delivering strong financial results and positioning the company for long-term success. With that, we will now open the call up for questions.

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OWENS CORNING FQ3 2023 EARNINGS CALL | OCT 25, 2023

Question and Answer

Operator

[Operator Instructions] Our first question today is from Stephen Kim from Evercore.

Stephen Kim

Evercore ISI Institutional Equities, Research Division

Good results, and thanks for all the commentary. My question is going to be a little more general about market share and margins. There's been a lot of volatility in ARMA shipments relative to your roofing volumes quarter-to-quarter. But overall, industry volume and pricing has been strong in Roofing. And then meanwhile in Insulation, you've taken a lot of capacity actions but pricing has also been strong, and it sounds like there's pent-up rebuild activity needed there. So I'm hoping you can speak to kind of market share versus margins generally across your businesses? And so looking back over the past few years, can you assess for us how your market share has trended in your view, particularly in Roofing and Insulation and how you think about market share versus margins going forward in those 2 segments?

Brian D. Chambers

President, CEO & Chair

All right. Thanks, Stephen. Appreciate the comments and the questions. Let me get started. I'll maybe talk a little bit about Roofing, and then I'll kick it to Todd to talk about Insulation. I think in general over the last few years, we've been very pleased with both our market share and our margins in our Roofing and our Insulation segment. So I think we work constantly to balance that approach in terms of the market where we want to continue to work with our customers, help them grow and win in the market. And that generally results in better volumes for us. And ultimately, we like that to lead to higher market share for our products. And so that's always a continued focus, but it always starts with an approach to how can we help our customers win and grow in the market. And the result of that being gains in market share, and the results of that being increases in margins because we're helping them be more successful in the market. So that's our general approach.

I think overall, in Roofing, I'll walk through the last few years. We've been very pleased with the performance of our Roofing business. We delivered another great quarter. But a lot of that work has been focused on commercially how we position the product line to succeed longer term. We've got a great duration product line, continue to invest in innovation around new colors, new styles. We've been growing our Roofing components business as part of that, and that's part of the mix related margin gains we're seeing in the business as we continue to grow share in that category. And we're seeing contractors increase their attachment rates and so multi material systems on the roof, we think that continues to grow. That also comes with a very strong margin, very consistent with our roofing margins. That's good for us. It's good for our distributors. It's good for our contractors as they sell into the home.

So we see and keep working on innovation and opportunities commercially that we think are going to continue to position us and put us in a position to continue to balance those, too, but also to see gains as we move forward. I think some of the near-term-- our performance relative to ARMA. Again, I think we got to step back and take a longer view. Our performance in Roofing has been very consistent over the last 3 years. And last year, in the back half of the year, we saw industry shipments start to decline a little bit, Our volumes stayed strong, solid because of that commitment to our customers, our contractor growth strategy, our components growth strategy. All of that resulted in fairly constant volumes and good share.

So we're seeing a little bit of that come back in the last couple of quarters with the increased storm demand. We're still on extended cycles. And so the last couple of quarters, we're a little bit under the ARMA shipments but over the long

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