Armstrong World Industries Inc

Ladies and gentlemen, thank you for standing by, and welcome to the Armstrong World Industries Incorporated first quarter 2020 earnings conference call. At this time, all participants are in a 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. If you require any further assistance, please press star 0. I would now like to hand the conference to your speaker today, 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 on the call this morning 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 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. These are unusual circumstances that we are all experiencing, and I want to begin by saying that I hope that everyone on this call, your families and your colleagues, are all safe and well. Safety has always been a non-negotiable operating principle at Armstrong, and COVID-19 has challenged us to deliver on this principle, and I'm happy to report our teams are delivering. They're working systematically, collaboratively, and with great agility in finding ways to adapt our processes to enable social distancing and to operate within CDC guidelines. Among other things, we have altered crewing, adjusted line speeds, installed barriers, and increased the frequency with which we clean our facilities. And our corporate and sales staffs are working from home. And our most recent board meeting was successfully held virtually. We have instituted our emergency leave process so that employees who need time to deal with the COVID-19 issues will have it. Armstrong is a strong company with 160-year history, an experienced leadership team, a strong balance sheet, and a deep set of core values. Armstrong has weathered crisis in the past, and we will weather this one as well. We are committed to keeping our employees safe and supporting our customers. distribution partners, suppliers, and the communities in which we operate. Our long-term strategy to drive shareholder value is unchanged, and we will continue even during what is sure to be a challenging 2020. Even within this challenging environment, we will continue to expand mineral fiber AUV, primarily through innovation and improved mix. We'll continue to grow architectural specialty share, And we'll continue to accelerate penetration into the specialties business through M&A activity and continue to drive productivity gains. And not only to continue our digitalization initiatives, but find ways to accelerate their use and deployment as we become the easiest building products company to do business with. And, of course, we will maintain a prudent balance sheet and balanced capital deployment policy. This morning, I will spend the majority of my prepared remarks on the impact of the virus, but I do want to briefly touch on our first quarter financial results and what we are seeing so far in April. Then I'll update you on where we are today, what we expect, and how our longer-term outlook is developing. First quarter sales were up 3% versus 2019. Adjusted EBITDA was up 5%, and margins expanded in the quarter. Sales in the second half of March slowed in the geographies you would expect, New York, Boston, Seattle, and some other severely affected cities. These regional headwinds were partially offset by the acceleration of shipments to essential healthcare projects and stronger sales in Latin America, the retail channel, and Canada, as we expected. The strong sales in Latin America and the retail channel coupled with significant weakness in premium markets like New York City and Boston, had a significant impact on the overall mix and drove negative AUV in the quarter. Now, this is an unusual occurrence for Armstrong, so I want to take a moment and be clear that this channel and the geographic swing does not represent a change in course to our overall consistent AUV growth. I'll also remind you that we are copying a very strong AUV quarter in 2019, where we delivered 10% growth. So I'm confident that we will return to positive AUVs as this year progresses. In the quarter, we also incurred expenses responding to the safety requirements of the virus and the fact that our production at the Marietta, Pennsylvania facility was briefly stopped until the state determined that the plant plays a critical role in the manufacture and supply of goods necessary to sustain life, namely healthcare facilities. These items overall had a modest negative impact on earnings. Now, sales in April have clearly been affected by the various state and local shelter-in-place requirements and their ripple effects. Based on shipments month to date, we currently anticipate that April sales will be down in the range of 25 to 30 percent. Weakness is apparent in all channels and all geographies with relative strength in Florida, Illinois, and North Carolina, while California, New York, and Massachusetts were particularly soft. Based on orders and discussions with distributors and contractors, we believe May and June will improve sequentially. And currently, we're tracking jobs that have been delayed, and we are focused on serving them effectively when they get started. Including in these delays are a few large transportation projects that will impact architectural specialties in the second half of the year. Overall, we expect the architectural specialty business to outperform the market in 2020. We believe the second quarter will be the trough of operating activity for the year, and we're managing our production and our inventory accordingly. While clarity is limited, we are aligned with most of the economic and sector-specific forecasts that we've seen and expect the third and the fourth quarter to be sequentially better. The situation remains fluid, so we believe it's prudent to withdraw previously communicated 2020 guidance. At this moment, all of our plants and distribution centers are up and running, with the exception of our recently acquired MRK facility. We continue to work to optimize our production and shipping operations within the new safety constraints. And the teams are getting better on a daily basis. We're in close contact with our suppliers to ensure their ability to deliver the materials and services necessary for our operations and logistics. And as America's only company, we have limited overseas supply chain exposure. and have not experienced any supply disruptions thus far. We are carefully monitoring finished goods inventory with a priority on solutions for hospitals and healthcare facilities. In fact, we just recently received urgent requests for products at healthcare facilities in New York City. Our teams at Steel Ceilings, our plant in Pensacola, Florida, and our Wave Group in Aberdeen were able to expedite orders for the Mount Sinai St. Luke Hospital conversion, and for the Bronx North Central Hospital expansion. These are two great accomplishments, and there are many more. Our management teams are utilizing a robust array of digital interactive communication tools to stay closely engaged with their teams. Our sales and design staff remain connected with customers and continue to work on ongoing and prospective projects. At Armstrong, we have a 3A policy. Any device, anywhere, any time. And this has been in place for four years now and our employees are comfortably working remotely and in a manner that is transparent to customers. If anything, interactions with architects and designers has increased over the past month. The breadth of custom technology we now have available on our digital platform is more important than ever. We are fortunate to have started our digital journey when we did as we have a suite of Armstrong specific digital solutions available to our customers. I have no doubt that these tools, which I've talked to you about in the past, including Customer Online, One Quote, Quote to Order, and the recently launched Project Works are providing a differentiated capability to serve our distributor, contractor partners in this unique environment. As a matter of normal practice, we annually create multiple recession scenario response plans. And while the rate and pace of this situation was not anticipated, We have levers identified and roles and responsibilities assigned and are executing against these plans. We are taking steps to manage expenses, preserve our cash, including cutting SG&A and deferring capital expenditures, and temporarily suspending our share repurchase program. Our regular quarterly dividend is not affected, and we remain in the market for strategic and financially attractive acquisition opportunities. So at this point, let me pause and turn the call over to Brian for a more detailed review of our first quarter results. And then I will close by sharing my preliminary views on some of the longer-term implications of this pandemic. Brian?