Q1 2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Armstrong World Industries incorporated first quarter 2020 earnings Conference call. At this time, all participants are not listen only mode. After the speaker presentation it'll be a question and answer session ask a question. During this session you want me to press Star one.

On your telephone.

We are quite any further research then please press star zero.

I'd now like turn the conference just because today, Tom waters, Vice President of corporate Finance. Please go ahead sorry.

Thank you good morning and welcome.

Please note that members of the media been invited to listen to this call and the coal is being broadcast live on our website Armstrong ceilings dot com.

With me on the call. This morning, a victory result, our CEO and Brian Macneal, our CFO hopefully you've seen our press release this morning, and both the release on the presentation, Brian will reference during this call are posted on our website under Investor Relations section.

I advise you that during this call we will be making forward looking statements that involve risks and uncertainties actual outcomes may differ materially from those are expected in Florida.

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 days there might be undertakes no obligation to update any forward looking statement beyond what is required by applicable securities laws.

In addition, a discussion of operating performance will include non-GAAP financial measures within the meaning of FCC regulation G.

A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix a presentation.

Both are available on our website.

I'll turn the call over there.

Thanks, Tom and good morning, everyone sees our unusual circumstances that we're all experiencing.

I want to begin by saying that I hope that everyone. On this call your families. In your colleagues are all safe and well.

Safety is always been a non negotiable operating principle that Armstrong and cobot 19 has challenged us to deliver on this principle.

And I'm happy to report our teams are delivering.

They're working systematically collaboratively with greater agility.

And finding ways to adapt our processes to enable social distancing and to operate within CDC guidelines. Among other things we have altered crewing adjusted line speeds installed barriers and increase the frequency with which we cleaner facilities.

And our corporate and sales staffs are working from home.

And our most recent board meeting successfully health virtually.

We have instituted our emergency Lee process, so that employees, who need time to deal with a cobot 19 issues well habit.

Armstrong as a strong company with a 160 year history.

And experienced leadership team a strong balance sheet and a deep set of core values on strongest whether crisis in the past and we will whether this one as well.

We are committed to keeping our employee safe.

Supporting our customers distribution partners suppliers and the communities in which we operate.

Our long term strategy to drive shareholder value was unchanged and we will continue even during what is sure to be a challenging 2020.

Even within this challenging environment, we will continue to expand mineral fiber and you'd be.

Primarily through innovation and improved mix.

We continue to grow architectural specialties share.

And we'll continue to accelerate penetration into the specialties business through M&A activity.

I continue to drive productivity gains.

And not only to continue our digitalization initiatives, but find ways to accelerate their use and deploying it as we become.

Easiest building products company did do business with.

And of course, we will maintain a prudent balance sheet and balanced capital deployment policy.

This morning, I'll spend the majority of my prepared remarks on the impact of the virus.

But I do want to briefly touch on our first quarter financial results and what we're saying so far in April.

Then I'll update you on where we are today, what we expect.

And how our longer term outlook is developing.

First quarter sales were up 3% versus 29 team.

Adjusted EBITDA was up 5% and margins expanded in the quarter.

Sales in the second half of March slowed in the geography as you would expect New York Boston Seattle.

Some other severely affected cities.

These regional headwinds were partially offset by the acceleration of shipments to a central health care projects and stronger sales in Latin America retail channel and Canada as we expected.

The strong sales of Latin American the retail channel coupled with significant weakness in premium markets like New York City and Boston.

I had a significant impacts on the overall mix and drove negative easy in the quarter.

Hi, This is an unusual occurrence for Armstrong, so I want to take a moment to be clear that this channel and the geographic swing does not represent a changing course to our overall consistent you'd be growth.

I also remind you that we're keeping a very strongly you'd be quarter in 29 team, where we delivered 10% growth.

So I'm confident that we will return to positive they use these this year progresses.

In the quarter, we also incurred expenses responding to the safety requirements of the virus.

And the fact that our production at the Marietta, Pennsylvania facility was briefly stops until the state determined that the plant plays a critical role in the manufacturing supply of goods necessary to sustain life, namely health care facilities.

These items overall had a modest negative impact on earnings.

Now sales in April have clearly been affected by the various state local shelter in place requirements and their ripple effects.

Based on shipments month to date, we currently anticipate that April sales will be down in the range of 25% to 30%.

Weakness was apparent in all channels and all geography.

Relative strength in Florida, Illinois.

In North Carolina.

Well, California, New York, and Massachusetts, particularly so.

Based on orders and discussions with distributors in contracted we believe may and June will improve sequentially.

And currently we're tracking jobs that have been delayed and world and we are focused on serving them effectively when they get started.

Including in these delays or a few large transportation projects that will impact architectural specialties in the second half of the year.

Overall, we expect the architectural specialty business to outperform the market in 2020.

We believe the second quarter will be the trough of operating activity for the year.

And we're managing our production in our inventory accordingly.

Wow clarity is limited we are aligned with most of the economic and sector specific forecast that we've seen and expect a third into fourth quarter can be sequentially better.

The situation remains fluid. So we believe it's prudent withdraw previously communicated 2020 guidance.

At this moment older plants or distribution centers are up and running but the exception of our recently acquired MRK facility.

We continue to work to optimize our production and shipping operations, but then the new safety constraints.

And the teams are getting better on a daily basis.

We're in close contact with our suppliers to ensure their ability to deliver the materials and services necessary for our operations and let's just logistics and as America's only company, we have limited overseas supply chain exposure.

And have not experienced any supply disruptions thus far.

We're carefully monitoring fish finished goods inventory with a priority on solutions for hospitals and health care facilities.

It was just recently received urgent what class for products and health care facilities in New York City.

Our teams that steel ceilings are plant Pensacola, Florida in or wave group in Aberdeen.

We are able to expedite orders for the Mt Sinai.

St Luke's hospital conversion and for the Bronx, North Central Hospital expansion.

These are two great accomplishments and there are many more.

Our management teams are utilizing a robust array of digital interactive communication tools to stay closely engaged with their teams.

Our sales and design staff for me connected customers continued to work on ongoing your perspective projects.

And I'm sure we have a three a policy any device anywhere anytime.

And this has been in place for four years now in our employees are comfortably working remotely and in a manner that is transparent to customers if anything interactions with architects and designers has increased over the past smart.

The breadth of custom technology, we now have available on our digital platform is more important than ever. We are fortunate have started our digital journey. When we did as we have a suite of Armstrong specific digital solutions available to our customers.

I have no doubt that these tools, which I've talked to about in the past including.

Customer on line, one quote quote order and the recently launched project works are providing a differentiated capability to serve our distributor contractor partners and this unique environment.

As a matter of normal practice, we annually create multiple recession scenario response plants and while the rate in piece of this situation was not anticipated.

We have levers identified and roles and responsibilities aside and are executing against these plants.

We are taking steps to manage expenses preserve our cash, including cutting s. DNA and deferring capital expenditures.

And temporarily suspending our share repurchase program.

Our regular quarterly dividend has not affected and we remain in the market for strategic and financially attractive acquisition opportunities.

So at this point, let me pause and turn the call over to Brian for more detailed review of our first quarter results and then I will close by sharing my preliminary views on some of the longer term implications of this pandemic.

Brian.

Thank you Nick good morning, everyone on the call and I ethics thoughts that I hope everyone is healthy and safe.

Today, I will be dealing our first quarter results, but before I begin as a friendly reminder, I'll be referring to the slides available on our website and slide three details our faces a presentation.

Beginning on slide four for our first quarter results sales that you wanted $49 million were up 3% versus prior year.

Adjusted EBITDA increased 5% and margins expand it 90 basis points.

Adjusted diluted earnings per share of a dollar intense French grew 10% driven by increased earnings reduced interest expense and a lower share count.

Adjusted free cash flow improved by $18 million were 106% over the prior year.

Given our focus on cash and liquidity, we've added additional metrics to page four.

Our cash balance of $147 million $927 million lower than last year.

While our revolver retail ability of $305 million is up $105 million as result of our refinancing in September 2018.

This positions us with $452 million available liquidity.

Net debt is $21 million higher than last year, given by share repurchase activity capital expenditures dividend payments and by the acquisition of MRK.

As of the quarter aim our net debt to EBITDA leverage is 1.5 times versus 2.1 times last year as calculated under the terms of our credit agreement.

Our covenant threshold is 3.75 times, so we have considerable headwinds.

In the quarter, we repurchased $34 million in stock purchase it spending repurchase activity to preserve liquidity in light of the code at 19 situation.

Since the inception or the repurchase program, we've bought back 9.6 million shares a cost of $596 million for an average price of 62013 cents.

As of the quarter end, we had $104 million remaining under our share repurchase program.

Turning now to slide five adjusted EBITDA increased 5%.

The architectural specialty segment drove volume growth, including the year on year impact of the AC G.I. acquisition, which closed in March 20 Nike.

He was a headwind in the corner.

And I will provide additional details when I review the mineral fiber segment.

Input costs are favorable in the quarter, but offset by inventory valuations as inventories declined at the ended the quarter.

We continue to get strong manufacturing poor performance from our plants aided by our ongoing digitalization investments.

As gene a benefit it year over year due to lower incentive in deferred compensation expenses.

And Weve equity earnings grew versus prior year.

Slide six shows adjusted free cash flow performance in the quarter versus the first quarter 2018.

Cash from operations was up $8 million Promotionally driven by higher earnings.

Capital expenditures were whoever year on year.

But do not yet reflect the impact of the delays we've implemented as result of Cobiz 19.

Interest expense was lower as a result ever refinancing in September 2019.

We used cash distribution was down slightly due to the year on your timing of capital expenditures in working capital changes.

Slide seven begins our segment reporting.

In the quarter mineral fiber sales grew 1% versus prior year.

Overall volumes is positive as growth in Latin America, the Big box channel in Canada, offset me quoted weakness in our U.S. commercial.

He was negative driven by non product mix factors.

This stuff the channel geographic shifts that negatively impacted ASV from both a sales and earnings perspective.

And I'll remind you that easy last year was up 10% in the first quarter.

So we're wrapping a strong year ago period.

Within the core commercial business, we continue to see above market performance from our higher and products, including total twosix sustain and recently introduced the bill.

In the quarter price over input inflation was once again positive.

As we move through the year and comparisons normalize you're confident that easy well once again be positive.

Given the current inflationary backdrop likely comprised of more mix then like for like prints.

Adjusted EBITDA was up $5 million were 6% versus prior year as margins of 44% expanded 230 basis points from prior year.

Strong performance from our manufacturing operations with the key driver.

DNA was lower due primarily to your and your incentive compensation expenses, including our deferred compensation program.

First quarter SDMA spending was not impacted by the reductions we are now implementing as a result of the covert 19 situation.

Moving to architectural specialty segment on slide eight quarterly sales grew 12% to $51 million.

As he outlook on our last earnings call, we expect the tough comparisons in the quarter as Q1 2019 benefited from large transportation projects that we knew would not reoccur.

Most of the sales growth was driven by EUR 2019 acquisition or they see Jive.

But as we've discussed this is not is not a purely apples to apples comparison as we've moved previously source third party wood product sales to instantly.

On a comparable basis sales of our base business was up modestly.

Adjusted EBITDA was flat in the quarter as sales growth was offset by cost associated with acquired businesses and continued investment.

We continue to see growth in the costing and premium range of our ask product portfolio.

And we did not experience any sourcing issues in our standard protocol.

Acquisition integration continues to go well no order intake in a quarter was strong.

Slide nine is where we would normally update you on our guidance for the year.

However, due to the unprecedented nature to get 19.

And the subsequent lack of clarity in the marketplace, we're withdrawing our previously issued guidance.

We're also temporarily replacing our past practice of specific financial guidance with commentary on actions that we have greater control over it.

And confidence in Adobe to live in 2020.

First we will do all the weekend to ensuring the safety of our employees service, our customers and support the communities in which we operate.

We're taking steps to ensure we think servicing spike in demand you're seeing in health care projects, while offsetting weakness in other end markets.

Second our mineral fiber business will continue to earn like for like price rather than inflation through service quality and innovation.

Just as we had for the past decade, including during the financial Globe Global financial crisis.

Our innovative products will continue to drive mix gains and contribute to an easy.

The architectural specialties business will organically Gainshare and as Dick mentioned, we will remain open for business for attractive strategic acquisitions.

Our manufacturing operations teams will continue to drive productivity gains.

As they demonstrated in the first quarter, and we're taking actions to prudently reduce manufacturing and as teenage spending.

Third we are temporarily suspending our share repurchase program to preserve cash.

We look forward to restoring it when the outlook becomes more certain.

Our regular quarterly dividend remains in place I Board declared another distribution just last week.

Fourth given the strong free cash flow generation of this business and our expectation to see favorability in every element of free cash flow generation below EBITDA, we expected delivery free cash flow margin in the range of 22% to 25% of sales.

We are implementing steps to delay capital expenditures to a range of 45 million to $55 million down from the $71 million in 2019.

Yeah, we're taking advantage of provisions of the cares Act it allows us to defer that $6 million, a payroll taxes into future years.

We've also accelerated our 2019 federal tax filing to allow us to receive a 28 million dollar refund associated with the sale, but international business.

Consistent with past practices, we will exclude this when we discuss operational adjusted free cash flow performance.

That said, it's still $28 million of cash.

Oh these actions give us confidence that barring a truly unforeseen downturn, we will generate a 22% to 25% adjusted free cash flow margin.

Slide 10 comes from our Investor presentation, and I wanted to highlighted here as it clearly illustrates the power of our cash generation capability.

And our ability to manage through recessionary environments, including the global financial crisis.

This past performance informs our confidence in delivering a 22% to 25% adjusted free cash free cash flow margin in 20 Twond.

Finally, as we previewed last quarter, we executed a pension risk transfer moving over a billion dollars a pension obligations related to approximately 10000 retirees.

As a result of this transaction, we we recorded a non cash charge of $374 million as a component of non operating expense to reflect a partial plan settlement.

These charges recorded in our unallocated corporate segment and as with other noncash pension expenses and income we exclude this from our adjusted financial results.

Did not have to make any cash contributions to the <unk> pension as a result of the transaction and do not anticipate contributions in the coming years.

For your balance sheet models, this transaction and they required re measurement of our pension benefit obligation results in a 370 million dollar reduction.

And retained earnings Athree hundred 85 million dollar reduction in our accumulated other comprehensive loss.

And an $11 million increase in our prepaid pension asset.

These are challenging times, but I have made dabir Armstrong is uniquely positioned to succeed.

We have the leading brand.

That's the innovation pipeline.

Unparalleled industry margins and the best in cash we collect cash flow margin generation.

We fully expect to emerge on the other side of this crisis with our value accretion modeling Pat.

With that I'll turn it back over today.

Thanks, Brian a shock to the system of the magnitude we are experiencing now well on a undoubtedly have far reaching impacts on the way all of US live work learn steel and play into future.

I think we can all imagine a future with a heightened focus on healthy spaces and offices stores hospitals airports schools and other indoor environments, what exactly this new normal will look like it's still developing.

But armstrong is committed to remaining on the leading edge of innovation safe.

And sustainable commercial interior solutions.

We already off for a broad array of health care appropriate products, including health selling family.

Hello, I don't ceilings allows for the wash ability and scalability necessary and hospital settings exceeding industry guidelines for clean ability.

These products provide anti microbial bio block performance that resist the growth of bacteria.

These products also provides a superior acoustical performance necessary and healing environments.

And can be used and non medical space is too for example, Kalla health zone offers the smooth this mineral fiber ceiling available, making get perfect for offices retail education. Another interior environments, along with its total acoustics and sustained performance.

We are using this time of uncertainty to strengthen our already close relationships with the most creative thought leaders in the AG community.

We will have a strong voice in the conversation around the future interior spaces.

Developed products and systems to serve these needs.

We're also engaging with contractors in assessing the future of job site activity. It is unlikely that construction practices emerge from this crisis unchanged.

We will be at the forefront of designing on the job solutions for the new environment.

Just one ball collaboration with our waived team, our digital solutions and with our distribution partners.

Finally, we are building on our already robust digitalization platforms to further enable the virtual design process, we have pioneered and make the order management process completely frictionless.

As I said earlier Armstrong as a strong company.

We have a talented committed and agile team.

We have deep long standing relationships with the leading contracted designers and architects in the industry.

We have best in class distribution partners.

We have a network of a proven suppliers and service providers.

And a strong balance sheet with ample liquidity low leverage and no near term maturities.

And as Brian mentioned again, we're open for business for financially and strategically attractive acquisitions and investments.

And we have a long term strategy that is as appropriate now as it was a year ago.

We entered this crisis with the strongest brand leading share positions, the broadest and most innovative product portfolio in the industry.

Financially, we have best in class margins unparalleled free cash flow margin and numerous avenues for growth.

And we will exit this crisis, and then even stronger relative position poised to win.

And to create long term shareholder value.

As you've heard me say before Armstrong remains committed to being a standout leader and innovative products and digital solutions and provide the best possible experience for our customers.

And we are committed to make a difference in spaces, where people live work learn yield and play.

And with that we'll be happy to take your questions.

Thank you as a reminder to ask a question you want me to press Star one on your telephone to withdraw your question press. The pound key piece, then by what we compared to Q1 day roster.

First question comes from Keith Hughes of Suntrust. Your line is open.

Okay. Thank you a couple of questions on the 25% to 30% decline in April you have shots for how much about.

How much of the distributor inventories coming down versus.

What we're self.

Keith.

It's hard to tell how much of that.

I'm.

I'm sure. It's a mix based on different distributors and there are different situations. So I wouldn't attribute that too heavily on distribution.

Leveling off of distribution I would say that's more skewed toward the stoppage of construction sites in the flow of product into those construction sites and again there were some big.

Cities, Boston, New York City, Seattle, San Francisco that literally close construction sites. So.

I think it's more reflection of that.

Okay and then.

Difference between mineral fiber and architectural specialties, and though and I.

I'm, sorry, I didn't hear in questions.

Yes so.

Wanting for April can you give a sense how much mineral fiber was versus architectural specialties.

Yeah as you can imagine that.

The way that these two businesses perform in a downturn.

The majority of that as mineral fiber, we're continuing to gain share and our backlog and teams to me very robust and architectural specialties. So it's a it's a minority portion for our from architectural specialties. The majority portion from mineral fiber.

Okay I can pass like in past downturns that was very similar performance in 2008 in 2009.

Okay. Thank you.

You're welcome.

Thank you and next question comes from John Lovallo with Bank of America. Your line is now open.

Hey, guys. Thank you for taking my questions and hope you guys are Ah are doing well unhealthy.

First question is yeah. The first question is you know maybe just sticking back at prior downturns, maybe the global financial crisis would be healing something to think about here, we still able to put through due to price increases a year with we'll call. It three ish percent capitalization.

I think what happened in the last downturn to use that as a reference point.

Price ASV was positive continued to be driven up by by mix as the industry continued the matter they were buying less but they were buying more of the higher value, Iran products and we expect that to be the same dynamic in this and this and market environment as well.

So I think.

Deflation goes down.

And.

Like for like pricing holds mix is positive and that drives the the overall you'd be higher.

Again, that's that's exactly what we have seen in the last several recessions and the depth of the recession in the financial crisis. In 2008 2009, we saw that again, so we expect again that dynamic to happen again in 2020.

Okay. That's helpful. And then maybe just about it referring to capital allocation I know the share repurchases are put on hold you know do you anticipate still pursuing architectural specialty acquisitions or is that kind of on the back burner for now as well.

No I think in the short term here as Brian outlined I think very well, we're we're being prudent cash managers here controlling our costs for deferring capex stopping or our share repurchase as you mentioned.

But as soon as we have.

An ISO how deep this isn't how wide this is going to be and how long it's going to last.

We have a strong balance sheet, we are as Brian outlined we continue to expect to drive strong cash flow this year, even in this environment.

And that we're in a unique position to be opportunistic around M&A. So we're open for business, where we are pipeline looks looks good it's going to continue to get better we believe through this.

We will be active in M&A as as we see good strategic financial smart place to make.

Thank you guys.

Yeah.

Thank you.

Our next question comes from Ken Zener with Keybanc. Your line is open.

Good morning, everybody.

Okay.

I guess right. The one fundamental question I have it is I would like you to expand on your view that.

You know in past periods, you did see the high end, a accelerates and I'm thinking specifically 2010 when offices.

Pad.

A lot of renovation.

As landlords sought to keep.

Tenants or attract pivots, given the unique nature of this deceleration.

And people are using things like Jim could you talk to where your confidence comes from given that that office space won't be.

Seen by companies as you know.

I guess.

The intensity or the need per employee might go down okay.

And the de since you've been around for over 100 years did you guys look at any demand curve supposed to be es business.

Influenza. Thank you that's it.

Thanks, Ken for the question you know I think.

We do believe there's got to be changes for sure right. The emphasis on healthy spaces is going to be everybody's focus.

Not only in offices right, but education.

Transportation just about every commercial space is gonna be enthuse, emphasizing how do we create more healthy spaces.

I think it's fair to say.

That there's going to be a pause on new construction in office in particular as as.

People assess their needs and what the real new normally it's going to due to the office space.

And in fact, a third party.

You know it seems like like dodges already.

Or reduce the new construction outlook for this year.

But I would say again you have to remember in this business, we have a diverse set of end markets.

Office, we're not bias so heavily to just one that we're going to go with way offices go as as we've talked about in the past the last 10 years actually there's a real portfolio effect of.

When office has been up in the last four or five years, there's others that have offset that.

So.

I the way, we think about what's going on in office and I think this is still developing to be honest with you can't is.

There's gonna be a lot of renovation opportunities because what has been happening over the last 10 years has been employee densification.

And even in education environment student Densification, those trends are going to reverse.

And this trend toward opened offices.

It is going to reverse.

I think we can be confident of those simple basic design trends.

Are going to reverse themselves those in themselves will create tremendous renovation opportunities in the office segment.

And by the way I think this is going to happen in the healthcare facilities as well as the educational facilities as they try to use more healthy materials and these environments.

So I think there's gonna be puts and takes well have to see we're very early to understand the real new normal impacts.

But I'm not overly concerned that they're not going to need because people are telecommuting.

Where he then theres more colleges using online education.

That that is going to be a huge headwind for this business I think there's gonna be equal opportunities in other parts and other verticals and in other parts of renovation activity.

Let me just while I'm on this let me just say can't because I think this is important for.

Everybody to recognizing this is how we've seen this in the past is.

This business will trade in a very.

Tight range in terms of the volume and mineral fiber because of the diverse end markets that we serve and because that diversification is actually accentuated when you look at the cuts of renovation at new.

And and so.

There's always puts and takes there's always positive or negative is going on as we've experienced over the last 10 years, but the range of volumes and all parts of the cycle really tightly.

Ah that's what gives you an age and I think in this and this cycle, we're gonna see something very similar.

Thank you.

You're welcome.

Thank you next question comes from Kathryn Thompson with Thompson Research Group. Your line is now open.

Hi, Thank you for taking my questions. Today first is going to focus on supply chain and we have feedback from our commercial construction contracts are pointing to disruptions in the supply chain and these mainly been around plants are factories operating either it on reduced hours are closed altogether.

What are you seeing in terms of matching supply chain and more importantly, what are the bigger changes you is that going forward in terms that matching supply chain.

Another system isn't necessarily the supply chain that manufacturing, if your product, but really poor to supply chain to the end market.

Thank you.

Well I think the.

I mean, it's it's hard to say exactly all the changes just yet, but I I think.

The use of digital tools is going to creep its way into all parts of the supply chain I I think that's inevitable.

I'm really happy that we've taken an advance had started on this I know a lot of our distributors and our partners have.

Also moving in this direction.

But I I think.

The the use of digital tools and making it easy for people to manage the worst placement worse in a remote way I think is gonna be key to the supply chain going forward and I would say at that that's the apparent when at this point.

I don't see any structural changes or moves in the supply chain as far as our business and our approach to the market so far.

Okay.

Following up and it's truly more on especially surfaces surfaces and products.

Huh.

As we're having their early conversation on a changing workplace.

What types of products other than.

We focused on the ceiling, but what other types of products actually manufactured your target are well positioned for this changing landscape in terms of healthy spaces, but interior products. Thank you.

Yeah, whether it's on a ceilings for the wall I think a clean ability, it's going to be in a very important attribute.

And you might see some more solid surfaces on both the walls and the ceilings things like metal or would that are highly cleanup Apple. In addition to our mineral fiber line. That's why the cleanup also I think this actually could expand to be.

The use of various materials on ceilings and wells that are again provide the extra clean ability.

Okay. Thank you.

Catherine Thank you.

Thank you next question comes from Susan Mcclary with Goldman Sachs. Your line is open.

Thank you good morning.

And my question is just you know going back to thinking about some of the the volumes in the projects that you expect to come through how should we think about you know what percentage of your revenues could potentially be coming from health care or some other sectors that have been smaller maybe over the last few years as office maybe.

Kinda give some of that share back and then thinking about that shift in your you're ready you break out are there any margin implications with that.

Yes. Good question, Susan I think I'm as I was saying earlier there might be.

A pause taking on new construction in office and it certainly be outlook of some of the third party.

Data sources, we look at.

Conversely, there they're forecasting an increase in new construction activity and renovation activity in health care as you can imagine I think this crisis is clearly.

Highlighted there's a capacity issue in our health care system to manage.

Events like this.

That will likely get rectified over the next several years.

And the way that they're treating.

The spaces for flexibility and to be able to expand within the current facilities.

In different parts of the hospital.

For certain events like this I think is going to create renovation opportunities. So again I think there's gonna be bought a lot more activity in health care facilities over the next several years that would more than offset so what we might see for instance in the new construction part of the office market.

That's about 15% to 20% of our businesses I'm today.

And with with office and the 25% to 30% part of our business, so not too far from a proportion standpoint.

Okay, and then there any margin implications as we think about the growth in health care or do those projects tend to run fairly similar with some of the office work that you do.

Yeah, the margin and the these that we sell and both of those spaces are about the same.

Okay and then you know can you mentioned in the commentary you know the effort that you're putting into thinking about reducing s. DNA and kind of controlling the cost structure can you just give us a little more color there.

Yeah, Brian I'll, let you speak to that if you will.

Yeah, I'll just before I answer, yes, you know I had a piece on the margins Susan.

Each of these end markets start to mix up grade as they do major renovation. So we've called out more confidence in our ability to mix that's going to help those margins across each of those end markets and then on the U.S. DNA side.

We've been making investments in the last few years, we'd frozen head count at this point, we're prioritizing spending for the.

Commercial facing sales teams.

But all the other.

STN a more DNA, we're locking down to make sure we'd get conserve cash there and generate.

Free cash flow.

Okay. Good thank you.

Thank you.

Next question comes from Michael what with Nomura Instinet. Your line is open.

Hi, good morning.

Could you give some more thoughts in terms of what the decremental margins may look like at least in the initial stages of this decline and how are you thinking about I imagine the duration of the downturn is going to determine the nature of the cost actions. The ultimately take have you gotten to a point, yet where you're you're.

Your planning for ever an idea in terms of temporary or permanent cost actions, and where where might you be thinking now about the duration in terms of that planning.

Yeah, I'll, let Brian talk about the definitely duck detrimental margin Mark margins, Mike, but I would say, we're very clear we have line of sight to the cost actions, we need to take.

For what we see in front of us in the next month or two.

And and those plans are being implemented as we speak so those those are going as you say, though as things start to develop is the.

Outcomes that we're expecting or different one way or the other than we can adjust we have like a site to another round of cuts and actions that we would take.

In the event that it was deeper longer than we expected.

So I would just say you know, we're not providing any guides in terms of of the.

Of the.

Overall numbers, but I'll just say, we do believe may and June should be sequentially better than April.

And that's one of the big differences right. In this downturn is it took a long time into 2008 nine down turned to reach the trough.

I think we you could be 30 to 60 days and this event to reach the.

Ross and then and then to starts are we back out of that.

So I think we have good line of sight on the actions and you know this t. well, we'll we'll adapting to johnston's we needed as we need as things develop in front of us.

The decremental margins right, if I take that.

Yes, sure Mike as you know are minimal fiber segment as incremental margins of 60% A.S. is typically the 30 range.

So as you step back and think about the actions, we're taking as a result of sums crest demand. The detector my minimal decremental margins would be that's 40% to 50% range with a total company and as they pointed out you know this team well, we're going to adjust we've got a finger on that post and we're trying to make sure.

We've got the best information to inform how deep this is gonna be and how long. It is until we can take the rate actions to generate free cash flow [laughter]. Okay. I appreciate that and also what are you seeing in terms of I know you have a project tracker to track those big projects can you just speak to any trends there and maybe what you're hearing anecdotally from.

Architecture customers in terms of the nature of the weakness that you've seen in terms of how much of it is work stoppage versus an inability to just get into certain places are cities versus just you know underlying demand a fall out.

Thank you.

Yeah, Mike you know, we and the first quarter and we talked about this rate we had really good overall activity quoting activity. In fact, I think I mean I've mentioned this on our last call that hadn't talked anybody that didnt have positive quoting activity and was feeling good about the year before this all began so I think.

The work is there and a lot of and a lot of cases. The works already started it just got stopped and so as we track these projects.

We're watching very closely for.

Things that are delayed versus canceled.

And we've we've had very few cases of work being canceled.

It's been mostly delayed until things open back up again.

And then and that's the sentiment I think within our our contractor and our distribution community is yeah. When these things open up the jobs are there waiting for us to finish and waiting for us to do.

So I think that's the sentiment generally speaking really across the country.

Okay. Thank you Stacy.

Yeah, you too.

Thank you.

Next question comes from Stephen Kim with Evercore ISI. Your line is now open.

Yeah. Thanks, very much guys couple of questions one be.

Next we saw impacted by Big box I'm glad you mentioned the easy comps from a year ago period, how much of what you saw in this quarter do you attribute to the comps are versus something that you saw encouragingly on a sequential basis.

From those two end market.

Well, we had tough comps actually in the first quarter I'm, sorry, that's what I'm out yeah, that's what I'm not yeah, I I figured today just to make make that clear yeah, Yeah, Let me, 10% HBV and 7% like for like pricing in.

In the first quarter of 19, so we we expected that to be a tough comp than we were looking for what we saw on the like for like pricing, which is flattish pricing.

On that side of the you'd be so it's all mix and the mix was driven by.

I guess, if we were expecting.

The last time market to <unk> to rebound remember, we had a tough year last year in that channel.

And we were putting axis in place to fix that same with the big box channel. So we were expecting some growth in those channels.

Well I think at exacerbated the situation, though is in the last couple of weeks of March we had high end use the markets in the U.S. that also you know they were shut down Boston New York City. So these are high easy markets that we didn't we're able to spin Seattle's the other one that we weren't able to the ship into.

So really it's the combination of.

You had lower volumes in your highest TV markets in the United States.

A complicated by you had stronger growth in your lower a you'd be channels. So really overall it was a mix is a mix issue and as you know you've seen overtime quarter to quarter. These things kind of work their way out on an annual basis and we expect he used to be positive in 2020, despite the downturn.

Yeah.

Great appreciate that.

Secondly, you talked about digitalization and the initiatives even undertaking there over the last couple of years.

In general I'm trying to understand how significant this could be for you as we come out of this initial impact from cobot 19.

Can you give us from specific examples where the digitalization programs that you've got a that you've been implementing our having a noticeable impact on your results and.

Our any of these likely in your view.

Become more visible into Q as early as to Q or three Q.

Well I think everybody's been forced right to work this waiver work remotely and so we've really had to rely on digital tools.

And and you know theres been a couple of examples where weve been able to use the project works software connecting literally <unk> and four different areas.

An architect a contractor I.

Distributor and our Salesforce.

In a common place and actually look at the take off design work.

That needed to happen in be agreed upon to move the project forward.

Without project.

Direct worse I don't know how you do that.

Other than a series of emails or exchange is a pieces of the drawing but to the literally be able to do with real time in project works.

It was obviously, a big asset and allowed us to actually get that work going and moving.

And by the fact of while working remotely so.

There's a there's really good examples I'm very encouraged by the way that our sales team in particular are staying connected to the architectural community and moving projects forward, even though nobody's in the office.

So I think these are going to.

As I said in my prepared remarks, I really believe he is going to get accelerated because some people are gonna get used to working its way because they've been forced to do and they're finding out hey, that's actually this is pretty good and this is this is pretty easy and it's more efficient.

So I think there's going to be an acceleration in the use of these tools as we're still in the early innings, Steven but I think these are going to get accelerated.

Do you think it could be like 25% of your newer projects that are using this project work software or it is that does that too aggressive.

I think sitting here, it's too hard to tell.

Okay. So we'll see we'll see I think it's gonna be a lot.

You know exponentially more than it was before which we were in the early innings and so it's hard to say an exact number on that Stephen but I think it's gonna be a lot more than and it's not going back to the way it was.

To the numbers it was before I think this was going to accelerate our.

Our work with architects and designers in particular in this way.

Yeah, great well clearly, it's an advantage being in early mover. There. So that's great. Thanks, guys. Yeah. Thank you.

Thank you Sir our next question comes from Philip Ng with Jefferies. Your line is now open.

Hey, good morning, everyone. So give us some color, but how trends were tracking in April in southern markets. You called out there were hit harder like Boston, San Francisco, New York versus somebody other region.

And Oh I see any early read on.

Timings on those markets that may have reopened from your contacts.

Well I think I mentioned, the four big ones, where we felt the biggest shortfall I mean literally when they shot.

They shut the construction sites there is no flow of material versus you know a slowdown in the pace of work for distancing and so forth that maybe happening in other places.

Boston, and New York, Seattle, San Francisco, Hey, literally stopped construction work altogether. So I think I mentioned those those are the ones that are that we we felt mostly in April.

Bostons opened up already.

You know New York has not yet, but as anticipated in may middle amaze sometime they start to I read. This morning are we going to relieve.

The restrictions on construction work.

Seattle is now open back up.

Of course, when we say open back up these are slow transitions back to opening under the safe work practices.

So I don't mean like a light switch they've been open back up and slower product is going but is flowing again, but.

It's encouraging and again it gives us.

The the confidence to say, we think may should be better than April and June should be better than me.

As these projects are there waiting to be finished and then.

As we.

Opened those sites up and are able to start shipping into those sites to start we should start to see some improvement in may and June.

Got it any color on those places that weren't head where day sound like 10% skews It sounds like Boston, New York, Obviously was hit very hard.

Yeah, those were stoppages and so.

Oh, you know, it's hard to put a number on it to be honest with you.

So I'd, rather not put a number on it but I can tell you those are the biggest and hiring you Avi markets you can imagine it's an outsized.

Impact on the overall sales trend.

Got it that's super helpful.

And then okay. Once you obviously was very noisy from a TV standpoint, but curious what type of traction you saw on your price increase that you typically go out with our mineral fiber early and year and how perhaps you might be tracking in April.

Yeah, I think our pricing is our likes to like pricing component of that is it. It is where we expected it to be Phil and tracking the way we expected that to be was early you know it was early and the Uh huh.

His before the crisis, frankly, so fortunate that way.

But really the mix is until the until.

New York, Boston shall we start really getting a good flow of products were going to have some mix headwinds.

And I would say that's consistent with what we see in April given the downfall as I just talked through is driven by some major met metro markets.

Got it that's super helpful and just one last one for me how should we think about inflation or maybe perhaps deflation now Brian gave us some color to start the year now that would kind of flow through over the course to you.

Yeah, Brian you want to take to you won't take that question.

Sure.

Yeah, we had we either outline a little bit of net inflation rate, obviously on the weight size most of that's contractual 2.5% range, but as many are seeing some of the.

[noise] gas is down a lecture city is relatively flat from the roles or puts and takes that net.

Well you know deflationary period, so we're again not guiding Phil [noise] to the deflation because as you did we mentioned this is dynamic.

You'd see some pressure back into the fourth quarter. So I'd say, it's not as inflationary as we thought back at the beginning of year.

Okay Super helpful. Thanks, a lot guys.

Thanks, Phil.

Thank you and next question comes from <unk> Capital Your line is that woven.

Hi, Thanks, Thanks for squeezing me in just first I'll just wanted to circle back run on the Capex a view pitching it down to 45 billion dollar range just wondering.

Is this a bare bones maintenance will double or there are additional work I guess.

Levers you can pull on Capex, if you need to over the nurses or one or two years.

Right now let's pick up.

Yes.

So Eric Good question [noise], the we re range that 45 55 or so.

That's a good mix kind of it in our historic norm of 50% repair and maintenance, another 50% that supporting growth and productivity.

We still have contingencies, there if we need to pull them. If this is a more per longer deeper demand impact so more to go there or if we need to.

Okay. Thanks.

For the past the quick picture question just.

It's only one month, what their data, but you know you did talk about Dodge starts getting they're going to revise down on the office side you'd be I had a pretty drastic pull back you know given but your products tend to go into you know structures. The a get started a year or two afterwards, so just wondering how you're thinking about the ball.

Are you more opportunity over the next several years just given the I guess somebody's drastic moves on to leading indicator side. You would you be concerned you know as far as a.

The pullback in demand long term we're.

I guess anyway, you could help us pick about those are leading indicators and how you're thinking about them as well.

[laughter].

Yeah, It's really it's early right, but Dodge has recalibrated around look force starts.

You know when you look at our set of markets.

Well, let's pick a number it's probably in the neighborhood of what they're out looking and we all know that that's not an exact science, but down 10% in terms of.

Starts.

12, 18 months out that's Oh, no impact on say, 30% of our business.

So 10% of our down on 3% or a business about a 3% headwind.

As I outlook before there is equal opportunity and accelerated renovation activity in both the office education healthcare facilities that will help to offset that and in fact, what happens in and it has happened in eight of the last nine downturns.

Including that the 2008 2009.

When new construction.

Goes negative.

Our and our activity picks up.

And that 70% of our business.

So we're not concerned about you know major structural shifts or changes in terms of the overall demand for mineral fiber within the verticals. It may change a bit that's that portfolio effect that weve actually been experience for the last.

Several years.

So we're not only concerned about the Apple watch it could be could create a bit of an air pocket or headwind that we'll be watching for 12 to 18 months out.

But again I think that that would in itself would be ignoring the fact that there's a tremendous amount of other renovation opportunities that that we're excited about.

Great. Thank you very much.

<unk>.

Thank you next question comes from David Mcfadgen with Longbow Research. Your line is now open.

Hi, good morning, Thanks for taking the questions Vicki earlier in response to a question you provided a little color around the percentage of your business in office and health care and together they represent about half of the middle fiber business.

First of all I guess for clarity or are we talking about middle fiber no fiberplus, yes.

But I wonder if I could get up to maybe.

Yeah, I wonder if I could get to the round that out a little bit just talk about the other 50% what verticals would make up the balance.

Yeah, David I was talking to the so this is primarily a mineral fiber look although okay architectural specialties isn't too far off of this okay. So it wouldn't be a huge departure, but this was mainly what we're talking about in terms of mineral fiber.

But the.

The other verticals and this is in our investor deck, if you want better detail reference, but retail transportation and education, what would make up the other 50% roughly.

Right is there any chance of getting some granularity around just corn condos.

In terms of the percentages.

Yes.

Yeah, that's in our Investor deck, and Brian maybe you could you could say more about where to find that investor deck.

Hi confined to the deck. That's okay. Okay, Yeah, I mean, edgy and anticipation is you had said that.

Okay David.

For the question just on yesterday, just trying to get a sense of where the fixed versus variable would fall.

Brian will pickup.

Sure.

David You know, we obviously everything over time is variable right depends on how long it is.

At least majority of it so in the short term a good bit of that is fixed but we are working on the discretionary pieces of it.

I'm not going to give you exact number on that breaks down but.

You can imagine travel has been cut back it saves and we're finding ways to operate more remotely and we're going to get it continued to do that even as we see markets open up because you're finding ways to be more efficient there.

Some of the digitalization efforts, we've talked about so we're looking to to maintain that spend even with it little bit headwind from investments from the acquisitions.

[noise] they can.

Actually it.

Thank you and next question comes from just interested with Zelman and Associates. Your line is open.

Oh good afternoon, guys. Thank you for.

For taking me on here. The first question I had I don't know if you can answer but roughly you can give us some context the percentage of your business that that is in the materially affect the geography I'd be interested to know that.

Well just an all geographies have been impacted by the current a virus and our demand.

Some have been.

But the four or five that I mentioned, where there's literally stoppage of construction.

Sites in those cities, obviously, there was the most dramatic in terms of.

The impact there are large metro markets by the way, but to go you know to stoppage.

Not delays or slow down.

Which we have seen in some of the other markets that haven't they have really can deemed construction has an essential business.

Which has been the majority of places outside of those major Metro as I mentioned.

Where are you still have a slowdown slowed down in labor and Ah you know pace of work.

So it's been it's we've seen an impact as I said in my prepared remarks really in all channels smell geography.

Right I'm, just saying for I guess I should have refrain on your freight, but where are you actually taken 100% stoppages just curious if there's like a definition.

Because in your portfolio.

Now I'd, rather not disclose that at this point again I I can tell you it was.

An oversized contribution based on the fact that there was stopped versus a slowdown in the flow.

Makes sense and then.

The other question I haven't come back to to David's question about the protocols.

Looking at at retail transportation and education, and just if there's any context or nuance that you can call out there currently and then just based on your experience.

And the nature of this downturn, how do you think those verticals those pieces of your business will respond.

Yeah I think.

What we have from a historical perspective that informs this is back when I was mentioning earlier that you know.

<unk> downturns like this the Capex dries up in some of the.

New construction activity slows down and goes negative for a bit.

And I think that's that's reasonable to expect except in health care I think in health care, we're gonna see.

A continuation of the expansion of health care capacity and facilities.

Which will offset some of the other.

Verticals.

Big transportation projects in my experience.

They may get delayed, but they don't get canceled that they've already been started.

And so.

Lot of this stuff that's already been started its going to get finished because this isn't a financial crisis.

The money hasn't dried up for those projects I.

I think in certain segments, you might see a pause until they understood.

With this new normal looks like and what it might mean for them as a company.

But I think we're gonna see a an uptick in renovation activity and all of these verticals.

Really driving to more healthy spaces, and how did they get to healthier spaces, whether it be diverting traffic foot traffic, whether it's meeting spaces whether its.

You know.

More private spaces, both in education.

Health care and offices, so I think there's a lot of positive trends here that could drive renovation activity.

Higher over the next couple of years.

You mentioned like eight of the last nine downturns I guess it goes back many many decades, what does it does not or I guess is that in your won or is that in your two Oh I guess you here to start the clock on the recession I noticed that.

Filter through the longer on the longer term lease for free or.

The non res, but just thinking about this renovation piece what what in your mind.

Suggests that confidence we'll be in the business realm strong enough to support renovation or refurbishment.

Relative to last downturns, maybe which wasn't I guess sort of a great. The financial crisis, where renovation did not hold up is that is that correct.

Yeah that was the only one where both went down in the same year, but even in that year. It that was down in 2009 in 2010 renovation activity pop back up.

So it was a temporary.

Downturn of course that was a very serious obviously very serious downturn.

Yes, I answer your question on that on.

Thank you I'm not showing any other questions at this time.

I'd now like to attend the call back over to Vic Grizzle for closing remarks.

Okay. Thank thank you very much and thanks, everybody for joining US I think it's you know when you're on the outside looking in into crisis like this it. It I think it's important for me to the note that the rate and pace of activity inside the organization, even though we're remotes.

Is extremely high our team is highly engaged and there on this and I think the way to picture. What this team is doing right now is leaning into this crisis, they're ready to execute.

And as we said earlier on the call. This team is ready to adapt and adjust as needed as we get into what is undoubtedly going to be a a challenging second quarter.

But if we look forward to updating your next quarter and want to thank you and and wish everybody to Stacy.

Ladies and gentlemen, this concludes today's conference call. Thank you participating you may now disconnect.

[music].