Armstrong World Industries Inc

Welcome to the Q1 2023 Armstrong World Industries Incorporated 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Teresa Womble, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you. Good morning and welcome everyone to our call. On today's call, Vic Grizzle, our CEO, and Chris Calzaretta, our CFO, will discuss Armstrong World Industries' first quarter 2023 results and our 2023 outlook. To accompany these remarks, we have provided a presentation that is available on the investor section of our website. Our discussion of operating and financial performance will include non-GAAP 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 of the presentation we issued this morning. Both, again, are available on the Investors section of our website. 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, April 25, 2023. These statements involve risks and opportunities that may differ materially from those expected or implied. We provide a detailed discussion of the risks and uncertainties in our SEC filings, included with the 10-Q filed earlier this morning. We undertake no obligation to update any forward-looking statement beyond what is required by applicable securities law. And now I'll turn the call over to Vic.

Thank you, Theresa, and good morning, and thank you all for joining our call today. The results we reported this morning represent a solid start to 2023 as our team successfully executed on our strategic initiative and controlled costs against a backdrop of economic uncertainty. Our consolidated net sales increased 10% year-over-year, while adjusted EBITDA grew 9%, and adjusted free cash flow increased more than 50%. Our mineral fiber segment was a key contributor to the good start, with double-digit sales and adjusted EBITDA growth, as well as adjusted EBITDA margin expansion of 20 basis points. We delivered 9% mineral fiber volume growth in a quarter, largely due to recovery in sales following what was a challenging first quarter of 2022. As you will recall, in the first quarter of 2022, several of our distribution partners were reducing inventories after a period of accumulating higher levels of inventory in anticipation of improving market conditions as well as to buffer against supply chain disruptions and persistent inflationary pressures. We believe first quarter sales this year on this channel was strong versus that week comparison and have returned to more normal patterns that are consistent with maintaining historical inventory levels. This is also true for sales of our ceiling grid products from our wave joint venture. And we were pleased with the 14% earnings growth achieved in the quarter from our wave joint venture. Architectural Specialties had a slower start to 2023 with year-over-year sales growth of 3% and a $1 million decline in adjusted EBITDA. We experienced lower sales growth in the quarter tied to lower order intake in the fourth quarter of 2022. compounded by additional project delays in the quarter. All this against a strong performance quarter last year that had 26% sales growth as projects that had been delayed throughout 2021 moved forward as supply chain and labor constraints throughout the commercial construction industry had improved. Even with this slow start, we remain comfortable with our full year outlook in our specialty segment. comfort is driven primarily by the continuation of strong bidding activity across all our verticals with notable strength and transportation and health care in markets there appears to be more and larger projects out there tied to the infrastructure bill that have schedules into 2024 and beyond and this bodes well for our architectural specialty products we're also encouraged that our increasingly diverse product portfolio is providing additional demand from new spaces and commercial buildings. This is driving solid order intake for product categories like tectum, felt, wood, and metal. All in all, while we're pleased with how we started 2023, we remain cautious for the balance of the year. We continue to see challenges ahead for the commercial construction market, and we know we must remain focused on execution and cost management to deliver our outlook of solid top line growth with margin expansion across both segments. Our current view remains that market demand for the full year will be challenged. We continue to expect a mild recession to occur in the second half of the year, although the exact timing and duration remains uncertain. We also see continued weakness where return to office activity has stalled. And in some sectors of the economy that have slowed their investments. These factors, along with escalating interest rates, have pressured the office vertical more than others. Now that said, it's a fair reminder that the office vertical represents less than a third of our mineral fiber segment revenue. More broadly, overall bidding activity did turn positive in the quarter with pockets of strength in areas like transportation and municipal spending with investments in airports, metro stations, and convention centers. Healthcare is also an active area. along with education and data centers. While it's too early to conclude anything from this positive level of activity, the stabilization of demand that can occur from the diversity of end markets and how it can dampen demand in a downturn is noteworthy. While we continue to face a challenging and uncertain backdrop, we remain focused on what we can control, like how we manage our plants to achieve quality and productivity, our overall cost structure, our innovation efforts, and our investments for future growth. As we announced in February, we've made some difficult decisions around trimming our costs and reprioritizing certain investments in light of market weakness. And we will remain disciplined with all of our discretionary spending. As we move forward, what I've been very impressed with so far this year is how our teams have embraced our mission to deliver profitable growth with expanding margins and strong cash flow generation. The work our teams are accomplishing Accomplishing is notable and is helping us set up for long-term success. This includes our production teams who have done a tremendous work to exceed their productivity targets in the quarter, continuing the strong performance they delivered in 2022. Our sales teams and their new structure have also worked hard to achieve both our volume and pricing goals. And we're also pleased to share that our business development team remains active with good activity in the pipeline. Progress has also continued across our key growth initiatives. With our automated design service, Project Works, we remain focused on making the project design process as efficient as possible to the benefit of architects, designers, and contractors. We're expanding this automated service by including more and more of our product portfolio in this tool. And we are now able to offer the services earlier in the process to help architects and designers match their conceptual ideas of design with the best product solutions. We're currently on track to double the number of projects using Project Works this year. Our online sales platform, Canopy by Armstrong, also had a strong start to 2023 with strong increases across all key metrics. We continue to be very pleased with our progress with this unique offering for our category with the validation that we can find and serve new customers through this digital platform and last we continue to further develop our healthy spaces initiative while increasing sales growth and our healthy spaces product product portfolio we continue to fine-tune our value proposition around total indoor environmental quality which includes air temperature sound and light and we do this As we do this, we are seeing some promising opportunities and a connection between these attributes and ceiling solutions that improve the overall health and sustainability of a building. Still early days, but it's increasingly clear that ceilings have an important role to play in healthy, sustainable buildings of the future. Now let me pause there for a moment and let Chris provide some additional details on the quarterly financials.

Chris? Thanks, Nick, and good morning to everyone on the call. As a reminder, throughout my remarks, I'll be referring to the slides available on our website and slide three, which details our basis of presentation. On slide six, we discussed our mineral fiber segment results. Mineral fiber sales growth of 12% was driven by 9% volume growth and 3% AUV growth. As Vic mentioned, the increase in volumes was largely due to the weaker prior year periods. Additionally, our home center sales channel outperformed the prior year as inventory levels increased in this channel during the quarter. These home center inventory levels can fluctuate and are typically timing in nature and can cause a lumpiness in our volume results quarter to quarter. Rounding out the volume drivers in the first quarter, our growth initiatives led by digital and an extra shipping day contributed three points of growth, more than offsetting the impact of a softer market in the quarter. Mineral fiber AUV of 3% was driven by positive life-for-life price, partially offset by unfavorable mix. Geographic mix was the biggest headwind this quarter, as markets with lower AUVs generally outperform markets with higher AUVs. And to a lesser extent, we saw product mix headwind within the home center channel. We believe these mix headwinds are temporary. Mineral fiber segment adjusted EBITDA grew by $10 million, or 13%, and EBITDA margin expanded by 20 basis points compared to the prior year. led by the volume benefits that I just mentioned. Favorable AUV fell through at near historic levels despite the mixed headwind. Our plants had a good start to the year and exceeded their productivity targets in the quarter. WAVE equity earnings were also favorable as compared to the prior year, driven by lower steel costs flowing through the P&L and higher volumes. Recall that WAVE also had a weaker volume comparison due to the inventory level reductions in the prior year period. Offsetting these gains were higher input costs and SG&A expenses as we continued to invest in our digital initiatives. Turning to input costs, on our February earnings call, we outlooked an expected first quarter headwind related to inventory valuation. This inventory valuation impact for the quarter was $6 million and largely in line with what we expected. We anticipate a minimal inventory valuation impact for the rest of the year. The remainder of the input cost headwind in the quarter was driven by continued raw material inflation. Energy costs, specifically electricity, were still inflationary, but were not a material driver of the total input cost inflation versus the prior year. Despite these headwinds, mineral fiber adjusted EBITDA margins expanded by 20 basis points in the quarter. While on the topic of energy costs, I'd like to give a little more context to our natural gas exposure. We don't normally hedge natural gas and typically pay market rates for our supply. But given the volatility over the past year in natural gas prices, we have recently decided to lock in pricing for a portion of our natural gas needs with our current suppliers. We did this to add a level of stability to our cost structure, thereby de-risking some of our natural gas exposure in 2023. On slide seven, we discuss our architectural specialties or AS segment results. Despite increased sales across most product categories, the segment saw a slowing of the rate of growth, partially driven by a slowdown in shorter lead time orders received in the fourth quarter, primarily with our metal products. We also faced unfavorable project timing and a strong prior year comparison. Despite the softer top line result this quarter, current order intake and backlogs remain supportive of our outlook for 2023. Adjusted EBITDA margin took a step down and was negatively affected by softer sales levels, as this segment can be more impacted by lumpiness associated with project timing. We continue to manage costs as we scale and grow this segment. Slide 8 shows our consolidated company metrics, in which volume gains for the mineral fiber segment, favorable AUV, and favorable wave equity earnings more than offset inventory valuation impacts, raw material inflation, and higher SG&A expense. Adjusted diluted net earnings per share increased 10% versus the prior year, in line with adjusted EBITDA. Adjusted free cash flow increased $10 million, or about 50% versus prior year, and you'll see those drivers as we move to slide nine. Slide 9 shows first quarter adjusted free cash flow performance versus the prior year. The $10 million increase was driven by working capital improvement, primarily driven by inventories, and an increase in waived dividends. This was partially offset by higher CapEx and higher cash interest. We are pleased to see year-over-year improvement as cash flow generation remains a strong focus for us in 2023 and key to our ability to fund all of our capital allocation priorities. One of those priorities is returning excess cash to shareholders, and we continue to deliver on this in the first quarter, repurchasing $27 million of shares. Since the inception of the share repurchase program in 2016, we have repurchased a total of 12.8 million shares for about $878 million. As shown on slide 10, we are maintaining our full year 2023 guidance. As you recall, we took actions in the first quarter to trim our workforce in response to anticipated market conditions, and these actions are expected to generate full-year savings of about $6 million. We remain on track to deliver these savings. We also remain committed to driving sales growth in the range of 2% to 6% and adjusted EBITDA growth in the range of 3% to 9%. And as I just mentioned, we are focused on achieving another year of meaningful cash flow generation with guidance midpoint expectations providing a healthy 19% adjusted free cash flow margin despite a difficult market backdrop. Additional assumptions are available in the appendix to this presentation. And now I'll turn it back to Vic for some additional thoughts before we take your questions.

Thanks, Chris. Before we get to your questions, I'd like to take a step back from the results and our near-term outlook to reflect on the core attributes of Armstrong that are foundational to our resilience and our ability to be a consistent cashflow generator throughout economic cycles. As America's only focused ceilings and specialty wall company serving the commercial construction industry, we operate in an attractive category where we have unique competitive advantages, including the largest portfolio and production footprint in North America, and the largest and best exclusive distribution network in the industry. In addition, it's a category where our customers and our end users highly value our product innovation, service, and quality. We also serve a diverse set of end markets, as acoustical ceiling tiles are ubiquitous in commercial buildings. These include education, healthcare, retail, transportation, data centers, and of course, office. We believe our expansion in architectural specialties has further diversified our product portfolio and made us even more important and relevant to the A&D community by getting us into more statement spaces. As mentioned earlier, the portfolio effect of having this diversity is unique in its effect of creating stability in all parts of the cycle. It's very unusual to see all verticals move up or down at the same time, and this serves to dampen sales in an up cycle and dampen sales in downturns. This creates stability in our earnings stream and is one of the reasons we can consistently generate cash through all parts of the economic cycle. Again, a key attribute of the AWI story. Another core attribute of Armstrong is our ability to drive AUV growth in our mineral fiber business. Over the last 10 years, we've delivered a 5% AUV CAGR, even through the challenges of COVID. Looking further back, we achieved positive AUV growth during the great financial crisis. With our step up in innovation around sustainability and healthy spaces and our commitment to best-in-class service levels, we expect to continue to grow AUV well into the future. Rounding out these core attributes is our profitable 50-50 joint venture, which is the most innovative and efficient manufacturer of grid products. In addition to realized equity earnings each quarter, this venture has returned more than a billion dollars in dividends to Armstrong since the great financial crisis. Together, the core attributes of our company have allowed us to generate $1.3 billion in adjusted free cash flow and adjusted free cash flow margins, an excess of 20% since 2016. Looking just at the period since the onset of COVID, through the end of 2022, during what has clearly been a challenging market environment, we've delivered over $600 million of adjusted free cash flow, including more than $200 million in 2020 when shutdowns materially impacted our sales. In spite of market headwinds, we anticipate delivering strong cash flow generation again this year, given our expectations to hold AUV ahead of historical levels and grow initiatives and discipline approach to our spending. We have and will continue to be responsible and efficient allocators of capital as we seek to invest to generate near and long-term value for our shareholders. This includes direct returns to investors through dividends and share repurchases, as well as investments back in our business and into complementary acquisitions. We have a strong track record for doing this. Since 2016, we have returned more than $1 billion in dividends and share repurchases, while also acquiring nine companies to expand our capabilities, within the architectural specialty segment. So while none of us look forward to an economic downturn, at AWI, we believe we're well positioned to manage through all parts of the cycle, demonstrating our resilience and delivering cash flow growth. And with that, we'll be happy to take your questions.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. The first question comes from Catherine Thompson with Thompson Research. Your line is now open.

Hi, thank you for taking my questions today. Just one thing on the clarification on your volumes. up 9%, and I believe last year in the same quarter, volumes were off by 4%. And then you said that there was a 300 basis point benefit from growth initiatives and extra shipping day. So, to assume that, you know, you actually had a modest organic growth in the quarter, I just want to make sure that that logic holds with what you're seeing. And then you cited a couple of end markets that we're seeing growth, but could you give some clarification in terms of what you're seeing in terms of volumes for other key end markets that are important to Armstrong? Thank you.

Yeah, let me, Catherine, let me start with kind of at a macro level, and then I'll let Chris dissect some of the build there on the volume. markets that we experienced in the first quarter were primarily similar to what we saw in the fourth quarter as we saw if as you remember in the third quarter of last year we started to see the discretionary spending around renovation get pulled back and we expected that to continue in the fourth quarter that level of of softness in the market is very similar to what we saw in the first quarter so i would say overall the markets that we experienced in the first quarter are largely stable versus what we saw in the fourth quarter. So as you compare that to the first quarter of last year, I'm going to let Chris dissect that a little bit, and then I'll have some additional comments on the additional verticals question.

So thanks, Catherine. So as we said in our prepared remarks, mineral fiber volume down 9%. You know, the market was down low single digits, And that was really offset by, you know, the three points attributable to both ship day and initiatives. And then the remainder attributable to the prior year inventory comp and current year retail inventory build that we mentioned.

Yeah, across, sorry, Kathy, just to add to your second question there around the verticals. You know, I know the watch out here is around the office market and what's going on with the office market. Frankly, what we have seen in the office market in the first quarter is very similar to what we saw in the fourth quarter. I would say all of the markets kind of behave very similarly. So we haven't seen an additional downturn to all of the dynamics and then what we're reading about in the office market. I also mentioned on prepared remarks that the bidding activity across really all verticals, frankly, turned positive in the first quarter. And we're hesitating to conclude anything from that, by the way, because as we've reported, the last two quarters bidding activity had turned negative. And so the fact that we had a positive bidding quarter, we're not overweighting that at all. But it is noteworthy that there is some work out there really across all of the segments, again, including office. So we're going to watch that very closely as we go into the second quarter and beyond. But I would say overall, a very stable relative to the fourth quarter softness that we have already experienced.

And do you feel like the de-stocking has normalized? That that process is largely behind you? We do.

We do believe that. As well as our grid products, right, Catherine? I think that's maybe where we're going to, even including with our grid products that seem to hang on a little bit longer last year.

And as you see recovery, I mean, some of those are for bigger projects, but just for your basic everyday patch and match, are you seeing any recovery in those trends?

I would say no recovery, just about the same. Again, no additional downturn, no additional softness, but again, I certainly wouldn't say any recovery.

Okay, and final follow-up just before I hop back in the queue, just on pricing. You've seen a lot of industries. You've been fairly regular in the industry for two price increases each year. Are you still on track with that and And how do you feel for the full year when you think about guidance in terms of that price cost balance? Thanks very much.

Yeah. Yeah, sure, Catherine. As we outlook, you know, we wanted to get back to a regular cadence on our price increases. We are on track to continue that, which is our price increase of twice a year. We've implemented our price increase in February per our normal cadence. We've gotten good traction on that price increase. We do anticipate to continue to be an inflationary environment. Obviously, not as hyperinflationary as it's been the last two years, but nevertheless an inflationary environment. So it's important that we execute on these price increases, and our teams are doing that. So we're on track to that normal cadence of twice a year. You know, the sizing of these increases will – will be sized as we get closer to those dates of the price increase to reflect the inflationary environment that we're in to make sure that we cover inflation with our pricing initiatives and expand margins as we've outlook. We're still on track for that. Okay. Thank you. Thank you.

Please stand by for the next question. The next question comes from Susan McLeary with Goldman Sachs. Your line is open.

Thank you, and good morning, everyone.

Morning.

Morning.

My first question is following up on some of the commentary that you made in the office and markets there. Are you seeing that there's any differences geographically? In your comments, Vic, you said that you're seeing some greater activity in some of your lower margin markets. Does that relate to the office area and some of the broader shifts that are happening in terms of population and job growth across the country?

Yeah, I think so. All of our regions were positive in a quarter, so every region grew, including those that have back-to-office. If you look at the CASEL back-to-office index that we all watch, there are differences across the country. And we saw that in 2022, and we're going to continue to see that, I think, this year. Those markets that have higher levels of back-to-office have more tenant improvement activity ongoing. So I think there is a relationship there for sure. But, you know, some of the timing of – it's really timing, Susan, is some of these regions that were stronger than other regions had a lot to do with the base period comparison as well. The first quarter last year, as you know, distributors were destocking or taking their inventory levels down. We also had some irregular performances, if you will, as against that backdrop, some regions being really strong. In fact, our highest AUV regions last year in first quarter were the strongest while a lot of destocking was going on around them. So I think some of this is just timing on the disparity on sales by territory or geographic regions as we reported on. And that will largely work its way out through as the year goes on here.

Okay. All right. That's helpful. And then you also mentioned that you're seeing larger projects, especially in infrastructure areas, as a result of some of the bills that have been passed there. As you think about the – acquisitions that you've done in the last couple years in architectural specialties, the sort of range of product offerings that you have there now, how is that changing your ability to go after those projects? And what does that mean in terms of your visibility and the longer-term margins for architectural specialties, the ability to get to that targeted range there?

Yeah, I think it's a really good question, and there's a real strong connection here to our participation. I mean, it's To take a step back, in the last six months, we've quoted over 100 transportation jobs, over 100 transportation jobs just in the last six months. And so there's a lot more activity on the transportation front than what we've experienced in the last several years. That's noteworthy. But the fact that we're in these bids and we're quoting on this work is really directly connected to the expanded capabilities that we have added to the architectural specialty segment through our acquisitions. Our ability to do things with metal and wood, as we talked about in the last call with the Kansas City Airport, our innovation around wood and be able to meet those requirements was unique in the marketplace because we had purchased a wood business and now we're in that business. So I think there's a real strong connection. The breadth of our portfolio is allowing us to not only participate in these large projects, which we couldn't have before, but also be competitive and uniquely competitive in these large projects versus, you know, more niche players who don't have the breadth and the platform of an Armstrong. And so we're bringing some real competitive advantage, I think, to these projects. Definitely a strong connection to what we've done over the last several years to be able to play now in these larger projects.

Okay. That's helpful. Thank you, and good luck.

Thank you. Thank you. Please stand by for our next question. The next question comes from Keith Hughes with Truist. Your line is now open.

Thank you. Question on mineral fiber costs. The $6 million inventory, is that an inventory write-up? Specifically, what is that that affected the core?

Hey, Keith, it's Chris. No, it's basically inventory valuations. Think about it in terms of inflation and the timing of inflation rolling through the P&L as inventory is sold. It's not a write-off. It's just the timing of inflation.

Okay. All right, perfect. And the second question on the AEB, I think it was pressured with geography. Is that a function of the Northeast, which tends to be, I think, your highest AEB, just being weaker than other parts of the country? And do you expect this to... be something we're going to see consistently over the next year?

No, I think it's timing. So just to, again, as I said earlier, Keith, I think it's timing. The northeast part of the country, it grew in the first quarter. It didn't grow as fast as some of the southern regions. But the comparison year over year is we had double-digit growth in the northeast in the first quarter last year, while overall volumes were down 4% last year. So there were some outsized participation in two of our higher AUV areas that, by comparison, I'd say, even though they are positive, underperform some of the stronger growth territory. So in the month of April, Keith, I've already seen this reverse itself. So this is a timing, I think, phenomena that will kind of normalize throughout the year.

Okay, perfect. Thank you.

Thanks.

Please stand by for the next question. The next question comes from Derek Schmois with Loop Capital. Your line is now open.

Oh, hi. Thanks. I was wondering if you could provide a little bit more color just on your gas hedges. How much are you hedged now in any color on the duration of the hedges? And are you expecting costs to be up mid-single digits this year? Does your new hedging program impact that outlook at all?

Hey, Garrett. So, yeah, as I said, we hedged a portion. Be thinking about that in terms of, you know, about half of our exposure duration is really just for this year. And, you know, relative to our guide earlier associated with mineral, sorry, with natural gas and overall overall inputs. You know, it's not I wouldn't expect that to move the needle pretty, pretty materially there. But it was contemplated as we guide as we guided to our initial target. nat gas and input cost exposure for the year.

Great. Thank you. I wanted to follow up just on the mineral fiber volume outlook. And just in conjunction with the strong reported performance in the first quarter, I don't know if you could provide a little bit more handholding on how you expect the cadence of volume growth to progress over the next three quarters.

Yep. Yeah, so in terms of volume, think about, you know, the remainder of the year, while we don't provide, you know, quarterly guidance, you know, we do expect, you know, negative volumes in the second quarter. And really consistent with what we talked about in February, really continued deceleration of volume progression for the remainder of the year. Again, it comes back to, you know, the level of uncertainty. and cloudiness associated with the back half of the year and the mild recession that we've incorporated into our guidance.

Understood.

Thanks for your help.

Sure.

Please stand by for the next question. The next question comes from Phil Ng with Jefferies. Your line is now open.

Hey, guys. With the regional bank failures and likely tighter lending conditions on CRE loans, how do you see that impacting your business in any color on timing? And then, Vic, I guess it would be really helpful if you could help us segment your customer base in the type of work that you could see being impacted. I would suspect like new construction would be potentially impacted a little more, but any color on how to think about like major rental versus your patch and match business would be helpful. Thanks a lot.

Yeah, Phil, so in the first quarter, we really have not seen any impact from all the things that we're reading about and the different possibilities about ramifications. You know, I think our back half guidance reflects the level of uncertainty that this adds to it. And I think this is going to have to play out for us to really understand what the full ramifications of this could be. It really is balanced, though, when you think about the things that you read about in Class A office space and trophy where there's high demand for that space and the additional amenities and work that is doing to keep those buildings competitive and full. That drives renovation activity, and we're seeing that activity on one side of it. That's not likely to stop. you step back and look at overall construct new construction versus renovation i've said this before and i think this is going to play out in the back half of the year this will be primarily impacting the renovation more of those things that haven't already started where you have sunk costs like you would have in new construction you're going to have discretionary pullback on those patch and match levels of work the major renovation work I think that's where we're going to see additional softness in the back half of the year. I think we're appropriately balanced in our outlook that's reflecting what could happen in tighter lending conditions in our back half outlook. I think this has to play out for us to fully understand the full ramifications. And I'll leave it there, Phil. Okay.

That's more than fair. I guess from a cycle standpoint, Vic, it was really helpful to kind of give us some color on how you think about the free cash flow and the durability of AUV. Does the play look any little different this time around? I know in the past, volumes would fall, pricing would hold, and you would mix up with raws falling. This time around, I'm curious, how does mix hold up given some of the challenges you're seeing in office and retail, which I assume is a higher mix? and potentially weakness in places like San Francisco and New York, and help us think through the mix dynamic going forward.

Yeah, I think the best proxy is to go back and look at what happened in, you know, 2008, 2009, and 2010. I don't think it could get any worse than that. And in that case, we didn't see the trade down on mix. So we're not anticipating to see the same kind of or a different kind of a trade down activity on mix. Again, everything that I'm reading is that the highest demand office space continues to be Class A and trophy buildings. And the vacancy rates are the lowest in those buildings as people trade up from older buildings, 30 years and older. I think that dynamic is going to keep the mix appropriately you know, size for us in our outlook. And again, you know, mix happens across the country, not just in the major cities where there's offices. And then, you know, the final point I'll make on this is that new construction is what was positive in the Q4 of 2021 and all of 22 could add a positive tailwind in the back half of the year and into 24. again new construction tends to be higher review products based on um you know the nature of the new construction and putting in the latest and greatest technology so i that's kind of a long-winded answer but i don't really see a dynamic here that's that should change our expectation on driving higher auvs and higher mixes and and maybe i'll just make this long-winded answer even longer by you know when i when i talk about the focus of this business now that we don't have an international division, we have a tremendous amount of focus on this America's market where we're innovating and bringing products to market even faster. We've talked a lot about those with you. I think the work that we're doing around healthy spaces, the work we're doing around sustainability, all of these are bringing higher AUV products into the marketplace even faster. So there's a lot of tailwind to AUV growth just through the innovation. that I think offsets any of those minor dynamics that you were alluding to. So, again, sorry for the long-winded answer, but I do believe we have a positive AUV story well into the future here. Okay. Super. Great comment, Nick. Appreciate it. Thanks. You bet. Thank you.

Please stand by for the next question. The next question comes from Stephen Kim with Evercore. Your line is now open.

Thanks very much, guys. Appreciate the help so far. Just wanted to touch on the mineral fiber volume first. I guess, first of all, the extra shipping day, that was actually not something we had expected. So can you help us understand, just foresee, are there any other future day adjustments we should be thinking about later this year? And then with respect to your volume, I guess, inclusive of any, you know, shipping day issues. I think previously you had talked about your outlook for the year, the kind of the shape of the year-over-year changes, kind of being like down low single digits in the front half, and I think down high single digits in the back half. This is what you had previously talked about. You're not changing your guidance now, but you had a very strong one cue, obviously. And so, I'm curious, is there any help you can give us in terms of maybe a change in the shape of that sort of first half, second half kind of year-over-year comparison?

Hey, Stephen. So for the first quarter, obviously up one shift day. The only other shift day dynamic we have this year is Q3, where we're down one. So overall, flat on a shift day basis for the whole year. In terms of volume, you know, we do incorporate kind of that shipping day dynamic into our guide. And again, we outlook, you know, mineral fiber volume being in that mid-single digit range for the year. First half, back half dynamic, we're expecting, you know, positive first half volume for mineral fiber. But you're right, the second half is in that high single-digit range in terms of year-over-year comp. And again, that's due to the progression that I mentioned earlier with just sequential deceleration starting in the second quarter. And again, really pronounced in the back half there due to the expected recession that we have incorporated into our outlook.

So I'm guessing because the first half is now going to be positive, it sounds like your second half outlook is still down high single digits, but maybe more high single digits than previously thought. Would that be a fair guess?

Yeah, I think that's fair.

High single digits in the back half is fair. Okay. And then when we think about Wave, I think typically it's stronger seasonally in 2Q and 3Q. Any reason why the seasonality might be different this year?

Well, the seasonality pattern away follows Armstrong broadly, right? Because most of the construction activity is in the second and third quarter, so no change in the seasonality there. Again, I think the third quarter is part of that back half uncertainty where there's not enough clarity around our customers' backlogs going into the back half. So certainly, I think with the uncertainty in the back half, we could see a dampening or a change in the seasonal patterns um given our outlook for the second quarter in the first half of the year again a lot of this first half volume that we're seeing steven is is carry over projects that didn't get completed last year or got delayed last year that's really kind of feeding some of this addition to some of the favorable comp um in the base period that um that we talked about so i think of course there could be something

macro that dampens the the uh quarter in the back the the strongest quarter which is the third quarter in our back half yeah for sure um okay great that's uh that's very helpful thanks so much great thank you please stand by for the next question the next question comes from reef jed rossick with bank of america your line is now open

Hi, good morning. It's Rafe. Thanks for taking my question. I just wanted to follow up on the like for like pricing and makes impact to the quarter. Could you sort of break out what the like for like pricing was either year over year or quarter over quarter, what the expectations are for the year? And then did you see normal realization on the February price announcement?

Yeah, our like for like pricing was as expected in the quarter. I mentioned earlier that our February price increase, we got good traction on as well. So I think we're where we wanted to be, where we expected to be on our like-for-like pricing objectives. Obviously, that was offset by some of the timing-related mix headwinds in the first quarter that dampened, I think, the overall AUV growth. But the like-for-like pricing is where, again, where we expect it to be and where we're comfortable with.

Just as we think about the AUV cadence through the year, you sort of mentioned that you expect some of the mixed headwinds to reverse in the second quarter. Should we expect outsized positive AUV in the second quarter because of that?

Outsized relative to what, Rafe?

The four-year guidance.

I couldn't say. Yeah, it's hard to call.

I mean, obviously, you know, in our guide for the year, we assumed, we talked about this back in February, you know, positive mix. I just, you know, go back to, you know, what we saw in the first quarter on the mixed side was really timing related and expect, you know, that to kind of reverse itself as you think about mix for the rest of the year. And again, still looking at positive mix for 2023.

And then just very quickly, on the retail sort of restocking that you saw, can you sort of give some color on what you think drove that? Like, has sellout improved on the ceiling tile side at some of the home center channels? I think that was one of the drivers to the volume upside in the first quarter. I'd be interested to hear sort of what you're seeing in that channel.

Well, there's some resetting going on at one of the big box retailers. you know, sometimes it's a bit of a mystery on why they take their inventory levels down as far as they do and then build them up so quickly. As we've reported a number of times, that does occur. I would say that's more the dynamic in the first quarter activity with one particular big box retailer. So again, I wouldn't point to some Large outside point of sale data, for example, that drove that. This is really inventory levels getting pretty low, some resetting activity going on there, which we normally do and work with our retail customers throughout the year on. And then a rebuild of inventory right behind that. I think that's more of the actual and practical application or answer for what that activity is about. Okay, thank you. Yep.

Please stand by for the next question. The next question comes from Adam Baumgarten with Zellman and Associates. Your line is now open.

Hey, good morning, everyone. You mentioned that bidding activity turned positive for the quarter. Did that continue into April? I don't have April data yet. We won't get that until next month. So I could answer that specifically. We're going to keep an eye on it. Again, we're not putting too much weight on it in the first quarter, but we're going to keep a close eye on it for the second quarter. Okay, got it. And then just on the topic of natural gas, just curious when you guys put in the hedging program and if you could remind us what percentage of your total COGS is natural gas.

Yep, sure. Paul Hoffman, Energy and we don't we don't break it out kind of any more than that, but energy is about 10% of our mineral fiber cogs implications of our total culture mineral fiber. Paul Hoffman, Again, I mentioned we were hedging about 50% of our natural gas exposure by way of the the price blocks have talked about. Paul Hoffman, kind of entered into towards the earlier part of the quarter. So you can kind of look at, you know, look at the NYMEX settlements and kind of get a feel for, you know, the pricing there. And, you know, hopefully that's helpful as you're thinking through the NatGas locking.

Got it. And then just to confirm, I think there was a question earlier on just overall input cost inflation assumed in the guide. It was, you know, mid-single digits last quarter. Is the way to think about that is roughly the same still?

Yeah, for the year, mid-single digits on input cost. Again, a little bit of variability, obviously, depending upon how the rest of the year shakes out, obviously, on dynamics associated with nat gas, but certainly more heavily weighted there towards our raw material inputs where we see a lion's share of that inflation. Got it. Thank you.

You're welcome.

Please stand by for our next question. The next question comes from Joe Ehlersmeyer with Deutsche Bank. Your line is now open.

Yeah, thanks very much for the question. Just wanted to clarify on that last point about the hedging. You mentioned it starting in the earlier part of the quarter. Is it simplistic enough to think you're talking about the early part of this quarter, or was this the early part of last quarter that you started it?

Yeah, sorry, good question. Early part of Q1.

Okay, got it. And then just a quick clarification on the mix. I know it's kind of been beaten to death at this point, but was there a benefit from lapping unfavorable channel mix related to the destocking last year? I don't think I saw the favorable geographic mix called out, but it looks like you did call out the unfavorable channel mix in the prior year.

Well, I don't recall what was disclosed last year in particular. I mean, it was a down quarter last year, right, based on the destocking. But I wouldn't put this particularly all on destocking, but I would say that In the first quarter of last year, we had areas where our highest ADV products were sold that were stronger than the others. And so part of this is just base period comparisons driving some of this mix, which is, again, why we believe this is transitory and will work its way through as we go in the year.

Okay. Thanks very much.

Please stand by for the next question. The next question comes from John Lovallo with UBS. Your line is now open.

Good morning, guys. Thank you for taking my questions. The first one, I just wanted to go back to Stephen's question on the mineral fiber volume being a little bit better than expected in the first quarter and the full year expectation remaining the same. I mean, that would seem to imply that. the back half outlook has gotten incrementally worse. So I just wanted to clarify that. And if so, what are you seeing that has changed your mind on that?

You know, John, one thing that we did mention with Stephen's question is some of the goodness that we saw in the first quarter, and we point to this, is the inventory build and the retail channel, which will come out, right? That's a timing-related. I wouldn't, you know, we wouldn't expect to hold that for the whole year. So we didn't mention that in Steven's question, but that's another factor in this overall equation is some of that goodness in the first quarter is timing-related inventory building. Gotcha.

Okay. All right. And then, excuse me, on the digital growth initiative spending,

I mean, is that a lever for you guys to potentially pull back on if your end markets were to soften more than expected?

I think we've done a tremendous amount of work and effort around making room so that we can continue our digital investment. The traction that we're getting there is making a meaningful contribution to the growth of the business. we've made room in our cost structure so that we could continue to do that. And again, we're, I think, appropriately balanced in our outlook for the rest of the year, given the uncertainty in the back half, so that we don't have to pull additional levers like that. Got it. Thank you, Vic. You bet.

I show no further questions at this time. I would now like to turn the conference back to Vic Grizzle for closing remarks.

Thank you. I just want to say thank you, everybody, for joining today. At the end of the first quarter, we feel like we're in a very different position than we were at the end of the first quarter last year. We're well positioned for tougher market conditions that we're outlooking, and we feel good about the position that we're in and ready to perform in tougher economic conditions that we're outlooking. So thank you again for joining today, and we'll look forward to talking to you next quarter.

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

Goodbye. you Thank you. Thank you. Thank you.

Welcome to the Q1 2023 Armstrong World Industries Incorporated 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Teresa Womble, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you. Good morning and welcome everyone to our call. On today's call, Vic Grizzle, our CEO, and Chris Calzaretta, our CFO, will discuss Armstrong World Industries' first quarter 2023 results and our 2023 outlook. To accompany these remarks, we have provided a presentation that is available on the investor section of our website. Our discussion of operating and financial performance will include non-GAAP 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 of the presentation we issued this morning. Both, again, are available on the investor section of our website. 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, April 25th, 2023. These statements involve risks and opportunities that may differ materially from those expected or implied. We provide a detailed discussion of the risks and uncertainties in our SEC filings included with the 10-Q filed earlier this morning. We undertake no obligation to update any forward-looking statement beyond what is required by applicable securities law. And now I'll turn the call over to Vic.

Thank you, Theresa, and good morning, and thank you all for joining our call today. The results we reported this morning represent a solid start to 2023 as our team successfully executed on our strategic initiative and controlled costs against a backdrop of economic uncertainty. Our consolidated net sales increased 10% year-over-year, while adjusted EBITDA grew 9%, and adjusted free cash flow increased more than 50%. Our mineral fiber segment was a key contributor to the good start, with double-digit sales and adjusted EBITDA growth, as well as adjusted EBITDA margin expansion of 20 basis points. We delivered 9% mineral fiber volume growth in a quarter, largely due to recovery in sales following what was a challenging first quarter of 2022. As you will recall, in the first quarter of 2022, several of our distribution partners were reducing inventories after a period of accumulating higher levels of inventory in anticipation of improving market conditions, as well as to buffer against supply chain disruptions and persistent inflationary pressures. We believe first quarter sales this year on this channel was strong versus that weak comparison and have returned to more normal patterns that are consistent with maintaining historical inventory levels. This is also true for sales of our ceiling grid products from our wave joint venture. And we were pleased with the 14% earnings growth achieved in the quarter from our wave joint venture. Architectural Specialties had a slower start to 2023 with year-over-year sales growth of 3% and a $1 million decline in adjusted EBITDA. We experienced lower sales growth in the quarter tied to lower order intake in the fourth quarter of 2022. compounded by additional project delays in the quarter. All this against a strong performance quarter last year that had 26% sales growth as projects that had been delayed throughout 2021 moved forward as supply chain and labor constraints throughout the commercial construction industry had improved. Even with a slow start, we remain comfortable with our full year outlook in our specialty segment. comfort is driven primarily by the continuation of strong bidding activity across all our verticals with notable strength and transportation and health care in markets there appears to be more and larger projects out there tied to the infrastructure bill that have schedules into 2024 and beyond and this bodes well for our architectural specialty products we're also encouraged that our increasingly diverse product portfolio is providing additional demand from new spaces and commercial buildings this is driving solid order intake for product categories like tectum felt wood and metal all in all while we're pleased with how we started 2023 we remain cautious for the balance of the year we continue to see challenges ahead for the commercial construction market and we know we must remain focused on execution and cost management to deliver our outlook of solid top line growth with margin expansion across both segments. Our current view remains that market demand for the full year will be challenged. We continue to expect a mild recession to occur in the second half of the year, although the exact timing and duration remains uncertain. We also see continued weakness where return to office activity has stalled. And in some sectors of the economy that have slowed their investments. These factors, along with escalating interest rates, have pressured the office vertical more than others. Now, that said, it's a fair reminder that the office vertical represents less than a third of our mineral fiber segment revenue. More broadly, overall bidding activity did turn positive in the quarter with pockets of strength in areas like transportation and municipal spending with investments in airports, metro stations, and convention centers. Healthcare is also an active area. along with education and data centers. While it's too early to conclude anything from this positive level of activity, the stabilization of demand that can occur from the diversity of end markets and how it can dampen demand in a downturn is noteworthy. While we continue to face a challenging and uncertain backdrop, we remain focused on what we can control, like how we manage our plants to achieve quality and productivity, our overall cost structure, our innovation efforts, and our investments for future growth. As we announced in February, we've made some difficult decisions around trimming our costs and reprioritizing certain investments in light of market weakness. And we will remain disciplined with all of our discretionary spending. As we've moved forward, what I've been very impressed with so far this year is how our teams have embraced our mission to deliver profitable growth with expanding margins and strong cashflow generation. The work our teams are accomplishing Accomplishing is notable and is helping us set up for long-term success. This includes our production teams who have done a tremendous work to exceed their productivity targets in the quarter, continuing the strong performance they delivered in 2022. Our sales teams and their new structure have also worked hard to achieve both our volume and pricing goals. And we're also pleased to share that our business development team remains active with good activity in the pipeline. Progress has also continued across our key growth initiatives. With our automated design service, Project Works, we remain focused on making the project design process as efficient as possible to the benefit of architects, designers, and contractors. We're expanding this automated service by including more and more of our product portfolio in this tool. And we are now able to offer the services earlier in the process to help architects and designers match their conceptual ideas of design with the best product solutions. We're currently on track to double the number of projects using Project Works this year. Our online sales platform, Canopy by Armstrong, also had a strong start to 2023 with strong increases across all key metrics. We continue to be very pleased with our progress with this unique offering for our category with the validation that we can find and serve new customers through this digital platform and last we continue to further develop our healthy spaces initiative while increasing sales growth and our healthy spaces product product portfolio we continue to fine-tune our value proposition around total indoor environmental quality which includes air temperature sound and light and we do this As we do this, we are seeing some promising opportunities and a connection between these attributes and ceiling solutions that improve the overall health and sustainability of a building. Still early days, but it's increasingly clear that ceilings have an important role to play in healthy, sustainable buildings of the future. Now, let me pause there for a moment and let Chris provide some additional details on the quarterly financials.

Chris? Thanks, Nick, and good morning to everyone on the call. As a reminder, throughout my remarks, I'll be referring to the slides available on our website and slide three, which details our basis of presentation. On slide six, we discuss our mineral fiber segment results. Mineral fiber sales growth of 12% was driven by 9% volume growth and 3% AUV growth. As Vic mentioned, the increase in volumes was largely due to the weaker prior year periods. Additionally, our home center sales channel outperformed the prior year as inventory levels increased in this channel during the quarter. These home center inventory levels can fluctuate and are typically timing in nature and can cause a lumpiness in our volume results quarter to quarter. Rounding out the volume drivers in the first quarter, our growth initiatives led by digital and an extra shipping day contributed three points of growth, more than offsetting the impact of a softer market in the quarter. Mineral fiber AUV of 3% was driven by positive like-for-like price, partially offset by unfavorable mix. Geographic mix was the biggest headwind this quarter, as markets with lower AUVs generally outperform markets with higher AUVs. And to a lesser extent, we saw product mix headwind within the home center channel. We believe these mix headwinds are temporary. Mineral fiber segment adjusted EBITDA grew by $10 million, or 13%, and EBITDA margin expanded by 20 basis points compared to the prior year. led by the volume benefits that I just mentioned. Favorable AUV fell through at near historic levels despite the mixed headwind. Our plants had a good start to the year and exceeded their productivity targets in the quarter. WAVE equity earnings were also favorable as compared to the prior year, driven by lower steel costs flowing through the P&L and higher volumes. Recall that WAVE also had a weaker volume comparison due to the inventory level reductions in the prior year period. Offsetting these gains were higher input costs and SG&A expenses as we continued to invest in our digital initiatives. Turning to input costs, on our February earnings call, we out looked an expected first quarter headwind related to inventory valuation. This inventory valuation impact for the quarter was $6 million and largely in line with what we expected. We anticipate a minimal inventory valuation impact for the rest of the year. The remainder of the input cost headwind in the quarter was driven by continued raw material inflation. Energy costs, specifically electricity, were still inflationary, but were not a material driver of the total input cost inflation versus the prior year. Despite these headwinds, mineral fiber adjusted EBITDA margins expanded by 20 basis points in the quarter. While on the topic of energy costs, I'd like to give a little more context to our natural gas exposure. We don't normally hedge natural gas and typically pay market rates for our supply. But given the volatility over the past year in natural gas prices, we have recently decided to lock in pricing for a portion of our natural gas needs with our current suppliers. We did this to add a level of stability to our cost structure, thereby de-risking some of our natural gas exposure in 2023. On slide seven, we discuss our architectural specialties or AS segment results. Despite increased sales across most product categories, the segment saw a slowing of the rate of growth, partially driven by a slowdown in shorter lead time orders received in the fourth quarter, primarily with our metal products. We also faced unfavorable project timing and a strong prior year comparison. Despite the softer top line result this quarter, current order intake and backlogs remain supportive of our outlook for 2023. Adjusted EBITDA margin took a step down and was negatively affected by softer sales levels, as this segment can be more impacted by lumpiness associated with project timing. We continue to manage costs as we scale and grow this segment. Slide 8 shows our consolidated company metrics, in which volume gains for the mineral fiber segment, favorable AUV, and favorable wave equity earnings more than offset inventory valuation impacts, raw material inflation, and higher SG&A expense. Adjusted diluted net earnings per share increased 10% versus the prior year, in line with adjusted EBITDA. Adjusted free cash flow increased $10 million, or about 50% versus prior year, and you'll see those drivers as we move to slide nine. Slide 9 shows first quarter adjusted free cash flow performance versus the prior year. The $10 million increase was driven by working capital improvement, primarily driven by inventories, and an increase in waived dividends. This was partially offset by higher CapEx and higher cash interest. We are pleased to see year-over-year improvement as cash flow generation remains a strong focus for us in 2023 and key to our ability to fund all of our capital allocation priorities. One of those priorities is returning excess cash to shareholders, and we continue to deliver on this in the first quarter, repurchasing $27 million of shares. Since the inception of the share repurchase program in 2016, we have repurchased a total of 12.8 million shares for about $878 million. As shown on slide 10, we are maintaining our full year 2023 guidance. As you recall, we took actions in the first quarter to trim our workforce in response to anticipated market conditions, and these actions are expected to generate full-year savings of about $6 million. We remain on track to deliver these savings. We also remain committed to driving sales growth in the range of 2% to 6% and adjusted EBITDA growth in the range of 3% to 9%. And as I just mentioned, we are focused on achieving another year of meaningful cash flow generation with guidance midpoint expectations providing a healthy 19% adjusted free cash flow margin despite a difficult market backdrop. Additional assumptions are available in the appendix to this presentation. And now I'll turn it back to Vic for some additional thoughts before we take your questions.

Thanks, Chris. Before we get to your questions, I'd like to take a step back from the results and our near-term outlook to reflect on the core attributes of Armstrong that are foundational to our resilience and our ability to be a consistent cash flow generator throughout economic cycles. As America's only focused ceilings and specialty wall company serving the commercial construction industry, we operate in an attractive category where we have unique competitive advantages, including the largest portfolio and production footprint in North America, and the largest and best exclusive distribution network in the industry. In addition, it's a category where our customers and our end users highly value our product innovation, service, and quality. We also serve a diverse set of end markets, as acoustical ceiling tiles are ubiquitous in commercial buildings. These include education, healthcare, retail, transportation, data centers, and of course, office. We believe our expansion in architectural specialties has further diversified our product portfolio and made us even more important and relevant to the A&D community by getting us into more statement spaces. As mentioned earlier, the portfolio effect of having this diversity is unique in its effect of creating stability in all parts of the cycle. It's very unusual to see all verticals move up or down at the same time, and this serves to dampen sales in an up cycle and dampen sales in downturns. This creates stability in our earnings stream and is one of the reasons we can consistently generate cash through all parts of the economic cycle. Again, a key attribute of the AWI story. Another core attribute of Armstrong is our ability to drive AUV growth in our mineral fiber business. Over the last 10 years, we've delivered a 5% AUV CAGR, even through the challenges of COVID. Looking further back, we achieved positive AUV growth during the great financial crisis. With our step up in innovation around sustainability and healthy spaces and our commitment to best-in-class service levels, we expect to continue to grow AUV well into the future. Rounding out these core attributes is our profitable 50-50 joint venture, which is the most innovative and efficient manufacturer of grid products. In addition to realized equity earnings each quarter, This venture has returned more than a billion dollars in dividends to Armstrong since the great financial crisis. Together, the core attributes of our company have allowed us to generate $1.3 billion in adjusted free cash flow and adjusted free cash flow margins, an excess of 20% since 2016. Looking just at the period since the onset of COVID, through the end of 2022, during what has clearly been a challenging market environment, we've delivered over $600 million of adjusted free cash flow, including more than $200 million in 2020 when shutdowns materially impacted our sales. In spite of market headwinds, we anticipate delivering strong cash flow generation again this year, given our expectations to hold AUV ahead of historical levels and grow initiatives and discipline approach to our spending. We have and will continue to be responsible and efficient allocators of capital as we seek to invest to generate near and long-term value for our shareholders. This includes direct returns to investors through dividends and share repurchases, as well as investments back in our business and into complementary acquisitions. We have a strong track record for doing this. Since 2016, we have returned more than $1 billion in dividends and share repurchases, while also acquiring nine companies to expand our capabilities, within the architectural specialty segment. So while none of us look forward to an economic downturn, at AWI, we believe we're well-positioned to manage through all parts of the cycle, demonstrating our resilience and delivering cash flow growth. And with that, we'll be happy to take your questions.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. The first question comes from Catherine Thompson with Thompson Research. Your line is now open.

Hi, thank you for taking my questions today. Just one thing on the clarification on your volumes. up nine percent and i believe last year in the same quarter volumes were off by four percent uh and then you said that there was a 300 basis point benefit from growth initiatives and extra shipping day so to assume that you know you you actually had a modest organic growth in the quarter one and sort of make sure that that logic um holds with what you're seeing And then you cited a couple of end markets that we're seeing growth, but could you give some clarification in terms of what you're seeing in terms of volumes for other key end markets that are important to Armstrong? Thank you.

Yeah, let me, Catherine, let me start with kind of at a macro level, and then I'll let Chris dissect some of the build there on the volume. The markets that we experienced in the first quarter were primarily similar to what we saw in the fourth quarter. As you remember, in the third quarter of last year, we started to see the discretionary spending around renovation get pulled back, and we expected that to continue in the fourth quarter. That level of softness in the market is very similar to what we saw in the first quarter. So I would say overall, the markets that we experienced in the first quarter are largely stable versus what we saw in the fourth quarter. So as you compare that to the first quarter of last year, I'm going to let Chris dissect that a little bit, and then I'll add some additional comments on the additional verticals question.

So thanks, Catherine. So as we said in our prepared remarks, mineral fiber volume down 9%. You know, the market was down low single digits, And that was really offset by, you know, the three points attributable to both ship day and initiatives. And then the remainder attributable to the prior year inventory comp and current year retail inventory build that we mentioned.

Yeah, across, sorry, Kathy, just to add to your second question there around the verticals. You know, I know the watch out here is around the office market and what's going on with the office market. Frankly, what we have seen in the office market in the first quarter is very similar to what we saw in the fourth quarter. I would say all of the markets kind of behave very similarly. So we haven't seen an additional downturn to all of the dynamics and then what we're reading about in the office market. I also mentioned on Prepare to March that the bidding activity across really all verticals, frankly, turned positive in the first quarter. And we're hesitating to conclude anything from that, by the way, because as we've reported, the last two quarters bidding activity had turned negative. And so the fact that we had a positive bidding quarter, we're not overweighting that at all. But it is noteworthy that there is some, you know, there's some work out there really across all of the segments, again, including office. So we're going to watch that very closely as we go into the second quarter and beyond. But I would say overall, a very stable relative to the fourth quarter softness that we have already experienced.

And do you feel like the de-stocking has normalized, that that process is largely behind you? We do.

We do believe that, as well as our grid products, right, Catherine? I think that's maybe where we're going to, even including with our grid products that seem to hang on a little bit longer last year.

And as you see recovery, I mean, some of those are for bigger projects, but just for your basic everyday patch and match, are you seeing any recovery in those trends?

I would say no recovery, just about the same. Again, no additional downturn, no additional softness, but again, I wouldn't, certainly wouldn't say any recovery.

Okay, and final follow-up just before I hop back in the queue, just on pricing, you've seen a lot of industries, you know, you've been fairly regular in the industry for two price increases each year. Are you still on track with that and And how do you feel for the full year when you think about guidance in terms of that price-cost balance? Thanks very much.

Yeah. Yeah, sure, Catherine. As we outlook, you know, we wanted to get back to a regular cadence on our price increases. We are on track to continue that, which is our price increase of twice a year. We've implemented our price increase in February per our normal cadence. We've gotten good traction on that price increase. We do anticipate to continue to be an inflationary environment. Obviously, not as hyperinflationary as it's been the last two years, but nevertheless an inflationary environment. So it's important that we execute on these price increases, and our teams are doing that. So we're on track to that normal cadence of twice a year. The sizing of these increases will change. will be sized as we get closer to those dates of the price increase to reflect the inflationary environment that we're in to make sure that we cover inflation with our pricing initiatives and expand margins as we've outlook. We're still on track for that. Thank you. Thank you.

Please stand by for the next question. The next question comes from Susan McLeary with Goldman Sachs. Your line is open.

Thank you, and good morning, everyone.

Morning. Morning.

My first question is following up on some of the commentary that you made in the office and markets there. Are you seeing that there's any differences geographically? In your comments, Vic, you said that you're seeing some greater activity in some of your lower margin markets. Does that relate to the office area and some of the broader shifts that are happening in terms of population and job growth across the country?

Yeah, I think so. All of our regions were positive in the quarter, so every region grew, including those that have back-to-office. If you look at the CASEL back-to-office index that we all watch, there are differences across the country. And we saw that in 2022, and we're going to continue to see that, I think, this year. Those markets that have higher levels of back-to-office have more tenant improvement activity ongoing. So I think there is a relationship there for sure. But, you know, some of the timing of – it's really timing, Susan, is some of these regions that were stronger than other regions had a lot to do with the base period comparison as well. The first quarter last year, as you know, distributors were destocking or taking their inventory levels down. We also had some irregular performances, if you will, as against that backdrop, some regions being really strong. In fact, our highest AUV regions last year in first quarter were the strongest while a lot of destocking was going on around them. So I think some of this is just timing on the disparity on sales by territory or geographic regions as we reported on. And that'll largely work its way out through as the year goes on here.

Okay, all right, that's helpful. And then you also mentioned that you're seeing larger projects, especially in infrastructure areas as a result of some of the bills that have been passed there. As you think about the... acquisitions that you've done in the last couple years in architectural specialties, the sort of range of product offerings that you have there now. How is that changing your ability to go after those projects, and what does that mean in terms of your visibility and the longer-term margins for architectural specialties, the ability to get to that targeted range there?

Yeah, I think it's a really good question, and there's a real strong connection here to our participation. I mean, To take a step back, in the last six months, we've quoted over 100 transportation jobs, over 100 transportation jobs just in the last six months. And so there's a lot more activity on the transportation front than what we've experienced in the last several years. That's noteworthy. But the fact that we're in these bids and we're quoting on this work is really directly connected to the expanded capabilities that we have added to the architectural specialty segment through our acquisitions. Our ability to do things with metal and wood, as we talked about in the last call with the Kansas City Airport, our innovation around wood and be able to meet those requirements was unique in the marketplace because we had purchased a wood business and now we're in that business. So I think there's a real strong connection. The breadth of our portfolio is allowing us to not only participate in these large projects, which we couldn't have before, but also be competitive. and uniquely competitive in these large projects versus more niche players who don't have the breadth and the platform of an Armstrong. And so we're bringing some real competitive advantage, I think, to these projects. Definitely a strong connection to what we've done over the last several years to be able to play now in these larger projects.

Okay. That's helpful. Thank you, and good luck.

Thank you. Thank you. Please stand by for our next question. The next question comes from Keith Hughes with Truist. Your line is now open.

Thank you. Question on mineral fiber costs. The $6 million inventory, is that an inventory write-up? Specifically, what is that that affected the course?

Hey, Keith, it's Chris. No, it's basically inventory valuations. Think about it in terms of inflation and the timing of inflation rolling through the P&L as inventory is sold. It's not a write-off. It's just the timing of inflation.

Okay. All right, perfect. And there's one question on the AEB. I think it was pressured with geography. Is that a function of the Northeast, which tends to be, I think, your highest AEB, just being weaker than other parts of the country? And do you expect this to... be something we're going to see consistently over the next year.

No, I think it's timing. So just to, again, as I said earlier, Keith, I think it's timing. The northeast part of the country, it grew in the first quarter. It didn't grow as fast as some of the southern regions. But the comparison year over year is we had double-digit growth in the northeast in the first quarter last year, while overall volumes were down 4% last year. So there were some outsized participation in two of our higher AUV areas that, by comparison, I'd say, even though they are positive, underperform some of the stronger growth territory. So, in the month of April, Keith, I've already seen this reverse itself. So, this is a timing, I think, phenomena that will kind of normalize throughout the year.

Okay, perfect. Thank you.

Thanks. Please stand by for the next question. The next question comes from Garrick Schmois with Loop Capital. Your line is now open.

Oh, hi. Thanks. I was wondering if you could provide a little bit more color just on your gas hedges. How much are you hedged now in any color on the duration of the hedges? And I think you expected costs to be up mid-single digits this year. Does your new hedging program impact that outlook at all?

Hey, Garic. So, yeah, as I said, we hedged a portion, be thinking about that in terms of, you know, about half of our exposure. Duration is really just for this year. And, you know, relative to our guide earlier associated with mineral, sorry, with natural gas and overall inputs, you know, it's not, I wouldn't expect that to move the needle pretty materially there, but it was contemplated as we guide into our initial nat gas and input cost exposure for the year.

Great. Thank you. I wanted to follow up just on the mineral fiber volume outlook. And just in conjunction with the strong reported performance in the first quarter, I don't know if you could provide a little bit more hand-holding on how you expect the cadence of volume growth to progress over the next three quarters.

Yeah. Yeah. So in terms of volume, think about, you know, the remainder of the year, while we don't provide, you know, quarterly guidance, you know, we do expect, you know, negative volumes in the second quarter. And really consistent with what we talked about in February, really continued deceleration of volume progression for the remainder of the year. Again, it comes back to the level of uncertainty and cloudiness associated with the back half of the year and the mild recession that we've incorporated into our guidance.

Understood. Thanks for your help.

Sure.

Please stand by for the next question. The next question comes from Phil Ng with Jefferies. Your line is now open.

Hey, guys. With the regional bank failures and likely tighter lending conditions on CRE loans, how do you see that impacting your business in any color on timing? And then, Vic, I guess it would be really helpful if you could help us segment your customer base in the type of work that you could see being impacted. I would suspect new construction would be potentially impacted a little more, but any color on how to think about major rental versus your patch-and-match business would be helpful. Thanks a lot.

Yeah, Phil, so in the first quarter, we really have not seen any impact from all the things that we're reading about and the different possibilities about ramifications. You know, I think our back half guidance reflects the level of uncertainty that this adds to it. And I think this is going to have to play out for us to really understand what the full ramifications of this could be. It really is balanced, though, when you think about the things that you read about in Class A office space and Trophy where there's high demand for that space and the additional amenities and work that is doing to keep those buildings competitive and full. That drives renovation activity, and we're seeing that activity on one side of it. That's not likely to stop. If you step back and look at overall new construction versus renovation, I've said this before, and I think this is going to play out in the back half of the year. This will be primarily impacting the renovation. More of those things that haven't already started where you have sunk costs like you would have in new construction, you're going to have discretionary pullback on those patch and match levels of work, the major renovation work. I think that's where we're going to see additional softness in the back half of the year. I think we're appropriately balanced in our outlook that's reflecting what could happen in tighter lending conditions in our back half outlook. I think this has to play out for us to fully understand the full ramifications. And I'll leave it there, Phil.

Okay. That's more than fair. I guess from a cycle standpoint, it was really helpful to kind of give us some color on how you think about the free cash flow and the durability of AUV. Does the play look any a little different this time around? I know in the past, volumes would fall, pricing would hold, and you would mix up with raws falling. This time around, I'm curious, how does mix hold up given some of the challenges you're seeing in office and retail, which I assume is a higher mix? and potentially weakness in places like San Francisco and New York, and help us think through the mix dynamic going forward.

Yeah, I think the best proxy is to go back and look at what happened in, you know, 2008, 2009, and 2010. I don't think it could get any worse than that. And in that case, we didn't see the trade down on mix. So we're not anticipating to see the same kind of or a different kind of a trade down activity on mix. Again, everything that I'm reading is that the highest demand office space continues to be Class A and trophy buildings, and the vacancy rates are the lowest in those buildings as people trade up from older buildings, 30 years and older. I think that dynamic is going to keep the mix appropriately you know, size for us in our outlook. And again, you know, mix happens across the country, not just in the major cities where there's offices. And then, you know, the final point I'll make on this is that new construction is what was positive in the Q4 of 2021 and all of 22 could add a positive tailwind in the back half of the year and into 24. And again, new construction tends to be higher review products based on, you know, the nature of the new construction and putting in the latest and greatest technology. So that's kind of a long-winded answer, but I don't really see a dynamic here that should change our expectation on driving higher AUVs and higher mixes. And maybe I'll just make this long-winded answer even longer by, you know, when I talk about the focus of this business, now that we don't have an international division, we have a tremendous amount of focus on this America's market where we're innovating and bringing products to market even faster. We've talked a lot about those with you. I think the work that we're doing around healthy spaces, the work we're doing around sustainability, all of these are bringing higher AUV products into the marketplace even faster. So there's a lot of tailwind to AUV growth just through the innovation. that I think offsets any of those minor dynamics that you were alluding to. So, again, sorry for the long-winded answer, but I do believe we have a positive AUV story well into the future here. Okay. Super. Great comment, Nick. Appreciate it. Thanks. You bet. Thank you.

Please stand by for the next question. The next question comes from Stephen Kim with Evercore. Your line is now open.

Thanks very much, guys. Appreciate the help so far. Just wanted to touch on the mineral fiber volume first. I guess, first of all, the extra shipping day, that was actually not something we had expected. So can you help us understand, just foresee, are there any other future day adjustments we should be thinking about later this year? And then with respect to your volume, I guess, inclusive of any, you know, shipping day issues. I think previously you had talked about your outlook for the year, the kind of the shape of the year-over-year changes, kind of being like down low single digits in the front half, and I think down high single digits in the back half. This is what you had previously talked about. You're not changing your guidance now, but you had a very strong one cue, obviously. And so, I'm curious, is there any help you can give us in terms of maybe a change in the shape of that sort of first half, second half kind of year-over-year comparison?

Hey, Stephen. So for the first quarter, obviously up one shift day. The only other shift day dynamic we have this year is Q3, where we're down one. So overall, flat on a shift day basis for the whole year. In terms of volume, you know, we do incorporate kind of that shipping day dynamic into our guide. And again, we outlook, you know, mineral fiber volume being in that mid-single digit range for the year. First half, back half dynamic, we're expecting, you know, positive first half volume for mineral fiber. But you're right, the second half is in that high single-digit range in terms of year-over-year comp. And again, that's due to the progression that I mentioned earlier with just sequential deceleration starting in the second quarter. And again, really pronounced in the back half there due to the expected recession that we have incorporated into our outlook.

So I'm guessing because the first half is now going to be positive, it sounds like your second half outlook is still down high single digits, but maybe more high single digits than previously thought. Would that be a fair guess?

Yeah, I think that's fair. High single digits in the back half is fair.

Okay. And then when we think about Wave, I think typically it's stronger seasonally in 2Q and 3Q. Any reason why the seasonality might be different this year?

Well, the seasonality pattern away follows Armstrong broadly, right? Because most of the construction activity is in the second and third quarter, so no change in the seasonality there. Again, I think the third quarter is part of that back half uncertainty where there's not enough clarity around our customers' backlogs going into the back half. So certainly, I think with the uncertainty in the back half, we could see a dampening or a change in the seasonal patterns um given our outlook for the second quarter in the first half of the year again a lot of this first half volume that we're seeing steven is is carry over projects that didn't get completed last year or got delayed last year that's really kind of feeding some of this addition to some of the favorable comp um in the base period that um that we talked about so i think of course there could be something

macro that dampens the the uh quarter in the back the the strongest quarter which is the third quarter in our back half yeah for sure um okay great that's uh that's very helpful thanks so much great thank you please stand by for the next question the next question comes from reef jed rossick with bank of america your line is now open

Hi, good morning. It's Rafe. Thanks for taking my question. I just wanted to follow up on the like for like pricing and makes impact to the quarter. Could you sort of break out what the like for like pricing was either year over year or quarter over quarter, what the expectations are for the year? And then did you see normal realization on the February price announcement?

Yeah, our like for like pricing was as expected in the quarter. I mentioned earlier that our February price increase, we got good traction on as well. So I think where we wanted to be, where we expected to be on our like-for-like pricing objectives, obviously that was offset by some of the timing-related mix headwinds in the first quarter that dampened, I think, the overall AUV growth. But the like-for-like pricing is where, again, where we expect it to be and where we're comfortable.

Just as we think about the AUV cadence through the year, you sort of mentioned that you expect some of the mixed headwinds to reverse in the second quarter. Should we expect outsized positive AUV in the second quarter because of that?

Outsized relative to what, Ray?

The four-year guidance.

I couldn't say.

Yeah, it's hard to call. I mean, obviously, you know, in our guide for the year, we assumed, we talked about this back in February, you know, positive mix. I just, you know, go back to, you know, what we saw in the first quarter on the mixed side was really timing related and expect, you know, that to kind of reverse itself as you think about mix for the rest of the year. And again, still looking at positive mix for 2023.

And then just very quickly, on the retail sort of restocking that you saw, can you sort of give some color on what you think drove that? Like, has sellout improved on the ceiling tile side at some of the home center channels? I think that was one of the drivers to the volume upside in the first quarter. I'd be interested to hear sort of what you're seeing in that channel.

Well, there's some resetting going on at one of the big box retailers. you know, sometimes it's a bit of a mystery on why they take their inventory levels down as far as they do and then build them up so quickly. As we've reported a number of times, that does occur. I would say that's more the dynamic in the first quarter activity with one particular big box retailer. So again, I wouldn't point to some large outside point of sale data, for example, that drove that. This was really inventory levels getting pretty low, some resetting activity going on there, which we normally do and work with our retail customers throughout the year on, and then a rebuild of inventory right behind that. I think that's more of the actual and practical application or answer for what that activity is about. Okay, thank you. Yep.

Please stand by for the next question. The next question comes from Adam Baumgarten with Zellman and Associates. Your line is now open.

Hey, good morning, everyone. You mentioned that bidding activity turned positive for the quarter. Did that continue into April? I don't have April data yet. We won't get that until next month. So I could answer that specifically. We're going to keep an eye on it. Again, we're not putting too much weight on it in the first quarter, but we're going to keep a close eye on it for the second quarter. Okay, got it. And then just on the topic of natural gas, just curious when you guys put in the hedging program and if you could remind us what percentage of your total COGS is natural gas.

Yep, sure. Paul Nelson, Energy and we don't we don't break it out kind of any more than that, but energy is about 10% of our mental fiber cogs. Paul Nelson, input costs are of our total culture mineral fiber again I mentioned we were hedging about 50% of our natural gas exposure by way of the the price blocks have talked about. Paul Nelson, kind of entered into towards the earlier part of the quarter. So you can kind of look at, you know, look at the NYMEX settlements and kind of get a feel for, you know, the pricing there. And, you know, hopefully that's helpful as you're thinking through the NatGas locking.

Got it. And then just to confirm, I think there was a question earlier on just overall. input cost inflation assumed in the guide. It was, you know, mid-single digits last quarter. Is the way to think about that is roughly the same still?

Yeah, for the year, mid-single digits on input cost, again, a little bit of variability, obviously, depending upon how the rest of the year shakes out, obviously, on dynamics associated with nat gas, but certainly more heavily weighted there towards our raw material inputs where You know, we see a lion's share of that inflation. Got it. Thank you.

You're welcome.

Please stand by for our next question. The next question comes from Joe Ehlersmeyer with Deutsche Bank. Your line is now open.

yeah thanks very much for the question just wanted to clarify on that last point about the hedging you mentioned it starting in the earlier part of the quarter is it simplistic enough to think you're talking about the early part of this quarter or was this the early part of last quarter that you started it yeah sorry good question early part of q1 okay got it um and then just a quick clarification on the mix uh no it's kind of been beaten to death at this point but Was there a benefit from lapping unfavorable channel mix related to the de-stocking last year? I don't think I saw the favorable geographic mix called out, but it looks like you did call out the unfavorable channel mix in the prior year.

I don't recall what was disclosed last year in particular. I mean, it was a down quarter last year, right, based on the de-stocking. But the I wouldn't put this particularly all on destocking, but I would say that in the first quarter of last year, we had areas where our highest ADV products were sold that were stronger than the others. And so part of this is just base period comparisons driving some of this mix, which is, again, why we believe this is transitory and will work its way through as we go in the year.

Okay, thanks very much.

Please stand by for the next question. The next question comes from John Lovallo with UBS. Your line is now open.

Good morning, guys. Thank you for taking my questions. The first one, I just wanted to go back to Steven's question on the mineral fiber volume. you know, being a little bit better than expected in the first quarter and the full year expectation remaining the same. I mean, that would seem to imply that the back half outlook has gotten incrementally worse. So I just wanted to, you know, clarify that. And if so, you know, what are you seeing that has, you know, has changed your mind on that?

You know, John, one thing that we did mention in with Stephen's question is Some of the goodness that we saw in the first quarter, and we point to this, is the inventory build and the retail channel, which will come out, right? So that's a timing related. I wouldn't, you know, we wouldn't expect to hold that for the whole year. So we didn't mention that in Stephen's question, but that's another factor in this overall equation is some of that goodness in the first quarter is timing-related inventory bill. Gotcha.

Okay. All right.

And then, excuse me, on the digital growth initiative spending in mineral fiber, I mean, is that a lever for you guys to potentially pull back on if your end markets were to soften more than expected?

I think we've done a tremendous amount of work. effort around making room so that we can continue our digital investment. The traction that we're getting there is making a meaningful contribution to the growth of the business. So we've made room in our cost structure so that we can continue to do that. And again, we're, I think, appropriately balanced in our outlook for the rest of the year, given the uncertainty in the back half, so that we don't have to pull additional levers like that.

Got it. Thank you, Vic. You bet.

I show no further questions at this time. I would now like to turn the conference back to Vic Grizzle for closing remarks.

Thank you. I just want to say thank you, everybody, for joining today. You know, at the end of the first quarter, we feel like we're in a very different position than we were at the end of the first quarter last year. We're well positioned. for tougher market conditions that we're out looking. And we feel good about the position that we're in and ready to perform in tougher economic conditions that we're out looking. So thank you again for joining today and we'll look forward to talking to you next quarter.

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