Armstrong World Industries Inc

ladies and gentlemen thank you for standing by and welcome to the Q1 2022 Armstrong World Industries Inc earnings conference call at this time all participants are in a listen only mode after the speaker presentation there will be a question and answer session to ask a question during the session you will need to press star 1 on your telephone if you require any further assistance please press star 0 I would now like to hand the conference over to your speaker Ms. Larissa Womble, Director of Investor Relations. Please go ahead.

Larissa Womble Thank you, Cherie, and welcome to everyone on the call this morning. Today we'll have Vic Grizzle, our CEO, and Brian McNeil, our CFO, discuss Armstrong World Industries' first quarter 2020 results, as well as our outlook for the rest of the year. Our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of the SEC Regulation G, A reconciliation of these measures with comparable GAAP measures is included in the earnings press release and in the appendix of the presentation we issued this morning. Both are available on our investor relations website. As a reminder, during this call, we will be making forward-looking statements that represent the best view of the company of our financial and operational performance as of today's date, April 26, 2022. These statements involve risks and uncertainties that may differ materially from those expected or implied. We provide a detailed discussion of the risks and uncertainties in our SEC filings, including the 10Q filed earlier this morning. We take no obligation to update any forward-looking statement beyond what is required by applicable securities law. Now, for those of you following along with our presentation, please turn to slide four. as I turn the call to Vic.

Thank you, Theresa, and good morning, everyone, and thank you for joining our call today to discuss our first quarter 2022 results. As we reported in our earnings release today, we delivered year-over-year top-line growth of 12% and adjusted EBITDA growth of 3% versus the first quarter of 2021. These consolidated results represent a very strong quarter for our architectural specialty segment and muted performance for our mineral fiber segment due to distributor inventory adjustments that I will discuss in more detail in a few moments. There continues to be a growing number of positive indicators pointing to a continuation of the market recovery. This combined with the strength of our architectural specialties performance this quarter and increasing traction of our growth initiatives supports our confidence in maintaining our full-year guidance for sales and EBITDA growth for 2022. First, let's look at the performance for architectural specialties. First quarter sales of $79 million, a 24% increase year over year, was a single quarter record for this segment. The increase was aided by shipments for projects delayed in the second half of 2021, as well as a continuation of share gains and the recovery in the commercial construction market. We were encouraged to see shipments for architectural specialty projects across various verticals, including office, education, transportation, and hospitality. What I wanted to highlight is this new Irving Institute building at Dartmouth College. This 55,000 square foot building will be home to the college's sustainability office and their center for energy, sustainability, and innovation. It has been designed to be the highest performing building on the campus from an energy efficiency and overall sustainability perspective. The design team specified our metal radiant ceiling panels as part of the holistic solution to achieving their sustainability goals while maintaining health and comfort for the occupants. These radiant ceiling panels are a product line we acquired back in 2018 when we purchased steel ceilings. They've been a great addition to our portfolio of healthy and sustainable products as they help to lower carbon emissions and reduce energy costs. First quarter EBITDA for the architectural specialty segment increased 88% from the prior year to $13 million, And I'm particularly pleased with the expansion of our EBITDA margin to 16.3%. That's up 560 basis points. This improvement in profitability is a strong step toward our targeted EBITDA margin of at least 20% for the segment. The increased shipment levels help drive this result, as have the efforts of our team on pricing to offset inflationary pressures and to maintain strong operational performance. It's worth noting that this strong top and bottom line growth was all generated through organic activity and reinforces our strategic rationale for expanding this segment and the additional market opportunities it provides. Maybe the most notable highlight in this segment for the quarter was the robust order intake for architectural specialties. The new order intake in the first quarter increased 23% from prior year levels. This has lifted our project backlog above where it was when we entered the year. And this is an important indicator of what we believe are improving market conditions. In the mineral fiber segment, we continue to deliver strong price performance with AUV growth of 12%. We again demonstrated our unique ability to consistently achieve like-for-like pricing ahead of inflation. This also drove gross margin expansion for the segment. Sales volume, however, fell year-over-year, and EBITDA declined 5% from 2021 results. Contributing to this lower EBITDA result was a nearly $3 million decline in equity earnings from our Wave joint venture. Now, both the decline in mineral fiber sales volume and the lower equity earnings from Wave are directly the result of efforts of our independent U.S. distribution channels to reduce inventories to more normalized inventory levels. Now, we were aware and anticipated some headwinds to mineral fiber sales volumes given our January 3rd price increase that shifted the typical January buy-head volume into December. But the magnitude of the inventory reductions we experienced in the quarter was greater than expected. Now, it's unusual for us to be talking about distributor inventory levels because they are typically very steady and follow normal seasonal patterns, given our best-in-class service levels. Our distributors know they can count on us to consistently deliver in a timely fashion, as we have continued to do throughout the pandemic. However, the lingering effects of the pandemic, along with unprecedented challenges of rapid inflation and uncertainty throughout the broader supply chain, created a unique set of circumstances for our distributors. Distributor inventory levels increased throughout 2021 as they sought to secure supplies of all products at higher rates in anticipation of further price increases, potential supply chain bottlenecks, and against the backdrop of increasing bidding activity in the market. And it's not just a ceilings-only anomaly. The breadth of this issue across the building products industry can be seen in a chart we've provided in our earnings call deck of data from the U.S. Bureau of Economic Analysis that shows historical inventory-to-sales ratios for building product wholesalers highlighting the fact that inventories in the fourth quarter of 2021 grew at more than 3x the rate of sales on a year-over-year basis. This measure was also higher in the fourth quarter of 2021 than any point in the last 25 years, escalating from an upward trend that began in the second quarter last year. So again, unprecedented conditions of rapid inflation, labor availability, supply chain disruptions against the backdrop of higher demand and construction activity have driven inventories to higher levels and created this anomaly. And given our conversations with those distributors, we believe that they are now approaching those more normalized levels. We believe the effort by our distributors to right-size their inventories does not reflect underlying market conditions. Recent discussions with our distributor partners point to solid activity and optimism, and they indicate ceiling volume growth in line with what we expect underlying market demand to be in 2022. Further to the divergence of this particular inventory dynamic and market activity, sales of mineral fiber products through our retail and wholesale channels continue to be positive. And most of the sales in these channels represent more real-time demand, particularly for patch and match and light construction projects. Broader market indicators also continue to reflect improving market conditions. For example, the Castle Back to Work Index continues to strengthen with the rate over the past few weeks hitting an all-time high since the start of the pandemic at 43%. Project bidding activity remains strong, particularly in renovation work where we've seen four consecutive quarters of at or above 20% growth in project counts. New construction starts measured in square feet are also up double digits, led by transportation, retail, and office. March results for the architectural billing index were also very strong, remaining well into expansion territory for billings nationally with a rating of 58 versus 51 in December. And again, sales in the architectural specialties with less inventory buffer due to the custom nature of the segment was up double digits. Beyond these market factors, we're also pleased with the continued progress of our healthy spaces and digital growth initiatives. Increases in sales attributed to both of these initiatives helped offset some of the inventory drawdown in our U.S. distribution channel and are expected to be key contributors to our growth outlook for 2022. I'll provide some more additional details on these initiatives after Brian provides a few more details on our financial results. Brian, over to you.