Fitch Upgrades Owens Corning's IDR to 'BBB+'; Outlook Stable

Published: 2025-02-06 04:39:11 ET OC

Fitch Ratings has upgraded the ratings of Owens Corning, including the company's Long-Term Issuer Default Rating (IDR), and senior unsecured notes and revolving credit facility ratings, to 'BBB+' from 'BBB'.

The Rating Outlook is Stable.

The upgrade reflects Owens Corning's improved business profile and deleveraging following the $3.9 billion acquisition of Masonite International Corporation in May 2024. Owens Corning's ratings reflect the company's leading market position in all of its major businesses, strong brand recognition, balanced product, market and geographic diversification, and strong profitability and FCF generation.

Risk factors include market cyclicality and exposure to volatile raw material costs. The company has a disciplined capital allocation policy but may temporarily operate at the upper end of its leverage target for opportunistic acquisitions.

Key Rating Drivers

Strong Credit Metrics: Owens Corning's credit metrics are appropriate for 'BBB+' rating, including pro forma EBITDA leverage of about 2x for the LTM ended Sept. 30, 2024. Fitch expects EBITDA leverage to remain between 1.7x and 2.0x in the next few years. Fitch does not envision debt reduction in the coming years as leverage is forecast to settle below management's target of 2.0x-3.0x. CFO-capex/debt is forecast to settle between 21%-22% at YE 2024, 18%-19% at YE 2025 and 20%-21% at YE 2026.

Product Portfolio: Fitch believes the Masonite acquisition adds some strategic value, particularly given the relatively modest enterprise value multiple of about 8.6x. The acquisition expands Owens Corning's overall footprint and Masonite's leading position in the North America doors market enhances the company's position in the building products sector. Although there is little overlap in the manufacturing processes of doors and Owens Corning's existing product offerings, the company could leverage supplier and distribution networks for sourcing and cross-selling.

Owens Corning is also reviewing strategic alternatives for its global glass reinforcements business, which generates about $1.3 billion of annual revenues. This business supplies a wide variety of glass fiber products for applications in wind energy, infrastructure, industrial, transportation, and consumer markets. The review is consistent with Owens Corning's strategy to focus on building and construction materials. Fitch's rating case forecast does not assume the sale of this business segment, but Fitch believes the upgrade remains appropriate even if the business is divested.

Strong Profitability: Owens Corning's EBITDA and FCF margins are strong relative to its investment-grade building products peers. Fitch expects Owens Corning's EBITDA margin to be around 23.5%-24.5% in 2024, and 21.5%-22.5% in 2025 and 2026, which is above the high-teen EBITDA margin percentages reported between 2017 and 2020. Fitch believes productivity gains and economies of scale will allow the company to sustain higher margins than historically reported.

Consistent FCF: FCF margins are forecast to settle between 5.5% and 6.5% in 2024-2026, lower than the low-double digits reported between 2020 and 2023. FCF is forecast to be lower due to elevated capex and higher dividends. Fitch's rating case forecast assumes capex as a percentage of sales of 7%-7.5% in 2025 and 2026, compared with 4.5%-5.5% between 2020 and 2023. The higher capex in the next few years supports capacity expansions, including investments in its U.S. fiberglass insulation network through a new line. The company also recently increased its quarterly dividend by 15%.

Diversification: Owens Corning has well-balanced geographic and end-market diversity. About 70% of revenues come from the residential construction market, although Fitch estimates that more than two-thirds is directed to the more stable repair and remodel segment. The commercial construction market and industrial sector account for 20% and 10% of revenues, respectively. This diversity provides some cushion against regional or end-market downturns. The company's diversification is a credit positive relative to more U.S.-centric building products peers with concentrated exposure to particular markets or distribution channels.

Leading Market Position: Owens Corning has strong leadership positions in all of its core product offerings within its roofing, insulation, door and composites segments. Fitch believes that its leading market position and strong market share in core markets provide pricing power and shelf-space allocation from distribution channels. These advantages should lead to higher and more stable operating margins through the cycle.

Disciplined Capital Allocation: Owens Corning has a disciplined capital allocation framework. The company has at times increased leverage to pursue strategic acquisitions, but delevered the balance sheet with 12-24 months. Fitch expects the company to continue to evaluate acquisition opportunities. Management expects to return 50% of FCF to shareholders through dividends and share repurchases, although the company has tempered share repurchases in the past when leverage is elevated. Fitch expects FCF to be directed towards share repurchases absent acquisitions.

Derivation Summary

Owens Corning's credit metrics, including pro forma EBITDA leverage of about 2x, are in line with investment-grade peers, including PPG Industries, Inc. (BBB+/Stable) and The Sherwin-Williams Company (BBB+/Stable) and Masco Corporation (BBB/Stable), but stronger than Fortune Brands Innovations, Inc. (BBB/Stable).

Owens Corning is similar in size to Mohawk Industries, Inc. (BBB+/Stable), but has higher EBITDA margin and higher EBITDA leverage. Owens Corning is larger than Masco and Fortune Brands, but smaller than PPG and Sherwin-Williams. Owens Corning has modestly higher EBITDA margin and relatively more geographic, product and market diversification than Masco and Fortune Brands.

Key Assumptions

Revenues increase 12.5%-13.5% in 2024; 8%-9% in 2025 and 2%-3% in 2026;

EBITDA margin of 23.5%-24% in 2024 and 21.5%-22.5% in 2025 and 2026;

EBITDA leverage at or below 2.0x at the end of 2024, 2025 and 2026;

-- (CFO-capex)/debt of 21%-22% in 2024, 18%-19% in 2025 and 20%-21% in 2026;

FCF margin of 5.5%-6.5% in 2024, 2025 and 2026.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Fitch's expectation that EBITDA leverage will sustain above 2.3x;

Fitch's expectation that (CFO-capex)/debt will sustain below 20%;

Adoption of a more aggressive capital allocation policy, including debt-funded share repurchases.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Fitch's expectation that EBITDA leverage will be consistently below 1.8x, supported by management adopting more conservative financial policies;

Fitch's expectation that (CFO-capex)/debt will sustain above 25%.

Liquidity and Debt Structure

Owens Corning has robust liquidity, with $499 million of cash as of Sept. 30, 2024 and $996 million of borrowing availability under its $1 billion revolving credit facility that matures in March 2029. The company also has $299 million of borrowing availability under its $300 million accounts receivable securitization facility that matures in February 2025.

Owens Corning has a well-spread debt maturity schedule, with $400 million maturing in 2026 and $500 million coming due in 2027. Fitch expects the company to refinance these maturities. The company repaid $400 million of senior notes that matured in Dec. 2024.

Issuer Profile

Owens Corning is a global building and construction materials leader with four integrated businesses: roofing, insulation, doors and composites.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.