Armstrong Flooring, Inc.

Q3 2021 Earnings Conference Call

11/9/2021

spk00: Greetings. Welcome to the Armstrong Flooring Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the call over to your host, Head of Investor Relations, Matt Culligan. You may begin the conference.
spk03: Good morning. Thank you for joining us today. earnings conference call. I'm joined this morning by our President, Chief Executive Officer, Michelle Bermet, and our Chief Financial Officer, Amy Trojanowski. In addition to the earnings press release issued last evening, a copy of the slide presentation to accompany this call is available 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 on 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 security law. In addition, our discussion of operating performance will include... 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.
spk04: Thank you, Matt, and good morning, everyone. I will start by providing a third quarter business update, then I will ask Amy to share details on the third quarter financial results. During the third quarter, we increased sales by approximately 8% year over year, and we made further progress on our multi-year revenue. transformation plan in several key areas. Q3 sales benefited from higher price realization, including our third price increase implemented in August. However, during the quarter, we experienced further supply chain disruptions and continued inflationary pressures that significantly impacted our performance, including lower than expected delivery of source materials to fulfill orders. While we have gained positive traction with our new launches and there continues to be healthy demand for our products, the supply chain and inflationary dynamics have continued to impact profitability and we are disappointed with our results. I'll speak to you today about the various actions we have taken and will continue to take to address these headwinds and improve profitability. First, in September, we followed up on our August price increase by announcing the most comprehensive pricing actions in the company's history. These pricing actions became effective on November 1st and include a full reset of pricing and reassessment of individual programs. These included simplifying pricing methods across channels, instituting ocean freight surcharges to recover the unprecedented cost the company is experiencing in the dynamic supply chain environment, and revamping processes to recover domestic freight expenses. These actions are expected to generate approximately $15 million of profitability improvement per quarter once fully implemented, and we expect full implementation by Q2 2022. Additionally, we have reviewed and will continue to review profitability at a customer level and take necessary actions to exit business that is not returned desired margins. In our residential sheet business, we expect volume to decline in 2022 due to discontinuation following a big box product line review. The business will cease at the end of the first quarter of 22, but will have minimal impact to EBITDA. We are very grateful to our customers who continue to be understanding and collaborative in this challenging inflationary environment. Second, we have taken actions to manage costs. We curtailed our planned capital expenditures and SG&A spend related to marketing and promotions in the third quarter and have taken actions to continue to reduce this spend through the remainder of 21 and into 22. This included implementing headcount controls beginning in the third quarter, in addition to a headcount reduction announced in the late October period. which is expected to result in approximately $4 million in annual savings on a go-forward basis. Furthermore, as the supply chain challenges continue to impact our planned growth and efficiency improvements, we implemented a hot desk to improve service to customers, streamlining the order management process, particularly for large orders. In addition, working with our international transportation partners We have been able to increase our expected container shipments by over 25% in the fourth quarter, and we are working to secure a similar level of increases in the first quarter of 2022 to continue building momentum. These increases will improve our level of service and help us meet customers' demand for some of our new rigid LVT offerings, along with enabling us to work through our current backlog. Looking at trends in our markets, our sales growth reflected healthy demand in each region we operate. In North America, growth was driven by price realization and channel growth in our commercial and residential direct channels. Asia and Australia experienced continued recovery from the pandemic in most sectors. As it relates to product lines, LVT in North American market remains strong. And we're seeing positive customer and market responses to our commercial and residential LVT products. Our sales initiatives into the hospitality sectors are also gaining momentum, and we are pleased to have recently signed additional agreements with several large national hotel brands. As we move into the fourth quarter, the residential commercial demand environment remains robust. However, with this in mind, we're anticipating macroeconomic headwinds related to our input costs and shipping to continue through the rest of this year and throughout 2022. As we have done thus far, we'll continue to be responsive and agile in our measure to offset these impacts. Finally, on November 1st, we finalized amendments on our ABL credit facility and term loan, respectively. Amy will speak at length on these amendments shortly. In summary, we're balancing our near-term initiatives with the long-term strategic goals of our multi-year transformation plan to expand our customer reach, simplify our portfolio and operations, and strengthen our capabilities. We're pleased to have already built out our direct go-to-market residential sales force, and we have been happy with the positive reception of our new products. Looking ahead, our focus in 2022 is to capture the return on these investments while continuing to streamline our cost structure. With that said, I'll turn it over to Amy to take you through our third quarter financial results. Amy?
spk01: Thank you, Michelle, and good morning, everyone. Turning to slide four, on November the 1st, we finalized amendments to our ABL credit facility and our term loan. The amendments reset our cash flow covenant as of September 30, 2021, providing us with financial covenant relief through at least December 31st of 2021. Under the terms of the amendments, we will have access to our credit facilities through December 31st with a new minimum availability threshold requirement. As context, availability under our ABL credit facility at September 30 was approximately $57 million, and we expect to continue to make use of our facility throughout the remainder of the year and be in compliance with the new minimum availability levels. In conjunction with these amendments, we have reclassified 63.3 million of debt to short-term on our September 30 balance sheet. We have been and will continue to work collaboratively with our lenders to explore longer-term financial covenant relief. We are in ongoing discussions with our lenders and expect to make additional comments concerning these discussions before the end of the year. I'll refer you to slide five, which provides a summary of our financial results for the quarter. Third quarter net sales were 168.5 million, a 7.6% increase versus the third quarter of 2020. Our year-over-year sales performance reflected growth in North America, China, and Australia. In North America, our net sales increase of 5% resulted from recent pricing initiatives, growth in direct channels, and favorable product mix, which helped to offset slower end-of-quarter volumes in residential national accounts and distribution. Demand continued to remain strong throughout the quarter. Several of the anticipated deliveries in the third quarter were delayed into the fourth quarter due to port congestion and transportation delays. Despite this, we entered the fourth quarter with a global backlog of approximately $67 million, which is elevated versus historical norms. We are expecting increased deliveries of sourced products in November and December to help us serve this backlog in the U.S. This, combined with improving raw material availability and more consistent operations at our manufacturing facilities, will lead to improved sales growth in Q4 and beyond. Moving to slide 8, SG&A costs were $4 million higher than the prior year, in line with our expectations and primarily reflective of a return to more normalized spend versus the same quarter prior year. In Q3 2020, during the height of the pandemic, we instituted furloughs, benefit reductions, and suspended certain incentives. The return to normalization and reinstitution of these items contributed to approximately $2.5 million of additional spend year over year. Increases also include $2.1 million related to the normalization of the sales force and related promotional activities. following the lifting of travel restrictions, which allowed our sales staff to re-engage in person with customers. In addition, we incurred an additional $1.5 million related to salaries and benefits for our expanded sales force, which was built out in Q4 and the early part of Q1 2021. Offsetting these were $2.1 million of savings from lower IT and consulting spend along with the benefits of lower facility costs associated with the relocation of our global headquarters in the first half of the year. Turning to slide 9, adjusted EBITDA for the quarter was a loss of $17.9 million compared to adjusted EBITDA of $2.8 million in the prior period. The lower adjusted EBITDA was primarily due to higher raw material input costs and shipping costs in addition to higher selling, general, and administrative expenses in 2021 versus the pandemic levels during the third quarter of 2020. These impacts contributed to a 21 million and 5 million impact on adjusted EBITDA period over period, which more than offset positive pricing recovery of approximately 9 million. As we highlighted on the prior slide, The CDI index for suspension PVC, which is a key raw material for us, shows the significance of the increases we have been seeing. After more than three years of relatively stable pricing, the cost has more than doubled since June of 2020. Finally, in the third quarter, we realized $3 million of year-over-year manufacturing productivity from prior transformation action, including the tile optimization, sheet consolidation, labor standardization, and work to improve yield and reliability. Moving on to slide 10, we had a net cash usage of $8.9 million in the quarter and negative free cash flow of $13.9 million. Our change in operating cash was impacted by rising input costs and the disruptions in the supply chain, which have outpaced our price increases. We have taken action to manage these factors, including managing working capital with respect to receivables and accounts payable, partially offsetting the impact from these operating losses. Capital expenditures for the quarter were $5 million, slightly higher than the third quarter of 2020, and up $0.9 million sequentially from the second quarter, however lower than initially budgeted amounts. Capital expenses for the remainder of the year have also been adjusted, with the expected spend for the full year, 2021, to be approximately $25 million. We expect to maintain a similar level of CapEx during 2022. Net debt was $59.2 million compared to $66.1 million versus year-end 2020. and we maintained available liquidity with cash and access to revolving credit facilities of $76.8 million. We ended the quarter with $14.9 million of cash plus the availability under our credit facilities. I'll now turn it back over to Michelle for some closing remarks.
spk04: Thank you, Amy. In conclusion, our team is working hard to address the macroeconomic challenges we are facing through price increases, other SG&A cost savings initiatives, and driving additional efficiencies in our logistics network and operations to offset rising costs while making our supply chain more resilient. As we look to the remainder of 2021 and towards 22, we will continue this financially disciplined approach while still maintaining our long-term focus on growth, business transformation, and value creation for all our stakeholders. Thank you for joining us today. Operator, please open the line for questions.
spk00: Thank you. 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. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Catherine Thompson. with Thomson Research Group. Please proceed.
spk02: Brian Byros Hey, good morning. This is actually Brian Byros on for Catherine. Thank you for taking my questions. I guess maybe first on the pricing chasing inflation. I appreciate the chart on slide six. I don't think I've ever seen it presented that way before, so that's pretty helpful actually. But I guess what's assumed in those numbers in that chart, I guess from an inflation standpoint and maybe more importantly from a volume standpoint?
spk01: Good morning, Brian, and thanks for the questions. You know, what we have assumed in that is our outlook on raw material increases, which is an elevated cost of all of our raw materials, as well as shipping disruptions. And, you know, we're seeing some higher costs for our source materials as well. We expect that to continue through 2022. and have dialed that into, you know, those forecasts. The inflation, we also added a chart just for some context on overall inflation that we're seeing. And we use the example for suspension PVC. As you can see there, you know, that material had been relatively stable for multiple years. And since June of last year, the price has more than doubled. So we're seeing that across a number of our key inputs, and we've certainly dialed all of that into our forecast. Slightly elevated costs in the fourth quarter versus the third quarter, and then it will stay at that higher level throughout 2022.
spk04: And as far as volume, we're...
spk02: Got it. And that was also on the pricing resets you guys mentioned. Can you just help us understand how those conversations actually go with customers? That seems like it's a little bit more involved than just saying, here's a price increase, because it seems like you're doing a little bit more of a restructuring of the way you go about pricing and presenting that to customers. Can you just give us some more color on how that actually worked? Sure, sure.
spk04: Well, as you saw with when you have some raw materials that are doubling and basically some of the historical price points we're all used to working with for product have to be reset, right? To a point, you know, we're all used to working to value engineer projects or even a we're balancing that and obviously everybody has to So it's a category by category, segment by segment, and we're working through that. And obviously what we were doing before was not working to a traditional price increase. Hey, three to five percent or six doesn't work when you're seeing 100 percent inflation. You know, that works when we're seeing, you know, commodities go up and down a few percentages here and there. We're working through that, and we're looking for very different results in the coming quarters.
spk02: Understood. And maybe the last one for me is to start, I guess. On the backlogs and orders coming in, I know you guys said you're bringing in some more product in November, December to increase meeting demand. Can you talk about maybe any trends in those between if it's product or different end market segment, I guess? What are you seeing out there that's coming in and going out now?
spk04: Well, demand has been very good, and we mentioned that our new products have done very well. Actually, the third quarter, it's our best response so far to a new product. Seventeen percent of our North American sales were made up of new products. So it's going to what we're launching, our customers are buying and are excited about. So that's very positive. Definitely both residential and commercial are growing for us. also positive we're very fortunate so you know naturally residential is leading and commercial is catching up so it's a robust environment and I think as we continue improving our supply chain our availability it's not only on the source side it's really even on the raw material side we have been dealing all year with either force majeure or availability constraints commented by multiple other peers and other building products company that we've been all dealing with limitations on raw material availability. As we resolve those and stabilize those as the industry, I think we'll all benefit from it because demand is there. There's a shortage of housing. There's good demand in remodeling. Commercial, as we know, has been depressed for a few years, and that's picking up. So we're in a strong demand environment. We're very fortunate to have a strong demand environment that we can meet, and looking forward to doing that and keep better. And we're also working very collaboratively, as you mentioned, with our freight forwarders to execute. So it will get better, and we'll resolve this.
spk02: That's it. Good luck. Thank you.
spk04: Thank you. Appreciate it.
spk00: We have reached the end of our question and answer session. I would like to turn the conference back over to Michelle for closing comments.
spk04: All right. Well, thank you all for joining us this morning. We look forward to talking to you in the fourth quarter and improving on our results. Thank you.
spk00: Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Disclaimer

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.

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