Q4 2020 Armstrong Flooring Inc Earnings Call
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Greetings and welcome to Armstrong flooring, and fourth quarter, 'twenty and 'twenty earnings Conference call. At this time, all participants are in a listen only mode and <unk>.
Question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Amy Trojan and ASCII you may begin.
Thank you for joining us today for Armstrong flooring fourth quarter, and full year, 'twenty and 'twenty earnings Conference call.
I'm joined today by our President and CEO Michel Vermette.
In addition to the earnings press release issued today, a copy of the slide presentation to accompany this call is available on the investors section of our website at Armstrong flooring dotcom.
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 a more detailed discussion of the risks and uncertainties that may affect Armstrong flooring. Please review our SEC filings.
Forward looking statements speak only as of the day they are made.
And 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 SEC regulation G.
A reconciliation of these measures to the most directly comparable GAAP measures is included in the press release and the slide presentation posted on our website.
I'll now turn the call over to Michele beginning on slide three.
Thank you Amy and good morning to everyone on the line.
I will begin with a brief overview of our business highlights and Amy will discuss our financials in more detail before I close with a review of our business transformation progress and our outlook for 2021.
2020 was a transformative year for Armstrong flooring, and I could not be prouder of our team for their resiliency and dedication to staying safe and delivering exceptional service to our customers and March 'twenty and 'twenty, we announced our multi year plan to transform and modernize our business.
Since that time, we have pursued projects group under three critical objectives, one expanding customer reach.
Two simplifying our portfolio and organization and three strengthening our capabilities.
Shortly after introducing our plan.
COVID-19 pandemic created an unprecedented environment for the global economy, as many governments communities and companies implement strict controls to minimize the spread of the virus.
During that time, we shifted our immediate focus to prioritizing safety financial flexibility and operational efficiencies.
And with our debt recapitalization and placed by mid year. We then had the financing and the financial flexibility to progress further with our planned business investments.
Against that backdrop macro trends have further supported our strategic initiatives.
And we see that continuing in 2021.
Residential housing construction remains positive for our customers.
With this and market continues to grow in importance.
Across the industry seasonally adjusted single family housing starts are up 28% as of December.
Other indices, such as the Harvard's leading indicator of remodeling activity are predicting a three 8% increase in 2021 similar to trends in the fourth quarter of 2020.
While the commercial and market remains murky for 2021, we.
We anticipate that the worst may be behind us.
The architectural billing index Abi while still below 50 has been improving after bottoming in April 2020.
Providing a better indicator for the commercial and market as we look forward.
And the short period of time and since we announced the transformation.
We have made significant progress and overhauling our product portfolio.
Re engaging with customers.
Introducing innovative products and rebalancing, our residential and commercial footprint.
In short we have done exactly what we said we were going to do despite the pandemic impacts on our business throughout the year.
We are dedicated to becoming a leaner faster growing and more profitable company.
And the fourth quarter provided further evidence of our progress.
As it relates to our financial performance fourth quarter results were in line with our expectations.
And we improve our top line year over year as we capitalize on the strong recovery and residential end markets in North America.
More importantly, we increased our investments and internal efforts to ramp up our transformative initiatives.
Specifically in the fourth quarter alone.
We introduced new and innovative products to expand our addressable market.
We improved the utilization of our plants with increased productivity and yield.
We also added capability to our Kankakee facility to facilitate the transition of our title consolidation.
We implemented our simplified price increase which became effective in January 2021 to combat tariffs and raw material related impacts.
And finally, we launched a new and modern corporate rebranding, including a new website that is driving higher level of customer engagement.
In regard to end market activity.
Stronger trends and residential end markets have continued to outpace a slower recovery and commercial activity within the U S.
We were pleased that our residential business grew and the fourth quarter as the actions we have taken to improve our marketing and sales efforts were supported by continued strong residential demand.
Low interest rates and the urbanization trends continue to fuel the growth and the housing starts and we expect this trend to continue in the coming quarters.
On the commercial side, we have business in health care education, and retail and markets.
And this environment the retail business that are doing well do not want to lose momentum by disrupting their stores for a renovation project.
And many of the businesses that arent doing well have limited resources for capital investment.
So to that point, we expect retail to remain challenge and.
Into 'twenty and 'twenty one.
On the healthcare side.
Remodel in existing facilities has slowed significantly while the new construction environment is holding up but activity remains slower than normal.
Renovation projects can only be delayed so long before obsolescence and maintenance becomes an issue and if you take that factor into account. This creates pent up demand from renovations over the long term. Our team is focused on executing to grow sales and 2021, and we believe we will continue and capitalize on strong demand tailwind.
And most particularly in residential end markets. These market indicators have been considered as we introduce our 2021 top line growth expectations.
I will provide further detail on our progress under each of the three key areas of expand simplify and strengthen later in the call.
The important takeaway here is that we are making great progress against our goals.
Overall, we are confident that we're making the right long term decisions to position our business for future success.
Success begins with service and another important point is that we have created a step change in the way we service our customers and 2020 versus 2019.
Armstrong flooring products are finally getting widely recognized the gain.
We received many awards in 2020 for the recognition of our innovation as well as our environmental stewardship in the industry, reflecting the strength of our brand and.
An example.
Green builder media ranked Armstrong flooring is number one and sustainability among 10 leaning companies included in the flooring category.
We received the <unk> Platinum award for our American personality 12 product.
Good design, one of the oldest and most prestigious design awards programs recently recognized our rigid core essentials and.
And bound men pure and rejuvenation restore products and their floor and wall covering and category of the 11 products in this category Armstrong flooring and received four recognitions.
We were named the winner of the Environmental Excellence Awards sponsored by keep Oklahoma Beautiful as a result of our environmental stewardship to reduce process waste at our Stillwater plant.
We are grateful for this recognition that would not have been possible without our talented design and operations teams, who are working hard to help Armstrong flooring reach its full potential.
I will discuss additional progress updates on our transformation later in the call, but before that I will now turn the call to Amy to provide detail on our financial performance and liquidity.
Thank you Michelle and good morning to everyone on the line.
I'm honored to be a part of the Armstrong flooring team and excited to see our company entered 2021 and much stronger footing and our goal to achieve greater success.
I will now provide a review of our fourth quarter and full year financial performance.
Turning to our fourth quarter results on slide five.
We were pleased to produce fourth quarter results that were in line with our expectation.
On a year on year basis revenues increased one 8%.
$143 9 million compared to $141 3 million and the prior year quarter.
Increased activity at home centers and other residential channel helped to partially offset COVID-19 related business disruption, mainly the postponement of certain commercial projects and.
Slower activity at many of our independent customer retail locations.
And the corridor, our residential revenues were up over 2019, while commercial revenue declined over the same period.
Volumes were a greater driver and residential revenue growth and the fourth quarter of 2020, and we should see the benefits from late 2020 pricing actions into 2021.
Fourth quarter 2020, adjusted EBITDA was a loss of $14 5 million.
We realized higher carrot and and unfavorable mix of raw materials versus the prior year quarter.
Adjusted EBITDA had approximately $4 million of incremental SG&A, resulting primarily from transition service agreement income and the prior year quarter, which did not recur. In addition to planned growth investments to support our business transformation.
Also worth noting is that we experienced benefits from several commercial rollout and the fourth quarter of last year.
And which did not recur and a quiet quarter of 2020.
Looking at our full year results on slide six.
Net sales declined six 6% to $584 8 million as compared to $626 3 million and the prior year.
The decrease in net sales was primarily due to the effects of COVID-19 on our business.
Particularly in the second and third quarter of 2020.
For the full year residential sales were up representing 40% of our total revenues.
Reflecting a shift from our historical 35% trend.
Commercial sales declined year over year, representing a total of 60% of our overall revenues.
Full year 2020, adjusted EBITDA was a loss of $6 3 million as compared to EBITDA income of $24 4 million and the prior year.
The decrease and adjusted EBITDA was primarily due to lower net sales and increased investment to support our transformation and Mr. Kent.
In addition, we entered 2020 with SG&A headwinds totaling around $20 million.
Net income benefits incurred in 2019 related to our transition service agreements with the buyer of our wood flooring debt.
That headwind ended and the fourth quarter of 2020.
Turning now to free cash flow and liquidity on slide seven.
During 2020, we invested $21 million and Capex.
Spending related to manufacturing consolidation maintenance and safety and other key initiatives to support our long term growth.
We also incurred approximately $17 million and incremental costs associated with our business transformation projects in 2020.
In total our operating cash flow was modestly negative for the year and in line with our expectation.
Cash flow will continue to reflect incremental capex and investments necessary to execute our strategy and.
Into 2021.
Additionally, as we mentioned on our last earnings call our inventory levels have increased and the short term to support our quick ship initiative as well as the transfer of production from our South gate facility to our Kankakee, Illinois facility.
We continue to prioritize the monetization of noncore assets.
Namely our stock gate facility and land portfolio.
As we indicated last quarter, given our intention to sell soft and.
We reclassified by property as an asset held for sale on our balance sheet.
Under the terms of our credit agreement during the fourth quarter $30 million of availability once withheld under our credit facility.
And with holding will continue and <unk>, south and southeast site.
At December 31, 2020, we had total liquidity of approximately $53 million, including cash of approximately $14 million plus availability under our credit facility.
Sequential reduction and our available liquidity represents the 30 million withheld for Southgate as well as working capital other capital investments and the previously mentioned inventory build to implement the changes as part of our manufacturing consolidation initiatives.
We have no significant debt maturity until the year 2023.
Moving into 2021, we will continue to execute our plan to expand simplify and strengthen our business to generate stronger performance and augment the trajectory of our long term profitability.
We believe that we have ample financial resources to effectively execute our near term and long term objectives.
I will now turn the call back to Michelle will discuss our business transformation progress and 2021 outlook.
Thank you Amy I will now provide some additional details on our transformation progress.
These collective strategic initiative should translate to improve earnings cash flows and overall returns we.
We will start with expanding our customer reach on slide 10.
In the fourth quarter, we continued to directly serviced and national flooring lines, where we have nearly doubled our sales of displays since Q1.
Other key national accounts and home centers remain a significant area of long term focus for us.
Prudent investments and sales and marketing are crucial to the long term success of our customer centric operating model and and the second half of the year, we added resources to our sales team to expand our reach and both existing and untapped verticals.
The pandemic initially delayed our ramp up on the go to market side by several months.
Most particularly as it relates to access to our customers. However, our team was able to get creative to offset that impact and we're able to make significant strides as the year progressed.
On the product side, we believe we will continue to outperform and <unk> because of the actions. We are taking to improve product mix realized quick ship and capture additional share and areas, where we have not participated in the past such as hospitality.
And the fourth quarter, we hired our head of hospitality, whereas wrapped up quickly to target that segment proactively for the first time and our history.
We are organizing and augmenting our supply chain resources to reduce costs and increase efficiencies also allowed us to enhance our customer reach in 2020.
Last quarter, we discussed our maiden America quick ship program, which continues to receive positive customer feedback.
The quick ship program has enhanced our relationship with distributors partners by providing them with a more efficient means to execute on tight project timelines.
To date the program has contributed to an increase and capacity utilization and our Lancaster facility by 33% and encouraging results.
Turning to the simplification of our portfolio and organization on slide 11.
The key takeaway on this application is that we have optimized the production output and rationalize the capacity of our plants this year versus last year.
Our consolidation and streamlining actions have provided Armstrong flooring with a better manufacturing footprint that is operating more efficiently.
These efforts included the recent consolidation of our residential sales sheet and <unk> manufacturing lines.
We also completed the manufacturing closure of our South gate facility with final production on February 12.
Consolidation and streamlining of our plants has produced positive absorption impacts our.
Our lines are experiencing improved productivity and we're running less unplanned overtime.
Into 2021, we will continue to optimize shifts with demand as we will realize further efficiencies.
We reduced our SKU count of underperforming products by 31% in 2020.
We have simplified our product pricing approach as well and.
In December we enacted price increases of 5% to 9% on our products that became effective on January <unk> to help offset some of the impacts to our business from inflation and tariffs and.
And in the first quarter, we plan to launch and alternative Lv T product refresh and a new seat product refresh and both of which will be manufactured and in the U S.
Overall during 'twenty and 'twenty, we dramatically simplifying our product portfolio reduce administrative overhead optimized inventory and improve our operational efficiency, but there is still more work to be done.
Looking at the strengthening of our capabilities on slide 12.
The various work streams, we have implemented to date have helped strengthen our overall capabilities from our customers.
We are revamping and modernizing our processes work stream product designs productivity and our culture to raise the bar on our ability to service customer.
As a result, it's much easier to do business with Armstrong flooring than it used to be.
And we anticipate continuing to enhancements.
Our service is improving and feedback received from our customers to date has validated our approach.
And regards to our financial capabilities, our debt recapitalization was completed mid year strengthening our balance sheet, enabling us to make the need investments and transform the business.
During the fourth quarter, we launched our new corporate branding, which will be incorporated into retail programs across our footprint.
Initial reception of both our new branding and corporate websites have been outstanding.
And we're grateful for those who help bring this refreshing and modernized new look to Armstrong flooring.
Another example, where we have strengthened capabilities is that with the closure of our South gate facility we.
We have transferred south gates production capabilities to our plant and kankakee to absorb the demand while maintaining a distribution presence with our new Southern California distribution center to support our west coast customers.
It is evident that the <unk>.
Actions, we have taken to simplify our operations and product portfolio have also strengthened our service capabilities.
We are now better able to focus on and demand products that are important to our customers where in the past we spent too much time, pushing outdated lower margin products.
As an example of this we have augmented our LDC capacity at our Stillwater facility producing multiple in demand product lines. We've also modernized our Jackson plant and to streamline production capabilities.
On the administrative side our headquarters relocation project is moving along and is on track to be completed by the second quarter.
As a reminder, we expect this move will provide us with cost savings on our corporate headquarter lease of approximately 60% annually.
I will now discuss our outlook for 'twenty and 'twenty one on slide 13.
Yes.
In 2021, we expect to improve our top line driven by strong residential activity, particularly.
Particularly and <unk> product categories, and partially offset by declines and DCT categories.
Commercial demand will likely continue to be pushed out.
Our recently announced price increase and expansion into additional market segments will also support our growth prospects.
In addition, we will continue to focus on improving our gross profit over the long term.
But to do this we have to invest and SG&A and reinvest in the business, albeit cautiously and with a return oriented mindset.
We expect improvement to adjusted EBITDA in 2021 to be supported by top line growth as well as benefit from our transformation.
We expect growth to be weighted towards the back half of the year as the market environment improve.
It's important to note that inconsistent state and local government orders related to COVID-19 have resulted in and will continue to have varying impacts on Armstrong flooring and some of our customers.
We're also carefully monitoring potential raw material inflation impacts and rising transportation costs.
As we have stated on prior calls our operating results and the short term, we will continue to be limited by go to market investment necessary to execute our business transformation.
<unk> will improve as we grow into these investments.
In conclusion, we believe we entered 2021 as a better company and all aspects.
And I am grateful for the focus and dedicated efforts of the Armstrong flooring team to work through a complex environment in 2020.
We have created a culture of continuous improvement with a long term decision making mindset.
As you saw and heard today, we have made significant progress on our strategic plan, but there is still much work to be done.
That said, we remain confident and we have the right leadership team and plan in place to return to long term growth and profitability.
We look forward to updating you in the coming quarters as we make further progress.
Thank you again for joining us today operator, please open the lines for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is and the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset.
Before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Keith Hughes with true Securities. Please proceed with your question.
Thank you have a couple of questions number one you highlighted a lot of change going on and the business.
Cost coming out and some investment coming back in.
Okay.
Without these systems volume gains and 21.
And what costs were due to this negative six EBITDA that you just reported and improve on that are you going to need volume to make that move on.
And Keith well, thank you for joining us. So one we do expect volume to be better first and foremost right. So just with the efforts maturing both on the residential side that we have done.
And so and to your point costs.
We just stopped.
Manufacturing in the South gate facility recently so.
That that base of costs will be coming out at the end of March so.
So that is not there so we did.
The staffing will be eliminated so.
That will be definitely a reduction and our cost base that will be helpful across the platform. So those those initiatives will be paying off also so.
We're continue working through it and also the headquarters as I mentioned in the second half will be significantly reduced debt expense will benefit us going forward there'll be other costs that we will be spending too.
Participate and other verticals and there'll be some give and take but we definitely expect both topline and adjusted <unk> adjusted EBITDA to continue improving.
As we go forward.
Okay.
You talked about growth and you talked about that and the slot with residential strength.
Sure you know and commercial in terms of the sequential pace of business has there been any signs of life and any of the end user markets.
Pick up and the last three or four months.
Well, it's been better.
And there has been consistent improvement quarter to quarter.
So we.
We are.
We're hopeful that as the year improves next year that we that we eventually get to positive also.
We were.
And we're not positive yet.
And it's getting closer to that in the fourth quarter. So.
Definitely and bullish on what the team's doing what we're also got a lot of self help with our quick ship program. It's an area we were not participate on participating on the transactional side.
So theres definitely some parts.
And pieces that we're not playing in and they also and you think of hospitality.
We just had no presence at all so it's a combination of.
Market getting better and a lot of self help and that area and also we've done a lot of work on our product portfolio. We introduced some really good products, such as men and pure and some <unk>.
Revamp NCD and <unk> and improve our.
And our <unk> offering and the middle of the year last year and as you know commercial takes a little bit of time to.
Specify and get the business out there so as those things mature and.
And we get the benefit of the work of our sales team and those specification, we expect definitely that to benefit and ourselves.
As.
And those efforts mature and.
And in 2021.
And your <unk> growth.
And what Youre anticipating and 21 are you at the point or are you growing in excess of the market, particularly given your commercial exposure are you growing in excess of the.
The market at this point.
Well I haven't seen any exact market data so far so I don't know, but we.
And our trend is improving so.
So we were our <unk> growth is positive so.
So and we expect to continue improving on it so.
Okay and just final question what is your outlook appears to be vinyl markets and 'twenty one and.
And our ingenious and nominated.
Hopefully as the health care market stabilizes, we expect the.
New construction has been pretty good but renovation has been put on hold so we expect that to come back somewhat and lot of people have been holding up on projects, but hopefully this vaccine will kick in and as things improve second half it will be better so better so.
Yes, so I expect.
A little bit more robust.
Okay, Alright, thank you very much alright.
Alright, Thank you Keith.
Our next question comes from Julio Romero with Sidoti and company. Please proceed with your question.
Hey, good morning, Michel and Amy you.
You talked about your business transformation and your customer centric initiatives.
What are you hearing from your customers in terms of evolving residential needs as folks repurpose homes for work from home school from home et cetera, and.
And how does that impact I guess Armstrong.
Well I think definitely everybody is.
Definitely bullish on residential for 'twenty and 'twenty, one and I think everybody has seen and I would say and the last six months.
The change and I would say not only and the home for renovation and everybody's seen I mentioned, a little bit and our opening comments people are moving outside of those some of the larger cities into larger spaces.
And everybody wants more room and is looking at their lifestyle everybody companies are much more open to remote work and as a benefit and many companies and entrepreneurs and retailers.
And as people reinvent their.
Their homes to mashed and lifestyle Theres still a lot of remote learning and lot of remote work.
Myself and <unk> are definitely and that boat.
Personally how we work through it and I think it's created a lot of different projects for everyone and I think the trend will continue for some time I think and lot of people are reassessing their life and what's important to them and.
Think we will see.
And that trend benefit for at least and another two to three years and and.
<unk>.
And that comes about and I think it creates a lot of good opportunities for our customers both on the builder side as a new construction and I would say on the.
Remodels sign for very much the the retailers out there so definitely that will be a robust market.
For years to come I think.
Got it and.
Can you talk to your goal to penetrate new commercial verticals, such as corporate office and government and how you see those potentially offsetting the headwinds you expect and retail.
Well I think to your point I think there's been a series of verticals, where we have not participated or NFS and such as hospitality and corporate was been very.
Moderate for us and I think and some even some other verticals we may not have been as equipped as we needed to to.
To compete we're adding some commercial sales rep to first specifications insurance segments also.
So I think theres a lot of opportunities, where we can do more our brand is very well respected and opens a lot of doors in many areas. So we've we've also added.
National and National account team that we have high expectations with them and they were off to a great start of open up some key national accounts and the good thing is many major businesses want cleaner areas easier to maintain and so they can show.
And how it is safe to come into their business and our national account teams are really making a.
<unk> opened up some new doors that maybe werent there before so we're really lucky that they are having some nice momentum with commercial national accounts.
Where the.
People are consuming resilient and maybe where there was carpet before and.
They are willing to put resilient and that's a big win for us So have high expectation there.
And we're more and more engaged with our customers now and I think that goes a long long way. So I'm bullish with the commercial team will accomplish very bullish with the residential team can do.
And getting this company back on track starts with growing sales and gains and that's first and foremost.
Okay.
Got it.
Last one from me is if you can talk to kind of cash flow outlook and are you still aiming to get back to free cash flow positive and 22.
I think definitely and with this pandemic and we're looking and everything it's definitely top of mind, that's where we need to get to the.
And the one thing we are looking and everything.
And that we're doing to make sure we're doing it we're looking to monetize assets. We're looking at our inventories and al I want to also give the benefit of Amy being here. She just got here and looking at this and pencil and this out for us.
So I think we're going to make the most of 2021 and then we're going to assess 'twenty, two but definitely sooner and get there the better right. So I think thats definitely top of mind for all of US. So we're definitely focused on it.
Great. Thanks for taking the questions and best of luck in 2000.
Thank you I appreciate it.
We have reached the end of the question and answer session I would now like to turn the call back over to Michel Vermette CEO for closing comments.
Well. Thank you everyone for joining us today, we appreciate your interest and Armstrong flooring, and we look forward to updating you on future calls thank you.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.