Armstrong World Industries Inc

Good day and thank you for standing by. Welcome to the Armstrong World Industries, Inc. First Quarter 2021 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 one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Tom Waters, VP of Corporate Finance. 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 armstrongsealings.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. and 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 will turn the call over to Vic.

Thanks, Tom, and good morning, everyone. It's good to be with you today to review our first quarter results. A solid start to what we expect will be a robust year of growth for Armstrong. Overall in the quarter, we continue to see sequential improvement and the recovery of our markets. Our total company daily shipping rate sequentially improved and accelerated through the end of the quarter, and that acceleration has continued nicely into April. This first quarter comparison is against the last of the pre-COVID market conditions, as we saw very little impact from COVID in our base period. In this first quarter of 2021, adjusted revenue of $253 million increased 2% from prior year, driven by sales of our 2020 acquisitions, which more than offset COVID-driven volume reductions in our organic business. Adjusted EBITDA of $85 million declined 12%, from the prior year driven by COVID-related volume declines, continuing investments in our growth initiatives, and the resumption of spending that was deferred when the pandemic hit. The mineral fiber business has started the year as we expected. Our mineral fiber daily shipping rate posted a third consecutive quarter of sequential improvement as people returned to work and markets continued to reopen. Like-for-like pricing exceeded input cost inflation, Top line mix was positive as sales of our premium products continued to outpace the rest of our product offerings. And channel mix was once again a headwind, although to a lesser extent driven by relatively strong sales in the lower price point home center channel. Channel mix, as we have experienced during the pandemic, has already begun to subside and is not expected to be a headwind going forward. The territory mix challenges we've faced for the past few quarters have diminished as New York City and the other six major metro areas we've recently called out are essentially in line with the rest of the country. On the operations side, our mineral fiber plants ran well with solid productivity, despite the challenges created by the winter storms. And our wave joint venture performed well and was able to price ahead of rising steel costs to deliver a strong first quarter. Our architectural specialty business delivered solid top-line growth of 25% versus prior year quarter, driven, again, by our 2020 acquisitions of Turf, Mose, and Arctura. A real highlight in the quarter was the acceleration in order intake, with the sequential organic order intake at a record level. That's resulted in a stronger-than-expected backlog. We continue to be encouraged by our win rates on projects, and our ability to differentiate our offering versus our competition. Given our strong backlog, we remain confident in delivering our 2021 sales outlook of more than 30% growth. In the quarter, we continued our investment in architectural specialties to further extend our capabilities and our capacity to support our expectation of continuing strong growth in this segment. Integration of our three new acquisitions continues to go well, and I remain excited by the potential for incorporating their technology and design capabilities across the Armstrong platform. Our acquisition pipeline is robust and continues to grow, and we have the balance sheet, liquidity, and appetite to execute additional acquisitions and alliances. In terms of the overall macroeconomic environment and marketplace conditions, markets have improved and are showing signs of gaining momentum. I am encouraged by the trends we are seeing in the data and by the tone of the conversations with our customers and distribution partners. Bidding activity can tend to improve through the quarter and more projects delayed last year are being released. GDP estimates are being revised upwards, which is a positive leading indicator for increasing renovation activity. CEO confidence is rising and return to office statistics are improving significantly. proving signaling a desire for an expectation of return to the marketplace. There is a strong desire to get students and teachers back in the classroom where they can be most productive and to get work teams back together so they can be most effective in collaborating, innovating, and networking. These trends, along with the potential for trillions of dollars in government spending on infrastructure, including spending specifically targeted for renovating schools, is creating greater optimism, and a more favorable economic backdrop. Along with stronger economic outlook, inflationary pressures are ramping up. The raw material most impacted in our operations thus far has been steel, used primarily at our WAVE joint venture in the manufacturing of our suspension systems. As a result, beginning back in December, we have implemented five price increases totaling more than 40%. It's been a challenging body of work for both our sales teams and our distribution partners to manage, but they have performed well and as evidenced by WAVE's first quarter results. We are also experiencing rising input and freight costs in our mineral fiber and architectural specialty segments. As a result, we have announced a heavier than normal 10% price increase on mineral fiber products and pulled the effective date up to May, earlier than normal. This is on top of the implemented February increase of 7%. In architectural specialties, we have also increased pricing on standard products and are adjusting our quoting processes on custom projects. With these actions, I remain confident that we will once again deliver like-for-like price realization greater than input cost inflation. Overall, both segments are operating at a high level. We have fortunately not experienced any supply chain disruptions. allowing for outstanding service levels. And because of our recent digitalization initiatives, we are staying more closely connected to our customers and partners than ever before, supporting a strong project backlog position. And our teams are executing well on our price initiatives to stay ahead of inflation. So with this healthy state of operation, a solid first quarter result, and our market outlook for the remainder of the year, we are reiterating the full year 2021 guidance we provided in February. And with that, I'll turn the call over to Brian to review the details of our financials. Brian?

Thanks, Vic. Good morning to everyone on the call. Today, I will be reviewing our first quarter 2021 results and our guidance for the full year. But before I begin, as a friendly reminder, I'll be referring to the slides available on our website, and slide three details our basis of presentation. On slide four, we begin with our consolidated first quarter results. Adjusted sales of $253 million were up 2% versus prior year. These adjusted sales include approximately $700,000 of purchase accounting adjustments related to our 2020 acquisitions. This is the last quarter for this adjustment. Adjusted EBITDA fell 12%, and EBITDA margins contracted 520 basis points. As Vic stated earlier, this contraction was expected given the pressure that persists this quarter from COVID-related demand declines, the investments we continue to make in our growth initiatives, and the fact that we have reinstituted the cost we temporarily cut last year. Furthermore, as a reminder, when you look at our adjusted EBITDA reconciliation in the appendix on slide 12, Q1 of 2020, earnings as reported were significantly impacted by our Q1 pension annuitization. Adjusted diluted earnings per share of 84 cents were 23% below prior year results. This result includes $6 million, or 9 cents, of amortization expense related to our 2020 acquisitions. Adjusted free cash flow declined by $13 million versus the prior year. Our balance sheet remains in a strong position as we ended the quarter with $397 million of available liquidity, including a cash balance of $122 million and $275 million of availability on our revolving credit facility. While net debt of $587 million was $43 million above Q1 2020 results, our net debt to EBITDA ratio of 1.9 times, as calculated under the terms of our credit agreement, remains well below our covenant threshold of 3.75 times. We have considerable headwind in this measure. In the second quarter, we repurchased 126,000 shares for $10 million or an average price of $79.60 per share. Since the inception of our repurchase program in 2016, we have bought back 9.9 million shares at a cost of $616 million for an average price of $62.57 per share. We currently have $584 million remaining under our repurchase program which expires in December 2023. Slide five summarizes our Mineral Fiber segment results. In the quarter, sales declined 5% versus prior year due to the impact of COVID. Mineral Fiber shipments exited the quarter on a positive note with March shipments flat to prior year on a rate per day basis. Through Friday, April's month-to-date daily ship rate is up 58% versus prior year and higher than 2019. Positive like-for-like pricing and favorable product mix continued, but as Vic mentioned, channel mix was a headwind in the quarter and affected the fall-through rate. We expect this will be the last quarter we face this channel mix fall-through rate headwind. Mineral fiber segment adjusted EBITDA was down 10%. as a result of the COVID-driven volume declines, SG&A spending to support our growth of investments, and the reinstitution of the 2020 temporary cost reductions. The mineral fiber plants ran well and drove productivity that fell through to the bottom line. Input cost inflation was temporarily offset by inventory valuations, but inflation is clearly ramping up and driving our proactive pricing actions. As Vic mentioned, WAVE, has been pricing out ahead of rising steel costs. Moving to our architectural specialties, or AS segment, on slide six, adjusted sales grew 25% versus prior year, or $13 million, as the 2020 acquisitions of Turf, Mose, and Arctura contributed $17 million in the quarter and more than offset COVID-driven organic sales decline of $4 million. EBITDA for our AS segment declined $3 million as EBITDA contributions from the 2020 acquisitions were more than offset by AS organic performance. Sales for our AS organic business continued to be lumpy as projects were delayed out of the first quarter, and we made growth investments in both capacity and capability to support our top-line expectations for AS. We remain confident in our sales guidance for the AS business as a result of the favorable trajectory of order intake in the first quarter that Vic mentioned. As sales ramp up throughout the year, we expect EBITDA margins to improve. Slide 7 shows drivers of our consolidated adjusted EBITDA results for the quarter, including a breakout of the impact from our 2020 acquisitions. Sales from our acquisitions essentially offset organic volume declines. AUV was a positive contributor driven by like-for-like pricing in the middle fiber segment, but was offset by higher SG&A. Slide 8 shows adjusted free cash flow performance in the quarter versus the first quarter of 2020. Cash flow from operations was down $13 million, driven by lower earnings. Keep in mind that the first quarter is typically our weakest for free cash flow generation. as we build inventory to service the strong summer demand period. We remain confident that we will deliver the 19% free cash flow margin that we have guided to for the year. Slide 9 summarizes our guidance for 2021. We are reiterating our overall expectations to grow sales 10 to 13%, adjusted EBITDA 9 to 13%, adjusted EPS 5 to 15%, and deliver free cash flow yield of 19%. April is off to a good start, and we are optimistic with the trends developing in the second quarter. It is too early to make any adjustments to our annual guidance, and we will provide an update on our guidance in July when we have more data. Slide 10 reiterates the seasonality we expect for sales in 2021. This is not something we typically share, as our seasonality is usually very consistent year to year. However, given the disruptions experienced in 2020, the seasonal pattern of our year-on-year sales will be unusual in 2021, so we've included this page to provide additional insights. In conclusion, I remain positive about the outlook for 2021. With an improving health and economic backdrop, an evolving portfolio of healthy spaces, products, and new digital tools and capabilities, Armstrong is well-positioned to advance our value creation model in 2021. With that, I'll turn it back to Dick.

Thanks, Brian. Before we get to some Q&A, I want to touch on a few important initiatives in the company, namely ESG, Healthy Spaces, and our new digital platform, Canopy by Armstrong. On our last call, I mentioned that ESG would be an area of focus for us in 2021 and beyond. As we build on our history of community engagement and corporate responsibility, it's increasingly important to all our stakeholders to and it has a natural fit with our mission, our history, our culture, and our strategy. As many of you have seen, earlier this month we launched a redesigned sustainability section of our website that reflects our three pillars of focus, people, planet, and product, and establishes our 2030 goals in these areas. In addition, work is underway and on track to complete our first sustainability report this summer. This comprehensive report will address the needs of GRI, SASB, and TCFD. And because of the importance of this work, I want to take a moment and recognize the great deal of effort and commitment by our teams that has gone into capturing our achievements thus far, baselining our opportunity for improvement, and to developing meaningful long-term goals. More to come on this total effort as we progress along this important journey, which aligns well with our strategic emphasis on healthy spaces. As healthy spaces continues to be a focal point in economic recovery, ceilings are becoming increasingly more relevant. As the capstone to an interior space, ceilings are critical for managing airflow and providing for optimal ventilation, as well as delivering acoustical performance and design aesthetics. These trends are revitalizing the ceilings category and making this category more relevant for the current and future need of healthy indoor spaces. And of course, this suits Armstrong well as a long time category leader. Armstrong is becoming recognized as a thought leader on the importance of holistic space planning, design and construction, and the impact this approach can have on the confidence and wellbeing of people while they're indoors, which is where we spend a large majority of our time. We believe that the growth investments we've made in 2020 will bear fruit in 2021. with gains from new healthy spaces solutions and our new digital capabilities. Our product innovations are on target for what a post-pandemic market will demand. Healthy spaces is much more than an event-driven opportunity. It's here to stay. Healthy spaces has always been important, but the pandemic has forever changed the definition of healthy and our health and safety expectations for indoor spaces. Architects, designers, facility managers, business owners, are all looking for solutions that bring people back into commercial spaces and make them more suited for future use. As offices de-densify and expansive collaborative spaces become the norm, the need for acoustical performance in ceilings will only increase, as will the need to better clean and manage airflow. Ceilings are central to providing these solutions. Our 24-7 Defend family of products, including Air Assure, Clean Assure, and VitaShield ceiling solutions are designed specifically to help improve air quality and ventilation sustainably. What's encouraging is that despite being launched just five months ago, 24-7 Defend products have been sold into all of our core sectors, office, education, healthcare, retail, and transportation. This clearly demonstrates the broad-based opportunity for healthy spaces. These product innovations timed for the healthy spaces catalyst, coupled with our new digital platform of Canopy by Armstrong, positions Armstrong well to capture the evolving market recovery opportunity. Launched earlier this year, Canopy by Armstrong, that's with a small k, is online at canopybyarmstrong.com. Canopy utilizes artificial intelligence and machine learning to provide early access and enhance visibility to a large part of the market opportunity we were previously unable to efficiently track. This technology is allowing us to influence an Armstrong solution and is making purchasing easy. Canopy provides facility owners and managers an end-to-end solution, including diagnostic tools, consulting, and pre-certified installation services. Online, consumer-friendly, and fulfilled by our best-in-class distribution network, Canopy is tapping into pent-up renovation demand in smaller-scale commercial spaces and driving mineral fiber volume growth. Early results are encouraging. We are seeing growth across all our critical metrics, website traffic, orders, order value, and sales. To date, each month has been significantly better than the last. and I expect this will continue throughout the year. Again, we are encouraged by the improving market conditions and the increasing relevance of the ceiling category, and we are especially excited about the market opportunities ahead that Armstrong is so well positioned to capture that will enable us to deliver on our commitment to deliver strong results for our shareholders and on our mission to make a positive difference by creating healthier spaces where we live, work, learn, heal, and play. And with that, we'll be happy to take your questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Catherine Thompson with Thompson Research. Your line is now open. Hi. Thank you for taking my questions today.

helpful color in terms of the what we're seeing in March and April and how we should think about stair-stepping with granted some unusual comps. One thing if you could give just a little bit more clarity on which is new construction versus repair and remodel. Given the launch of your Healthy Spaces product, I would imagine you're seeing greater demand there, but really want to get a better understanding of how much growth is being contributed by new construction versus retrofit, which is in a pretty unusual environment.

Yeah, you know, I think, Catherine, the activity, current activity, is reflective of what, in new construction in particular, as you know, is reflective of what's going to happen 18 months out, right? So what we're actually experiencing now in terms of or revenue or opportunities to ship into today is what was laid in 2020, okay, or what was not laid in 2020. So I think this year what we should expect, new construction activity from a sales standpoint is going to be a slight headwind. With that said, the bidding activity of new activity and new construction was positive in the quarter versus prior year. And this is the first time we've seen new construction activity be positive in the last several quarters. So I think that's an encouraging sign for me when I start to see that there's an end to a part of the headwind from new construction activity. Most of the activity we're seeing today that we're developing in near term and selling into for 21 is on the renovation side. Several of the projects that were delayed last year we're starting to see get released now. And really it was the latter part of the first quarter, and we expect to see that continuing into the second quarter. So the bigger part of our business, Catherine, you know well, 70% of our business is from renovation and large remodel projects. That's an encouraging sign for us on the activity front. And on the new construction side, again, the fact that we're starting to see more activity there bodes well for the second half or even into 2022. Okay.

And the follow-up question is on SG&A and the quarter. Really, I just wanted to get a clarification of how much the increase was due to the ramp-up of your December acquisition, which is, I believe, closed mid-December, structurally higher SG&A from the three acquisitions completed in 2020, and the higher incentive comp that you noted in your release. We really essentially want to parse out how much is more one-time versus structurally higher costs going forward?

Yeah, I'll let Brian comment on some of the details of that, Catherine. But overall, SG&A was as expected. We made a very conscious decision last year to continue our investments in the growth initiatives that I talked about, Healthy Spaces, this new digital platform, Canopy by Armstrong, Our architectural specialty, capacity, and capabilities, we've continued our investments in those, and those certainly are reflected, I think, in our first quarter numbers. And then the resumption of the temporary cost cuts that came back in from the 2020 deferral. So I'll let Brian comment on some of the specifics around those, but when I look at our SG&A, it was very much as expected and on track of what we – we intended to do with our – really driven by our growth initiatives.

Brian, you want to add any closing thoughts? Yeah, sure. As you further break that down, Catherine, say roughly $6 million to $7 million was around incentives and deferred comp, and that's more of a temporary item that we last year had a reduction in that didn't repeat here in Q1. $3 million of it is coming from the 2020 acquisitions. And then the remainder is the growth investments we're making to support the AS and canopy in healthy spaces.

Okay, perfect. Thanks. And before part, I wanted to say congrats to Tom for all your efforts with IR at Armstrong. We're going to miss you, and I'm going to miss our big word challenge, best of luck in retirement.

Thank you. Thank you for that, Catherine.

Thank you. Our next question comes from John Lavoya with Bank of America. Your line is now open.

Hey, guys. Thank you for taking my questions as well. The first one, Brian, if I heard you correctly, I think you said that April mineral fiber volume was up 58% year-over-year. I'm just curious if you could remind us of the monthly volume cadence on a year-over-year basis in 2Q20, so April, May, and June in 2Q20 on a year-over-year basis.

Yeah, John, that's one of the reasons I referenced that April was above 2019. So I'm encouraged to see that that sales rate per day exceeded two years ago before we had the COVID impact. So roughly last year sales, mineral fiber sales were down in the 50 range. So it's a nice pickup and encouraging that we're seeing that in April.

Gotcha. But did you have it? I can follow up with you, but I was curious if you had it on a monthly basis. But I'll follow up. The second question is, you know, AUV, you know, obviously returned to positive territory in the quarter, which was encouraging and certainly ahead of our expectations. Curious, you know, if this was ahead of your expectations and the level of confidence that you guys have that we're sort of through the worst of the pressure at this point.

Now, this was as expected. In fact, John, we had talked about last year the underlying concerns driver of our AUV last year was this territory mix that was very unnatural and caused by the unevenness of the COVID impact on some of these major cities, and of course some of the shutdowns that happened there, and that that was transitory. The underlying driver of mix that has been occurring in this industry for the last 10 years has been product mix, and that remained positive last year in 2020, and and as we expected this territory mix to kind of work its way through, as it has and as it did in the first quarter, that this product mix would start to show its way through and drive a part of that AUV component that wasn't there last year. So it's exactly where we expected it to be, and we think it's going to continue to improve from here with the backdrop of inflation to help us with our like-for-like pricing, And I think this territory mix has already normalized itself, as it's demonstrating here in the first quarter for the rest of the year. You know, channel mix was the only one that remained a slight headwind. And, again, that will work its way through, and it's already subsiding in terms of its balance with the rest of the territories and the rest of the channels. Now, I think AUV is exactly where we expect it to be, and I think it's fair to say that as you look at our guidance for the rest of the year with our easier comps in the second and third quarter that we're trending toward the high end of that range. Great.

Thanks very much, guys.

You bet.

Thank you. Our next question comes from Susan Macari with Goldman Sachs. Your line is now open.

My first question is just, you know, going back to the order trends that you are seeing in there, can you give us some sense of maybe what those end markets are, any color on the geographies as well, and just, you know, some context on that activity that you're seeing and how to think about where it's coming from?

Yeah, Susan, I think – let me start with the geography part of that because we certainly have seen – better demand from the southern part of the United States sooner, as those parts of the market have opened up sooner than, say, the northeast and even maybe parts of the northwest. So it seems to be kind of a transitory trend, though. I see the northeast, like New York City in particular, and California are improving nicely, and So I kind of see the rest of the country catching up to that. But geographically, we did see, say, Florida, Georgia, Texas, and some of those parts of the country out in front of some of the other areas. Really, on the vertical side, so the different sectors, education office, we really see a bounce back uniformly across all of those sectors. And I would expect that because what was – What happened in 2020 was indiscriminate to the sector or the new versus renovation. Everything was shut down uniformly. It didn't matter what type of project it was or what vertical it was in. So I would expect here in these early days of the recovery is a bounce back kind of uniformly across all of the verticals. And I think that's what we're seeing here in the first quarter. And again, into April, it's early. But we like the trend that we see in terms of the market activity across all of those sectors. I will just mention, though, since you've asked the question around that, the bidding activity in education and healthcare is trending upward nicely, and I would say ahead of some of the other sectors. And I think that's a reflection of maybe some of the additional funding and activity that's going into or funding that's going to drive that activity in those two sectors. So we'll see. That'll be to be determined, I think, as we see that unfold in the second and third quarters.

Yeah, it does feel like there's a lot of focus on education and kind of improving the schools out there. And so it seems like you are certainly capturing some of that, which is encouraging. My next question is just on the inflation. I know that you talked a little bit about the transportation expense obviously increasing. Can you give us some color around how to think about how that is kind of going to flow through for the balance of the year? Do you expect you'll see further increases? And I guess You know, how do you think about that against the normal cadence of pricing that we usually see from you? Should we expect that there could be, you know, obviously you've already announced that second price increase. How many are you thinking about for this year, and how should we be expecting those to come through?

Well, I think the fact that we pulled it forward, you know, we typically do our second price increase in August. We obviously pulled that forward into May. It's a little heavier than what we normally go with as well. It's a 10% price increase. to reflect what we expect to happen in terms of inflation so we can stay ahead of the inflation. So the answer to your question is really to be determined. I think we're going to take a look around as we get into the summer months, and if we're expecting or seeing an acceleration of inflation, I'll say, then we wouldn't be afraid to go out with another price increase to stay in front of it. So I like what we see, our 7% increase in February. was very effective, which is, again, a little bit heavier than when we normally go in February. I'm expecting that we'll have good success with the 10% in May, and then we'll see where we go from there. What I think is really notable is where we have the highest levels of inflation is in our wave business with steel costs that really started last August in terms of inflation. And they've really been able to implement price increases regularly, in fact, over the last several months to stay ahead of the steel inflation. So they're doing a good job. Remember, this is the same selling organization that raises prices on our ceiling tiles as well as the grid system. It's the same sales organization. So I'm confident we'll do a good job, as we already are, in terms of staying ahead of inflation.

Okay, that's very helpful, Collar. Thank you, and good luck with everything.

Thank you, Susan.

Thank you. Our next question comes from Ken Zenner with QBank. Your line is now open.

Good morning, everybody. Hey, Ken. Good morning. So 2Q is above 2Q19. That's good. You know, and you think – Obviously, you're talking to your product mix, which is, I think, as much regional mix fading in the second half. Is that correct, where we think about product mix really being driven by regional mix? Is that accurate, Vic?

No, the product mix is underlying across all the territories. That's continued to be positive. It was positive all last year, Ken, and then it continued to be positive as a fundamental. The territory mix... You know, New York and California, Chicago, some of those areas that were harder hit that carry higher value products.

Right.

But drove the negative overall mix. And that's pretty much normalized out as we've seen here in the first quarter.

Okay. You know, there's so many things happening. It certainly appears your share, you know, gains, if we had a good metric, would be improving, I think. Right. You know, you guys are being very disciplined. We can see that in price. As I drove to Timbuktu to get my second shot a couple weeks ago, you know, Northern California, it's just, you know, they were just building like crazy out in farm fields, which wasn't uncommon. But we had a big shift from the technology in the San Francisco area out, you know, into the exurbs. Could you maybe – I know you've really focused on schools, but, you know, as I take a step back and, you know, your stock's trading – where it is which is you know appropriate i think um could there be some bigger demand curve for your products you know as suburbs excerpts get a lot more demand you know in terms of the traditional suburbs right i mean you have shopping centers you'd have schools being built beyond just the refurb i mean is there something with this huge infrastructure spend the bill that could be coming you know inflation Could you kind of just talk a little bit about blue sky if the demand curves? Because I know we're all focused on things like office buildings in the urban area, understandably, but it seems like there could be a big kick from this excerpt that perhaps people aren't thinking about. Could you address that, please?

Yeah, Ken, we do see this trend. And, again, there was a nice article on Wall Street today on this trend that's happening of, know folks moving out of the city's higher cost areas of city to lower cost areas of the suburbs and we've said from the beginning can that there's not enough capacity there's not enough infrastructure in place out there to to house these folks that move there that will create opportunities for new construction activity renovation at the minimum but new construction activity If you look at the commercial construction over the last 10 years, since the financial crisis, the inner cities is where the most investment has gone for new construction. It hasn't been in the suburbs. And so we don't believe there's capacity there for a significant number of folks moving out of the cities into the suburbs. We've always viewed that as an opportunity, at a very minimum, again, renovation activity for those folks moving in, but also for new construction to house the additional need in those areas. And we shouldn't forget, and Ken, as we've talked about, you can't forget the capacity that's left in the inner cities. Somebody will fill that void, and I think that's the trick is how long will it take for that capacity to be utilized again, which drives a renovation event for Armstrong. That is latent demand for us. So Net-net, we believe this is a positive trend when you have volatility or transitory trends in the commercial construction area.

And maybe just to put that in context, with volumes down like they were in FY20, you guys have had that cyclical volume perspective where mineral fiber had been declining, never really recovering from the 99 peak. you're gaining obviously an architectural which you know is not necessarily swapping out square footage but um do you think you know there could be really a cyclical trough basically in mineral fiber because it sells so much in fy20 and it's been on this perpetual decline since 99 effectively could this be the renault i mean to the extent jobs are moving to florida new office space to the extent apple Or, you know, one of the tech companies is building a tech plant in North Carolina. I'm increasingly thinking about how your business might really be affected by that. I mean, are you seeing that? I mean, the bid activities take a long time, but can we de-densify and wouldn't that hurt the product mix? You know, if you're not putting something into the Salesforce tower, but putting it into suburban Raleigh, for example. Thank you.

Yeah, Ken, we don't see any change in the mix. whether it's in a suburb or whether it's in the inner city or in North Carolina versus San Francisco, these companies will have a standard of the quality they want in their interior spaces from an acoustical standpoint, from a lighting standpoint. And now with this new catalyst from a healthy spaces standpoint and the role of ceilings and the importance of the role it's playing in terms of driving and delivering high-quality air for occupants, it's a real catalyst for the ceilings category overall. So I think we're going to see additional opportunity in the ceilings category as part of the solution to create healthy, highly ventilated air from the role that it plays in the interior design. So I think that this is a tailwind opportunity for the category.

Yeah, it is interesting. Well, thank you very much. And, Tom, thank you for all of your help over the years.

Thank you. Our next question comes from Keith Hughes with Tuis. Your line is now open.

Okay. Thank you. Question on architectural specialties. You talk a lot about sales based on minimum and mineral fiber. What's it look like in architectural specialties and kind of where do you stand in April over a two-year basis from that business outside of acquisitions?

Yeah, the order rate's been terrific, Keith, as we talked about. You know, coming into the quarter, into the first quarter, we saw some of these projects on the organic part of the business. We saw some of these projects getting delayed and delayed out of the first quarter. So we landed about what we expected given some of the signals we were seeing on some of these projects getting delayed. But with that said, We had, on top of that, we had really strong, as Brian outlined in his remarks, we had really strong order intake. In fact, the month of March was a record level of order intake for us in architectural specialties, which was a really strong signal for us that there's lots of projects out there. They're not getting canceled. And so if I look at our backlog right now, our backlog is in one of the better positions I can remember it being at this time of the year. for what we expect to deliver for the year. And that gives us confidence that, you know, these projects delayed out of the first quarter, we're going to pick them up in the second and third quarter. And we're going to be fine on the top line there. So, again, I think there's – we continue to win in this space. We continue to integrate these new acquisitions. That gives us more credibility with the architectural design community to win specifications, which you know is a big driver to –

know the pricing and the margin structure that we have in this this category okay thanks and uh kind of final question on raw materials i understand we're talking about on steel and wave and all the price increases there if you look at your as and mineral fiber inputs for the tiles themselves what uh what's where's the most inflation coming from right now well it's interesting it's really on the packaging the packaging side which

Lumber is a big part of that, and you know well what's going on with lumber, right?

Oh, yes. Oh, yes.

So the packaging is really where we're seeing the greatest impact across both of our businesses, outside of wave with steel, which is very clear. But I think that's where – that and freight are the two highest levels of inflation we're seeing across the business. Brian, you want to add to that?

Yeah, Keith. We talked previously about total cost of goods sold inflation in the 2 to 2.5 range. We're now looking at that to be three to three and a half across both businesses. So while it's picked up some, that's been the basis for us pulling forward our pricing activity.

And that three to three and a half, that's not wave numbers. That's excluding the steel component, correct?

That's correct. Okay.

All right. Thank you. Thank you.

Thank you. Our next question comes from Stephen Kim with Evercore ISI. Your line is now open.

Yeah, thanks very much, guys. I wanted to pick up on your commentary about the April shipment, and I did catch that fact that you mentioned that it was going to be higher than 2019, which was kind of an attention getter given where your guidance is. I guess my question was I know that you guys do a fair amount of – you have a lot of exposure to some of the cities. I know in New York City in particular, but there are also some others. My question was whether or not those REIT areas had fully participated in that improvement, or if, in fact, what you're seeing in April is actually even maybe a little underpowered, maybe based on these areas not fully coming back. So just some clarity around that would be helpful.

Yeah, so putting that into context, So, Stephen, right, it's one month, right? But we all know that the 2019 levels is really a key marker for us, a key milestone for when the market is back to its pre-COVID conditions. So that's an important milestone. It's one month, but we really like what we're seeing in that trend and acceleration actually from the month of March into April. So it's one month, okay? So we're watching it very closely and we're encouraged by that. I will say not all of the seven key territories, like New York City, are fully participating yet. There's still healing going on in those markets. There's still more to go in those markets, which is why I think you can't overweight April, and we're not overweighting April without taking into the context of these seven key territories, which are still California and New York in particular are still healing and still have more to go. I'd say we're encouraged by the activity, the bidding activity in those two regions, the conversations we're having with customers in those regions on the activity. So we're encouraged by that, but we're in the early days.

Sure. Yeah, I know, but that's additionally encouraging. So second question relates to kind of a bigger picture, one around open plenum design specifically. one of the things that I think you all have made very clear is that there's a growing awareness of the need to manage, to treat the air that is actually being occupied. And just makes that job, you know, tremendously more difficult. And so you, I would think that one, to the degree that an ongoing awareness of the need to treat airspace persists, that Open Plenum is going to have some pretty tough sledding ahead and that your business could theoretically gain share back from Open Plenum. So I was just wondering whether or not you'd seen anything that might be a little more concrete than just what that sort of high-level thinking might lead you to conclude.

Even before now, in the recent time, we've seen the pendulum on open plenum swing back away from no ceiling at all because of the acoustical performance in those open plenum designs. So we've already seen, and that's created a nice opportunity for us with our architectural specialty business to provide really open-looking products like linears and some of the things that we have going in that provide an open look but provide some acoustical solutions there. So we've already seen a change in the conversation on the popularity of open plenum. This will add additional, I think, scrutiny on energy efficiency, which is becoming more and more important in the sustainability equation. And number two, again, being able to treat 100% of the year or all of the year versus a portion of the year that doesn't get trapped in the plenum. Again, I'd say there's a lot of conversations. This will add some additional scrutiny to it, but it's too early to say that the category is what's going to happen to the category of it all. In both cases, Stephen, I do believe this is an opportunity for ceilings to play a more important role in those open plan of designs, and we're encouraged by that.

Yeah, absolutely. Well, great. It's something to look forward to, and Tom, again, congratulations, and we'll meet you. Thanks, Steven.

Thank you. Our next question comes from Phil Eng with Jefferies. Your line is now open.

Hey, guys. The R&R activity that's coming back, perhaps that was delayed from last year, have you seen these customers take on some of these healthier living space products that you've been rolling out in the last few quarters? And are you seeing a little more retrofitting where these customers are improving that air ventilation or maybe improving social distancing?

Well, certainly the renovation activity that's going on now is stuff that was already in the works and is moving forward. Some of those specifications have been changed to our new products so that they can get the benefits of healthy spaces. That's created a nice little lift early on in until we get through the specification process for larger projects and so forth. So absolutely, we're getting really good traction, lots of great conversations around this. And as I mentioned, what was encouraging for me specifically, it was not just office or not just education, but it really was across every, including restaurants, by the way, all the verticals that we serve.

That's great. And then appreciating, you gave some great color about how trends are shaking out in April, so that's awesome. But in terms of the backlogs and bidding activity, appreciating there's more of a lag, can you quantify how much that is up in Q1 versus Q4? And then appreciating maybe new construction could be a little weaker this year. That handoff from that pickup, when you expect that new construction piece to kind of inflect positive, is this mid-2022? Just want to get a better handle on that handoff.

Yeah, so roughly in the single-digit positive range, just to help you quantify the level of – and that's versus prior year. And it was much better than the fourth quarter. So that's, again, it's another data point in the sequential improvement, the opening of the market, and the activity. And as you know, in this bidding activity, it can be anywhere from six to 18 months out, depending on how big the project is and how extensive the project is. So what was the second part of your question, Phil? I may have missed that.

Yeah, I'm just trying to get a sense when that handoff with the improvement you're seeing right now in terms of bidding activity will offset potentially some of the headwinds you were talking about on the new construction side because obviously you had a drop-off last year just from a timing perspective, that handoff flipping positive.

Yeah, we're really – it's somewhere between – Six and 18 months, again, very similar in terms of the size of the project itself that drives the timing of that. As you can imagine, Phil, some of these large projects are 24 months out before they'll need a ceiling. And, of course, some of the smaller projects can be three to six months. So it's really hard to say. On average, I think a good 18-month – window is a pretty good average across the different types of projects and different verticals.

Okay, super helpful. And I appreciate all the help over the years, Tom. Good luck.

Thank you. Our next question comes from Garrick Schmois with Loop Capital. Your line is now open.

Hi, this is Jeff Stevenson on for Garrick today. Thanks for taking my questions. My first is on how should the AUV improvement look the rest of the year between like-for-like price and mix?

Yeah, I think we're going to see, normally, just for your reference, we typically see about half-and-half contribution from like-for-like pricing and mix in our outlook. We're currently outlinking four to six. And as I indicated earlier, I think we're closer to the high end of that range, given where we are at the end of the first quarter. Again, normally it's about a half and half, but I think it's fair to say this year, given the headwinds that we had last year on territory mix that we don't expect to repeat this year, we could see a little bit more contribution from mix toward the end of the year than like-for-like pricing. Again, I expect a really strong like-for-like pricing performance given the inflationary backdrop that we're in right now.

Right. No, that makes sense. And I know it's early and you mentioned that you're tracking toward the higher end of the four to 6% mineral fiber AUV guidance, but could there potentially be upside given the higher than usual may increase, especially if some of these higher price Northeast markets come back faster than expected moving forward?

Yeah, I think the range we're out looking right now is still appropriate. We'll have to wait and see. this inflationary backdrop, how it persists through the remainder of the year. And then, you know, of course, the rate and pace at which some of these key markets, like New York and California, we've talked about how much they bounce back in the second half of the year. So I think the range we have, again, trending toward the high end of that, it's still an appropriate range.

Okay. Thanks for taking my questions. You bet. Thanks, Jeff.

Thank you. Our next question comes from Ives Bromhead with Exane BNP Bay Airbus. Your line is now open.

Good morning, and thank you for taking my question. I've got two. I just want to get a clarification on what is the one-off cost exactly on the AS side. I think you mentioned $6 million to $7 million in incentives, $3 million on acquisition in Q1. Just wondering if I've got the correct numbers and how should we think around those numbers going forward?

Yeah, this is Brian. So the one-off costs really hit the mineral fiber EBITDA bridge. On AS, you've got a combination of additional SG&A from the acquisitions and then investments happening to support our growth. So they're less temporary. On mineral fiber, I called out that $67 million that's more temporary-based for Q1.

Okay, thank you. And my second question is on the AIS. Just trying to understand what is the size of the market that you'd like to achieve going forward, how much do you think the actual specialty revenue could hit in, let's say, five years' time, assuming you continue your external growth and And then on the back of that, what level of margin should this division be able to achieve once you've already done all the growth investments on the OPEC side?

Brian, I'll take that. You know, as far as the opportunity, we've been public around the size of this specialty segment being in the neighborhood of a billion dollar segment for the Americas. And so I think that's a a good proxy for you to use or to think about. That's how we think about it. We're obviously relatively in the early innings of our penetration into a billion dollar segment. We're not going to provide any long range guidance other than to say our expectations that we continue to grow double digits every year in that space. We have plenty of penetration opportunities in addition to organic growth opportunities. And I think the margins in this business, over time, we expect to continue to improve as we get better at this and we get more efficient with this. We do believe this is not a business that you would expect to achieve mineral fiber level EBITDA margins, for example. It's a very different business and very different manufacturing model. But we would expect this business to be in the mid to high upper 20 level of EBITDA margins, which would be among the best-in-class business or building products companies out there. And that's our directional that we're working toward as we penetrate more and more of this market. I hope that helps your question, sir.

Yeah, thank you. And, again, good luck on the retirement, Tom. Thank you very much.

Okay, thank you.

Thank you. Our next question comes from David McGregor with Longbow Research. Your line is now open.

Yes, good morning, everyone. Good morning. I guess I want to start off with just asking, given, you know, the kind of encouraging indication on your orders and your billing, or your billings at least, or your bidding, excuse me. how are you thinking about kind of the investment in the marketing organization? Do you, do you begin adding spec writers here or just, you know, how hard do you lean into at this point? Or do you kind of wait and see just, you know, if this has legs or just want to think about how that investment profile looks for you over the balance of the year?

Yeah, actually we've been investing into this. Um, even in 2020, we invested into the go-to-market, uh, capability, uh, especially around our architectural specialty business where you need more project management and designers to support more and more projects as we continue to build out our pipeline of projects and architectural specialties. So it's kind of an ongoing building of that organization from a capacity and capability standpoint. And I'll just remind everybody, too, that We have one selling organization. We sell mineral fiber and architectural specialties in one selling organization. It really is a point of leverage for us with the architectural and design community to specify a broad range of products on every job. And so when we add capability to that, a lot of times it's subject matter experts and, again, designers and project managers to support that field sales organization. So I guess long-winded answer, but I would just say we're kind of feathering that in as we go. And our backlog gives us, again, some good optimism that this is going to continue throughout the year.

So do you have an expansion of that selling organization built into your guidance for this year?

Yes, we do.

Okay, great. That's helpful. Thank you very much. And then you mentioned you were talking earlier about education and health care. I'm just wondering if the bidding you're seeing there, the upturn in bidding there, you called it as being maybe exceptionally strong versus the other verticals. Is that remodel or is there a meaningful new component to that or just maybe what you're seeing there within those two verticals?

Yeah. You know, for the most part, it's alterations and renovation activity. But I will say there was some good new activity as well, which, again, was encouraging to see. Of course, 18 months out, we would like to see that kind of activity feeding the pipeline. But, yeah, for the most part, we're seeing renovation and major reno and renovation-type projects.

Okay. And then maybe I could just come back to another question kind of broached on the topic of infrastructure and And maybe I could just ask the question maybe a little more pointedly, and it's just, are you a beneficiary of an infrastructure bill? And if so, how?

Yeah, absolutely. When you look back at investment in infrastructure, commercial construction comes along with it. And I think in this particular one, the focus on, again, schools and education system is encouraging for us because we have a real strong presence there. And, of course, we think that that's a tremendous opportunity in the new construction as well as renovation activity. So we're a net beneficiary for sure in infrastructure. Again, historically speaking, that's what's happened. And with our architectural specialty business and airports and subways, those are obviously very big opportunities for that segment of our business.

Are many of these projects coming back, Vic, dependent upon an infrastructure bill? I mean, you said you're seeing a lot of bidding coming back from projects that were on hold last year. Do you think they're moving forward based on some expectation around stimulus funding, or do you think they're moving forward on their own merits?

I think they're moving forward on their own merits. Really, a lot of these projects were delayed from last year. That's what we're seeing in the early, I'd say the early days of this recovery so far. Yeah.

Okay. Great. Thanks very much. Good luck, Tom.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Vic Griswold for closing remarks.

Thank you, and I just want to thank everybody for joining today. Again, solid start to the year, really ahead of our internal expectations, and the market recovery in the commercial seems to be well underway. I'm really encouraged by the investments that we made last year. That has put us in a terrific position to capture whatever this market opportunity offers up in the next coming quarters. So we're excited about it, and we thank you again for your interest, and we look forward to talking to you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.