Owens Corning CEO Michael Thaman told analysts in a conference call Thursday that the company didn’t heed early warnings signs that a mild winter had front-loaded demand for roofing products and instead it participated in volume-related discounting that thinned margins and made its roofing segment unable to turn a profit as demand fell off.
“We sold an awful lot of shingles at deep discounts, and in doing that, we gave our distribution partners an incentive to want to buy a lot of shingles and try to carry low-cost inventory deep into the year,” Thaman said. “We pushed too much production in the first quarter from our standpoint, and we passed along margin, as opposed to lower asphalt costs. What we're seeing in the industry today is it would be our goal to go back to the central tenets of what we're trying to achieve with winter buys.”
In previous years the company promoted winter buying in order to keep production levels consistent year-round, take advantage of lower asphalt prices, and ensure that product is moving through the supply chain to capitalize on the potential for an early roofing season, Thaman said.
“There have been three good reasons why we've done winter buys, and I would say from Owens Corning's perspective, this year we went zero for three,” Thaman said. He cited higher-than-usual asphalt costs; the company’s producing and selling more than one-fourth of its annual demand in the first quarter; and its putting excessive low-cost inventory in the market as its primary faults, combined with a hot summer that kept many roofing contractors off the market without deferring sales past the company’s mid-September price increase.
The problem, Thaman said, was not with the discounts so much as it was with the saturation of the 2012 winter buying market. “It created a lot of distortions in the market, from our estimation, none of which were particularly good,” Thaman said. “So the discipline issue will be … our position, which is we think winter buys are a nice incentive for our distributors, destocking some inventories where we can pass on some reduced asphalt costs through and give our distributors some incentives to help us keep our plants running and be ready for the spring selling season.”
Third-quarter roofing segment earnings before interest and taxes were $83 million, down $73 million from a year earlier while sales dropped 27% to $471 million for the same period. High asphalt prices and low demand held back production capacity, Thaman said, despite improvements in pricing during the quarter. Company-wide earnings before interest and taxes were $59 million compared with $177 million for the same period a year ago, while sales slid 13.6% to $1.27 billion for the same period. Earlier this month the company adjusted its targeted annual EBIT to between $280 million and $310 million following its August announcement that downgraded the outlook to between $360 million and $420 million, in both cases due to lagging sales in its roofing and composite divisions.
“It is a competitive market,” Thaman said. “And if, in fact, we see aggressive winter buys in the market this year, we'll really have no choice but to match them because on a variable margin basis, you really can't afford to let volume and share slip out of your business in the first quarter. You can't make it up for the remainder of the year. It's just lost opportunities. So it is going to require that we're able to go and get back to a stance in the market where winter buys go back to something that resembles more of their historical objectives and will look much different than what we saw in the first quarter of this year.”