Q2 2021 Armstrong World Industries Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to.
For the Q2.2021 Armstrong World Industries, Inc. Earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone.
Telephone.
As a reminder of this conference call May be recorded I would now like to turn the conference over to your host Ms. Theresa Womble director of Investor Relations.
Thank you Ashley and welcome everyone on today's call Vic Grizzle, our CEO and Brian Macneal, our CFO will discuss.
Strong world the industries second quarter 2021 results rest of your outlook and strategic progress our discussion of operating and financial 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 measure.
Gus ours included in the earnings press release and in the appendix of the presentation. We issued this morning, both are available on our Investor Relations website.
During this call we will be making forward looking statements that represent the view, we have of our financial and operational performance as of today's date July 27.
For 2021, the statements involve risks and uncertainties that may differ materially from those expected or implied we provide a detailed discussion of these risks and uncertainties in our SEC filings, including the 10-Q, which was filed earlier. This morning, we undertake no obligation to update any forward.
Forward looking statements beyond what is required by applicable securities law.
Now I'll ask the operator to turn to slide 7 of our presentation as I turn the call over to Vic.
Thanks, Larissa you all recognize the new voice on the phone. This morning of the receipt of Wamboldt, it's really.
Great to have her she is back filling Tom waters, who retired last quarter. So welcome Teresa.
And thank you all for joining our call today, it's good to be with you to review our second quarter results. It's been a challenging 16 months since the onset of the pandemic and I want to begin by thanking the 2800 employees.
At a Wi.
Why for their dedication of agility and excellent execution. During these trying times, it's because of their excellent work that AWS is so well positioned to capture the current market recovery.
The results we posted this morning, Mark a strong recovery from last year's second quarter, when the pandemic was accelerating and many markets where effectively.
By government mandates.
On a year over year basis second quarter consolidated net sales grew 38% driven by a 32% increase in mineral fiber sales and of 59% increase in architectural specialty sales.
We generated $100 million of adjusted EBITDA.
Which was of 44%.
The increase from prior year results and our adjusted EBITDA margin expanded 160 basis points. This is a particularly impressive margin performance given the persistent inflationary pressures and the investments, we're making in people innovation and technology in support of our strategic priorities.
And to serve the growth we see ahead for.
<unk> in 2021 and beyond.
On the strength of these results and the expected continuation of the market recovery in the back half of the year, we have updated and increased our 2021 guidance.
Before Brian gets into the financial details I'll provide some insights into market developments this quarter.
And the drivers behind the strong.
For the rest of them, we have heading into the back half of the year.
Across both mineral fiber and architectural specialty segments, we are experiencing a solid rebound in renovation activity.
As expected and consistent with historical norms coming out of recessionary conditions. This.
This activity is broad based across the majority.
40 of our verticals and is providing the expected offset.
To the continued softness in new construction projects starts from 2020.
Overall nonresidential construction indicators continued to improve and many of the delayed projects from 2020 have resumed of.
Of the various sector of drivers we monitor over half have continued to.
To strengthen since April Additionally, bidding activity in the quarter improved from first quarter levels again with improvement in all verticals within those verticals retail and office activity posted the strongest sequential improvements.
All of these are positive indicators that the recovery of strengthening and are providing greater clarity to.
Look for the second half of 'twenty, 'twenty, 1 and more confidence that we can enter 2022 out of sales run rate at or above 2019 levels.
As a result, we have increased our full year sales adjusted EBITDA and adjusted EPS outlook.
Turning to the specifics of the segments and looking first.
First at the mineral fiber segment, our sales per shipping day rate continued to recover and show sequential improvement for the fourth consecutive quarter.
July is rates at this point are continuing the upward trend and are in line with what we would normally expect from a seasonality perspective.
As with most companies we have been.
Working hard to manage the impact of inflation and our sales teams continued to do an outstanding job of ensuring that our announced price actions are realized in the marketplace for offset persistent inflationary pressure and.
And consistent with our history, our teams delivered like for like pricing ahead of inflation again this.
As we expect inflation to persist we have announced our third price increase this year effective mid August.
<unk> in total was an outstanding highlight in the quarter with significant mix improvements to go along with the strong like for like price realization.
The improved 10% in the quarter.
Aided.
Quarter strong rebound in territory mix, as we posted sequential and year over year improvements in each of our top 7 territories.
Operationally, our mineral fiber plants ran well and operating leverage improved.
The operational excellence of our manufacturing teams has been a bright spot throughout the pandemic and has.
<unk> been more critical than now given the broader material shortages in the construction industry.
This is becoming a real competitive advantage for Armstrong even in these most challenging times for supply chains, we have maintained our best in class service levels.
As a result, we hear from our customers that our ability to be of.
And reliable supplier distinguishes Armstrong not only in the ceiling space, but in the broader commercial construction market as well.
I'm extremely proud of the work of our operations teams are doing.
Our wave joint venture also had an excellent quarter again managing to price ahead of significant steel inflation and delivered solid earnings.
Never growth.
The team at wave has done an excellent job managing through extraordinary pressures on both steel pricing and availability.
With their great work in this first half they are well positioned to maintain service levels and stay ahead of inflation in the second half of the year.
And our architectural specialties segment.
Our strong top line growth was driven by both our 2020 acquisitions and a nice bounce back in our organic business due to recovering demand for major renovation work as more people return to the commercial buildings.
EBITDA margin in this business improved sequentially, but remained below prior year levels, primarily due to our investments.
Earnings commercial and production capabilities to meet the robust outlook, we have for the remainder of 2021 and going into 2022.
We are pleased with the progress thus far of integrating the 2020 acquisitions and as sales accelerate through the back half of the year, we expect our margins to continue to improve.
The backlog in.
And control of specialties continues to build on the record levels, we referenced in our first quarter call.
This is particularly encouraging and demonstrates continued penetration into this fragmented specialty segment.
Now while this bodes well for future sales, we do expect to experience. Some short term project delays similar to what we also.
Architect new construction and major renovation mineral fiber projects due to material labor shortages impacting upstream building activity.
So despite the strong backlog, we could experience some choppiness here in the short term.
Inflationary pressures are also impacting the architectural specialty segment.
And similarly.
Through our mineral fiber segment activity, we're on our third price increase to offset raw material inflation.
All in all of this was a strong quarter for the company and with the momentum we see in our key markets, we expect to deliver additional growth in the second half of the year.
With that I'll turn the call over to Brian to discuss more of the financial details Brian.
Thanks Victor.
See what for everyone on the call and welcome Teresa.
Today I'll be reviewing our second quarter 2021 results and our updated 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 3 details our basis of presentation.
On slide 5.
We begin with our consolidated second quarter 2021 results adjusted sales of $280 million were up 38% versus prior year, adjusted EBITDA grew 44% and EBITDA margins expanded 160 basis points of.
Adjusted diluted earnings per share of $1.16.
Good morning was 61% above prior year results.
This result excludes $7 million or 10 on an adjusted EPS basis of acquisition related amortization.
This is an adjustment we are introducing this quarter because we believe it provides a more meaningful comparison of operating performance between periods.
This adjustment has been made retrospectively and prospectively in the reconciliation tables included in our earnings materials.
Our balance sheet remains strong and our strong position as we ended the quarter with $419 million of available liquidity, including a cash balance of $119 million.
In 3.
$3 million of availability on our revolving credit facility.
Net debt at the end of the quarter was $559 million and our net debt to EBITDA ratio of 1.6 times as calculated under the terms of our credit agreement remains well below our covenant threshold of 375 times.
300 of considerable headroom here and feel comfortable in our current positioning.
In the quarter, we repurchased 194000 shares for $20 million.
For an average price of $102.85 per share.
This marks a clear step up from our Q1.
So as of $10 million, we currently have $564 million remaining under our repurchase program, which expires in December 2023.
All of this slide you'll also see our consolidated second quarter EBITDA bridge from the prior year results of.
For the $31 million EBITDA.
Gain was primarily driven by increased volume as well as favorable AAV and increased wave equity earnings.
As Vic mentioned the positive <unk> was driven by both like for like pricing actions and improved territory mix as we saw a resurgence in our 7 markets.
This was partially offset by higher SG&A.
Purchase costs, driven by continued growth investments and a healthy spaces and digitalization efforts.
<unk> of spending following last year's temporary cost outs, and our 2020 acquisitions.
We discuss our mineral fiber segment results on slide 6 in the quarter sales increased.
<unk>, 32%, mostly due to an expected increase in sales volume from last years trough in Q2 as the economy was shut down.
While this rebound was anticipated we are happy to see both volume and AAV come in ahead of our expectations.
We continue to closely monitor our daily ship rate compared to both 2.
<unk> 'twenty and 2019, and we're happy with where we're trending in the couple of weeks at the beginning of the third quarter.
As a reminder, we expect the typical seasonality of our sales to return to something closer to normal this year with our strongest months of carrying in the summer.
Both comparisons remain an unusual.
Due to an atypical 2020.
The mineral fiber segment, adjusted EBITDA increased 44% driven by the volume of <unk> gains, which were partially offset by higher SG&A spending to support our growth investments and the re institution of certain costs that were temporarily reduced during 2020.
Of course was the headwind this quarter, which impacts.
Across our supply chain.
This is part of the reason we've added a price increase in May and of also announced in August price increase.
We expect inflation to stabilize but remain elevated over the back half of the year.
It was a very strong quarter for our wave.
In <unk> as they are doing an excellent job of pricing ahead of inflation and managing steel supply chain issues.
Moving to architectural specialties or Aaas segment on slide 7.
We reported second quarter sales growth of 59% or $27 million with the 2020.
Physicians of turf Moes, and our tour contributing $17 million and our organic sales increasing $9 million or 20%.
Segment, EBITDA increased $3 million as improved sales from the 2020 acquisitions and the organic business more than offset increased manufacturing.
Joining venturing costs and SG&A spend.
It is important to note that the planned spending increases in manufacturing and SG&A support our growth strategy for this segment and will help ensure that we maintained strong service levels for our customers as order intake levels remain at historic highs.
The EBITDA.
In fact, the margin for the segment improved sequentially by 255 basis points from the first quarter and as sales ramp up further through the year, we expect EBITDA margins to improve in line with that growth.
Slide 8 shows the drivers of our consolidated results for the 6 months period, including a breakout of the impact.
EBITDA of our 2020 acquisitions.
Sales for the first 6 months of the year were up 18% and adjusted EBITDA increased 12%.
The year to date results share a similar story as the quarter higher volumes favorable <unk> and increased wave equity earnings, which were partially offset by higher SG&A.
<unk>.
Adjusted diluted earnings per share increased 13% to $2.11.
And again this now excludes acquisition related amortization in both the base and current period.
Slide 9 shows our year to date adjusted free cash flow performance versus prior year.
The decline of 13 million.
Was driven by an increase in capital expenditures as we get back to our normal capex spending levels following lower spending in 2020, as we manage for cash and liquidity.
Our cash generation through the first 6 months was above our expectation and is the basis for increasing adjusted free cash flow guidance for the full.
Year as Youll see on the next slide.
Slide 10 summarizes our updated guidance for 2021.
Please note this guidance update assumes no significant pandemic related shutdowns of our job delays due to supply chain issues. We are closely monitoring variance of COVID-19, and their impact on our business.
We are increasing our guidance ranges for all of our key metrics and now expect year over year revenue growth of 16% to 18%.
Adjusted EBITDA growth of 12% to 15% of.
Adjusted EPS growth of 12% to 18%.
We are also lifting the bands of our free cash flow.
Patients to $195 million to $210 million.
The adjusted EPS figures for both 2020 in 2021 reflect our decision to exclude acquisition related amortization in the calculation.
On the right side of the page Youll see highlighted changes in the key drivers of our.
<unk> revision.
The 2 largest changes you'll notice are the increase of mineral fiber AAV, 2.6% to 9%.
An increasing of our mineral fiber volume to 2% to 4%.
We'll get to those in the second but first I'll touch on the others. We are dropping the ranges of our 2020.
So generally fit for the <unk> segment by 5% to reflect actual performance to date and expectations for the second half of the year.
You'll see an increased depreciation and amortization being driven by the finalization of the purchase accounting for our December acquisition of <unk>.
As previously noted we are excluding the acquisition.
<unk> been weighted intangible amortization from adjusted EPS, but wanted to provide an update for those that use amortization in their modeling.
The increase in Capex is is in support of our capital allocation priorities with the number 1 priority being reinvesting to drive growth in our business.
And now onto mineral.
<unk> River <unk> in volume.
Earlier Vic mentioned 3 pricing actions, we've taken in mineral fiber this year.
Which we're in February may and August and have been 7%, 10% and 11% respectively.
While we do not fully realize these announced price increases the increased pace and rate.
Mineral fought increases for a large part of the reason, we're elevating the <unk> range to 6% to 9% for the full year.
We never take our ability to get price for granted and we realize it's vital to our success.
We also expect mix to lift <unk>.
As we continue our legacy of product innovation.
Returned to historical levels of <unk> fall through.
And now of put the unusual channel in territory headwinds of 2020 behind us.
Mineral fiber volume growth has always been a priority for us with our performance through the first half of the year, the favorable macroeconomic trends and with the traction we're.
We're seeing in healthy spaces in our digital initiatives, we anticipate mineral fiber volume growth of 2% to 4% for the full year.
In conclusion, our performance in Q2 was a key input to our increased confidence in raising our full year 2021 guidance. We're delighted with the work of our teams have done and the results.
That we've achieved and I am excited and optimistic about the months and years to come for Armstrong and I know our teams feel the same way and with that let's advance the slide 11, and I'll turn it back to Victor.
Thanks, Brian as Brian was alluding to we're very pleased with how our business has performed so far in 2021 and with the continued recovery of the broader market.
But we have reason to be more optimistic and positive about the outlook for the rest of the year before we get into our Q&A session I'd like to share some thoughts on the progress we've made on the key pillars of our strategy. The work we've been able to accomplish despite the challenges of the pandemic has put us in a strong position to capture the opportunities emerging as the economy.
<unk> recovers.
The cornerstone of our strategy has been revitalizing the demand for mineral fiber products, while improving the <unk>. The generated by these products to this end we are certainly glad to see people starting to return to offices schools and restaurants.
Though we continue to monitor the evolving dynamics of this.
The pandemic the castle back to work index at the end of the second quarter hit its highest mark since March of last year. When the pandemic really took hold in the U S.
We're seeing employers.
Owners architects and designers and the occupants rethinking and redesigning their spaces to meet new emerging demands for.
Excuse me for what now defines.
Excuse me.
[noise] are healthy and safe place.
The trends of Densification of reversing and the focus on air quality has been redefined and changed forever. These new forces on interior spaces are creating additional renovation of new construction opera.
<unk> for Armstrong, because ceilings play a critical role in achieving this newly defined level for healthy spaces.
And our innovative healthy space products are gaining traction. We just recently received the largest order yet for $24.7 defend family of products from our large schools district in Florida.
The vitus.
Yield products order are specifically designed to support improved indoor air quality with technology that is endorsed by the CDC.
To remove airborne pathogens in the format integrated directly into the ceiling tile.
Our living lab, which we recently opened at our headquarter campus showcases partnerships and as of vehicles.
To drive new innovation for healthy spaces. The slab allows for design and product experimentation as well as the collection of important data to demonstrate the benefits of various designs products and solutions for total indoor environmental quality.
The lab demonstrates how to bring a holistic approach to indoor environmental quality.
<unk> focusing on optimal lighting thermal and acoustical conditions as well as air quality ceilings is what brings these together and is the hallmark of how healthy spaces are defined.
The 1 building that supports the physical psychological and social health and wellbeing of people.
We also continue.
Progress with our digital efforts with another quarter of sequential growth from the canopy in project works platforms. The.
The speed and cost advantages. These digital platforms offer customers are not only industry, leading but they represent a step change in design outcomes for both architects and contractors the progress we've made.
To make profit digital platforms is important to support our long term growth and mineral fiber.
Growing through architectural specialties, and creating more scale in that business is also a key strategic priority for us.
We have made solid progress in integrating our 2020 acquisitions, while organically we continued.
With the increase our level of penetration.
Through a broader array of specialty products and capabilities, we are extending our reach into more spaces in commercial buildings.
And even with the recent delays in major new construction projects, we continue to expect double digit top line growth and margin expansion in this business.
And finally.
<unk> sustaining of discipline approach to capital allocation rounds out our priorities, while we acted prudently at the start of the pandemic to preserve cash we maintained our number 1 priority of investing back into our business when strategically important innovation and acquisition opportunities emerged.
And we have made these investments while still providing day.
Direct returns to shareholders through our dividend and share buyback programs with.
With confidence in our strong cash flow going forward, we have both the capability and the intent to maintain the balance of all of these capital allocation priorities. Our team is focused and committed to the strategic priorities and to the overall purpose of the company.
Making.
<unk> of positive difference in the spaces, where we live work learn heal and play the dedication of our employees coupled with our best in class distribution network and our partner relationships remain of unique form of competitive advantage, helping us deliver the best products for our customers and strong returns for our shareholders.
While we continue to.
The monitor the evolving pandemic conditions.
Armstrong is well positioned for a strong future ahead.
And with that we'll be happy to take your questions now.
At this time if you have a question. Please press Star then the number 1 and your telephone keypad.
And your first question comes from.
From Kathryn Thompson with Thompson research.
Hi, Thank you for taking my questions today.
The inflation has been the.
The topic of the year.
And I appreciate the color on the pricing actions you have this so far.
Thinking about the really realizing the full.
Of.
These are this is this realistically to start hitting late in 'twenty, 1 and 1 into 'twenty 2.
And then also along with that line with the price increases are given you're starting to see bore a renovation, which is generally a higher price point are you seeing changes.
Effects and also the price increases.
From a mix standpoint, thank you.
Hi, Catherine Thank you for the question.
Yeah, I think pricing has been something.
Something in our mineral fiber business and particular in our grid business through wave.
We have.
The net we have a track record of staying ahead of that being able to anticipate the and then stay ahead of that.
Our first half performance on our price initiatives and the realization of those initiatives have demonstrated we continue to stay ahead of the inflation.
Our price increase in August I think should should.
I think.
Reassure everyone that we will stay ahead of the inflation that is anticipated to continue into the second half of the year.
And when we talk about these price increases and again.
Based on history.
The price increases are across the entire product portfolio. So at the <unk>.
And at the mid and that's at the high end of the product portfolio, we get similar price realization.
So you know no matter, what the mix of products happens to be in a more renovation rich environment, which we're entering now.
And that we should we should have similar price realization expectations.
Low end.
And all of those environments, because we get it across the entire portfolio. So that's that's something we're counting on it and I don't expect any price mix impacts from our price realization efforts that way I will mention that on the.
The overall mix last.
<unk>, we talked about mix being.
The product mix being a good guy, but it was overshadowed by the territory mix and what we saw in the second quarter and we expect the to continue to see in the second half as the territory of mix, which was the bad actor in the overshadow last year.
From these you know the unnatural.
Last year will dynamics of shutting down these keep key markets.
Continue to heal and we got a nice benefit from that in the second quarter and I think theres going to continue to heal by the activity we see in the second half.
Okay.
That's helpful.
There's a wide variety of different.
Bottlenecks and the value.
Natural chain, but also shortages of certain of the supply.
<unk>, including aluminum.
And the others are.
Are there any type of raw material shortages that you're seeing and are having good work around.
Across our business, we haven't seen or felt that impact.
Fact world.
We're monitoring the steel for our grid business very closely and we're managing that very well. So we don't believe that's the risk.
In into the business, but we're watching it very carefully again across our business, we have not seen supply chain issues and service levels.
Again, I'm very proud of.
The fact that we're able to maintain our lead times and deliver on time and not be part of the issue that I think of lot of our our customers are experiencing at the moment.
Okay, and then final question.
What is the biggest.
Different sequentially when you think about how you've been managing the business and the.
Taking a step back what does that give you confidence.
Looking for the next 12 to 18 months.
Thank you.
Yeah. Thanks shot of it you know again of I think we expected renovation activity to bounce back this year we.
<unk> been talking about you know when when new construction activity historically goes down into negative territory renovation activity picks up and moves into positive territory. That's been true in 8 of the last 9 recessions.
And again you have to go back decades to 2.
To get to.
<unk> the last recessions.
And so that that has been historically, the the norm and we expected that to happen again this year and that's exactly what we're experiencing so when I look at the renovation activity coming back.
In 2021.
Number 1 as expected, but when I see the strength of it and the bidding activity, which I'm I'm watching very closely as a leading indicator to future <unk>.
Man.
Of the bidding activity in the second quarter.
Was was a step change from what was seen in the first quarter number 1 but also when.
I go back and look at Q2 of 'twenty and I look at how much the bidding activity fell off and compare it to how.
How much it picked up in the second quarter again, it was the step change different too not only rebound from where it was but 2 it's even stronger.
Stronger than what it was net.
Negative if that makes sense for you so and again that was that was across the the spectrum of types of construction, but in particular in the renovation part of the market. It was up a demonstrably better.
So that's leading I think that's a leading indicator for us for confidence into the second half and certainly into 2022.
And then I'll point to 1 other thing our backlog and the architectural specialty business, which Katherine you know well we have our best visibility there in terms of of projects.
And our backlog and our architectural specialty business is built on the record level, we had in the first quarter. So sitting here for the second half we have the most.
Walk in position than we've ever had for our second quarter expect for our second half expectations again, that's providing some additional.
Think optimism for the recovery is well underway.
Okay, great. Thanks.
Thank you.
Yeah.
Your.
Back when the Shanghai from Susan Mcclary with Goldman Sachs.
Thank you good morning, everyone.
Hi, Susan.
My first question is you know thinking about the mix across the different verticals I know that you talked about the sequential increase that you've seen in office and retail.
In the second quarter.
Our nights when we think about you know the comps in there and all the moving parts that of kind of come together over the last year can you talk about which verticals are seeing the most growth and which ones you still have him you know some more incremental room to improve over time and you know just kind of where things are falling and in your expectations for that as we go through the second half and then into.
But when he too.
Yeah, so the the.
Across all the verticals I think let me just step back of the reference you made to retail and office within the bidding activity and it really was the standout improvement in bidding activity in those 2 areas. So and of course that the leading indicator right that's not necessarily what we saw.
In the second quarter.
So.
That being said referencing to your point, what we saw in the second quarter was actually a bounce back across all of the verticals.
Still kind of uniformly and I reported on this in the first quarter 2 that we.
Which makes sense when you think about everything was uniformly.
The shut down last year it wasn't necessarily.
The segment by segment shut down it was across the entire industry and so I think naturally we're seeing from them.
Some uniformity and the bounce back as projects that were delayed.
Have resumed.
And we're starting to see those in the pipeline and you know what I'll go back to something we watch very closely last year was the project delays and we were watching for cancellations and we reported on this was we saw very few cancellations of projects last year.
So it stands to reason that those projects that day.
Get canceled.
Should be resumed and then that's really what we're experiencing on a uniform basis.
And the and of the first half of this year I would say, but going forward I think it's interesting it's nice to see office kind.
Kind of outperforming if you will in the bid activity.
Along with.
The retail okay, alright, that's very helpful color and then I guess just as a follow up to that you know I know you made some comments around some of the new product introductions healthy spaces, those kinds of things that you've put out there and it sounds like they are getting some momentum but can you just talk to how those are contributing to some of this volume growth that you're seeing coming through you know any.
The kind of indicators in terms of either actual orders or the bidding activity that's coming in and how we should be thinking about their contribution to the business going forward.
Yes, it's on it's on the fringes really it's marginal contribution relative to the overall size of the business.
I'm very pleased with the please with the month to month growth that we're seeing.
The month over month growth that we're seeing there so they're they're not meaningful contributors are in in the first half of this year.
And I I would expect for 'twenty, 1, it's probably not a meaningful level of the big driver here is the uptick in renovation activity and that that is the single biggest driver and will be for the rest.
For the year.
Okay, Alright that makes sense can I just squeeze in 1 last 1 which is that you know this quarter you have not mentioned anything on channel mix, which in the past you know has been of pressure on the business does that is it fair to say that that's really kind of alleviated itself and things of really started to normalize from the channel perspective in the second quarter I think that's right.
Right. That's the right conclusion, it was really not a meaningful contribution plus or minus.
Yeah, Okay, alright. Thank you guys. Good luck thank.
Thank you.
Your next question comes from Phil Inc, with Jefferies.
Hey, guys.
Your volume guidance for mineral fiber seems pretty conservative given the momentum you're.
We're seeing in the business well into July you've got some easy comps so what's driving your expectations for essentially flattish volumes in the back half of if we look at the midpoint of the guidance are there any things that we didn't even mindful of you know the uptick you are seeing in our R&R being offset by new construction any color would be helpful. Vik.
Yeah, Phil I think.
There there is still some chop that we're seeing we had talked about.
In April we had a we.
We had levels of above 2019 levels and then well.
And then May and June kind of normalized and so the July is the is at or above 20.
The 19 levels.
But so we're seeing a little bit of unevenness across the market and I think we're factoring some of that that chop into our outlook for the second half although I.
I mean, I wouldn't undervalue of the acceleration we are putting in for the second half of the year, we do expect some acceleration in mineral fiber.
Can have but we do have some expectation for some early chop I think until we get to the the later parts of the end of the year as we and again as I stated in my remarks, we expect to be of 2019 or above of exiting the year.
Okay is the Choppiness is more on the new construction business, which has a lag.
Factor from last year right. So it sounds like R&R, it's been pretty solid.
It's really it's really across the.
The geographies frankly as well as it is across the the construction types.
So I wouldn't I wouldn't just put it in the bucket of new obviously knew the headwind right. We didn't have the starts last year to be selling.
Into this year.
But the renovation activity is more than offsetting that as we as we outlined.
And then thinking.
At the 2022, you Vicki mentioned, a step change in bidding activity into Q.
Is that more of the mineral fiber side of things and then when we think about that kind of.
Coming to fruition of on your volumes when should we kind of expect that flowing through.
Well the the we look at the bidding activity.
Across the construction types, we look at it on a value basis as well as the number of basis. So it's really for the entire business. It's not just moving on fiber, but certainly.
The pertains the mineral fiber as well.
So.
So again you know.
The the lag on these these starts ranges from 6 months to 24 months, depending on the size of the projects, but within that that 18 months is a pretty good average and bidding activity could have some.
Impact on the second half, but certainly in 2022, Okay Super helpful and just 1 quick 1 a the accelerated pretty nicely in the quarter and you're implying a nice pick up in the back half any color in terms of how to break up mix are.
It was a good guy versus absolute pricing and does your guidance factor in.
What do you guys have out there for the August price increase.
Price.
So the price in power, we're seeing right now.
Yeah, you know, we're running around that historical split of 50.50.
And in inflationary times, we tend to get a little bit more price than mix.
What he might we might end up a little bit more than 50.50 towards the end of the year with are our August price increase but yeah.
Yeah, we're running pretty close year to date here at a 50.50, Mark So that's not a bad proxy they continue to use okay.
Okay and your guidance includes the August increase for could that'd be a narrow of upside.
Yeah, no we've factored that into.
So our guidance so.
So it's it's it's it's considered in there yes, okay Super helpful guys.
You bet.
Yeah.
Your next question comes from Adam Baumgarten with Zelman.
Hey, good morning, everyone. Thanks for taking my questions just on the EV.
So kind of if I look at the midpoint of guidance for the year. It actually would imply a very modest but a slight deceleration on a year over year basis, despite easier comps and a V and some of those price increases you mentioned starting to flow through so is that maybe offset by some kind of mix as mixed did start to normalize a bit in the back half of next year.
I'm curious why it wouldn't.
Kind of accelerate further given all the initiatives and price increases out there.
Yeah, we had of our probably our best mix contribution in the second quarter right with.
With the territories.
The correcting themselves and we didn't have the channel mix.
Headwind so.
I think that's a good way to think about it.
It is mix is going to normalize a bit in the back half as we had some improvement in those 7 key territories that were well that was the overhang on mix in the second half of last year I think that's the right way to think about it.
We expect to get more price realization in the back half to offset inflation stay ahead of inflation.
Frankly, it got it thanks, and then just I'd be curious if you could give us some more color on on some of the acquisitions and the performance being below your expectations is that you know end market related and other supply constraints, just some more color around kind of the the.
The slightly worse than than you anticipated performance there.
Yeah, well, let me just start with saying that.
We're very pleased with the performance of those acquisitions, they're growing double digits.
In the face of of dependent but they had a very strong year last year and they and they are growing double digits on top of that this year. So I won't I don't want to say that because of contextually. That's how we think about these acquisitions and how they're performing remember the earn out structure that we put in place.
As for some stretch numbers that had risk to them given the pandemic and the recovery rate and pace of the recovery nobody could guess that so we put an earn out structure, which really pushed the risk towards the the sellers of the company.
And you know and as Bryan to comment on the account.
Counting we had to account for that.
And theyre not reaching those levels the stretch levels.
But they're performing very well and again of double digit levels in the face of this pandemic.
Got it and then just lastly, just curious.
Curious, what you're seeing in education and.
<unk> markets you know, we're kind of hearing that things are picking up given some of the surpluses that state and local governments have you know I would assume some of that's going towards the schools just I'm not sure. If you called it out yet on the call, but just what youre seeing in education, and maybe some of the government verticals.
Yeah again the activity is there are the bidding activity is there.
Government of.
I would say, we've not seen of abnormal contribution from education or institutional spending.
Or an institutional segments. So far I think that's still coming I think they're they're still working through.
What theyre going to changes are going to make what.
There is modifications that are going to make in the schools and so forth.
We're saying we're seeing good activity, there, but I wouldn't say we've seen.
Kind of a step up in activity there based on government stimulus that's going their way.
Got it thanks, a lot of good luck. Thank.
Thank you.
Yeah.
Design. Your next question comes from Stephen Kim with Evercore ISI.
Yeah.
Yeah. Thanks, very much guys I appreciate all the color.
Vic I had a general question about what you think the potential impact of.
Of the Delta Varian or some other variant that we may see a here over the next 6 months or of year might be like in general I would think that there could be some obvious negatives in the form of maybe some potential additional delays or something and project work from the other hand I could also see some positives and so as you sort.
Of reflect back on how the initial wave of Covid.
Has ultimately kind of played out now that the dust is settling on that.
Curious what you think your exposure.
The <unk>.
From a variant are coming into the picture would be whether it would be a net positive or net negative.
Yeah, Stephen It's a interesting question because if you go back and you're referencing what happened last year.
Remember what happened last year that the.
The the markets were shut down basically construction sites were shut down and activity literally came to.
Okay.
That's not a scenario that we would be planning for or expecting to happen from the variant.
I don't sense any appetite out there to go that far now with that said, we're watching it very closely because depending on certain local regulations that could go in place.
We could see that impact rate and pace of job sites being.
Being completed or are resumed.
So we're keeping a close eye on that debt.
Positive side of the switch, which you said it just keeps in front of everybody that we have to continue to work to make the space is healthy enough.
So that we.
We can exist and we can function and go on about our economic lives with the variant and other variants that may come down the pike. So in a way it reinforces the need for healthy spaces and how we have to think about these spaces to be able to get people back into them, but also keep them in.
You know.
In the in the advent of others not only this variance, but theres new events. So so we're balanced about it but we're watching it very closely in terms of its impact on the rate and pace of of construction activity in the back half of the year.
Yeah per point.
I wanted to ask about.
Investments are.
You know that run kind of run through in the walk on the SG&A side on the SG&A line.
I was curious if you could give us some general sense of what the split was between you know just temporary cost reversals.
And the actual investments.
Some of the and then secondarily are you seeing the improvement that you talked about geographically across your business was that inclusive of New York City specifically.
Yes, let me take the second part of the question and I'll, let Brian answer the SG&A split.
Yeah, and also of the territories, all 7 of them improved including New York City in fact.
The work in California, both improved.
Nicely in the quarter.
So those are 2 very big markets for us. So it was good to see.
Ryan you want to handle the SG&A question, Yes, Stephen Good question as you look at.
Page 5 our EBIT EBITDA bridge, we've got $18 million higher SG&A.
5 of that is coming from the 2020 acquisitions.
$6 million from those temporary cuts we did last year in 2020 coming back in and.
You and others May recall, we said, it's about $5.5 million.
So the round at the 6 in this quarter and then another $7 million at the total company level investments around the growth.
Digital and healthy spaces.
Yeah.
Okay and is that level of investment you know roughly $7 million is that a number that we can kind of be thinking.
What about for the next couple of quarters.
Yeah. It will it will stay no higher than that 7.
But it but around that number.
Okay.
Great. Thank you so much guys great.
Great. Thanks, Steven.
Yeah.
Your next.
The question comes from Ken Zenner with Keybanc.
Good morning, everybody.
They can again.
Yeah.
So Brian you talked about normal seasonality I think in your.
The prepared remarks normal season.
Seasonality implies a little up <unk> <unk> from <unk> is that which given your overall guidance would imply for Q rolling off of the normal level of that.
Within the range of what you were trying to communicate just so I'm clear.
Yeah, Ken debt on Q3, typically is our strongest quarter and we would expect to see.
Of that pick up some in Q4 be proportionately lower.
Back to its normal percentage of the year.
Okay.
Vic I think you made comments around exiting <unk>.
2021 above FY 19 could you.
The specific I can be sales it could be even it could be margin could you just kind of talk to what you're referring to there.
Please yeah sure.
Sure Ken that's a daily shipping sales rate.
And we're tracking that too.
As a proxy for the window.
When does the market get back the full recovery and we're we're back to building on that platform for future growth, that's kind of the proxy we've been looking and that's really a mineral fiber because that that represents probably the broader part of the market versus the overall I mean, our overall sales per shipping day rate is already.
2019, because of the growth in E S and because of the acquisition, but we're really trying to use the proxy to the overall health and condition of the broader market.
Okay.
Got it got it and then with the for Q seasonality, Okay that makes sense.
You talked about backlog obviously.
Already of B you know with these are these the price increases since you looked at the 10-K back to it sounds like the early sixties unheard of recession stuff.
Are these prices actually exceeding what you saw in the Seventy's by chance.
Price of the prices of our products or projects yeah, just the.
So the actual price increases that you can't get out, but you know I mean, its 3 big increases here. So.
Is this.
Nearly.
Having gone through all of the 10 games, but it certainly seems like this might be a record of actual price increase for you guys of mineral fiber net accurate.
Yeah, it's a it's pretty close.
So we had of.
Cumulative similar number maybe not as high in 2018.
When we had again some rapid inflation based on the steel tariffs in particular here right. So yeah. It's it's up there Ken to your point.
[laughter].
I mean, we got out of Canada.
Salvation of 1 day.
Yeah.
Got it.
But I ask I Wonder you know backlog demand.
W. Ivers, others are you seeing.
Share shifts at all I know, it's not something you wouldn't it be specific around.
They are sensitive to that however.
I'm, just wondering how that fits in given.
The constraints in the industry I'm, just trying to understand if you're saying demand or if you're seeing share shifts or something to that effect. Thank you very much.
Yeah, Ken I think.
This is really.
Renovation activity driving what we're seeing right now versus a significant moves in share gain.
We're doing a really good job in servicing our customers holding onto the specifications and winning new specification and that always helps with your your pricing and your your margins because you don't have.
The inefficiencies and you're and you're in your <unk>.
Plants in your supply chain so.
We're doing well, we're well positioned I'd say this is really.
A reflection of our innovation and some tailwind from the market recovery.
Thank you.
Thanks, Ken.
Your next question comes from carriage Schmeling with loop capital.
Great. Thank you.
Wondering if you could provide a little bit more color just from the increase in bidding that youre seeing in retail and office of you cited a couple of times of the call. I mean, this is mostly of the renovation side.
And you know it just sort of any.
Any more color on what's driving that is the kind of a function of of people kind of returning back to work.
Office space retail space, just getting used in different ways than it was pre paradigm back or is it maybe more of just kind of a return of normal activity that 1 would have expected if we didn't have COVID-19.
Yes.
Pretty broad based all of the verticals were positive.
So that was encouraging to see and again, it's not too surprising because everything was kind of shut down of delayed from last year. So there's some catch up in there I would imagine from what didn't happen in 2020.
And then retail and office was stronger.
Yes.
Than the others.
But again I think when I I split it by new construction activity and the bidding there versus the bidding and alterations in renovation. It was meaningfully higher on the alteration of renovation activity again, which reflects what we would expect.
Then the when new construction is down you would have higher rates of of growth and alterations in renovation.
Again, I think there's a combination of a little bit of pent up demand from stuff that didn't get done last year.
Plus the recovery and people returning back to the office.
This is back in the classroom.
And again generally people have to do something to get their spaces ready no matter, if you're again of restaurant owner of gymnasium owner.
The <unk>.
The dentist office people are doing things to create a more healthier environment for people to come back and feel good about being in those spaces.
The Kid I again, I think all of this is kind of contributing to across the board across the verticals really across the all of the construction types.
Higher activity again, with the higher activity being on operations and renovations.
Which is what you would expect in this environment.
Okay.
Some of the follow up.
So that you know you referenced the.
The strong alteration of renovation bidding just given the context of inflation the.
At some point.
And given the price increases that you're pushing of the inflation across other building product categories.
Some point do you get worried that the the smart bidding environment could.
So.
Hindered by the inflationary.
The experiences that we're seeing right now.
Yeah watching for that I have not seen that are of hints of that I think this is really much more supply chain.
In product availability, driving the rate and pace versus.
Is the cost of the inflation. So we should continue to watch for that but I I really don't get a sense. If that's going to be the driver I think supply and availability is going to be the driver on the rate and pace.
Great. Thank you very much yeah, you bet.
Yeah.
At this time.
Could be further questions I will now hand, the call back to the grizzle CEO for closing remarks.
Yeah, I just want to thank everybody again for joining our call today again, we're pleased with where we are at the.
The halfway mark here of the year and really a transition year out of a pandemic and the as.
Of the market opens back up.
Opens back up with a little bit of I need unevenness in some chop as we talked about on the call.
But I love, where we're positioned where we're investing into a bit of a tailwind here for market recovery.
And where are we.
We're excited about getting this market fully opened in.
Theyre not taking advantage of our strong position coming out of the pandemic. So again. Thank you all for for your attendance today and your interest and we'll look forward to talking to you next quarter.
That concludes today's conference. Thank you for your participation you may now disconnect.
Yeah.
Okay.
Okay.