Q3 2020 Armstrong World Industries Inc Earnings Call
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And gentlemen, thinking we're standing by and welcome to the Armstrong World Industries Inc. third quarter 2020 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 to ask a question. During the session you won't need to press star one on your telephone as a reminder, today's program may be.
Recorded and now I would like to introduce your host for today's program, Tom Waters, Vice President of corporate Finance. Please go ahead Sir.
Thank you good morning, and welcome everyone. Please note that members of the media have been invited to listen to this call and the call is being broadcast live on our website at hormone ceilings Dot com.
With me on the call today are Vic Grizzle, our CEO and Brian Macneal, our CFO hopefully you have seen our press release this morning, and both the release and the presentation, Brian will reference during this call are posted on our website in the Investor Relations section.
The 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 implied for.
For a more detailed discussion of the risks and uncertainties that may affect Armstrong World Industries. Please review, our SEC filings, including the 10-Q filed earlier this morning.
Forward looking statements speak only as of the date. They are made we undertake no obligation to update any forward looking statement beyond what is required by applicable Securities Law. In addition, our discussion of operating performance will include non-GAAP financial measures within the meaning of FCC regulation G.
Reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation.
Both are available on our website with that I will turn the call over to Vic.
Thanks, Tom and good morning, everyone and thanks again for joining us today I'm pleased to be with you today from our corporate campus in Lancaster, Pennsylvania.
Strong like many companies as adapting to a new normal of hybrid work activity here at Armstrong safety protocols are in place and our physical spaces have undergone a first phase of modifications to allow our organization to return to the office safely.
We are actively working on more permanent changes to our facilities, including the use of new ceiling and grid solutions to create healthier spaces for our staff and visitors.
Our manufacturing and distribution facilities continue to operate well and safely quality.
Quality and service levels are high and our connectivity to customers.
Enabled by our digital tools remains excellent.
Overall demand in the quarter improved sequentially much as we had expected on a seasonally adjusted basis Q3 was 14% better than Q2.
Down 11% versus 25%.
In addition, we saw sequential improvement within the quarter as daily mineral fiber sales improved from down 15% in July to down 11% in September.
At October has continued this trend and is progressing better than September.
Our top seven territories, which had lagged significantly in the second quarter return to the overall national average during the quarter.
But the New York Metro area, our highest TV territory continues to lag.
Overall sales of $247 million were down 11% quarter versus prior year volume was down 10% and mineral fiber ASV was slightly negative.
Positive like for like pricing improvement and favorable product mix were offset by negative channel mix and negative territory next primarily driven by the lag in New York Metro area.
In addition sales to big box customers were up in the quarter versus 2019, which is good from a volume perspective, but given the lower sales price in this channel. It was also a headwind to mix.
While the overall demand trends in the quarter progress largely as expected there were some developments that we observed that I want to share with you to provide context on the market conditions.
As expected construction activity picked up in the territories most impacted by Cove it.
Related restrictions in the second quarter, mainly the seven largest territories, we referenced on our last call.
The easing of state local regulations on job sites and increasing ability of contractors to work with a newly imposed restrictions. Both helped the situation. However, as the quarter progressed, we saw delays emerge and previously less impacted territories now.
Namely the south and the Midwest following the migration of the virus.
The shift in regional activity reflects the impact of increasing cobot cases on construction activity.
And the overall uneven nature of the market reopening.
New construction activity has fared pretty well overall as existing projects continued toward completion, while smaller and mid sized renovation projects experienced greater headwinds.
And our conversations with our customers. It is clear that there remains a lot of near term uncertainty as building owners work to determine the best path forward to adapt their facilities to enable the safe return of occupants.
This is also true of schools with some remodel activity remaining on hold as many students learn from home.
Also in the quarter, we continued to experience softness in our low visibility flow business. These are the small discretionary repair remodel type projects that flow through our distribution partners.
And often without a specification.
In addition to the uneven opening of the markets. We also experienced minor business interruptions in the quarter due to protest activity in certain cities and hurricane Sally which closed our Pensacola, Florida plant for a few days. Thanks.
Thankfully our team at the plant a safe and were back up and running.
The Armstrong team and our partners continue to earn my admiration as they overcome obstacles and continue to deliver for our customers adjusted EBITDA in the quarter of $92 million was down 19% from 2019 the.
The pandemic driven volume decline is really the entire story as the business continues to operate well and as expected otherwise.
Brian will provide more details on our financial results in a moment.
But it has been an impressive performance by our operations team and an extraordinary environment I could not be more proud of the work that they have done thus far despite the challenges in the market. Our strong cash flow performance continues and we remain on track to deliver over $200 million and adjusted free cash flow.
Based on this continued strong cash flow generation in our confidence to continue to do so our board has approved a 5% increase in our regular quarterly dividend to 21 cents per share and we are restarting our share repurchase program.
The third quarter was also notable in that we completed two M&A transactions the.
The previously discussed acquisition of Chicago based turf design, the leading provider of custom felt based ceilings and walls.
And then on August 24th we acquired those designs.
Most us a northern California based designer and fabricator of custom architectural metal ceilings walls dividers and column covers.
Most brings unique capabilities that can be utilized to improve the product offerings of our three existing metal ceiling facilities.
And further strengthens our already leading position in the growing category of metal ceilings in malls.
As clean label surfaces, and partition solutions are now more important than ever Im delighted to welcome. The most came to the Armstrong family.
This transaction marks our seventh acquisition since 2017.
We are truly building an unmatched platform of specialty ceilings in walls, and we are not done our M&A pipeline continues to grow as we see more and more opportunities to build out the most unique set of capabilities in the industry and our financial strength allows us to do so.
Now with that ill pause and turn the call over to Brian to review, our financial results and then I'll be back to talk about the creation of healthy spaces that is dominating the conversation in these times Brian.
Thanks, Vic good morning to everyone on the call today I'll be reviewing our third 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 basis of presentation.
Beginning on slide four for our overall third quarter results sales of $246 million were down 11% versus prior year.
Significant sequential improvement from the second quarter when year over year sales were down 25% adjust.
Adjusted EBITDA fell, 19% and margins contracted 370 basis points again, a substantial sequential improvement from the second quarter when year over year, EBITDA was down 36% and margins contracted 590 basis points.
Adjusted diluted earnings per share of one dollar and seven cents fell 22% and adjusted free cash flow declined by $53 million versus the prior year I will address the reasons for this decline in a moment.
Our cash balance at quarter end was $139 million and coupled with $315 million of availability on our revolver positions us with $454 million of available liquidity.
Down $33 million from last quarter, as we completed the turf and those acquisitions during the past this past quarter and down $24 million from the third quarter of 2019.
Net debt of $542 million is $4 million higher than last year as a result of our acquisitions, partially offset by cash earnings and the receipt of $19 million from the sale of our teams who plant in China, which was idled.
As of 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.
Our balance sheet is in solid shape.
In the quarter, we did not repurchase any shares as our repurchase program remain suspended to preserve liquidity in light of the Soviet 19 impacts on the market.
Last week, our board of directors approved the restart of the program drilling.
Going forward, we will look to return to our customary approach of repurchasing shares subject to our normal process and protocol.
Since the inception of the repurchase program, we bought back 9.6 million shares at a cost of $596 million for an average price of $62.13.
We currently have $604 million remaining under our share repurchase program, which now expires in December 2023.
Slide five illustrates our mineral fiber segment results in the quarter sales were down 14% versus prior year, but sequentially improved from the prior quarter when year over year sales declined 26%.
So the 19 driven volume declines were the key driver.
ASV was a headwind as positive like for like pricing and favorable product mix were offset by the channel and geographic mix issues that face mentioned.
While sales in our key seven territories improved sequentially and converge with the performance in other territories.
Performance within these key seven to seven territories was inconsistent was a headwind to overall price and mix for the mineral fiber segment.
Easy in the remaining territories was positive.
Adjusted EBITDA was down $20 million or 21% as the volume decline sell through to the bottom line in a view as a threat.
Renewed manufacturing productivity and cost reduction initiatives, lower raw material and energy costs and SGN a cost management were all positives in the quarter.
We that equity earnings were down due to lower sales and also as a result of a year to date two off of allocated costs from Armstrong and Worthington.
Moving to architectural specialties segment on slide six.
Sales were up 1% as the acquisitions of turf and most contributed almost $8 million in the quarter and.
And offset Covance, driven organic sales decline of 12%, which were sequentially better than the 22% decline we experienced in the second quarter.
While current period sales activity was challenged given sales in local restrictions. We continue to have exciting wins and had been awarded the Kansas City International Airport and the Princeton University residential college projects. These jobs will ship in 2021, and 2022 and demonstrate our continued.
Ability to win complex and iconic projects.
Despite flat sales direct margins expanded significantly driven by the higher margins of the turf and those acquisitions relative to our base business and ongoing productivity in the network, particularly at acquired facilities.
Six managing manufacturing costs and has seen a were up driven by the costs of turf and modes.
Slide seven shows our consolidated results for the quarter and clearly illustrates the impact of Covance related volume declines.
Slide eight shows adjusted free cash flow performance in the quarter versus the third quarter of 2019.
Cash flow from operations was down $48 million largely driven by volume due to code at 19.
Also in the quarter. Despite lower income in Q3, 2020, we actually paid $14 million more in cash taxes in the third quarter of 2019. This is largely driven by timing in certain discrete items in the base period.
Not included in this cash flow bridge, our two significantly positive nonrecurring cash items in this quarter, we applied a $27 million tax refund.
Related to the sale of our international operations, and we received $19 million from the sale of our closing two facility in China.
We have received an additional $2 million from this sales in October and this transaction is now complete.
Slide nine shows our year to date results as you can see sales are down 12% adjusted EBITDA was down 18% and adjusted free cash flow is down 16%.
Slide 10 is our year to date bridge again to the posted related volume declines are the main driver followed by the geographic and customer HBV issues, we've called out for.
For the year product mix and like for like pricing are both positive contributors to sales, but mix is a headwind to EBITDA due to geographic and channel mix.
Input cost deflation in the savings we are driving in manufacturing and SGN eight despite our acquisitions helped mitigate the sales fall through to EBITDA.
Slide 11 reflects our year to date free cash flow as with the quarter operating cash flow was impacted by volume declines due to sales of 19, the tax refund and team to sales proceeds mentioned earlier are excluded.
Capital expenditures reflects the delaying actions, we are taking to finalize or to prioritize.
Cash in the near term.
Interest expense is lower as a result of our refinancing in September of 2019.
Wave earnings were impacted by volume declines.
Slide 12 is our guidance for the year.
We now anticipate full year revenues in the range of $920 million to $935 million were down 10% to 11% over.
Overall, the decline will be entirely volume as we anticipate HCV to be essentially flat for the full year.
EBITDA will be in the range of $320 million to $330 million as the sales decline drops down and is partially offset by productivity and the impact of our cost containment actions.
Actions are in place to drive 40 million to $45 million of savings and manufacturing in ESG in a.
Down slightly by $5 million from our previous outlook as we invest for future growth.
Our cash flow guidance is adjusted from our prior outlook as we have taken capital expenditures up acquired the working capital turf Imos and adjusted this seasonal trajectory of our fourth quarter to account for continued sequential improvement.
These are challenging times, but Armstrong is laser focused on controlling what we can control investing to drive growth and building on an already best in class platform.
Our ability to execute two meaningful acquisitions during a global pandemic is testament to our focus and confident I have no doubt that we will emerge on the other side of it is of this crisis and even stronger position to grow and create value.
With that I will turn it back to that.
Thanks, Brian healthy spaces is the dominant topic and commercial construction conversations today 90.
92% of architects and designers surveyed said they are having conversations with their clients on how to make their spaces healthier and safer.
Anthony universally known fact that we spend 90% of our lives indoors.
And even though healthy spaces have always been important. This pandemic has made it an even greater priority, possibly the highest priority and the standards for which health and safety are measured.
Our being raised to a whole new level.
At Armstrong, we have been a leading supplier of ceilings in spaces, where healthy have mattered, the most and operating rooms, and IC awards and other isolation room applications.
Now we are bringing that experience to today's conversation about creating healthy spaces and how to create one we.
We believe a healthy space.
And say space is a space that protects us and fosters a feeling of well being and comfort that allows people to be at their best.
So where does ceilings come in.
You are already familiar with how sales play a role in acoustics, anesthetics and and making the most of natural and supplemental light interior environments, all of which are part of the healthy spaces equation.
As the structural capstone of any space the REIT sealing system can make a meaningful difference by bringing the additional elements of healthy spaces together.
Our ceiling grid partition solutions contribute to maximizing ventilation and minimizing the transmission of harmful pathogens.
And most buildings the sealing system as part of the supply and return Air Ducting.
Were already very in tune with that with our current solutions for healthcare spaces.
We're now adapting the technology to be more affordable and effective in the office the classroom and other settings to meet the new definition and the new standards for a healthy space.
Im very pleased to introduce a new family of products called 24, seven defend these products represent innovative new solutions against harmful pathogens and other particles in indoor environments are 24, seven defend product family already includes infusion partitions and clean assure disinfecting products, which are proven.
Renewable products.
What's new is the air assure family of gasket ceiling tile products that sell fuel to the grid system and a new integrated Vida shield ultraviolet air purification and ceiling tile system.
When placed in our standard grid system errors sure gasket and ceiling panels form a tight seal and reduce airflow leakage ended the plant them by 300% over standard sealing panels rig.
Reducing air leaks significantly increases the effectiveness of air ventilation and filtration systems, allowing more air to flow through the return air events, where can be filtered and purified ensuring greater air quality.
In addition to allowing more filtering and cleaning of Aaron spaces error sure can also reduce the risk of pathogens traveling between spaces in a building further protecting a greater number of people.
In addition to offices and healthcare facilities. This is vital for schools and senior living facilities as they are being asked to create more isolation rooms to prevent the spread of infections.
Reducing air leakage would there sure is an easy way to retrofit existing rooms and is available with our popular sustain and total acoustics solutions.
Now to complimentary way the new patented scientifically proven Vida shield system pairs, an active ultraviolet air purification system with Armstrong ceiling panels.
To provide cleaner safer air and any commercial space.
And unobtrusive drop in sealing system that draws air into a chamber above the feeling exposes the air to you the light neutralizing harmful pathogens and then returning clean air to the room.
Vida shield can be used as a standalone solution or for even better results can be integrated with AEROSURF panels.
Together these two new solutions reduce the risk of indoor air transmission of harmful pathogens.
This pandemic is serving as a catalyst to renovate in commercial spaces to create healthy and safer spaces. Unlike anything we've seen before.
And we believe it will continue to evolve for many years to come because healthy spaces are now essential.
These new products are just the beginning of 24 seven defend families. We have solutions and our innovation pipeline that we will add to this family in the coming quarters.
Armstrong as a clear leader in the commercial construction market and we have been for many many years.
As the need for healthier buildings evolves, we will be at the forefront driving positive change in our industry. We.
We believe these changes in the short and long term will allow market leader like Armstrong to further grow our business and bolster our competitive advantage.
Together.
With our industry leading position.
Our digitalization investments and now with our expanding health space. This platform Armstrong is well positioned for profitable topline growth.
With the pending renovation Renaissance in the medium term and a whole new way of thinking about commercial interior spaces longer term.
We are both ready for and excited about the possibilities ahead and this is all aligned with our commitment to continue to deliver strong returns for our shareholders and to making a positive difference by creating healthier spaces, where people live work learn healed and play.
With that we'll be happy to take your questions at this time.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered you'd like to remove yourself from the queue. Please press the pound key our first question comes from the line of John Lovallo from Bank of America. Your question. Please.
Thanks.
John The Battle your line is open.
I don't hear anything from John So want to go to the next question May we'll circle back to John.
Certainly once again, ladies gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone.
Can we go to the next participant MCU blue.
Hi appear to be having some technical issue at the moment just one moment. Please.
Tom develop your line is open.
Can you guys hear me.
Great EPS with hearing now John Yes, Okay, great sorry, sorry about that that was on my end I apologize.
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Your outlook for a flat fee in 2020, it seems to imply something like 2.5% positive in the fourth quarter. I mean is this how you guys are thinking about it will mark my reading this incorrectly.
Brian you want to take that.
Yes sure John.
On the sales side, yes for sure.
And we used the word relatively flat, so plus or minus one lets say in that range.
But we continue to see that geographic territory.
Channel mix as a headwind for the fall through to EBITDA.
Okay. Okay. That's helpful. And then maybe just on on DNA DNA outlook of $70 million for 2020 within the EBITDA Guide you gave that seems to imply will be about $7 million of DNA in the fourth quarter, which would be pretty big sequential step down.
Is that correct or in part is what's driving that.
Let me take that yes. Please yes, so Josh yes that is correct and it's just the timing of assets move at all says that depreciation study.
Okay, Alright, Thank you guys yep. Thanks, Sean.
Thank you. Our next question comes from the line of Kathryn Thompson from Thompson Research Group. Your question. Please.
Hey, good morning, it's actually Brian Barris on for Catherine.
Thank you for taking my questions I wanted to ask about the architectural specialties segment.
I think last quarter kind of expected the segment to outperform the mineral fiber segment based on I think the pipeline and the visibility that you guys had.
Organic was down 12% in Q3 versus mineral fiber was down 14% so little bit outperformance. There I guess was that in line with your expectations or there may be a few delays that drag that down a little bit.
Yes, Brian This is back I think that was aligned with our expectations again quarter to quarter because of the project nature of that business you can see some different comparisons on the year I still expect architectural specialties as.
As we did in the third quarter, but I expect that in total for 2020 to outperform the overall market.
We had a terrific quarter in terms of order intake and the architectural specialty although a lot of that is for 21 and 22, but still there's a lot of activity out there and.
That team is doing a terrific job and winning projects.
Got it and then.
Got it then I guess the Regionality.
I think you mentioned some of the slower ones.
That were there in Q2 and Q3 are now kind of back to the National average, excluding the New York City Metro.
Are those expected to kind of remain at that national average into Q4 and early twenties 20, Warner is there some amount of.
Enough demand from being behind earlier that could maybe suing them to be above the average going forward in the near term.
Yes, I wouldn't put a lot of tailwind to them in terms of pent up demand I think a lot of this is just really depending on how these key metropolitan areas are opening up and experiencing the virus. We did see sequential improvement in those key seven territories, we highlight in the second quarter, which was a significant drag.
For us.
And.
Those territories open back up and got back up to.
A run rate that was consistent with the rest of the markets. That's exactly what we expected to see and that's what we saw except for the New York Metro area, which continues to lag.
But you know within the non key seven territories for the rest of the territories.
We're seeing sequential improvement there as well, but as the co bid cases caught up to some of those lesser impact territory like the mid west or south as we were highlighting.
We start we started to see activity slow in terms of the sequential improvement in those areas, which makes sense right there.
The number of Cobra cases is impacting the relative construction activity in those markets. So I think this all gets back to normal as we we get on the other side of of.
These these cities in these 10.
Territories opening back up and.
And responding to normal market demand conditions, So I think thats, a thats going to continue to be the uncertainty here in the rate and pace of which a lot of these territories.
Experienced the virus and then come out of their experience with buyers.
Got it and maybe just quickly following up on the New York City Metro specifically.
On a same thats still lagging is that a magnitude you can put on that or maybe is it lagging, but getting better or is it lagging in staying down.
Getting better, but still lagging the the other territories, but yes, we definitely saw sequential improvement as you would expect but still lagging and we're not going to break out each of the territories I think thats.
Well hang on to that.
Got it thank you all right Brian Thanks.
Thank you. Our next question comes from the line of Susan Mcclary from Goldman Sachs. Your question. Please.
Thank you good morning, everyone.
Good morning, Susan.
Well you know time will go about the pipeline of projects that you have been as you head into 21, I know that you mentioned that there's clearly been some delays in our thoughts first just across the entire country.
No crown sense, maybe of what that backlog is looking like for you at legal just not even for the fourth quarter, but kind of looking a bit further out.
Oklahoma to pool.
Color as you look at the current bidding activity are there any real shift in terms of maybe average project size or.
During the war on terror that could perhaps kind of see per influence, how we think about future volume versus the.
Yes, Susan let me and I think they are connected very much right. The backlog and then what we see in terms of bidding activity. So first of all on the backlog the best.
Our visibility we have in our backlog is in our architectural specialty business and the activity there and the win rate. There continues to be very impressive in fact in the third quarter, we had our best order intake quarter.
In that segment sales.
So there is plenty of jobs out there, there's there's plenty of business out there in terms of the specialty business and we're and we're closing it and and of course a lot of those are in 21 and 22 majority of that.
When that business closed projects are a little further out because of the design component so right.
Record levels of order intake for 21 and 22 in the architectural specialty business.
Thats really supported by an improvement in the bidding activity.
And we talked about the bidding activity being down 21% in the second quarter across all the verticals.
In the third quarter that improved sequentially to be down only 10% and that's the number of projects and this is related to the second part of that question that.
The dollar amount of projects was down 10% in the second quarter and down 5% in the third quarter. So the number of projects in the third quarter were tracking were down 10%, but the value of the project was down only five and what that says then is the size of the projects.
These larger projects medium to larger size projects are continuing and what is being held back or delayed more are these smaller what I call more discretionary type projects, where people are still in a wait and see mode of whether they want to do those modifications.
And where they want to do those modifications and so thats very logical to me makes sense that some of the smaller more discretionary projects or whats being held up and delay versus the larger projects. So its good question I think we're on.
We're seeing the sequential improvement not only in the activity.
And bidding activity, but also in our order rates.
And therefore, the visibility into next year.
Is improving so hoped.
Hopefully that answers your question Thats a good question.
Yeah, I know that color is very helpful. Thank you.
And I guess my follow up question is you mentioned in your commentary that you've gotten the authorized authorization to read them buyback can you give us some color on your appetite for buybacks, especially given the current valuation how you're thinking about capital allocation between buyback versus maybe M&A or some of the other.
Opportunities that you have.
Well no change in our capital allocation priorities.
And I think Thats really mirrored what we've been doing so far this year, which is investing back in our business to grow.
And you know.
With our recent.
Announcement actually last night of our new innovation around healthy spaces, if part of where we've been investing back in our business around this need for healthy spaces and innovating into that our digitalization tools for example.
Another good area, where we're investing back in our business. So that remains our our first priority.
Also in the third quarter, we closed two acquisitions. So we're open for business and as our second priority for the use of cash or we're going to continue to bolt on unique capabilities to the Armstrong platform.
And those two acquisitions are off to a terrific start by the way just we couldn't be happier with those two acquisitions and the fact that we can get them done in this environment, which was an impressive effort by our team.
But the third priority is around this return to shareholders and.
I think with a little bit more clarity about the depth of the recession and the impact on the markets and therefore, our cash position I think we're more confident to get back into that.
That third bucket and we do have the cash.
To allocate to that third bucket after we do the first two which.
You saw and the increase of our dividend.
In the quarter and also again back into the market for.
Share repurchases I can tell you we're going to maintain a prudent posture just given.
The uncertainty around the rest of the year as activities.
So.
Although were restarting it you will see us maintain a prudent posture and at least through the end of the year in terms of our share repurchases.
Got you Okay. Thank you very much for that color is helpful. Good luck that you about thank you Susan.
Thank you. Our next question comes from the line of billing from Jefferies. Your question. Please.
Hey, good morning, everyone.
I guess on the mix side of things encouraging to see at least some side maybe improve in the fourth quarter, you're expecting it to be positive.
When we think about 2021.
The element on the mix side.
Exactly yes.
Big drag again, and do you have enough on the like for like pricing, where do you think you've got to return back to like.
Low to mid single digit longer term target when we think about next year.
Yes, Phil I Theres no change here I think relative to the dynamics that drive mix up in this industry. So.
We've got to have a very unique set of market dynamics, that's driving this omni even territory behavior and even within the territories, some very uneven projects and project types that's driving.
A lot of this mix I think as we get into 20 wine and we get back to some some normalcy in terms of the dynamics in the marketplace. The same drivers of mix are or are there are still there and we're going to continue to see a positive mix in this industry.
And in this business.
A highlight again you know this.
This is territory and.
Kind of regional mix, but the product mix remains positive for our business, meaning that customers are buying more and more of our higher value higher performing products than they are of the other products as they upgrade their naturally that dynamic drives the mix up and we're innovating into that and I will say.
With the.
The sales.
Sales with the products that we announced last night.
Which are going to be at a 30% to 50% premium on the products.
We sell today that is going to continue to drive a higher in richer mix as the appetite for healthier spaces.
Continues to grow into 2021.
That's great color actually that was my next question Dick So thanks for taking that off.
I mean, it seems like a very exciting product how quickly would you be able to ramp it up and see contribution to your bottom line is this going to be a big needle mover next year and I definitely see the value proposition.
Is this a more cost effective solution for your customers.
This is going to be very cost effective and I think this is going to be more than cost effective in terms of the non discretionary nature due to.
To gain confidence for occupants to come back with these spaces. This is going to be a very.
Easy Retrofittable solution without tearing down the grid or are driving major renovation. This could you can swap out ceiling tiles and drive an improvement and the air quality and that's really what we're after here is some.
Some.
Easily retrofittable type products to help people make these changes quickly and get their people back into the spaces. So I think this is going to be at the start and I believe that we will get some good traction on this in 2021, we're in the process of ramping these products now as we speak.
Okay. Just last one last one for me to do.
Do you see any impact in your business.
On the plus or negative side with a potential blue sweep scenario with a fight in presidency, and the Democrats control on the Congress.
No I don't think we see.
We'll have to wait and see what happens in the first quarter after inauguration, but.
I think the dynamics in this business work well and on on both sides of the high or frankly or whoever is in the white house.
Okay. Thanks, a lot that can really appreciate it guys you bet.
Thank you. Our next question comes from the line of use Brahma <unk> from Exane. Your question. Please.
Good morning, gentlemen, thank you for taking my question is.
Just two on my side. The first one just wanted to know if you could comment maybe on the lower demand that you've seen year to date in coin 20.
How much of these projects are.
Just delayed let's say and you would expect to see those three starting in Q4, even 2021 did you have like a proportion of the provided you see that you're seeing in your businesses and.
And I know, it's still very early days.
What would be the base case scenario for 2021 should we expect to recover.
Most of those lost volumes of 2020 into next year and my second question is actually just on what has been just asked around the pride and then kind of blew wave coming.
Coming from a European background, where the renovation wavy starting to hit to Europe.
And there's clearly a dynamic where there's a multiplier effect on the energy saving renovation. So I wanted to know if you have any sense of what is the current energy saving renovation today into us and where that needs to get to to reach Decarbonisation led.
Let's say by 2050, if Biden does go through thank you so much.
Sure.
First of all your first question around.
Delays really delayed versus cancellations and we continue to track the the proportion of each of these.
And we're not seeing cancellations much like we saw in the second quarter were not seeing.
A lot of cancellations in fact its its.
Predominantly the ways that we're seeing and the delays at this point are now.
And to 2021.
And we're seeing very little delayed activity beyond that so you have to assume that if these projects are realized will be realized next year versus cancelled altogether. So I think that's a that's something we've been paying very close attention to now whether theyre actually materialize in 2021 I think the.
Market dynamics and the overall economy will drive those decisions later, but at this point, they're not canceled they're primarily delayed.
As it relates to energy I mean ceilings drive an energy savings and control the amount of air that you have to treat for the environment for occupants. So we have always been part of an energy saving conversation with one of our new acquisitions. We also have.
Ceilings that naturally control the environment through heating and cooling within sealing system itself. So we have lots of solutions around driving entered energy savings and we believe this is a.
This next phase as we create healthier spaces to control the year and the flow of air throughout the building, we're going to be adding to that energy savings by making the HPC systems more efficient through the use of our air sure ceiling panels. So I think we have a lot to offer no matter who's in the white house, and which policies are being driven.
I think we have a lot to offer and that energy savings conversation.
Okay. Thank you so much thank you.
Thank you. Our next question comes from the line of Adam Baumgarten from Credit Suisse. Your question. Please.
Hey, guys. Thanks for taking my question just starting on given that understandably the new construction side still kind of hanging in just as projects get completed but given the kind of weak starts data we've seen over the last few months when would you expect the recent weakness to start to show up in your results next year.
Yeah, I think you know from for what we see in new construction and it's very interesting dynamic when you look at the new construction, which gets a lot of the headlines the new construction impact on 2020 business has actually been fairly light.
It's been more of the discretionary on our projects, which you could hold back and again when you think about it that way it makes sense that some of these shows.
Shorter cycle type projects would would be held back first but when you know a sealing system is 18 months out from a new construction start there's a pretty good lag there for things that are not on this year that will start to show up in the second half of next year and into 22 on a lag.
Basis. So we continue to expect new construction activity overall to be paused or or.
A headwind to overall demand.
I'll remind you, though it's at 30% of our business. The other 70% is driven by our activity and that's the headwind, we really see and feel this year.
But but I went back and looked at 22008 in 2009 and 10, what happened during that timeframe.
When new construction goes negative on our activity picks up.
And although in 2009, we had really a deep drawdown in our activity as you would expect but the following year it bounced back to positive territory.
Now whether that happens next year I think there's some dynamics the pandemic vaccine. There's a lot of things will have to play out.
But that's a data 0.4, I think everybody to go back into to look at and Thats. How we think about it new construction again is going to be I think a headwind for at least a year or so as you know it lags into the system are in ours really the driver of the business and we have some real opportunities.
There that we're excited about.
Got it thanks, and then just switching over to the air ashore in you mentioned some of the HPC savings and given that 30% to 50% premium can you quantify why it's worth maybe putting that in outside of the safety benefits, obviously, but just from a cost perspective, what kind of HPC savings a building could experience that they put this.
This product then.
Yes, it's going to be very specific to which HB system is in place right now, but we know it's a meaningful savings for the HP were working with HPC suppliers today.
In the development of this we know a lot of buildings are.
Matt Maxed out in terms of their HPC capacity. So in a way this adds more capacity for them by making it more efficient to collect the year and therefore, they can introduce even fresher air or more fresh air.
To drive the the air quality higher so we think that theres going to be meaningful savings here, but also additional capabilities that they may not be able to get through without upsizing their HPC system.
So again, it's going to be the amount of savings will be dependent on the size of the building and the amount of savings will be based on the the.
The level of capacity utilized in the in the current situation with the HPC systems.
Got it thanks that was helpful. Okay. Good thanks.
Thank you. Our next question comes from the line of Keith Hughes from Suntrust. Your question. Please.
Thank you.
A question on the cost savings program.
It looks like a few about $9 billion of manufacturing EPS generic.
Five of the mineral fiber segment is that what was realized in the quarter are there some other numbers.
Architects specs fleets or other parts of the income side.
Brian you want take that yes.
Sure Keith Thanks for the question yes.
Yes, thats five you're seeing in the quarter mineral fiber is a net number. So there is some additional savings there.
There will be an offset by some of the investments were making there to bring some of these innovations to market and the other part of it is down in that SDMA line.
And then to your third point really some of it also shows up in EPS. So we're on track with the total.
The total number of a quarter ago the question.
Yes, the total was 12.
Well okay.
And I know you lowered it to $40 million to $45 million with some of the investments you were talking about.
It still leaves a pretty healthy amount for the fourth quarter, which I'm, having a hard time reconciling with regard where the margins are pretty weak compared to the four can you kind of explain what's going on there.
They feel undergrad Grad Brian.
Yes.
Keith its some of the investments we're talking about with the launch of the new products.
The healthy spaces and some of the digital efforts were implementing.
To drive that growth.
Okay. Let me ask the question on different topic for Vick primarily on.
The you gave us a really good number on the order rates being down 5% in dollars in the quarter, which is a pretty big improvement.
Argues good accuracy.
Out yet.
Are you sort of are you starting to see.
Any sort of indication.
More bigger renovation activity from businesses going back to their offices and Avenue socially. This employees are for example, your new products.
To create maybe a healthier space is there any indication of that or is that something we took.
To come at some point.
Yes, So let me correct. It's the numbers you cited were not order rates, but there was a bit activity. So just to be clear the minus five on value its bid activity that would track across all verticals.
You know, there's there's a lot of activity Keith in terms of the renovation the required to get the folks back in the spaces.
And it's really across all the verticals as we talk to the architectural design community Theres No big wave that I would point to that saying, it's it started and you know, it's it's going to happen in the fourth quarter. It that's that's not what we're saying.
I think this is actually going to be something we're going to see feathered in over the coming quarters. As you know theres different rate pace of back to the office back to school and various parts of the country. So I really don't anticipate it happening all at once or in a big wave I really see this as a continuation and feathering in.
Sales of new renovation activity as the market comes all the way back.
I think it's a net positive clearly when the market gets back. This this increased level of renovation will be additive to an overall stable market condition.
Okay, great. Thank you very much okay. Thanks.
Thank you. Our next question comes from the line of David Macgregor from Longbow Research. Your question. Please.
Yes, good morning.
Okay.
A few questions for me first of all it was interesting that the mineral fiber the U.V. on a like for like basis was positive.
And I just wanted to sort of get you to talk about that with regard to the.
The weakness in the New York market and some of the other major markets, let's call it market, you're seeing and where I presume pricing is maybe a little more competitive as people are bidding for volume can you just talk about what you're seeing competitively in the market right now across these two sort of categories of markets.
Yeah like like for like pricing as you noted was positive as.
We implemented a February price increase.
And weve executed on that we've carried that through and Thats generated some nice like for like pricing. Our team does a nice job holding on to that in a deflationary period of time.
So and thats really across across the territories I Wouldnt pin that on New York being more competitive in fact, I wouldn't put that on New York being more competitive the markets remain competitive they have always been cmet competitive and I Wouldnt point to these markets as being any more competitive than they were six months ago.
Ill or a year ago I think these these markets continue to be competitive what we're doing is we're continuing to out innovate on the service side with our digital tools and with our product innovation. So we are winning specifications and pulling those specifications through distribution.
We continue to do that really well in this environment. So I expect that we will continue to drive positive like for like pricing.
In the fourth quarter on on and.
And to to next year. This is really a savvy is really in a mixed phenomena as I talked about earlier between channel mix and territory next great great. Thanks for that Dickey seven markets that you identified last quarter and you discussed briefly this quarter through recovery contributed how much to the growth this quarter.
Now, we didnt call that out specifically David but.
It sequentially improved back to its proportion of the overall mark of the overall sales pie. If you will right, which is something that was lagging in the second quarter. So we're glad to see it sequentially improve.
Back back to that level in aggregate again as I highlighted New York Metro.
Hi via territory for US continues to lag of those seven and and putting additional pressure on our mix and our HCV overall right.
The 40 to 45 million in cost containment. So what's the carryover benefits 21 is getting full year, but next year.
Brian I'll, let you take that yes, David we've been pretty consistent that we're going to put those back and so they're temporary customer not permanent structural costs and so I expect those to come back into next year.
Okay, and lastly, just I realize it's still early but as you look forward to 2021, how do you think about raw materials, and some sort of inflation within that part of the European ill.
It's really hard to call, we're really not looking some of those dynamics just yet so.
So it's really hard to say David at this point is there any way you could say what you're seeing in the market right now in terms of conditions and maybe to allow us to extrapolate Asa.
Well in our current situation where in a deflationary net deflationary.
Situation right now.
Okay, great. Thanks, very much okay.
Thank you. Our next question comes from line of Stephen Kim from Evercore ISI. Your question. Please.
Hi, Thanks, a lot guys have question regarding the Ayubi I know you indicated that it could be you know Bob.
Center down focused on basically flattish for the year was curious what the potential is for that actually be positive and for Q.
The drivers to an eventual return to positive value be contributing to EBITDA will be like so not necessarily blocking you down to a timeframe, specifically, but what would be the what would be the things that would be driving the EU the dropdown to be positive to EBITDA.
Yes, Brian you want to take that first part of that.
Sure.
So Steven.
We're seeing it it's all about this key seven territories in some of the channel mix headwinds that we called out.
For.
As we see those all progressively get better and and we called out the New York Metro is still somewhat lagging added as Q seven.
Given the high agencies in those markets as they start to pick up that will help the folsom base.
And drive positive ASV.
In Q4.
At least on the sales line.
Yes over what about the EPS.
I'm sorry, Steve go ahead, and a follow up I was going to add a little color to that go ahead.
Oh I was just going to say that but how about take do you think that could be.
But positive to EBITDA and if not in Fourq, you like what would be the dynamics that would drive that.
Returned to positive EBITDA contribution from Asia.
Yes, So I would expect you let me take a bigger guys quite good Brent sorry, but no I would I would expect it still to be somewhat of a headwind in Q4.
As we see it again, we're not providing 21 guidance yes.
But I would expect to see that sequential improvement.
Start to get better from the dropdown sample.
Okay.
Yes, David I was just going to add I think some of the unusual market dynamics driving some of these these channel mix and territory mix issues.
Work their way out next year as we get back to some normalcy in terms of the market dynamics and then the industry dynamics take over which is every renovation is a mix up opportunity and and every specification is a mix up opportunity as we drive more specs around total acoustics.
Sustain and now ashore era.
Error shore products. So I think the mix continues to be positive.
Going forward.
Got it and then how about on the capacity side I think last quarter. You had indicated that you had the potential maybe to make to make production shifts or things like that but I think that at that point. You you didn't really feel like that was something you wanted to do or was not start do you still feel like that is something that you don't need to do or is that.
One thing that you have are beginning to implement in your plant, but we did that I have to be clear. We can do that is we did reduce our shifts.
And we Rightsized, our manufacturing activity to match the demand environment that we're in and to make sure that we had a healthy inventory level.
To plan for any potential disruptions. So no we did that and we.
We continue to operate very lean and efficiently.
Okay. That's great yeah, sorry about that I was misunderstanding and then lastly for me as these new products are really interesting I'm, particularly intrigued by this gasketing, which it seems like an incredibly good idea a couple of questions related to that one is what is this something that had been tried before.
Im just curious as to why this doesn't seem to be sort of industry standard already are there sort of technical issues related to it.
Or if you could help us understand that a little bit and then also is there anything that is available out in the marketplace in terms of an installation method out method, which achieves that kind of efficiency.
Efficiency, Eric airflow efficiency.
Without changing the ceiling tiles is that something that's already done already just so those are the two questions I have there.
Yes in some of the healthcare facilities and and the data centers. We have used a gasket added a grid system to get the same field ceiling tile in the installation.
This is the first gasket at ceiling tile in the market. However.
Which allows for people to not have to change their grid system and for you to be able to retrofit existing ceiling tiles with a gasket and see what's up and get the same seal system.
Very very quickly and affordably.
Thats I think thats the special.
Innovation here for a very large installed base that needs to be retrofitted.
So we've had a lot of experience in sealing off ceilings for those unique healthcare situations that I mentioned.
And that data centers, and we're just reversing and solving the problem differently with the first ever gasket and ceiling given top.
Very exciting I think this is going to make it a very affordable.
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Retrofittable renovation for schools offices to make we're excited about it.
Yes sounds like a great idea. Thanks, guys. Thank you.
Thank you. Our next question comes from the line of Justin Spear from Zelman <unk> Associates. Your question. Please.
I think that I, just just breaking down the vertical trend I know.
No. We are I think have a pretty good idea of some of the relative mix of some of the verticals, but throughout the quarter, particularly for that tenant improvement piece of the business. That's so important maybe walk through how things trended across office education healthcare and then as you as you are interacting with distribution contacts with the project funnel looks like.
These verticals as you as you look ahead.
Yes, when you look at across all the verticals, we saw sequential improvement across all the verticals.
I think and then when you look at.
The the bidding activity, we started to see a little bit of separation in the bidding activity across the verticals, where education was stronger going into the summer months. This year I think a lot of people got an early start on renovation activity in schools as kids around school and.
And then it weakened sooner.
In the summer months because of some of that pull forward activity. So I think that was one of the separations that we noticed across the verticals.
Again, we had a pretty good season education frankly.
Given the backdrop, but the timing of it was a little bit different. So we saw that show up in the bidding activity as more weak across the.
The various verticals, but in each of the verticals, we saw a continuation of sequential improvement as you might expect when you go from.
Minus 21% in terms of projects down to minus 10, only thats pretty big improvement.
So if for whatever reason.
Good things out of your control.
Yes, the pandemic worsens or maybe the macro deteriorate further and perhaps we see an air pocket emerge in activity because the pipeline for whatever reason dwindles, alright that EPS generic comment you made about about some of those costs rolling back would you potentially for span that if you were to see things deteriorate on the top line.
Yes, we have.
Ill say more government mandate shutdowns or more imposed restrictions that you know greatly reduced the volume back to kind of where we are today for example.
Yeah, I think we could we would be definite looking at those costs that cost structure again and looking at what we want to feather backend. So again, we run this business to to rightsize that relative to the conditions that we're in.
And right now, we're making investments back in our business to support the growth and the digitalization initiatives that we've got going so.
I expect that to continue.
I'm expenses.
So I don't know how much visibility you have in terms of channel inventories how do those look any insights that you can you have there and your conversations with distributors.
Well I can call out, but I can comment on that is.
Our distribution partners have done a terrific job in servicing our customers in a very kind of erratic demand environment and I believe they've rightsized their inventories to the current demand environment. So as we go forward and we see an improving demand environment their inventory positions are moving accordingly.
So I think that we should expect that to continue into the fourth quarter and into next year.
Excellent excellent and then lastly for me just on the project wins that you mentioned and an architectural specialties.
Are those needle mover went juxtaposed against maybe the projects rolling out of backlog or are they are they more than offsetting that or how should we think about I guess.
The broader picture with.
Respect for these product when you articulated.
Yes, it's a good question I think that there definitely needle movers. These are large projects.
The kensit airports of very large projects its not only architectural specialties, but theres mineral fiber on that job as well.
That the projects that we have won and taking orders for this year is equivalent to the same time last year.
In the face of the pandemic and as bad as the economy has been that business has taken in the same amount of orders as it did last year at the same time. So that gives you a flavor of how successful that businesses is it.
<unk> is doing against a pretty tough backdrop, and so they're definitely needle needle movers.
In terms of the impact that they're going to make on the backlog going into next year.
Excellent and then the recent acquisitions.
She made you've had a good track record of out of the gate revenue synergies as yet because you harvest I guess or is your push that's for your funneling through your network.
How should we think about revenue synergy potential for for these acquisitions.
Going forward well.
Well I think at the historical track record is pretty good I think we're going to have.
A nice contribution to those both of those businesses being bolted onto a large platform like Armstrong and our go to market our distribution channel.
No I think theres going to be some terrific revenue synergies and both of those businesses as they.
Get integrated into the Armstrong go to market platform.
Thank you very much guys. Appreciate it okay you bet.
Thank you and our final question for today comes from the line of Garik Shmois from loop capital. Your question. Please.
Hi, This is just Stevenson on for Gary Thanks for taking my questions. My first one is just wondered if you could talk about the December grid pricing increase in the motivations. The industry had to move ahead with an increase before year end.
Yeah, it's really driven by a tightening raw material and an increasing raw material in steel.
And so that's that's the driver.
Behind the price increase as you know we normally.
Go up in somewhere around February timeframe, and but based on what we're seeing in terms of pressure on steel prices.
We're going out earlier.
Okay. That's helpful and then.
Steel going up how to think about decremental margins, a little fourth quarter for some of these raw material costs are starting to creep higher.
Yes, Brian will take that.
Sure Hey, Jeff So just to clarify on our steel input costs affects our wave joint venture and so it doesn't fall flow.
Flow through into our cost of goods sold it shows up in that wave equity earnings line.
Right, but so so from a from a detrimental standpoint.
For the for the total business, we're still in that.
Indeed 60 range.
Because that takes into account that that flow through of steel into that wave equity earnings.
Got it I appreciate it and best of luck.
Great. Thank you.
Thank you and this does conclude the question and answer session of today's program I'd like to hand, the program back to Vic Grizzle for any further remarks.
Excellent thank everybody for joining us today again third quarter against a very strange and a challenging backdrop.
Very proud of what our team has done in terms of two acquisitions in the quarter.
We had record quarter in order intake in our architectural specialty business and we launched a whole new family of healthy spaces solutions that are we're really excited about the help.
Building owners and occupants get back to life and get back to work. So we're excited about all of these things and again. Thank you for joining our call today, we look forward to talking to you next quarter.
Thank you, ladies and gentlemen for your spacing at today's conference. This does conclude the program you may now disconnect good day.
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