Armstrong World Industries Inc

Ladies and gentlemen, thank you for standing by and welcome to the Q Forward full-year 2021 Armstrong World 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 need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to turn the call over to your host, Theresa Womble, Director of Investor Relations. You may begin.

Thank you, Kevin, and welcome everyone to our call this morning. On today's call, we'll have Vic Grizzle, our CEO, and Brian McNeil, our CFO, discuss Armstrong World Industries' fourth quarter and full year 2021 results, our 2022 outlook, and progress on our growth initiative. Our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of SEC's Regulation G. A reconciliation of these measures with the most directly comparable GAAP measure is included in the earnings press release and in the appendix of our presentation, which was issued this morning. Both are available on our investor relations website. During this call, we will be making forward-looking statements that represent the view we have of our results and our performance as of today's date, February 22nd, 2022. These statements also involve risks and uncertainties that may differ materially from those expected or implied. We provide a detailed discussion of these risks and uncertainties in our STC filings including the 10-K filed earlier this morning. We undertake no obligation to update any forward-looking statements beyond what is required by applicable securities laws. Now, for those of you following along, we'll start our presentation as I turn the call over to Dick.

Thank you, Theresa, and good morning to all of you, and thank you for joining our call this morning. As we reported this morning, we ended 2021 with a strong quarter in both our segments, and delivered robust top-line growth for the full year of 18% as we surpassed $1.1 billion in net sales. Our team delivered these results while facing a choppy, uneven market recovery, rapid inflation, supply disruptions, and labor shortages. I'm proud of the strong execution by our organization, and I'd like to take a moment to thank all of our teams for their hard work this year in this difficult environment. These results would not have been possible without the effort and dedication of each of our 2,800 employees who remained focused on our objectives, continued innovating, kept our plants running safely and efficiently, and maintained our best-in-class service to customers. First, turning to our quarterly results, we delivered 18% year-over-year growth in consolidated adjusted net sales. Mineral fiber segment sales increased 13% year-over-year with strong pricing and positive volume for volume growth contributing to this double-digit performance. Architectural specially adjusted sales rose 34% with contributions from both our base business and our 2020 acquisitions. In addition, I'm happy to report that our mineral fiber sales this quarter were also ahead of 2019's result by 5%, and our organic AES business posted higher sales than 2019's levels as well. Now, these are important milestones pointing to the healing and the market recovery coming out of the pandemic. For the full year, consolidated net sales increased 18% year-over-year, with mineral fiber sales increasing 13% and architectural specialty sales increasing 37%. Consolidated adjusted EBITDA for the full year increased by 13% from 2020 levels. Taking a step back and reflecting on the year, again, I'm very pleased with these results and how our teams executed in the face of, again, rapid inflation, supply chain disruptions, labor availability, and while battling COVID in our communities. And our teams did all this without disruption to the best in class service levels our customers have come to count on, no matter what. In 2021, the underlying fundamentals of our business that have supported our results and enabled us to consistently outperform in all parts of the cycle were on full display. These fundamental value drivers have been tested and once again proven to be resilient in all parts of the cycle, including through a pandemic. Among the most notable value drivers on display in 2021 has been AUV, or our average unit value for our mineral fiber business. For well over a decade now, we have sustained AUV growth throughout both inflationary and deflationary periods, and it remained a positive story for us in 2021. For the full year, our mineral fiber AUV increased 10% from 2020, primarily driven by like-for-like pricing as we successfully stayed ahead of inflations. As we have reported throughout the year, we are able to consistently achieve like-for-like price growth due to the strength of the total value we bring to our customers. This value encompasses our innovation, consistent quality, and customer service, as well as our brand strength and our deep relationship with architects and designers. It's critical work, particularly with uncertainty and the various challenges of a year like we had in 2021, and it's being acknowledged by our customers. The unique focus and credibility we have in the market allows us to be responsive to customers and earn these price increases. And it's enabled us to expand our mineral fiber gross margins by 170 basis points, even in a rapid inflationary environment. In addition to like-for-like price, the other contributing component of AUV is sales of higher value products and solutions that are supported by our innovation and new product development efforts. Throughout the pandemic, our unique focus as an America ceilings and specialty walls company allowed us to continue our strong engagement with customers and to deliver market-driven innovation that addresses current and emerging market needs. Our new product development is a critical component of our AUV strength by allowing us to improve our product mix consistently over time. And it's what drives our strong product vitality index, which is a measure of sales from products introduced in the last five years. For the second year in a row, this measure was about 40 percent, an elite level in the building products industry. Looking forward, we expect to sustain this performance with innovation focused on supporting healthier indoor spaces, as we will discuss later in the call. Mineral fiber sales volume growth was another positive for the year, as we delivered nearly 3 percent year-over-year growth. Now, this represents the strongest annual growth rate since 2005. Beginning in the second quarter, we delivered year-over-year improvements in our sales rates per day each quarter and expected to exit 2021 at a rate above 2019's levels, and we did, with the fourth quarter coming at 5 percent ahead of fourth quarter 2019's result. While most of this improvement was driven by price, we did see some positives from a volume perspective as well. Mineral fiber volumes closed in on 2019 levels and we're just 5% below 2019's fourth quarter, which was the best comparable all year. Also looking back on 2021, we're pleased with the strong performance in our architectural specialty segment through advancements in capabilities made both in terms of organic growth and the integration of our 2020 acquisitions. Sales grew a robust 34% in 2021 against a soft new construction backdrop. Importantly, organic sales for this business segment contributed nicely, increasing high single digits, again, against a soft new construction backdrop. We're especially encouraged by the record-setting level for order intake in the architectural specialty segment, driving the project backlog to historic highs, with our 2020 acquisitions backlog up 40% from prior year. Now, it's worth calling out this meaningful increase in backlog for the new acquisitions because it again confirms the revenue synergies realized when we add these smaller, highly capable companies onto the Armstrong platform. We also made progress throughout the year to improve the margins in this segment through innovation, increased operational efficiency, and pricing discipline. We're well on our way back to 20% EBITDA margins in this segment. These advancements in our capabilities and our execution and the higher backlogs are providing a positive setup for 2022 and into 2023, for the architectural specialty segment. Finally, as we look back on 2021, despite a choppy and uneven rate of recovery, we are encouraged by the traction we're seeing in the underlying fundamentals in the market. Return to office rates, non-residential construction bidding and starts have all improved, and we saw a quarter-on-quarter improvement throughout 2021 for the Castle Back to Work Index. Commercial construction bidding activity also improved, beginning in the second quarter and continued to strengthen throughout the year. Bidding activity remained up in double digits, broadly for nearly all verticals, and specifically bidding activity for office ended the fourth quarter at its highest levels for the year. Meanwhile, new construction starts were depressed for the year as we expected, but improved quarter to quarter throughout the year. We are encouraged by these developments as well as the positive sentiments we are hearing from our distribution partners as we look forward to 2022. So let me pause there and allow Brian to walk through more of our details on our financial results, and I'll be back to add some additional comments on our outlook.

Brian? Thanks, Vic. Good morning to everyone on the call. Today I'll be reviewing our fourth quarter and full year 2021 results, as well as our 2022 guidance. 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 five, we begin with our consolidated fourth quarter results. Net sales of $283 million were up 18 percent versus prior year. Adjusted EBITDA grew 21 percent, and EBITDA margins expanded 60 basis points as both segments grew margins in the quarter. Adjusted diluted earnings per share of $1.09 improved 35 percent versus the prior period on increased adjusted earnings. Adjusted free cash flow declined 34%, driven mostly by timing of working capital impacts due to a strong sales in the fourth quarter. Our cash balance at quarter end was $98 million and coupled with $335 million of availability on a revolving credit facility positions us with $433 million of available liquidity. Net debt of $533 million is $46 million lower than last year. As of year end, our net debt to EBITDA ratio is 1.4 times versus 1.8 times last year as calculated under the terms of our credit agreement. Our covenant threshold is 3.75, so we continue to have considerable headroom in this measure. Our strong balance sheet reflects our year's performance and offers flexibility to execute on all our capital allocation priorities of investing back in the business, executing on business development, and returning excess cash to shareholders through dividends and share repurchases. In the quarter, we repurchased 278,000 shares for $30 million, or an average price of $108 per share. This is a 50 percent increase in share repurchase dollars from Q3 and brings the full-year repurchase spend to $80 million, purchasing 785,000 shares at an average cost of $102. We currently have $514 million remaining under our repurchase program, which expires in December 2023. You can see our consolidated fourth quarter EBITDA bridge from the prior year results on this slide as well. The $15 million adjusted EBITDA gain was primarily due to favorable AUV, which was driven by positive like-for-like pricing, increased volumes, and waived equity earnings. This favorability was partially offset by increased input costs on raw materials, freight, and energy costs as inflation accelerated throughout the quarter. Further offsetting the favorability was an increase in SG&A expenses compared to the prior year quarter driven by the 2020 acquisitions, investments to support growth initiatives, and more normalized discretionary spending that was proactively reduced in the prior year period. For cost of goods sold, While we expected inflationary pressure to continue into the fourth quarter, we saw inflation accelerate from Q3 into Q4, and we ended the full year with cost of goods sold inflation just above 5%. Our teams continue to execute and successfully manage through this challenge, and I'm happy to report we again achieved price over inflation in the quarter. Slide 6 summarizes our Mineral Fiber Segment results. In the quarter, sales were up 13 percent versus prior year, marking a strong finish to the year. AUV growth was again double digits at 13 percent, driven by positive price and favorable mix. Volume was also positive in the quarter. Adjusted EBITDA for this segment increased $11 million, or 17 percent, which drove EBITDA margin expansion of 110 basis points. The growth was driven primarily by AUV, which was weighted to more like-for-like pricing than mix. We were pleased to see manufacturing productivity more than offset the return of 2020 temporary cost reductions. Input costs increased due to accelerating raw material, energy, and freight inflation. The acceleration of inflation in the fourth quarter was a key driver in the decision to implement our mineral fiber price increase in January 2022 versus February, our typical timing. We expect inflation to remain elevated in 2022. SG&A was higher as we absorbed the return of prior year temporary cost reductions and continued our investment and growth initiatives. Earnings from our joint venture, Wave, increased with continued price overinflation. The team at Wave has continued to manage steel inflation with expertise and remains watchful of potential supply chain issues. Slide 7 summarizes the fourth quarter results for architectural specialties or the AS segment. Sales were up $19 million or 34% versus prior year as the 2020 acquisitions of Turf, Moe's and Arctura contributed $14 million in sales. AS organic sales were up 12% driven by increased volumes and traction from recent pricing actions. Adjusted EBITDA for this segment was up 58% on both organic and inorganic contributions and EBITDA margins expanded 220 basis points versus the prior year driven by pricing actions, which is captured in the volume line. Please note, moving forward in 2022, the 2020 acquisitions will become part of the organic business and will not be broken out separately. We typically call out our acquisition contributions for a year after the deal closes. Slide 8 details the drivers of our consolidated EBITDA results for the full year 2021 and reflects a strong performance in rebounding from 2020 that had a greater impact from the pandemic. Adjusted net sales increased 18%, adjusted EBITDA 13%, and adjusted EBITDA margin contracted 160 basis points versus the prior year as we continued to absorb the 2020 acquisitions, make investments in our growth initiatives, and reinstate the temporary cost reductions we actioned in 2020. We came in at the lower end of our adjusted EBITDA range due to higher inflation and unfavorable channel mix. Adjusted earnings per share increased by 17%, driven mostly by increased adjusted earnings, and to a much lesser extent, reduced share count versus the prior year. Adjusted free cash flow declined 10%, and I'll comment on that on the next page. On this page, you can also see our full-year consolidated bridge. Volume growth, positive AUV, and wave equity earnings more than offset increased SG&A expenses, increased input costs, and additional manufacturing costs from the 2020 acquisitions. The increase in volume was driven primarily by the 2020 acquisitions and positive minimal fiber volume. Favorable AUV was driven mostly by positive light for light price and favorable channel mix. Wave equity earnings were driven by positive AUV and higher volumes partially offset by increased steel costs. The increase in SG&A expense expenses was driven primarily by the addition of the 2020 acquisitions, an increase in incentive and deferred comp expenses, investments to support growth initiatives, and the return of prior year temporary cost reductions. Input costs were driven higher by inflation on raw materials, freight, and energy costs. While adjusted EBITDA margins contracted, gross margin expanded through price overinflation and productivity. and partially offset the increase in SG&A as a percentage of sales. Slide 9 shows adjusted free cash flow performance for the full year 2021 versus the prior year, a decline of 10 percent. Capital expenditures were planned to be higher than the prior year as we resumed a more normal spending level. In the fourth quarter, we ended with higher working capital that had a negative impact to adjusted free cash flow. The higher working capital was largely timing related And as you'll see on the next page, we expect that timing to benefit 2022 free cash flow growth. Slide 10 provides our guidance for 2022. We anticipate net sales growth in the range of 10% to 13% versus prior year. Assumed in this sales growth is mineral fiber AUV growth of 8% to 10%, driven by like-for-like pricing and positive mixed benefits. Mineral fiber volume of 2% to 4% on a recovering market and incremental volume from our growth initiatives, and AS sales growth of more than 10%. Future acquisitions will be incremental to this guidance, and another reminder that this AS growth of greater than 10% now includes the 2020 acquisitions, which were previously classified as inorganic growth. Compared to the last two years, we expect that 2022 will be a more normal operating environment for the team, especially around seasonality of the business. Our typical sales calendarization is weighted 49% in the first half of the year and 51% in the second half, with the second and third quarters being stronger than the first and fourth quarters. Breaking the first half down, Q1 has one less shipping day versus prior year. We expect adjusted EBITDA to grow 10% to 16% as strong AUV driven by like-for-like pricing falls through at a rate higher than our historic rate, Mineral fiber volume growth falls through its 60% variable margin, continued productivity in our plants, and benefits from improved results at wave. We will continue to invest in growth initiatives and expect AS margins to improve throughout 2022. We expect adjusted earnings per share of $5 to $5.20 or 15% to 19% growth versus the prior year and adjusted free cash flow growth of 13% to 24% versus the prior year. Before I turn it back over to Vic, we're excited to share more details around our growth initiatives and how they will impact our results at our upcoming Investor Day on Thursday, March 3rd at our Lancaster campus. We look forward to seeing a lot of you on this call in person next week and can't wait for you to experience firsthand AW's innovation, digital, and healthy spaces growth initiatives. It's certainly been a long time since we've been able And for us, it will mark a large step forward in ushering the new normal, where the spaces that we work and interact matter even more. Our power of focus allows our leaders to be directly aligned with our growth strategy, and I truly believe we are leaving 2021 on a strong note and on the right path for consistent growth going forward.

With that, I'll turn it back over to Vic. Thanks, Brian. And before we get to your questions, I'd like to call your attention to some of the additional advancements we made this year that has further strengthened our competitive position going into 2022. Connected to our Healthy Spaces Initiative, we entered an important partnership with the scientific advisory firm Nine Foundations. This organization, founded by Harvard's Dr. Joe Allen, is at the leading edge of science and research on human health and the built environment. Through partnerships like this, we continue to explore how our products can make a meaningful impact on healthy indoor spaces and further develop our suite of solutions to clean, contain, protect, and support the advancement of better indoor environmental quality. Our healthy spaces team has already begun innovation work in connection to this partnership, and we have other partnerships in the works as well to build out a stronger position in this emerging set of needs in the market across multiple verticals, including healthcare, education, and offices. Along with our Healthy Spaces initiative, we continue to drive forward our digitalization efforts. As we've highlighted throughout the year, these efforts focus both internally on our operations and in our sales functions, as well as externally to bring new customers to AWI. Our Canopy by Armstrong digital platform is bringing customers who get lost in the pursuit of ceiling solutions because they're either too small or located in underserved geographies. Tapping into this part of the market has the potential to increase the level of renovation activity. We're encouraged by the traction gained throughout the year, validating the opportunity to use digital technology to cost-effectively serve new customers in new ways. Again, it's still early days, but the traction we are gaining is encouraging. As we enter 2022, we have even more confidence that together with our broader innovation effort, digital and healthy space initiatives can provide new avenues for growth that will benefit AWI for years to come. In 2021, sales from our strategic initiatives contributed approximately half of our mineral fiber volume growth for the full year. And this is a baseline that we think we can build on. We also issued our inaugural sustainability report, confirming our enterprise-wide commitment to 2030 goals. This report highlights our longstanding leadership in areas such as product recycling and transparency, while pushing us forward to innovate throughout our operations to reduce our impact on the climate and provide solutions for customers that are healthy and sustainable. We believe that sustainability solutions will be critical to winning in the marketplace, and we are committed to maintaining our leadership position. In addition, we have aligned our report with the leading global frameworks for sustainability reporting to ensure transparency and accountability to all our stakeholders. And finally, as we have reported before, we made a decision to not furlough our employees in 2020 during the pandemic. We took care of our employees. And in fact, we added new employees in support of our growth initiatives. We continue this effort to add more to our capabilities and capacity for growth in 2021. The engagement and capabilities of this organization is stronger and more capable as a result. and further strengthens our ability to perform in a tight labor environment. Building on our stable set of value drivers with these new growth initiatives, additionally, we believe there are several larger dynamics at work that will support future demand for our ceiling and wall solutions. These include significant amounts of funding for education that has yet to be spent. The pent-up demand for tenant improvement as people return to offices and new spaces to support a new hybrid way of working, and the increased awareness of the need for healthy and sustainable indoor spaces. When you combine these factors with our industry-leading innovation, industry-leading relationship with architects and designers, and our laser-like focus on this America's market, you can understand our enthusiasm for what lies ahead. We look forward to sharing more about these at our Investor Day next week. And with that, we'll be happy to take your questions.

Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touch-tone telephone. If your question has been answered, you wish to move yourself from the queue, please press... One moment for our first question. Our first question comes from Rafi DeDorsis with Bank of America.

Hi, good morning. It's Rafe. Thanks for taking my questions. Sure. Good morning. First, I wanted to go through the mineral fiber guidance on pricing. It seems like you're assuming sort of a 40% AUV on mineral fiber. You announced 28% price increase in 2021 and then another 12% in January. And then the AUV was up 10% in 2021. Can you just walk us through when you're announcing price increases? How should we expect that to be realized in terms of actual mineral fiber AUV? And then how does the timing of price increases differ between new construction and R&R in terms of when you're actually realizing it? And then should we expect a stronger pricing benefit through 2022 and then even into 2023? Brian? Yeah, sure.

Yeah, a lot to unpack there, right? So historically, we've We've realized about 30% of our announced price increases in a given year. So we did accelerate our pricing action in 2022, January at 12%. We typically do it February and August. So August is still an open item. But consistently over the years, we've realized about that 30% mark of what's been announced in the current year. Obviously, there's a little bit more carryover from the actions taken in 2021. But that's been baked into our guide of mineral fiber AUV 8 to 10 percent, and that'll be more pricing, like-for-like pricing, than mix has been that ratio historically.

Let me just add to that, if I can, for a second. As we have projects in our backlog and project pricing, I think you've heard us say we honor that project pricing. And so the feathering in of the price increases is over time as these projects materialize. And then there's different ways in which we alter the pricing based on competitive scenarios and so forth. So all of that factored in, as Brian said, we realized about 30%, and we size our price increases to ensure that at those levels of realization, we're more than covering inflation. And I think You know, 21 was a great example of that, and we expect, again, an inflationary environment in 22, and we'll be sizing our price increases. Obviously, we've sized one now in January, but as the year goes, as we size the one that we normally do in the summer, we'll size it according to the inflationary backdrop that we see. Again, with the objective to make sure that the prices that we're realizing are sufficient to cover inflation.

Got it. That's very helpful. And then you spoke about the improving billings trend on commercial projects. When would you expect that to translate into better volume growth? And then can you talk about the historical lag between when a project starts versus when ceilings actually go in? How is that now compared to where it's been historically?

Yeah, that's a good question because it has changed, right? I think the supply chain disruptions, the availability of labor on the job sites, for example, has extended the timeline of when from a bid to a start to actual ceiling consumption that has been elongated. We alluded to that throughout the year. So that is a function. That is the question, right? We have Since the second quarter, we've been reporting and watching this bidding activity that's been in double-digit territory for three consecutive quarters now. That's a good forward-leading indicator, but again, that's the question, right? When are these projects going to land in starts and actually get actionized in the marketplace? We believe eventually it does come, but I think that's going to be a function of supply chain constraints, labor constraints, And that could add to some of the choppiness here. But we're already seeing, again, when you look at the volume of renovation activity, we're already seeing that in the numbers today. We expect that to continue, but I think the big question that you're getting to here is what is the rate and pace at which a lot of that double-digit bidding activity, when does it land? The big takeaway for me is that, and I'm hearing this from our distribution and our contractor customers, is that the work is out there. The demand is out there. The ability to get it, again, landed with labor and materials to fund those is really, I think, the bit of the uncertainty that's out there. The demand profile is not uncertain. I think it's the ability to actionize it at this point.

Okay, thank you. See you next week.

You bet. Okay, sounds good.

Our next question comes from Philly with Jefferies.

Hey, guys. Vic, you were obviously pretty upbeat about your ability to get EBITDA margins for AS back to that 20% range, and it was good to see it inflect this past quarter, year-over-year, but it's been under pressure since the pandemic. So any color on how quickly can I get back to that 20% range and what you're baking in for this year?

I think we'll make meaningful progress on that in 22. I would expect by 23 we're fully there. I'm really encouraged by, you know, again, we're growing into that investment that we made ahead of demand, which we spoke to. This is a project-intensive business, right, so you have your bigger backlogs that you have to price your way through. There's a little bit more of a lag there than in our mineral fiber business, but I'm encouraged on the traction on both of those fronts. So, again, we have line of sight to get back there, not at the expense of top line, because we think this is, a tremendous growth engine for us and is proving to be so. But I think over the next two years, we'll be back to that 20% level.

Got it. And then, Vic, the 2% to 4% volume growth that you're guiding for mineral fiber, pretty healthy, certainly a little better than at least some of our contacts have been expecting for 2022. Just curious, how much of that line of sight do you have at this point? Is this coming from the new construction side of rebounding? maybe you guys are taking share from some investments you're making in the digital side or healthy living. Kind of help us unpack your confidence in getting that number and maybe any color on your growth profile versus your peers.

Yeah, I really don't think we're going to get a lot of help from the new construction side of the equation. Again, that's about 30% of our business, so I think that's going to continue to to be softer, and although it was gaining momentum throughout the year, I think its impact on our business, we're not counting on a lot of tailwind there. But in the renovation side of the business, again, the 70% of the demand profile for this company, I believe that that's where we're going to see some good recovery, the tenant improvement work improving throughout the year. So the renovation is going to drive it on the market side. And then You've got to give credit to, and we are, as we see the traction in our digital and our healthy space initiatives, an ability to serve new customers and create new events of demand. So it's a combination of market and then these key initiatives driving additional demand for mineral fiber that's contributing to that 2% to 4%. We're very encouraged by that and excited about it. To your point, it's been a long time since we've had this kind of mineral fiber volume growth.

Sounds good. Looking forward to seeing all the new products next week. Great.

Great, Phil.

Our next question comes from Keith Hughes with Truist.

Thanks. So if you look within the guidance you're giving us in terms of volume growth, can you kind of talk about which end-user markets you think will be above that and which below that? I understand the focus here is on renovation for the growth.

Keith, we're counting on really all three of our verticals contributing. And we're not that good, and I don't think the industry is that good to call above and below the average here. But I think when you look at the bidding activity and you look at the activity out in the marketplace, we're seeing office, health care, and education, all three of those main verticals are going to contribute. Transportation is going to continue to be a big contributor here. on both the mineral fiber and the architectural specialty side. So it's hard to call, I mean, above and below the average there, but what I'm encouraged by is all three are going to be participating is our expectation.

And you might talk about this a little more next week, the architectural specialty. Where do you think you stand in terms of market share in that business?

Yeah, it's a much more fragmented market and tougher to land, but We believe we're clearly the leader now in this space because our competition are much smaller, niche-like players that we go up against. So we're by far, I think, the leader. But with that said, we still think we're somewhere around a 20% penetration of the opportunity that we see in this space. So a long ways for us to go to get to a more mineral fiber-like share position. But we're still, we're clearly the leader, we're clearly the industry leader in this space. Okay, thank you.

Our next question comes from Catherine Thompson with Thompson Research Group.

Hi, thank you for taking my questions today. Just on following up on WAVE, we've heard mixed feedback from the industry on steel availability as the year came to a close. Could you give an update where you see kind of availability and pricing trends into 22, balancing the impact of increasing demand in other steel-driven industries, such as the auto industry. Thank you.

Yeah, Catherine, the wave business, and I think you can appreciate this, they have done a terrific job in managing the hyperinflation that we saw in steel in 2021. to be able to raise price and supply our customers to expand margins in the face of really nearly 100% inflation in steel. So, first of all, they've done a terrific job in managing. And we've been able to supply all of our customers. I think part of this is this relationship that we have with Worthington, where we're able to secure steel and leverage the relationships that Worthington has with the mills, directly buying from the mills. really does show up at a time like when you hear steel and availability issues. Now, with that said, that doesn't mean that there isn't near misses and opportunities for us to move steel around, you know, to balance out the demand across the country. We did that in the fourth quarter, in fact. But for the most part, our team is doing a great job, and we expect that we've got supplies to meet the demand in the marketplace, and we're servicing our customers the best in the industry right now on the grid side of the business as a result of some of those relationships we talked about. We're still expecting some inflationary environments in this business, not like we saw in 21, and I'm confident that business will stay ahead of whatever inflation we see there in 22.

Okay, that's helpful. On that 70% demand forecast, for more R&R, and you've given some great detail today on this, but lest we forget about COVID and demand for products that you have created specifically for preparing for a post-COVID world with air quality improvement. What are you seeing in terms of demand for those type of products in terms of mix versus kind of your more traditional product than the and spaces that would make sense, i.e., outside of healthcare.

Yeah, I think one of the noticeable differences I've seen throughout the year is that the size of the projects. You know, as you might imagine, something new like this, you might start with smaller projects, smaller areas in which they make these changes. What I've been impressed with throughout the year is the size of the projects has increased significantly. closer to what our normal average size would be for, say, a mineral fiber project. So I think that's a sign and signal that this is becoming more broadly recognized as something that, as a solution that's needed in more general spaces versus, like, specific spaces. That's encouraging. So I think, you know, early days, this is going to have to go through a specification cycle. even on the larger renovation, the larger projects are going to have to go through a renovation cycle. Again, I like the traction we're seeing. It's going to be, I think, slower and steadier than a spike in demand expectation that maybe some have. Does that answer your question, Catherine?

Yes, it does. And then final point, new year, new sets of problems or issues to manage. You have potentially rising interest rates, continued inflation, which you've talked about, and other mitigating global factors. How do you think about managing cash in light of that? You are throwing off a lot, but just really discuss a little bit more how you're thinking about managing cash this year that may be a little bit different than last year.

Thank you. Do you want to take this, Brian, or do you want me to take it?

No, go ahead. So, Catherine, you know, obviously that economic backdrop with rising interest rates is always a watch out for us. You know, you'll see in our K, we've got our Term A swapped at a high rate as far as the percentage covered, which is locking us in at pretty nice fixed rates on that interest side. And then on the inflation side, you noted in our script 12% increase for mineral fiber Jan 2nd, you know, we're being very watchful of that inflationary backdrop. And as a reminder for folks, that steel inflation hits our wave equity earnings, not our cost of goods sold per se. But we're watching to make sure we drive pricing actions that deliver above the inflation dollars in order to hold or expand our gross margins. So that's how we're thinking about that cash and cash flow drivers for 2022.

Great. Thank you very much.

Thank you, Catherine.

Our next question comes from Susan McClary with Goldman Sachs.

Thank you. Good morning, everyone.

Good morning.

My first question is wondering if you can talk a little bit about geographically what you're seeing on the ground, especially as we think about some of your really big MSAs and some of those markets that perhaps lagged the reopening over the last year and a half, two years or so, how you're thinking about incremental improvements as we look to 2022 in those areas?

Yeah, Susan, the, um, in 2020, you're referencing a call out that we had around these seven major metros and the seven territories that, that, uh, really got disproportionately impacted by government mandated shutdowns. And so we saw a really a negative mix, um, based on that, um, Very unusual, and so we called that out and we talked about that. Throughout this year, we returned back to normality in terms of the proportionality of these seven territories with the rest of the country. So geographically, we're not seeing major disparities amongst the geographies, and in particular, these seven territories that we called out in 2020. So in proportion, they're back, and it seems like the country is moving kind of in unison when you look at these seven versus the rest of the country. That being said, you still have some pockets that are lagging others, but in total, they're immaterial in the overall scheme of things in terms of the mix of the regions going forward.

Okay, that's helpful. And then just following up, can you talk a little bit about the M&A backdrop as you think about architectural specialties? Just an update on that pipeline, perhaps, and what you're seeing in terms of deal activity and the potential to get some deals done this year.

Yeah. Yeah, thanks for the question, because we didn't do a deal in 21, which is the first year in a couple years that we haven't done a deal. I will say we're open for business, and we're talking to a lot of folks, and We have a dedicated business development team that gets up every day and works on this pipeline. So it's not for a lack of effort, but what you're saying is discipline, too. We're not going to do deals just to be doing deals. We want to make sure that we acquire unique skills and capabilities that, when bolted onto this Armstrong platform, really create some synergies. We're doing a lot of relationship building projects. with companies. We're talking about partnerships that doesn't require the same level of risk or even capital. So it's active. I guess as my point, Susan, we're very active in this area and we're open for business and we plan to do more of these acquisitions, the right acquisitions. And I think it's fair to say we'd be disappointed if we don't do an acquisition this year given the health of our pipeline right now.

Okay, that's helpful color. Thank you. Good luck.

Yeah, thank you.

Next question comes from john Lavala with UBS.

Good morning, guys. Thanks for taking my questions as well. Maybe starting with inflation, Brian, I think you mentioned the expectation for it to remain elevated in 2022. But do you think it gets worse from here before it gets better? How do you sort of think of that? And then how does that impact the margin cadence that you're expecting?

Yeah, go ahead. Yeah, John, good question. You know, we ended 2021 roughly 5% for cost of goods sold. We expect that, you know, sort of that range four to six for 2022. You know, there's puts and takes there. I think raw materials are picking up some. Freight might settle down a little bit. And, you know, under the energy bucket, gas is still elevated and energy has been pretty flat. So on the input cost side, little higher in 22, but generally we're going to see about that four to six range of inflation for the year. And so as we think back to the margin conversation, as you know us well and everybody on the call, we're pricing to not just offset those inflation dollars, but to get more pricing dollars over inflation to hold or expand margins.

Got it. Thank you. And then Vic, you talked about bidding being up double-digit rates across segments. Can you just provide maybe a little bit more granularity by segment, maybe which ones are leaders and if there's any laggards out there?

Well, we haven't broke down by vertical, but I can add a little color in this way, John, that both the number of projects and the value of projects, when you split it that way, were both up double digits across all the verticals. office, healthcare, education, even retail. When you split that bidding activity data by renovation and new construction, reno was, again, no surprise here, was twice as growing twice as fast or twice as strong as the new. So again, kind of leads to where that activity, and again, that's both in the number of jobs or projects out there as well as the value of them. So hopefully a little bit more color. It's really broad-based across the verticals. Office was really strong in the fourth quarter, stronger than the other verticals as it had kind of lagged the other verticals in prior quarters, but still up double digits. So again, I would say that's leading, that's confirmation for us and what we expect, that the renovation activity is going to lead this recovery and new construction will catch up later. Makes sense. Thanks. Yeah.

Our next question comes from Stephen Kim with Evercore ISI.

Yeah, thanks, guys. A lot of my questions have been asked, but you mentioned that your DNA guide, I think about 74 million this upcoming year, that's down kind of noticeably. And I was curious as to what was driving that. Is that going to be weighted, that reduction more weighted in one of your divisions? Something, if you could give us some color on that, that'd be great.

Yeah, so, Stephen, I'll take that. On the total depreciation and amortization, depreciation underneath that is actually up a little bit. It's really that amortization tied to the 2020 acquisitions. As you, you know, earlier in the year cycle of those acquisitions, you amortize more. And so that's an almost $17, $18 million reduction just on that amortization line itself while depreciation is going to be up slightly.

That helps. And then, Vic, I think you talked about the fact that education budgets that haven't been spent is something that you can see as being a driver over the longer term. And I was curious if you could give us a sense or how big of an issue could this be and how much of a mixed drag that may bring. I generally think of education as being a little bit more commodity type product. So I was just curious if you could give a little more color there.

Yeah, it does. From what we can tell, what we're hearing is that the ESSER funds have not been fully allocated or spent yet. So there's still lots of opportunities in it. As you know, that bill that passed was over a five-year period, so it does have some additional out years versus a spike in spending and then it goes away. This does have an allocation across the next several years, which I think would be helpful to spend the money in the right ways, frankly. You're right that the education segment does have a commodity part of the business, but The higher education, the high school and the higher education does offset that. So we see a similar mix across our office as we would see in our education segment. And really what is being sold into education right now around our Air Assure products, our Health Zone products that were primarily designed for healthcare is now being used in education facilities in pursuit of healthier spaces. Those are at higher value. Those are higher value products. And so... I don't really anticipate a big mixed headwind from an outsized growth curve in education, for example.

That's helpful to know. I guess last question for me is kind of at a higher level. The pandemic has moved to sort of an endemic, as folks are thinking about it. Over the last couple of years, there's been a lot of speculation, a lot of movement towards solutions. And I'm curious, I would think that at this point things are starting to sort of firm up in terms of having a little more confidence for what the next couple of years is going to look like from a design perspective and feeling's role in that. And I was curious if you could talk a little bit about what you think is going to stick and that you have a lot of confidence and how AWI can sort of lean into that directly with the products you offer. Yeah.

You know, I think this pendulum has really moved, right, from one end of the spectrum to the other end of the spectrum on, in particular with office, right, even at education at some point. But we've moved much quicker on that front. But I think we are getting some more clarity around what the architectural community is embracing as a new design attribute to include when they're designing the next generation spaces. I think the new Harvard Business Survey that came out was very interesting in terms of the fact that I think businesses are recognizing, though, that even though people are going to be in the office 30% less at the time, for example, that they don't need less space. And that was the first survey, I think, again, back to the pendulum swinging, back when people were getting rid of... office space and so forth. I think businesses have come to realize that they need the space because 100% of their employees are going to be there on certain days. But the kind of spaces that they need are different. And I think, so it's not only a healthy type of a product line that's going to be in the designed attribute set, but also the spaces and the actual spaces and how they're designed is going to create additional opportunities for as well as healthy products that Armstrong brings. So I think I'm as encouraged as this as an opportunity as I was a year ago by the way that this is going to be, the way it's sticking and the way it's going to be a long-term trend, Stephen. I think this is something that's been speculated for a long time, that once we get vaccinated, we all get back to the office, that this will go away. Healthy is here to stay. And the survey work that we're seeing now is confirming that. That's the case. And the work that we're doing with architects and design community, which, as you know, is the driver of what goes into next-generation buildings, that's a key indicator for me.

And, Stephen, I'd just add to that. That's one of the reasons we're having the Investor Day next week. We have a living lab here that will help showcase those solutions, those spaces, and what's going on sort of in interior spaces. So we're looking forward to sharing that with everyone.

Great. Thanks very much, guys.

Thank you.

Our next question comes from Adam Balgarten with Zellman.

Hey, good morning. I guess maybe on AUV in the fourth quarter, you know, it slowed on a year-over-year basis despite some additional price and it looks like easier comps. You know, if I look by channel from a growth perspective, it seemed pretty similar to 3Q. So just wondering what drove that. You know, can you maybe talk through like-for-like pricing and mix and how those played a role in the quarter? Sure.

Brian, go ahead.

Yeah, Adam, that was primarily driven by some headwinds I'd say on mix. The price side of it was pretty consistent versus Q3 into Q4, but the mix came in a little lower because of some of that channel mix.

Okay. Got it. And then maybe taking a step back, Vic, you've mentioned a couple times over the last couple quarters about some choppiness out there. And I guess maybe what exactly do you mean by that? Is it volatile order patterns? Is it more delays or cancellations? Just maybe putting a finer point on what you mean by the choppiness.

Yeah, it's really at the job site. I think we see some choppiness at the job site in terms of them being ready for the ceiling on the job site when it's scheduled. A lot of delays on that because something upstream is not in place or they have a long lead time or they have a disruption on. So it's pushing some of these demand cycles that we have out a bit. That's probably been number one from what we've experienced. creating some of this choppiness. But also, I think just some of the hesitation. Back early in the call, we talked about the rate and pace at which a lot of this bidding activity lands in the marketplace. I think there's some start and stopping going on based on availability of labor and supply chains. That's also creating some of that chop. So between the two things, not the job site and then the start and stop of new business, I think is what we are feeling is choppy.

Okay, got it. And then just thinking about margins for next year by segment, any meaningful difference in the margin expansion expected for mineral fiber versus AS?

We expect margins to expand in AS for sure, as we've talked about. We have line of sight to how we're going to do that. On the Mineral fiber side, we continue to expect to stay ahead of inflation, so expanding gross margins. We are outlooking to continue our investments in SG&A around these growth initiatives that are really benefiting mineral fiber. So we'll see a little bit of that. But over the longer, the midterm, and we'll talk about this next week, we expect margins in both of these segments to expand. We're investing now ahead of these healthy spaces and digitalization initiatives, but we're going to price-add inflation, expand margins at the gross margin level, and then we'll get through this year, I think, of investing, again, behind these initiatives and then be expanding margins through the midterm.

Got it. Thanks. That's helpful. Best of luck.

Thank you. Our next question comes from Garrett, because I'm also with Loop Capital.

Oh, hi. Thanks. A couple of clarification questions for me. First is just on the margin cadence for the year. You did provide the sales outlook, and I think I heard you, 49% of sales generally occur in the first half of the year, 51% in the back half. You are pulling forward a price increase by about a month ahead of normal. You try to price ahead of inflation. So I'm just kind of curious if the the margin in the overall EBITDA path is expected to look similar to sales, or is there any kind of lag effect we should be considering?

Yeah, Garrick, this is Brian. Historically, we're sort of back to the historic breaks of the calendar, so roughly 50-50 on the EBITDA line. Sales, I mentioned in the script, 49-51, so EBITDA is generally 50-50. Perfect. Okay. Great.

Thank you for that. I just wanted to follow up on mix. Are you still seeing the channel mix headwind continue into the first quarter? And maybe just more broadly, just, you know, any thoughts on how you expect, you know, mixed to evolve in 2022? I think historically you get a couple of points in AUV for mix, but you know, is that pace expected in 2022? Is there any change off of kind of the historical trend?

Yeah, Garrett, I think, you know, the channel mix can move in any given quarter, right, because of just sometimes big box retail moves inventory positions. You know, we're encouraged by some of the strength we're seeing in some of our other geographies like Canada and LATAM, which creates a little bit of channel mix. But I'd say broadly, we may, you know, from a mix standpoint, we'll be probably slightly below our historic average because as R&R that's typically at a lower price point, although a nice healthy percentage margin. And so that can create a little bit of mixed headwind, but we'll take that volume any day. Yep, got it. Thank you very much.

And I'm not showing any further questions at this time. I'd like to turn the call back to Vic for any closing remarks.

Great. Thank you all for joining us again today. We're excited about our investor day next week. We hope to see all of you there. The one thing that we have done in 2020 and 2021, we believe, is we've strengthened our position to compete. And we look forward to sharing where we've strengthened our position to compete next week at our investor day. So, again, thank you for joining us this morning. And, again, look forward to seeing everybody next week.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.