Q1 2021 Armstrong Flooring Inc Earnings Call
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Greetings and welcome to the Armstrong flooring first quarter 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero and you're telling.
Phone keypad. Please note. This conference is being recorded I will now turn the call over to your host CFO, Amy Church and Alky. Please go ahead.
Thank you for joining us today for Armstrong flooring first quarter 'twenty 'twenty, One earnings conference call.
I'm joined this morning by our President and CEO Michel Vermette.
We trust that you have seen our press release. This morning on the investors section of our website at Www Dot Armstrong flooring dotcom.
During this call we will be making forward looking statements that involve risk and uncertainty.
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 the SEC Reg G.
A reconciliation of these measures to the most directly comparable GAAP measures is included in the press release.
I'll now turn the call over to Michele.
Thank you Amy.
And good morning to everyone on the line.
I will start by providing a Q1 business update as well some color on our transformation progress.
And Amy will share additional details on our financial results.
Overall, the positive momentum and our business continued into the first quarter and I'm pleased with the ongoing transformation of Armstrong flooring.
Well a month ago, we introduced our strategic roadmap to transform and modernize our business.
And soon thereafter, the world entered the early stages of global COVID-19 pandemic.
And last quarters earnings call, we discussed how our teams and team members overcame the challenges brought on by the pandemic to achieve significant progress against the various facets of our plan during 2020.
And I'm pleased to report today that we continue to make significant progress against our goals during the first quarter of 2021.
Yes.
And the first quarter, we delivered 7% top line growth.
Which reflected contributions from each region, where we operate.
In North America.
Our results reflect growth in residential remodel and new construction.
Commercial sales were flat and sales to residential and national accounts were down due to prior year.
Program launches that did not repeat in 2020 one.
Internationally, our markets are recovering and a faster pace led by strong performance and China and Australia.
Operationally, our improvements, resulting from maintenance and reliability initiatives are providing us with overall increase uptime and throughput at our plants.
That's in these improvements were tempered during the quarter by the impact of Winter Storm Yuri.
We closed three of our plants and the Midwest and south from approximately three weeks and February and early March.
Along with disruptions and the supply of key raw materials.
Amy will discuss this in greater detail and the call.
Overall on the residential side.
The man has been supported by impressive single family housing starts growth of 41% year over year and March which came in well ahead of initial industry expectations.
On the commercial and the Abi index closed out at $55 six and March reflecting continued sequential improvement.
Our new products are also continue to receive positive recognition.
We received top point awards from builder magazine, and three categories and our power product received four eight X awards for design excellence heading into Q2, we're seeing strong orders across the board point to continued recovery from the pandemic.
And I'd like to give an update on our transformation progress.
As you recall, we introduced our transformation plans and March 2020.
With a focused strategy to transform and modernize their business as we look to become a leaner stronger and more profitable company over the long term.
On slide six we've highlighted some of the key projects across each of our three strategic pillars that we've advanced over the last 12 months.
All of our teams have been executing well from a frontline manufacturing team to the sales team and our functional support teams.
Everyone has been focused on executing our strategic initiatives and cementing the foundation of our growth as we expand our customer reach and simplify our products and operations and strengthen our core capabilities.
Talk about some of the first quarter 2021 progress.
Please turn to expand on slide seven.
And the first quarter, we continued to make additional strides forward with our go to market strategy.
As we discussed through 'twenty, and 'twenty, we're investing and our customer relationships and adding new members to our sales marketing and customer service team. So we can contribute continued to improve our service to our customers.
We're pleased to report that we and more than 15, new sales professional during the first quarter to enhance customer reach and bringing the total additions to more than 40 and the last 12 months.
We also introduced the Armstrong flooring pro line, which will be available for sales to our customers in the builder and multifamily channel and the second quarter of this year.
Initial feedback on our pro line has indicated solid interest and these products, which have a refresh pallet texture and style profile.
In addition, we have been working closely with our distribution partners to develop and exclusive line of flooring under the Armstrong flooring, Cintra brand, which will be available in the second half of the year.
We're continuing to develop in demand products for our hospitality channel as well.
Through the rest and refuge product line that was introduced this year.
We're excited by the progress we're making in this channel.
Recognizing it will take some time to bill and establish new relationships with our customer targets and this segment.
That said, our ongoing dialogues with several national change and.
And the hotel space continue to provide us with confidence and our opportunities and our product portfolio is receiving positive feedback.
Furthermore, in Australia, and China, we've seen several nice wins in the health care channel, which is another target vertical for us.
That's one such example, we're excited to be selected to provide flooring for a large renovation project at the Prince of Wales Hospital, and Sydney, Australia.
Turning to slide eight.
Our journey to simplify our portfolio and our organization took several significant steps forward and the first quarter.
The completion of our South Gate, California property sale and March was the culmination of months of work by our teams.
Yeah.
Our production teams worked tirelessly on the enablement of production and Kankakee to absorb the Southgate Tau production volume.
And we had a dedicated team that handle our production and closure at the Southgate site.
The monetization of that asset and that had been completed without focus attention to detail to successfully execute on the simplification initiatives. We initially envisioned.
And conduct conjunction with the South gate sale.
We opened our new West Coast distribution Center and L. A to service our west coast customers efficiently.
On the manufacturing side.
And increased productivity and our manufacturing facilities with the improvement we continue to make including yield improvements along with improved equipment reliability and consistency across our facilities.
We also saw increased throughput and our turnkey Stillwater.
And Jackson and facilities.
Which benefited productivity and the quarter, helping to partially offset some of the previously mentioned impacts of winter storm, Yuri which closed these same facilities for up to three weeks and the quarter and disrupted supply of key raw materials.
The third pillar of our transformation and strengthening our core capabilities. If you could please turn to slide nine.
I will discuss our Q1 progress on this front.
Transforming and modernizing our capabilities get chewed and to make us more efficient and easier to do business with.
Last summer, we announced the planned move or a headquarters that will take place and mid 2021.
The first step of this move was completed with the opening of our technical center and the late March.
This unique facility will house, our technical and R&D teams for the first time in our company history, all under one roof.
This facility brings a great collaboration and testing space that provides our teams with more opportunities to work together and create these innovative products and applications that our customers desire.
We're looking forward to getting everyone to the new campus and having all of our teams collaborate and mark and a modern and energizing space.
Our transformation office is focused on in the enabling project management and oversight of our key initiatives and has recently added additional expertise focus on change management to ensure that our transformation efforts are sustained.
Separately, we've continuing to modernize our systems and processes, improving production data and our ERP system and.
And improving organizational alignment and supply chain customer service and procurement.
All of these efforts combined to support our go to market initiatives and improving our customer experiences.
While also delivering better information for decision, making among our teams.
While there remains work to be done all of these key steps among others completed in 2020 and ongoing initiatives have firmly planted the foundation of our transformation plan.
I remain confident they were on the right path forward.
With today being Earth day on Slide 10, we want and take a moment to reiterate that we are committed to transforming and business, while keeping sustainability top of mind.
We know that responsible sustainable business begins with respect for people and the environment.
On our last earnings call, we discussed that Green builder media recently ranked Armstrong flooring is number one and sustainability, among 10, leading companies, including and the flooring category.
We were honored with this recognition.
In fact throughout our history, one of our core values has been to act responsibly by recycling waste and conserving resources whenever possible.
And 2020, we added water meters and key locations throughout our manufacturing plants to help quickly identify locate and repair underground water leaks.
Hundreds of feet of old pipes were replaced or eliminated.
Our efforts paid off as we're able to reduce our year over year water, and Tennessee, which is measured as water consumption per thousand square feet.
Production by 17% compared to prior year.
Good day, our global sustainability steering committee comprised of key senior leadership members meets at least quarterly to discuss our sustainability improvements.
Our manufacturing plants, and maintain and environmental management system and accordance with ISO 14001.
Which include continuous environmental performance targets.
Double of Armstrong flooring key goals on sustainability in 2020. One include completing waste audits and mapping to drive towards zero waste facilities.
Publishing and G. R I complaint sustainability report.
Simplifying and explain and transparency certification on our flooring products.
And bring team members together to establish distributed accountability for sustainability.
Notably, we also remain on track and get circles to reduce energy water and waste intensity across our footprint by 25 per cent by the year 2020 five.
We look forward to publishing our detailed 2020 Saturday report in the coming months that will provide more detail on 2020 accomplishments and energy management chemical management, and probably lifecycle environmental impacts across our footprint.
I'll now turn it over to Amy to discuss our financial performance and liquidity for the quarter.
Thank you Michelle.
I'll begin with a brief review of our financial performance on Slide 12.
First quarter net sales improved $7 four per cent versus 2020.
And five 1% versus 2019.
In 2020 as you remember we had strong performance in North America at the beginning of the quarter.
And in 2020, one we saw more improvement towards the back half of the quarter.
This momentum at the end of the quarter, along with our open customer orders point toward a continued recovery across our footprint.
In China sales.
Improved substantially versus the prior year period with improvement driven by recovery from the pandemic.
We believe a portion of this increase is related to timing with some sales being pulled forward and Mike dance, if our recent price increases and our Chinese market.
North American sales were essentially stable.
With sales at the L. P T and all channels improving versus the prior year.
Sales and our residential and national accounts were lower year over year due to initial product rollouts and the prior year quarter that did not recur and the first quarter of this year.
Due to the size of our business volatility and residential and national account sales will happen quarter to quarter based on the timing of these new rollouts.
Globally, our revenue from commercial channel was up double digits versus the prior year, while residential channels were essentially flat.
As Michel mentioned previously and the impacts of Winter Storm you already closed several of our manufacturing facility for approximately three weeks and the first quarter and disrupted the supply of key raw materials throughout our supply chain.
Into the second quarter availability of raw materials continues to improve.
However, we continue to experience headwinds from higher raw material and shifting cost compared to the prior year.
Global Marine shipping remains very volatile due to port congestion and almost like now ever given an incident.
We announced sales price actions and the first quarter and additional increases have been announced for the second quarter.
These increases will cover a broad range of our products that we expect to help mitigate higher inflation and realized raw material price.
On slide 13, adjusted EBITDA was a loss of $7 6 million compared to a loss of $1.6 million and the prior year.
Raw material increases and higher domestic and ocean freight.
$6 9 million headwind and the quarter, including about $2 million of production inefficiencies caused by the impact of winter storm Yuri.
We also had some duplicate costs in the quarter related to the closure of the South gate facility in conjunction with the opening of our West Coast distribution Center in Los Angeles.
We are finalizing the remaining customer shipments from South gate this month.
So we will continue to see related costs and the second quarter as we wind up our activities there.
And SG&A costs were $1 5 million higher from the prior year, but sequentially lower by 2 million.
Factoring in our upcoming product launches and the newly on boarded sales and marketing team members, we expect SG&A spend will be sequentially higher and the remaining quarters of the year.
Finally, turning to slide 14, our liquidity position improved significantly following the sale of our South gate facility.
Which contributed net cash of $55 million to our operations per feature and Batman.
Our operating cash flow was a use of 28 million compared to a cash use of 17 million and the prior year.
The force first quarter is normally a heavy seasonal outflow based on our usual working capital spend.
During the quarter higher receivables were 15 million and use of cash as we adjusted to simplified payment terms and stronger sales and the back half of the quarter, well higher inventories and represented a $2 million use of cash.
These increases were offset by higher payables and the same period.
Following the Falcon and sale, we made a required longterm debt prepayments of $20 million and.
And repaid borrowings outstanding under our revolving credit agreements as well.
At March 31st 2021, our net debt with 36 million compared to our 66 million net debt position at December 31st 2020.
We have available liquidity of 104 million, providing ample liquidity to fund our transform transformation initiative.
I will now turn the clocks and Michel for his closing remarks.
Thank you Amy and.
To think the Armstrong flooring team for their strong performance and dedication to our plan during the first quarter.
I'm pleased with our progress and I'm ready and remain optimistic about our future.
Transformation is underway and we're continuing to deliver on the commitments. We made to you just over a year ago.
<unk> that we've worked on steadily through the myths of the global pandemic.
And commitments to build a strong foundation for our business to expand and simplify and strengthen our core capabilities.
I have full confidence and our team members to continue to safely serve our customers and this rapidly evolving market, while continuing to make incremental progress and our long term value creation initiatives.
Thank you again for joining us today operator.
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Our first question comes from Ken <unk> with Keybanc capital markets. Please go ahead.
Good morning, everybody.
Good morning, Thank you for joining us.
No problem I Wonder if you could just kind of update us on you know the the pricing announcements that you have in place are you now and how that might vary obviously, let's say the U S residential versus international.
And how that's related to the cost and puts that you're seeing in terms of how the cadence of.
And that should unfold through.
And through the year, that's my first question.
Well, we announced a price increase in December and it's starting to phase in AR and AR and the mill of the first quarter, but with the winter storm, we had and definitely impacted our raw materials across the North America and also globally that the combination of.
The recovery from the pandemic and basically the limited availability of the raw materials and definitely some producers are taking from losing some capacity for extended weeks has created and inflationary situation. So we announced a second price increase at the end of the quarter.
And that will phase in AR and the second but we expect the first one to be pretty much be complete and in the second quarter and the second one to be evolving through the second and eventually bleed fully implement and the third as you know some of these price increases take some time to do.
I'll go through and through the contracts and definitely and commercial bids there's a certain period of time to phase those in due to those commitments, but yeah.
And Luckily the industry has been dealing with this for many years and has had a lot of practice. So it's it's more question of a win.
When and dealing with it and our customers are also understands that the reality. So that's working through and then the international one was announced at the same time and the second one and we should see the benefit of that partially in the second and then start getting better and the third and the fourth.
I appreciate those details.
And really from Covid affected kind of your business transformation and.
Life actually and the last year could you kind of talk about how.
You know, you're playing and SG&A investments.
Specifically and you know how those might be unfolding. This year I net that you guys broadly have talked about it but now that.
And I want to say things are normalizing and and five if you could just kind of update us on your tactical choices that you're making thank you very much.
Very good question. So as you know and we were hopeful last year about this time to be investing and adding a sales representation.
Engaging in the independent retailers for with more product launches and displays but naturally and the second quarter basically no. One one anybody in their stores and to your point, we were trying to figure out what this you know how and lengthy and how complex and what was the impact of Covid.
So we definitely had to take a pause in our go to market strategy reset it pretty much and the third quarter and we started basically as we had a little more clarity and the marketplace and now to your point and things are definitely and getting better so.
So we started hiring back in the force the hiring the go to market additions in the fourth and representation to call an independent retailers and on builders and also and making some additions and also in key segments, where GAAP such as hospitality.
We've made a significant increase in our independent retailers and the first quarter to keep building upon that.
And we also launched a series of new displays both and sheet and I'll turn it on and the first quarter did some of that and the fourth quarter and also some new L. V. T displays with key buying groups, such as NSA and others. So we some of the things we were hoping to do really late summer last year or early summer last year.
Where we we started doing the fourth quarter and first quarter and we're phasing through that process as we speak so naturally the SG&A investment is and commensurate with that those investments and go through and that's what Amy was covering.
Those those will be reflected and in the coming quarters, but naturally the sales should follow naturally as the program matures and people become more productive and the field.
Thank you very much.
Thank you.
Next question, Keith Hughes with true with Securities. Please go ahead.
Oh. Thank you actually this is Judy American for Keith Hughes, and if I could just follow up a little bit on the first question on slide 13, you talked about the EBITA and packs and the $4 9 million of higher raw material and other higher costs.
And you answered kind of about your and thoughts about the price increases coming through the year do you think that $4. Nine line is that kind of the run rate for the year and even though you've got the price increases coming do you think maybe by the end of the or the pricing will offset those or is there any thought or anything else you can kind of add about those increased costs.
Sure and you know the the raw material cost and the increases are frankly, coming and I'm extremely fast and in some cases faster than we can implement pricing as Michel talked earlier, you know a number of our.
Contracts have have a.
Set pricing for a period of time and.
We're limited in the window in which we can can do those increases that said you know we're managing the raw materials are very very carefully theres been huge disruption are you know across all of the supply chain for these materials and as we look at it you know based on.
And our information we expect there to be continued increases in each quarter and raw materials. This year and based on the visibility that we have at this point and obviously that could change it.
No.
March was was much steeper than February and and we've seen continued increases here in April and.
And so we're trying to tobacco and so all of that and make sure that we have the right are the right recovery freight has also been a headwind for US. This year are both on ocean freight and.
And the cost there for some of our imported materials, but then also you know on ground transportation and.
And availability lanes timing and pricing and.
And have all been some headwinds that that the teams have been managing through.
Okay, that's helpful and I forget and one more question you talked about on commercial.
And it and global it sounds like that was doing better, but some of that was pull forward and price increases and.
And but also in the U S.
More so have you seen and increase in quotation activity and commercial or is this like project delays that are kind of resuming or and anything else you put out there and we hope so to your point, we're seeing more activity for sure and commercial you saw the a b is or you know I guess the architects are seeing soma.
Seems things are happening, we're seeing actually more transactional work are also helping our commercial results, we augment and our business with our new quick ship program and.
That has helped to take advantage of opportunities that things to your point, they've got pushed back or got deferred and prior periods. So some property owners are addressing that and refurbishing some.
Some of it there their properties. So oh, the commercial business is definitely an improvement versus the fourth quarter and I expect continued improvement and the second and third so definitely the you can just see the activity the conversation with the customer.
Is there still some slug initial sluggishness in commercial but it seems to be the there's definitely more and more conversations project discussions and to your point some of the projects that have been on the sideline from an extended period of time are starting to come off which were.
We're excited to see.
Okay, great. Thanks, Thank you very much.
And you.
Next question, Chris White with Thompson Research Group. Please go ahead.
And good morning, Michel and Amy Thanks for taking my questions I wanted to continue on the commercial and market questioning you. You said Q1 commercial was flat and you've cited adi's strength I'm wondering if you're if you think you could actually see growth and the commercial market for Q2 and.
And if so how strong do you think the growth could be given some comps that were off pretty dramatically in 2020.
Well to your point I mean, the comps are making it a we should definitely see growth for sure definitely with the comps that we had and in Q2 and I would expect that would be the case across the industry. So I'm definitely and also in our case with some of the things we're doing our go to market and some of our.
Programs, we put in place I would expect those to help us through not only the the market is getting better but I think some of our initiatives are maturing and that will help us in Q2, and Q3 I won't quote a specific number or range by a definitely expect.
Commercial to be a positive and in the and the second and the third quarter that can help us and and continue growing the business and which as you know first and foremost goal and and reset reestablishing the brand where it needs to be and so and we're connecting with customers. We have more reach now and then we significantly had last year.
And as that comes through as you know the commercial businesses and one that has a longer sales cycle and the residential one but I'm very.
Positive with what the team is doing and how they're engaging with customers and a coffee and will bear fruit in the coming quarters.
Thank you and and then digging down on that a little bit more.
Breaking commercial down by segment I know the education and health care had been lagging recently are those the two sectors that you are seeing kind of a momentum coming back or is that is it other sectors that are that you're kind of seeing the streets.
Ah, we're definitely seeing more activity and more discussion on projects both on the education and health care for sure.
And there's definitely some active.
Activity is we're getting engage and hospitality now are as we mentioned in our remarks.
You can tell that yeah.
Even the hospitality owners the ones that have the funding to do it are really and looking at refurbishing their properties to make sure. They are as competitive as it can be as the consumer.
Consumer comes back and the travel industry.
And to get a leg up on their competition, so you're seeing some of those.
Discussions are for sure.
So I think there's definitely some corporate work and a lot of people are resetting what they're doing it's moderate.
But.
The you can tell theres more discussions of what the the the office of the future should look like and the reality, where we're dealing with and knowing that there could be other versions of what we've dealt with and this past year of COVID-19 or related issues. So how do we change or the way, we work and and.
Operate so there's definitely some conversations happening as how and how everybody is.
Resetting their corporate footprint, so and you know the good thing is hard surface is a is a great product.
And help you stay keep your property clean and organize you see if there's you know if its and bidding condition or not and so it's definitely been a positive all around.
Thank you that's helpful and then flipping over to the residential side, you had a smoke and that a smoke and about the residential and national accounts that were down due to the product launched last year that provided tough comps can you help us better understand that national accounts and announced last year and and then why.
And why it would be down this year, despite a stronger residential market.
Well it was tied to a load and so as you know when you have major from a residential national account and you do the inventory load in when you load in and multiple days of products right. So we're in a very short time frame. So you get a one time benefit across your.
And that's really what we're referring to was the initial inventory load and last year. So we didn't have a comparable inventory load in this year versus last year, it's not necessarily the program itself.
More of the what we displace we displace someone else and you know, we and we benefited from launching two.
Thousands of stores around the country and that was all happening within that one quarter. So [laughter].
Those under a company our size and those will make our sales trend lumpy in residential national accounts from time to time. So that's what we were saying that we're very we're very bullish on our residential national accounts and it's just the timing and some of the rollout from time to time, depending on their size and this was a large ones, though which was good and we're happy we want more.
More of those going forward.
Got it. Thank you that's helpful last one from me.
You mentioned the success of the quick ship program can you talk a little bit about how kind of scaled up. This program is are we still and the early stages.
Or do you think you'd kind of take it as much market share as you as you can with it. Thank you very much.
And I appreciate the question and it's very much and the early stages. This is something we we launch in August and September of last year, our distributors have been very good partners to get the product out we have some geographies, they're doing a tremendous job.
And getting the word out and you can tell it's gained momentum so by the time the product get specified or use or get a program and in T I projects or ti facilities or different groups that should only keep maturing so it's off to.
A very good start you know, where we're seven months in eight months and in that process. Now. So we definitely expect a significant improvement and continued improvement and for a quick ship and will also augment that overtime. So I think this was out and we're happy with the early returns and we will get to adjusting and.
And investing in it so.
Great. Thanks again.
Thank you.
And I'll hand, it back to Michelle for closing remarks.
Alright, 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 all.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.