Armstrong World Industries Inc

I would like to welcome everyone to the Armstrong World Industries' four-quarter and full year 2024 earnings call. All lines have been placed in 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 again. Thank you. I would now like to turn the call over to Teresa Womble, VP of Investor Relations and Corporate Communication. You may begin your conference.

Thank you, John, and welcome everyone to our call this morning. On today's call, we have Vic Rizal, our CEO, and Chris Casareta, our CFO, to discuss Armstrong World Industries' fourth quarter and full year 2024 results and our 2025 outlook. We have provided a presentation to accompany these results that is available on the Investors section of the Armstrong World Industries website. Our discussion of operating and financial performance today 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. During our call, we will be making forward-looking statements that represent the view we have of our financial and operating performance as of today's date, February 25, 2025. These statements involve risks and uncertainties that may differ materially from those expected or implied. We provide a detailed discussion of the risks and uncertainties in our SEC filings, including the 10-K filed earlier this morning. We undertake no obligation to update any forward-looking statement beyond what is required by applicable securities law. Now, I will turn the call over to Vic.

Thank you, Theresa. Good morning, and thank you all for joining our call. Today, we announced record-setting fourth quarter and full year 2024 results as our teams continue to execute our strategic priorities and deliver consistent growth. At the total company level for the full year, our net sales increased nearly 12% from 2023 results, and our adjusted EBITDA grew 13%, with our adjusted EBITDA margin expanding 50 basis points. Our adjusted free cash flow also rose 13%, and our adjusted diluted earnings per share were up 19%. This marks the fourth consecutive year we have generated net sales and earnings growth in the face of challenging market conditions. This would not have been possible without the dedication and relentless focus on execution by our teams. I'm extremely proud of our team's commitment to consistent execution, excellence and innovation, and to serving our customers well, all of which enabled these record-setting results. So I want to say thank you to all of our 3,600 Armstrong colleagues and to our distribution and channel partners who we work closely with to deliver for our customers. Both mineral fiber and architectural specialty segments positively contribute to these record-setting results. Mineral fiber ended the year with approximately 6% net sales growth, 11% adjusted EBITDA growth, and adjusted EBITDA margin expansion of more than 200 basis points. And with the addition of two acquisitions, 3Form and Zaner, architectural specialties generated year-over-year net sales growth of 27% and adjusted EBITDA growth of 24%. Importantly, on an organic basis, the architectural specialty segment also expanded adjusted EBITDA margin by 40 basis points to approximately 19%. This furthers our progress toward our goal of a 20% margin in this segment. Now, turning to our fourth quarter results, in mineral fiber, we achieved 9% average unit value or AUV growth, which was the strongest quarterly growth rate of the year. and was driven by both mix and like-for-like pricing. For the full year, AUV grew 7%, nicely above our historical average. Similar to our results last quarter, our growth initiatives continue to contribute positively to the mineral fiber AUV and volume results, and largely offset softer market conditions. Strong AUV growth, along with solid productivity gains and impressive performance from our wave joint venture drove 10% mineral fiber EBITDA growth and 70 basis points of EBITDA margin expansion to 37.5%. This was the best fourth quarter EBITDA margin in the mineral fiber segment since 2019. In fact, we've generated year-over-year EBITDA margin expansion in this segment in each of the last eight quarters. Delivering this consistent performance requires strong execution across the business, including our sales teams, our manufacturing, and innovation teams. These results demonstrate the resilience of our growth model in all parts of the economic cycle. Now turning to our fourth quarter results in architectural specialties. Sales for this segment increased 41%, with more than half of that growth driven by our recent acquisitions of Boch, 3Form, and Zaner. The organic architectural specialty sales also continue to accelerate this quarter, up 15% year over year with solid demand across our portfolio. Order intake also increased on a broad-based strength across our product portfolio. As we've noted throughout 2024, we continue to see benefits from large transportation projects. Acquisitions have been and continue to play an important role in expanding our portfolio of diverse materials and unique capabilities enabling us to sell more into more spaces. Since 2016, we've completed 12 acquisitions in the specialty space, creating the broadest portfolio of products and design capabilities with a world-class manufacturing network. This has become a clear competitive advantage as we have grown and has opened new opportunities for growth. This is particularly evident in the metal category. Over the past decade, Armstrong has successfully developed and acquired world-class metal design and manufacturing capabilities for interior ceilings and specialty walls. As a result of this work, we have established an industry-leading position in interior architectural metal solutions in North America. Now we are taking this industry leadership position to the exterior of a building. Our most recent acquisition, Zaner, accelerates our ability to grow our position in exterior architectural metal applications with a company that is globally known as the leading expert in the design, engineering, and fabrication of complex, highly crafted exterior architectural metal projects. Simply said, for the most iconic exterior architectural metal projects, architects and designers go to Zaner. The addition of Zaner allows us to accelerate our penetration to this adjacent, highly specifiable market category, building on the capabilities of Polk Modern that we acquired in 2023. We believe that metal exterior applications are a natural extension of our interior architectural metal platform within the architectural specialty segment with high growth potential. With the addition of this adjacency, we estimate we've added another $1 billion to the addressable market for our architectural specialty segment, bringing its total addressable market to more than $2.5 billion. We're excited to apply our growth model to this adjacent market and to continue our above-market growth rate for years to come. So let me pause there for a second and head over to Chris for more 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 fourth quarter mineral fiber segment results. Mineral fiber sales grew 8% in the quarter, driven by strong AUV growth of 9%. partially offset by modestly lower sales volumes. The increase in AUV was roughly balanced between both favorable mix and positive like-for-like pricing. On volume, one extra shipping day in the quarter partially offset market conditions that continued to stabilize. Mineral fiber segment adjusted EBITDA grew by 10% in the quarter, with adjusted EBITDA margin expanding 70 basis points to approximately 38%, despite lower volumes. Adjusted EBITDA margin expansion was primarily driven by the fall through of AUV and higher equity earnings from our WAVE joint venture. WAVE equity earnings were driven by favorable AUV, higher volumes, and lower steel costs. These benefits more than offset an increase in mineral fiber SG&A, which was driven primarily by higher employee costs and a decrease in company-owned officer life insurance gains related to deferred compensation plans as compared to the prior year period. As Vic mentioned, Mineral Fiber's adjusted EBITDA margin of 37.5% in the quarter was the best Q4 margin performance for this segment since 2019. This level of financial performance highlights our Mineral Fiber value creation drivers, including consistent AUV growth, annual productivity gains, and earnings from our WAVE joint venture. With this solid fourth quarter performance, full-year Mineral Fiber adjusted EBITDA margin finished above 41%. and was consistent with our previously-outlooked expectations. On slide 7, we discussed our architectural specialties, or AS, segment results. Healthy sales growth of 41% in the quarter was driven primarily by contributions from our recent acquisitions of Boak, 3Form, and Zaner. Importantly, year-over-year organic AS sales growth continued to accelerate sequentially. As we noted on our last two calls, we expected to see the continuation of top line organic growth in the AS business along with continued organic margin expansion in the second half of 2024. And I'm pleased to report that we delivered AS organic sales growth of 15% with AS organic adjusted EBITDA margin expansion of 70 basis points. AS segment adjusted EBITDA grew 33% in the quarter and the year-over-year growth rate accelerated throughout 2024. Higher sales more than offset increased SG&A from our recent acquisitions. Order intake also strengthened over the second half of the year. We also remain encouraged by the positive activity we're seeing in the transportation vertical and are optimistic that our project pipeline will continue to build as we progress throughout the year. For the full year 2024, adjusted EBITDA margin for the AS segment was approximately 18% and consistent with our previously outlook expectations, which did not include the December acquisition of Zaner. We are pleased that the AS organic adjusted EBITDA margin expanded 40 basis points to approximately 19% and was able to dampen the dilutive impact of our recent acquisitions on the AS segments adjusted EBITDA margin for the year. We expect continued progress on increased profitability and margin improvement of these recently acquired businesses. Slide 8 highlights our fourth quarter consolidated company metrics in which we delivered strong double-digit growth for both sales and adjusted EBITDA. Adjusted diluted net earnings per share grew 23% and total company adjusted EBITDA margin compressed 100 basis points, reflecting our recent acquisitions. Excluding the recent acquisitions, total company adjusted EBITDA margin expanded 40 basis points. Adjusted EBITDA growth in the quarter was driven by the fall-through impact of strong AEV performance, increased AS sales, and positive wave equity earnings. These impacts were partially offset by increased SG&A, primarily attributable to our recent acquisitions. These key drivers remain consistent with the full year period as we turn to page nine, as full year sales were up 12% and full year adjusted EBITDA was up 13%, resulting in 50 basis points of margin expansion. Adjusted diluted net earnings per share were up 19%, driven by higher pre-tax earnings, a lower effective tax rate, and lower shares outstanding. The lower tax rate in the fourth quarter and full year 2024 was driven primarily by discrete items, a capital loss valuation allowance release related to the sale of real estate and a tax reserve benefit related to a tax year statute closure. Adjusted free cash flow grew 13% and was at a healthy 21% of net sales and 61% of adjusted EBITDA. In 2024, our core value drivers delivered profitable growth with incremental volume from recent acquisitions and growth initiatives, consistent strong AUV performance, and healthy equity earnings contribution from WAIF. These benefits more than offset the increase in SG&A, a significant portion of which was driven by our recent acquisitions. Slide 10 shows our full-year adjusted free cash flow performance versus the prior year. The 13% increase was primarily driven by higher cash earnings, which was partially offset by higher cash taxes paid. The strong adjusted cash flow margin profile of our business allows us to execute on all of our capital allocation priorities. As a reminder, these 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. In the fourth quarter of 2024, we acquired the issued and outstanding shares of Zaner for cash consideration of $46 million, reflective of a purchase price of $42 million, inclusive of $16 million of cash acquired, subject to customary post-closing adjustments for working capital. Additionally, in the fourth quarter, we repurchased $15 million of shares and paid $14 million of dividends. As of December 31, 2024, we have $662 million remaining under the existing share repurchase authorization, which runs through the end of 2026. We enter 2025 with a strong balance sheet and ample available liquidity, and with our proven ability to consistently generate strong free cash flow, we remain committed to all of our capital allocation priorities. Slide 11 presents our guidance for 2025. With overall stabilizing market conditions, we expect choppiness throughout the year and flattish mineral fiber volume for the full year. We also expect mineral fiber AUV growth above our historical average of about 5%. Adding to mineral fiber growth, we expect AS organic growth to continue as we penetrate the highly fragmented market. Note that results from three-form will be incremental through the first four months of 2025. and results from Zaner will be incremental throughout almost the entire year. We expect these two acquisitions together to drive more than half of the growth in total AS segment sales. This results in total company net sales growth of 9 to 11%. As you know, our first quarter is typically one of the weaker quarters of our year for mineral fiber, with our stronger quarters in Q2 and Q3 due to better weather conditions and timing of renovation and new construction activity. While we don't provide quarterly guidance, we do expect a higher degree of variability quarter to quarter in 2025 as we navigate choppy market conditions. Moving to adjusted EBITDA, we expect mineral fiber AUV impacts to more than offset low single digit input cost inflation. With this, growth in the AS segment, the benefits from WAVE, and continued focus on execution throughout the organization, we expect adjusted EBITDA growth of 8% to 12%. We expect adjusted EBITDA margin expansion in both segments for the full year with a total company flat to prior year as we drive the integration of our recent acquisitions. For the full year, we expect adjusted diluted net EPS and adjusted free cash flow to grow at rates similar to adjusted EBITDA. You'll notice that our capital expenditure assumption is slightly higher as compared to recent years due to planned investments in our energy-saving ceilings manufacturing capabilities in support of future growth. Please note that additional assumptions are available in the appendix of this presentation. We are well positioned to deliver strong results in 2025 as we continue to demonstrate the resilience of our business model despite a near-term choppy market outlook. Our teams have proven agile and have consistently advanced our strategy while navigating uncertain market conditions in recent years, and I expect that to continue in 2025. And now I'll turn it back to Vic before we take your questions.

Thanks, Chris. Picking up on the market conditions that Chris just referenced, let me provide additional color there on how we're thinking about the markets in 2025. Overall, we see demand in our key markets continuing to stabilize while we navigate the uncertainty from potential tariffs and new policies. New construction starts were positive throughout 2024, driven by education, transportation, and data centers. Lagging those starts should be a positive contributor to our markets in 2025. Dodge bidding activity in the fourth quarter remained choppy and a sideways moving pattern, as it has all year. And we are encouraged by the increase in back to work mandates and higher leasing activity over recent quarters in the office vertical. We also continue to benefit from large transportation projects, as I mentioned, as well as major entertainment and sports venues, including convention centers and NFL and other sports stadiums. Still, there remains a level of uncertainty that is likely to cause some additional choppiness in 2025 with potential tariffs and new policies and their impact on inflation and interest rates, these factors could create pauses and potential wait and see decisions impacting project timing. That said, we know how to execute and insert market conditions. And with our diverse set of end markets and our resilient business model, we are well positioned to deliver sales and earnings growth again in 2025. Underpinning the strength of our business model and a key element of our value creating building blocks is our industry leading innovation. Our innovation is guided by market and customer needs. And one of the strongest, most prevalent need is for energy saving solutions. As we've shared before, buildings consume nearly 40% of global energy. In the US, the built environment consumes nearly 75% of all electricity used. And about half of that energy usage is to heat and cool buildings. Given this, There's a strong desire for companies like Armstrong to help reduce commercial building energy usage. Beyond an economic benefit of energy savings, there's a larger need for reducing the strain on our electrical grid system to support the expansion of AI and the build-out of supporting data centers. This need for energy savings is likely to be a catalyst for innovation and solutions across many industries for many years to come. This mega trend across industries has led Armstrong to our TempLock technology that addresses this challenge. TempLock is a unique ceiling product that contains phase change material that works as thermal energy storage, passively absorbing and releasing heat in the building and reducing the cycles for heating and cooling. With this new energy saving attribute, our TempLock ceiling tiles can reduce heating and cooling costs and generate meaningful cost savings while also helping to reduce the strain of the built environment puts on the nation's electrical grid systems. In January, we, along with our customers, received some positive news when the U.S. Treasury and IRS issued final regulations under Section 40 of the Internal Revenue Code. This section expanded the energy investment tax credits under the Inflation Reduction Act. These final regulations confirm that solid liquid phase change material is a type of thermal energy storage property that may qualify for the investment tax credit under Section 40 . TEMPLOC as a phase change material may qualify for an investment tax credit of up to 50%. This means that depending on the project, customers installing TEMPLOC in new construction or renovation projects may qualify for an investment tax credit that would allow them to pay less for a ceiling that does more. In addition, just last week, we also learned that TEMPLOC products are now part of the approved selection of ceiling products available for the U.S. Government Services Agency, which manages the large portfolio of government office buildings. These developments are part of the growing validation of these products in the marketplace and are encouraging milestones for an important long-term initiative driving renovation and its potential impact on mineral fiber volume growth. In closing, again, I want to thank our employees for their dedication and execution that enabled us to deliver record results again in 2024. This has been another important year for us as we further strengthen our value creating building blocks along with our overall competitive strength. We continue the pursuit of our growth initiatives to offset soft market conditions. In 2024, this included industry shaping innovation and technology like our 10-block energy-saving ceiling products that pay for themselves over time. We've made significant strategic acquisitions that expand our addressable market and strengthen our ability to provide unique, specifiable products to more parts of a building, and now including its exterior. And finally, we continued the advancement of our digital initiatives to both support AUV and volume growth by serving markets untouched by our traditional channels. with Canopy by Armstrong, and further deepening our relationship with architects, designers, and contractors with Project Works. These advancements have further strengthened our business model, made Armstrong even more resilient, and positioned us well for continued growth in 2025 and beyond. And with that, we'll now be happy to take your questions.

Ladies and gentlemen, we will now begin the question and answer session. As a reminder to everyone who has dialed in, if you would like to ask a question, please press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, simply press star one again. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. We kindly ask everyone to limit themselves to one question and one follow-up. Thank you. Our first question comes from the line of Susan McClary with Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone, and congrats on a nice quarter.

Good morning. Thank you.

I want to start by talking about the new products because it sounds like you're gaining some really nice momentum there that is starting to truly come through in the results. Can you talk a bit more, Vic, about some of those initiatives that you are seeing out there? how we should think about the guide for the mineral fiber AUV to come in ahead of the historical range for 25, how much of that is coming from these initiatives relative to like for like pricing in there and just, you know, any additional color on how those products are coming through in the marketplace.

Sure. Thank you. Happy to address that. You know, our initiatives over the last couple of years have contributed both to, as you were saying, AUV growth. and volume growth. And we continue to see traction in our Canopy platform, for example, that is reaching a very small, niche-y customer that kind of falls through the cracks. And we continue to grow, had double-digit growth in 2024 on that platform again. We're very encouraged by the traction that we continue to get there. And by the way, to your question around the AUV, Canopy is a net contributed to positive AUV growth, our average unit value on the Canopy platform is nearly 2x of our average unit value for mineral fiber. And so Project Works is another example of where we continue to gain traction. We nearly doubled the amount of projects through Project Works in 2024. And again, connected back to the AUV growth, the AUV through Project Works is five or six times our average unit value of mineral fiber volume. So again, a nice growth initiative that's adding to current and future AUV growth. And then the energy savings, which I think is the specific of your question, the milestones that we got in the marketplace in terms of the support with tax credits also being adopted by the GSA are real big milestones for overall market adoption of this new technology and a very new application for ceiling tiles. And I continue to be very encouraged by the fact that we're over the right target, having a different level of conversation with customers who are looking to solve this energy savings challenge that they have. And again, so when you look at the AUV of our energy saving ceiling tiles, again, to tie it back to our AUV growth, it's 2 or 3x our average unit value on mineral fiber products. When you think about the AUV growth and the consistent AUV growth that has been a legacy of this business for the past 10 plus years, and you think about this new technology and the new growth initiatives that we're bringing to the market, you can't help be excited and encouraged by the opportunity consistently and continue to grow our AUV in this business going forward.

Yeah, okay, that's great color. It's very exciting to hear that. And then maybe turning to the discretionary R&R side, you know, appreciate the commentary you gave on the broader market and how you're thinking about some of those factors coming in, but can you talk a bit about that discretionary R&R piece just given where rates have been and any additional color on what you're seeing there and how you're thinking about that as we move through 2025?

Yeah, you know, when you look at bidding activity overall, It kind of followed the same pattern we saw all through 2024 with one quarter positive and the next quarter down, next quarter positive, next quarter down, following this kind of choppy pattern but sideways moving. That continued in the fourth quarter. And, you know, the bidding pattern has been really consistent over the past nine quarters in this light. And to your question, really the bidding activity has been strongest on the new construction side. which kind of matches what we've been seeing on the new construction starts, which was positive throughout 2024 versus 2023. So the discretionary renovation has been the weakness. I'm sure this is the genesis of your question. That renovation activity, the discretionary type in particular, has been on hold. While some of the uncertainty plays itself out, Given the level of uncertainty, the renovation, now it's around tariffs and policy changes and things like that, that discretionary renovation work continues to be on the sidelines. And so that's one we're gonna be watching very closely in 25 as some of the uncertainty around the overall market and the optimism around the overall market progresses throughout the year to see some of that discretionary renovation come back into the marketplace. Again, I think in 2025, new construction is going to be a tailwind. As we lag those new construction starts into 2025, it's going to be a tailwind for us in 2025. And then when you look at the office segment in particular, we had the third consecutive quarter of leasing activity that increased in the fourth quarter. And it's at levels post-pandemic highs now going into 2025. And the outlook for 2025 in the office segment is that vacancy rates are forecasted to improve in 2025. So we won't call this necessarily a turning point at this point, but there are more green shoots and more optimism around one of the softer discretionary renovation verticals for us, and that's been the office segment. I hope that provides a little more color there.

Yeah, no, that was great. Thank you for all of that, Vic, and good luck with everything.

Thank you. Your next question comes from the line of Garrick Schmois with Loop Capital. Please go ahead.

Oh, hi. Thank you. I was wondering if you could provide a little bit more color on how we should be modeling the quarterly cadence for the year. You indicated you'd expect to see more variability as you navigate some of these choppy conditions, but any additional hand-holding, whether it's on the top line or on the margin, would be great.

Yeah, hey Garrick, it's Chris. Yep, on the mineral fiber side, I'll speak specifically to mineral fiber volume. You know, we obviously don't guide to quarters, but if I take a step back and think about really the first half, second half dynamic, you know, outlooking flattish volume for the year in mineral fiber with a little more of softness in the first half of the year and then turning, you know, more favorable in the back half. And that's really around you know, trying to see and navigate how some of the uncertainty that's out there in the market kind of shakes out and winds up settling down. So a little bit softer in the front half and more favorable in the back half of 25.

Okay, that's helpful. I wanted to follow up on AUV. You know, you're guiding to another year of above normal AUV growth. You've been speaking and struggling to the answer to the previous question with respect to favorable mix moving forward. You know, if we start to see, you know, some better demand conditions, as you're expecting, is it reasonable to think that we might be entering into a period of new normal with AUV growth in both landfill and mix, and that AUV could be above normal for an extended period of time here?

Yeah, I think when I take a step back and think about the longer, kind of the longer term horizon, you know, Vic mentioned our innovation and some of our new products and the, you know, call it the incremental AUV points relative to our existing AUV. I think that provides some potential for additional AUV growth in the future. When I think about 2025, I'd say between the first half of the year and back half of the year, it's relatively balanced in terms of that AUV growth. But sure, I mean, it's really a testament to our innovation pipeline, staying close to our customers, and really aligning with the needs in the market. And I think our products and solutions align to that and creates a lot of opportunity for us to continue to grow the AUV side of our equation. Okay. Very good. Thanks. Best of luck. Thank you.

Next question comes from the line of Kate Hughes with TruViz Securities. Please go ahead.

Thank you. I just wanted to narrow in on a couple, well, one industry market office, which always gets a lot of discussion. How did the order pattern, particularly in office renovation, end the year, and what are you sort of expecting from that in 2025?

Yeah, and that office vertical, Kate, it was consistent with what we have been seeing, a kind of a sideways kind of stabilizing um pattern in office again this is the third fourth quarter was the third quarter um consecutive of leasing activity improving the bidding activity also was notable notably positive in the fourth quarter in office so i i think it was the order pattern was consistent and sideways moving stabilizing versus the soft downward motion that we've been experiencing in the last couple years in the office vertical so Again, I think it's a little early to be calling a recovery in the office segment, but certainly it's consistently moving sideways as we're trying to establish at least a trough here. That's what we're modeling going into 25 as well. Not a big recovery in office, but I think the downward pressure is behind us on the office segment.

Okay, one other question as we enter 25, what end user market is the strongest?

Well, I think transportation, the data centers, which is now being broken out from office are real highlights in terms of opportunity growth there. I think the healthcare continues to be positive. And even though the ESSER funds are expiring in the education segment, it was a really good election season for state municipal bonds that is likely to backfill the ESSER funds. So I wouldn't say it's going to be a real positive, but I don't think it's going to be the negative that some of it may be anticipated with the ESSER funds tailing off. So I kind of see it in that order for us. Keith? All right.

Thank you very much.

You bet. Your next question comes from the line of Philip Ng with Jefferies. Please go ahead.

Hi, this is Fiona Ong for Phil. How do you expect the recent tariff on steel and aluminum to impact your wave earnings in 2025? Just wondering, do you have the ability to push price higher?

Yeah, let me take the tariff question here. And maybe take a broader approach to your question, because I think WAVE is part of the part of the the question and part of the the answer also here. And I'll ask Chris to put a fine point on the impact that that might have for us on a cost cost basis. You know, with the tariffs that we know at or at least the potential tariffs that are out there and well publicized, the short answer for the impact on Armstrong is quite limited. And when you look at the limited nature, we still have mitigation plans on that limited impact to even further minimize the overall impact of that. So let me break that down very quickly. We really are a North American supply chain. And really, when you boil it down, it's primarily a U.S. supply chain business. And from the China tariffs that are in place, we buy very little from China, mostly MRO or spare part type items that can be sourced locally. In Mexico, we buy virtually nothing. Canada, we do have a Montreal plant for metal ceilings that represents less than 3% sales for the company. And as you know, we have a pretty large footprint in the United States for metal ceiling manufacturing that we can mitigate by local sourcing some of those projects here in the US. To your question, though, the steel and aluminum tariffs are the other place where Armstrong could be impacted. It's really in the wave joint venture. We buy a small quantity of steel and aluminum from imports in our wave joint venture for the production of our grid systems. We have local sources that we can move that import volume to. And of course, you know, our pricing discipline, we were factoring in any cost impact into our pricing plans here in the early part of 2025. So I'll just say again, we have limited impact from the tariffs that we know, both the ones in place, but the potential ones that we know about. And we have a strong track record of covering any inflationary impact from these tariffs with our pricing initiatives. And to get very specific, Chris, I'll ask you to comment on the cost impact.

Sure. And as Vic mentioned, you know, on the supply chain side for mineral fiber and architectural specialties, relatively insulated there, expect less than a 1% impact on Armstrong AWI cost of goods sold in 2025. Taking a step back and looking at Wave, as Vic mentioned, less than 2% of their cost of goods sold on steel and aluminum. Overall, I think about this from a competitive and broader backdrop. There's also a similar backdrop of other folks in the market facing similar dynamics as it pertains to tariff impact. in a relatively small or insulated and minimal impact as I think about it in terms of supply chain impact on costs.

Thank you. That's really helpful. My follow-up questions will be in your 2025 guidance, you mentioned a choppy market outlook for mineral fiber. Do you expect volumes in that segment to probably inflate in 2026?

Yeah, I'll pause and stop short of guidance for 2026. You know, again, want to see how 2025 unfolds. As Vic mentioned, you know, there's a degree of uncertainty, obviously, choppiness associated with the market. So, you know, our best view right now is flattish volume for mineral fiber, and we'll see how the year progresses before thinking about 2026. But thanks for the question.

Thank you. I appreciate the callers.

You're welcome. Your next question comes from the line of Stephen Kim with Evercore ISI. Please go ahead.

Hi. This is Atish. I'm for Steve. Thanks for taking the questions. So first, in mineral fiber, it was mentioned that input costs became a headwind in the quarter. Could you kind of clarify which inputs and how we should think about the pressure there as we move through 2025?

Yeah, sure. So let me pause and take a step back and just talk about, you know, what we've assumed in our guide for 2025. You know, overall, from a total input cost perspective, outlooking low single-digit inflation. Just a reminder, you know, labor is about 10% of our COGS inflation inputs in mineral fiber. Energy is 10, freight is 10, and raws are about 35%. So all up, you know, total input costs in that low single-digit inflation range. From a freight perspective, expecting inflation on both the rate basis and fuel basis. So, you know, in that low single-digit range. Raws, low single-digit inflation for 25. And then about 10% or so inflation on energy. And that's really driven by natural gas. And if you think about, you know, how pricing for natural gas has progressed from 24 into 25 and kind of the latest outlook for 25, that'll make a lot of sense. So it just kind of adds a little bit more color around how we're thinking about this year.

Great. That's super helpful. And then on ARC spec, upon the Zaner acquisition, can you help us kind of contextualize the the total percent of the company sales that are in next year is now?

Yeah, Chris, let me take this first, and then you can add to that. Thanks for the question, because we're really excited about the acquisition. You know, when you step back and look at architectural specialties since 2016, it's averaged 20% CAGR growth since then, and we're outlooking another 20% in 2025. And of course, that's a combination of organic penetration into this specialties area, but also inorganic additions to the business. And Zaner is just another step of that. One of the exciting things about the Zaner acquisition that coupled with the Boak acquisition is that it really does establish a design and manufacturing platform for the exterior part of the building. that opens up another billion dollars worth of total addressable market. That's about the size of the market when we started in 2016 on this run of 20% CAGR growth. So the way we think about it, and one of the reasons why we're excited is it obviously opens up another opportunity pool for us to play in, but it gives us confidence that we can continue to the growth of architectural specialties for years to come as we have now a renewed leg of penetration opportunities in addition to future inorganic bolt-on opportunities so I will mention again that you know this is the third consecutive year in 2024 was the third consecutive year that we were able to expand margins in this business organically so we're driving really strong top line and expand expanding margins and we're demonstrating we have the right levers to pull to expand margins in this business. So we're excited about the segment overall, the Zaner acquisition just gives us a whole nother leg and capability with our bulk acquisition, uh, to continue our growth into the future.

Yeah. And just to add on, uh, as well to your, to your question, you know, we, um, assumed, you know, about 20%, uh, top line growth in the AS segment for 25, more than half of that is related to a inorganic contribution, uh, in the year. and overall segment expand margins for 2025. And as Vic mentioned, this is the play we've run around acquisitions where we can bring these unique, specifiable attributes and capabilities into the company and continue to grow, create value for shareholders by leveraging the Armstrong platform. So really excited about the opportunity to do that in 2025 with our recent 24 acquisitions.

Great, thank you.

Thank you. Your next question comes from the line of Rafi Adrosich with Bank of America. Please go ahead.

Hi, good morning. It's Rafi. Thanks for taking my question. Sure, good morning. Starting with the temp block, can you talk about how you think about the potential either TAM or just market size of 10 block relative to some of the other growth initiatives you've had over the last few years like a healthy spaces or or canopy like how big could 10 block be um over time yeah that's a good question right because it's really um when you think about this particular um technology and the application broadly speaking

to drive renovation, it's a much, much bigger opportunity, which is why we're excited about it. That's why we're innovating around this. This phase change material has a lot of different avenues that we can go with it. So when you think about the installed base of mineral fiber at 39 billion square feet, and over time, getting to the point where why would you ever put another ceiling tile in it doesn't pay for itself over time it doesn't save you energy it's um it's an exciting opportunity so we're not sizing it publicly but you can get the gist it's a very large opportunity and we think for many many years to come as we transition all of the installed base ceiling tile over time to energy saving ceiling tiles

Two more follow-ups on 10Block. Some of the other growth initiatives you've had, there's been an investment ramp associated with that. Do you need to put additional SG&A in to drive that conversion or for product innovation on 10Block to realize that market opportunity? And then the second question is, like, how do we think about TempBlock AUV relative to your average today?

Yeah, the AUV contribution is somewhere in the neighborhood of 2 or 3x of our average mineral fiber volume. So it's a nice adder and contributor to positive AUV growth over time. The answer to your SG&A question, we are already feathering in SG&A to support the market development and the market acceptance, if you will, the development of different customers that make decisions around this. So we're already doing that and we'll continue to do that into 2025. And we factored that into our cost outlook. So in addition to that, you didn't ask, but in addition to that, you'll notice a little step up in our capex spending, and that is to support some additional capacity creation finishing capacity creation in one of our plants to support the energy-saving ceiling tile production.

So you wouldn't expect to step up beyond 25? You would not expect to step up in SG&A or CapEx beyond what you've already done to support the growth?

Yeah, I think there can be, you know, obviously, Rafe, at the rate and pace of sales growth, there could be a little bit of a step up in SG&A. But, you know, the way I think about it is, you know, relative to rate and pace. On the CapEx side, no, not at this point in time. We think with the capacity that we're adding, you know, it should support our short-term growth outlook. You know, hopefully, and again, we remain excited about the opportunity that TempLock offers. So should that outpace our expectations, given that level of AUV opportunity and mineral fiber volume growth, we remain excited about the potential that this product has. Great. Thank you.

Your next question comes from the line of John Lavalio with UBS. Please go ahead.

Good morning, guys. Thanks for taking my questions as well. The first one is, you're expecting flattish mineral fiber volume growth in 2025. Curious, you know, first of all, how that sort of compares to the market. And then I think, you know, last quarter, you guys had seemed, you know, reasonably confident in the ability to return to the more normalized kind of two to 4% volume growth this year. Sounds like markets have stabilized a bit and maybe some green shoots. So what's it going to take to get back to, you know, those levels of growth?

Yeah, the, the, Implication for the market is in that plus or minus 1% range. We're still confident that our growth initiatives are going to add up to one point of growth, offsetting the softer market condition or adding to a flatter market condition. I think plus or minus 1% is a pretty good proxy for a choppy market going forward. As far as the 2% to 4%, the 2% to 4% middle to long-term outlook was the growth initiatives plus the market recovery back to 2019 levels. So I wouldn't say that we're outlooking, we're certainly not outlooking 2025 to be a market recovery with the Plattish market. So to get back to the two to four, we're going to have to have the market contribute to get to that two to four range to complement our growth initiatives that we continue to be very optimistic about.

Okay, makes sense. And then, you know, on architectural specialty, the EBITDA margin forecast of 18%, you know, it seems like that's being impacted by some of the more recent acquisitions like Zaner. Just curious, you know, does this change or push out the, you know, the outlook for, you know, kind of consolidated 20% EBITDA margins in that segment?

Well, we're going to continue to make progress. As I mentioned earlier, this is the third consecutive year that we've expanded the margins organically in that business. So we're on the right path. As you know, as we add new acquisitions to this segment, they come in at lower EBITDA margins, given the scale or the lack of scale that they have. And the opportunity for us to scale these businesses is the opportunity to drive operating leverage and improve the overall EBITDA margin business. We're running that play. I think we're going to continue to do that. But certainly when we bring on new acquisitions like you're noting here, there's work to do for us to get those businesses up to the 20% EBITDA level. And again, I think I really feel good about the three consecutive years really demonstrating that we have our right levers that we're focusing on. We're pulling them in the right way. and make a really good headway toward the 20%. So we remain confident that we're going to get this business to a 20% EBITDA business over time. Got it. Thank you, guys.

You bet. Thanks. Your next question comes from the line of Brian Beros with Thompson Research Group. Please go ahead. Hey, good morning.

Thank you for taking my questions. On the Zaner acquisition, I guess it seems like a larger step into the exterior space. seems like a strategic decision to grow into that category, as you mentioned. I guess, how do we think about further acquisitions to rent out the exterior offering? Or is that more of a organic growth initiative from here to kind of attack that? I mean, you mentioned $1 billion in new addressable markets.

Yeah, Brian, it's an exciting space for us. And, you know, five years ago, this wouldn't have been a space that we could attack. But because of the metal design and fabrication capability that we've been building and developing, partly through acquisitions as well. We really have a world-class metal design and fabrication capability that we can use now to take to the exterior side of the building. And with the expertise and the brand of a company like Zaner, it really is an accelerator for us to participate and play organically now in this space. But again, when you look at the sales of Zaner with Boak and a billion-dollar TAM opportunity, that puts us at less than 10% share. And so, again, very similar place that we started with architectural specialties over 10 years ago. So there's plenty of penetration opportunity here organically, but also there's going to be additional players that we could bolt onto this business as we go. And we'll be open for business in that particular category as we are in the interior side.

Sounds good. Excited to see how that turns out. I guess on the guidance 25, I guess what are the puts and takes to get maybe to the high and low end of guidance between volume, AUV, anything else that would kind of drive the range? It seems like volume might be the biggest driver of the range, but any more color would be helpful. Thank you.

Yeah, I'd say volume for sure, but if I just take a step back and take a broader look at the overall landscape in the market, it's a little more clarity and some calmness applied to the chop that we have outlook for the year. So I think a lot of it's going to be just around how the broader macro shakes out, how the market shakes out, which could provide some potential upside and you know, on the downside case, you know, be at the lower end. So that's really the biggest variable and the dynamic that we face here in 2025 in that, you know, quarter-to-quarter chop throughout the market. So that's kind of how I would size the ranges and the variability on the guide. Thank you.

You're welcome. Thanks.

As there are no further questions at this time, I would now like to turn the call back over to Vic Grizzle, President and CEO, for closing remarks.

Thank you, and thank you all again for joining and for your questions. Again, you know, as we navigate some more turbulent market conditions going forward here, I think our diverse set of end markets plays well for us to keep a very stable business. Our consistent ability to drive AUV growth our ability to continue to drive productivity, even in soft market conditions, really allow us the resiliency that we need in market conditions like this. And we remain confident in our 2025 outlook and look forward to updating you on our next call. Thank you very much.

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