Armstrong World Industries Inc

Good day, ladies and gentlemen, and welcome to the first quarter 2019 Armstrong World Industries Earnings Conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance during the call, please press star and zero on your touch-tone telephone. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Mr. Tom Waters. You may begin.

Thanks, Skylar. Good morning, and welcome. Please note that members of the media have been invited to listen to this call, and the call is being broadcast live on our website at armstrongceilings.com. With me today are Vic Grizzle, our CEO, and Brian McNeil, our CFO. Hopefully you have seen our press release this morning, and both the release and the presentation Brian will reference during this call are posted on our website in the investor relations section. I advise you that 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 World Industries, please review our SEC filings, including the 10Q filed earlier this morning. Forward-looking statements speak only as of the date they are made. 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 Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation. Both are available on our website. With that, I'll turn the call over to Vic.

Thanks, Tom, and good morning, everyone. It's good to be with you today to review our first quarter results, a solid start to 2019. We delivered sales growth of 7%, and adjusted EBITDA improved 17%, with margins expanding 330 basis points in the quarter. Organic sales were up 4%, and our recent acquisitions added to that growth. Both segments performed well, and we remain confident in our 2019 guidance. Now, in a moment, Brian will walk you through the details of the results of each of the segments, but I first want to touch on a few of the key themes in the quarter. In the mineral fiber segment, average unit value, or AUV as we refer to it, was up double digits in the quarter. Our AUV accelerated as positive like-for-like pricing, outpaced inflation, and solid mixed gains from our recent new product innovations continued to gain traction in the market. Mineral fiber volumes got off to somewhat of a slow start with specific pockets of weakness in Latin America, our big box channel, and weather-related challenges in the Upper Midwest and parts of Canada. Our view of the underlying North American commercial market is unchanged, as we believe much of this softness is timing-related and will be recaptured as the year progresses. Volumes in our new products and high-end products were positive year over year and continued to outpace the market. And WAVES earnings were up double digits in the quarter. On the operations side, Our mineral fiber plants ran particularly well, and good cost control resulted in lower SG&A as percent of sales. The new innovative mineral fiber platform, DesignFlex, is now fully launched in the market, and we are actively working over 150 projects. The customer excitement for this new platform continues to energize our expectations for continued mixed gains into the future. On our website, the DesignFlex has been our most viewed launch since the unprecedented success of Total Acoustics. Our spring launch will feature an extension to this line with DesignFlex Formations. It's a prepackaged ceiling, perimeter, and suspension kit that will simplify the design and installation process for many jobs. This is another example of how we are making it easier for architects and designers to specify Armstrong products. The highlight of our upcoming spring launch is going to be AcoustaBuilt, our latest innovation in the mineral fiber category. AcoustaBuilt is an acoustical alternative to drywall ceilings. It combines the smooth white aesthetics of a drywall ceiling with superior acoustics of mineral fiber. This platform bridges the gap between drywall and mineral fiber with the same drywall installation methods used by contractors. A number of regional contractors have already embraced the solution, are active in the market, working on jobs. Architectural specialties had another strong quarter with sales up 24%, including the benefits of our recent acquisitions, and adjusted EBITDA grew 15%. The adjusted EBITDA margin of 22% was consistent with full year 2018. Even as we layered in additional resources for future growth, and absorb the expenses of our newly acquired businesses. Given the progress we're making with our architectural specialties operations and the leverage we're gaining on our SG&A base, we remain confident that margins, again, will expand for the full year. Our backlog for the remainder of the year also strengthened nicely, adding to our confidence for another year of strong sales growth in architectural specialty segments. Also notable in the quarter in the architectural specialty business is the close of the Acquisition of Architectural Components Group, or ACGI. Closed that in March, and integration is well underway. Marshfield, Missouri-based ACGI is a leading manufacturer of wood ceiling and wall systems. This fast-growing wood category is strategically important to Armstrong, and ACGI's broad product capabilities will further enhance our leading position in this category. We are making ACGI our center of excellence for wood manufacturing design, and we'll be focusing our future investments for wood here to create a new state-of-the-art facility. ACGI will add $20 to $25 million to our sales in 2019, further accelerating architectural specialty's growth. We continue to make good progress on the integration work at two acquisitions we did last year, Plasterform and Steel Ceilings. We're confirming the synergies we expected in our business cases. Also in the quarter, we began an expansion project at our Montreal metal ceilings plant that will increase our metal capacity by up to 50% and will include new equipment to improve our design capabilities and further increase the flexibility of our manufacturing processes there. As you can see, we continue to build out a strong architectural specialties platform to service both current and future demand and the specialty ceilings and walls. At the company level, other notable activities to highlight. First, our digitalization initiatives are progressing well, and we remain focused on employing more digital technology to create a frictionless experience for all of our customers. So far this year, we've doubled our quoting capacity for architectural specialties through the use of digital technology. And as a result, self-service quoting is up 25% year over year. We're also undertaking digitalization initiatives in our manufacturing processes. To date, we've deployed over 300 sensors in our plants to gather detailed, real-time data on the health of our manufacturing processes. Using this data, we were able to predict the need for preventive maintenance in advance of planned downtime. And this is just one of our digital factory initiatives to increase plant reliability, to minimize energy usage, and ultimately improve product quality and reduce our manufacturing costs. I look forward to updating you on these initiatives and other digitalization projects in the coming quarters. Second in the quarter, you no doubt saw that we have resolved the ROCFON lawsuit. As we reported, all claims are dismissed, and this matter is now behind us. Thirdly, pertaining to the sale of our international business, we continue to support Knopf and their efforts to satisfy EU clearing conditions. and we continue to expect the sale to close in the second quarter. So let me pause there, and I'll turn it over to Ryan for some more details.

Thanks, Vic. Good morning to everyone on the call. Today, I'll be reviewing our first quarter results, but before we go into the financials, as a friendly reminder, I'll be referring to the slides available on our website. Slide three details our basis of presentation. Consistent with our basis of presentation principles, In the quarter, we adjusted out $20 million of expense associated with the conclusion of the Rock Fond litigation matter. This includes costs, expenses, and attorney fees paid under the settlement agreement. This matter is behind us, and we don't expect any additional costs going forward. Turning now to slide four for our first quarter results, sales of $242 million were up 7%. Adjusted EBITDA increased 17% with margins expanding 330 basis points. Adjusted diluted earnings per share of $1.10 grew 24% as profitability increased and we lowered our share count via buybacks. Adjusted free cash flow improved by $14 million over the prior year quarter, driven primarily by the higher profitability. Net debt decreased by $188 million from a year ago, primarily as a result of receiving payment for the sale of our international business in 2018, partially offset by stock repurchase activity. In the quarter, we repurchased $20 million of stock, and to date, since the inception of the repurchase program, we have bought back just over 8 million shares at a cost of $450 million, for an average price of $56.18. Currently, we have $250 million remaining on our program, which runs through October 2020. Turning now to slide five, adjusted EBITDA increased $13 million as strong AUV gains, driven by like-for-like pricing, fell to the bottom line. Mineral fiber volume declines offset gains in architectural specialties. The input cost increases came from raw materials, including waste paper and mineral wool, as well as freight costs. Energy costs were relatively flat year-on-year in the quarter. Overall, these inflation numbers are at the low end of our expected range. Our plants continue to run well and deliver gains over prior year despite the added costs of our acquired businesses. SG&A costs were flat as restructuring savings were offset by inflation investment in architectural specialties capabilities, and the SG&A of our acquired companies. We've continued their 2018 positive momentum, primarily driven by price. Slide 6 shows adjusted free cash flow performance in the quarter versus first quarter of 2018. Earnings growth was the primary driver of the operating cash flow improvement. The capital expenditure increase was due to timing as we anticipate full-year capital spending to be relatively flat with the prior year. Cash interest expense is higher as rates increased in the latter part of 2018. WAVE's quarterly dividend was also higher, driven by higher earnings. Slide 7 begins our segment reporting. In the quarter, mineral fiber sales grew $6 million, or 3%. AUV gains driven by strong like-for-like pricing and continued mix improvements more than offset volume declines. Volume was impacted by the timing of projects in the quarter, inventory management at big box retailers, and market softness in Latin America. Additionally, certain geographies were impacted by the wet weather in February and March. We expect to recapture much of the timing-related shortfalls as the year progresses. Adjusted EBITDA was up $12 million, or 17%, as margins expanded 480 basis points. Like-for-like pricing gains were the biggest driver to improve EBITDA. Productivity in the plants was solid, and we realized savings from the footprint optimization actions we took last year. Raw material and freight costs were higher than last year, but the rate of increase has moderated. SG&A expenses were lower as a result of our right-sizing actions in 2018. As you will remember, we've outlooked $10 million in savings across both manufacturing and SG&A in the first half of 2019, driven by our 2018 restructuring actions. And we are on track to deliver these benefits. Finally, WAVE had another good quarter, adding $2 million to the bottom line. Moving to architectural specialty segments, on slide eight, quarterly sales increased 24% as share gains continued. Organic sales grew 9%, and the acquisitions of plaster forms, steel ceilings, and to a small extent, ACGI drove an additional 1,500 basis points of sales growth in the quarter. Adjusted EBITDA and architectural specialties was up 15% in the quarter, as sales gains were partially offset by investment in sales support capabilities and the fixed cost of the acquisitions. The adjusted EBITDA margin in the quarter was 21.7%, down 190 basis points from an especially strong Q1 in 2018. The acquisitions impacted this decline as organic margins expanded. We continue to expect year-on-year margin expansion in architectural specialties, and as we've said before, quarter-to-quarter results can be a bit lumpy. Slide 9 is our 2019 guidance, and it is unchanged from what we shared in February. We remain confident in the revenue EBITDA, EPS, and cash flow ranges. To close, I'm pleased with our solid start to 2019 and remain confident that we have the plans in place to deliver high single-digit sales growth and double-digit adjusted EBITDA growth, consistent with our value creation model. With that, I'll turn it back to Vic.

Thanks, Brian. As you can see, 2019 is off to a good start. The underlying commercial market in North America is solid and consistent with our expectations. The conversations I've had, frankly, in the field with our distribution partners, some of the architects, and leading contractors indicates a good level of activity out there, and we're in a really good position to service that activity. Earlier this month, we celebrated our third year of being a standalone ceilings and wall company. It truly is amazing how fast three years can go, but we've accomplished a lot in those three years. We've invested over $100 million to reinvigorate the mineral fiber category with innovations like Sustain, Total Acoustics, Design Flex, and now AcoustaBuilt, further propelling AUVs higher. We have completed four acquisitions in the attractive specialty category of architectural specialties, and those are on track to add over $100 million in new sales. We've addressed the poor returns in our international business through the sale to Knopf for 13 times EBITDA. Cash generation has grown over 25% per year. And finally, we've returned over $450 million to shareholders through a combination of share repurchases and a recent regular dividend program. Now, as an America's only ceilings and wall company, we are more focused than ever. We are more stable than ever, generating more cash per revenue dollar than any other building products company. And now with consistent top-line growth driven by a successful architectural specialty segment, we are well-positioned to create even greater value for our shareholders. And we're just getting started. With a power of focus together with a clear and a consistent strategy can deliver extraordinary results. And that's what we're excited about here at Armstrong. And in talking with our customers, they are excited too about the difference they are seeing from this company. So with that, we'll be happy to take your questions.

Ladies and gentlemen, at this time, if you have a question, please press the star, then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Mishu Sud with Deutsche Bank. Your line is now open.

Thank you. First, I wanted to ask about the pricing growth, the AUV growth on the mineral fiber side. Very, very strong number there. I think the strongest number I may have seen in the time I've known you folks. Just wanted to understand maybe a little bit about the factors that might have affected that and maybe the sustainability of that. Were some of the timing of the shipment issues, did that maybe boost that number higher? How should we think about the sustainability of what's a very strong number?

Yeah, Nishu, this is Vic. Yeah, very strong pricing, both like-for-like pricing and mix. Both of those made up the double-digit gains in AUV. If you remember last year, we were facing an inflationary period last year, actually a much higher inflationary period than we've seen in a long time. So we pushed hard for price increases to make sure that we covered inflation in 2018, and we realized the majority of that actions in the second half and I think so part of what you're seeing in the first quarter is nice carryover from the realization that we had in the back half of last year so again that's the like for like part and then again we had nice positive mixed gains on sales at the higher end of the portfolio growing faster and then a little softer to your point I think a little softer on the lower end gave us a little bit better mix overall So I think the combination of those two things are contributing to the strong pricing. As far as the sustainability of that, as we get into the second half of the year, I think we'll see some normalization of our pricing as we comp the stronger realization rate that we had in the second half of last year. So I think we'll hang on to a good portion of this, but I think the realization comps will get a little different in the second half.

Got it. Thanks for the color. And then on the volume side of mineral fiber, you've maintained the, you know, kind of flat to low single-digit mineral fiber volumes. As you look into the kind of post-quarter trends and some of the timing and, you know, potentially the weather issues that affected it, are we still on track for that when you take a kind of year-to-date view? Because obviously the 1Q numbers themselves implies that volumes were down probably, what, maybe mid-single digits or so.

Yeah, no, I think when we look at each of the components of where the volume was softer, it was really related to timing-type activity. So in the big box channel, we talked about this every once in a while, we'll get some depletion of inventory levels and we'll get some timing on to when the orders and the shipments happen. That occurred again in the first quarter. Again, a lot of weather-related impacts in parts of Canada and the Midwest. We had some larger projects also that contributed to some of that timing. So for the most part, we're hanging on to that because of this fact that, for the most part, it's timing-related issues. So, again, I think we'll recapture that demand. It wasn't lost demand. We'll capture that in the coming quarters.

Gotcha. Just one last one on the macro. Some of the forward-looking commercial construction indicators on the new construction site have weakened significantly. Any concern there? Are you folks seeing that? I mean, obviously, with your sales network, you have very deep roots into looking at that yourselves. Are you concerned about that? Maybe it was just weather issues or volatility early in the year, but any thoughts there, if you could, please?

Yeah, we're not really concerned on 2019. I think 2019 looks solid, and again, I like the on-the-ground data. We had our industry show last week, the CISCA show, well attended, and I think the sentiment generally from contractors and our distribution partners certainly are the backlogs are building nicely. The activity is strong. Quoting activity in particular remains strong. We're not seeing anything in terms of the ground-level activity or change in the ground-level activity that would give us pause for 2019. Okay, thank you. Thank you, Nishu.

Our next question comes from Stephen Kim with Evercore. Your line is now open.

Thanks very much, guys. Strong quarter. I wanted to ask you, just to follow up on issues, questions on volume and mineral fiber, just to clarify, I think you also mentioned LATAM in there, as well as the weather-related issues geographically here in the U.S., and then you talked about inventory destocking. I just want to make sure we got all the pieces in volume and confirm that there was one last day versus a year ago. And so if you could just maybe shed a little bit of light on LATAM and Did I catch everything that was affecting the volume? And can you quantify what you think the timing issues in aggregate amounted to in the quarter, year over year?

Yeah, so for LATAM, it's two components for us, really. Mexico, which through the new election activity down there and some of the freeze on spending, we saw it in Mexico a bit. And then the other piece was in Puerto Rico. Again, last year, if you remember, we were shipping to the devastation from the hurricane. And so a little base period comp issue in Puerto Rico. I think those are really the two softest points of Latin America for us that we saw. So part of that in Mexico may not come back. I think that could be one of the areas that's more market-related, and we'll have to see how that develops as the new president gets fully seated there. And I think I can't add any more color, I think, to the rest of the segments that were both retail Canada and weather-related on the volume side.

Okay. Okay. But there is going to be – there was a days issue, I think, right, from a comp perspective, correct me if I'm wrong. And I think that that – does that continue also in 2Q based on what you see?

Yeah, so, Stephen, the primary drivers are the ones we listed. I mean, we continue to look at those shipping days, but it wasn't as impactful in Qs 1 and 2 as we anticipated.

Oh, okay, interesting. All right, that's fine. And then, in general, you know, with the strong performance, you know, in aggregate, particularly with, you know, AUV more than making up for the volume temporary shortfalls this quarter, I mean, it would seem that you've maintained your guidance, but that perhaps your confidence in the higher end of the range might be greater. Is that a fair characterization of your assessment?

Well, I wouldn't want to give any more color on the guidance. I think we're confident in our guidance for sure with this strong start and the performance. Our plants are running well. I mean, the operation overall is in good shape. So I don't want to give any more color than that. It's early. It's the first quarter. But certainly we're confident based on our first quarter performance and our overall guidance for the year.

Okay, great. And then one last one for me regarding your self-service quoting. I find that important and interesting. You said it was up 25%, I think, on a year-over-year basis at this juncture. What kind of growth do you think that digital technology enabling self-service quoting can drive in the future? Is this the most rapid rate of acceleration that we're going to see, or could we see substantially greater gains than even that?

Well, I think the way to think about this, and we're very excited about this because the way I talked about it, it's a way to create capacity for growth, right, without adding a lot more cost in the business so we get more efficient at the work streams that we're handling so that we can do more of that, and that's going to be supportive of growth. It's also an opportunity in some ways for us to reallocate resources to other areas of the business to create more value, whether it's margin or productivity related, or it could be more on the growth side of the business. In our order entry area, we've redeployed people that were doing a lot of management around these orders that are now being self-served by our customers. We're diverting them to more job follow-up, for example. Those are real growth-oriented type activities that we're able to do it. So it's going to be a way for us to be more efficient and and create a better experience for our customers, number one. And number two, it's going to create capacity for us to sustain this level of growth, the trajectory that we're on now. Those are both very exciting results or impacts to the business.

Great. Thanks very much, guys. Thank you.

Our next question comes from Ken Zenner with KeyBank. Your line is now open.

Good morning, gentlemen.

Hey, Ken. Good morning, Ken.

So once again, you're proving that you don't need volume to grow profitably, realizing that you don't want to shrink to oblivion. Can you guys just talk about, you know, how, given you had a volume decline of 6%, realizing whether in the things Brian outlined, and we've had this talk, but could you kind of talk just about what a cycle would look like for you guys if the industry, if you face down 5% volume, just so we can get clarity around the operating leverage that you believe your business has, not on a quarterly basis, obviously, but let's say, you know, if shipments were down for the industry 5%, what would that mean for AWI in terms of earnings sensitivity?

Well, I think to answer that question, you have to go back to the value drivers of the business, right? So, AUV is one of the value drivers in the business that in a downturn would continue. And we saw that in the last downturn. When the last downturn, customers continued to mix up to higher value products. And that was a very deep downturn, as we all remember. So in the next downturn, we expect that the AUV improvement would continue in the face of a downturn. And the other thing this business does very well is continue to manage costs in a downturn on the productivity side and the plants. As you can imagine, these could be very volume-sensitive plants and assets, but we're able to manage those costs and move very quickly, both non-structurally and structurally, to take costs out and manage costs in the downturns, and especially in a – a gentle downturn, we'll call it, versus the more severe downturn that we experienced back in 2008 and 2009. So those two big value drivers are going to continue in the next downturn, and I think this business will behave a lot less cyclical. Before, when we had a flooring business, before when we had an international business, I think AWI is going to behave very differently in the next downturn because of those two big value drivers as America's focused ceiling and walls company.

Understood. And just one final question. For LATAM, could you, and I apologize if I missed this, could you kind of bookmark what that was in terms of FY18 sales just so we have a better sense of what your exposure is there if this is a one-off thing?

Hey, Ken, this is Brian. So what we've said over the years is LATAM, Canada, big box, in total those three are roughly 20% of our total sales.

equally split, Brian?

I'd say pretty close.

Thank you. Thanks, Ken.

Our next question comes from Michael Wood with Nomura. Your line is now open.

Hi, thank you. You mentioned in your prepared remarks inflation at the low end of the range. Is that expected to continue for the full year? And I imagine you had some legal fees related to the settled lawsuit. Now that those look like they're shaping up to be better, I'm curious what the other side of it is that you maintain guidance. Was it primarily the softer volumes that kind of kept that guidance in check?

Hey, Mike. So on the inflation, yes, we guided roughly 3% to 3.5% on inflation for the year, and we came in in the quarter just on the lower end of that. So we continue that to continue through the rest of the year and stay within our range of three to three and a half. On the lawsuit, you know, we've adjusted out the $20 million. That's both our cost and the cost of the settlement, and we don't expect that to continue on. It will not continue on. So as we think about guidance, it's Q1, and, you know, we're early days, good solid quarter. The individual pieces of our guidance could obviously ultimately move, but we're pretty confident in our overall sales growth, EBITDA, cash flow, and EPS ranges.

Got it. One of the more volatile end markets over the past few years has been education. Do you have any early leading indicators or thoughts on how particularly the busier season as we get into the summer might fare this year?

Yeah, it's too early to tell, Mike. But again, I have the same position that I had at the beginning of the year. I'm still more optimistic that we'll have a better education just based on the macro data on funding at the state and local level. So we'll see. It's a little early to call it right now, but I'm still optimistic about a better education season.

Great. And finally, can you give us any more specifics on what portion of that average unit value was related to shipment and timing of the lower-priced products that were delayed in, like, home centers in Latin America and anything else be helpful to know what was just a timing-related piece?

Yeah, frankly, it's a smaller portion. I think that's the way to think about it. The continuation of like-for-like pricing and the mix from product, product mix, so sales from the higher-end and higher-performing products, I think was the bulk of the AUV improvement. I think that's the way to think about it. There was a small component to, if you will, the channel mix and some of the lower end, but I wouldn't think about it as being a larger, meaningful part.

Okay, thank you.

Thank you, Mike.

Our next question comes from Garrick Schmois with Longbow. Your line is now open.

Thank you. I just wanted to ask on architectural specialty, is there just some deceleration of organic growth to 9%? I think you were copying strong mid-teens, if not better, the last several quarters. So, if you could speak to what was driving that, was that also timing-related, or are you seeing any change in the end-market environment?

Yeah, no, I think it's a good call-out. The organic growth portion of this is as volatile quarter to quarter as the overall business. And I would attribute that not as a deceleration but more of a timing between projects within that business and the lumpy sales that can come in that business quarter to quarter. The other thing I would point you to is last year first quarter was specifically a strong first quarter for architecture specialties. So, we're copying a little bit of a stronger base period also in that business. So, frankly, when I look at the backlog, I wouldn't characterize it as a deceleration at all.

Okay, thanks. And I just wanted to ask some clarifying questions just on mineral fiber. AUV, you start to anniversary the price increases from last year. Should we expect positive AUV in the second half of the year, just from the mixed benefits that you cited?

Yeah, no, I think you should expect positive AUV in the second half of the year. However, we are starting to anniversary the bulk of the price realization that happened last year, which is in the second half of the year. So as I said earlier, As we start to get into those comps, we'll see some normalization of our AUV for the whole year. Okay.

And as you look at inflation or maybe the lack thereof, is there any additional price increases that you need to put in the market to offset?

Well, we expect inflation to continue throughout the year at a similar rate as Brian was talking, at the 3% to 3.5% range. So... We'll assess that as we normally raise price in the summertime, and we'll assess that, and we'll size our price increase accordingly.

Great. Thank you.

Great. Thank you.

Our next question comes from Catherine Thompson with Thompson Research. Your line is now open.

Hi. Thank you for taking my questions. First, just on your investor day, outlined $27 million in investments in tech over the next three years. Given some of the early successes you're seeing, is there any change in that figure? And then also, could you just remind us what type of returns you're aiming for these investments? Thank you.

Sure. And we have not changed our outlook on that investment, and I'll let Brian comment on some of that. But we're very excited about it, and I think we're gaining traction and confidence in these investments can generate a very nice return. Brian, do you want to add anything to that?

Yeah, Catherine, thanks for the question. You know, we're in the early days of our digitalization journey. Like many companies, we're still in that optimization phase of digitalization, as we outlined in the investor day. And so while we don't anticipate that investment going up, we're always looking for opportunities to invest more in that area as we get better at that digitalization effort.

Just a cleanup question on guidance and understanding it's a fatuous assumption that given the seasonality of Q1, it shouldn't change your full-year outlook. But just to confirm, you still are keeping that 0% to 3% for middle fibro growth per volumes and the AOV growth of 5% to 6%? I really just wanted to make sure that those assumptions are still in line for the full year.

Yes, Catherine, they're still in line for the year. Again, most of the volume in Q1 was related to timing issues, and obviously our AUV came in stronger than we originally anticipated. So in the end, there's some puts and takes, but we're very confident in our overall 7% to 10% sales growth for the year.

Okay, great. Thank you very much.

Thanks, Catherine.

Our next question comes from Phil Ng with Jefferies. Your line is now open.

Hey, guys. Can you give us a mild post on the adoption of DesignFlex and AcoustiBuilt, and when do you expect the contribution to flow through more fully? It's probably more of a 2020 event. And then when you think about this contribution, will it come in more on the AUE side of things, or do you actually see a nice lift on the volume side as well?

Yeah, on DesignFlex, Phil, I'd say it's probably more of an impact in 2020, just because something as unique as DesignFlex has to go through the specification process. So you're at least 12 to 18 months of a specification process. So I think that's the way to think about it. And because DesignFlex, for the most part, is going to go into existing spaces where mineral fiber is being used, you'll see it show up more on the AUV side initially. Later, what we hope to see and we expect to see is that DesignFlex will allow architects to use mineral fiber in places that they wouldn't normally use it because of its unique shapes and colors and things that you can do with mineral fiber in this case. So that's further down the road, I think, but that's the way to think about it in terms of the impact there. Acoustic belts are slightly different, although the AUVs are nicely accretive and will drive a mix-up as well. That's clearly going into the drywall category where they aren't considering the used mineral fiber, and that should be additive on the volume side. So, again, very similar. This is going to be a spec product, so you've got to think, you know, anywhere from 12 to 24 months from when we launch that, and we're officially launching it in the market in May. So... So more to come on that. We'll keep you updated, but that's probably even a little further out.

Got it. That's helpful, Connor. And just given the amount of cash you guys are generating, even factoring in some bolt-ons, you should still have a fair amount of excess cash. How do you guys think about buybacks? I mean, the stock's obviously had a very nice run. Will you guys be taking more of an opportunistic approach or pretty systematically every quarter just based on the cash you're generating?

You know, I think the way for us to think about this is – and for you to think about this, is we have $250 million left on our authorization, and we plan on executing all of that $250 million. There's about 18 months left in that timeline to do so. We still are very, I'd say, optimistic and bullish around the valuation of this company when you think about the stability now without a foreign business, without an international business, the ability to drive tremendous amounts of cash, as you're referring to, we still think that there's plenty of valuation and value creation opportunities ahead of us. So we're going to be in the market buying back our shares in the coming months. So we plan to continue to execute against that 250. Brian, you want to add anything to that?

I think you said it well, Phil. A year and a half left, six quarters, $250 million. Everyone can do that quick math for a straight line spend. As you know, in any given quarter, there may be certain events that we are privy to that preclude us from trading at certain times, but we'll be back in the market.

Got it. That's helpful. And just one cleanup question. Vic, I think you alluded to maybe spending a little more capital on enhancing the facility via ACGI and then this Montreal facility on the steel side of things. Can you talk about You know, what type of investments should we expect on the CapEx front, and could there be any near-term impact on margins as you kind of step up investments in the short term?

Yeah, these capital investments on the architectural specialty sides are quite different than on the mineral fiber side. So the way to think about this is they're much smaller. I would say they're in the $1 million to $5 million range type of investments, and we'll be feathering those in. I don't expect a lot of headwind on margin from those. You might get it in a quarter or two, but overall we're feathering these investments in, and I would continue to expect us to expand margins on the annual basis.

And so I would just add, you know, all that's considered in our guide right now of $70 million of CapEx.

Okay. Thanks a lot. Appreciate it.

Our next question comes from Peter Galbo with Bank of America. Your line is now open.

Hey guys, thank you for taking my call as well. Vic, you commented a little bit on the education sector, but I believe last quarter you talked about maybe a better year for health care with maybe a little bit of moderation in office. Just want to understand how that's been trending both through the first quarter and I guess through this far in the second quarter.

Yeah, my position on that, Peter, hasn't changed. I think health care and education should be better this year. And it's too early, really, to call that after the first quarter. But my position hasn't changed on that. I still am optimistic, like I said earlier, that there's a better education season out there.

Okay, now that's helpful. And, Brian, maybe two quick ones. First, on architectural specialty, I know you had mentioned in your prepared remarks that improving EBITDA margins for the year. I believe last quarter you had talked about 20 to 50 basis points. I just wanted to make sure that that was, you know, the same. And then on the 10 million of SG&A savings in the first half of the year here, just how much of that was in the first quarter relative to what we should expect for 2Q? Thanks.

Yeah, so Peter, really it hasn't changed for AS margin expansion. We'll continue to focus on building margins year over year as we leverage the scale from the acquisitions and increased sales. So that low 20, 50 bps is not out of the range of possibility. And obviously, we continue to drive margin expansion on mineral fiber with strong AUV. And I apologize. I missed your second question. What was that?

No worries. On the SG&A savings, the $10 million, just what the impact was in the first quarter, just so that we know for 2Q.

Sure. Think of that as five and five, both Q1 and Q2 benefits. So as we complete that benefit over two years, $20 million, 10 came last year, and we're seeing about five in each of the first two quarters this year. Awesome. Thanks, guys. Thank you.

Our next question comes from Keith Hughes with SunTrust. Your line is now open.

Yes, question on the acquisition. You talked about it being kind of your platform for wood products. I guess my question is, in terms of deals, how many more sectors or subsegments do you need to do kind of platform deals versus building up where you are right now?

You know, Keith, the way I think about that is there's more platforms under consideration. Maybe I'll leave it like that. We have wood and metal, as you know. And there's a couple of other platforms that are of interest and that we're exploring. So I wouldn't say that we're finished with the platform build-out. And then there's also this other side of the matrix that you're pointing to, which is capabilities. And so, like in the metal area, there's still more capabilities that we want to have in our portfolio that we think are critical for architects to specify around. So I think there's work on both dimensions for us to continue to do, platform build-out, as well as capability build-out within the platforms.

Okay. And just to find it, the 7% to 10% growth guidance, that includes 1% to 3% of acquisitions. Is that correct? Yes, that's correct. All right. Thank you. Thanks, Keith.

And our next question comes from Justin Spear with Zellman & Associates. Your line is now open.

All right. Thanks, guys. Starting out with the architectural business, Your organic growth view for the year, has that changed at all in terms of, I think, that mid-teens level I think you were looking for last quarter?

No, it hasn't changed. Again, as was talked about earlier, right, there's a little less than that in the first quarter. But, again, that's just the sequencing quarter to quarter. So we're still hanging on to that, and the backlogs look good and supportive of that.

Okay, and then just switching gears to the mineral fiber piece. I'd like some help unpacking your underlying market growth view, particularly on the volume side, what it was in your estimation the first quarter, and what you're thinking for the full year. And then within that, some context, if you can, if you can break out the refurbishment component versus new construction component as you map out this year. if you're thinking that growth will accelerate in the underlying market, how the underlying market looks in terms of do you think it accelerates from here, or do you think it trends along the lines of 0% to 3%?

Well, so our outlook is 0% to 2% on volume, and, you know, I think that's a good proxy for the overall market blended for new construction activity as well as renovation activity. And our view on the market hasn't changed, as I talked about in my prepared remarks. There's some timing-related impacts in the first quarter, but the activity around these new construction, the projects around new construction, and the R&R activity is consistent with a zero to two market overall for the year. So we haven't changed our position on that, and I think that that's what we should expect to see in the remaining quarters. Again, minus some of the timing-related issues in the first quarter.

And, Justin, this is Brian. Just going back to your AS point, I just want to clarify something there. In our guidance, we say greater than 15% AS volume growth. That's reflective of those acquisitions that we've previously closed at the start of 2019. So it doesn't include ACGI. But as you recall, AS grew 24% in the quarter, and there was some small contribution from ACGI. So AS is fantastic. from our benefit on track.

For the organic growth, when you back all that out, what does that kind of shake out on the math today?

Yeah, what we articulated was 9% on the organic side in the quarter, and then those deals that we closed in 2018, plaster forms, steel ceilings, added additional 1,500 basis points. ACGI was a small percentage of that. So just to clarify what we've shown on the guidance.

I'm talking about the full year. So the full year, mid-teens, I think was characterized. That's still intact?

That's still intact, yes.

Okay. I wanted to just follow up on that mineral fiber comment, just in terms of the underlying inventories, how they look across your channels. You mentioned, I think you implied destocking the home center channel. Just how it looks at the core distribution part. I think distribution is roughly 70-plus percent of your business. How does inventory situation look, and do you think that you'll be run rating in line with that underlying demand growth that you're thinking?

Yeah, the inventory levels in the independent channels, we haven't commented on. We probably won't comment on those. They're in normal levels. That's not the issue that we're referring to in the quarter. It's really around the retail channel, and that's the one that seems to be – more volatile, and it definitely is more volatile than what we see in the independent channel, which is much better managed, I would say, quarter-to-quarter than what we see in the big box channel.

Okay. And then the last question for me is just in terms of the 10% AUV realized in the first quarter, how much of that was carryover from pricing last year as opposed to realization of the first quarter announcement in I think it was January, February, if you could unpack the two.

Yeah, I think the way to think about it, Justin, is most of it is carryover on the like-for-like pricing, and then you have your mix-up that's a good, solid run rate and consistent with prior year. So the February price increase, which you're referring to, it's – you know, a minor portion of the overall first quarter. As you can imagine, there's only 30 to 45 days of real price in there. So most of it's carryover. That's the way to think about it. Okay. Well, thank you, guys. Appreciate it. Thanks, Justin.

At this time, I'm showing no further questions. I'd like to turn the call back over to Vic for closing remarks.

Thank you very much, everybody, for your questions and your attention today. Again, we're excited about the start that we have and the year that we have in front of us. as a really Americas-focused ceilings and wall company, and we'll look forward to updating you on our 2Q results in a few months. Thank you, and have a nice day.

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