Q3 2019 Earnings Call
Q3 2019.
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I like to hand, the conference over to your Speaker today, Tom waters VP of corporate finance.
Thanks. Good morning. Welcome. Please note that members of the media have been invited to listen to this call and the call is being broadcast live on our website that Armstrong ceilings dot com.
With me today, our Vic Grizzle, our CEO and Brian Macneal, our CFO hopefully you've seen our press release. This morning that both the release in the presentation, Brian will reference during this call are posted on our website in the Investor Relations section.
Buys you the during this call we will be making forward looking statements that involve risks and uncertainties.
Actual outcomes may differ materially from those expected or implied for more detailed discussion of the risks and uncertainties that may affect Armstrong World Industries. Please review, our SEC filings, including the 10-Q filed earlier this morning.
Forward looking statements speak only as of the date. They are made we undertake no obligation to update any forward looking statements beyond what is required by applicable applicable securities law.
In addition, our discussion of operating performance will include non-GAAP financial measures within the meaning of FCC regulation G.
Reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of this presentation.
Both are available on our website with that I'll turn the call over to Vic.
Next time and good morning, everyone. It's good to be with you today to review our third quarter results, another strong quarter and a record EBITDA quarter for the company sales grew 6% adjusted EBITDA improved 13% to $114 million and margins expanded 250 basis points.
Year to date sales were up 8%.
Adjusted EBITDA is up 15% and margins have expanded 240 basis points.
With these solid results, we remain confident in our full year adjusted EBITDA guidance and as we tightened the guidance range, we're slightly raising the midpoint.
At the moment, Brian will walk you through the details of the results by segment, but I first wanted to touch on a few of the key takeaways.
And the mineral fiber segment average unit value or HCV as we referred to it was up more than 2% with both like for like pricing and mix improvements positively contributing in the quarter.
As we previewed with you price realization in the quarter continue to normalize from the higher increases we've reported earlier in the year.
It's also worth noting that positive price and mix in the quarter was on top of the strongest price performance quarter of 2018.
In the quarter price increases once again outpaced input costs.
On the mix side, we continue to see above market performance from our new product innovations sustain total acoustics and design flex.
Year to date mineral fiber ASV is up 6% and we remain confident and once again, delivering ASV growth into 5% to 7% range for the full year.
Assistant with both our historical average and our guidance.
Mineral fiber volume was positive in the quarter and continues the favorable sequential quarterly trend, we outlooked earlier in the year.
Sadly speaking commercial activity in the U.S. remains favorable with both bid activity and backlogs remaining positive despite a continuation of uneven our activity across the various verticals.
New construction and larger remodel projects continue to trend favorably broadly across the U.S.
And the education sector in particular was positive throughout the summer much as we had anticipated.
However in total volume came in below our expectations, Canada, and the big box channels remain softer than expected, although improving but not yet back to the expected levels.
There is unique political and economic issues in Canada, and inventory balancing and the big box channels are all working their way through but again slower than initially expected.
Also to a lesser extent smaller project size, our and our activity in the us retail and healthcare verticals continued to be softer and uneven across the regions.
Canada, Latin America, and the Big box channels represent the majority of our year to date drag on volumes.
Our teams have been working hard to compensate the unique circumstances in each of these channels and I'm pleased with the work completed in the Big box channel and into Latin America Channel that will drive improvements in Q4 and into 2020.
Adjusted EBITDA margins expanded in the mineral fiber segment.
Our operations teams continue to execute at a high level and delivered a great quarter.
Mineral fiber gross margins expanded 140 basis points.
Last quarter I introduced you to our plant reliability metric some multi input measure up manufacturing performance that captures things like uptime yield and throughput and I've reported that it was trending near all time highs.
On the third quarter. This trend that only continued but our teams broke the plant reliability record result in an outstanding 5% productivity improvement.
This is a reflection of the hard work and expertise to the people in our plants.
And it's also a demonstration of early results of our digital factory initiatives, which is a subset of our overall digitalization strategy.
Margin expanded expansion was also driven by favorable price over inflation mix gains driven by or innovation.
And a strong quarter at our waived joint venture.
Equity earnings from our weight joint venture were up 16% in the quarter helped by strong sales of higher value component products and non traditional grid items that improved waves overall sales mix.
Turning now to our architectural specialty segment, where we had another strong quarter sales were up 23%, marking the sixth time in the last seven quarters that sales growth has exceeded 20%.
Our teams continue to leverage best in class capabilities to win more projects and outpaced market growth.
Hey, C.G.I., our newest acquisition contributed $7 million in the quarter.
Our AC G.I. integration efforts are ahead of plan and we are gaining early traction by adding a C.G., it's exciting with products and capabilities to the Armstrong sales platform.
Overall, the base, a es business, which includes our 2018 acquisitions of past performance steel ceilings remains on track to grow more than 15% as we got it at the beginning of the year.
Our backlog going into the fourth quarter and 2020 remains strong and supports continuation of this trajectory.
EBITDA margins and architectural specialty segment expanded to 24% in quarter.
I was particularly pleased that all of the acquired companies improved EBITDA margins sequentially in the quarter.
All four acquisitions continue to run ahead of their financial business cases further validating that we are acquiring good businesses integrating them, well and driving sales and operating improvements on the Armstrong platform.
Now at our Investor Day, we use the tech them acquisition to illustrate how we take smaller subscale regional businesses and scale them on the Armstrong platform.
These acquisitions are typically sales growth constrained and our operating with EBITDA margins below our segment average.
We noted that margins can often decline in our first year of ownership as we bring that business is up to our operational standards.
And after initial year of integration and investments, we generate leverage FIA sales growth from our spec writing capabilities and participating in our best in class distribution network.
We also drive operational efficiencies by bringing our manufacturing and lean expertise to their operations.
Both of these efforts resulted in meaningful margin expansion, which is exactly what we're seeing attack them.
Year to date, Tekcomms EBITDA margin is 31% and improvement of over 400 basis points from 2018, and almost doubled from when we acquired them in 2017.
We remain confident that this path to enhance profitability is repeatable across our more recent acquisitions.
Also within the architectural specialty segment were pleased to announce another acquisition.
As you may have seen in our press release, we have entered into an agreement to purchase MRK industries manufacturer of specialty metals ceilings and walls.
We expect this transaction to close in the fourth quarter.
We know MRK and the management team well as they have been a key supplier to us for several years now, including supporting the success of the Grand Central Terminal project in New York City.
Mark case unique capabilities and management know how will be a great asset to architectural specialties business.
As an existing supplier MRK won't be a material contributor to our topline at least in the short term.
But they are unique manufacturing in design capabilities will enhance the overall architectural specialty segment margins.
In the quarter, we continue to advance our digitalization initiatives beyond the manufacturing work I previously mentioned.
We are working to drive speed from the eyes of our customer scalability and the architectural specialties business and to create a frictionless design and purchase experience.
As part of our fall launch we are not only introducing new products were also rolling out new digitally enabled solutions.
We have added new revett families to our website for the digit design flex products and later this quarter, we will introduce a new digitally enabled solution.
Called project works to service, providing a collaborative platform that will benefit all of our customers from designers builders tenants.
And even to our distribution partners.
Project works provides design visuals budgetary pricing bill of materials.
And installation instructions to all projects stakeholders on one single platform now this work can be done in minutes instead of days.
This will further armstrong's competitive advantage from new construction and major renovation projects.
Project works is the next step in our customer facing technology journey.
Began with one quote.
Common portal for real time quotations.
That progress to Cook to order, which automated the order process and now project works and all in one designed to delivery platform.
This is an exciting industry, leading technology enabled capability.
You could expect to hear more about this and other customer facing technologies in the coming quarters as we continue on our path to becoming the easiest company and the building products space to do business with.
Now, let me pause and I'll turn the call over to Brian for more details on the financials Brian .
Thanks, Nick good morning to everyone on the call today I'll be reviewing our third quarter results for before I begin as a friendly reminder, I'll be referring to the slides available on our website and slide three details our basis a presentation.
Beginning on slide four for our third quarter results sales of $277 million were up 6% from prior year.
Adjusted EBITDA increased 13%.
And margins expanded 250 basis points.
Adjusted diluted earnings per share of $1.38 cents grew 20% as profitability increased and we lowered our share count.
With regard to taxes, our quarterly as reported tax rate of 15% was impacted by the $25 million gain we realized on the sale of our half of the wave international businesses.
We've adjusted this gain from our adjusted EPS calculation, resulting in a 19.7% quarterly tax rate.
For the year, we are anticipating a rate of just below 25%.
Adjusted free cash flow improved by $25 million or 34% over the prior year.
Cash earnings improved significantly and offset higher capex and cash interest.
Net debt is $58 million higher than last year, driven by the acquisition of AC JCI share repurchase activity and the initiation of a regular quarterly dividend a year ago.
In the quarter, we repurchased $33 million of staff.
Since the inception of the repurchase program, we've pulled back 8.7 million shares at a cost of $512 million for an average price of $58 in 94 cents.
Currently we have over $188 million remaining on our share repurchase program, which runs through October 2020.
Turning now to slide five adjusted EBITDA increased $14 million as volume growth in the architectural specialty segment was coupled with HCV gains strong manufacturing performance and a solid quarter from wave and our mineral fiber segment.
Input cost inflation, including natural gas and freight was slightly favorable for the quarter.
SGN a spending rose as we have taken on the go to market and administrative expenses associated with a CDIY.
And made additional investments and capability support EPS growth.
Cdna as a percent of sales declined and added to our EBITDA margin expansion.
Slide six shows adjusted free cash flow performance in the quarter versus the third quarter 2018.
Cash earnings grew 35% and offset modest increases in income tax payables, capex and cash interest.
Slide seven begins our segment reporting.
In the quarter mineral fiber sales grew $6 million or 3%.
Gains, including both like for like pricing and continued mix improvements.
Volume was up 1% in the quarter as volume in the education vertical improved.
Adjusted EBITDA was up $11 million or 13% as margins expanded 400 basis points.
We gained strong performance from our manufacturing operations and a solid quarter for wave for the key drivers of earnings growth.
SGN a expenses were also lower in the quarter, even as we've now lapped our cost saving initiatives in 2018.
Moving to architectural specialty segment on slide eight quarterly sales increased 23%.
Day sales, which includes the plaster form and steel ceilings businesses acquired in 2018 grew 8% and the Guy acquisition contributed the rest.
Adjusted EBITDA and EPS was up 18% in the quarter as sales gains were partially offset by the fixed cost of acquisitions.
EBITDA margins contracted 100 basis points in total and were driven by 310 basis points headwind related to the acquisitions.
Turning now to slide nine for the first half of 2018 sales of $791 million were up 8%.
And adjusted EBITDA increased 15% driving margin expansion of 240 basis points.
Adjusted diluted earnings per share of $3.66 grew 22%, primarily driven by increased profitability.
Year to date adjusted free cash flow grew $25 million were 17% ahead of last year.
Slide 10 is the bridge of our results for the first nine months of the year.
Strong HCV performance in the mineral fiber segment remains the key driver to our increased profitability in 2019.
Coupled with volume gains in architectural specialty segment solid manufacturing performance increased profitability at wave and lower SDMA spend drove adjusted EBITDA up 15%.
I'll remind you that manufacturing and X gene a both benefited from the restructuring actions we took in the middle of 2018.
These savings as well as manufacturing productivity have more than offset the cost embedded in acquiring.
Acquired businesses and organic investments in ask capabilities.
Slide 11 displays the drivers of adjusted free cash flow for the first nine months of the year.
Operating cash flow benefited from cash earnings, which were up 22% and lower working capital, which offset higher income tax payables, which were impacted by the $20 million tax refund we received last year.
We remain on track to deliver $225 million to $235 million of adjusted free cash flow for the year.
A 9% increase at the midpoint when excluding the special dividend from wave in the base period.
Slide 12 updates or guidance for the year, we've narrowed our sales grange growth to sit plus 7% to 8%.
And we are tightening and raising the range of our EBITDA and EPS guidance and reaffirming our free cash flow range.
Before turning the call back to Vic or three non operating finance items I'd like to call your attention too.
First as you saw from our press release last week. Our board has declared a quarterly dividend of 20 cents per share an increase of 14% from our prior quarterly dividends.
This increase is consistent with growth in free cash flow and is an indication of the board and management's confidence and our strategy and value creation model.
Second we completed a refinancing of our credit agreement on September Thirtyth.
The terms of this new 1 billion dollar facility will provide approximately $8 million in annual after tax interest savings beginning next year.
2019 interest expense is essentially unchanged from prior guidance as Q4 savings are offset by refinancing fees.
In addition, this new structure includes a $500 million revolver up from our previous $200 million revolver, providing us with significant liquidity and flexibility.
This new agreement extends maturities three years to September 2024, and correspondingly reduces amortization of principle.
Third with the completion of the sale of our international businesses to cut off we have removed all the assets and liabilities of the gist of these discontinued businesses from a balance sheet.
We still maintain a payable to wave for the remaining portion of their proceeds.
We expect this payable to be settled by the first quarter of 2020, when we finalize the working capital and other other standard closing adjustments with cannot.
To close I'm pleased with how the businesses operating and the results we've been able to deliver so far this year with sales up 8% and adjusted EBITDA up 15%.
I remain confident that we have the plans in place to delivers high single digit sales growth and double digit adjusted EBITDA growth consistent with our value creation model with that I'll turn it over to them.
Thanks, Brian as Brian mentioned, we have concluded the sale of our EMEA and Pacific rim businesses to cut off.
This milestone completes our pivot to an Americas, only ceilings and specialty walls business that we announced back in November of 2017.
Beginning with that announcement the Armstrong team has been transitioning our focus to maximizing the opportunity for profitable growth and free cash flow generation right here in this high quality Americas business.
As we finalize closing adjustments and taxes, we now expect to realize approximately $209 million of cash from the transaction up from the original $250 million, we out looked at signing.
And our most recent projection of 280 million.
I want to take this opportunity to thank our former colleagues for their hard work their commitment to making the Armstrong brand the global leader in sealing solutions and most importantly for the positive attitude they brought with them each and everyday throughout this process, we wish them all well.
Now since our last quarterly release Theres been a lots of positive activity here at Armstrong, we delivered yet another quarter of double digit adjusted EBITDA growth and strong free cash flow. We grew the architectural specialty segment by more than 20% again.
We closed on the sale of our international businesses, ultimately delivering the $290 million of cash to shareholders.
We refinanced our credit agreement, which will drive $8 million and annual interest savings, we repurchased $33 million of our stock.
We announced a 14% increase in our quarterly dividend and we signed yet another Arkansas architectural specialties acquisition.
We're excited about our focus as an American ceiling and specialty wall company and the momentum this has created.
Theres no more competition for our time, our energy and our resources, we can focus all of them right here at home in the Americas.
We expect to finished the year strong and deliver another year of double digit EBITDA growth strong cash flow generation and topline momentum.
Armstrong remains committed to being the standout leader and innovative products and digital solutions.
To provide the best possible experience for our customers and we are committed to making a difference in the spaces, where people live work learned heal and play.
And with that we'll be happy to take your questions.
As a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key.
Please standby, while we compile culinary rosner.
Our first question comes from Keith Hughes from Suntrust. Please go ahead.
Thank you.
Question on the environment, we've seen few data points of.
Nonresidential construction, specifically seeing some some weve patches to.
Could you give us any sort of feel have you seen any of this service projects being delayed, particularly given the revenues will go wider than expected in the quarter.
Yeah, Keith you know the the volume softness really was outside the U.S. that we that we we saw for the most part.
Okay, the third quarter market environment, and the conversations that I've been having in the field feel pretty much. The same is as weve experienced.
This whole year really past seven or eight quarters, new construction and large remodel projects continue to be.
Favorable with bid activity as I mentioned in my prepared notes.
And the backlogs.
As in the field several times this quarter and everybody I talked to set the bid activity continues to be really good and that.
There there are very happy with their backlogs going into the fourth quarter and even into next year.
So that part of the market feels about the same and I would say on the our and our side, which is less visible Keith as you know.
That kind of shows up through distribution that continues to be lumpy as it has been for the last seven or eight quarters certain verticals, turning on and turning off.
And and that being a little bit uneven in lumpy and again, that's kind of pretty much what we saw throughout the third quarter as well with the exception of education as I mentioned, the education sector did have a better our and our activity than we've had in the prior year. So that was good to see.
Okay. Thanks, its and final question.
The margins and mineral fiber were outstanding in the quarter, you talked about some of the productivity improvements.
Is this the kind of situation that changes savings you made does not have legs over the next several quarters, we continuously as margins move up.
Yes, I think it was a couple of drivers the right Keith on the on the margin line, we continue to get favorable price mix with moderate inflation.
So I think thats part of the for the the help there, but our manufacturing and operating teams just had a fantastic did a fantastic job on the productivity side.
Hey.
They continue to drive the productivity initiatives and then as I indicated some of the early gains from these this this digital.
Effort that we're putting in place and our manufacturing operations is already yielding some dividends I've said this before I think that.
We've got a long ways to go with our lean manufacturing initiatives in terms of driving overall productivity, but now that we're adding this digital component and getting smarter with the use of to digital technology and how to run the plants and keep them up and running.
I think theres a longer runway here for continued productivity gains.
As we go and I'm more confident in that and then.
Then I have been in the past so I think there's a there's a good long runway that we should count on some continued and.
Productivity improvements here.
Okay. Thank you.
Thanks good.
Thank you.
Next question comes from Stephen Kim from Evercore ISI. Please go ahead.
Yeah. Thanks, very much guys just wanted to follow up on Keith question there.
In the queue I think you provided about $3 million, if I'm not wrong, Brian from Matt.
It looks like manufacturing productivity I was curious how much of that was tied to last year's plant closure and how much from some of these are exciting digitalization initiatives that you've got going on.
Brian you want to take the first part of that.
Yes Stephen.
The three of that the three was in mineral fiber and that's being driven by two things one the digitalization effort, we mentioned and to really have a good focus Vic mentioned a few times.
As we get focused on this Americas only business and our R&D team gets focus there.
Teams at the plan are really executing well on some of the capital projects. We've implemented there so no no benefit from the carryover the restructuring.
Got it that's encouraging.
That's what you're going to add something on that or you know I think he covered the the second part of your question.
Again I, let me just qualify I think the digital component of the overall productivity was obviously, a smaller component, but it was material in worth calling out because I I believe it's an indicator for what we can see going forward.
But it was a it was a smaller part of the overall productivity number.
Yeah, that's fine.
All right I wanted to just from a housekeeping perspective make sure that we understood. The impact of days. So was there an extra shipping day in the quarter and and or not and then.
Broadly on project work, some kind of interested in hearing a little bit more about that one of the things that we've we've seen with.
Building.
Information modeling.
Management software I guess I should say.
Is the issue of adoption and the willingness of of Counterparties to get involved in the learning process of it that is required to use some of these.
These programs. So I was curious as to if there was anything about your rollout that was going to be targeted.
Something of that you think will enable you to have your clients.
Topped project works in a way that would be perhaps better than maybe some of what we've seen else in previous attempts from others.
Hey, Steve This is Brian I'll take the shipping day, Yes, we did have one extra shipping day and as you look forward into Q4 Theres no change in shipping day, So one extra day in Q3.
Got it. Thank you Stephen on the the project works, we're really excited about this architects are.
Demanding more and more.
Threed modeling and rabbit models that will allow them its productivity for them right. If they can take a lot of our system.
And a threed model they can plug and you know kind of cut and paste. If you will it just tries productivity for them. So that's really important for them to do that especially around the details were grid and tiled interface. So we've been working on this for some time what project works is going to do though is on a single platform and so.
Again for all the stakeholders in the value chain to see is along the design journey, how things are changing and so.
It helps with the communication and of course, the lapse and time that happens over many days a lot of times and getting some of these things in these details worked out because everybody can see him on the same platform.
That's going to and I think improve the use of more them and.
Building information models that you were referring to and the revenue files in the upfront process for communication all the way through to the installer. So again, we're it's a start at some that's on our design flex.
Platform to begin with.
Which has some complication to it. So this is really going to de complicate. If you will that system. So we're excited about so beginning and it's something for us to build on.
Great sounds good idea thanks, guys.
Thank you.
Thank you. Our next question comes from John Lovallo from Bank of America. Please go ahead.
Hey, guys. Thank you for taking my questions. The first one is maybe just following up on Keith initial question about.
The potential for slowing commercial activity on the new construction side.
Encouraging that you're not seeing anything but what are some of the early signs that you'd be looking for that might indicate that things are softening a bit.
Yes, John I'll, just reiterate again, we're not seeing.
A slowdown on that side, and it's really hard to tease out new construction activity.
On a broad scale basis, and large remodel projects. So you can appreciate that theyre both highly specified.
Projects.
So we're you know we're not really seeing a slowdown there of course, we get asked about this a lot and we're looking for it but we haven't seen it so I want to be very transparent about that we would be looking for certainly in our conversations with our contractor customers as well as our distributors as what's happening on the bid side.
And if the bid activity starts to slow down I think that would be an early indication that we might be.
Certain to see some of the lagging coming into the system.
Again, the reporting from our contractors and distributor so far the bid activity remains robust.
Okay. That's helpful and then as a follow up it sounded like you your commentary on Latam may have been a little bit more constructive this quarter than in the past and it sounded like you might even see some improvement in the fourth quarter or am I reading that messaging correctly, yes, that's right I think we've seen from the first quarter, we've seen sequential improved.
And in Latam and I know the teams have been working some some other plans down there to accelerate the improvements. So I expect that to continue to improve I think you read that right.
Okay. Thanks, guys Yep. Thanks.
Thank you.
Your next question comes from Michael Wood from Nomura. Please.
Please go ahead.
Hi, good morning.
Just wanted to ask about the implied fourth quarter guidance with your full year numbers, if I'm calculating correctly, the mineral fiber volume growth looks kinda in a flat to down high single digits range year over year, just curious what some of the variable that would occur weather impacting if that would fall in the higher low end of the range.
Yeah, Mike.
It does I think you you may have been spoke you said flat to high single digits just to correct that for everybody I think you've been flat to low single digit write down.
Just to be yeah, yeah, yeah, yeah, yeah, Okay, just to be clear on that.
And I think Thats right I think we expect in the fourth quarter a bit of a continuation of what we we saw in the third quarter with some improvement in some of the areas like are saying in Latam in particular.
But continued good ASV growth, good architectural, especially going I'm expecting another near 20% growth quarter and and architectural specialties.
And but overall, it's going to be a strong double digit EBITDA quarter for us.
So I think you can pretty much expect that depending on how much improvement we get in lat am and retail channels, which has been the headwinds on volume.
I think you've got the range about rate for what we expect and that's part of the the implied guidance in the fourth quarter.
And can you give us a little bit better bridge on the third quarter price number I think last quarter. You mentioned that you were expecting roughly equal contribution from price and mix say you. The I think based on your comment the mix was was the majority of the increase.
So can you just talked about the breakdown there may be what black Ham and retail contributed.
Well on the on the price mix, they were pretty close a little more mix than price in that in that bucket.
And again I think we saw improvements and we're not breaking them out individually, Mike, but we saw improvements in both the retail let him in the quarter just not to the level that we expected when we're talking to you in July .
Great. Thank you.
Yes.
Thank you.
Next question comes from Kathryn Thompson from Thompson Research. Please go ahead.
Hi, Thanks for taking my questions today, just a quick follow up on guidance always appreciate the pigments and getting to the point with the outlook.
That's it could you just clarify the puts and takes on a Titan guidance more specifically how much did lingering issues from the first half carry into the second half impacting the outlook person any other changes fundamentally currently thank you.
Yes, Katherine they the guidance you're referring to is on the revenue side.
We adjusted to the low end of our range that it's really.
Excuse me mineral fiber volume.
And the majority of that the the vast majority of that are the headwinds that we talked about from earlier in the year around.
Canada Lat am and then the big box channel those continue to be the the primary headwinds for us going into.
The second half of the year going into the fourth quarter and I think that.
That continues to be our issue again, the U.S. market overall continues to be as expected.
And and again, we're working through those issues in those other.
Most other channels.
Okay.
Thanks, and then just another follow up on mineral fiber you know understanding that second half.
Had tougher optics related to pricing just because the two price increases last year with the first half benefiting from the SEC effort.
Should we expect to similar type.
Flow through for pricing that we saw in Q3 into Q4 or is there anything else, we should take into consideration looking forward.
Yeah, I think your point to something important which is what we had outlook.
From the first half of this year, we would be copying our best price realization, which happened in the second half of 2018 third quarter was our our best price realization quarter and fourth quarter was still very good so we'll be.
We will be a comping a.
Very good price quarter from last year again, but not as good as the third quarter. So I'd expect to the fall through should be somewhat similar to slightly better than what you saw in the third quarter in the fourth quarter.
Great. Thank you so much you're welcome.
Thank you.
Our next question comes from Ken Zener from Keybanc capital markets. Please go ahead.
Good morning, gentlemen, vacant mourn Ken.
So about this time last year asked if you guys could grow without getting tile units.
You said, yes, you did it this year quite well, which is showed up in your valuation. So I guess my question is can you add a similar path for EBITDA dollar growth Thats why 20 is f. why 19.
And Brian if you could be specific or repeat probably what you already said, which is that you saw no benefit I think in the third quarter from last year's plant closures or any one time asked you nay benefits because I think thats.
Certainly one of the cases that the various have made.
Is that the leverage you got this year and EBITDA was tied more to these onetime benefits rather than.
Sustainable.
First.
But the market is trying to figure out if you can expand on that please.
You want to go first and then I'll follow up with the mineral fiber.
So again I mean, I think this quarter three is just another good example of the strong productivity and manufacturing you'll see on our earnings call.
Deck that we've got over $3 million of productivity from the plants was over 5% as we've mentioned in our prepared remarks.
Yeah, I can't under emphasize the value of focus.
And what I mean by that is our plants. Our teams there are prioritizing and really focus on running the plants well executing against our value added capital expenditures there.
And then a little bit of help from the digital side. So.
It's sustainable that's very good productivity.
Also in the quarter you saw a nice benefit from wave as we manage price in the input cost of steel year over year. There. So wave was up 16% in the equity earnings.
That added another $3 million to the mineral fiber segment. So I think these are sustainable items that.
Aren't benefiting from last year's restructuring, we're pretty well done with the benefits of those to the through the first two quarters. When I think can to your point, we're demonstrating that in.
In the absence of wherever the headwinds come from whatever channel they come from we're able to offset them with good.
Hey, you V improvements the mix up that's going on from our innovation working in the productivity that Brian highlighted so I think theres definitely a track record there now that we can grow.
Without mineral fiber.
Volume growing.
But with that said you mineral fiber volume growth is important to us and we have initiatives around driving mineral fiber volume and we do believe that we can drive mineral fiber volume.
So.
So that's going to continue to be something we focus on and work on but in the absence again based on the portfolio mix of.
Mineral fiber.
We can demonstrate we have demonstrated we continue to demonstrate we can grow EBITDA.
Through these other levers.
I do appreciate that said something people have been talking about so just to secondary question.
I know you guys talked about 60 days, the visibility and no new project based demand. So if you could just revisit I understand that guidance now.
Brighter Vic what gave you confidence to stick with the implied second half unit gains when you guys reported the second quarter.
And given that you had a revised down would you perhaps do that again or what were the factors that really driving that I think people anticipated this downward revision but.
Why don't you guys kind of just stick with that.
Well, because I think we thought Canada was going to bounce back faster than it than it has in fact, Canada hasn't bounce back yet so I think that was really the biggest mis and our outlook.
And where we sat in July and then last time and the retail channel. We thought there was more lift there based on again, what we're hearing from those markets that we thought that we would recover faster now we're recovering but it just not at the rate that we thought and we certainly thought we could hit the low end of the range.
With with a little bit of improvement in Latam and refund the big box channel as well as Canada bounced back so I think thats, where we.
Where we we came up short versus our expectations.
Thank you.
Thanks, Ken.
Thank you.
Next question comes from Phil and GE from Jefferies. Please go ahead.
Hey, good morning, guys.
Bill.
I appreciate your Es business tends to be little Lumpier nature, and you're lapping obviously, some really tough comps.
Organic growth did decelerate quite a bit in the first half. So I'm just trying to gauge of this is more of a timing dynamic or growth has moderated.
No I think this is timing Phil I mean, we.
You know quarter to quarter, you can get some project lumpiness.
But I I remain confident that we're going to grow that business more than 50%.
The core part of that business, 15% and then the acquisitions on top of that so we don't really see any slowing loved the love what I've seen the backlog right now being and not only for the fourth quarter for going into next year. So no slowdown there.
That's great and then just one more question on a us appreciate you're making investments.
Theres a integration company when you make these deals and no complaints on my end I mean, you've seen the growth, but margins had taken a step back. This year do you expect some of those investments kind of level off when we think about 2020 and margins kind of ticked back up or it's going to be like a multiyear process.
Well the core part of that business, Phil the margins have expanded what the headwind you're seeing on the overall segment is the new acquisitions, which come into lower margins. So thats kind of providing a drag and a headwind, but I'm very pleased with how even the new acquisitions in 2018, along with tech them that I highlighted in my.
Thanks, and and the base business has expanded margins they continue to get more and more productive. So I'm very pleased with how the margins are expanding that business and is this new acquisitions that we are adding on top they'll work their way out per our track record.
Got it alright, thanks, a lot alright, thanks, Phil.
Thank you.
Our next question comes from Garish Weiss from Longbow Research. Please go ahead.
Thanks first question is just on mineral fiber pricing just wonder if you can comment on the August price increase how much traction or you think you've got just also just to be clear on the pricing cadence was that really just a function of the tougher comparison or was there any change in underlying price.
Yeah, No I think.
Gary because we highlighted.
We.
We were coming into the base period, where we had the highest price realization.
And last last year cycle again, we had more inflation in 2018, so we were aggressively driving more and more pricing in the marketplace to cover that inflation and so so a bit of that as the base for it as we adult looked there's no change in the pricing.
We're continuing to run the play as we have always run.
And there is lots of puts and takes with every price increase given the project nature of the business, but I would say, there's no change in that pricing environment.
Okay and the August price increase was a level trashing consistent with prior August price increases, it's consistent with with past price increases as Craig Thanks, and my follow up actually thought inflation I think coming on the second quarter you saw inflation the contract maybe Watson they have to 3% it was a little bit lower than what you thought at the beginning of the year is that still good number users.
Any changes on your puts us.
Hey, guys like it's Brian So inflation is trending down as you'll see that we had favorable input costs, which includes raw materials energy and freight.
So we bring in the labor component of that and look at total cost of goods sold.
We're still tracking price over inflation.
But inflations definitely coming in at the lower end of our range.
Thank you.
Thank you.
Thank you.
Next question comes from Justin spare from Zelman. Please go ahead.
Good morning that you guys just.
Just first.
Looking at the volume drag from home depot, or I guess, the home centers and Canada and the third quarter Oh, It's something you mentioned in the first quarter and it look I thought it was getting limited in the second quarter, but how much impact in your full year volume guidance at mineral fiber from both spus discrete headwinds and how big are those businesses within your overall min.
Our fiber business.
Yeah, Weve outlook that those those that part of our business is about 20% of our sales and about 30% of our volume. So give you some relative size of that.
What we had outlook does that those businesses what sequentially improve.
They did in second quarter, and then again in the third quarter, but just not at the rate at which we had we had expected and so when you look at it in total the of the mineral fiber volume drag.
The majority of the vast majority of that drag has come from that's that part of the market. So that part of our business so without breaking out get very specific number but you can.
You can take from this that the vast majority of the the headwind here on volume has been from those three.
Okay, Okay, and then and then separately just the implied organic growth into the fourth quarter four and for the full year.
For architectural specialties segment I want to I want I want to look at that stripping out a C.G.I. plaster form an F.C.I. I think we're we're estimating roughly 36 million for the year, plus or minus and year to date I think you've disclosed in your Q. It's about 27 million. So if we were to strip that out what's the organic growth profile.
While that you're looking for for the full year and for the fourth quarter. Yeah. I think we're on our guidance for that part of the business growing a greater than 15%. So and I think you can expect the very similar performance in the fourth quarter.
Yeah, but I think we have a little bit of a different definition, because the year to date organic growth.
It is is trending below that and so I just wanted to make sure. We're on an apples to apples. So we don't over estimate for for next quarter, but.
Our apples to apples definition as grew a little under 4% organically in the third quarter.
And your up roughly I don't have 7% year to date.
If we were to look at it on that definition stripping out that M&A that carried over that's not organic from last year and earlier. This year from a day what are you anticipating for the that kind of organic growth definition for the fourth quarter.
So just in the the definition that we've guided to.
Is our base business with the acquisitions already completed.
So that would have been plaster performance steel ceilings in that base period, that's what we've guided to an outlook and we're on track to deliver that number.
So if you look at the third quarter there is no contribution.
From a.
From the from the inorganic activity and cost performance deal since they were close in the late second quarter.
Right. So I think you I think you communicated $9 million on your Q several acquired revenue that's not organic.
That's obviously going from that standpoint, I want to beat a dead horse here, but I.
I just wanted to make sure. We're hearing your clearly in terms of the organic growth cadence you're expecting.
Implied in the fourth quarter.
Yeah, the inorganic that we're implying again includes steel ceilings and plaster form.
Third pass through anniversary in terms of contribution so they are in the base.
And that's what we've got that that's what we've guided too so.
That's a greater than 15% guidance that we're providing out there.
No and the guidance that you mentioned MRK it is not being that additive at least near term, but what were the intercompany sales of MRK CW and that 14 million revenue definition.
Yeah, we didn't break that out totally but you can pretty much count on the majority of those for Armstrong sales intercompany sales.
Got it that got to talk on those debt that that deal closed in the fourth quarter, it's not close yet and so we certainly haven't outlooked anything in our.
Projection so far.
Excellent. Thank you guys. Okay. Thank you.
Thank you.
Last question comes from from have from BNP Paribas. Please go ahead.
Good morning, gentlemen, two question if I can the first one I think you mentioned the fact that you had some lumpy or nor verticals I just wanted to understand which vertical you're referring to and also I'd be interested to into sunny there's any differences between regions across the U.S. into moves the end market developments.
Second question is on your 10-Q, you highlighted to 4 million declining manufacturing costs.
In Q3, 19 could you help as soon as and what exactly are getting good cost that are falling and how we should think about those going forward given the falling energy prices that seem to be continuing thank you very much.
Brian I'll, let you take the third part of that.
As far as the verticals I called them out in terms of.
The lumpiness in are uneven it's been the retail in the healthcare.
Verticals for the most part office.
Office continues to be and education as I outlined continued to be positive. So the lumpiness is really coming and actually the unevenness in terms of their participation has been the retail and healthcare.
And across the US I'd say, there's there's no regional standouts, it's very the activity is very.
Consistent and broad based on the new construction in the large remodel projects across the U.S. The majority the vast majority of our regions across the us were positive in the quarter.
So.
Again, you can have it's never 100%. So that's very encouraging the fact that the vast majority of our territories were positive in the quarter. So Brian you want to short the other part and as when you get a chance to look at our earnings call deck, you'll see it on page seven.
Input costs, which includes the benefit from energy freight and raw materials was roughly a million dollars beneficial in the quarter versus year ago, and the rest of it. The other three was all driven by that productivity, which in that manufacturing line we have.
Have labor inflation, that's being offset by productivity.
Okay. Thanks, So how should we think somebody but the the energy and in because therefore going forward because if I look at.
How gas and electricity in the energy component to the is looking like going forward. It does seem that you should have quint more tailwind actually going forward.
Is that correct.
That's correct largely remember energy is roughly 10% of our total cost of goods sold so it's a small small piece, but we are seeing favorability in the energy part of our piano.
Okay, great. Thank you so much.
Thank you great.
Thank you. This concludes our culinary session at this time I'd like to turn the call back to Vic Grizzle, President and CEO for closing remarks.
Yeah, I just want to say thanks, everybody for joining today again, I think we had a really strong quarter one of the things that didnt come out I wanted to just mentioned again is the the mineral fiber volume growth at the high end of the portfolio remained very strong in the high single digit level and it just further demonstrates that the.
Innovation that we're bringing to market is the innovation that architects want to specify and use and creating the base for future renovations, so really encouraged by that and along with all the other things that we mentioned on the call. So thank you again for joining look forward to finishing the year very strong and talking to everybody in February .
Thank you again.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect good day.