Armstrong World Industries Inc

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 and full year 2020 Armstrong Word Industries 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 touchtone telephone. Please be advised that today's conference may be recorded. Should you require any further assistance, please press star 0. I would now like to hand the conference over to your host, VP Corporate Finance, Tom Waters. Sir, please go ahead.

Thank you. Good morning and welcome, everyone. 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 10-K 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 Dick.

Thanks, Tom, and good morning, everyone. It's good to be with you today, and thank you again for joining. You know, before we get into Armstrong's fourth quarter and full year 2020 financials, I want to take a moment to recognize what we've all been through on a personal level these last 12 months. Our 2,700 Armstrong employees, our communities, our partners, suppliers, our customers, and our shareholders have no doubt been impacted by the multiple crises we've all faced. I want to acknowledge the challenges and the hardships many of you and all of us have experienced. And I want to share my admiration for the creativity and the teamwork and many acts of selflessness that I have witnessed within our own organization and in our communities. It's been an extraordinary year. and I wish us all a healthy and prosperous 2021. I have a lot to cover today. I'll begin by reviewing our financial results with some commentary on fourth quarter market conditions, and then I'll recap our 2020 accomplishments, and there are many, including launching new products in response to the threats posed by COVID-19, Air Assure and VitaShield. Then I will discuss the increasing importance of healthy spaces before turning the call over to Brian and provide a detailed review of our financial performance for both the quarter and the year. Then I'll be back, and I'll close our prepared remarks by discussing in more detail what we've been working on in preparation for a post-pandemic market to further strengthen our company, namely in the areas of growth, digitalization, and sustainability. With regard to the marketplace, in the fourth quarter, we saw sequential improvement, pretty much as expected. The various in-markets and channel activity continued to be mixed by territory and vertical. New Orleans, for example, exhibited quarter-over-quarter strength related to hurricane damage, and the Pacific Northwest continued to improve. Meanwhile, the Upper Midwest and Southern California moderated. The number of healthcare projects bid during the quarter picked up nicely, but was offset by slower activity in education. So although we saw overall sequential improvement, underlying conditions remain choppy and drive near-term uncertainty as building owners seek to determine the best path forward to adapt their facilities to enable the safe return of occupants. For the full year, 2020 sales of $937 million were down 10% from 2019. Adjusted EBITDA of $330 million was down 18% from 2019, coming in at the high end of our guidance range. Adjusted free cash flow for the year was a strong $212 million, or 23% of sales, once again demonstrating the strength of Armstrong's best-in-class value creation model, even in the face of a pandemic-driven sales decline. Full year 2020 results were characterized by a significant drop in sales in the second quarter as the pandemic struck and certain markets were effectively shut down by government mandates. Since the second quarter, we have experienced sequential improvements on both a month-to-month and a quarter-to-quarter basis. In the mineral fiber business, in addition to significant volume declines, we were faced with two unusual mixed headwinds that impacted AUV, or average unit value. Beginning in the second quarter, we experienced significant negative territory mix, as our key seven territories, including the New York metro area, were disproportionately affected by the construction shutdowns. This trend moderated and continued to improve in the fourth quarter. A compounding AUV headwind was channel mix, driven by stronger sales to big box customers as work from home became a reality for many. This was a good result from a volume perspective and reflects the hard work of our teams with these channel partners. However, price points in this channel are lower than our overall average and drove a headwind on mix fall through, particularly in the most recent quarter. We expect these timing-related trends to normalize beginning in the second quarter of 2021. Core product mix, the underlying driver of AUV improvement for the past 10 years, has continued to be positive in 2020 as our higher-end solutions, including the total acoustics and sustained families, outperform the lower price range of our portfolio. reflecting the continued desire of architects and building owners to improve the performance and aesthetics of their spaces. The other component and underlying driver of AUV is like-for-like pricing. Once again, in 2020, we delivered positive like-for-like pricing and priced greater than input cost inflation. Operationally, our plants ran well, adopting new safety protocols, and we were able to maintain high levels of quality, service, and productivity. I'm extremely proud of the way our manufacturing teams innovated to find ways to keep our plants operating and servicing customers throughout this year and do it safely. Architectural specialties experienced similar disruptions as large renovation and new construction projects were delayed at the outset of the pandemic. But as with mineral fiber, sales recovered sequentially as markets reopened and contractors adapted to the new safety protocols. The architectural specialties business exited 2020 with a record backlog and is well positioned for 2021. Now, more than any year in my memory, 2020 was about more than just financial results. In a year of a health crisis and a resulting economic crisis and a social crisis on top of that, 2020 was about responding to short-term priorities while preserving the foundation for longer-term opportunities. When the pandemic first hit, our priorities were protecting the health and safety of our people, adapting our business practices to maintain connectivity and collaboration with our customers, and continuing to supply essential products with a special emphasis on serving healthcare projects. Once the immediacy of the crisis passed, we made several strategic decisions based on the belief that the pandemic will end and the innate human desire for connection and community will once again return us all to offices, schools, and shops. We made decisions to conserve cash and manage expenses, to retain our talent and preserve organizational capability and capacity that we have worked really hard to build over the past several years. We remain committed to our digital and M&A initiatives, and we pivoted our new product development efforts to meet the need for healthy spaces with an emphasis on improving indoor air quality. Now, sitting here today, I believe those decisions were the right ones and are delivering on our objective of emerging from this crisis a stronger, more capable, and competitive company. As you recall, when the pandemic hit, we suspended our share repurchase program and trimmed capital expenditures prudently to conserve cash. We identified and acted on $40 million of temporary cost savings that would not impact our growth and value creation opportunities. With the return of some stability in the marketplace, we have resumed our share repurchase program. We're returning our capital expenditures to pre-pandemic levels, and we are enhancing our investments in our digital and healthy space initiatives. As we have reported, we did not furlough our salespeople. We did not lay off resources or slow work on key initiatives. In fact, we launched new digital tools like Project Works to keep our sales teams better connected to customers. and we added resources to our organization in order to accelerate the work around these and other key strategic initiatives. Specifically, we launched a new digital platform in the fourth quarter that will enable Armstrong to drive mineral fiber volume growth. I'm going to provide more details on this in a moment, but I believe These actions collectively will further extend Armstrong's leadership position and allow us to accelerate growth as the economy recovers. Now, looking back on 2020, acquisitions were also a bright spot. Despite the challenges presented by COVID, we were opportunistic and pursued and completed three transactions with Turf, Moe's, and Arcturus. These companies each bring unique and exciting capabilities as well as talent that cement Armstrong's leadership and felt products, custom metal capabilities, and maybe most importantly, bring design and technology capabilities that can be integrated and scaled across our entire company. Our M&A pipeline remains active, and we continue to have the capability to execute additional acquisitions and partnerships. In new product introductions, we also had a strong year. We launched 35 new products in 2020. That's a 50% increase from our normal pace of activity. I could not be more proud of our MPD team, and I know that they are working very hard to develop important, groundbreaking new products and solutions to further contribute to the healthy space demands that we'll all have in 2021 and beyond. Several of these new products came about from a pivot that we made when it became apparent that the COVID-19 pathogen was largely transmitted through the air as an aerosol. Even with enhanced access protocols for our labs and test chambers, our team brought to market at record speed the 24-7 defend portfolio to address the need for healthier, safer spaces and to specifically improve indoor air quality. In November, we launched the Air Assure family of ceiling tiles. AirAssure is a gasketed sealing solution that forms a tight seal to the grid system. It's designed to reduce air leaks through the sealing plate by up to four times over standard sealings. Reducing air leaks can significantly increase the effectiveness of HVAC systems by forcing more air to flow through the return air vents where it can be filtered and purified, therefore enabling better air quality. In addition to allowing more filtering and cleaning of air, Air Assure can also reduce the risk of pathogens traveling from space to space in a building. And by doing so, again, Air Assure can protect a greater number of people. Also in November, we paired the patented VitaShield ultraviolet air purification system with Armstrong ceiling panels to provide cleaner, safer air in pretty much any commercial space. This system concealed In the ceiling, Plenum draws air into a chamber integrated into the ceiling tile, exposes the air to UV light to neutralize the harmful pathogens, and then returns the cleaner air to the room. VitaShield can be used with our ceilings as a standalone solution, or even better, it can be integrated with AirAssure panels. These two new products are just the beginning of a robust pipeline of healthy space solutions which represents a multi-year renovation opportunity for Armstrong. The big picture of healthy spaces is critically important. As you likely know, we spend 90% of our time indoors, so it stands to reason that these spaces where we live our lives ought to be as safe, healthy, and sustainable as possible. They should be deliberately and holistically planned, designed, and built to be protective, reassuring, and comfortable. In my view, this has always been true But the pandemic has redefined what we mean and what we want in our healthy and well spaces. And the need for solutions in this area is more pressing than ever. The way we think about the performance of spaces we inhabit has changed and expanded forever. As a CEO, I think a lot about my employees and how they're doing and how this is impacting their lives in a myriad of ways. When we return to the office, I want them to feel safe and secure so that we can focus on doing our best work. I know that we are at our best and most creative when we are together. We're excited that Armstrong can play a crucial part of bringing healthy spaces to people. To help us learn more and bring healthier spaces to life faster, we're installing our 24-7 defense solutions in our own facilities. and we are retrofitting one of the existing buildings on our corporate campus to be a healthy spaces living lab. This healthy space pilot will showcase what we've learned so far about ceiling systems and will provide a space for us to collaborate and innovate with other leading interior component manufacturers. By working together, we'll be able to better design integrated, holistic, and effective healthy spaces solutions. Healthy spaces remains the dominant topic in the commercial construction conversations today. 92% of architects and designers surveyed said they are having conversations with their clients on how to make their spaces healthier and safer. As you all know, Armstrong has always had a strong presence in the A&D community, and its presence is strengthening as we are at the forefront of these conversations on how to create healthy spaces. Now, with that, I'll turn the call over to Brian to review the details of our financial performance. Brian?