Armstrong World Industries Inc

Thank you for standing by and welcome to the first quarter 2024 Armstrong World Industries Earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Theresa Wombo, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, and welcome everyone to our call this morning. On today's call, Vic Grizzle, our CEO, and Chris Calzaretta, our CFO, will discuss Armstrong World Industries' first quarter results and rest of your outlook. To accompany these remarks, we have provided a presentation that is available on the Investors section of the Armstrong World Industries website. Our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the earnings press release and in the appendix of the presentation we issued this morning. Both of these are on our investor relations website. During this call, we will be making forward-looking statements that represent the views we have of our financial and operational performance as of today's date, April 30th, 2024. These statements involve risks and uncertainties that may differ materially from those expected or implied. We provide a detailed discussion of these risks and uncertainties in our SEC filings including the 10Q filed earlier this morning. We undertake no obligation to update any forward-looking statement beyond what is required by applicable both securities law. Now, I will turn the call to Vic.

Thank you, Theresa, and good morning, and thank you all for joining our call today. We're pleased to report record-setting first quarter financial results, a continuation of the momentum from last year into 2024. We're also excited to share more about the recently announced acquisition of 3Form, within our architectural specialty segment, as well as the continued traction from our key growth initiatives, which continues to help offset weaker market conditions. And it's important to acknowledge our ability to execute on all of these could not be possible without the focus and dedication of our nearly 3,100 employees, so thanks to the entire Armstrong team. Now, starting at the total company level, We reported a 5% increase in net sales compared to first quarter of 2023, and adjusted EBITDA growth of 16%, with 300 basis points of adjusted EBITDA margin expansion. Adjusted diluted earnings per share increased 23%, and adjusted free cash flow rose 46% from the prior year. Each of these, net sales, adjusted EBITDA, adjusted diluted EPS, and adjusted free cash flow All were at record levels for our first quarter. Within our mineral fiber segment, first quarter sales increased 5% year over year, driven by strong AUV performance that more than offset lower volumes. Our solid AUV performance of 8% represented a balance between favorable like-for-like price and favorable mix. The mix improvement in the quarter was largely driven by lower volumes in our lower AUV home center channel, as compared to the build of inventory in the prior year. Mineral fiber sales also benefited from our digital growth initiatives, Canopy and Project Works. Canopy continued to contribute year-over-year volume growth, while Project Works continued to gain traction with architects, designers, and contractors. Sales from these growth initiatives largely offset a modest headwind from market softness. The strong mineral fiber AUV performance in the quarter coupled with solid earnings from our wave joint venture and lower input costs resulted in an 18% increase in mineral fiber EBITDA and EBITDA margin of 41% with 450 basis points of margin expansion. I'm pleased with these results as they reflect a high level of performance and execution by our teams. This includes our consistent and steady productivity efforts, our disciplined commercial execution, and our ongoing product and process innovation. All of these factors are critical to Armstrong consistently providing our customers with best-in-class service levels and product innovation that distinguish what we provide customers versus our competitors. Another contributing factor to our mineral fiber results that's important to call out was the continued performance of our manufacturing plants, and specifically the quality and service levels we achieved in a quarter. As I've mentioned before, we track an index of five key measures of service and quality that are critically important to our customer, which feeds a single metric we call the perfect order measure. This is a tough measure to hold ourselves to as we strive for perfection on every single order to our customers. This measure includes order accuracy, on-time delivery, shipping damage, product defect, and billing accuracy. And this quarter, The measure was near record levels, and it's just another piece of the total customer experience serving as an important differentiator versus our competition. So overall, an outstanding quarter in our mineral fiber segment. Now turning to our architectural specialty segment. Net sales increased 6%, and EBITDA grew by 4%. In the quarter, we experienced some choppiness in the demand pattern, which can happen from time to time given the project nature of this business. However, we continue to see an increase in activity related to transportation projects as a result of the government infrastructure bill. We expect this activity to continue in the coming quarters and possibly provide a three to five year tailwind to demand for our specialties business. Shifting project timelines for these large complex projects, however, can lead to choppy sales patterns quarter to quarter, as we experienced in the first quarter. Our order intake continued to be positive in the quarter, And we remain confident in our ability to grow faster than the market in the specialties category. Now let me turn to the exciting news that we announced yesterday, the acquisition of 3Form. 3Form is a well-established category leader and represents the largest business we've acquired to date. And we're excited to welcome 3Form's almost 400 employees to Armstrong. 3Form is a highly respected brand and design leader in translucent resins and glass used in a wide range of interior applications. Their products are highly specified and can be found in almost any building across a wide range of market verticals. 3Form has deep expertise using color, texture, and light to truly elevate the design of a space. Their products are on important design trends centered on occupant well-being, bringing the natural light indoors with three form and the multiple acquisitions we've completed we continue to strengthen our position in the architectural specialties category enabling access to more designers broadening our specifiable product offering and ultimately selling into more spaces within commercial buildings as we've proven we have a unique ability to use the strength of the Armstrong's platform to grow and and unlock additional value from the companies we acquire. And we're excited to do the same with 3Form. With this acquisition and coupled with our successful organic penetration within this category, we're well on our way to grow this segment to over a half a billion dollars in sales. Now I'll pause and turn the call over to Chris for a closer look at the financial results. Thanks, Beck, and good morning to everyone on the call. As a reminder throughout my remarks, are we referring to the slides available on our website and slide three, which details our basis of presentation. Beginning on slide seven, we discuss our first quarter mineral fiber segment results. Mineral fiber sales grew 5% in the quarter, driven by AUV of 8%, partially offset by lower volumes of 3%. First quarter AUV was driven by both favorable like-for-like pricing and favorable mix. We continued to realize price in line with our expectations in the quarter, And the favorable mix was largely driven by channel mix dynamics, as we lacked prior year inventory level increases in our home center channel that did not repeat in the current year quarter. This also drove the decrease in mineral fiber volumes. In addition, in the quarter, our initiatives delivered positive volume, which largely offset soft market conditions as compared to the prior year quarter. Mineral fiber segment adjusted EBITDA grew by $15 million, or 18%, and adjusted EBITDA margin expanded by 450 basis points to 41%. The main drivers of adjusted EBITDA margin expansion were the fall through of AUV and a solid contribution from wave equity earnings. Wave equity earnings grew $7 million versus the prior year, driven by higher volumes and margin improvement. We also saw lower mineral fiber input costs, driven primarily by frightened energy, specifically natural gas, and to a lesser extent, favorable inventory valuation timing versus the prior year period. These lower input costs were offset by an increase in SG&A expenses. On slide eight, we discussed our architectural specialties or AS segment results. Sales growth of 6% in the quarter was driven primarily by contributions from our 2023 acquisition of Boke Modern and continued strength of our metal category. Despite contributions from some larger transportation projects, that helps support mid-single-digit sales growth, shifting project timelines and delays drove uneven demand in the segment during the quarter. This choppiness is not unusual for the project-based businesses in AS. Adjusted EBITDA margin compressed by 20 basis points in the quarter. While margins were pressured due to lumpy manufacturing costs and selling investments, we remain focused on margin expansion in the segment. And as we have previously mentioned, we remain committed to returning to our goal of a greater than 20% EBITDA margin level in the AS business. In fact, on an organic basis for the full year 2024, we still expect to expand EBITDA margins in this segment. As we continue to monitor project timelines and backlog, we remain encouraged by the activities surrounding the transportation vertical. And as Vic noted, we're excited to add three forms to the AS segment. Their financials will be included in our consolidated results beginning in the second quarter of 2024. I'll comment on three forms impact to our 2024 outlook in just a few minutes. Slide nine highlights our first quarter consolidated company metrics. We grew adjusted EBITDA by 16% and expanded margins 300 basis points versus the prior year period, driven by AUV fall through to EBITDA and solid wave equity earnings. Adjusted diluted earnings per share increased 23% and adjusted free cash flow increased 46% versus the prior year period. Our total company adjusted EBITDA margin of 33.9% marks a solid start to the year and in fact was our best first quarter margin performance since Q1 of 2020 prior to any significant pandemic related impacts. Slide 10 shows our year-to-date adjusted free cash flow performance versus the prior year. The 46% increase was driven primarily by higher cash earnings and lower CapEx, which was partially offset by unfavorable working capital impacts. We continue to be pleased with our ability to deliver strong adjusted free cash flow growth and remain focused on driving profitability, which fuels our cash generation. As we mentioned on our February call, Earlier this year, we entered into a strategic partnership and made a $6 million equity investment in Overcast Innovations with McKinstry, an innovative leading construction and energy services company for a 19.5% ownership interest. Our portion of Overcast's results are recorded within our unallocated corporate segment. And just yesterday, we announced our acquisition of 3Form for a purchase price of $95 million which reflects a multiple that is in line with our historic pre-synergy EBITDA multiple of 8 to 10 times. We expect that this acquisition will be a positive contributor to all of our key metrics in 2024. Recall that our capital allocation priorities are reinvesting back into the business first, where we see the highest returns. Second, we pursue strategic partnerships and both on acquisitions, And lastly, creating value for shareholders through our share repurchase program and dividends. Strategic investments like Overcast and 3Form are examples of how we're executing on our second capital allocation priority to create value for shareholders. Given our healthy balance sheet and our proven ability to consistently generate strong cash flow, we remain well positioned to execute on all of our capital allocation priorities. In the first quarter, we repurchased $15 million of shares and distributed $10 million of dividends. As of March 31st, 2024, we have over $700 million remaining under the existing share repurchase authorization. Recall in July of last year, this authorization was increased by $500 million and extended through 2026 and remains an important component of our capital allocation priorities. in support of our strategy moving forward. Slide 11 shows our updated full-year guidance for 2024. We have raised our guidance for the year to reflect improved mineral fiber profitability and the contribution from the acquisition of 3Form. Including this acquisition, we now expect total company net sales growth in the 8% to 11% range, an increase from our prior guidance of 3% to 6% growth. The increase in our net sales guidance for the year is primarily driven by three forms. As mentioned in our February call, we still expect slower economic growth in the back half of 2024, and we continue to expect our growth initiatives to partially offset modestly lower market demand, resulting in mineral fiber volume to be down in the low single-digit range. We expect mineral fiber AUV to be in line with our historical average of mid-single digits, returning to a more balanced split of price and mix, and along with solid contributions from wave equity earnings to continue to drive mineral fiber EBITDA margin expansion. We now expect total company adjusted EBITDA growth in the eight to 13% range, an increase from our prior expectations of five to 9% growth. The increase in our adjusted EBITDA guidance versus our February outlook is roughly evenly split between contributions from three form and improved mineral fiber profitability. The improved mineral fiber profitability is driven primarily by lower than expected input costs that we now expect to be closer to flat for the full year compared to the prior year, and better than expected contributions from WAVE based on their first quarter performance. We still expect adjusted diluted EPS and adjusted free cash flow to grow at a rate similar to adjusted EBITDA. with three-form accounting for about half of the increase in adjusted diluted EPS compared to our prior guidance. Please note that additional assumptions are in the appendix of this presentation. As we look forward, despite lingering macroeconomic uncertainty in the back half of the year, our focus remains on solid execution and EBITDA margin expansion in 2024. We remain committed to driving consistent profitability and free cash flow generation to support our capital allocation priorities and to continue to create value for shareholders. And now I'll turn it back to Vic for further comments before we take your questions. Thanks, Chris. Let me take a minute and talk about the market backdrop and what we're currently seeing in commercial markets. Overall, the market appears to be stable at a low, down low single-digit level and consistent with what we've been seeing over the past several quarters. There continues to be pockets of strength in verticals like transportation, education, healthcare, and data centers, with retail and office appearing to be more stable. Looking ahead to the back half, there remains a level of uncertainty around the direction of interest rates, inflation, and their overall impact on economic activity. We also hear this level of uncertainty from customers as it pertains to the build and their backlogs and what they are seeing in the market. With this Uncertainty and its likely impact on discretionary renovation activity, we're still expecting a modest softening in the back half of the year. Now, regardless of market softness, our business model provides resilience. This resilience allows us to deliver profitable growth and create value despite soft market conditions. We demonstrated this unique resilience in 2023, delivering profitable growth, expanding margins, and what was overall a challenging market. And we are well positioned to do more of the same this year. The resilience of this business has been a hallmark for many years. And the uniqueness of the ceilings category, along with our unique position in it as an innovation leader, has and will continue to add value and new attributes to the ceiling category. It's the innovation that provides these new attributes and a unique value proposition to our customers. and ultimately positioning us to consistently grow AUV year after year. Now, an area of innovation that we believe is important to our customers involves products and solutions that address energy efficiency and carbon reduction. As we noted in our February call, late in 2023, we introduced Ultima TempLock ceilings, the industry's first ceiling tile that can help regulate temperatures within buildings and reduce energy costs. The first ceilings that pay for themselves over time. This is increasingly important because we know buildings generate about 40% of all carbon emissions generated annually in the US, and two-thirds of that is related to powering, heating, and cooling a building. Our most recent product launched this year, Ultima Low Embodied Carbon, or LEC, ceiling tiles, tackles the challenge of embodied carbon. The impacts from embodied carbon account for the remaining one-third of a building's carbon generation. The new Ultima LEC ceiling tiles are the lowest embodied carbon mineral fiber tiles on the market today, while maintaining its typical acoustical and aesthetically appealing attributes. These products are part of an innovative solution to help address the building industry's challenges, thus making the ceilings category increasingly more relevant And again, as important, these innovations come in the form of products that deliver overall AUV growth for Armstrong. So let me close by recapping our proven long-term earnings growth model that positions us well to deliver consistent growth in all parts of the economic cycle. Our growth model begins with investing organically back into our business on innovation and initiatives that create new value-added products like the energy-saving and low embodied carbon products just mentioned. and design services like Project Works that respond to the current and evolving market needs that strengthen our competitive position and ultimately drive long-term AUV growth. In architectural specialties, we pursue attractive new acquisition opportunities that add to our existing industry-leading portfolio, providing the broadest offering of products and services in this attractive growing category. And we have a proven track record of acquiring specialty businesses that when bolted onto the Armstrong platform can be scaled to improve efficiencies, to deliver top line growth and operating leverage. And lastly, we're able to make these investments because of our strong consistent free cash flow generation and high EBITDA margins that are among the highest in the building products industry. This allows us to invest in our business organically and inorganically while keeping our leverage at attractive levels. The consistency of our cash flow generation also enables us to make these investments while also returning cash to shareholders. We believe this is an attractive long-term growth model for our company that continues to position us well, even during times of market softness and economic uncertainty. And with that, we'll be happy to take your questions.