Q2 2020 Armstrong World Industries Inc Earnings Call
Spanning bar and welcome to the second quarter 2020, Armstrong World Industries Inc. earnings Conference call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session.
So I asked the question. During this session you will need to perhaps are wondering or telephone keypad.
If you require any further assistance.
Express and Star Zero.
I would now like turn the conference or what your speakers today.
Mr., Tom waters VP of corporate finance, Sir Please go ahead.
Thank you good morning, and welcome we felt that members of the media up in invited to listen to this call on the call is being broadcast live on our website at Armstrong Sealants Dot com.
For me on the call today are Vic Grizzle, our CEO, Brian Macneal, our CFO hopefully you've seen our press release. This morning at both the release on the presentation, Brian will reference during this call are posted on our website in the Investor Relations.
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 expected or implored.
For a more detailed discussion of risks and uncertainties that may affect Armstrong World Industries. Please review, our FCC filings, including the 10-Q filed earlier this morning.
Forward looking statements speak only as of the date. They are made we undertake no obligation to update any forward looking 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. A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation. Both are available on our website with that.
I'll turn the call over <unk>.
Thanks, John and good morning, everyone. As you. All know these are very unusual an extraordinary times and I hope that everyone. On this call along with your families and your colleagues are staying safe and well.
Its most recent quarter was challenging in many unique ways, but I'm extremely proud of how the Armstrong team has rallied in the face of this challenge safety is always been a non negotiable that Armstrong and this virus has been and we'll continue to be a significant challenge.
But when you are accustomed to operating a world class performance levels, a safety you find a lot of energy to innovate and two unique challenges like these.
And our team has done just that and our manufacturing and distribution facilities. Our teams have created an installed barriers altered operating processes installed new methods of cleaning and adopted numerous new practices and procedures to create a safe working environment.
The organization has continued to demonstrate a passion for customer service problem solving and innovation like these.
As of today, all of our plants and distribution centers are up and running and meeting the needs of our customers output has been aligned to meet demand and our inventory levels are well positioned.
Since the middle of March I think closely monitoring one of our most important customer service metrics are perfect order measure, it's a multi factor gauge of service quality.
I've been pleased that despite the required changes in our factories to maintain safety.
The remote working conditions and unpredictable order patterns, we have maintained customer service levels at very high free coded levels.
Our headquarters in sales staff continued to work remotely and have become increasingly adept at remote work. Our digital tools that is now more important than ever allowing us to remain fully engaged with our customers and our partners.
We have seen a significant usage of our self service digital platforms, one quote unquote to water.
And during this pandemic, we have continued to expand our capabilities in these areas. For example, our project works platform, which creates a drawings installation instructions and concurrent bill of materials.
It was initially launched as a support tool for the design flex family of products, but during this pandemic, we've rolled out project works capabilities and an expanded format to cover all core products, enabling us to automate more design and quoting work for architects designers and contractors, which has been a major productivity enhancer and.
These remote working conditions.
Also our product innovation efforts have intensified during this pandemic with heightened need for healthy interior space is driving our efforts.
In the quarter the demand environment evolves much as we expected with sequential improvement from the low point in April.
As we discussed on our last call by late April we were seeing significant drops in demand and key territories, such as New York City in Northern California, and Boston.
In a quarter and our top seven territories, which includes these key territories sales were down more than 40% as six of the seven territories were subject to government mandated shutdowns.
Collectively sales and all other territories were down 20%.
These seven top regions have an elite premium to the rest of the country. So they are especially impactful.
These territories and a construction sites are reopening now, albeit slowly given the new required safety protocols are now tracking in line with the rest of the country. We have seen very few cancellations and most of the cancellations. We are seeing tend to be relatively small remodel projects in the quarter sales of 203 mills.
<unk> dollars were down 25% versus prior year. This represents the largest year on year quarterly decline that we've experienced in decades.
Within the quarter, we saw each month getting progressively better for maples minus 30% result.
Volume declines from government shutdowns project delays and distributor inventory reductions fro the year on year decline.
He was flat in the quarter with positive like for like pricing offset by the territory mix issues I mentioned earlier.
Price is positive for the first half of the year as well as the quarter.
The territory mix headwind moderated as we move throughout the quarter.
And we continue to expect mix to be positive for the full year with the continued reopening of our key territories.
At the product level, we continue to see positive mix trends.
As our high end product offerings, including total acoustics and sustain continue to outpace the lower end of the portfolio.
Adjusted EBITDA on a quarter of $69 million was down 36%.
Despite these volume headwinds cash generation was positive and our liquidity position improved by $35 million from the end of the first quarter, driven primarily by positive earnings and working capital.
Commercial construction activity as a long way from where we were at the beginning of the year, but the pace is improving albeit slower as contractors learned to work within the new safety guidelines.
Over the second half of the year, we expect that they will continue to improve their levels of productivity.
And I'm encouraged by the trajectory of sales we are seeing on a weekly basis month to date sales in July are showing sequential improvement over Jim.
And while we are encouraged by these trends the marketplace remains uncertain.
As such we are not yet reinstating our normal detailed guidance for 2020.
However, we are providing an outlook of the range.
On the rate deposits outcomes and possibilities. We think is likely assuming continued sequential improvement and no second wave of shutdowns.
Ryan will provide details in a moment, but I will note that we're now expecting sales to be down in the 10% to 18% range for the full year.
As you've seen in our press release. This morning, we're excited to announce another acquisition in our architectural specialty segment Chicago based turf design.
This was our six acquisition in the past three years and further enhances our leading position and specialty ceilings in wells with approximately $25 million an annual sales turf is a leading provider of custom design felt they ceilings walls and barrier solutions.
And felt is a fast growing category within the architectural specialty space. It provides acoustical performance and enormous design flexibility.
Given the increasing need for interior barriers due to cobot 19, this isn't especially on trend product.
[noise] terms, leading custom capabilities combined with armstrong's existing offerings, and an unmatched portfolio felt products and solutions and especially for healthy spaces.
Brings to the table not just manufacturing capabilities, but also a skilled and respected design team working out of the renovation center and design showroom called the firehouse and downtown Chicago.
In addition, turf brings a proven and complimentary go to market approach to Armstrong with an established network specialized independent sales firms focused on driving specifications within the interior design community.
This further strengthens armstrong's already leading go to market position and specification writing capabilities.
Turf felt products contain up to 60% recycled material and our 100% recyclable at the end of their useful life.
Further strengthening our leadership position and sustainable ceiling and wall products.
Surface also profitable and will be accretive to the overall architectural specialty segment.
We are delighted to welcome the turf team to Armstrong.
This would be a great transaction to announce at any time, but given the current environment I'm, even more pleased to announce this acquisition. It demonstrates the financial strength of Armstrong and the fact that we're open for business.
Our sites are set on the future as we continue to invest to build on the strongest specialty ceilings and walls platform in the industry.
Our M&A pipeline is growing and remains active.
As we continue to pursue strategically important opportunities and our financial strength allows us to do so.
Our digitalization investments continue as we strive to become the easiest building products company to do business with and to drive efficiencies within our operations and our R&D efforts are ongoing as we pivot to meet the newly required healthy space requirements in commercial interior spaces.
We just completed our annual strategic planning process and reviewed the plant with our board of directors last week. The planned builds on our current financial strength as well as numerous exciting strategic priorities that we believe will drive profitable growth and cash flow in the coming years.
As a result of this route view and as a further acknowledgment of our strong free cash flow generation, our board increased our share repurchase program by $500 million to 1.2 billion and extended the maturity of the program to December 2023.
Given the current uncertainty in the a commercial construction market and our desire to conserve cash we expect to proceed with prudent caution in the short term, but we look forward to executing against this upsized authorization as we gain more clarity on the recovery and the overall demand environment.
And with that I'll turn the call over to Brian to review, our financial results and guidance and then I'll come back to talk about the trends we are beginning to see Brian.
Thanks, Nick Good morning, everyone on the call today I'll be reviewing our second 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 second quarter results sales of $203 million were down 25% versus prior year, our largest quarterly decline since at least the seventies.
Adjusted EBITDA fell, 36% and margins contracted 590 basis points.
Adjusted diluted earnings per share of 75 cents fell 41% driven by lower earnings.
Adjusted free cash flow improved by $8 million or 15% over the prior year.
Our cash balance at quarter end is a $117 million.
Our revolver availability of $370 million is up $170 million as a result of a refinancing in September of 2019.
This positions us with $487 million of available liquidity up $35 million from last quarter and up $47 million from last year.
Net debt is $18 million lower than last year, driven by cash earnings.
As of the quarter end, our net debt to EBITDA ratio is 1.5 times versus 1.6 times last year as calculated under the terms of our credit agreement.
Our covenant threshold is 3.75 times. So we have considerable headroom in this measure.
In the quarter, we did not repurchase any shares as we suspended our repurchase activity to preserve liquidity in light of the coded 19 impact on the market.
Since inception of the repurchase program, we have pulled back 9.6 million shares at a cost of $596 million for an average price of $62.13.
As Nick mentioned this program has been increased an extended we now have $604 million remaining under our repurchase program, which now expires in December 2023.
Turning now to slide five adjusted EBITDA was down 36%.
And coded 19 related Lockdowns drove sharp find declines in both of our segments and our customers reduce their inventories.
Easy while flat on the topline was a headwind to EBITDA as the territory mix impact of the key seven markets falls through at a higher decremental rate.
Raw material and energy costs were favorable and we continue to get strong manufacturing performance from our plants, despite a disruptive quarter.
These manufacturing productivity gains have been aided by our ongoing digitalization investments as we now have more than 2000 sensors deployed in our factories.
SGN a was favorable as we are managing expenses in light of the demand outlook.
While we are prudently managing our costs in the short term, we are continuing to make investments for the long term.
Well dressed our cost reduction initiatives in more detail when I review, our 2020 Apple.
Slide six shows adjusted free cash flow performance in the quarter versus the second quarter of 2019.
Cash from operations was up $11 million aided by favorable working capital versus 2019.
Capital expenditures were lower year on year as we are prioritizing our capital spend as a result of code 19.
Interest expense was lower as a result of our refinancing in September 2019.
We used cash distribution was down impacted by the same volume issues, we are facing and our mineral fiber business.
Adjusted free cash flow was up 15% versus 2019 and is it is a strong testament to Armstrong's best in class free cash flow generation capabilities, even under challenging circumstances.
Slide seven begins our segment reporting in the quarter mineral fiber sales were down 26% versus prior year.
Pandemic related volume declines were essentially the entire story with regards to the sales decline.
As Dick mentioned ASV was flat on the top line with like for like pricing up and territory mix down.
Adjusted EBITDA was down $33 million as the volume decline fell through to the bottom line.
As I mentioned territory mix had an even greater negative impact on EBITDA than on our sales and contributed to margin contraction.
Manufacturing productivity and cost controls input cost deflation and reduced SGN, a spending where all positive contributors in the quarter.
Weve earnings were impacted by the same volume headwinds and effective mineral fiber demand.
Moving to architectural specialty segment on slide eight the story is essentially the same.
As large construction sites were shut down architectural specialties shipments were delayed and the volume declines fell through to the bottom line.
As Rick mentioned, we are encouraged that the vast majority of jobs that were stopped our delays and not cancellations.
Starting in May we have seen job sites reopening and shipments picking up.
Slide nine shows our year to date results the combination of a good first quarter in a historically bad second quarter results in sales down 12% year to date and EBITDA down 17%.
Of note adjusted free cash flow is up 36%.
Slide 10 is our year to date bridge and although less dramatic than our second quarter Bridge you can clearly see the impact of the volume decline for the first half as well as our year to date favorability and input cost productivity Ines unit.
Slide 11 reflects our year to date free cash flow, which is up $26 million driven by operating cash flow, including working capital.
Capital expenditures reflects the delaying actions, we're taking to prioritize cash in the near term.
Interest expense is lower as a result of our refinancing in September 2019.
Wave earnings are impacted by the pandemic inline with minimal fiber.
Slide 12 is where we normally provide guidance as Dick mentioned, given the lack of clarity in the market. Our detailed financial guidance remain suspended we do however, one to provide some insights into how we're thinking about 2020.
Given the trajectory of sales in the bid activity. We're seeing we currently believe full year sales will be down 10% to 18%.
We continue Davy growth favorable input cost ongoing manufacturing productivity and SDMA reductions, we expect an adjusted EBITDA margin in the range of 35% to 37% and EPS down 20% to 35%.
We've instituted actions that will drive 45 million for $50 million of savings in manufacturing and has seen a primarily in the second half of the year.
These cost reduction actions, coupled with a reduction of capital expenditures to a range of 50 million to $55 million will drive a strong adjusted free cash flow margin of 22% to 25%.
This excludes additional free cash flow benefits of $50 million from the sale of our chain to plant in China, which we will see shortly and the use of tax losses related to last year sale of our international digit business, which will be applied to our third quarter and fourth quarter taxable.
[music].
As Dick mentioned, we're excited that we've completed the acquisition of turf.
This action is reflected in this updated outlook for 2020, and I want to provide a little more details on the earn out feature of this transaction that has been designed similar to our long term incentive plan.
Total cash consideration is $70 million or just under an eight times multiple of last 12 months' EBITDA.
Our agreement also includes contingent consideration payable upon achievement of certain future performance objectives through 2022.
The contingent consideration includes up to $24 million, an additional cash consideration for performance at certain revenue and EBITDA growth targets.
Full payout for target performance requires compound annual growth rates in excess of 23% for each measure through 2022.
Similarly, there is an additional contingent consideration for poor performance above target and is capped at a total additional cash of $48 million.
This maximum payout requires compound annual growth rates in excess of 38% for each measure through 2022.
If this maximum payout has achieved.
The resulting multiple based on 20 2022, EBITDA would be just under six times.
Turf is a strong business with a strong management team and we'd be very happy if they achieved this level performance.
Slide 13, as borrowed four investor deck and is our medium to long term value creation model.
2020, aside we believe we have a foundation that is built to grow sales in the high single digits every year.
Expand margins drive greater than 10% EBITDA growth annually and grow EPS even faster.
Finally from a value accretion standpoint taken already best in class adjusted free cash flow and grow at 10% to 15% per year.
This model is unchanged by the trend of buyers.
These are challenging times, but I have no doubt that Armstrong is uniquely positioned to succeed.
We have a leading brand the best products the best innovation platelet pipeline that's distribution in the industry that service unparalleled industry margins return on invested capital and best in class free cash flow generation.
We fully expect to merge on the other side of this crisis with our value creation model intact.
With that I'll turn it back today.
Thanks, Brian as I mentioned I want to take a few minutes and discuss what we're seeing as we look ahead to an evolving new normal environment.
Generally we're seeing improving construction activity sequentially, improving as we as we talked about as we expected.
Projects that were there before the economic shutdown are still there and we have seen very few cancellations. These projects are ramping back up but I've done so more slowly than originally imagined do their adoption of the CDC guidelines and new safety protocols as I mentioned.
Bidding activity declined significantly in April as you would imagine but bounced back in May and has improved from there to its current level of down 13% month to date in July versus last year.
Education bidding activity, it's actually turned positive in the past four weeks and this is an encouraging sign for commercial construction activity.
New construction projects that were started are going to get completed as well most major renovation work with that said, it's reasonable to expect that there will be a likely a pause and new office construction beyond the current project pipeline as companies need to assess new space and design requirements.
And education activity started earlier than prior years as schools took advantage of into classrooms to make repairs and planned renovations.
We expect us to continue into the summer months as normal.
The Big question will be how much money school systems will get from the federal government to make renovations an effort to get kids safely back into classrooms in the fall.
And our view whatever they get will be a net positive for additional renovation activity in schools.
There remains significant market uncertainty over the next six months and maybe until there's a vaccine for Cobi 19. So we're staying vigilant on the potential regional ups and downs created by outbreaks that are likely to continue in the various parts of the country.
And our outlook, we're not expecting government mandated shutdowns like we experienced in the second quarter.
As we think beyond the next six month period the impact of this virus on how we think can behave will still be with us health and safety and commercial spaces as being redefined it we as we speak one thing is certain the old definition of what safe were healthy means we'll no longer be true.
Therefore changes in commercial spaces will be required to meet this new definition.
The new expectations for what constitutes a healthy and save space for office workers students patients customers et cetera.
Upgraded HPC systems enhance clean ability increased spacing and flexibility so calm, but accommodate hybrid work from home learn from home modes within offices and schools will become increasingly prevalent.
Existing products like our anti microbial how sound family of ceilings, and our gas good clean room suspension systems, which control airflow and pressure and Datacenters.
And labs are now will now have applications in offices in schools retail settings and other.
Today more than 90% of these products are sold into healthcare facilities and clean rooms. So the opportunity in these other verticals is significant.
We're also working to develop additional sealing solutions to better manage airflow and create more healthy spaces. These changes are likely common phases over the next few years. The first phase will require quick and make shift kind of changes to get workers and students and customers backing these spaces as soon as possible the second phase.
It is likely to focus on making many of these changes more permanent and evolve and will involve systems and layout changes.
If I had a third phase is a phase of re imagining the spaces and optimizing for how students best learn and how offers office workers best collaborate and so forth.
This third phase is likely to result in major renovation work to structurally change office and classroom configurations.
Now the first phase is underway now.
And as we already Wi many commercial space operators are already thinking about what the options are in a phase two and a phase III view other situations.
Commercial renovation has not seen a catalyst like this in decades.
Making these kinds of changes in commercial space as has been largely discretionary and subject to the financial health of the organization or state local budgets.
Because this catalyst has been born of a health crisis. These changes may no longer be as discretionary.
At eight of you why we have a large and diverse installed base of 38 billion square feet of existing suspended ceilings in the U.S. alone.
This space is composed of roughly 30% office, 20% schools and mid teens reach of healthcare retail and transportation.
Each of these verticals have their own mix of new and repair and remodel activity, but on average 70% of our sales are tied to repair and remodel projects. Therefore, we're especially excited about this renovation Renaissance coming to commercial spaces, we're well positioned as a leading ceiling brand with the most.
Staying nimble solutions for healthy commercial spaces.
Our solutions are timely for what the market will require over the coming years and as a pillar of our strategic plan reviewed with our board of directors and our July Board meeting.
The excitement around this opportunity in the confidence in our ability to continue our industry, leading cash generation as motivated our board to increase the authorization of our share repurchase plan that we mentioned earlier, so $1.2 billion over the next three years.
This new catalyst for renovation activity is unlike anything we've seen a decades and this catalyst for renovating commercial spaces is likely to be with us for years to comp.
Armstrong gives a clear leader in the commercial construction market and we have been for many many years, we supply the highest quality most innovative ceiling and wall products to our customers. We have strong distribution partners and great relationships with the leading architects contractors and developers.
As the commercial construction market evolves sat at this crisis.
We will evolve also.
And we will drive positive change in this industry. For example, we believe we will take a leadership role in promoting greater usage of digitalization by our customers to make the commercial design ordering and product delivery process much more efficient.
As the commercial construction market will now require healthier buildings, we will also be at the forefront of this.
We believe.
Should we believe these changes in the long run.
I will allow a market leader like Armstrong to further grow our business and further cement our industry leadership position.
So with this new catalyst for renovation along with our continued penetration into the architectural specialty segment Armstrong is well positioned to resume profitable top line growth. We're ready for these changes and we will adapt and grow and continued to deliver strong returns for our shareholders through the continuation of making a pause.
The difference in spaces, where people live work learn heal and play.
And with that we'll be happy to take your questions.
[noise] at this time I would like to remind everyone in order to ask a question the spread far wanting your telephone keypad [noise].
And that is star one and telephone keypad.
Your first question comes from the line of John Lovallo from Bank of America. Your line is open.
Hey, guys. Thank you for taking my questions. The first one on decremental margins, Brian the in mineral fiber it looks about 60% into Q should this improved though as regional mix improves in the back half of your and then on the architectural specialties side, 40% was a little bit higher than that we.
Would have expected.
Maybe help us understand what drove that and how should we think about decrementals to the remainder of the year.
Hi, Brian Yes.
John.
Good question, you know as we look at our cost out actions is that a good majority of them in the back half. So we should see that decremental has come down from what we saw in Q2, so we're in that 55% to 60% range.
Got it okay. Thank you and then and then pick maybe if we just think about you know your thoughts post one two and then sort of we evolved over to Q, what was sort of the biggest delta in your thought process. I mean is it just really is simply as things being slower to.
And you any thoughts there would be helpful.
Yes, I mean, there was a lot of uncertainty even sitting in April right on how deep this would continue or how long it would continue.
But we all felt that they would be.
These cities would eventually open back up and the work forget we started and going again.
And I think one of the things that you mentioned it I think that surprise us the most is the.
I would say the lost productivity if you will in trying to adopt these these new CDC guidelines and spacing and how many people can get an elevator right to go up to the job sites and.
Many cities. It was one and you can imagine getting a whole crew up how long that might take so things like that I think slowed the opening of some of these job sites and the flow of product back into those job sites. The one hypothesis that I was watching through out the quarter, though because we expected sequential improvement it.
Again, some of these mandates were lifted but where the jobs still be they're.
The ones that we had in our pipeline the ones that we were starting to serve.
So when they when they reopen backup would they be there or would they be canceled or delayed for long periods of time and when I was pleased to see is that we did not see massive cancellations. We saw very few cancellations.
And the projects by and large were there.
That were there before the shutdowns and that was encouraging.
Great. Thank you guys, yes. Thank you.
Your next question comes from the line fill name from Jefferies. Your line is open.
Hey, good morning, guys.
Nike on for Phil.
I guess just start off with the full year sales guidance implies a pretty big range of outcomes in the second half on.
So maybe if you could just walk through the different scenarios that get you to each and that tends to 18% decline for the full year and if there's any trends you want to call out between mineral fiber and yes.
Yep.
Matt can we do we do run a bunch of scenarios, you can imagine, especially with the level of uncertainty on what's going to happen.
With with jobs and then follow on jobs from that so we've done a tremendous amount of scenario planning.
And we really got to an outlook scenario versus guidance, because the and we needed larger ranges to really capture the range of some of these scenarios and and so when we think about it. It was important I think the bracket what we see is going to happen again outside of any government mandated shutdowns.
I think we had a well bracketed in the in these wider ranges, but we purposely wanted to provide wider range is to make sure that we captured the scenarios would have going into too much detail of the scenarios.
It's really around assumptions on.
Big drivers for US are these seven key territories, and how well they open up and get back to their productivity levels on these jobs and continue on.
There's scenarios around that that that we're looking for plus some of these outbreaks. We're looking at some of the dampening effect. It could have although they're not shut down their dampening effects and some of these regions and we scenario would.
Different some some scenarios around what that might look like in a dampened recovery in some of those key areas. So really driven by sales at this point, we have a really good.
Handle on our costs and our cost control, we feel really good about the pricing, we I think where we feel good about modeling our mix.
Given those various scenarios. So this really just comes down to how well because the demand profile shape up and and we've modeled against that.
Mineral fiber versus architectural specialties, I think we're going to continue to expect architectural specialties to outperform the market just based on the project nature of that business and the visibility on the pipeline there.
It doesn't have a large discretionary component to it.
That is.
Harder to predict like we do in the mineral fiber.
So I would expect between the two will continue to see architecture specialty outperformed the mineral fiber business.
In an environment like this especially.
Got it now that that's really helpful and I guess touching on on architectural specialties I think most for your competitors there are more local or regional players. So have you seen share gains and this environment and.
How does not impact your M&A pipeline and maybe your appetite to pursue more bulls Heinz over the near term.
Yeah, I think in this environment, it's fair to say Theres not a lot of share moving one way or the other there's there's not enough activity really change the trajectory of of.
I mean these projects were shut down it didnt.
It didn't matter what kind of projects they were right. So.
I'd say no no change really in the share trajectory, although we were gaining share and we've been gaining share for several years now and I I expect that that trajectory to continue but no change in the the trajectory.
Certainly a lot of these companies have to be.
Struggling and in a low to no demand environment like we were in a second quarter and we're advancing our conversations with many of these companies and we are we expect a continued to have some opportunities that come out of this for that we're especially pleased with the ability to keep the conversation going with the the turf.
Owners and and management team, that's a very exciting acquisition for Armstrong has this is a company that brings many things versus just a new product and a new product.
Category for us into felt category in particular, but they bring some advanced design capability. They have a strong specification team, which you know, it's very synergistic to how Armstrong wins in the marketplace today.
And they have really strong management team, we're excited to happen.
On our overall management team. So we expect to continue we're open for business as we said here and we believed that the pipeline.
Actually the pipeline continues to grow as I mentioned in my prepared remarks.
Alright, Thanks for taking my question you about thank you.
Your next question comes from the line Susan Mcclary from Goldman Sachs. Your line is open.
Thank you good morning, everyone Hi, Susan.
Hi, Good question you mentioned in your comments Nick that July today is running ahead of yeah. I just wondered if you could give us maybe a bit more color on how July is trending and you know just where things are kind of coming in relative to June.
Yeah, it's sequentially improving versus June and.
You know you have some you have some seasonality effects that you look for also month to month.
And I can say that July is not only sequentially improving versus June but its covering the seasonality uptick that you would expect to see from a normal month movement from June to July So we've seen some nice.
Uptick in the flow of sales in July.
Okay. That's encouraging and then my second question is just on the cost reductions that you are also guiding to the 45 to 50 million can you give us a bit more color on the breakdown of that between the manufacturing versus the SGN a side, perhaps just some guidance on how much of that is structural versus more discretionary.
So as we kind of model the margins going forward, how much should we expect to kind of hold for a while well how much could potentially kind of flow back in the business as the volumes start to return.
So the question I'll less ask Brian to provide a little bit of call. Let me just add on the.
On the high end of this approach to cost reductions I think it's it's important to to to say that we have made a very conscious effort. In this particular downturn to continue investments and growing the business and the growth initiatives that we've we've.
Embarked on at the beginning of the year, we've continued and we've continued to invest in or innovation effort and so we've kind of.
Found a really nice balance of making sure that were rightsizing on the demand side of the business, but also we're not taking our eye off these growth investments and these initiatives that are really going to drive future growth of the company and we found a really nice balance there and that's been an important work for this management team.
But the team so nice job on the cost front end, Brian maybe you could outlined a couple of the buckets that Susan referenced.
Yes, absolutely so 30% of its more variable and tight tied to volume. The other 70% is more temporary like variable comp in travel third party vendors, which we expect to come back into arpino in 2021.
We we as a reminder, we continue to.
We expect sequential improvement and in in the event of any meaningful set back in that demand, obviously all costs would be for the scrutinized, but I think soon the short answer is 30% more variable the other seventys temporary.
Okay. Thank you that's helpful. Good luck with everything yes. Thank you.
Your next question comes from the line have Kathryn Thompson from Thompson Research Your line is something.
Hi, Good morning, this actually Brian on for Katherine Thanks for taking my questions first of all on.
Regarding the post co bid opportunities you guys mentioned some of these in the prepared remarks, but if you could expand more on the maybe like low hanging fruit for Armstrong to kind of participate in that commercial space to be configuration in the near term.
And versus the kind of more longer term opportunities that are out there.
Yeah. Thanks for the question you know.
At the at the the low hanging fruit as you referenced really is around patchen match and disturbances and apply them from any of the layout changes things lights.
He see changes things that you have to get into planning for whenever that happens that that is a renovation or replacement opportunity for Armstrong and I think that's gonna. That's ongoing now we have some real examples of that and are on our own campus win.
We had to change to lay out of our cafe to make it more healthy you have to remove the salad bar for example, and things that Hank from the ceiling over the salad bar to protect that have to be removed and therefore, the ceiling tiles have to be changed.
And so it's those types of low hanging fruit opportunities. We believe we're going to be there at the at the onset here, but as they as companies just like Armstrong are looking at how do we do.
Social different saying and how do we really out our our cubicle configurations and so forth that will also have an impact on where the lighting is and where the diffusers are in the ceiling and those create nice renovation opportunities again, and then longer term as I mentioned and as you structurally change the footprint.
Of your office or even the classrooms, which the business schools are wrestling with right now.
He will impact moving walls, changing H.B.A.C. systems, and so forth and give us an opportunity to actually replace all of the ceiling tiles with more anti microbial our health some type products and those are some medium to longer term opportunities. We see so again, we think this renovation.
Activity. This catalyst that's coming to renovation is gonna be with us for a while as this health crisis is I think change the way, we think about health and how we think about pathogens in the air.
And healthy spaces overall is being redefined in the eyes and I know it from from my own employees, and how they're thinking differently and what their expectations are to come back to the office and we desperately want our employees to come back to the office, it's where we do our best innovation, It's where we do our best collaboration so I bet every business owner.
CEO manager is thinking along these lines as well let alone are students and where we have to do to get to students back in the classroom. So we're excited overall about this is a real catalysts that we haven't seen in the renovation side of the business in a long time.
Got it and I guess, what that catalyst and that opportunity for people to come back to the office, how you're balancing kind of those opportunities with I guess the other side of the the pendulum the risk of small office footprints lower occupancy rates and kind of the downside for that how do you balance those two.
Well there is a balance right. It's not all that's not all going to move in one direction, but what we do know is that 90% of employee survey to want to come back to the us at least part time, if not full time.
70% of employees want to come back the office for the majority of their week, so things have to change in the space that's going to generate.
Renovation opportunity for for a company like Armstrong.
But even if as they reassess the the footprint that they have they move out of the space. The space gets re purpose. That's another renovation opportunity for Armstrong. So if somebody says we don't need 10% of our space. They let it go back to say the building owner he'd leases it out to somebody else and again, that's a tenant improvement opportunity.
For us the other tread here to keep an eye on is that when they say they don't need as much space they are actually.
Displacing where they need the space, maybe less city dwelling in terms of offices, but they need more suburban space.
And so there's there's counterbalancing to both of these so again I think theres opportunities and there's there's risks and they're going to counterbalance overtime, but it's a net positive overall for a company like Armstrong that rely 70% 75% of demand from renovation activity.
Thanks for the cost you bet.
Your next question comes from the line of Keith Hughes from Suntrust. Your line is open.
Thank you two questions first this renovation opportunities how far away.
Yeah.
Thank you.
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I think there's low hanging fruit going on right now I think the and I mean, right now meaning in the next 90 to.
120 days, especially if they get back into the classrooms, I think thats going to be we and I mentioned that the bidding activity in education is already turned positive versus the other verticals. So I would expect will start to see some some opportunities from this in the next 90 to 120 days again, it's kind of continued to go as.
And in phases in waves.
And I think.
It's not an event that happens and then it's over I think this is a continue continued over the next several years in terms of renovating.
You know that 38 billion square feet of installed base out there somehow needs to get touched and renovated we planned to be part of that conversation and each each of the the opportunities.
Okay second question on the cost save you highlighted earlier in the numbers. That's your dividend is not a run rate cost save or 12 month across a number.
Brian.
Yeah, Keith that's a this year.
Just this year, okay, yes, our that's all thank you thanks Keith.
Your next question comes from the line.
Kenneth Zener from Keybanc Your line is open.
Good morning Gentleman again.
Okay I appreciate your comments.
Very difficult landscape.
My two questions going to be about current and then the future. So.
You talked about inventory reduction could you talk about what that drag was you think first the Pos trends that we saw and then Brian if you could smith expand or.
Rick on the comments you made about the top seven markets.
And make sure I understood you correctly I think you said it was down 40% for 20% for the other so you could.
Somehow give us a.
Mix and sales or something to think about that and then relative to your second half guidance.
It's about sequential trends, but should we expect.
For Q to be down from three Q, which is normal seasonality or I'm, just trying to make sure we don't.
Back weight or you know, we interpret what you're saying.
As best we can that's my first question.
That sounded like several Ken.
I think it might have been by I appreciate it.
Well, let me take the first heard about and then I'll ask Brian to comment on the the territories that you asked about the.
The majority of what we're seeing its really when you said you said point of sale data, but it's really the market right I think most of the.
The downturn that we saw was government mandated shutdowns across the country and and there was a little bit of inventory correction that was going on in the channel for sure I'm sure everybody was managing their cash prudently.
But I wouldn't I wouldn't call it out and say that that was a.
A meaningful.
Part of the overall minus 25% we saw in the second quarter.
Brian you want to comment on the seven territories.
Sure and.
Cannot.
Maybe you pick also talk about the sequential piece, so can even with the seasonality. We do expect Q4 to be better than three as these key markets start to really open up.
And as we look at those.
Seven key markets I think Nick mentioned in his prepared remarks, what we've seen in July is then start to to get to the same level. So we've seen an improvement in those seven from what we saw in Q2 sequentially.
So we're we're continuing to monitor how quickly they open up in some of the logistics on the job sites.
Thank you.
The second question.
I appreciate your patience is what are you seeing could you expand on its education considering state funding is they are ready deficits and then.
You know is it a switch from elective spending to required for health safety and then what are you seeing from New York and perhaps Houston from hospital trends out of these early what's the early feedback from that institutional market. Thank you.
Yes, Ken so on the.
What was the first part of your question because I was thinking about your second one in Houston in New York, but what was the first are the first just state education States are Brooke.
No I got if yes schools need to do this for health reasons, that's very different approach than what had been an elective expenditures before in terms of how we allocate funds.
Yeah, when they were relying on their own state budgets right. They had to really prioritize and as we note and we've noted with you over the last seven or eight years.
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Funding with other places probably more importantly, the books and things like that and in terms of.
Supporting the education environment, but now the crisis is about making these these classrooms.
Healthier. So parents are more confident to send their kids back to school of course, the super intense everybody the teachers feel safer and in this space as well so the money being allocated either in the GLP Bill or the Democratic Bill is somewhere between 100 billion and $500 billion to help solve for.
Or how do we make these classroom safer to get to kits backend.
That's a real stimulus I think two renovation activity. It definitely is less discretionary than it used to be just because they have to solve for these spaces are healthier and addressed the the potential presence of pathogens. They have to address that to get that gets back in the classroom. So yes, I got to believe it's a lot less discretionary.
I used to be.
As far as you know the healthcare facilities in New York and Houston and appreciate your patience on that but we can we continue to see good activity on to healthcare front really across the country in terms of.
Renovating spaces to make them.
Healthier.
They are actually replacing ceilings in a lot of places as part of their cleanup effort.
So we've had some nice activity there overall and again, it's not it's not standout like we're seeing a big driver yet, but we're continuing to see improvement in health care facility I think longer term can't the way to think about the health care facility is one of the things that this pandemic, it's really shine a light on is the lack of local.
Cool medical facilities available to do things like testing.
And I think this could really be some nice new construction activity for the long term and health care.
Well have to wait and see.
Thank you thank you Ken.
Your next question comes from the line.
Adam Baumgarten from card Credit Suisse. Your line is open.
Hey, good morning.
Just on pricing how should we be thinking about in the equation going forward like for like pricing are you still proceeding with the August price increase that was laid out earlier on here.
Yeah.
On pricing, we were still getting good traction on our February price increase and in the a significant deflationary environment. We're on.
We're in we're not likely to go out with a a general price increase in August but use the pricing tools that we haven't our tool box for more surgical pricing opportunities.
And and so I expect like for like pricing to continue to be positive as we our year to date now and like for like pricing I think the traction but that price increase should continue through the second half of the year overall ASV is going to approve though as we get these territories back up and running and we get a more normal mix.
Regional mix going that we should have positive mix and overall positive Avi.
For the year, that's a that's what we expect to see.
Got it thanks, and then just on input costs had been a tailwind is that contemplated in guidance going forward for that to continue.
Yes. It is.
Great. Thanks.
No.
Your next question comes on the line.
Stephen Kim from Evercore.
Hi, ESI your line is open.
Yeah, Thanks, very much guys Crazy times.
But I thought that making workers more healthy.
I would mean that you'd get rid of the salad bar [laughter] pretty unusual costs, but as the world coming through right fell about.
Yeah, Yeah, exactly well I wanted to talk to you a little bit about this retrofit.
Opportunity.
So I guess first first thing is you know big picture when you.
When you think about the I'm trying to think about the timing because thats potential wave of renovation that may calm.
And and I'm looking at the architect data and we're seeing big drops in billings and project. We're hearing about layoffs in the architectural community and that kind of thing. That's I'm wondering are these renovation jobs typically requiring to utilize the usage of ah or the or the.
The in put up an architect.
Or not and therefore would you expect to see architectural billings increased ahead of this retrofit opportunity or not.
Yes. The 80 community is definitely involved and a lot of these renovations you're gonna have a mix right you're going to have some things that like I described earlier I think with keys question, you're going to have some patch unmatched stuff. There. They are just damaged titles because they are in trying to do something change filters or do something or change.
Lighting and in some of those type of patch and match most of those patra match opportunities. Stephen as you know don't include don't need anything, but a facility manager and.
And a good distribution outlets so.
There's a good portion of this business is low hanging fruit, it's not it's just going to show up through distribution, but we surveyed the AG community and 60% of the 80 community has said that all or most of their and client their clients are asking them and discussing healthy how to create healthy spaces in there and there's an era.
And their buildings.
92% of AG community has reported that clients that they've been asked from clients on how to create a healthy space. So I think the age of community is going to be involved and it just going to depend on is this the low hanging fruit in phase one or is this a phase two phase three discussion and I think you'd have to think about them in succession.
I really do it right and that's how we're thinking about it.
Yeah, No makes sense.
Maybe a little more specific about the growth opportunity for these Ah I think you mentioned antimicrobial product that are used in the health care and clean rooms settings.
Curious about you know these products effective for sound attenuation too or is that an area potential innovation for you just sort of combined.
Medical needs with the sound attenuation in products that we don't currently see today and in order to your existing products able to address the new found desire for clean ability as opposed to simply being anti microbial because I thought generally ceiling tiles that you make aren't really meant to be touched a lot and so.
The people are fixated on clean ability I'm curious as to if the company has any ideas for how to address that desire yeah no into in the healthcare facilities that we sell our health zone product.
And clean ability is a big requirement that product was designed to have this probability to clean ability that is required in it and a health care facility and as you can imagine acoustics and sound attenuation is very important and.
A patient environment.
Hasn't lots to do with their their blood pressure and how well they recover so yes. These how some products that we're talking about that we're going to have really good application outside of just the healthcare vertical today.
Bring acoustics, they bring aesthetics and they bring clean ability as well as the anti microbial performance. So it's a technology platform that weekend lift in place in these other verticals as we educate them on the features of the benefits of this product we're going to continue to build on this so we can even dry.
Hi, a broader range of acoustical performance is as well as a broader range of of.
Anti microbial performance.
Vicki I know you guys have pretty dominant market share generally but is your would you say that your footprint here or youre your market share within this health zone kind of area is it higher than your company average or is it a little lower than your company average in there for an opportunity for growth.
Well, we've said publicly I think that when you when you get into the specification community and jobs that are spec driven.
We have above our average.
Share position in those types of channels and and projects, it's really a a driver of our innovation and we really.
Cater our innovation to those next generation specifications and how soon is a big product to that.
Yeah, no it sounds great. Thanks, very much appreciate it yeah you bet soon.
Your next question comes from the line.
Well I'm in from Exane BNP Paribas Your line is open.
Good morning, gentlemen.
Two questions if I may.
The first one I think you just mentioned we're about 70% of your sales is exposed to the renovation and responsive site or I was just wondering if you have is human or.
And market structure in your nine key territories or you have a higher exposure to new construction in these markets.
Yeah. That's good question they tend to be about the same.
25% to 30% driven by.
New construction activity.
And then the remainder in renovation activity again. These are large installed bases and especially in these seven Kieran surcharge, we're talking about theres really large installed base and so there's parts of the to mature base that really dictates that that the allocation of 30 70.
Okay.
And.
Second question.
You mentioned that.
You are.
You mentioned claims from through Q2 20 in especially in June but I was just wondering if you would be able to quantify what would be.
In June in terms of here on your decline versus 29 levels and so now the reference point.
We're.
We're hesitant to do that because I think the ranges that we provided in or outlook I think capture.
What could happen to that run rate.
I mean, we're very pleased with the sequential improvement and more specifically the jobs that we were expecting to serve are still there.
And so this the sequential improvement from.
April to May May to June and then as I talked about earlier from June to July is continuing at a nice clip so.
Right, you know versus trying to reference that I think our outlook is the best.
Thing I could point you to in terms of what could happen with this exit rate and where we expect to land at the end of the year.
Okay. If I can add one more question if I may I mean, there's enough talking renovation retrofits or here in Europe and it seems that it's starting to also be pulled off.
The political steering the U.S. is pitch on thermal renovation.
Historically in the last decade, you've actually existed.
Some verticals would you be willing to look and I'm.
Possible verticals in H. back for example, or more insulation.
In.
In the future try and benefit from those potential plans.
Right now we're really focused on this this opportunity in ceilings and walls, we have a nice adjacent C and specialty ceilings and wells that we're we're in the early innings of we have we have a good runway there and I think but this renovation catalysts now for our mineral fiber business in the installed base, we have an additional.
Growth engine opportunity. So I think we have a lot to stay focused on within the ceiling and the wall space right now.
And and that's what that's where we're going to we're going to stay focus and make sure investment dollars go in behind those initiatives.
Alright, great. Thank you so much thanks, thanks for question.
Your next question comes from the line of Justins fear from Zelman Your line is open.
Thanks for sneaking me and guys appreciate it.
Just a couple of questions are for your questions, but I'm a bidding activity that you reference I think you mentioned that slowed substantially in April improved the down 13% in July.
I guess, what does that net of cancellations or is that a gross figure.
That would be a gross figure were not measuring the two together. This is really the amount of activity year over year comparison. So it's really an activity metric the way to think about it.
Yeah, Yeah, So I guess in terms of the second.
Yeah, the cancellations have been very small.
So the those cancellations that you're mentioning that I were so you mentioned that very small cancellations on projects that were already in backlog or in motion credit for those projects that have not yet broken ground. So I'm talking about bid activity that has not yet transacted are broken ground is that I guess the question of bidding activity encompassing projects that have already broken grow.
Out or is that prior to breaking ground.
This would be prior to that right. So it doesn't have to be breaking ground. The these can be tenant fit out right. So okay.
Yeah that these aren't this isn't a new construction metric this would be an overall bidding activity metric yeah.
So I guess in terms of the second quarter overall, what was the bidding activity how much how much that a decline I guess, how does that translate to revenues.
In terms of timing or phasing as we look out.
Well you know these projects can go anywhere from three months out to two years out right. So it's really kind of that's a really tough question to answer very specifically because the bidding activity is picking up all sites the projects.
That are that are being let.
So now I think this as a proxy for activity and I would think about it in terms of what we just experience in terms of a downturn in the quarter.
Did the bidding activity hold up and is it getting better. It's I think it's a directional more than an actual number comparison and correlation to revenue.
But it is Oh I think a good metric in terms of.
A future activity in future demand on.
Activity requiring bids for example versus part of our business again, just as you know as it is a patch in matching a flow business that wouldn't be captured for example, right. In this bidding activity. So I wouldn't waited too heavily in terms of a forecasts are for revenue, but it is a good measure overall bidding activity that continued.
Okay, and then in terms of any distinctions I know that there are certain parts of the nonresidential channel that are doing better affair and relatively better than others, but I guess, if you could like maybe rank order verticals. The key verticals for you I know you don't breakout lodging I don't know where you put a.
A big chunk of office education retail.
Transportation for health care, some residential but I guess it could rank order for us how things are trending and how you think about them in a rank order fashion as you look in your outlook.
Well I think all of these that I the verticals that are really important to us. They all kind of improve sequentially from the April education was the outlier as I mentioned earlier that really accelerated in terms of its bidding activity and actually it was positive versus prior year in bidding activity with us something right in this environment. So.
I called out that when I think the others have sequentially improved.
Kind of together.
Okay last question for me interest certainly your distribution.
Arrangements your exclusive distribution partnerships any distinctions or changes in strategy, there, maybe a blueprint more distribution partners or maybe a change in pack there in light of environment.
We really have the best best in class distribution partners today were we.
We rely on them heavily they rely on us heavily we have a really good.
Partnership and coverage in the marketplace today.
So what we're doing is we're investing in that channel with our our digitalization initiatives to help our relationship even be more efficient and covering our customers and covering more of the other customers in the marketplace. So we it's a real asset of the company and I really do believe we have the best partners in the industry.
I appreciate it guys best of luck you. Thank you Justin.
Excuse me for centers there are no further questions.
Third result that too.
Thank you I just want to thank everybody for joining today went a little over time, but some really good question we.
Obviously, a very very tough quarter everybody's had a very I think similar experience in terms of the shutdowns.
We remain focused on creating long term shareholder value as I mentioned earlier, we did not take money away from our growth initiatives and star of growth initiative, our Pos growth initiatives and we're very very happy about the balance that we have found on on the cost side of the business and maintaining the long term trajectory the business.
What about on the other side of this this renovation opportunity we're gonna be working hard to to make sure that were part of that conversation, where part of the solution of creating healthy spaces, which is going to be.
Much more non discretionary.
Expenditures for a lot of companies going forward. So thank you again and look forward to talking to you next quarter.
This concludes todays conference call you may now disconnect.
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