Q4 2019 Earnings Call
Greetings welcome to Armstrong flooring, Inc. fourth quarter, 2019, and business update earnings call.
This time all participants are in listen only mode. A question and answer session with all the formal presentation. If any what's your car operator systems. During the conference. Please press Star Zero and your telephone keypad. Please note. This conference is being recorded I would now like to turn the conference over to does they have chief financial officer. If they can you may begin.
Thank you for joining us today for our fourth quarter results and business strategy update conference call I'm joined by our President and CEO Michel permit We trust 15, our press release. This morning. Additionally, a copy of the slide presentation to accompany this call is available on the Investor section of our website at <unk> Dot com.
For you to slight to adapt presentation and invite you that during this call we will be making forward looking statements involve risks and uncertainties actual outcomes may differ materially from those expected or implied <unk>.
More detailed discussion of risks and uncertainties that may affect Armstrong flooring. Please review our SEC filings forward looking statements speak only as of today. They are made and we undertake no obligation to update any forward looking statement beyond what is required by applicable securities laws.
In addition, our discussion of operating performance will include non-GAAP financial measures within the meaning of FCC regulation G.
Conciliation of these measures most directly comparable GAAP measures is included in the press release and in the appendix of this presentation.
On today's call I will begin with a review of our quarter and full year performance.
Michelle and I will then discuss Arden, new long term strategic roadmap.
Where we will provide a holistic update on our new operating model at our critical objectives underpinning the exciting path for our company moving forward.
We have begun to make significant changes in our business our fourth quarter results on slide five set the stage for what we do as the hurdles to overcome through a range of initiatives in coming years.
During the quarter, we face pressure on multiple fronts, while managing to perform in line with our expectations.
Net sales were down compared to the prior year quarter due to several factors.
We experienced share loss in some categories, particularly on residential where we have the most work to do to better serve our customers needs.
Next was adversely impacted by lower relative Lv T cells.
We'll discuss today that factors in our control to more effectively getting back share and some of the positive signs we're already seeing from customers, who have one at archrock flooring to succeed.
Not been served appropriately.
The decline in adjusted EBITDA was primarily due to lower net sales as well as higher manufacturing costs and other operating inefficiencies.
This was partially offset by benefits from improved raw material sourcing.
Looking at our full year results on page six we experienced on favorable volumes and product mix throughout 2019.
We have the decline in sales was attributable to increased channel stocking in 2018 as result of anticipated tariff increases.
This was further compounded by distributor challenges in share loss, particularly in residential.
Full year adjusted EBITDA was impacted by lower net sales and higher input cost inflation pressure related to tariffs.
These costs were partly offset by improved productivity and SGN they benefits.
As a reminder, SGN they benefited from additional income associated with our transition service agreement from the sale of our what business as well as lower expense for incentive compensation.
Turning to free cash flow and liquidity on slide seven.
In 2019, we invested $29 million in Capex and operating cash flow was modestly negative.
Well, we effectively drove down working capital. According to plan as we move through the year you unusually steep first quarter outflow was difficult to fully overcome.
As a reminder, the timing of operating cash outflows over the past two years resulted in relatively strong free cash flow in 2018 compared to an outflow of free cash in 2019.
In addition, we incurred roughly $13 million related to executive transitions and other non recurring cash costs.
We ended the year with a strong balance sheet to support our strategy.
In addition in the fourth quarter, we completed the replacement of our prior credit facility with a new 100 million dollar asset based facility.
This new credit structure provides us with better flexibility to invest in initiatives and growth opportunities that make sense for our business and aligned with our multiyear strategic roadmap.
During the fourth quarter, we began to execute our plan to expand simplify and strengthen our business to generate stronger performance and augment the trajectory of our long term profitability.
I will now turn the call over to Michel to walk through our strategic business update and provide context behind the decisive actions that we're taking it to help our company achieved its full potential in coming years.
Thank you, Doug and good morning, everyone over the past six months, we have thoroughly reviewed our business and strategic direction. The plan, we will detail today reflects both the areas of strength in the business that we believe we can build upon.
As well our diagnosis of the root cause some the most critical issues. The business has faced that our planned seek to remedy.
I have already begun to execute on the multiyear plan announced today. This includes expanding our customer reach and modernizing our processes as well the optimizing a product portfolio and production footprint to better serve our end markets and to do so more profitably. Some examples of actions we are rethinking our we announced.
At the National for covering association members and commercial National accounts will be service directly in Q2.
We're investing in underserved salesman segments, we had two people call on hundreds of large builder contractors, we had one person calling on commercial national accounts.
We had one person dedicated to call at 13000 independent retailers.
We are in process of augment and these resources and we expect to have quick payback on these SGN investments.
We have just gets here, 20% of our SK use since October one.
Work of solving our commercial VCT from three to two point it in our Filching increased to one plan.
We initiate a monetization process for noncore assets, such as south gig.
We kicked off major productivity and quality improvements effort and our plan.
We launched a review of our corporate headquarters and believe we can cut lease expense by over 60%.
We have attracted a very good talent to augment our dedicated team and sales product management decide in finance.
Well expand on these points today and provide additional color on our multiyear roadmap.
As we do it it's important to keep in mind. Several factors first we're not starting from scratch, we're already gaining momentum from our early actions.
A tremendous value behind the Armstrong flooring brand loves us to reopen doors with customers, they're not easily accessible to most.
In addition, we have the people products footprint and relationships in place for initial execution.
Second there a lot of obvious obvious actions for us to take to change direction.
But to be clear some will provide benefits sooner and others will come over several years.
And finally, we did I believe our stock price reflects our plan into limit to unlock the company its full potential as the leading resilient flooring company.
We understand that to R&D evaluation, we deserve we need to demonstrate a healthier mix of topline growth gross profit in EBITDA margin improvement and improved cash conversion.
No I do I have full confidence in our ability to do so we have aligned our incentive plans with sales gross profit in stock price to help keep everyone focused to deliver on our objectives.
Slide nine provides a high level view of our company and represents our starting point.
Having operated in the global flooring industry for over two decades I am convinced there is tremendous value behind the Armstrong flooring brand.
As a really only company we're positioned the fastest growing flooring categories led by our largest category El <unk>.
We have diversified manufacturing footprint couple of led by established sourcing relationships.
Our mix of business today reflects our strong presence in residential renovation and overall commercial.
With additional potential in residential new construction and underpinned trade commercial verticals like hospitality and corporate.
We will discuss our growth pillars in all these areas and how we see our company evolving in the next several years.
Moving to slide 10.
As an initial steps we have begun to implement our new operating model to get the company focused on expanding our customer reach in serving them in the way they desire.
This is aligned with our investment in sales products processes to get in front of customers.
For many years the company has been internally and short term focus and nearly all aspects.
Leading to stream customer relationships and market share loss.
An internal focus has we're saying restrain new innovation and launches, especially in L. BT.
We have missed the industry shift to unbranded or private label opportunities that have effectively eroded our share.
Our short term focus caused us to Miss major waves of innovation in LDC by introducing limited offering and Richard core endlessly and supporting them with very little working capital.
In terms of operation, we still have significant complexities and our processes that are fit for a much larger company versus a company our size.
Our go to market approach has put a lot of responsibility in our distributors now has given them roles that we are better suited for such as Bradley marketing and also connectivity with large accounts.
Overall, we have been very cost focus at the expense I'm missing profitable opportunities.
That's partly attributable to our slow decision, making where the approach has been very cautious versus taking required actions.
With all these factors in mind, we have developed our new operating model centered on our customers and how we can contribute to their success.
Fortunately, we already have most of the debate capabilities to add value to our customers as an innovation leader.
But we have to embrace a mindset of being the first of the market and the cultural willingness to embrace change.
We will continue building on our brand and our innovation will augment our position the market as the resilient authority.
We will use our innovation in all channels, including in private label programs.
We're simplifying our processes to fit the size of our company to become more agile reliable and competitive.
We are realigning our go to market model to operate in every channel to better reach underserved areas such as builder multifamily in some key national and global accounts.
We're approaching market opportunities from mindset of profitable growth and generating returns where flattening organizations to streamline decision, making so that we can execute with speed.
Our addressable market is expanding quickly no under new bring model, we will position ourselves to lead the category.
But the backdrop of slide 11, there are five key points, we want you to take away from today.
We have a large addressable market opportunity in both commercial and residential.
We are well positioned and geographic markets and product categories.
We have a clear understanding of our us performance issues.
We have a focused strategy to transform and modernize our business.
And we will become more agile faster growing and more profitable company.
On slide 12 look in North America, which is our largest market. The residual category has grown at a double digit pace since 2015 led by Alvita.
In commercial we operate in a 7 billion dollar market.
Our core products, including Lv, TVC, t. and vinyl sheet directly touched $1.6 billion of that.
Now let me see in particular is taking share from all categories and providing a strong alternatives to carpet rubber manolo and ceramic so the size the resilient commercial market is expanding rapidly.
The North American residential market is about twice the size of commercial at roughly $13 billion. We directly operated in LDC vinyl sheet vinyl tile, representing just over $3 billion or the market.
Similar to commercial LBC offers a highly competitive alternatives to carpet would laminate and ceramic expanding the Brazilian market in residential as well.
Our brand Diamond 10, and other innovations along with our domestic manufacturing.
For faster service provider solid bedrock to build upon.
We also have a robust non PVC offering that were beginning to promote in more places, which is especially important to our commercial end users and beyond North America, we have a global footprint to serve customers very well across Asia and Australia.
Which we have seen some our strongest performing markets in recent years.
Our execution has been in consistent in the past, but the foundation is still strong and the opportunity is meaningful.
[noise] moving off the two our positioning on slide 14.
Looking at our products, we're going to focus on rebuilding the categories, where we operate currently.
We believe that being the expert and resilient in every aspect is a significant advantage and allows us to dedicate our efforts to the fastest growing flooring segment.
We're clearly focused on growing our mix of LPTA, but overall, we're in the right categories for a period resilient company.
With all the relate ancillary products to support total solutions for clients.
We are well positioned within our markets and product categories.
Our focus is to excel and the geographic markets across North America, Asia, Australia, where we operate today by expanding our channels.
Penetrate deeper and investing relationship there is significant untapped potential in the market.
We already operate it so that's our focus from next three years.
We're working to improve our product line and we're attracting great talent as we build out our sales team at the same time as I mentioned earlier, we need to be flexible with certain customers to include the right private label programs. So we can maximize our appeal in the marketplace and adapt our offering to partners they have their own branding strategy.
On slide 15.
Even with the growth of private label programs, a brand remains strong and desirable.
We are encouraged by the continued recognition of Armstrong flooring in the industry.
With a strong record of product and brand awards backed by strong prior performance in quality.
As we considered the required actions to get our company back on sound footing.
Strong industry reputation provides a solid launching pad to reopen doors and participate in new opportunities.
I discussed earlier, the limitations of our short term cost focus operating model.
On slide 17, I'll explain how those factors have directly contributed to our performance issues in the U.S. as reflected in our financial results in recent years.
These companies specific performance challenges are also reflected in the current depress valuation multiple well below our peers.
From all angles. It is clear that our previous strategy was not sustainable.
The drivers are of top and bottom line underperformance can be group into four key areas regression in multiple channels.
A slow turning product portfolio.
Underutilized assets in complex infrastructure.
Prior decisions to pullback sales and marketing efforts through the transfer of branding decisions to distributor, particularly in residential have deteriorate our position in the market.
These actions have placed responsibility distributors, where they are not correctly equipped to represent us.
This has put us further from the people that installed the floors as well as the people that on the spaces and make final purchase decisions.
In other cases, we have built relationship with end users, but forcing them to go through distribution was that aligned with their needs has excess.
The products that we have developed have largely been well received by the market, but we have unfortunately been too slow to market and did not reflect them frequently enough.
As an example, we have been many months behind adopting new Lv technologies like WPC loose Lake and Richard core.
This is reflected in our sales performance given that only 10% of our sales are coming from products. We have launched in the past 24 months.
Ratio based on cycle times, and fashion, the flooring industry should be closer to twice that level. So there's significant opportunity for us to improve realized process and to be more fashionable enrollment.
And our manufacturing we have multiple production lines that are underutilized.
We've already taken some steps to address this but our overall manufacturing footprint needs to be rebalanced to better reflect the trends of our product categories.
We will discuss this further and address some of these actions momentarily.
When you look at our processes and infrastructure. This clear that we are too complex.
As an example is the fact that we still have multiple customized T systems layered on top of S&P.
Some of which are over 20 years old.
When we talk about monetization as a clear example, where self help initiatives will allow us to process data uniformly eliminate non value added devotees make decisions faster and implement action sufficiently to be more agile and responsive with customers.
All in we see significant opportunities to accelerate growth and improved profitability as we address these performance issue, which will improve our returns.
Moving to slide 19.
We have put in place the strategic framework to transform modernize our business.
We have three critical focus areas first and foremost we're in closer to our customer to expand our business.
Second we have started simplifying our product offering in organization. So we can become more competitive and finally, we're putting in place or stricken that strengthening the many of these capabilities to compete at a higher level and make ourselves more appealing.
Our new customer oriented operating model will allow us to more effectively accomplish all three objectives.
On slide 20.
Our expansion strategy is to gain share where we operate in significantly expand our presence in underserved markets.
To reach more customer wedding direct sales representation to connect with large independent retailers.
Key commercial contractors and national accounts on large foreign contracts.
National in large regional customers expect to work directly with manufacturers on any sizable project.
We have already begun to work directly service some of these customers such as the national floor covering association membership and large customer commercial end users and they are excited to partner with us.
Along those same lines, the builder and multifamily channels have changed significantly with the group of large contractors performing an increasing amount of the installation services.
Therefore, many builders have similar expectations of interacting directly with the manufacturer as they operate in national or Super regional level were wrapping up our selling efforts to restore that direct connectivity in order to meet their needs in the over on the larger scale.
Big box National accounts. These channels are getting more and more sophisticated with their supply chain.
We need to be part of the discussion as they develop their long term roadmaps. So we can contribute to their success.
We also need to work with our distribution network to insert sure the selling experience is uniform across the country with the high standards our customer expect.
Well corn activities between Fi in our distributor network will create best in class customer experience and cost efficiency, there will be hard for our competitors to replicate.
Another expansion considerations that there are some verticals that we do not touch directly such as hospitality corporate our government due to the product offerings sourcing or marketing.
All those merchant verticals represent ONTAP upside potential for us.
Overall due to our cost focus in recent years, we have dramatically under vested in our marketing capabilities digital tools merchandising and brand awareness across the industry.
Fortunately, we're still in number one recognized brand in Florida, and the demand creation opportunities within our addressable markets are meaningful.
It is our responsibility to energize the marketplace to make sure that the appeal of our brand goes to every demographic over the long term.
On slide 21, the simplification optimization of our business is critical is a critical step for us to execute better throughout our organization.
In regards to our product portfolio, we have the advantage of being in LDC, which is taking share from most other flooring category.
We also have a third of our business and stable categories, such as commercial sheet and residential style, where we have opportunities to take share.
And our mature categories, such as VCP in residential sheet. The goal is to optimize our product in footprint to ensure that we can have a store sustainable cash in order to fund our growth categories.
We are in the right categories, but we need to improve our waiting towards the faster growing categories.
This means we need to increase our SK you mix towards LBC and reduce the offering and our VCT in residential sheet progress products, which collectively represent almost half a rescue use.
This is important because this portfolio waiting as heavily influenced our working capital commitments and our allocation of our sales and marketing spend.
Which has not reflected the direction the market.
Going forward, our marketing supply chain and design and innovation will be weighted heavily towards the growing categories.
And we'll make sure that our marketing investments and capital investments are also in the same attract attractive categories.
We expect our waiting to shift to LBC over the next 24 months as we eliminate costly in slow turning products.
As mentioned earlier, where often good start with 20% of RFK use discontinued.
On slide 22.
Portfolio balance rebalancing is aligned with a broader objective to refocus our resources to simplify processes and optimize operations.
Our system need significant more to integrate and make our sales more agile.
We believe that as we modernize ourselves overtime, we can redeploy SG any dollars into more productive selling efforts and brand building.
Furthermore, at a customer level, there's significant opportunity for us to improve the ease of doing business with Armstrong flooring.
This not only through our go to market enhancements also emanating back and forth between departments, providing customers with a simplified pricing structure and digitizing the customer experience where possible to get our company up to industry standards.
Actresses.
Theres also additional overhead that can be address.
Sure.
Headquarters, where we can reduce our lease costs and use those savings to invest in the business or just make ourselves more profitable.
There are also opportunities or manufacturing footprint.
Important to note that each of our six domestic plants produce a different range of products in certain capabilities at some plan still makes sense within our broader facility network.
We're going through the process one by one evaluating every component of each plant searching for the best use case or value for the to the company.
The line with that as announced in November we consolidate all of our felt sheet production to one facility to improve our cost profile.
As previously previously disclosed we are addressing monetizing our southgate facility land portfolio in California, as the demographics of that region have become more favorable in recent years addition to these actions were consolidating our commercial VCT from three plants to two plants in Mississippi in Illinois.
Options remain on the table to optimize the footprint in the long term. So we can make ourselves more efficient.
On slide 23, our third pillar is district and the core of our organization.
This slice of direct reflection of the migration of our company from internally focused model the customer centric model.
The essential takeaway is that where revamping modernizing all processes workstream product designs productivity and culture to raise the bar and ability to service customers.
These investments will allow us to redeploy funding to our customer facing areas and drive further growth.
On slide 24, we have an exciting pipeline of innovative products that we need to bring to market faster.
As mentioned, we are focused on lead the industry being nimble and getting paid for the products that customers want.
We're innovating, where we believe we can create value for our customers while generating strong returns.
In addition to aesthetics appeal features such as acoustic in air quality are attracting attention every flooring category.
Non PVC alternatives are gaining traction we're listening to customers and we're working to meet their evolving flooring needs. This is a critical step to rebalancing our product portfolio for growth.
Some examples include rejuvenation restore which has been well received the healthcare industry for it sound and wellness benefits.
When we look forward to more launches in coming quarters.
On slide 25, I'd like to talk to you how we aligning the organization to successfully follow the roadmap.
We have a lot of exciting opportunities and it's critical that we put in place the Ryan Sam structure to reinforce the changes necessary to drive shareholder value.
Our annual incentive programs will now be tied to delivery of sales and gross profit.
Which is where the biggest challenge had been in recent years.
We will also require minimal adjusted EBITDA to ensure that we execute investment prudently.
Optimal grow well growth will be foundation of our earnings which would improve our valuation and accordingly long term sent targets, which now includes substantial share price improvements to restore the company to a more appropriate level.
These are the right measures to put in place to ensure that our management team that's focused on creating long term shareholder value.
Now I'll turn the call over to Doug to review, our near term financial summary, and detail our path to become a leaner faster growing and more profitable company.
Thank you Michelle I'll begin with the revenue drivers to support our roadmap on slide 27.
As we look to reengage with our customers to drive topline growth. There are several factors that we have taken into account first we have established relationships in key commercial verticals, where we will continue to invest in addition, we will partner with major customers such as the builder multifamily channel to deliver the consistent services they need to run their businesses.
Finally, all of these customers already know interest Armstrong flooring. So it is important that we stay current in our product offering and time to market. It all comes down to providing the best products and services that our customers want and we believe this will enable us to grow sales.
Looking at Slide 28, our incremental direct sales model will come with higher margins, but there are other initiatives, we will execute on to improve our gross profit.
First as Michelle mentioned earlier, we have taken action at two plants to consolidate production and increase our utilization. We also began a strategic assessment of our southgate facility to explore monetizing that asset.
In addition, as we discussed on our last earnings call. We're working to update our pricing approach. This is a sensitive topic for competitive reasons, but at a high level, we are reducing complexity for both our customers and ourselves.
We're simplifying our product offering in declining categories, particularly residential sheet, and VCT, which will allow us to run our plants more efficiently and raise concerns and raised customer satisfaction.
Finally, we are developing new logistics capabilities to better serve our customers.
In many cases, our current logistics approaches based on capabilities that are outdated and the technological developments in that space provide us with the opportunity to simultaneously improve our service levels reliability threed and grow margins.
When we benchmarked ourselves with the competition.
We believe that a API as a long way from the gross margin that a business with our brand recognition and commercial mix should have our improvement plan focuses on realizing that significant potential.
Turning to SGN, a on slide 29 to facilitate the various improvements we have discussed we are looking to make several key investments first we need to put the right sales team in place that can serve our existing customers as well as direct account. So we don't currently do business with.
We also need to invest wisely and marketing our brand, especially with younger generations, where there is a significant market opportunity.
Our business transformation will be helped by two important factors.
First we are looking to reduce the lease expense for corporate headquarters.
Second we have aligned our incentive structure to focus on profitable growth. So that we can set the foundation for enhanced margins.
Furthermore, as we mentioned previously many of our processes and systems, our old and inefficient, which not only increases cost, but also adds complexity. When implication is that our control environment. It's very complex and as you will see in our 10-K filing we identified in reported a material weakness in internal controls related to information technology General.
Controls around specific type of customer rebate program that we use.
I can tell you that there have been no misstatements identified in the financial statements as a result of these internal control deficiencies.
Remediation efforts have begun but the material weakness will not be considered remediated until the applicable controls operate for sufficient period of time and we conclude through testing that the controls are operating effectively.
We expect the remediation to be completed by the end of fiscal 2020.
As we modernize our systems and processes. We expect this will further improve our control environment and allow us to capture operating efficiencies, helping us to more effectively manage costs.
Regard to working capital in Capex on Slide 30, there are a few key areas we are focused on.
First as we discussed earlier on the call, we're looking to reduce inventory and declining categories and build inventory in growing categories.
We also expect to increase our receivables as we sell more product directly to retailers and contractors in some cases with longer terms than our current average.
We're also looking to initiate targeted capital investments in areas, such as recycling capabilities to meet customer needs and reduce cost as well as backend systems to enable greater operating efficiencies.
We expect to facilitate these key investments in two ways first we are looking to monetize noncore assets such as the Southgate facility, we mentioned earlier.
Also we have closed on a new 100 million dollar ABL facility, which will provide us with improved operating flexibility to invest where we need to in order to grow our business.
Looking at our financial path forward on slide 31, the challenges we're facing have been building overtime and we know that it will require a lot of hard work to improve our results.
We have already begun to take action in some areas like improving the reach and capabilities of our sales team.
Reaction of large residential and commercial customers has been very positive.
Accordingly in 2020, we expect to see improvements in our topline from both volume and price mix as well as improvements in gross profit margin.
These improvements will be offset in 2020 by the investments required to create a long term growth engine.
In addition, certain 2019 SGN a benefits that we discussed on our previous call will not repeat in 2020.
Therefore, we expect a significant percentage decline in our adjusted EBITDA dollars end margin in 2020 compared to 2019.
As we continue to make meaningful progress on our initiatives the benefits will grow and we expect our EBITDA dollars to be higher in 2021 than 2019, driven by topline growth and productivity generated by our actions.
We also expect that our EBITDA margin will improve in 2021 compared to 2019 and each their year thereafter, as accretive initiatives and investments drive meaningful benefits to results.
Given our current low valuation it will be important that we improved the fundamental helped and trajectory of the company and this will be reflected in top line and gross profit improvements.
We will be judicious in our pace of investments and pay particular attention to cash usage.
We expect to consume cash over the next two years. However, we believe that we can monetize noncore assets to help fund our growth initiatives as we move into 2022 and beyond we expect to once again generate positive free cash flow as we restore EBITDA to healthy levels.
I'll fight some factors to keep in mind for the first quarter. The 2019, SGN a benefits that I referenced earlier total around $20 million with roughly two thirds of that in the first half of 2019 and one third in the second half of 2019.
Separately, we directly serve the trying to market and also have portions of our supply chain in Asia.
The Corona virus epidemic is truly tragic and we're doing all we can to keep our regional employee safe.
Based on what we know so far in the first quarter 2020, we expect to see a six to 8 million dollar unfavorable impact to sales and a two to 3 million dollar adverse EBITDA impact due to lower sales in China.
Beyond the first quarter, we're likely to experience some supply chain disruptions for us operations with some but not all of our suppliers having started production again.
Transportation is improving and our own plant is running but not yet a full capacity sense all our employees have not yet returned.
We are working to fight alternative products in the U.S market, which should help to offset part of the impact.
That said the full Corona virus impact to our 2020 performance will depend on the magnitude and duration of this epidemic which remains unclear.
Like any business transformation, we expect that there will be challenges along the way and it is important for us to stay focused on creating long term shareholder value rather than managing to the quarter.
Accordingly, beginning in 2020, we will no longer provide annual guidance ranges as we have in the past instead, we will provide updates on the key metrics that are important to delivering our strategic plan.
In closing we believe the steps, we're taking should create enhancements that will allow us to drive value for our shareholders in coming years.
With that ill now turn the call back over to Michel for closing remarks on slide 32.
Thank you Doug.
We have provide you with a clear roadmap for our company in coming years.
Begins with repositioning our culture for constant improvement and empowerment.
To reiterate the core enhancement of our new operating model, we are putting the customer first by aligning our services to meet their needs in the ways. They want.
We are realigning our go to market model to operate in every channel to better reach underserved areas, such as builder multifamily and some caon national and global accounts.
Becoming an industry leader in product innovation to differentiate the Armstrong flooring brand, while carefully evaluating our participation in unbranded or private label opportunities.
Simplifying processes to fit the size of our company to become more competitive inefficient.
Implementing system changes across our plant network that will allow us to improve our operations drive down costs and reignite organic growth.
And finally in investing thoughtfully with a return focus mindset supported by improved incentive structure.
We are confident these actions will bring stronger performance to organization, the coming years and should allow to generate greater value for shareholders in the future.
In conclusion and to reinforce the key points, we want you to take away from today's call. We believe we're laying a sturdy foundation to build on our growth pillars of expanding simplifying and strengthening our business in the years ahead.
We have a large and addressable market opportunity in the commercial and residential flooring spaces.
Combined with solid positioning in attractive geographies and product categories in a market leading brand.
I'm confident that our company will become leaner more agile and more profitable through our multiyear roadmap to transform and modernize the way we do business.
With the full support of the board our team is highly aligned with our long term plan and incentives to get it done.
Thank you again for joining us today, and we look forward to updating you on our progress during our next quarterly call. Operator, Please open the lines for questions.
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Okay.
Our first question is from Michael Wood with Nomura Instinet. Please proceed.
Hi, good morning, Thanks for outlining the strategic plan.
On that topic can you talk about the capex in SG investment thats needed as well as just management capacity in general it sounds like you're doing a lot and I've seen companies in the past move.
Too quickly and suffering some short term disruption. So just if you can talk about how you're going to manage all these changes to ensure the relationships remain steady.
So hey, Mike. Thank you for the question this Michel I'll take the management bandwidth one.
I think we have a key set of priorities listed to your point I think we're going through a process of trios, what makes sense and what does not make sense and were gone off priorities, obviously engaging with customers is right on top of that.
And I think thats to correct, our topline growth in our gross margin growth.
So those are first and foremost.
I would say, there's a lot of we're doing a lot of things, but also it everything also ties together.
To support the go to market. So we're hopeful and we'd like to also the early feedback we're getting on those activities, but we're very conscious of that and watching that carefully to make sure. We put our energies on the areas that have the most impact so.
So in we'll adjust accordingly, so we're very much on top of that all the way through and we brought in some new talent also that helps us execute in these areas.
So we're complementing the team with the right skill set to execute these activity. So I'll turn it over to Doug for the SGN and capital component Yeah, Mike as we think about where we're going to invest clearly the top line has been the challenge historically and Thats, what we want to focus on.
Driving some improvement there in the gross profit which is why the.
SG any increases that we've been talking about have really been focused in the go to market space Places, where we can get a quick payback.
We're cognizant of.
The constraints that we have both for time and money on these investments and so we're being judicious in the way that we pay stem that same goes for Capex, Michele and I look at each capital project as it comes up and make that decision of is this something that is going to have a quick payback for us or is this something that we need to delay until a future date.
Okay, and you know as you've reached out like you you talked about in prior calls to distributors to help shape. Your plan can you share with us some of the the top feedback that you received in terms of what they were asking for it to help.
Stabilizer improve wallet distribution.
We've had very candid conversation with our distributors I must say I'm very happy with their support.
Some decisions they do realize in some areas. We they were not participating and we were not participating in our prior go to market strategy.
So they've been.
As we've been very open with them Theyve been very supportive in this area also I'm happy to say that as we're introducing new products. They have been supportive in making commitments to stock.
In this area. So I think the and the other pieces, we made some key investments in people and product that they recognize the no and they are encouraged by what we're doing product wise I think let's face it for them in us overall and the great product line helps cures a lot of challenges so they're very happy on the direction were.
On the product side in particular.
We keep evolving we keep discussing with them things we can help each other.
I think we're both mutually important to each other so we need to be accretive and supportive of that and Im look forward. What we can accomplish this year in the years to come.
Great just if I can sneak one more and win win yes, I know it's early but when your strategy is complete do you have any sense at this point in terms of what you'd be targeting for a longer term.
EBIT margin goal.
Thank you I think long I think theres been this question on the company.
When we reach a 10% plus EBITDA and I think I mentioned earlier and the previous call I'm totally convinced that could be done or that better we have some issues we need to six now we're addressing those.
Theres nothing limiting us from doing that but unfortunately that hasn't been the past the company in the past and we're addressing that in that can definitely be done or better.
Okay go next question.
Our next question is from Justin sphere, with Zelman and Associates. Please proceed.
You guys I just wanted to make sure I understood. The answered the previous question in terms of yesterday investment.
Growth versus 2019 required and your strategic plan for 2020 can you give us some kind of a baseline to think about for the initiatives because recognizing that I know, there's a lot of moving parts, but the head count initiatives that you have what kind of as an investment growth are you expecting year over year.
We're not providing specific details on the on the magnitude of them what I will tell you is that.
The SGN the investments that we make will be self funding. This year. So as we add additional sales folks or other roles like that we expect that will have.
Gross margin improvement.
Offset the cost.
Okay, and then in terms of the.
The drive towards LPG and your mix of business, which is what will be required from a sourcing standpoint.
Drive towards that improved mix there recognizing that you do produce produce flexible LPT internally.
We do so we produce flex and Thats definitely with the current circumstances in the marketplace, that's a big plus.
We also have key relationships outside of China that week, we're leveraging to bring product in also so I think it's going to be combination of rigid in loosely go through.
So we have the opportunity to do some of that here soon so we're working.
Through that in I think that's making sure we're using our assets.
For the most profitable type products and I think the other thing we're doing we're also investing in working capital when we started this process.
We adjusted some inventory levels of areas, we were not participating the way we should and so we have made some net working capital investments starting in the fourth quarter and that will help us for the rest of this year also so we we started adjusting that mix in the fourth quarter, which will benefit us for 2020.
Okay. Okay, and then in terms of and I just in terms of the cash generation expectations and I know you're looking for out outlays in the next couple of years problem, possibly but but what are the leverage requirements of your refinance credit facility, just give us a sense for any.
Any risks there that we need to be aware of.
The.
ABL structure is really tied more to.
Availability.
And your mail ability on the facility. So it's a 100 million dollar facility and as a standard with a lot of these asset based loans, if you get to the point, where you've used all but.
15% or somewhere in that range, that's where it becomes problematic.
And then last question for me, just the near and intermediate term impact your portfolio from the removal of click LPTA tariff and separately, maybe help us understand what went into your map on the Corona virus impact.
Sure so the.
The impact of the exclusion on the click products.
It's it's got kind of at two prong effect, one is that we've been able to recognize lower import costs.
But then we've also a turnaround for customers and provided that benefit back to them. So we're still working through that the exact details and this program is scheduled the current according to the administration to end in August So I'd have to see how that dynamic plays out.
Grown on the krona virus, what we've seen as that our China operations were were down for an extended period given government restrictions on travel our plant is now up and running not at full capacity, but but up and running.
And so.
The overall Chinese economy, there's not a lot of construction activity going on right now obviously and so that's where we've seen the main impact as I mentioned in earlier, we do expect that there will be some impact to sourcing product into the us from China.
We're still working with our suppliers to understand where theyre at in there.
Ramp ups and when we can start getting product and in the meantime, we're looking at domestic alternatives that we can sell in the marketplace to help our customers meet that needs and deadlines that they have.
I would add that transportation as a key issue we've been fortunate that our team have secured sailings and we are getting product from both our vendors and our facility. So that's definitely a positive our team has done a great job.
With that challenge show.
So we're we're staying on top of the daily in the focused on it and but the team has responded very very well.
Under difficult circumstances.
I appreciate it guys. Thank you very much.
Thanks, Justin.
As a reminder to star one on your telephone keypad, if he would like to ask the question. We will displays for a brief moment for final question.
One.
We have no further questions at this time I would like to turn the conference back over to Michelle for closing remarks.
Thank you everyone for joining us today, we appreciate your interest in Armstrong flooring, and we look forward to updating you in the next chapter of Armstrong for future flooring on future calls. Thank you very much.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.