This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: Greetings. Welcome to the Armstrong Flooring first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the call over to your host, CFO, Amy Trojanowski. Please go ahead.
spk05: Thank you for joining us today for Armstrong Flooring's first quarter 2021 earnings conference call. I'm joined this morning by our president and CEO, Michelle Vermette. We trust that you have seen our press release this morning on the investor section of our website at www.armstrongflooring.com. During this call, we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong flooring, please review our SEC filings. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement beyond what is required by applicable securities law. In addition, our discussion of operating performance will include non-GAAP financial measures within the meaning of SEC Reg G. A reconciliation of these measures to the most directly comparable GAAP measures is included in the press release. I'll now turn the call over to Michelle.
spk02: Thank you, Amy, and good morning to everyone on the line. I will start by providing a Q1 business update as well as some color on our transformation progress. Then Amy will share additional details on our financial results. Overall, the positive momentum in our business continued into the first quarter, and I'm pleased with the ongoing transformation of Armstrong Flooring. Twelve months ago, we introduced our strategic roadmap to transform and modernize our business. And soon thereafter, the world entered the early stages of global COVID-19 pandemic. On last quarter's earnings call, we discussed how our team members overcame the challenges brought on by the pandemic to achieve significant progress against the various facets of our plan during 2020. I am pleased to report today that we continue to make significant progress against our goals during the first quarter of 2021. In the first quarter, we delivered 7% top-line growth. which reflected contribution from each region where we operate. In North America, our results reflect growth in residential remodel and new construction, while commercial sales were flat and sales to residential national accounts were down due to prior year program launches that did not repeat in 2021. Internationally, our markets are recovering at a faster pace led by strong performance in China and Australia. Operationally, our improvements resulting from maintenance and reliability initiatives are providing us with overall increased uptime and throughput at our plants. That said, these improvements were tempered during the quarter by the impact of winter storm Uri, which closed three of our plants in the Midwest and South for approximately three weeks in February and early March. along with disruptions in the supply of key raw materials. Amy will discuss this in greater detail in the call. Overall, on the residential side, demand has been supported by impressive single-family housing starts, growth of 41% year-over-year in March, which came in well ahead of initial industry expectations. On the commercial end, the ABI index closed out at 55.6 in March, reflecting continued sequential improvement. Our new products are also continuing to receive positive recognition. We received top-flowing awards from Builder Magazine in three categories, and our Empower product received four 8X awards for design excellence. Heading into Q2, we're seeing strong orders across the board pointing to continued recovery from the pandemic. Now, I'd like to give an update on our transformation progress. As you recall, we introduced our transformation plans in March 2020 with a focused strategy to transform and modernize our business as we look to become a leaner, stronger, and more profitable company over the long term. On slide six, we've highlighted some of the key projects across each of our three strategic pillars that we've advanced over the last 12 months. All of our teams have been executing well from the frontline manufacturing team to the sales team and our functional support teams. Everyone has been focused on executing our strategic initiatives and cementing the foundation of our growth as we expand our customer reach, simplify our products and operations, and strengthen our core capabilities. Let's talk about some of the first quarter 2021 progress. Please turn to expand on slide seven. In the first quarter, we continue to make additional strides forward with our go-to-market strategy. As we discuss through 2020, we are investing in our customer relationships and adding new members to our sales, marketing, and customer service team so we can continue to improve our service to our customers. We're pleased to report that we added more than 15 new sales professionals during the first quarter to enhance customer reach, bringing the total additions to more than 40 in the last 12 months. We also introduced the Armstrong Flooring ProLine, which will be available for sales to our customers in the builder and multifamily channel in the second quarter of this year. Initial feedback on our ProLine has indicated solid interest in these products, which have a refreshed palette, texture, and style profile. In addition, we have been working closely with our distribution partners to develop an exclusive line of flooring under the Armstrong Flooring Signature brand, which will be available in the second half of the year. We're continuing to develop in-demand products for our hospitality channel as well, through the Rest and Refuge product line that was introduced this year. We're excited by the progress we're making in this channel, recognizing it will take some time to build and establish new relationships, with our customer targets in this segment. That said, our ongoing dialogues with several national chains in the hotel space continue to provide us with confidence in our opportunities and our product portfolio is receiving positive feedback. Furthermore, in Australia and China, we've seen several nice wins in the healthcare channel, which is another target vertical for us. As one such example, we are excited to be selected to provide flooring for a large renovation project at the Prince of Wales Hospital in Sydney, Australia. Turning to slide eight, our journey to simplify our portfolio in our organization took several significant steps forward in the first quarter. The completion of our Southgate California property sale in March was the culmination of months of work by our teams. Our production teams worked tirelessly on the enablement of production in Kankakee to absorb the Southgate tile production volume. And we had a dedicated team that handled our production closure at the Southgate site. The monetization of that asset could not have been completed without focused attention to detail to successfully execute on the simplification initiatives we initially envisioned. In conjunction with the Southgate sale, we opened our new West Coast Distribution Center in LA to service our West Coast customers efficiently. On the manufacturing side, we're seeing increased productivity in our manufacturing facilities with the improvement we continue to make, including yield improvements along with improved equipment reliability and consistency across our facilities. We also saw increased throughput in our Kankakee Stillwater and Jackson facilities, which benefited productivity in the quarter, helping to partially offset some of the previously mentioned impacts of Winter Storm Uri, which closed these same facilities for up to three weeks in the quarter and disrupted supply of key raw materials. The third pillar of our transformation is strengthening our core capabilities If you could please turn to slide nine. I will discuss our Q1 progress on this front. Transforming and modernizing our capabilities continues to make us more efficient and easier to do business with. Last summer, we announced the planned move of our headquarters that will take place in mid-2021. The first step of this move was completed with the opening of our technical center in the late March. This unique facility will house our technical and R&D teams for the first time in our company history all under one roof. This facility brings a great collaboration in testing space that provides our teams with more opportunities to work together and create the innovative products and applications that our customers desire. We're looking forward to getting everyone to the new campus. and having all our teams collaborate in a modern and energizing space. Our transformation office is focused on enabling project management and oversight of our key initiatives and has recently added additional expertise focused on change management to ensure that our transformation efforts are sustained. Separately, we've continued to modernize our systems and processes improving production data in our ERP system, and improving organizational alignment in supply chain, customer service, and procurement. All these efforts combine to support our go-to-market initiatives in improving our customer experiences, while also delivering better information for decision-making among our teams. While there remains work to be done, all these key steps, among others completed in 2020 in ongoing initiatives, have firmly planted the foundation of our transformation plan. I remain confident they were on the right path forward. With today being Earth Day, on slide 10, we want to take a moment to reiterate that we are committed to transforming business while keeping sustainability top of mind. We know that responsible, sustainable business begins with respect for people and the environment. On our last earnings call, we discussed that Green Builder Media recently ranked Armstrong Flooring as number one in sustainability among 10 leading companies included in the flooring category. We were honored with this recognition. In fact, throughout our history, one of our core values has been to act responsibly by recycling waste and conserving resources whenever possible. In 2020, we added water meters in key locations throughout our manufacturing plants, to help quickly identify, locate, and repair underground water leaks. Hundreds of feet of old pipes were replaced or eliminated. Our efforts paid off as we were able to reduce our year-over-year water intensity, which is measured as water consumption per thousand square feet, a production by 17% compared to prior year. Today, our Global Sustainability Steering Committee, comprised of key senior leadership members, meets at least quarterly to discuss our sustainability improvements. Our manufacturing plants maintain an environmental management system in accordance with ISO 14001, which include continuous environmental performance targets. Several of Armstrong's foreign key goals on sustainability in 2021 include completing waste audits and mapping to drive towards zero waste facilities, publishing a GRI-compliant sustainability report, simplifying and expanding transparency certification on our flooring products, and bringing team members together to establish distributed accountability for sustainability. Notably, we also remain on track against our goals to reduce energy, water, and waste intensity across our footprint by 25% by the year 2025. We look forward to publishing our detailed 2020 SASB report in the coming months that will provide more detail on 2020 accomplishments in energy management, chemical management, and product lifecycle environmental impacts across our footprint. I'll now turn it over to Amy to discuss our financial performance and liquidity for the quarter.
spk05: Thank you, Michelle. I'll begin with a brief review of our financial performance on slide 12. First quarter net sales improved 7.4% versus 2020 and 5.1% versus 2019. In 2020, as you remember, we had strong performance in North America at the beginning of the quarter, and in 2021, we saw more improvement towards the back half of the quarter. This momentum at the end of the quarter, along with our open customer orders, points toward a continued recovery across our footprint. In China, sales improved substantially versus the prior year period, with improvement driven by recovery from the pandemic. We believe a portion of this increase is related to timing, with some sales being pulled forward in advance of our recent price increases in our Chinese market. North American sales were essentially stable, with sales of LVT in all channels improving versus the prior year. Sales in our residential national accounts were lower year over year due to initial product rollouts in the prior year quarter that did not recur in the first quarter of this year. Due to the size of our business, volatility in residential national account sales will happen quarter to quarter based on the timing of these new rollouts. Globally, our revenue from commercial channels was up double digits versus the prior year, while residential channels were essentially flat. As Michelle mentioned previously, the impacts of Winter Storm Uri closed several of our manufacturing facilities for approximately three weeks in the first quarter and disrupted the supply of key raw materials throughout our supply chain. Into the second quarter, availability of raw materials continues to improve, However, we continue to experience headwinds from higher raw material and shipping costs compared to the prior year. Global marine shipping remains very volatile due to port congestion and the Suez Canal ever given incident. We announced sales price actions in the first quarter and additional increases have been announced for the second quarter. These increases will cover a broad range of our products. that we expect to help mitigate higher inflation and realize raw material pricing. On slide 13, adjusted EBITDA was a loss of $7.6 million compared to a loss of $1.6 million in the prior year. Raw material increases and higher domestic and ocean freight were a $6.9 million headwind in the quarter, including about $2 million of production inefficiencies caused by the impact of Winter Storm URI. We also had some duplicate costs in the quarter related to the closure of the Southgate facility in conjunction with the opening of our West Coast Distribution Center in Los Angeles. We are finalizing the remaining customer shipments from Southgate this month, so we will continue to see related costs in the second quarter as we wind up our activities there. costs were $1.5 million higher than the prior year, but sequentially lower by $2 million. Factoring in our upcoming product launches and the newly onboarded sales and marketing team members, we expect SG&A spend will be sequentially higher in the remaining quarters of the year. Finally, turning to slide 14, our liquidity position improved significantly following the sale of our Southgate facility. which contributed net cash of $65 million to our operations for future investments. Our operating cash flow was a use of 28 million compared to a cash use of 17 million in the prior year. The first quarter is normally a heavy seasonal outflow based on our usual working capital spend. During the quarter, higher receivables were a 15 million use of cash as we adjusted to simplified payment terms and stronger sales in the back half of the quarter, while higher inventories represented a $2 million use of cash. These increases were offset by higher payables in the same period. Following the Southgate sale, we made a required long-term debt prepayment of $20 million and repaid borrowings outstanding under our revolving credit agreements as well. At March 31st, 2021, our net debt was $36 million compared to our $66 million net debt position at December 31, 2020. We have available liquidity of $104 million, providing ample liquidity to fund our transformation initiative. I will now turn the call to Michel for his closing remarks.
spk02: Thank you, Amy. I'd like to thank the Armstrong flooring team for their strong performance and dedication to our plan during the first quarter. I'm pleased with our progress and I remain optimistic about our future. Our transformation is underway and we're continuing to deliver on the commitments we made to you just over a year ago. Commitments that we've worked on steadily through the midst of the global pandemic and commitments to build a strong foundation for our business to expand, simplify, and strengthen our core capabilities. I have full confidence in our team members to continue to safely serve our customers in this rapidly evolving market while continuing to make incremental progress in our long-term value creation initiatives. Thank you again for joining us today. Operator, please open the lines for questions.
spk03: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Ken Zenner with KeyBank Capital Markets. Please go ahead.
spk00: Good morning, everybody. Good morning. Thank you for joining us. No problem. I wonder if you could just kind of update us on, you know, the pricing announcements that you have in place, you know, and how that might vary, obviously, let's say the U.S. residential versus international, and how that's related to, you know, the cost inputs that you're seeing in terms of how the cadence of that should unfold through the year. That's my first question.
spk02: Well, we announced a price increase in December, and it's starting to phase in in the middle of the first quarter. But with the winter storm, we had, you know, it definitely impacted our raw materials across North America and also globally. The combination of the recovery from the pandemic and basically the limited availability of the raw materials and definitely some producers losing some capacity for extended weeks has created an inflationary situation. So we announced a second price increase at the end of the quarter, and that will phase in in the second. But we expect the first one to be pretty much be completed in the second quarter and the second one to be evolving through the second and eventually be fully implement the third. As you know, Some of these price increases take some time to go through through the contracts and definitely in commercial bids, there's a certain period of time to phase those in due to those commitments. But, you know, unfortunately, luckily the industry has been dealing with this for many years and has had a lot of practice. So it's more a question of when and dealing with it. And our customers are also understand the reality. So that's working through. And then the international one was announced at the same time, the second one. And we should see the benefit of that partially in the second and then start getting better in the third and the fourth.
spk00: Appreciate those details. Realizing COVID affected kind of your business transformation, everybody's life actually, in the last year. Could you kind of talk about how you know, your planned SG&A investments specifically and, you know, how those might be unfolding this year. I know you guys broadly have talked about it, but now that I want to say things are normalizing. But if you could just kind of update us on your tactical choices that you're making. Thank you very much.
spk02: Very good question. So as, you know, we were hopeful last year about this time to be investing in adding sales representation, engaging in the independent retailers with more product launches and displays. But naturally in the second quarter, basically no one won anybody in their stores. And to your point, we're trying to figure out, you know, what this, you know, how lengthy and how complex and what was the impact of COVID. So we definitely had to take a pause in our go-to-market strategy and reset it pretty much in the third quarter, and we started basically as we had a little more clarity in the marketplace. And now, to your point, things are definitely getting better. So we started hiring back in the fourth – hiring the go-to-market additions in the fourth in representation to call on independent retailers, on builders, and also making some additions also in key segments where gaps such as hospitality – We've made a significant increase in independent retailers in the first quarter to keep building upon that. And we also launched a series of new displays both in Sheet and Alterna in the first quarter. Did some of that in the fourth quarter. Also some new LVT displays with key buying groups such as NFA and others. So some of the things we were hoping to do really late summer last year or early summer last year, We started doing the fourth quarter and first quarter, and we're phasing through that process as we speak. So naturally the SG&A investment is commensurate with those investments going through, and that's what Amy was covering. Those will be reflected in the coming quarters, but naturally the sales should follow naturally as the program matures and people become more productive in the field.
spk06: Thank you very much.
spk02: Thank you.
spk03: Next question, Keith Hughes with Truett Securities. Please go ahead.
spk04: Thank you. Actually, this is Judy Merican for Keith Hughes. And if I could just follow up a little bit on the first question. On slide 13, you talked about the EBITDA impacts and the $4.9 million of higher raw material and other higher costs. You answered kind of about your question Thoughts about the price increases coming through the year. Do you think that $4.9 million, is that kind of the run rate for the year? And even though we've got the price increases coming, do you think maybe by the end of the year the pricing will offset those? Or is there anything else you can kind of add about those increased costs?
spk05: Sure. You know, the raw material costs and the increases are, frankly, coming extremely fast. and in some cases faster than we can implement pricing. As Michelle talked earlier, you know, a number of our contracts have, you know, set pricing for a period of time and we're limited in the window in which we can do those increases. That said, you know, we're managing the raw materials very carefully. there's been huge disruption, you know, across all of the supply chains for these materials. And as we look at it, you know, based on our information, we expect there to be continued increases in each quarter in raw materials this year based on, you know, the visibility that we have at this point. Obviously, that could change. It, you know, March was much steeper than February, and we've seen continued increases here in April. So we're trying to balance all of that and make sure that we have the right recovery. Freight has also been a headwind for us this year, both on ocean freight and the cost there for some of our imported materials, but then also on-ground transportation. availability, lanes, timing, and pricing have all been some headwinds that the teams have been managing through.
spk04: Okay, that's helpful. And if I could get one more question. You talked about on commercial, I think in global it sounds like that was doing better, but some of that was pull forward, price increases, but also in the U.S., Have you seen an increase in quotation activity in commercial or is this like project delays that are kind of resuming or anything else you could add there?
spk02: To your point, we're seeing more activity for sure in commercial. You saw the ABI's or I guess the architects are seeing some of the same things happening. We're seeing actually more transactional work also helping our commercial results. We augmented our business with a a new quick ship program and that has helped to take advantage of opportunities that things to your point that got pushed back or got deferred in prior periods. So some property owners are addressing that and refurbishing some of their properties. So the commercial business is definitely an improvement versus the fourth quarter. And I expect continued improvement in the second and third. So definitely, you can just see the activity, the conversation with the customers. There's still some sluggishness in commercial, but it seems to be there's definitely more and more conversations, project discussions. And to your point, some of the projects that have been on the sideline from an extended period of time are starting to come off. which we're excited to see.
spk06: Okay, great. Thanks. Thank you very much. Thank you.
spk03: Next question, Chris White with Thompson Research Group. Please go ahead.
spk01: Good morning, Michelle and Amy. Thanks for taking my questions. I wanted to continue on the commercial and market questioning. You said Q1 commercial was flat. You cited ABI strength. I'm wondering if you think you could actually see growth in the commercial market for Q2? Uh, and if so, how strong do you think the growth could be, uh, given some comps that were off pretty dramatically in 2020?
spk02: Well, to your point, I mean, the, the, the comps are making it, uh, we, we should definitely see growth for sure. Uh, definitely with the comps that we had in Q2. And I would expect that would be the case across the industry. Uh, so, um, Definitely, and also in our case with some of the things we're doing in our go-to-market and some of our programs we put in place, I expect those to help us through not only the market is getting better, but I think some of our initiatives are maturing that will help us in Q2 and Q3. I won't quote a specific number or range, but I definitely expect commercial to be a positive in the second and third quarter that can help us in and continue growing the business, which is our first and foremost goal in reestablishing the brand where it needs to be. And we're connecting with customers. We have more reach now than we significantly had last year. And as that comes through, as you know, the commercial takes business is one that has a longer sales cycle than the residential one. But I'm very positive with what the team's doing and how they're engaging with customers and I'm confident it will bear fruit in the coming quarters.
spk01: Thank you. And just digging down on that a little bit more, breaking commercial down by segment, I know that education and health care have been lagging recently. Are those the two sectors that you are seeing kind of the momentum coming back, or is it other sectors that you're kind of seeing the strengths?
spk02: We're definitely seeing more activity and more discussion on projects, both on education and health care, for sure. There's definitely some activity as we're getting engaged in hospitality now. As we mentioned in our remarks, you can tell that even the hospitality owners, the ones that have the funding to do it, are really looking at refurbishing their properties, make sure they're as competitive as can be as the consumer comes back in the travel industry to get a leg up on their competition. So you're seeing some of those discussions for sure. And also, I think there's definitely some corporate work. A lot of people are resetting what they're doing. It's moderate. But You can tell there's more discussions of what the office of future should look like in the reality we're dealing with and knowing that there could be other versions of what we've dealt with in this past year of COVID or related issues. So how do we change the way we work and operate? So there's definitely some conversations happening is how everybody is resetting their corporate footprint. And, you know, the good thing is hard surface is a great product that can help you stay, keep your property clean, organized. You see if there's, you know, if it's in good condition or not. So it's definitely been a positive all around.
spk01: Thank you. That's helpful. And then flipping over to the residential side, you had spoken about the residential national counts that were down recently. due to the product launch last year that provided tough comps. Can you help us better understand that national accounts launch last year, and then why it would be down this year despite a stronger residential market?
spk02: Well, it was tied to a load-in. So as you know, when you have major residential national account and you do the inventory load-in when you load in multiple bays of products, right, So in a very short timeframe, so you get a one-time benefit across your business. And that's really what we're referring to was the initial inventory load in last year. So we didn't have a comparable inventory load in this year versus last year. It's not necessarily the program itself. It was more the, what we display, we display someone else and, you know, we, and we benefited from launching to, you know, thousands of stores around the country. And that was all happening within that one quarter. So those under a company our size, those will make our sales trend lumpy in residential national accounts from time to time. So that's what we were sharing with them. We're very bullish on residential national accounts. It's just the timing of some of the rollouts from time to time, depending on their size. And this was a large one, which was good. We're happy. We want more of those going forward.
spk01: Yeah, got it. Thank you. That's helpful. Last one for me. You mentioned the success of the Quick Shift program. Can you talk a little bit about how kind of scaled up this program is? Are we still in the early stages? Or do you think you've kind of taken as much market share as you can with this? Thank you very much.
spk02: I appreciate the question. It's very much in the early stages. This is something we launched in August and September of last year. Our distributors have been very good partners to get the product out. We have some geographies. They're doing a tremendous job getting the word out, and you can tell it's gaining momentum. So by the time the product gets specified or used or get programmed in TI projects or TI facilities or different groups, that should only keep maturing. it's off to a very good start. You know, we're seven months in, eight months in, in that process now. So we definitely expect significant improvement and continuing improvement for our QuickShip. And we'll also augment it over time. So I think this was – we're happy with the early returns, and we will continue adjusting and investing in it. Great. Thanks again. Thank you.
spk03: Okay. We'll now hand it back to Michelle for closing remarks.
spk02: All right. Well, thank you, everyone, for joining us today. We appreciate your interest in Armstrong-Floren, and we look forward to updating you on future calls. Thank you all.
spk03: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
Disclaimer