Q1 2021 Armstrong World Industries Inc Earnings Call
Good day and thank you for standing by welcome to the Armstrong World Industries, Inc. First quarter 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session ask a question. During the session you will need to press star one on your telephone.
If you acquire any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Tom waters VP of corporate Finance. Please go ahead.
Thank you good morning, and welcome. 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 Armstrong 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 from the presentation, Brian will fringe. During this call are posted on our website in the Investor Relations section.
Buys you that during this call we will be making forward looking statements that involve risks and uncertainties.
We will outcomes may differ materially from those expected or implied.
It was more detailed discussion of the risks and uncertainties that may affect Armstrong World Industries. Please review our SEC filings.
<unk> the 10-Q filed earlier this morning.
We're 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 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 Doug.
Thanks, Tom and good morning, everyone. It's good to be with you today to review our first quarter results a solid start to what we expect will be a robust year of growth for Armstrong.
Overall in the quarter, we continued to see sequential improvement and the recovery of our markets. Our total company daily shipping rate sequentially improved and accelerated through the end of the quarter and that acceleration has continued nicely into April.
This first quarter comparison is against the last of the pre COVID-19 market conditions as we saw very little impact from our from COVID-19 in our base period.
And this first quarter of 2021 adjusted revenue of $253 million increased 2% from prior year, driven by sales of our 2020 acquisitions, which more than offset COVID-19 driven volume reductions in our organic business.
Adjusted EBITDA of $85 million declined 12% from the prior year driven by COVID-19 related volume declines continuing investments in our growth initiatives and the resumption of spending that was deferred when the pandemic hit.
The mineral fiber business has started the year as we expected our mineral fiber daily shipping rate posted a third consecutive quarter of sequential improvement as people return to work in markets continue to reopen.
Like for like pricing exceeded input cost inflation.
Topline mix was positive as sales of our premium products continue to outpace the rest of our product offerings.
Channel mix was once again, a headwind although to a lesser extent driven by relatively strong sales and the lower price point home Center channel.
Channel mix as we have experienced during the pandemic has already begun to subside and is not expected to be a headwind going forward.
The territory index challenges, we face for the past few quarters have diminished as New York City and the other six major metro areas. We've recently called out are essentially in line with the rest of the country.
On the operations side, our mineral fiber plants ran well with solid productivity.
Despite the challenges created by the winter storms.
Our wave joint venture performed well and was able to price ahead of rising steel cost to deliver a strong first quarter.
Our architectural specialty business delivered solid top line growth of 25% versus prior year quarter, driven again by our 2020 acquisitions of turf Moes and Arcturus.
A real highlight in the quarter was the acceleration in order intake with the sequential or organic order intake at a record level. That's resulted in a stronger than expected backlog.
We continue to be encouraged by our win rates on projects and our ability to differentiate our offering versus our competition.
Given our strong backlog, we remain confident in delivering our 2021 sales outlook of more than 30% growth.
In the quarter, we continued our investment in architectural specialties to further extend our capabilities and our capacity to support our expectation of continuing strong growth in this segment.
Integration of our three new acquisitions.
Acquisitions continues to go well and I remain excited by the potential for incorporating their technology and design capabilities across the Armstrong platform.
Our acquisition pipeline is robust and continues to grow and we have the balance sheet liquidity and appetite to execute additional acquisitions and alliances.
In terms of the overall macroeconomic environment and marketplace conditions markets have improved and are showing signs of gaining momentum.
I am encouraged by the trends, we're seeing in the data and by the tone of the conversations with our customers and distribution partners bidding activity continues to improve through the quarter and more projects delayed last year are being released.
GDP estimates are being revised upwards, which is a positive leading indicator for increasing renovation activity.
Confidence is rising and return to office statistics are improving.
Moving signaling a desire for an expectation expectation of return to the marketplace.
There's a strong desire to get students and teachers back in the classroom, where they can be most productive and to get work teams back together. So they can be most effective in collaborating innovating in networking.
These trends along with the potential for trillions of dollars in government spending on infrastructure, including spending specifically targeted for renovating schools is trading.
Greater optimism and a more favorable economic backdrop.
Along with stronger economic outlook inflationary pressures are ramping up the raw material most impacted our operations. Thus far has been steel use primarily at our wave joint venture in the manufacturing of our suspension systems.
As a result be any back in December we have implemented five price increases totaling more than 40%.
In a challenging body of work for both our sales teams and our distribution partners to manage but they have performed well and as evidenced by waves first quarter results.
We are also experiencing rising input and freight costs in our mineral fiber and architectural specialties segments. As a result, we have announced a heavier than normal 10% price increase on mineral fiber products and pulled the effective date up to may earlier than normal this.
This was on top of the implemented February increase of 7%.
In architectural specialties. We've also increased pricing on standard products and are adjusting our coding processes on custom projects.
With these actions I remain confident that we will once again deliver like for like price realization greater than input cost inflation.
Overall, both segments are operating at a high level, we are fortunately not experienced any supply chain disruptions, allowing for outstanding service levels and because of our recent digitalization initiatives. We are staying more closely connected to our customers and partners than ever before supporting a strong project backlog position.
And our teams are executing well on our price initiatives to stay ahead of inflation.
So with this healthy state of operation, a solid first quarter results and our market outlook for the remainder of the year. We are reiterating the full year 2021 guidance we provided in February.
And with that I'll turn the call over to Brian to review the details of our financials.
Right. Thanks, Vic and good morning to everyone on the call today I'll be reviewing our first quarter 2021 results and our guidance for the full year, 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.
On slide four we begin with our consolidated first quarter results adjusted sales of $253 million were up 2% versus prior year.
These adjusted sales include approximately $700000 of purchase accounting adjustments related to our 2020 acquisitions.
This is the last quarter for this adjustment.
Adjusted EBITDA fell, 12% and EBITDA margins contracted 520 basis points as Vic stated earlier. This contraction was expected given the pressure that persist this quarter from COVID-19 related demand declines the investments we continue to make in our growth initiatives and the fact that we have reinstituted the costs we temper.
Early cut last year.
Furthermore, as a reminder, when you look at our adjusted EBITDA reconciliation in the appendix on Slide 12, Q1 of 2020 earnings as reported were significantly impacted by our Q1 pension annuity nation.
Adjusted diluted earnings per share of <unk> 84 cents were 23% below prior year results.
This result includes $6 million or nine cents of amortization expense related to our 2020 acquisitions.
Adjusted free cash flow declined by $13 million versus the prior year.
Our balance sheet remains in a strong position as we ended the quarter with $397 million of available liquidity, including a cash balance of $122 million and $275 million of availability on our revolving credit facility.
While net debt of $587 million was $43 million above Q1 2020 results.
Our net debt to EBITDA ratio of one nine times as calculated under the terms of our credit agreement remains well below our covenant threshold of 375 times, we have considerable headwind in this measure.
In the second quarter, we repurchased 126000 shares for $10 million or an average price of $79 60 per share.
Since the inception of our repurchase program in 2016, we have bought back nine 9 million shares at a cost of $616 million for an average price of $62 57 per share.
We currently have $584 million remaining under our repurchase program, which expires in December 2023.
Slide five summarizes our mineral fiber segment results in the quarter sales declined 5% versus prior year due to the impact of COVID-19.
Mineral fiber shipments exited the quarter on a positive note with March shipments flat to prior year on a rate per day basis.
Through Friday, April's month to day daily ship rate is up 58% versus prior year.
And higher than 2019.
Positive like for like pricing and favorable product mix continued but as Vic mentioned channel mix was a headwind in the quarter.
In effect at the fall through rate.
We expect this will be the last quarter, we face this channel mix fall through rate headwind.
Mineral fiber segment adjusted EBITDA was down 10% as a result of the COVID-19 driven volume declines.
SG&A spending to support our growth of investments and the re institution of the 2020 temporary cost reductions.
The mineral fiber plants ran well and drove productivity that fell through to the bottom line.
Input cost inflation was temporarily offset by inventory valuations, but inflation is clearly ramping up and driving our proactive pricing actions.
As Vic mentioned wave has been pricing out ahead of rising steel costs.
Moving to our architectural specialties or <unk> segment on slide six.
Adjusted sales grew 25% versus prior year were $13 million as the 2020 acquisitions of turf Moes and Arcturus contributed $17 million in the quarter and more than offset COVID-19, driven organic sales decline of $4 million.
EBITDA for our <unk> segment declined $3 million as EBITDA contributions from the 2020 acquisitions were more than offset by a S organic performance.
Sales for <unk> organic business continued to be lumpy as projects were delayed out of the first quarter and we made growth investments in both capacity and capability to support our top line expectations for Aaas.
We remain confident in our sales guidance for the <unk> business as a result of the favorable trajectory of order intake in the first quarter that pick mentioned.
As sales ramp up throughout the year, we expect EBITDA margins to improve.
Slide seven shows drivers of our consolidated adjusted EBITDA results for the quarter, including a breakout of the impact from our 2020 acquisitions.
Sales from our acquisitions, essentially offset organic volume declines.
He was a positive contributor driven by like for like pricing in the mineral fiber segment, but was offset by higher SG&A.
Slide eight shows adjusted free cash flow performance in the quarter versus the first quarter of 'twenty.
20 <unk>.
Cash flow from operations was down $13 million driven by lower earnings.
Keep in mind, the first quarter is typically our weakest for free cash flow generation as we build inventory to service the strong summer demand period.
We remain confident that we will deliver that 19% free cash flow margin that we've guided to for the year.
Slide nine summarizes our guidance for 2021, we are reiterating our overall expectations to grow sales, 10% to 13% adjusted EBITDA, 9% to 13%.
Adjusted EPS, 5% to 15% and deliver free cash flow yield.
19%.
April is off to a good start and we are optimistic with the trends developing in the second quarter.
It's too early to make any adjustments to our annual guidance and we will provide an update on our guidance in July when we have more data.
Slide 10 reiterates the seasonality we expect for sales in 2021. This is not something we typically share is our seasonality is usually very consistent year to year. However, given the disruptions experienced in 2020, the seasonal pattern of our year on year sales will be unusual in 2021. So we've included this.
Page to provide additional insights.
In conclusion I remain positive about the outlook for 2021, with an improving health and economic backdrop and involving portfolio healthy spaces products and new digital tools and capabilities Armstrong is well positioned to advance our value creation model in 2021.
With that I'll turn it back to the thanks, Brian before we get to some Q&A I wanted to touch on a few important initiatives in the company, namely ESG healthy spaces, and our new digital platform canopy by Armstrong on our last call I mentioned that ESG would be an area of focus for us in 2021 and beyond.
As we build on our history of community engagement and corporate responsibility, it's increasingly important to all our stakeholders and it has a natural fit with our mission our history, our culture and our strategy.
As many of you have seen earlier this month, we launched a redesign sustainability section of our website that reflects our three pillars of focus people planet and product and establishes our 2030 goals in these areas.
In addition work is underway and on track to complete our first sustainability report this summer.
This comprehensive report will address the needs of G. O R ice SaaS B and T. C F D and because of the importance of this work I want to take a moment and recognize the great deal of effort and commitment by our teams that has gone into capturing our achievements, thus far base lining our opportunity for improvement and to developing meaningful long term goals.
More to come on this total effort as we progress along this important journey, which aligns well with our strategic emphasis on healthy spaces.
Healthy spaces continues to be a focal point in economic recovery ceilings are becoming increasingly more relevant as the capstone to an interior space ceilings are critical for managing air flow and providing for optimal ventilation as well as delivering acoustical performance and design aesthetics. These trends our.
Rising the ceilings category in making this category more relevant for the current and future need of healthy indoor spaces.
And of course this suits Armstrong World is a long time.
Category leader.
Armstrong is becoming recognized as a thought leader on the importance of holistic space planning design and construction.
And the impact this approach can have on our confidence and well being of people, while theyre in doors, which is where we spend a large majority of our time.
We believe that the growth investments we've made in 2020 will bear fruit in 2021 with gains from new healthy spaces solutions and our new digital capabilities are.
Our product innovations are on target for what a post pandemic market will demand.
These spaces is much more than an event driven opportunity.
Here to stay.
Healthy spaces has always been important but the pandemic has forever changed the definition of healthy and our health and safety expectations for indoor spaces architects designers facility managers business owners are all looking for solutions that bring people back into commercial spaces and make them more.
Suited for future use.
As offices day, densify and expansive collaborative space has become the norm the need for acoustical performance and ceilings will only increase as we as will the need to better clean and manage air flow.
Ceilings are central to providing these solutions.
Our $24 seven defend family of products, including Air sure clean assure and vital shield sealing solutions are designed specifically to help improve air quality and ventilation sustainably.
What's encouraging is that despite being launched just five months ago $24 seven defend products have been sold into all of our core sectors office education health care retail and transportation. This clearly demonstrates the broad based opportunity for healthy spaces.
These product innovations timed for the healthy spaces catalyst copper.
Coupled with our new digital platform of canopy by Armstrong positions Armstrong well to capture the evolving market recovery opportunity.
Launched earlier this year canopy by Armstrong, that's what the small K is online at canopy by Armstrong Dot com cannot be utilizes artificial intelligence and machine learning to provide early access and enhanced visibility to a large part of the market opportunity. We were previously unable to efficiently.
Correct.
This technology is allowing us to influence and Armstrong solution and is making purchasing easy.
Canopy provides facility owners and managers and end to end solution, including diagnostic tools consulting and pre certified installation services.
Online consumer friendly and fulfilled by our best in class distribution network canopy is tapping into pent up renovation demand in smaller scale commercial spaces and driving mineral fiber volume growth.
Early results are encouraging we are seeing growth across all our critical metrics website traffic orders order value and sales to.
To date, each month has been significantly better than the last and I expect this will continue throughout the year.
Again, we are encouraged by the improving market conditions and the increasing relevance of the ceiling category and we are especially excited about the market opportunities ahead that Armstrong is so well positioned to capture that.
That will enable us to deliver on our commitment to deliver strong results for our shareholders and on our mission to make a positive difference by creating healthier spaces, where we live work learn heal and play.
And with that we'll be happy to take your questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
China question Pester pound key please standby will be comparable to Q1 day roster.
Our first question comes from Kathryn Thompson with Thompson Research. Your line is now open.
Hi, Thank you for taking my questions.
<unk>, if you're healthy spaces products, but imagine just in greater demand there.
But really wanted to get a better understanding of how much for growth as being contributed by new construction vs. Retro sent which is in pretty unusual environment.
Yeah, you know I think Catherine the.
The activity current activity.
Is reflective of what in new construction of particular as you know is reflective what's gonna happen 18 months out right. So what we're actually experiencing now in terms of sales or revenue or opportunities to ship into today.
Is what was weighed in 2020, okay or or what was not.
Wait in 2020, so I think this year, what we should expect new construction activity from a sales standpoint is going to be a slight headwind.
With that said.
The bidding activity of new activity and new construction was positive in the quarter vs. Prior year.
And this is the first time, we've seen new construction activity be positive in the last several quarters. So.
So I think that's an encouraging sign for me when I start to see that there is a.
Into a part of the headwind from new construction activity.
Most of the activity, we're seeing today that we're developing and near term selling into for 21 does all the renovation side several of the projects that were delayed last year, we're starting to see get released now and really it was the latter part of the first quarter and we expect to see that continuing into the second quarter. So the bigger.
Part of our business Catherine you know well, 70% of our business is from renovation.
And large remodel projects, that's an encouraging sign for us on on the activity front and on the new construction site again, the fact that we're starting to see more activity there.
Bodes well for the second half or even into 2022.
Okay and the follow up question is SG&A and quarter really just wanted to get a clarification how much the increase was due to the ramp up up your December acquisition, which is bleep close knit December.
Structurally higher SG&A from the three acquisitions completed in 2020.
And the higher incentive calm that she says <unk> and.
And then you release really essentially want a purse at how much it's more one time vs structurally higher costs going forward.
Yeah, I'll, let Brian comments on some of the details of that Katherine but overall I was SG&A was as expected.
We made a very conscious decision last year to continue our investments and the growth initiatives.
Uhm that I talked about healthy spaces. This new digital platform canopy by Armstrong architectural specialty capacity and capabilities. We've continued our investments and those and those certainly are reflected I think in our first quarter numbers and then the resumption of the temporary cost cuts that.
That came back in from from the 2020 deferral. So I'll, let all that Brian comment on some of the specifics around those but when I look at our SG&A is it was very much as expected and on track of what we we intended to do with are really driven bar growth initiatives, Brian you want any colors that yeah.
Sure. It is you further break that down Catherine.
Say roughly six to 7 million was around incentives and deferred comp and that's more of a temporary item that we had last year had a reduction in that didn't repeat here in Q1 three.
3 million of it's coming from the 2020 acquisitions and then the remainder is that growth investments, we're making to support the a S.
And canopy unhealthy spaces.
Okay perfect.
Thanks, and the four part I wanted to.
Say congrats to Tom for all your I per cent with Iron Armstrong, We're gonna Miss you and I'm Gonna Miss <unk> Challenge best of luck in retirement.
Thank you.
Thank you for that Katherine.
Thank you and our next question comes from John Levai L. With Bank of America. Your line is now open.
Hey, guys. Thank you for taking my questions as well so the first one Brian if I if I heard you correctly I think you said this April mineral fiber volume was up 50% year over year I'm. Just curious if you could remind us of the monthly volume cadence on a year over year basis, and two 220. So April May June 2222, 20th.
Your for your basis.
Yeah, John that's one of the reasons I referenced that April was above 2019.
So I'm encouraged to see that that sales rate per day exceeded two years ago before we had the COVID-19 impact so roughly.
Last year sales mineral fiber sales were down in.
In the 50 range. So it's a nice pick up.
And encouraging that we're seeing that in April.
Gotcha Uhm, but do you do you have it I can follow up with you, but which curious should be added on a monthly basis, but I'll I'll follow up second question is.
B you know, obviously returned positive territory in the quarter, which was which was encouraging and certainly ahead of our expectations curious of it you know if this was ahead of your expectations and the level of confidence that you guys have that we're sort of through the worst of the pressure at this point.
Now this was as expected and sat down we had talked about last year the underlying.
Driver of R. A V last year. There was this territory mix that was very unnatural and caused by the unevenness of the COVID-19 impact on some of these major cities and.
And of course, some of those shutdowns that happened there and that that was transitory the underlying driver of mix that has been occurring in this industry for the last 10 years has been product mix and that remained positive last year, and 2020 and and as we expected. This territory mix to kind of work its way through as it.
Has an as it did in the first quarter.
That this product mix wood start to show its way through and drive a part of that a V.
Component that wasn't there last year. So it it's it's exactly where we expected it to be and we think it's going to continue to improve from here with a backdrop of inflation to help us with our like for like pricing and I think this territory mix has already normalized itself is it's demonstrating.
And the first quarter for the rest of the year.
Channel mix was the only one that remained a slight headwind.
And again that'll work its way through.
At that and it's already subsiding in terms of it's balanced with the rest of the territory's from the rest of the channel. So now.
No I think it you vs and exactly what to expect it to be.
And I think it's fair to say as you look at our guidance for the rest of the year with our easier comps and the second and third quarter that we're trending toward the high end of that range.
Great. Thanks, very much guys you bet. Thank you Sir.
Thank you and the next question comes from Susan Mccarney with Goldman Sachs. Your line is now open.
Eddie My first question is just you know going back to the order trends that you are seeing in there can you give us some sense of maybe what those and markets are in any color on the geography's as well and just you know some context on that activity that you're seeing in how to think about where it's coming from.
Yes, Susan I think let me start with that the the geography part of that because we certainly have seen better demand from the southern part of the United States sooner.
As those parts of the market have opened up sooner than say the northeast.
And even maybe parts of the the northwest so it's.
It seems to be kind of a transitory trend, though other I see the northeast like New York City in particular, and California are improving nicely and so I kind of see the rest of the country catching up to that but geographically, we did see say, Florida, Georgia, Texas and some of those parts of the country out in front.
Of some of the other areas.
Really on the vertical side, so the different sectors education office, we really see a bounce back you.
Uniformly across all of those sectors and I would expect that because what was what.
What happened in 2020 was indiscriminate to the sector or the new vs renovation everything was.
Was shut down uniformly it didn't matter what type of project it was or what vertical it was in.
So I would expect here in these early days of the recovery is a bounce back kind of uniformly across all of the the verticals and I think that's what we're saying here the first quarter again into April it it's early.
But we like the trend that we see in terms of the market activity across all of those sectors I will just mention that since you've asked the question around that the the bidding activity and education and healthcare.
Is is training upward nicely and I would say ahead of some of the other sectors and I think that's a reflection of maybe some of the additional funding an activity that's going into our funding it's going to drive that activity in those two sectors. So, let's say that that'll be to be determined I think as we see that unfold and.
The second and third quarters.
Yeah. It does feel like there's a lot of focus on education, and and kind of improving the schools out there and so it seems like you are certainly capturing some of that which is encouraging.
My next question is just you know on the inflation I know that you talked a little bit about the transportation expense, obviously, increasing can you give us some color around how to think about how that uhm is kind of going to flow through for the balance of the year do you expect you'll see further increases and I guess you know how do you think about that.
Against the normal cadence in pricing that we usually see from you should we expect that there could be you know obviously, you've already announced that second price increase how many are you are you thinking about for this year and how should we be expecting those to come through.
Well I think the fact that we pulled it for we typically do our second price increase in August we obviously pulled out forward into may it's a little heavier than what we normally go with as well it's a 10%.
Rice increase to reflect what we expect to happen in terms of inflation and so we can stay ahead of the inflation.
The answer your question is really to be determined I think we're gonna take a look around as we get into the summer months and if we're expecting are seeing an acceleration of inflation I'll say, then we wouldn't be afraid to go out with another price increase to stay in front of it so.
So I like what we say, our our 7% increase in [noise] excuse me in February was very effective.
And then which is again a little bit heavier than when we normally go in February.
Mm mm mm.
Expecting that will will have good success, what the 10% in May and then we'll see where we go from there.
I think it's really notable.
Is what we have the highest levels of inflation is in our way business with steel costs that really started last August in terms of inflation and they've really been able to implement price increases regularly in fact over the last several months to stay ahead of the steel inflation, so they're doing a good job.
Remember this is the same selling organization that raises prices.
On our <unk>.
Ceiling tiles as well as the grid system. It's the same sales organization. So I'm confident we'll we'll do a good job as we already are in terms of staying ahead of inflation.
Okay. That's very helpful color. Thank you and good luck with everything thank.
Thank you Susan.
Thank you. Our next question comes from Ken Zone out with keeping Caroline is now open.
Good morning, everybody again good morning.
So to choose above two 219 that's.
That's that's that's good you know and you think obviously, you're you're talking to your product mix, which is I think as much regional mix it.
Fading in the second half is that correct, where we talked to think about product mix really being a reed driven by regional mix is that accurate Vic.
No the products mixes underlying across all their territory sweet.
Continue to be positive it was positive all last year, Ken and then it continued to be positive.
As a fundamental the territory mix, you know, New York, and California, Chicago some of those areas that were harder hit that carry higher value products right, but drove the negative overall mix and that's that.
That's pretty much normalised out as we've seen in here in the first quarter.
Okay.
You know.
So many things happening it's it's certainly appears your day.
Share get you know games, if if we had a good metric would be improving I think.
You guys were being very disciplined and we can see that in price.
As I drove to turn it back to you to get my second shot a couple of weeks ago, you know Northern California. It just you know they were building like Crazy and farm fields, which wasn't uncommon, but we had a big shift from the technology in the San Francisco area out you don't do the Exurbs.
Is there could you maybe I know you've really focused on schools, but <unk> I take a step back and you know your stock trading.
Where it is which is you know appropriate I think.
Could there be some bigger.
Demand curve for your products, you know is suburbs Exurbs get a lot more.
Demand you know in terms of the traditional suburbs right I mean, you have.
Shopping centers you'd have school is being built beyond just the reefer, but I mean is there something with this huge infrastructure spend the bill that could be coming you know inflation.
Could you kinda just talk a little bit about blue Sky, if if the demand curves because I know, we're all focused on things like you know office buildings in the urban area understandably, but it seems like there could be a big kick from this exurb that perhaps people aren't thinking about or is it.
Could you address that please.
Yeah can we do see this trend and again there was a nice article in the Wall Street day on this trend that's happening.
Of.
Folks moving out of the cities higher cost areas of the city to lower cost areas of the suburbs.
And we've said from the beginning that there's not enough capacity, there's not enough infrastructure in place out there too.
To house these folks that moved there that will create opportunities for new construction activity.
Renovation at the minimum but new construction activity. If you look at the commercial construction over the last 10 years since the financial crisis. The inner cities is where the most investment has gone from new construction it hasn't been in the suburbs and so we don't believe there's capacity.
There for a significant number of folks moving out of the cities into the suburbs. We we've always viewed that as an opportunity at a very minimum again renovation activity for those folks moving in.
But also from new construction to house, the additional need in those areas and.
<unk>.
And we shouldn't forget and Ken as we talked about.
You can't forget the capacity that's left in the inner cities.
Somebody will fill that void and I think that's the trick is.
How long will it take for that capacity to be utilized again, which drives a renovation events for Armstrong that is latent demand for us.
So that net we believe this is a positive trend.
When you have volatility are transitory trends in the commercial construction area.
[noise] and maybe just to put that in context, you know with volume down like they were in F y 20.
You know you guys have had that cyclical volume perspective, where mineral fiber you know I had been declining never really recovering from the get a 99 P M.
Have your gaming, obviously, an architectural which.
It's not necessarily swapping out square footage, but.
Uhm.
Do you think you know there could be really a cyclical trough basically a mineral fireworks itself. So much in F Y 20, and it's been on this perpetual declined since 99 effectively could this be renewed cause I've been to the extent jobs are moving to Florida, New office space to the extent alright Apple.
Or you know where the tech companies is building a tech plant in North Carolina, just I I increase moving thinking about how your business might really be affected by that I mean are you seeing that <unk> I'm a bit activities take a long time, but.
Can read the densify in the wood that hurt the product mix you know if you're not putting something into the sales force tower about putting it into the suburban Raleigh for example, thank you.
Yeah can we don't see any change in the mix, whether it's in a suburb or whether it's in the inner city or in North Carolina vs. San Francisco. These companies will have a standard of the quality. They want in the interior spaces from an acoustical standpoint from a lighting standard.
Point and now with this new catalysts from a healthy spaces standpoint, and the role of ceilings.
And the importance of the role it's playing in terms of driving and delivering high quality air for occupants.
It is a real catalyst for the ceilings category overall, so I think we're gonna see additional opportunity and the ceilings category as part of the solution to create healthy highly ventilated are from the world at a place in in the interior design. So I think that this is a tailwind opportunity for the category.
Yeah. It is interesting well. Thank you very much and Tom. Thank you for all of your help over the years.
Thank you and next question comes from <unk>.
To the online is out then.
Okay. Thank you a question on architectural specialties talk a lot about sales based on minimum and mineral fiber wood look alike, an architectural specialties and kind of where do you stand in April a rude to your bases from that business outside of acquisition.
Yeah. The order rate has been terrific are Keith as we talked about.
It's we're coming into the quarter into the first quarter. We saw some of these projects on the organic part of the business. We saw some of these projects getting delayed.
And to wait out of the first quarter. So we landed about what we expected given some of the signals we were saying on some of these projects getting delayed.
But with that said we had on top of that we had really strong it Brian outlined in his remarks, we it's really strong order intake in fact that the month of March was a record level of order intake force an architectural specialties, which was really strong signal for us that there's lots of projects out there they are.
Not getting cancelled and and so if I look at our backlog right now are.
Our backlog is in one of the better positions I can remember it being at this time of the year.
For what we expect to deliver for the year and that gives us confidence that.
These projects delayed out of the first quarter, we're going to pick them up in the second and third quarter Uhm.
I'm gonna be fine on the top line there.
So again I think.
We continue to win in this space.
We continue to integrate these new acquisitions that gives us more.
Credibility with the architectural design community to win specifications, which you know is a big driver too.
You know the pricing and the margin structure that we have in this category.
Okay sex and kind of final question on raw materials I understand we're talking about on so you'll have a way of and all of the price cruises. There. If you look at your a S. A mineral fiber inputs for the piles themselves.
What what's where's the most inflation coming from right now.
Well, it's interesting it's really on the packaging the packaging side, which lumber is a big part of that and you know well, what's going on with lumber right Oh, Yes, Oh, yes.
So the packaging is really where we're seeing the greatest impact across both of both of our businesses outside away with steel, which very clear.
But I think that's where that and frayed or the two highest levels of inflation, we're seeing across the business sprain, you want to add to that.
Yeah Keith.
Previously you about total cost of goods sold inflation and the two to two and a half range.
We're now looking at that to be three to three and a half across both businesses. So while it's picked up some that's been the basis for us pulling forward are pricing activity.
Send that through the three and a half that's not wave numbers dust, excluding the the steel component rock that's correct.
Alright, thank you.
<unk>.
Thank you and our next question comes from Stephen King Wood Evercore ISI. Your line is now open.
Yeah. Thanks, very much guys Uhm I wanted to pick up on your commentary about the you know the April shipment and I did catch that fact that you know you mentioned that it was gonna be higher than 2019, which was kind of an attention getter given where your guidance is.
I guess I. My my question was I know that you guys do a fair amount of you have a lot of exposure to some other particular the city is I know in New York City in particular, but there's also some others.
My question was whether or not those <unk> areas had fully participated in that improvement or if if in fact, what you're seeing in April it actually even maybe a little underpowered.
Maybe based on these these areas not fully coming back so just some some clarity around that would be helpful.
Yeah, so putting that into context the.
So it's David right, it's one month right uhm, but we all know that the 2019 levels is really a key marker for us to keep milestone for when the market is back to its pre COVID-19 conditions and that's so that's an important milestone.
It's one months, but we really liked what we're saying that trend in acceleration actually from the month of March into into April. So it's one month. Okay. So we're we're watching it very closely we're encouraged by that I will say not all of the seven key territory's like New York City are fully participating yet they're still here.
<unk> growing on in those markets.
There's still more to go in those markets.
Which is why I think he can't overweight April and we're not over waiting April.
Without.
Taking into the context of the seven keep territories, which are still California, and New York in particular still healing and still have more to go where where I'd say, we are encouraged by the activity the bidding activity in those two regions. The conversations we're having with customers in those regions on the activity. So we're encouraged by that but we're in the early days.
Sure Yeah, no, but that's that's additionally, encouraging so second question relates to a kind of a bigger picture one around open plan design, specifically Ah one of the things that I think you all have made very clear is that there's a growing awareness of.
The need to manage to treat the air that is actually.
Being occupied and fine just makes that job you know tremendously more difficult.
And so you I would think that to the degree that they're an ongoing awareness of the need to treat airspace persists that open plan I'm gonna have a real you know some pretty tough sledding ahead and that your business could theoretically gain share back from open plan them.
So I was just wondering whether or not you'd seen anything that might be a little more concrete then just what that uhm sort of high level thinking might my lead you to conclude.
Well I think.
Even before now in the in the recent time, we've seen the pendulum on open plenum swing back away from no ceiling at all because of the acoustical performance in those open point of zines. So we've already seen huh, that's created a nice opportunity for us with architectural specialty business provide.
I'd really open.
Looking products like Linear's and some other things that we have going in that provided open look but provide some acoustical solutions. They're so we've already seen a change in the conversation on the popularity of open plenum. This will add additional I think scrutiny on energy efficiency.
Which is becoming more and more important than the sustainability equation and and number two again being able to treat 100% of the year or all of the year vs. A portion of the year that that doesn't get trapped in the plenum.
So.
I think I I can't I'd say, there's a lot of conversations this will add some additional scrutiny. So it but it's too early to say that the category is.
And what's gonna happen to the category of it all in both cases, Steven I do believe this is an opportunity for ceilings to play a more important role in those open Plano designs.
And we're encouraged by that.
Yeah, absolutely well, great kind of look forward to and Uhm Tomah again, congratulations and a woman true.
Thanksgiving.
Thank you. Our next question comes from still English Japanese your line is now open.
Hey, guys Uhm day, R&R activity, it's coming back perhaps that would delay from last year have you seen these customers take on some of these healthier living space products.
You've been rolling out the last few quarters and have you seen a little more retrofitting, where these customers are proving that air ventilation or maybe improving social distancing.
Well certainly the renovation of activity that's going on now is stuff that was already in the works and is moving forward. Some of those specifications have been changed to our new products to so that they can get the benefits of healthy spaces. That's created a nice little lift early on and.
Until we get through the specification process for larger and larger projects and so forth. So absolutely getting really we're getting really good traction lots.
Lots of great conversations around this as I mentioned, what was encouraging from me specifically it was not just office or not just education, but it really was across every including restaurants by the way all the way all the vehicles that we serve.
That's great and then you know appreciating he gave some great color about how trends are shaking out in April. So that's that's awesome, but in terms of the backlogs and bidding activity appreciating there's more of a lag can you quantify how much that is up in Q1 vs queue for an an and appreciating maybe new construction could be a little weaker this year that handoff from.
Pick up when do you expect that new construction piece to kind of an influx positive is.
Mitch 122, just wanted to get a better handle on the handoff.
Yeah. So.
Roughly in the in the single digit positive range to just to to help you quantify the the level of and that's vs. Prior year and it was better than the fourth quarter.
So that's again, it's another data point in the sequential improvement the opening of the market in the activity, Okay and as you know in this building activity. It can be anywhere from six to 18 months out depending on how big the project is and how extensive the project is.
Uhm.
So.
What was the second part of your question fill out any of us that yeah, I'm, just trying to get to get a sense when that hand off with the proven you're seeing right now in terms of bidding activity will offset per day to somebody headwinds you were talking about on the new construction site. Because obviously you had a drop off last year, just from a timing perspective that handoff flipping positive.
Yeah.
It's somewhere between.
Six and 18 months again very similar in terms of of the size of the of the project itself that drives the timing of that as you can imagine feel some of these large projects.
Or 24 months out.
Before they will need a feeling.
And of course, some of the smaller projects can be three to six months. So it's really hard to say on average I think a good 18 months.
Window is a pretty good average across the different types of projects and different vehicles.
Okay Super helpful and I appreciate all the help over the years top good luck.
Thank you. Our next question comes from <unk>. So, let's look capital. Your line is now open.
Hi, This is just Steven some unprepared today. Thanks for taking my questions. My first is on how should the a V improvement look the rest of the year between like for like price and mix.
Yeah, I think we're going to see.
Normally just for your reference we typically see about half and half contribution from like for like pricing and mix and our outlook.
We're currently out looking four to six and as I indicated earlier I think we're we're closer to the high end of that range, giving where we are at the end of the first quarter.
Again normally it's about half and half, but I think it's fair to say this year, giving the headwinds that we had last year on territory mix that we don't expect to repeat this year, we could see a little bit more contribution from mix at the towards the end of the year. Then then like for like pricing.
Again, I expect a a really strong like for like pricing performance given the inflationary backdrop there are in right now.
Alright, well that makes sense and I know, it's early in the mention you're you're tracking towards the higher end of 4% to 6% mineral fiber you'd be guidance, but cause they're potentially be ups give them a higher than usual may increase, especially if somebody higher price northeast markets come back faster.
Unexpected moving forward.
Yeah, I think the range were out looking right now is still appropriate we'll have to wait and see.
Disinflationary backdrop, how it how it persists through the remainder of the year.
And then you know of course, the rate and pace of which some of these key markets like New York and California, We've talked about.
How much they bounce back in the second half of the year. So I think the range. We have again trending toward the high end of that is still that appropriate range.
Okay. Thanks for taking my questions you bet.
Thanks, Yeah.
Thank you. Our next question comes from I spell that with X M. P. M. P. P. Airbus Yeah line is not open.
Good morning, and thank you for taking my question I've I've got to I, just want to get a clarification. What is the one off costs exactly on the on the other side I think you mentioned six to seven minutes, an incentive submitted and on the acquisition in Q1, just wondering if I've got the correct numbers.
And how should we think around most numbers going forward.
Yeah. This is Brian Uhm. So the one of course really hit the mineral fiber Uhm EBITDA bridge.
On a S. You've got a combination of additional SG&A from the acquisitions, and then investments happening to support our growth so they're they're less temporary on mineral fiber I called at six to 7 million that's more temporary basis for Q1.
Okay. Thank you and my second question is on the <expletive> just trying to understand what is the side of the market that you'd like to cheat going Ford how much do you think the the actual specialty revenue could could hidden in this day five years time.
I'm, assuming you continue your your extra on growth and and then on the back of that what level of margin should this uhm.
Division be able to achieve once once you've already done all the the growth investments from the OPEC side.
Probably the I'll take that you know as far as the opportunity we've been public around the size of this specialties segment being in the neighborhood of a billion dollar segment for the Americas and so I I think that's a a good proxy for for you to use her to think about it.
How we think about it where where obviously relatively in the early innings of our penetration into a billion dollar segment.
So we're not gonna provide any.
Long range guidance other than to say our expectations that we continue to grow double digits every year and that space. We have plenty of penetration opportunities. In addition to organic growth opportunities and.
And I think the margins in this business over time, we expect to continue to improve as we get better at this and we get more efficient with this.
We do believe it's.
This is not a business that you would you would expect to receive.
To achieve mineral fiber level EBITDA margins for example.
A different business and very different manufacturing model.
But we would expect this business to be in the mid to high up or 20 level of EBITDA margins, which would.
It would be among the best in class business, our building products companies out there and that's that's R. A directional that we're working toward as we penetrate more and more of this market.
That helps your your question Sir.
Yeah. Thank you and again good luck on that every time at home. Thank you very much okay. Thank you.
Thank you. Our next question comes from David Mcgregor with Longbow Research. Your line is now open.
That's good morning, everyone morning.
I I guess I wanted to start off with just asking given you know I'm kind of encouraging indication on your orders your billing or your billings at least or your bidding excuse me. How are you thinking about kind of the investment in the marketing organization to your to your begin adding spec writers here or just you know how hard you lean into it this.
Point or do you kind of wait and see just you know if this has legs or just want to think about how you got investment profile looks for you over the balance of the year.
Yeah actually we've been investing into this even of 2020, we invested into the go to market capability, especially around our architectural specialty business, where you need more project management and designers to support more and more projects as we continue to build out our pipeline projects an architect.
Specialties.
So it's it's it's kind of an ongoing building of that organization from our capacity and capability standpoint.
And.
I'll, just remind everybody to that.
We have one selling organization, we sell mineral fiber in architectural specialties in one selling organization. It really is a point of leverage for us with the architectural design community specify abroad range of products on every job.
And and so when we add capability to that a lot of times, it's subject matter experts and again designers and project managers to support that field sales organization. So I guess long winded answer, but I would just say, we're kind of feathering that in as we go and.
And our backlog gives us again, some good optimism that this is going to continue throughout the year.
So do you have an expansion of that so silly organization built into your guidance for this year.
Yes, we do.
Okay. Great. That's that's helpful. Thank you very much and then you mentioned you were talking earlier about education health care I was just wondering if if the bidding you're seeing there the upturn of bidding there your call to those big maybe exceptionally strong vs. The other vehicles is that remodel or is there a meaningful new component to that or just maybe what your singer within.
Those two vehicles.
Yeah.
For the most part it's alterations in renovation activity.
But I will say there was some good new activity as well, which again was was encouraging to see.
Of course 18 months out.
We would like to see that kind of activity feeding the pipeline, but yeah for the most part where seen renovation and major Reno and renovation projects.
Okay, and then maybe I could just come back another question kind of broached on the topic of infrastructure and maybe I can just ask the question, maybe a little more pointedly and it's just.
<unk>.
Are you a beneficiary of an infrastructure bill if so how.
Yeah, absolutely when you look back at investment in infrastructure commercial construction comes along with it.
And and I think in this particular one to focus on.
Again schools and education system is encouraging for us because we have a real strong presence there and of course, we think that that's tremendous opportunity and the new construction as well as renovation activity. So we're net beneficiary for sure and infrastructure again, historically speaking that's that's what's happened and.
Uhm with our architectural specialty business in airports in subways. Those are obviously very big opportunities for for that segment of our business.
Many of these projects coming back thick dependent upon an infrastructure Bill I mean, you said, you're seeing a lot of bidding coming back from projects are on hold last year, you think they're moving forward based on some expectation around.
Standard was funding or do you think you're moving forward on their own merits I think they're moving forward on their own merits really they they were a lot of these projects were delayed from last year.
What we're seeing in the early I'd say the early days of this recovery so far.
Yeah, Okay, great. Thank you very much and good luck.
Thank you I'm not showing any further questions at this time I would now like to tend to call back over to Victor is no for closing remarks.
Thank you and I just want to thank everybody for joining today against solid start to the year really ahead of our internal expectations and the market recovery and the commercials seems to be well underway I'm really encouraged by the investments that we made last year that has put us in a a terrific positioned to capture whatever this market opportunity offer.
Up in the next coming quarters. So we're we're excited about it and we thank you again for your interest and we look forward to talk to you next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
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