Q2 2020 Armstrong Flooring Inc Earnings Call

Hello.

Welcome to the Armstrong for second quarter 2020 earnings Conference call.

At this time to screens or any listen only mode. If I didn't watch require operator assistance. Please press star Zero Wonder telephone keypad question answer session will follow the formal presentation.

A reminder, this conference is being recorded.

My pleasure to turn the call over its arbitrage interim CFO Greg.

Please go ahead.

Thank you for joining us today.

Strong flooring second quarter 2020 earnings conference call.

Joined by our President and CEO Michelle for Matt.

We caution you that seen our press release. This morning on the Investor section of our website at Www Dot Armstrong flooring dotcom.

During this call you'll be making forward looking statements.

Involve risk and uncertainties.

Actual outcomes may differ materially from those expected or implied.

For more detailed discussion of the risks and uncertainties that may affect Armstrong flooring.

Please review our FCC filings.

Forward looking statements speak only as of the date. They are made and we undertake no obligation to update any forward looking statement beyond what is required by applicable security law.

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

A reconciliation of these measures to the most directly comparable GAAP measure is included in the press release.

I'll now turn the call overcome Michelle.

Thank you Greg.

And good morning, everyone on the line.

Before I begin the discussion on our operating highlights and business activity.

First want to take a moment to formally introduce Greg Wayne.

Recently announced interim CFO.

Greg comes true Armstrong flooring with extensive interim CFO experience.

He has served as a valued advisor to many public companies C suite leadership teams.

We're excited to have Greg on board and I'm confident that he will provide great insight in perspective on our finance strategy and execution of our business transformation as we worked identified in a point a permanent CFO.

With that I will now dived into our operating highlights for the second quarter.

Overall, I'm pleased with our second quarter performance, which reflects the focus execution of our strategic claims during these challenging times.

At the beginning of the coated 19 pending.

We saw on Unprecedent environment as strict shelter in place orders and other bears actions to minimize the spread of the buyers were implemented across the globe.

During this time, we had shifted our near term focus to privatizing safety financial flexibility.

Operational efficiency to prepare our business so that we could overcome the unpredictable market dynamics at hand.

We entered this quarter with the expectation to multiple depressed demand scenarios.

We were happy to report that our topline performance improved month over month throughout the quarter.

Leading to second quarter performance that exceeded our initial expectation.

This is in part due to recovery in demand.

Our critical flooring products as the economy reopened in shelter in place orders were lifted across many markets.

In addition, we are beginning to see the initial benefits from some of the actions we introduced as part of our strategic long term <unk> back in March.

Which I will detail further shortly.

Importantly, I would like to reiterate that we remain focused on the health and well being up all of our employees and stakeholders.

As we mentioned last quarter most of our customers operate in the central industries.

And we are fortunate that we have been able to continue serving them throughout the pandemic.

During the second quarter business performed better than expected in every segment.

Well, we clearly experienced a significant impact to our top line from a year over year perspective.

Mainly due to lower North American volumes, particularly in April.

We were encouraged to record positive, but also the court.

We achieved this while under pricing pressure across the category.

Fortunately, our initial efforts to simplify our processes through enhanced productivity and cost control helped us to achieve favorable results with all circ stance is considered.

Look at our markets.

In North America, we witnessed several encouraging trends as the quarters progressed and economies reopen across the country.

On the residential side and most particularly in new construction.

We saw outperformance across the board.

This resulted primarily from homebuilders as wells from somebody internal customers engaging gigs when efforts from earlier in the year they continued to gain momentum.

On the repair and remodel side.

And center business, where we continue to serve our branded and private label products have larger operated unscathed throughout the pandemic.

These businesses have remained open and available to homeowners, who perhaps now have some additional motivation to remodel given they are spending much more time at home.

On the contrary opportunities on smaller independent retailers and large commercial contractors has a bit more limited.

And these end markets are experienced a more prolonged recovery from our perspective.

In many cases are smaller independent retailers have not yet been able to fully resumed normal activities as quickly as we would have hoped.

Looking at the commercial side.

Healthcare and education are bright spots, but.

But in other industries, we believe the slow recovery is primarily due to many delayed projects across the country.

Furthermore, it's important to note that <unk> market conditions are continuing to evolve.

In some parts of the country are saying ebb and flow of activity.

So why we have been encouraged by promising new residential construction trends and optimistic discussion with some more customers.

We are mindful that conditions are subject to change.

But this in my we will continue to focus on the factors that are in our control.

Such as the execution of various projects and our long term strategic roadmap.

In Asia, which represents a small portion of our footprint.

Business has recovered were relatively quickly.

But there's still some challenges we're working through.

Fortunately, we have yet to see immaterial impact to our supply chain from Kobe related impacts.

Just prior to the code that 19 pandemic.

We introduced our strategic Roadmaps to transform and modernize our operations to become a leader faster growing and more profitable company.

As a reminder, this a multiyear plan.

The three critical objectives to expand simplify and strengthened our business.

As part of this plan, we're transforming our product portfolio.

Reengaging with customers reintroducing innovative products and rebalancing, our residential and commercial footprint.

To every extent possible, we had been enact exactly what we said youre going to do since the assumption at this point.

With the near term emphasis on less capital intensive initiatives.

Now with our recently amended credit facility.

In new term.

We have the rights financing in the financial flexibility to make more significant progress on these goals.

In regards to expanding our customer reach.

The response from the launch of our do not PVC, then pure sheet product have been encouraging.

I'm, sorry, flooring is becoming a better service provider and rebuilding our relationship and reputation with our customers.

Our new customer centric operating model has been well overseas.

We have been able to engage with customers differently and more effectively.

In the shift to virtual interaction has not slowed us down.

We have adapted quickly.

And the way we train the way, we engage I'm confident in our ability to outperformed our markets from a service perspective.

We have connected with thousands of decision makers in the commercial in Sri leveraging technology.

As planned we started servicing the national Flooring Association directly.

We also held well attended virtual forms with our local distributors for retail sales associate to remain on top of mind and help them upside when customers would turn.

Establishing and building relationships with customers such as the isn't that critical part of our strategy that we expect to contribute more substantially and strengthen our results over the long term.

On the simplification side during the quarter, we announced the relocation of our corporate headquarters to Greenfield.

Premier mixed use corporate park also located in Lancaster, Pennsylvania.

We're excited to move our offices to those vibrant space, which is much better fit for the size of our company will ultimately provide us with the benefits of it so our cost structure.

In fact, this move is expected to help us achieve approximately 60% savings from our current headquarter lease.

I guess there is on track to occurred in the summer 2021.

As we discussed last quarter prior to the onset independently.

We began assessing the monetization noncore assets, such as our Southgate facility land portfolio in California.

We haven't made further progress on transitioning production that plane.

And into our production facilities as necessary.

The market value that we estimate for that so property in California continues to provide us with comfort in the strength of our toll noncore asset monetization potential.

And we expect to provide additional updates on this assessment in the coming quarters.

These are several examples of our progress during this unprecedented global pandemic.

Most of which represent permanent enhancements to our business.

We're proud of our team's ability to adapt to the work from home environment, while continuing the strong engagements efforts with our customers.

Our teams are saying created in finding ways to be increasingly relevant to key influencers in the flooring space.

We'll continue to provide you updates on the progress we make on our strategic roadmap.

With that.

I'll turn the call to Greg to provide additional updates on our financial performance and liquidity.

Thank you Michelle.

I'll begin with a brief review of our second quarter financial results.

As Michelle mentioned.

Scitor he unprecedent circumstances of the quarter.

Our revenue and adjusted EBITDA performance. We're ahead of plan and reflection of proactive company driven effort in many areas.

Global sales were $145.6 million.

Pair $277.7 million in the prior year quarter.

With a 32 million dollar decrease.

Primarily attributed to lower volumes due to cobot 19, pandemic and shelter in place related business disruption.

This includes the impact from temporary closing of many independent customer retail locations.

And the postponement of certain commercial projects.

Adjusted EBITDA was $6.9 million in the second quarter 2020.

The topline impact from lower volume reduced EBITDA by approximately $16 million.

Price mix headwind amounted to $2 million.

Largely reflective of lower price in response, you get eight Tara.

We also had approximately 2 million of headwind in S. DNA.

Resulting from management transition expenses.

As well as some planned growth investments to support our strategic roadmap.

Partially offsetting these headwinds were positive impacts from reduced input costs, which contributed about $2 million to the upside.

Primarily due to the previously mentioned lower care.

Additionally, we experienced a 5 million dollar benefit from productivity and strict cost control.

I'd like to remind you that we enter 2020.

S T N a headwind totaling around $20 million.

As a result of benefits incurred in 2019.

With approximately 8 million note that in the second quarter of 2090.

These prior year benefits were primarily related to our transition service agreements with the buyer of our wood flooring business.

Capex with reduced to 3.4 million.

With spending mainly is limited to maintenance and safety.

Operating cash flow was $10.2 million.

Which was in excess of adjusted EBITDA.

The main driver of operating cash flow was reduction in working capital as we drove down a significant working capital build in the first quarter.

As we mentioned last quarter, we don't expect the remainder of the year to follow normal cash flow patterns.

And we have implemented numerous measures reserve cash as necessary.

Our recent actions to improve our liquidity profile have provided us with ample financial resources to execute additional objective related to our strategic plan.

In June 2020, we amended our senior secured asset based revolving credit facility.

Modifying the facility size to $90 million with a maturity date in December 2023.

This amendment provides us with further flexibility on our covenants with terms that are more appropriate in the current environment.

Additionally in June we entered into a 70 million dollar term loan facility, which has further strengthened our capital resources.

Capital from this facility is available to us for business transformation.

And growth initiatives.

Working capital needs and general corporate purposes.

At June Thirtyth.

2020, we had total liquidity of approximately $120 million.

Putting cash of $34 million plus availability under our credit facility.

Our term loan does not mature until 2025.

In anticipation of evolving market conditions.

We will continue to evaluate additional actions to enhance our liquidity and cash as necessary.

I will now turn the call back to Michelle for closing remarks.

Thank you Greg.

As we move into the second half the year.

We remain focused on expanding our reach within our addressable markets.

Simplifying our processes and strengthening our competitive position, while being mindful that extend shelter in place orders may have an evolving impact on the near term demand for critical flooring products.

That said I am confident in our entire team and their ability to move forward with a multifaceted strategic plan.

Which will ultimately create positive long term outcomes for our business.

But positive reception from our customers innovative new products in the pipeline.

In our recently improve liquidity position, we now have the foundation to execute our business transformation.

Operator.

Please open the lines for questions.

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Just sort of questions at this time about to turn the floor back over to Michel pretty for closing comments.

I want to thank you all for joining us today and look forward to talk to you next quarter. Thank you.

Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation today.

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