Armstrong World Industries Inc

Thank you for standing by. My name is Bailey and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2024 Armstrong World Industries, Inc. earnings 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, again, press star and one. I would now like to turn the call over to Theresa Womble, Vice President of Investor Relations and Corporate Communications. You may begin.

Thank you, Bailey, and welcome everyone to our call this morning. On today's call, we have Vic Grizzle, our CEO, and Chris Calzaretta, our CFO, to discuss Armstrong World Industries' third quarter results and rest of your outlook. We have provided a presentation to accompany these results that is available on the investors section of our company 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 issued this morning. Both are available on our investor relations website. During this call, we will be making forward-looking statements that represent the view we have of our financial and operational performance as of today's date, October 29th, 2024. These statements involve risks and uncertainties that may differ materially from those expected or implied. We do provide a detailed discussion of the risks and uncertainties in our SEC filings including the 10Q filed earlier this morning. We take no obligation to update any forward-looking statement beyond what is required by applicable securities law. With that housekeeping done, I will now turn the call over to Vic.

Thank you, Theresa, and good morning, everyone, and thank you for joining our call. As we reported today, Armstrong delivered another quarter of strong results with record-setting third quarter sales and strong earnings growth, enabling us to once again raise our earnings guidance for full year 2024. Similar to last quarter, our teams executed well on all fronts while still facing muted market conditions, as well as managing through two impactful hurricanes. To our customers and the communities impacted by Hurricane Celine and Milton, We extend our sincerest hope for a quick recovery from the physical and economic damage from these storms. And to our teams at our Pensacola, Florida and Macon, Georgia facilities and our entire supply chain group, thanks to you for successfully managing through these storms with minimal interruption to our operations and to our customers. This is a clear example of our agility and dedication to customer service and operational excellence. And I'm proud of this effort and the work of our 3,500 employees who exemplify this commitment to serving our customers every day. Now, taking a closer look at our third quarter results, total company sales and adjusted EBITDA were at record-setting levels. Each increased 11% from prior year results, while adjusted diluted earnings per share increased 13%. These strong results were driven by contributions from our recent architectural specialty acquisitions, a three-form and bulk modern, both of which are performing very well, along with solid AUV performance and specifically like-for-like price realization in our mineral fiber segment. Strong manufacturing productivity gains and solid contributions from our wave joint venture also contributed nicely in the quarter. This collective performance was also modestly better than we had expected and contributed to the increase and our full year 2024 outlook, which Chris will talk more about here shortly. Our mineral fiber segment continued to perform well this quarter, even as market conditions remained mixed across our key verticals. Mineral fiber net sales increased 3% on solid AUV performance, more than offsetting a modest decline in sales volumes. Our commercial teams executed well in the quarter, achieving strong like-for-like price, along with some share gain in our retail channel. Together with this strong execution and contributions from our digital growth initiatives, Canopy and Project Works, we were able to largely offset overall market softness. Mineral fiber adjusted EBITDA rose 8% in the quarter, and adjusted EBITDA margin reached almost 44%, marking the seventh consecutive quarter of year-over-year adjusted EBITDA margin expansion. And this result also is the strongest third quarter margin performance reported since 2019. These results reflect our ongoing ability to deliver strong AUV performance, driven by consistent like-for-like pricing and productivity gains in our mineral fiber plants, while remaining focused on quality and service. In the quarter, our plants delivered service levels ahead of our targets. Measures like our perfect order measure and fill rates were at elevated performance levels. And as you've heard me discuss before, these KPIs measure performance in areas that are key to our industry-leading value proposition to our customers. Consistently providing our customers with high-quality products and best-in-class service levels helps strengthen our market position and earn our pricing in the marketplace. The contribution from our plants goes hand-in-hand with the work our commercial teams do to differentiate Armstrong and continues to be foundational to our competitive advantage. Our architectural specialty segment also reported a strong quarter with net sales up 32%, accelerated by the inclusion of Freeform that we acquired in April of this year, along with contributions from Bulk Modern, which we acquired in the second half of 2023. On an organic basis, the segment generated net sales growth of 7%. And as expected, this was a step up from our organic sales performance in the first half of the year. and was driven by solid performance across our broad portfolio and specifically activity in the transportation vertical to the large airport projects I've mentioned previously. As we've discussed, these transportation projects are often large and multi-phased. I'm pleased to report our teams are doing a great job managing the complexity with supply chain coordination, construction, and service quality. Being able to provide the level of service and coordination required to efficiently execute on these larger projects has become a differentiated advantage for Armstrong. Importantly, we are seeing more bidding activity turn into orders as projects begin to move forward. We mentioned being awarded a couple of Florida projects, airport projects on our last call. This quarter, we were awarded six additional airport projects in various parts of the country. We continue to expect the federal funding for these projects to provide a multi-year opportunity for Armstrong. I'm particularly pleased with the earnings performance of our architectural specialty segment, with adjusted EBITDA increasing 27% and adjusted EBITDA margins above 20%, including with the impact of 3.4%. It's worth noting that the AS organic EBITDA margins have expanded every quarter in 2024, demonstrating we are executing the right actions in our pursuit of our stated goal of at least 20% adjusted EBITDA margin for this segment on an annual basis. Now, overall market conditions are continuing to further stabilize. Activity continues to be positive in education, healthcare, and transportation, along with data centers. while office activity appears to have stabilized with tenant improvement work slowly returning in parts of the country. Although a level of uncertainty remains, we are encouraged by what we are seeing across our verticals. As we have navigated these somewhat choppy and inconsistent demand conditions post-COVID, the positive impact of our diverse set of end markets, the resilience of our business model, and the consistent dependable execution of our organization, has allowed us to deliver net sales and adjusted EBITDA growth every year since 2020. Now, let me pause here and allow Chris to provide some additional details on our financial results. Thanks, Vic, 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 in slide three, which details our basis of presentation. Beginning on slide six, we discuss our third quarter mineral fiber segment results. Mineral fiber sales were up 3% in the quarter, driven by favorable AUV of 4%, partially offset by modestly lower sales volumes. The increase in AUV was driven by strong like-for-like pricing with flat mix on a very strong prior year comparison. Market conditions continued to stabilize in the quarter, and our initiatives, along with higher volumes in our retail channel, partially offset market softness. Mineral fiber segment adjusted EBITDA grew by 8%, with adjusted EBITDA margin expanding 200 basis points to 44% despite modestly softer volumes. Adjusted EBITDA margin expansion was primarily driven by the fall through of AUV, gains from improved manufacturing productivity, and higher equity earnings from our wave joint venture. Manufacturing productivity in the quarter was ahead of our target, and wave equity earnings were driven by favorable price cost, partially offset by lower volumes. These benefits more than offset an increase in SG&A, which was driven primarily by higher incentive compensation. I'm pleased with how our team executed in the quarter and their commitment to drive profitable mineral fiber growth with a focus on consistent margin expansion despite muted market conditions. On slide seven, we discussed our architectural specialties or AS segment results. Robust sales growth of 32% in the quarter was driven primarily by an increase from our recent acquisitions of 3Form and Vogue Modern, as well as organic sales growth primarily driven by some larger transportation projects. Including the acquisitions of 3Form and Vogue, third quarter total AS adjusted EBITDA margin was 20%. And as we noted on our last call, we expected to see the top line growth of the organic AS business accelerate and continue to expand margins in the back half of the year. We're encouraged that our third quarter results reflect that and expect sequential top line improvement in the fourth quarter. We are on track to deliver the approximately 18% adjusted EBITDA margin for the full year 2024 that we had outlook for the total AS segment in April and July. We're also pleased with the performance of our recent three-form acquisition. The integration plan is on track as we continue to leverage and scale the business on the Armstrong platform. while delivering innovative solutions and best-in-class service levels to our customers. As Vic noted, we're also encouraged by the positive momentum on bidding activity and order intake as we close out 2024, and as we continued positive activity in the transportation vertical. Slide 8 highlights our third quarter consolidated company metrics in which we delivered double-digit growth for sales and earnings, with adjusted EBITDA margins fairly consistent with the prior year. Notably, adjusted diluted net earnings per share grew 13%. The drivers of third quarter adjusted EBITDA growth are consistent with the first nine months of the year. And as we turn to page nine, we present our year-to-date consolidated company metrics, which reflect double-digit sales and earnings growth with total company adjusted EBITDA margin expansion of 100 basis points. 2024 year-to-date performance was driven by our core value drivers. which are foundational to the profitability of our company. Incremental volume from acquisitions and growth initiatives, consistent strong AUV performance, and healthy equity earnings contribution from WAVE drove our adjusted EBITDA growth for the year-to-date period. These benefits more than offset the increase in SG&A, a significant portion of which was driven by recent acquisitions. Slide 10 shows our year-to-date adjusted free cash flow performance versus the prior year. The 9% increase was driven by higher cash earnings and lower capital expenditures partially offset by unfavorable working capital changes. As we expected and as noted on our last call, adjusted free cash flow generation accelerated in the third quarter with 17% growth versus the prior year. We saw continued strong cash earnings and positive contributions from working capital in the third quarter. We remain confident in delivering double-digit adjusted free cash flow growth for the full year. Our demonstrated ability to consistently deliver strong adjusted free cash flow allows us to support all of our capital allocation priorities. Recall that our capital allocation priorities are first to reinvest back into the business where we see the highest returns. Second, to execute strategic acquisitions and partnerships to create shareholder value. And third, to return cash to shareholders through dividends and share repurchases. Just last week, we announced a 10% increase to our quarterly dividend, marking the sixth consecutive annual increase since the inception of our dividend program in 2018. This increase reflects our Board of Directors' continued confidence in our long-term growth strategy and evidences our ability to continue to return cash to shareholders. In the third quarter, we repurchased $15 million of shares and paid $12 million of dividends. As of September 30, 2024, we have $677 million remaining under the existing share repurchase authorization. With a healthy balance sheet and ample available liquidity, our ability and intent to complete additional acquisitions remains unchanged, and we remain committed to advancing all of our capital allocation priorities. Slide 11 shows our updated full year 2024 guidance. With strong profitability in the third quarter and our improved profitability outlook for the remainder of the year, we are increasing our guidance for adjusted EBITDA and adjusted diluted net earnings per share, as well as modestly increasing our guidance for adjusted free cash flow. We have also tightened the range on our full year sales outlook. As market conditions stabilize, we continue to expect full year mineral fiber volume to be down about 1%. We also continue to expect full year mineral fiber AUV to be above our historic average. Our sales outlook for the full year is in the range of 10 to 11% growth. Given solid third quarter performance and improved full year profitability expectations, We now expect total company adjusted EBITDA growth for the full year in the 12 to 14% range, an increase from our prior expectations of 10 to 13% growth. There are no material changes to our AS segment assumptions from our July outlook. For the full year, we expect adjusted free cash flow to grow 10% to 14% and expect adjusted diluted net earnings per share that now grow at 16% to 17%, with about half of the increase in the EPS outlook driven by a lower effective tax rate compared to the prior year. Please note that additional assumptions are available in the appendix of this presentation. Our focus on driving profitable growth in light of a challenging market environment remains unchanged, and we expect 2024 will be our fourth consecutive year of net sales and earnings growth. The strong results we've delivered thus far and our robust growth outlook for the full year gives us confidence that we will finish 2024 strong and enter 2025 with positive momentum. And now I'll turn it back to Vic before we take your questions. Thanks, Chris. As Chris summarized, we are well positioned for another record year of double digit top and bottom line growth in 2024. We have momentum that we expect to carry forward into 2025. and I'm extremely proud of the accomplishments so far this year. Our product innovation remains focused on important attributes and solutions that are responding to current and future market needs. Products like our TempLock energy-saving sealing products and our low-embodied carbon sealings. With these products, we are directly addressing large macro trends that we believe will be important in driving our business for many years to come. In our recent updates, we have discussed the significant role buildings play in both energy use and carbon emission, with buildings contributing about 40% of all carbon emissions generated annually in the U.S. Within this, about 40% of energy consumed by commercial buildings is related to heating and cooling. I'd like to take a moment to elaborate on these trends that are driving the need for greater energy efficiency within these buildings. Now, one driver is the rapid expansion of data centers and the increasing adoption of AI technologies, both of which are pressuring the US electrical grid. According to the Electric Power Research Institute, data centers are projected to consume nearly 9% of the nation's electricity by 2030. That's up from 4% in 22. As AI is becoming more integrated into everyday technology, energy consumption is and will continue to increase considerably. For example, you may have seen the stat that a simple chat GBT query uses 10 times the energy of a typical internet search. Meanwhile, building owners aiming to decarbonize to achieve both energy and emission savings are adding to the strain on the electrical grid as they look to shift from natural gas to electric heating systems. The aging electrical power grid will struggle to keep up with this unprecedented increase in energy demand, raising serious concerns about the reliability and sustainability of electricity supply. So addressing the energy demands of buildings is a critical area of focus in order to lower the strain on the grid while redirecting energy to support newer applications like data centers and AI. We believe Armstrong has an important role to play here. Our TempLock energy saving ceiling products provide up to 15% reduction in energy usage for heating and cooling of buildings, which is a significant cost savings for building operators. These products contribute to lowering the building's carbon emissions while maintaining thermal comfort for occupants, and they are the first ceilings on the market that pay for themselves over time. Taking this one step further, heating and cooling of buildings is also a main driver of peak electricity demand that has forced utility providers to build expensive grid capacity to handle these spikes in usage. TempLox thermal storage can be leveraged during these peak hours, moderating demand and providing relief to electrical infrastructure when it's needed most. As utilities and grid operators seek solutions for grid stability, this kind of demand flexibility is becoming more critical for a more resilient energy system. Also in support of building energy savings is a regulatory driver for increased energy efficiency through new building codes and standards. One example is currently gaining momentum across the country are enhanced building performance standards that are being introduced by state and local governments that mandate specific building level energy use and emission reductions. Thirteen cities in the U.S. have implemented laws on these standards as of 2024, including New York City, Boston, St. Louis, and Seattle, to name a few. There are another 30 cities planning on launching similar laws by 2026. Now, over time, we believe these standards will contribute to an acceleration of retrofitting older buildings, particularly Class B and Class C buildings, in order to comply, but also to become more competitive. This is because new tenants know that buildings meeting these standards will be more economical to operate. The energy saving products we have launched are well positioned to help building owners reach these standards and will contribute to a renovation tailwind for years to come. Now, before turning to your questions, I would like to go back to a point I made earlier. So far in 2024, Armstrong has continued to demonstrate resilience in a challenging environment and is delivering consistent profitable growth. While it's too early to provide a detailed outlook for 2025, we do expect the foundational components of our growth algorithm to persist. And these include steady, consistent mineral fiber AUV growth supported by like-for-like pricing and market-driven product innovation. Growth initiatives to drive mineral fiber sales volume above market-level growth rates. Growth from our architectural specialties through market penetration and acquisitions that are scaled on the Armstrong platform. manufacturing productivity improvements that offset inflation and expand margins. As we continue to successfully execute our growth strategy, we are confident in our ability to generate strong and consistent free cash flow to fund future growth and provide an attractive return to shareholders through our dividend and share repurchase program. These are the hallmarks of Armstrong's business model that continue to drive consistent results through all parts of the economic cycle. But this proven framework, again, we are confident in our ability to navigate a dynamic market backdrop, capitalize on the opportunities we see, and deliver strong growth and profitability for years to come. With that, we'll be happy to take your questions.