Armstrong World Industries Inc

Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter 2019 Armstrong World Industries earnings conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Tom Waters, Vice President of Corporate Finance, please go ahead, sir.

Thank you, Catherine. 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 our 10-K, which will be filed shortly. We are finalizing customary control and documentation work with our auditors. This will have no impact on the financials reported in our press release and the earnings call deck. 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 gap 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, and thank you for joining our call. It's good to be with you today to review our fourth quarter results, which capped another strong year for Armstrong. In the quarter, sales grew 3%. Adjusted EBITDA improved 14%. This represents the 39th time in the last 40 quarters in which we've delivered positive EBITDA growth and a 12% growth CAGR since 2009, demonstrating again the stability and consistency of our business. In the quarter, EBITDA margins expanded 330 basis points and adjusted EPS was up 40%. In a moment, Brian will walk you through more of the financial details, but first I want to touch on a few of the key business results. In the mineral fiber segment, average unit value, or AUV for short, was up more than 5%, with both mixed gains and like-for-like pricing positively contributing in the quarter. Consistent with our third quarter results and our outlook, price realization continued to normalize from the high increases we reported in the first half of the year, which was driven by strong price realization carried over from a more inflationary 2018. Price gains once again outpaced input costs and contributed to margin expansions. On the mix side, we continue to realize above-market growth from our new product innovations like Sustain, which are free from red list chemicals, and our Total Acoustics line, which feature the ideal combination of sound absorption and sound blocking, and Design Flex, which adds colors, sizes, and shapes in mineral fiber, metal, and wood ceilings and walls. These products continue to illustrate how innovation is valued by our customers and can continue to drive mix higher in the mineral fiber segment. For the full year, mineral fiber AUV was up over 5%, consistent with both our historical average and our 2019 guidance. Mineral fiber volume was down 2% in the quarter as expected, with ongoing softness in the lower end of our product range directly connected to the big box channel and continued uneven R&R activity across the various verticals. Volume growth in our higher end products was up high single digits in the quarter, as has been the case all year. Consistent with that, with what we've said before, commercial activity in the U.S. continues to be favorable, with both bid activity and backlogs remaining positive. New construction and larger remodel projects continue to trend favorably across the U.S., while smaller R&R projects continue their uneven activity across the various verticals. The big box channel improved, but remained a headwind, and Canada remained soft. As we start 2020, we are seeing early returns from our channel-specific initiatives that we discussed in October. Canada, Latin America, and big box collectively are trending positively and are expected to continue this positive trend into 2020. In the quarter, adjusted EBITDA margins in the mineral fiber segment expanded at an impressive 430 basis points, driven by a multiple of factors. Pricing once again exceeded input cost inflation, Our new innovative products continue to drive higher mix gains, manufacturing productivity was strong, WAVE had another solid quarter, and SG&A expense was lower year-on-year, so a broad base of contribution to impressive margin expansion. Turning now to our architectural specialty segment, where sales were up 5% in the quarter. In the quarter, we experienced a supply disruption from a key vendor of standard products. This was caused by a quality issue that our teams identified and then stopped shipments to prevent a negative impact on our customers. Now, while the majority of the architectural specialty business is made up of highly customized products, there is also a group of catalog products of primarily metal and wood products offered in standard shapes and sizes. This supply chain disruption pushed out lead times in the quarter of these standard products, which resulted in a temporary loss of sales. We know what happened. We know what the issue is. We've worked with our vendor to correct the issue. And as at the start of the new year, lead times and shipments have returned back to normal levels. As of today, shipments of these products are up 40% sequentially, giving us confidence we've successfully restored the flow of these standard products back into the market. With this issue impacting our momentum coming into the year and the fact that we're lapping large transportation projects, we could see a softer year-on-year start in the architectural specialty segment. But for the year overall, the custom portion of our business has strengthened from this same time last year and gives us confidence in another year of double-digit growth. Again, as a reminder, the architectural specialty business is a project-intensive business, and the timing of large projects can create unevenness quarter-to-quarter. and makes it difficult to gauge the activity in this business simply on a quarter-to-quarter comparison. The visibility and the growth of the backlog is a meaningful indicator for what to expect for the year. Again, sitting here today in February, our backlog is up double digits versus this same time last year. We continue to work on acquisition opportunities in this segment and expect to close one to three additional transactions in 2020. as we further build out our industry-leading product portfolio and capabilities. In the fourth quarter, we closed the acquisition of MRK Industries, a manufacturer of specialty metal ceilings and walls. MRK has been a key supplier to us for several years, including supporting the success of the Grand Central Terminal project in New York City. We are happy to have their unique manufacturing and design capabilities and their management know-how inside the Armstrong family. For the full year, total company sales were up 6%, crossing over $1 billion in sales. Adjusted EBITDA was up 14% to $403 million. Margins expanded 270 basis points, and adjusted free cash flow was up 13% when excluding the special wave dividend in 2018. A strong year with positive contributions from both segments and on almost every line of the P&L. Price, mix, and volume all contributed meaningfully to sales growth and margins. Our plants had excellent operating performance and sequentially improved throughout the year. SG&A as a percent of sales improved, and wave equity earnings were up 9%. Truly a team effort with strong, steady execution to deliver solid financial performance for us to build on in 2020. One of the highlights of the year was the operating performance at our mineral fiber plants. I've talked throughout the year about our plant reliability metric, a multi-input measure of overall manufacturing performance that captures things like uptime, yield, and throughput, and how recent performance have been trending up and is approaching all-time highs. This trend continued in the fourth quarter, and I'm anticipating that we will establish a new record in 2020. This performance is a combination of focused leadership and And at the plant level, numerous teams executing project after project to reduce costs while improving both quality and service. These improvement efforts were aided by our digital factory initiatives as well. At the end of 2019, we had deployed 1,300 sensors in our plants, providing us with temperature and vibration data to analyze and deploy preventive measures. This analysis has enabled us to reduce scrap rates and increase uptime. We're only in the early innings with this initiative, and we have plans underway to deploy an additional 1,300 sensors during 2020. This gives me great confidence that the manufacturing productivity improvements we saw in 2019 are repeatable in 2020 and beyond. Most importantly in our plants, our manufacturing teams continue to work in a safe manner. 2019 was our 10th straight year with a recordable injury rate of less than 0.9 which represents world-class safety levels. As we look ahead to 2020, we expect to experience a similar market environment to 2019 and supportive of growth and consistent with what we've outlined in our value creation model. New commercial construction starts in 2019 should provide a moderate tailwind in 2020, with in-market demand expected to be mixed across the various verticals. We feel good about the office, education, and the transportation in markets. We expect relatively flat performance in the healthcare vertical, and we anticipate another soft year for the retail market. As I mentioned before, Canada, Latin America, and the big box channel have stabilized and should continue to improve throughout the year. With that, I'll pause and turn the call over to Brian for some more details on the financials. Brian? Thanks, Vic.