Armstrong World Industries Inc

Good day, ladies and gentlemen, and welcome to the second quarter 2019 Armstrong World Industries Incorporated Earnings Conference Call. At this time, all participants are in 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, please press star on the zero key on your touchtone telephone. As a reminder, this call may be recorded. I would now like to introduce yours for today's conference, Tom Waters, Vice President of Corporate Finance. Please go ahead, sir.

Thank you. 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 statements 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 will turn the call over to Vic.

Thanks, Tom, and good morning, everyone. It's good to be with you today to review our second quarter results, another solid quarter for the company. We delivered sales growth of 9%, adjusted EBITDA improved 14%, and margins expanded 160 basis points. With this strong quarter, we are completing a solid first half of 2019. For the half, sales were up 8%, EBITDA is up 15%, and margins expanded by 240 basis points. Both of our segments are performing well and accelerated throughout the half, and therefore, we remain confident in our 2019 guidance. In a moment, Brian's going to walk you through the details of the results by segment, but I first want to touch on a few of the key takeaways. In the mineral fiber segment, average unit value, or AUV, was up more than 6%, with both like-for-like pricing and mixed improvements positively contributing in the quarter. Our industry-leading innovation continues to be the key driver of mix improvement, with sales of mineral fiber products at the high end of our portfolio growing double digits in the quarter. Recent new product launches, including the Sustain and Total Acoustics product families, are leading the way. But we are now also seeing contribution from DesignFlex, which we launched last summer. Architects and designers are beginning to see the creative possibilities afforded by this leading-edge new offering and we are encouraged by the initial new business results. Our new product vitality measure, which is a measure of sales of new products introduced in the last five years, is now over 40%. For perspective, this measure is up from the low teens as recently as five years ago. This has been a focused effort by our team, and we are now seeing the fruits of this work. Year-to-date, mineral fiber AUV is up over 7%. we're confident in once again delivering AUV growth in the 5% to 7% range, consistent with our historical average. Now, as we discussed when reporting our first quarter results, weather and other timing-related headwinds impacted mineral fiber volume at the start of the year, and we anticipated steady improvement as the year progressed. And that's what we saw in Q2, as volume improved sequentially, making up a meaningful portion of the shortfall. The relatively smaller channels, namely Latin America, continue to lag in the quarter, and given the political and economic conditions in those regions, we expect that these areas will remain a headwind in the second half, resulting in overall flattish volume for the year. Our mineral fiber operations are executing at a high level. In the quarter and year-to-date, mineral fiber gross margins have expanded more than 300 basis points. Our plant reliability metric, a multi-input measure of overall manufacturing performance, continued its recent favorable trend and was near all-time highs in the quarter. Quality and service metrics were also excellent. And most importantly, safety performance remained strong. Now, it's early days, but we are beginning to see results from our digital factory initiatives, a subset of our overall digitalization strategy. To date, we have deployed hundreds of sensors throughout our mineral fiber plants, and are harvesting and analyzing the data using both human and artificial intelligence. Insights from this analysis is already allowing us to optimize how we run our production lines, resulting in lower scrap rates and increased uptime. I believe this technology will enable our solid track record of productivity to continue into the future. Architectural Specialties continues its strong run with sales up 38% in a quarter. The base business, which includes our 2018 acquisitions of plaster form and steel ceilings, grew a strong 23%. And our first quarter 2019 acquisition of ACGI contributed the rest of the growth. We continue to penetrate the specialty ceilings and walls market and expand our leadership position through the broadest portfolio, the best in class design capabilities, and the industry-leading service and quality through our distribution partners. Now, related to this combination of competitive strengths, I'd like to share a real example of a custom job we recently won. A major hotel project in Nashville called for a complex wood fabrication solution that prior to the ACGI acquisition was not an opportunity for us. However, with ACGI's advanced manufacturing capabilities, we were able to provide the required solution containing the highly engineered wood products necessary to achieve the performance and the aesthetic vision of the architect and building owner. This solution included 13 different wood product types, including curved panels, baffles, and radius trim, a rare combination for any single manufacturer. These specialty wood capabilities also opened the door for us to win a significant order of design flex mineral fiber ceilings and drywall grids. No other single company is capable of delivering such a broad combination of products and technical support necessary to make this project a reality. A true one-stop shop experience for the architect and building owner. With the acquisition of ACGI, we now have in-house capabilities in the critical specialty substrates of metal, wood, and wood fiber. Combined with our glass-reinforced gypsum capabilities at Plaster Forum, and our strategic supplier network, we have established a unique leadership platform in the specialties category. While we have come a long way in building these capabilities, there is still much more to come as we broaden and deepen our specialty ceiling and walls capabilities and accelerate growth for years to come. I'm particularly pleased that we were able to expand margins in the architectural specialty segment despite our investments. and while overcoming the integration of lower margin acquired businesses. We remain confident that our playbook of acquiring good businesses, bolting them on to the Armstrong sales and marketing platform, and investing in their manufacturing capabilities will yield significant growth, margin expansion, and create shareholder value. So with that, let me turn the call over to Brian to go through some of the details. Brian?

Thanks, Vic. Good morning to everyone on the call. Today I'll be reviewing our second 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. Turning now to slide four for our second quarter results, sales of $272 million were up 9% despite one less shipping day versus Q2 of 2018. Adjusted EBITDA increased 14%, with margins expanding 160 basis points. Adjusted diluted earnings per share of $1.27 grew 31%. As profitability increased, we lowered our share count 5% via buybacks, and our book tax rate was 400 basis points lower than last year. Adjusted free cash flow declined by $14 million over the prior year. Cash earnings improved but were offset by a $20 million income tax refund in 2018 and lower payables in 2019. Net debt increased by $63 million, driven by a lower cash balance due to the acquisition of steel ceilings and ACGI, as well as share repurchase activity. In the quarter, we repurchased $28 million of stock. Since the inception of the repurchase program, we have bought back 8.3 million shares or 15% of our outstanding float at a cost of $479 million for an average price of $57.42. Currently, we have over $200 million remaining on our share repurchase program, which runs through October of 2020. Turning now to slide five, adjusted EBITDA increased $13 million as strong AUV gains driven by both like-for-like pricing and improved mineral fiber product mix, fell to the bottom line. Volume gains were driven by architectural specialties. Inflation moderated in the quarter but remained a slight headwind. Year-to-date inflation is running in the range of 2 to 3 percent. As Vic mentioned, our plants continue to run well and deliver gains that offset the added costs of our acquired businesses and investments in AS capabilities. SG&A costs were slightly favorable as our 2018 restructuring efforts overcame inflation, investment in AS, and the SG&A of our acquired companies. Wave earnings were down $2 million as they are comping a very strong second quarter in 2018. Wave remains on track to deliver earnings growth for the full year and margin expansion. Slide 6 shows adjusted free cash flow performance in the quarter versus the second quarter of 2018. Cash earnings growth improved and grew 46 percent, but was offset by the tax and accounts payable headwinds I mentioned earlier. Other cash items were essentially flat year on year. Slide seven begins our segment reporting. In the quarter, mineral fiber sales grew $7 million, or 4 percent. AUV gains driven by strong like-for-like pricing and continued mix improvements more than offset volume declines. Despite a weak Latin American market, we maintained a positive outlook for volume in the second half of the year. Adjusted EBITDA was up $10 million, or 11%, as margins expanded 310 basis points. AUV gains were the biggest driver to improved EBITDA. Productivity in the plants was solid, and we realized savings from the footprint optimization actions we took last year. While material costs were slightly higher than last year, while freight and energy costs were essentially flat. SG&A expenses were lower as a result of our cost-saving initiatives in 2018. And as you will remember, we announced a $20 million restructuring program in the second quarter of 2018 to right-size our SG&A structure and optimize our manufacturing and distribution footprint for America's only business. We realized $10 million in savings in the second half of 2018, and we've now delivered another $10 million of savings across both manufacturing and SG&A in the first half of 2019. Moving to architectural specialty segment on slide 8, quarterly sales increased 38%. Organic sales grew 12% as share gains continued. Base sales, which includes the acquisitions closed in 2018, grew 23%, and the ACGI acquisition contributed the rest. Adjusted EBITDA NAS was up 39% in the quarter as sales gains were partially offset by investment in sales support capabilities and the fixed cost of the acquisitions. As Vic mentioned, margins as sales leverage and our integration efforts offset the headwinds of investments and lower margin acquisitions. EBITDA margins in the... EBITDA margins in the base business, which includes our 2018 acquisitions, expanded 40 basis points. Turning now to slide nine, this provides our results for the first half of 2019. Sales of $514 million were up 8%, and adjusted EBITDA increased 15%, driving margin expansion of 240 basis points. Adjusted diluted earnings per share of $2.28 grew 25%, primarily driven by increased profitability. Slide 10 is the bridge for our first-half results. Volume gains and architectural specialties were largely offset by declines in mineral fiber volume. AUV was the big driver of earnings growth, with both price and mix contributing meaningful gains. Year-to-date, we experienced moderate inflation and drove benefits from productivity gains in our 2018 restructuring. These improvements more than offset investments and the fixed manufacturing costs of acquisitions. SG&A also benefited from restructuring and more than offset investments in the SG&A of acquired businesses. Slide 11 displays the drivers of adjusted free cash flow for the first half of the year. Operating cash flows benefited from cash earnings, which were up 11%, but year-on-year were impacted by the $20 million tax refund we received last year. We remain on track to deliver $220 to $240 million of adjusted free cash flow for the year, a 9% increase at the midpoint when excluding the special dividend from WAVE in the base period. Slide 12 outlines our guidance for the year. We are reaffirming our sales, EBITDA, EPS, and cash flow guidance. The sale of our international business is nearing its conclusions. and we expect to close the transaction in the third quarter. I'll remind you that we received the proceeds for the sale last year, so the impact on 2019 financial performance will be minimal. To close, I'm pleased with the results we have been able to deliver so far this year, with first-half sales up 8% and adjusted EBITDA up 15%. I 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 over to Vic.

Thanks, Brian. At the halfway mark, 2019 is shaping up nicely. Overall, market conditions are largely as we expected entering 2019, and our teams are executing very well. So we remain confident in our full-year guidance, which delivers high single-digit revenue growth and double-digit EBITDA increases consistent with the growth trajectory we outlooked at our investor day last November. Our value creation drivers, namely AUV improvement, mineral fiber, accelerated growth through share gains and acquisitions and architectural specialties, a balanced approach of feathering and investments to support the growth while maintaining margin expansion, and returning cash to shareholders are all being executed as planned. And of course, innovation remains paramount at Armstrong, not only in new products, but now also in digital technology. Our digitalization initiatives are well underway and include design and visualization tools to improve the speed and accuracy of the architectural specification process. We are developing capabilities to provide virtual and augmented reality project visualization while simultaneously creating design drawings, installation instructions, and a real-time bill of materials. What used to take weeks will soon take hours. This technology will allow the AWI team to earn specifications for its industry-leading product innovations, as well as improve our customers' experience along the way. Armstrong is committed to being the leader in innovation, to providing the best possible experience for our customers, and committed to making a difference in the spaces where people live, work, learn, heal, and play. So with that, we'll be happy to take your questions.

Ladies and gentlemen, if you have a question at this time, please press the star on the one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, please place your line on mute once your question has been stated. Our first question comes from the line of John Lovallo with Bank of America. Your line is now open.

Hey, guys. Thank you for taking my questions. The first one, it seems like of the mineral fiber volume headwinds that you called out last quarter, that LATAM is probably the one that didn't improve as expected, which would imply that big box and whether both, you know, got a little bit better. Is this the right way to think about it? And, you know, if it is, how big is LATAM, you know, as a percentage of your mineral fiber business?

Yeah, John, that's the right way to think about it. It's, you know, we had weather-related issues in parts of the country, and in Canada in particular we called out. And then also some of the inventory corrections in the big box area. All of those areas improved significantly. sequentially in the quarter as we expected it to, and as we talked about in the first quarter. The one that didn't improve enough, and now knowing what we know now about that market, I don't expect Latin America in particular to bounce back or have enough time in the remainder of the year to bounce back. It eventually will bounce back. I think we're in good shape down there. But I don't think that that's going to help us in the second half of the year. Therefore, That gets us to the lower end of our previous guidance range on volume. But the rest of the areas are, again, they're working their way through the system as we expected them to do. And as far as sizing, we don't break out LATAM specifically. But as I said in my prepared remarks, it's a smaller channel for us overall relative to the other channels that we have.

Gotcha. Okay, that's helpful. And then, you know, of the mineral fiber AUV in the quarter, Was there any meaningful divergence between kind of the historical 50-50 split between price and mix?

It was kind of like the first quarter. As we outlook, it was a little heavier on the like-for-like versus mix. But, again, as the year plays out, we expect that to be closer to a 50-50. Okay.

Thanks, guys.

Yeah. Thanks, John.

Thank you. And our next question comes from the line of Catherine Thompson with Thompson Research. Your line is now open.

Hi. Thanks for taking my questions today. And just to follow up on the AUV next question, given that it's a little heavier for light for light, assume this is from more the pricing actions from last year flowing through than current year pricing actions?

Yeah, Catherine, that's the way to think about it. As we talked about in the first quarter, we're lapping some of the aggressive price increases we were doing based on the inflationary environment last year. As you know, we were going heavier with our price increases in the second quarter last year, so it wasn't a full quarter. That's why you saw some moderation there, but that's the right way to think about it.

And how should we think about it as we look over the next 12 months, given pricing actions that are out in the market now?

Yeah, I think we're going to be comping Again, a lot of those successful actions last year in raising price to compensate for the heavy inflation. So I think you'll see some moderation on the price side. I expect the mix, and it's been favorable all year. I think that part of the equation should continue for us. I'm very confident about the mix continuing. So like I said, I think overall we're going to end at a very similar place than we normally do or historically have. with about a 50-50 mix of price and mix.

Okay, perfect. Just in terms of new products, could you give an update on the AcoustiBuilt rollout? Also, just a clarification of how big you think that opportunity is. Thank you.

Yeah, the AcoustiBuilt continues to gain a lot of attention and a lot of interest in the marketplace. I personally have been involved in some conversations with architects that are very interested in the combination of having that monolithic white, smooth white look with the acoustical performance of mineral fiber. And you have that in the same product is a revolutionary combination of features and benefits. So there's a lot of interest. We're in the early days of working through a specification cycle. So as we've talked about, this is not a meaningful impact in 2019. But I'm very pleased with the interest level. We've had several installations. We've closed already our first couple of jobs in that material, and they've all gone very well. So very pleased with it, early days. And we're going to refrain from sizing the total market opportunity until we get further into the rollout. But, again, we continue to think this is a meaningful opportunity, and we're excited about it.

Okay. And then final question really is more on technology, understanding that most of the construction industry is populated by Luddites. How is the self-service quote rollout going, and do you still see this as a meaningful cost saving for Armstrong? Thank you.

Yeah, thanks for the question. I think we're really excited about this one quote system that we have that As we broaden our portfolio of products, we continue to be easy to do business with and we provide access to this broad portfolio in a very frictionless way. This one quote system that we have that's turning into a quote to order, one quote to order system, which is the next generation, is just making that easier and easier for our customers to interact with us. The adoption rate of that was extremely high and went very quickly. And we continue to get traction with, again, the second generation of that, which is taking, once you have a one quote in the system, be able to have that go from a quote to an order in a seamless fashion as well. So, again, this is, I think, the beginning, and we're in the early innings of rolling out more of this digital technology approach. that makes it just so much more easy to do business with. And again, I'm very encouraged by the adoption rate in the marketplace and the feedback I got personally from the ability to have this one closed system. Great. Thank you so much. Thank you.

Thank you. And our next question comes from the line of Ken Zinner with KeyBank. Your line is now open. Good morning, gentlemen.

Good morning. Good morning, Ken.

You know, I'm not sure, you know, so the stock's off today. You've had an incredible run all year. You know, there's something I asked you in the third quarter conference call, and I think that's what the weakness is kind of reflecting, is this persistence of volume decline in mineral wool, exceptional price mix. Vic, you talked to the 40, I think we said 40% vitality rate. And then the lower margins, obviously, in AS, you know, investments, et cetera, et cetera. Can you just go over, you know, your view? Is the volume declines you said were coming from Latin America, are those – but you held your guidance, right? But, I mean, is Latin America volume, which you're not going to break out, understand? It seems to me that the margins would be less in that product mix that you're delivering there. Is that accurate or is that not accurate? Okay.

Oh, that's accurate. I think the, um, and we've talked about, it's a smaller channel for us. It's, um, it's a developing market where you, you tend to sell lower, uh, lower value product mix into and therefore lower margin. So that's, I think you got it right, Ken.

And then, you know, because price mix is so strong, people just wonder how long, you know, you can have isolating mineral. I think, you know, personally, you have to look at them both together because you're covering the space in the building. But, um, You know, do you foresee all these, this 40% vitality rate? I mean, when you record flex design and this stuff, I mean, is that going to be going through, I assume that's going through volume with price mix, or is that, how are you going to be recording that so we don't misinterpret the volume that's occurring in that category as it relates to price mix benefits?

Yeah, as I talked about, Ken, the main driver of the AUV improvement is has been this mix impact from the new innovations, from Total Acoustics to Sustain to Design Flex, which, to your question, is a mineral fiber product. So it goes through our price-volume mix breakout. So it's going to be contributing to mix in a big way. AcoustaBuilt's another one that's going to be a mineral fiber product that's going to continue to support a higher-value mix. Again, I think I'm really encouraged by the Vitality Index that we've been tracking over the last several years. It tells us a lot of things, and it should tell you this. It should tell you that the innovation that Armstrong is bringing to the market is relevant innovation and that the market wants. And we're really letting the market drive our innovation efforts. And I think this is an affirmation that, again, the products that we're bringing are the right features and benefits and at the right price point that – Customers are willing to pay. And that's why I think it's so encouraging. And I'd say that's why you should also be encouraged, because of the long cycle with this innovation, that this mix-up story is going to continue at Armstrong.

Right. Thank you very much.

Thank you, Kevin. Thank you. Thank you. And our next question comes from the line of Michael Wood with Nomura InstantNet. Your line is now open.

Good morning. This is Ryan Coyne on for Mike. Maybe just a little bit on cost inflation. Just curious how inflation is tracking your initial 3% to 3.5% range from earlier this year.

Yeah, Ryan, we're down below that now. We're in that 2% to 3% range. I'd say 2.5% to 3% is a little bit more accurate, but in that 2% to 3% range.

Okay, great. And then just a little higher level, just from your vantage point, how the commercial construction market is faring. year-to-date, what you see for the second half, and then maybe a little bit on what you're seeing for 2020?

Yeah, Ryan, this is Vic. Let me take that. I think, as I mentioned in my prepared remarks, the market is about what we expected it to be. Education in particular, I had been outlooking that we were expecting a better education market this summer season than we saw last year, and that has materialized. It's modestly better than last year. It's driven by healthier state and local government spending. And that's also been supported by some improving education starts over the last 18 months or so. So I think that's been a nice materialization of what we were expecting to see. Healthcare remains flat overall. Retail is down slightly. And office continues to hang in there in the low single digits. So I'd say overall the market is about what we expected. And, you know, I'll add to that a little bit of color from my visits out to the field, meeting with contractors and distributors, even architects that are very bullish about the second half of the year, given their quoting activity and their backlogs. So, again, we feel good about what we're seeing in front of us right now from a market standpoint. Appreciate it. Thank you. You bet. Thank you.

Thank you. And our next question comes from the line of Garrick Chamois with Longbow Research. Your line is now open.

Hi, thank you. I'm just wondering if you could touch on the cash flow in the quarter. And, you know, you're reiterating your outlook, but it seemed like working capital was a little bit of a headwind. So, you know, wondering how that tracks in the second half of the year and just the confidence that that reverses.

Sure, Garrick. It's Brian. We're pretty confident in it. You know, I mentioned I called out, we had some, in the first half last year, we got a $20 million refund on taxes. And so we're normalizing, you know, we're starting to wrap that. And for the quarter specifically, working capital was a headwind, but a slight benefit on the half. So we expect it to follow a consistent performance in the back half like we saw last year and deliver our guidance.

Okay, thanks. And then just to follow up just on the volumes in mineral fiber, just wanted to be clear, really the only change in your guidance, you know, related to LATAM and then also just with respect to the expected volume growth in the second half of the year, you touched on education coming in a little bit better than you had previously expected. You know, is also that the main change in, you know, I guess the verticals, you know, tracking in the second half versus your initial expectations?

Yeah, I think all the verticals are about what we expected. Again, the one that we had to kind of wait and see on was education because it's such a seasonal market. But as I said earlier, it's materialized as we had hoped it would. So I think the main headwinds, you know, as we talked about, we got off to a slow start in the first quarter driven by some of these weather and timing-related issues. And I still think those are working their way through, with the exception of Latin America being, I think, a little bit more of a headwind and probably a longer timeframe than we'll have time for in 2019. But I think overall, I think that's – I think we're seeing the market that we expected.

Hey, Garrett, this is Brian. The other thing I'd add to the education is, interestingly enough, we're starting to see some mix up there, and even K through 12. So it's not the university, so – It's an encouraging mix-up, too.

Okay, that's helpful.

Thank you very much.

Thank you. And our next question comes from the line of Keith Hughes with SunTrust. Your line is now open.

Thank you, Vic. Back to your comments on your work in the field and some of the general bullishness of the contractor's and other customers, are they seeing demand spill over into 2020? Do you have that long of a vision that the start of 2020 will look as robust as the second half of 19?

Well, as you know, they have a lot less, right? But in our longer project cycle business, like in architectural specialties, I am hearing some good activity spilling over into 2020 already. So As you know, the contractors and distributors aren't going to get too far out in front because of their visibility, but it's more positive than people are being negative, if that helps. And I'm really seeing, again, on the longer cycle projects in architectural specialties. So it's early days, it's early to tell, but that's one sentiment that I'm picking up in the marketplace.

One follow-up, too, on the mix. Question, are you seeing higher-end projects come in, or do you just think you're winning more share at the higher end right now?

Well, I think there's some upselling going on with these new features and benefits that are available now, like we were talking about with Total Acoustics and Sustain, for example. So a lot of this stuff, Armstrong is involved, we're on. but there's a trade-up going on with these new offerings. So I think there's a lot of that going on. I do believe that we do a really good job on the specification side of the business, driving the specifications at the high end of the market. So I think we're doing a really good job at the high end there.

Okay, thank you.

Thanks. Thank you. And our next question comes from the line of Stephen Kim with Evercore ISI. Your line is now open.

Thanks very much, guys. Good quarter. Just as a housekeeping item, a couple of housekeeping items here. Day's impact, what do you think that had? What kind of influence do you think that had in the quarter? And did I hear you say that you thought that the office segment was up mid-single digits or low single digits?

Yeah, so on the day's impact, it's about 1.5% is the way to think about that on the quarter, both on volume and revenue. What I said on office, Stephen, was that it continued to be positive, and it's in the low single-digit positive is what we're seeing so far in the marketplace. And, again, there's some really good new construction activities that are supporting that as well. Got it.

Okay. And then second question related to the SG&A savings in mineral fiber and the investments in architectural specialties. Can you break out, like, what some of the largest contributors to the savings are? You know, what drove the increase in those two numbers, one positive, one negative? And is the 2Q savings run rate pretty good news going forward?

Steven, this is Brian. So, no, we've completed the benefit of the restructuring process. It's a combination of cost of goods sold and SG&A. We had profiled $10 million in the first half of this year. So that run rate that we saw for mineral fiber is not a run rate, which is roughly $4 million in the quarter. But the investments we're making, for example, in AS, and remember, even though we break these into segments, it's really one big business, right, because there's multiple products, our broad portfolio on every job. And so we're adding some more CAD designers and the upfront technical folks to help with project-oriented specifications. Okay.

That makes sense. Sort of keying off of that, Vic, you had talked about the visualization initiatives and the innovations that are being implemented on that front. I just want to make sure I understand, are these desktop-based applications? Are these website-driven applications? Where are the designers going to utilize this functionality and these features? Are they sitting at their own offices, or do they have to go to a distributor location to interact with these? What's the user interface like?

Initially, these are desktop applications. Because of the size of these files, eventually they'll migrate to cloud-based solutions, is our hope. and the plan. But yeah, the opportunity right now is in both in their office, where we have to take our system in, but we have a site on campus now that they can come to and we can do live work on campus. Or we can do it virtually through an internet feed. So there's multiple ways to interact, but right now they're desk-based solutions.

Would it be your guess that where this really takes kind of like a potential quantum leap forward would be when they can actually do it in the convenience of their own office whenever they get around to it, you know, having a cloud-based system? Or is there something about the way in which the designers work and interact with your products such that that won't necessarily be the case like it would be, let's say, in certain other products and design situations?

No, we certainly expect this to get to a point where it's easy enough to use and they can do it in a cloud-based environment. That's definitely the plan and the direction. I think our customers want this to be available as a tool for them to use as they see fit within their design cycles. So that's definitely the direction we're moving.

Okay. And in terms of timeframe to get there?

We're not really prepared to say publicly. It's kind of an ongoing development process. And we'll keep you updated as we go. But right now, it's kind of locked in a – we're sitting in a desktop solution for the time being.

Okay. Well, great. Thanks very much, guys. Thanks. Thanks.

Thank you. And our next question comes from the line of Phil Ng with the Jefferies. Your line is now open.

Hey, guys. To get to your flat volume guidance for mineral fiber would imply you would see a pretty noticeable pickup in back half. Is part of the confidence that's driving that uptick driven from the trends you're seeing in July and perhaps the education piece you flagged?

Yeah, I'd say what we're seeing in July is consistent with that outlook. And, again, in my comments earlier about the education season. So I'd say, yeah, that's right.

Okay, big piece of the education piece. All right, sounds good. And then good to hear you're seeing some pretty positive feedback on design flags. Have you started to see any meaningful contribution, whether it's on the AUV line or on shipments? And then as for the AcoustaBuild piece, I know it's going to be more of a 2020 event. Is the opportunity more on commercial, or there's some opportunity on the rising side as well? Thanks.

Yeah, you know, I'd say design flex, it's still early and relatively small to the overall size of the business, so it would probably be in the rounding air of, you know, on the mixer line. But, again, I think we're gaining ground there, and it is starting to materialize in terms of revenue, which is very nice to see. The Acoustabuilt has application on both sides, both residential and commercial. But where we're focused right now is where we have the opportunities is initially on the commercial side of the business. But we clearly see opportunities on both sides. Got it. All right. Thanks a lot. You're welcome.

Thank you. Our last question comes from the line of Justin Spear with the Zellman Associates. Your line is now open.

Hey, guys. Appreciate the time. Just a few questions. One, starting out with the architectural specialty side, the growth and margin expectations as you look to the back half, if you can help characterize, you know, what you're thinking, you know, the comparisons, particularly on the growth side and the third quarter are fairly difficult, but just getting some characterization there would be helpful.

Yeah, I think... Again, I think what we talked about earlier in terms of the segment activity and the way that our customers are feeling about their backlogs, we are comping some tougher price comps because a lot of the price activity occurred in the second half of last year. So, again, that's why we expect to see some of that moderate on a comp basis. But we should have some stronger volume in the second half, as we've talked about. And so I think the combination there keeps us in the high single-digit top-line growth. And then the plants and the teams are operating very, very well. So we expect to continue to see double-digit earnings growth on the bottom line.

And particularly for the architectural specialties business, that high single is a good number to kind of model towards. And then... I guess the second question on that is just on the margin side, given the investments that you're making, how you're thinking about that lining up in the back half as well for that business.

Yeah, again, I think we're expecting to see margin expansion in that business. I would expect double-digit top-line growth to continue in that business. Okay. Again, they're continuing to take share in the, I would say, the base business materials that we're currently in. as we ramp up some of these new acquisitions as well. So I expect to see some continued momentum in that business in the second half.

Okay. And in terms of the spending, is that going to sequence down in terms of the margins? You said you expect expansion. In terms of the magnitude of expansion on the volumes, what are you baking in your guidance there?

Brian, do you want to take that? Yes, sure. So, Justin, a couple things here. One, we're not going to be, you know, shy about making some investments. Again, these investments show up mostly in A.S., but they benefit the total company. And we want to make those rightful choices and investments that help sustain this nice high single-digit growth. So I can't give you an exact number. You know, there's typically a couple million dollars a quarter, one to two a quarter for the total company. Again, most of that shows up in A.S., But, again, we're not going to hesitate to make some of those investments in order to sustain that top line.

Perfect. And this next question is more intermediate term in nature, and you've had some acquisitions here. Just maybe an update on what you think for your current platform as it stands today in architectural specialties in particular, what your, I guess, the addressable market size or definition is and how fast you think that market is growing or expected to grow in the coming year or two. Of course, you're taking share, but just trying to get a baseline or a handle on the addressable market.

Yeah, the addressable market, Justin, it's tough to be very, very specific about it, but we've talked about it being it's greater than a billion-dollar market opportunity in that, especially ceilings and walls. And so... Again, our share position would be, although we're the leader in this space, you can see the nature of the fragmentation in that space. So that's the opportunity for us to continue to execute against that. And, again, our pipeline of acquisitions continues to develop nicely to support that penetration in that market. Excellent.

And then last question for me is just on the SG&A leverage, obviously very good on some of the actions that you've taken. for the overall business, what are you embedding for SG&A, either as a percentage of revenue or maybe a dollar run rate figure, recognizing their seasonality in a business, but dollar run rate figure, what's a good run rate to think about for the balance of this year, maybe on an annualized basis?

So, Justin, I'd say annualized, we're running right around that 15% of sales, and so that affords us as we grow sales to make some investments back in the business, but our longer-term value creation is right around that 15% of sales.

Okay. So the 15%, do you think it's a good number to use or close to it for the full year, despite the very, very good first, or particularly the second quarter, very good there? So we should see that step up a little bit in the back half.

Yeah. And this year I'd say we're running a little heavier than that because of some of the acquisitions we closed last year. But overall, longer term, it's right around that 15% mark. All right.

I really appreciate the time, guys.

Congratulations. Thank you, Justin. Thank you. Thank you. And that does conclude today's question and answer session. I would now like to turn the call back to CEO Vic Grissel for any further remarks.

Yeah, I just want to thank everybody for joining our call today. Again, we feel very good. I want to thank our employees, too, for just terrific execution the first half of this year. And we look forward to updating you after our third quarter performance. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.