Armstrong World Industries Inc

Good day, and thank you for standing by. Welcome to the Armstrong World Industries Second Quarter 2022 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 that session, you will need to press Start 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Teresa Womble, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, Carmen, and welcome, everyone. On today's call, Vic Grizzle, our CEO, and Brian McNeil, our CFO, will discuss Armstrong World Industries' second quarter 2022 results and rest of your outlook, along with some notable progress on our growth initiatives. Also joining us today for the Q&A session is Chris Calzaretta, who will take over the CFO role effective August 1st as Brian moves into his retirement. Our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of SEC Reg G. A reconciliation of these measures with the most directly comparable GAAP measure is included in the earnings press release and in the appendix that the presentation issued this morning. Both of these are available on the investor relations website at armstrongworldindustries.com. During this call, we will be making forward-looking statements that represent the view we have of our financial and operational performance as of today's date, July 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 undertake 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 we turn the call over to Vic.

Thank you, Theresa, and good morning, everyone. This morning, we reported overall mixed results with strong sales growth of 15%. while EBITDA grew 2%. Our net sales growth resulted from double-digit year-over-year growth for both our mineral fiber and architectural specialty segments. And within the mineral fiber business, we delivered strong AUV performance of 12% and 1% volume growth. As we outlooked in our first quarter call, we experienced the continuation of destocking activity into the month of April at key U.S. distribution partners that dampened our overall mineral fiber volume growth versus actual market levels. Also, as we outlook, this destocking activity ended in April and sales volumes normalized in May and June, in fact, accelerated through the end of the quarter. The sales activity in the back half of the quarter were more in line with what we see as underlying market conditions. While we are encouraged by our strong sales growth, our EBITDA performance lagged, specifically within the mineral fiber segment. This segment was impacted by an acceleration in inflation in the quarter above what was expected, particularly in the terms of natural gas. While our overall cost inputs tend to be fairly stable, it is possible to experience a margin squeeze during a short period of time, such as a quarter, when the rate and pace of inflation is extreme. This is what we experienced in the second quarter, with June recording the highest rate of inflation since 1981 and the most rapid monthly increase since 1983. Now, to size this for AWI, between energy and freight, costs doubled from the rate we experienced in the first quarter. This margin squeeze experienced in the first quarter is temporary until our pricing actions launched on July 1st can catch up. Now, as most of you know, we have a proven track record of staying ahead of inflation with our pricing discipline. Given the rapid increase, we did not achieve our typical fall through rate. However, it is worth calling out that even in this rare situation of extraordinary inflation, we were able to cover inflation from a dollar's perspective. Our January price increase was sized for a continuation of the rate of inflation we experienced in the first quarter. But after the invasion of the Ukraine and at the end of February and the sanctions that followed, the trajectory of energy costs changed significantly across the world. Again, as extraordinary as these events are, we believe this is a temporary squeeze on our margins. and that with our July price action, we expect to return to our historical fall-through rate performance. Now, with all that said, overall market indicators continue to be positive, and the underlying performance of the ceilings category has developed largely in line with our initial expectations for the year. While we experienced a headwind from inventory reductions through April, reported sell-through rates of our products at distribution has grown in the low to mid-single-digit range. And as a leading indicator of commercial activity, commercial bidding activity remains at double-digit growth levels. Further to that, the architectural billings index has also been at expansionary levels for several quarters and aligns with what our sales folks are experiencing with a strong uptick in in-person meetings with the architectural and design community. These are all positive signs for a continued market recovery. Project delays have continued along with the overall elongation of the construction project completion cycle, driven by continuing supply chain disruptions, availability of skilled labor, and accelerating inflation. While material availability on job sites has improved, labor availability has emerged as more of the primary driver for longer completion cycles. Before I move on to the architectural specialty segment, I would like to highlight the fantastic job our mineral fiber production plants are doing. With a choppy volume flow from April to June, the plant teams safely manage through this while maintaining high customer service levels, while also delivering on our productivity targets in the quarter. This is especially critical in this inflationary environment that we're in. Our plant teams also made terrific progress toward our 2030 sustainability goals. A good example of that is a project that came online in March at our Macon, Georgia plant. This is our largest mineral fiber plant that we operate, and one of the key raw materials we use is recycled waste paper, like recycled newsprint. And some of you may know that pricing for this recycled paper has been increasing as supply declines in the digital world. Over the past 12 months, we've been working with urban consumer products who operate a nearby consumer tissue plant on an opportunity to use 100% of their tissue fiber waste stream in the manufacturing of our mineral fiber sealing tiles. This work was completed in March, and with a minor investment in material handling costs, we now have a local source for 15% of our recycled paper needs, and in the process are eliminating 30 million pounds of landfill waste annually. This is a win-win for both companies and the planet as we work to reduce our environmental impacts, diversifying our supply chain, to reduce risk and lowering our costs. Now, turning to our architectural specialties segment, we delivered another excellent quarter of sales and earnings growth. Net sales for architectural specialties products grew 20% from 2021 second quarter level, marking the second consecutive quarter of record-setting sales. Fueling this growth has been continued strength in our newer acquisitions, as well as in our base business, particularly in our felt products. We're very pleased to see how our recent acquisitions are benefiting from the leverage on our national selling platform, particularly at Arctura and Turf. Combined sales of Arctura and Turf grew greater than 50% for both the quarter and the year-to-date period. I'd also like to highlight the performance of Technum this quarter. These unique aspen fiber products are not only highly functional and aesthetic, but they are highly sustainable too. Over the past 12 months, we have focused on expanding our Technum portfolio with six new product families and increasing the marketing efforts around these products. These efforts combined by strong production execution resulted in a record-setting sales quarter for Technum. It's a strong testament to the growth model in place for our AS business as we bring together our design, innovation, and manufacturing know-how with our best-in-class distribution model to drive profitable growth. Second quarter adjusted EBITDA for architectural specialties increased 35% year-over-year, and the adjusted EBITDA margin for the segment expanded 160 basis points. We remain well on our way to reaching our 20% EBITDA margin goal in 2023. Now, finally, in architectural specialties, order intake in the quarter remains strong more than keeping up with the order's shift in the quarter. This provides us good visibility to a solid second half of the year. Now, Brian, for the final time here at AWI, before he begins his retirement, we'll provide more details on the financials. Brian?