Armstrong World Industries Inc

Ladies and gentlemen, thank you for standing by and welcome to the second quarter 2020 Armstrong World Industries Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's 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 keypad. If you require any further assistance, please press star 0. I would now like to hand the conference over to our speaker today, Mr. Tom Waters, VP of Corporate Finance. Sir, please go ahead.

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 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. As you all know, these are very unusual and extraordinary times, and I hope that everyone on this call, along with your families and your colleagues, are staying safe and well. This most recent quarter was challenging in many unique ways, but I'm extremely proud of how the Armstrong team has rallied in the face of this challenge. Safety has always been a non-negotiable at Armstrong, and this virus has been and will continue to be a significant challenge. But when you are accustomed to operating at world-class performance levels of safety, you find a lot of energy to innovate and to unique challenges like these. And our team has done just that. In our manufacturing and distribution facilities, our teams have created and installed barriers, altered operating processes, installed new methods of cleaning, and adopted numerous new practices and procedures to create a safe working environment. The organization has continued to demonstrate a passion for customer service, problem solving, and innovation like these. As of today, all of our plants and distribution centers are up and running and meeting the needs of our customers. Output has been aligned to meet demand, and our inventory levels are well-positioned. Since the middle of March, I've been closely monitoring one of our most important customer service metrics, our perfect order measure. It's a multi-factor gauge of service quality. I've been pleased that despite the required changes in our factories to maintain safety, the remote working conditions, and unpredictable order patterns, we have maintained customer service levels at very high pre-COVID levels. Our headquarters and sales staff continue to work remotely, and have become increasingly adept at remote work. Our digital tool set is now more important than ever, allowing us to remain fully engaged with our customers and our partners. We have seen a significant usage of our self-service digital platforms, one quote and quote to order. And during this pandemic, we have continued to expand our capabilities in these areas. For example, our Project Works platform, which creates drawings, installation instructions, and concurrent Bill of Materials, was initially launched as a support tool for the DesignFlex family of products. But during this pandemic, we rolled out Project Works capabilities in an expanded format to cover all core products, enabling us to automate more design and quoting work for architects, designers, and contractors, which has been a major productivity enhancer in these remote working conditions. Also, our product innovation efforts. have intensified during this pandemic with heightened need for healthy interior spaces driving our efforts. In the quarter, the demand environment evolved much as we expected with sequential improvement from the low point in April. As we discussed on our last call, by late April, we were seeing significant drops in demand in key territories such as New York City and Northern California and Boston. In the quarter, in our top seven territories, which includes these key territories, Sales were down more than 40%, as six of the seven territories were subject to government-mandated shutdowns. Collectively, sales in all other territories were down 20%. These seven top regions have an AUV premium to the rest of the country, so they are especially impactful. These territories and the construction sites are reopening now, albeit slowly, given the new required safety protocols are now tracking in line with the rest of the country. We have seen very few cancellations, and most of the cancellations we are seeing tend to be relatively small remodel projects. In the quarter, sales of $203 million were down 25% versus prior year. This represents the largest year-on-year quarterly decline that we have experienced in decades. Within the quarter, we saw each month getting progressively better from April's minus 30% result, volume declines from government shutdowns, project delays, and distributor inventory reductions drove the year-on-year decline. AUV was flat in the quarter, with positive like-for-like pricing offset by the territory mix issues I mentioned earlier. Price was positive for the first half of the year, as well as the quarter. The territory mix had been moderated as we moved throughout the quarter, and we continue to expect mix to be positive for the full year, with the continued reopening of our key territories. At the product level, we continue to see positive mix trends, as our high-end product offerings, including Total Acoustics and Sustain, continue to outpace the lower end of the portfolio. Adjusted EBITDA on the quarter of $69 million was down 36%. Despite these volume headwinds, cash generation was positive and our liquidity position improved by $35 million from the end of the first quarter, driven primarily by positive earnings and working capital. Commercial construction activity is a long way from where we were at the beginning of the year, But the pace is improving, albeit slower, as contractors learn to work within the new safety guidelines. Over the second half of the year, we expect that they will continue to improve their levels of productivity. And I'm encouraged by the trajectory of sales we are seeing on a weekly basis. Month-to-date sales in July are showing sequential improvement over June. And while we are encouraged by these trends, the marketplace remains uncertain. As such, we are not yet reinstating our normal detailed guidance for 2020. However, we are providing an outlook on the range of outcomes and possibilities we think is likely, assuming continued sequential improvement and no second wave of shutdowns. Brian will provide details in a moment, but I will note that we are now expecting sales to be down in the 10% to 18% range for the full year. As you've seen in our press release this morning, we're excited to announce another acquisition in our architectural specialty segment, Chicago-based Turf Design. This is our sixth acquisition in the past three years and further enhances our leading position in specialty ceilings and walls. With approximately $25 million in annual sales, Turf is the leading provider of custom-designed felt-based ceilings, walls, and barrier solutions. And felt is a fast-growing category within the architectural specialty space. It provides acoustical performance and enormous design flexibility. Given the increasing need for interior barriers due to COVID-19, this is an especially on-trend product. TURF's leading custom capability is combined with Armstrong's existing offerings in an unmatched portfolio of felt products and solutions, and especially for healthy spaces. TURF brings to the table not just manufacturing capabilities, but also a skilled and respected design team working out of the renovation center and design showroom called the Firehouse in downtown Chicago. In addition, TURF brings a proven and complimentary go-to-market approach to Armstrong with an established network of specialized independent sales firms focused on driving specifications within the interior design community. This further strengthens Armstrong's already leading go-to-market position and specification writing capabilities. TURF felt products contain up to 60% recycled material and are 100% recyclable at the end of their useful life, further strengthening our leadership position in sustainable ceiling and wall products. TURF is also profitable and will be accretive to the overall architectural specialty segment. We are delighted to welcome the TURF team to Armstrong. Now, this would be a great transaction to announce at any time, but given the current environment, I'm even more pleased to announce this acquisition It demonstrates the financial strength of Armstrong and the fact that we are open for business. Our sights are set on the future as we continue to invest to build on the strongest specialty ceilings and walls platform in the industry. Our M&A pipeline is growing and remains active as we continue to pursue strategically important opportunities, and our financial strength allows us to do so. Our digitalization investments continue as we strive to become the easiest building products company to do business with, and to drive efficiencies within our operations. And our R&D efforts are ongoing as we pivot to meet the newly required healthy space requirements in commercial interior spaces. We just completed our annual strategic planning process and reviewed the plan with our board of directors last week. The plan builds on our current financial strength as well as numerous exciting strategic priorities that we believe will drive profitable growth and cash flow in the coming years. As a result of this review and as a further acknowledgement of our strong free cash flow generation, our Board increased our share repurchase program by $500 million to $1.2 billion and extended the maturity of the program to December 2023. Given the current uncertainty in the commercial construction market and our desire to conserve cash, we expect to proceed with prudent caution in the short term, but we look forward to executing against this upsized authorization as we gain more clarity on the recovery and the overall demand environment. Now, with that, I'll turn the call over to Brian to review our financial results and guidance, and then I'll come back to talk about the trends we are beginning to see. Brian?