Armstrong World Industries Inc

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2019 Armstrong-Wald Industries, Inc. earnings conference call. At this time, all participants are in the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Tom Walters, VP of Corporate Finance.

Thanks. 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 10-Q 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 this 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 third quarter results. Another strong quarter and a record EBITDA quarter for the company. Sales grew 6%, adjusted EBITDA improved 13% to $114 million, and margins expanded 250 basis points. Year-to-date sales were up 8%, adjusted EBITDA is up 15%, and margins have expanded 240 basis points. With these solid results, we remain confident in our full-year adjusted EBITDA guidance and And as we tighten the guidance range, we are slightly raising the midpoint. Now, in a moment, Brian will 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 as we refer to it, was up more than 2 percent, with both like-for-like pricing and mixed improvements positively contributing in the quarter. As we previewed with you, price realization in the quarter continued to normalize from the higher increases we reported earlier in the year. It's also worth noting that positive price and mix in the quarter was on top of the strongest price performance quarter of 2018. In the quarter, price increases once again outpaced input costs. On the mixed side, we continue to see above-market performance from our new product innovations, Sustain, Total Acoustics, and DesignFlex. Year-to-date, mineral fiber AUV is up 6%, and we remain confident in once again delivering AUV growth in the 5% to 7% range for the full year. consistent with both our historical average and our guidance. Mineral fiber volume was positive in the quarter and continues the favorable sequential quarterly trend we outlooked earlier in the year. Broadly speaking, commercial activity in the U.S. remains favorable, with both bid activity and backlogs remaining positive, despite a continuation of uneven R&R activity across the various verticals. New construction and larger remodel projects continue to trend favorably broadly across the U.S., And the education sector in particular was positive throughout the summer, much as we had anticipated. However, in total, volume came in below our expectations. Canada and the big box channels remained softer than expected, although improving, but not yet back to the expected levels. There's unique political and economic issues in Canada, and inventory balancing in the big box channels are all working their way through, but again, slower than initially expected. Also, to a lesser extent, smaller project size R&R activity in the U.S. retail and healthcare verticals continue to be softer and uneven across the regions. Canada, Latin America, and the big box channels represent the majority of our year-to-date drag-on volumes. Our teams have been working hard to compensate the unique circumstances in each of these channels, and I'm pleased with the work completed in the big box channel and in the Latin America channel that would drive improvements in Q4 and into 2020. Adjusted EBITDA margins expanded in the mineral fiber segment. Our operations teams continued to execute at a high level and delivered a great quarter. Mineral fiber gross margins expanded 140 basis points. Now, last quarter, I introduced you to our plant reliability metric. It's a multi-input measure of manufacturing performance that captures things like uptime, yield, and throughput. And I reported that it was trending near all-time highs. Well, in the third quarter, this trend not only continued, but our teams broke the plant reliability record, resulting in an outstanding 5% productivity improvement. This is a reflection of the hard work and expertise of the people in our plants. And it's also a demonstration of early results of our digital factory initiatives, which is a subset of our overall digitalization strategies. Margin expansion was also driven by favorable price over inflation, mixed gains driven by our innovation, and a strong quarter at our Wave Joint Venture. Equity earnings from our Wave Joint Venture were up 16% in the quarter, helped by strong sales of higher value component products and non-traditional grid items that improved Wave's overall sales mix. Turning now to our architectural specialty segment, where we had another strong quarter, Sales were up 23%, marking the sixth time in the last seven quarters that sales growth has exceeded 20%. Our teams continue to leverage best-in-class capabilities to win more projects and outpace market growth. ACGI, our newest acquisition, contributed $7 million in the quarter. Our ACGI integration efforts are ahead of plan, and we are gaining early traction by adding ACGI's exciting wood products and capabilities to the Armstrong sales platform. Overall, the base AS business, which includes our 2018 acquisitions of plaster form and steel ceilings, remains on track to grow more than 15% as we got it at the beginning of the year. Our backlog going into the fourth quarter and 2020 remains strong and supports the continuation of this trajectory. EBITDA margins and architectural specialty segment expanded to 24% in quarter. I was particularly pleased that all of the acquired companies improved EBITDA margins sequentially in the quarter. All four acquisitions continued to run ahead of their financial business cases, further validating that we are acquiring good businesses, integrating them well, and driving sales and operating improvements on the Armstrong platform. Now, at our investor day, we used the Tecnam acquisition to illustrate how we take smaller subscale regional businesses and scale them on the Armstrong platform. These acquisitions are typically sales growth constrained and are operating with EBITDA margins below our segment average. We noted that margins can often decline in our first year of ownership as we bring the businesses up to our operational standards. And after an initial year of integration and investments, we generate leverage via sales growth from our spec writing capabilities and participating in our best-in-class distribution network. We also drive operational efficiencies by bringing our manufacturing and lean expertise to their operations. Both of these efforts result in meaningful margin expansion, which is exactly what we're seeing at Technum. Year-to-date, Technum's EBITDA margin is 31%, an improvement of over 400 basis points from 2018, and almost double from when we acquired them in 2017. We remain confident that this path to enhanced profitability is repeatable across our more recent acquisitions. Also within the architectural specialty segment, we are pleased to announce another acquisition. As you may have seen in our press release, we have entered into an agreement to purchase MRK Industries, a manufacturer of specialty metal ceilings and walls. We expect this transaction to close in the fourth quarter. We know MRK and the management team well, as they have been a key supplier to us for several years now, including supporting the success of the Grand Central Terminal project in New York City. MRK's unique capabilities and management know-how will be a great asset to our architectural specialties business. As an existing supplier, MRK won't be a material contributor to our top line, at least in the short term, but their unique manufacturing and design capabilities will enhance the overall architectural specialty segment margins. In the quarter, we continue to advance our digitalization initiatives beyond the manufacturing work I previously mentioned. We are working to drive speed from the eyes of our customer, scalability in the architectural specialties business, and to create a frictionless design and purchase experience. As part of our fall launch, we are not only introducing new products, we are also rolling out new digitally-enabled solutions. We have added new Revit families to our website for the design flex products, and later this quarter, we will introduce a new digitally-enabled solution called ProjectWorks, a service providing a collaborative platform that will benefit all of our customers, from designers, builders, tenants, and even to our distribution partners. Project Works provides design visuals, budgetary pricing, bill of materials, and installation instructions to all projects' stakeholders on one single platform. Now this work can be done in minutes instead of days. This will further Armstrong's competitive advantage for new construction and major renovation projects. Project Works is the next step in our customer-facing technology journey that began with one quote, common portal for real-time quotations, that progressed to quote-to-order, which automated the order process, and now Project Works, an all-in-one design-to-delivery platform. This is an exciting, industry-leading, technology-enabled capability. You can expect to hear more about this and other customer-facing technologies in the coming quarters as we continue on our path to becoming the easiest company in the building product space to do business with. Now let me pause and I'll turn the call over to Brian for more details on the financials.