Q3 2021 Armstrong World Industries Inc Earnings Call
Good day and thank you for standing by welcome to the Q3 2021 Armstrong World Industries, Inc 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 to ask a question. During this session you will need to press star one on your telephone and if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your Speaker today Theresa Womble director of Investor Relations. Please go ahead.
Thank you and welcome everyone to our call. This morning today, we had a big Crystal our CEO, Brian Macneal, our CFO to discuss Armstrong World Industries' third quarter 'twenty 'twenty. One results are rest of your outlook and progress on our growth initiatives.
Our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of S. T SEC regulation G.
A reconciliation of these measures with the most directly comparable GAAP measure is included in our press release and in the appendix of the presentation. We issued this morning, both are available on our Investor Relations website.
During the 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.
October 26 2021.
These statements involve risks and uncertainties that may differ materially from those expected or implied we provide a detailed discussion of the risks and uncertainties in our SEC filings, including the 10-Q filed earlier. This morning, we take no obligation to update any forward looking statement beyond what is required by applicable.
<unk> la.
Now for those of you following along with our presentation. Please turn to slide four as I.
Turn the call over to Vic.
The research good morning, everyone and thank you for joining our call today. This morning, we announced another quarter of recovery from the Covid impact. The results of 2020, we delivered strong third quarter top line growth up 19% versus 2020 results.
With mineral fiber sales, increasing 15% and architectural specialty sales improving 31% adjusted EBITDA of $99 million was 8% ahead of prior year results. We are pleased to have cheesy have achieved these results against the backdrop of a choppy market recovery increasing inflation.
Supply chain disruptions throughout the construction industry unrelated to these challenges we also experienced a rare manufacturing equipment failure, causing lower than expected production rates in September, which Brian will discuss in greater detail in a moment.
Despite these challenges in the rare production issue, we reaffirmed the mid points of our full year 2021 guidance and expect to have a strong finish to the year.
To that point these continue to be unprecedented times inflation remains a strain on raw material freight labor and energy costs throughout the construction industry.
At AWS, we have moved proactively throughout the year to increase prices and stay ahead of these inflationary pressures and consistent with our performance over the past decade. We have successfully stayed ahead of inflation.
We recognize this is unique and it's a testament to the strength of our industry, leading service model and the high quality innovative products, we manufacture that allows us to earn those price increases in the marketplace.
Specifically within our mineral fiber segment, we reported third quarter <unk> growth of 14%.
Which is the highest level we've achieved since we separated from the flooring business in 2016.
And this growth was largely driven by like for like pricing improvements.
And not unrelated to inflationary pressures supply chain throughout the economy have also been under unprecedented pressure.
Again, our teams throughout the organization have been on top of their game. They have remained agile and dedicated to liberty disruptions to our customers and partners.
This is critical because of our best in class service model is an important component of our value proposition to our distributors and to the contractors who depend on them.
Because of this importance, we set a high bar for our service performance.
Many companies May track, two or three service performance metrics, we track six as part of what we call our perfect order measure.
These include order fill accuracy on time delivery shipping damage billing accuracy product defects and returns.
I can share with you with great satisfaction that this measure not only remained above our 90% threshold throughout 2021.
For the mineral fiber segment in particular, but it has improved in the third quarter.
So I'm proud of how our teams have executed to handle these unprecedented challenges.
Internally to meet our customers' needs.
Now externally these challenges have impacted our business in the form of project delays impacting both our mineral fiber and architectural specialty segments.
Despite these challenges mineral fiber sales volumes increased in the third quarter versus prior year on the strength of the R&R part of our business that is more than offset the impact of these project delays and a lower new construction activity.
Our sales rate per shipping day also showed sequential improvement in the quarter.
In fact September sales rate per day eclipsed that of 2019 and our quarterly results for this metric has now improved sequentially for the last five quarters.
From a profitability perspective, the mineral fiber segment generated strong gross margins compared to prior year, reflecting positive like for like pricing improved mix and our ability to overcome the production headwind I mentioned earlier with other productivity efforts and in fact this was the best gross margin level since <unk> of 2019.
Our wave joint venture delivered another strong quarter as they have maintained excellent pricing discipline to stay ahead of inflationary pressures.
We're also pleased with the performance of one of the group's newest innovation called simple soffit.
Now like many of our innovations we've introduced simple stuff its drive.
The efficiencies.
For our customers and for those who ultimately install our products.
Salford framing as a common design feature that requires a significant use of labor and materials on commercial construction jobs and has a variety of complexities based on interior design and the accommodation of HVAC systems now given the pressures on labor, we realized creating savings in this area it could be a significant value generator for.
For our customers.
What the team at wave introduced our prefabricated suffered framing systems at our engineered using our automated design software to match to the design specs and calm pre packaged and easy to handle flat boxes.
Because of their design are simple Salford systems can be installed up to three times faster than traditional methods with less material and labor hours.
Simple sockets are making a significant difference in terms of speed and costs on the sites, where they have been used including some high profile projects such as the new P. G. <unk> headquarters in California, The Kansas City International Airport and for hockey fans out there the UBS Arena at Belmont Park, where the New York Islanders would drop the puck for.
The first time in mid November we're very excited about how this new innovative product has gained traction and the value it's creating for our customers.
In the architectural specialty segment had a strong top line quarter as well improving and improving margin performance. In addition to the contributions from our 2020 acquisitions sales and earnings from the organic business rebounded nicely from prior year lows.
We've also successfully introduced price increases for these products and that is helping address some of the inflationary pressures on this segment as well.
New construction and major renovation activity improved but was uneven due to project delays.
Even with those challenges.
And our continued growth investments in this segment architectural specialties EBITDA margin improved 350 basis points sequentially and I expect these improvements to continue back above the 20% level.
We remain optimistic about the 2022 in 2023 outlook for architectural specialties.
Given the fact that we are on track to exit 2021, with a very strong order backlog and bidding activity remains robust.
As new construction activity regains momentum, we expect sales growth to further accelerate in this segment.
The broader industry indicators that we track also support our growing optimism for both the Aaas and the mineral fiber segments.
As many of these have continued to improve we'll remained in positive territory in the third quarter GDP forecasts remain above 5%. The architectural billing index ended September well into expansionary territory at $56 six up from August reading of $55 six <unk>.
To the second quarter Dodge data for both bidding and construction starts improved double digits. These.
These are strong indicators for growth in 2022, and 2023 and with our recent investments we are well positioned to capture additional growth as the market recovers.
Now with that I'll turn the call over to Brian for more detailed look at our financial performance.
Thanks, Vic and good morning to everyone on the call today I'll be reviewing our third quarter 2021 results and our updated guidance for the 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 five we begin with our consolidated third quarter 2021 results adjusted net sales of $292 million were up 19% versus prior year, adjusted EBITDA grew 8% and EBIT.
Margins contracted 320 basis points.
EBITDA margins contracted due to continued investments in SG&A and lower manufacturing productivity.
Adjusted diluted earnings per share of $1.17 was 9% above prior year results adjusted.
Adjusted free cash flow was 28% above prior year results.
Our balance sheet remains healthy as we ended the quarter with $439 million of available liquidity, including a cash balance of $94 million and $345 million of availability on our revolving credit facility.
Net debt at the end of the quarter was $533 million and our net debt to EBITDA ratio of one five as calculated under the terms of our credit agreement remains well below our covenant threshold of 375.
In the quarter, we repurchased 187000 shares for $20 million or an average price of about $1 700 out of $107 per share.
As of September 30th we had $544 million remaining under our repurchase program, which expires in December 2023.
Last week, we announced a 10% increase in our quarterly dividend. This is our third increase in the last three years and when paired with our share repurchases as a reflection of our commitment to a balanced and disciplined capital allocation priorities that continue to be investing in the business expanding into adjacencies through.
<unk> and returning capital to shareholders.
You can see our consolidated third third quarter EBITDA bridge from the prior year results on this slide as well.
The 8 million dollar adjusted EBITDA gain was primarily due to favorable AAV driven by positive like for like pricing and favorable channel mix increased volume driven by the 2020 acquisitions and contributions from wave equity earnings.
This favorability was partially offset by higher SG&A costs.
Increased input costs on freight raw materials, and energy and an increase in manufacturing costs driven by the 2020 acquisitions.
The increase in SG&A was driven by more normalized discretionary spending compared to the prior year cost reductions and increase in variable compensation.
<unk> for future growth and a healthy spaces in digital initiatives and the 2020 acquisitions.
Not surprisingly like many other manufacturing companies, we felt inflation impacts throughout our supply chain.
Less than some of other building product companies allow.
While our strong supplier partnerships have never been more important and our teams have done a great job of managing through this challenge, we expect inflationary pressure to continue into the fourth quarter.
We now see cost of goods sold inflation somewhere in the four 5% to 5.0% range for the full year 2021.
As demonstrated historically and in this quarter, we'll work to drive like for like pricing above inflation.
Our mineral fiber segment results are on slide six in the quarter sales increased 15%, mostly due to favorable <unk> previously mentioned we.
We saw sequential improvement in our sales.
Shipping day metric and continue to track this closely in comparison to both 2020 and 2019.
<unk> fell through to EBITDA at historical highs.
As a result of the price increases we announced in February may and August and.
And again is the outcome of our ability to price ahead of inflation.
Mineral fiber segment, adjusted EBITDA increased 10% driven by the AAV gains and another strong quarter of equity earnings from the wave joint venture.
The team at wave has done a great job of pricing ahead of a steel inflation and managing issues across the supply chain. These.
These gains were partially offset by higher SG&A spending due to the return of prior year cost reductions increased variable compensation and investments to support our growth initiatives.
Input cost.
Trended higher this quarter due to raw material energy and freight inflation.
Which remains a top focus areas for us as we end the year and prepare for 2022.
In addition, we experienced a $3 million headwind due to unplanned maintenance activities at two of our larger plants.
This caused downtime at both plants and drove loss productivity higher scrap costs and additional freight cost to maintain our best in class service levels.
Both situations, where remediate it during the quarter and I'm happy to report that the plants are running very well in October.
This is an atypical event for AWS.
As many of you know, we consistently drive plant productivity year after year.
Moving to architectural specialties are Aaas segment on slide seven.
Third quarter, adjusted net sales grew 31% or $19 million with the 2020 acquisitions of turf Bose and arcturus contributing $16 million and organic sales increasing $3 million.
<unk> segment, adjusted EBITDA increased 1% as improved sales from the 2020 acquisitions and the organic business more than offset project push outs higher SG&A and increased manufacturing cost.
<unk> EBIT Mark.
Margin for this segment improved 350 basis points sequentially from the second quarter, but contracted 500 basis points when compared to the third quarter of 2020 results.
This segment is still being pressured by inflationary conditions.
Continued along with a recent spike in project delays due to commercial construction labor disruptions and supply chain challenges.
The project push outs are delaying some revenue to Q4 and 2022.
In September we announced an additional round of price increases for <unk> products, which have already gone into effect.
<unk> price increases in each quarter of 2021.
Slide eight shows the drivers of our consolidated results for the nine months period, including a breakout of the impact for our 2020 acquisitions.
Sales for the first nine months of the year were up 18% and adjusted EBITDA increased 10%.
The year to date results are driven by higher volumes as the second quarter lapping a prior year more significantly impacted by the pandemic favorable AAV and increased wave equity earnings, which were partially offset by higher SG&A spend and.
And increased manufacturing and input costs.
Adjusted diluted earnings per share increased 12% to $3 28.
Slide nine shows year to date adjusted free cash flow performance, which is flat versus the prior year increase.
Increases in cash earnings working capital improvements and wave related dividends were offset by an increase in income tax payments and higher capex spending following a reduced prior year in an effort to manage cash and liquidity during the pandemic.
Our cash generation through the first nine months is in line with our expectations.
We summarize our updated guidance for 2021 on Slide 10. Please note. This guidance update assumes no significant pandemic related shutdowns where material job delays.
Due to supply chain issues, we are narrowing our guidance ranges for all key metrics and now we expect year over year revenue growth of 17% to 18% adjusted EBITDA growth of 13% to 15% adjusted EPS growth of 14% to 16% and adjusted free cash flow of down 7%.
2%.
The right side of the page highlights updates for the prior from the prior guidance communicated in July.
You'll notice the increase in mineral fiber <unk> range from 9% to 11% as our teams continued to do a great job of realizing price from our three mineral fiber increases this year.
We're bringing down the range of our mineral fiber volume 212, 2% as near term Choppiness remains and projects were delayed into the out months and 2022.
We continue to invest in our healthy spaces in digital initiatives and believe they will be meaningful contributors to our future growth.
But the larger impact on volume for the current year is the project delays previously discussed this.
This is a shift in contribution between the 2020 acquisitions and the organic business.
To the <unk> segment as revenue impacts are felt from the project delays.
We now expect the 2020 acquisitions to contribute about 30% growth in Aaas organic in the mid to high single digit range.
In conclusion I am proud of the work our team teams have accomplished throughout the third quarter in the face of supply chain challenges and a renewal of COVID-19 concerns.
It certainly wasn't easy, but they delivered a solid quarter. These are challenging times, but I remain optimistic that our investments in the future whether it's in people growth initiatives innovation or partnerships will unlock the next level of growth for AWS <unk> with that I'll turn it back to Vic for slide 11.
Thanks, Brian before we get into the Q&A session, let me share a little bit more about how we see our current position and the progress on key initiatives and what that means for the future here at Armstrong inflation and supply chain challenges are likely to persist into next year.
But at AWS, we're demonstrating that we can manage our way through this successfully delivering price ahead of inflation and minimizing the impact from supply chain disruptions.
Conditions are continuing to improve albeit in an uneven and choppy like fashion.
People are returning to offices and kids thankfully are back in classrooms.
And new construction activity is returning despite.
Despite the unevenness in the recovery, we have remained focused on strengthening our competitive advantage and improving our long term growth trajectory. Our strong financial position has allowed us to continue investing in our growth initiatives, such as healthy spaces and digital innovation and those efforts are progressing well and gaining traction are.
Our healthy spaces product sales have continued to improve quarter on quarter and there are clear signs of the growing recognition of the role ceilings can play in ensuring indoor spaces are healthy for example, we have seen a significant uptick in our demand for health zone products. This is a first line of our healthy spaces solutions as a reminder, these products wrench.
Reduced a few years back to meet the needs of the health care environment in terms of disinfect ability and wash ability, which are now attributes important to any and all indoor spaces on.
On a year to date basis sales of these products have increased 38% versus 2020 at over 20% versus 2019 levels.
What's most encouraging is that approximately 60% of these sales are now coming from outside of the health care vertical.
This was validating the broader need and the transferability of existing healthy space solutions to more general purpose applications, such as offices schools and hospitality.
Vital shield and <unk> the two products that we introduced at the end of last year again still early days, but the progress is encouraging sales of these products in the third quarter doubled from the second quarter sales levels and we have more than doubled the number of active projects in the quarter and are conducting several trials on large scale projects.
On the digital front, we continue to invest across several initiatives with a focus on speed and cost benefits for our customers. One such initiative is project works, which is our digital design and pre construction service.
This service automates the design process from concept to billow materials drastically increasing the speed of design, while allowing design iterations, along the way in minutes or in hours versus days.
In addition, once the design is complete we can provide an accurate bill of materials that makes the lives of contractors much easier. This is a service that is deepening our collaboration with architects designers and contractors in a mutually beneficial way, it's helping us secure additional specifications and ultimately to sell more products into.
More commercial spaces, we are excited about the number of projects being processed by project works and how it strengthening armstrong's leadership position in the commercial construction industry.
In summary, our advancement of digital and product innovation. Despite the ongoing challenges of the evolving Covid pandemic is a testament to the power of focus we have as an Americas only ceiling, especially walls company.
This power focus has been critical throughout the pandemic as we kept all of our plants in operation and made no cuts to our sales and marketing efforts.
Our unique and powerful focus.
Has also helped us manage through the challenges of inflation and supply chain disruptions to maintain our launch our long track record of achieving price over inflation.
In maintaining our best in class service levels.
This uncertain period, we have not slowed our efforts to execute on our company strategy, our customer relationships are stronger now than ever and our ongoing product and digital innovation is providing important top line growth opportunities.
As our markets continue to recover we are in an excellent position to capitalize on this recovery and to deliver increased levels of value creation for our shareholders.
And with that we'll be happy to take your questions.
And as a reminder to ask a question you will need to press star one on your telephone.
And our first question is from Keith Hughes of <unk>. Your line is open.
Thank you.
Two questions first you had said at the beginning of the call. Your September daily sales rate is greater than it was in 2019 is that on all products, we've got a mineral fiber Oklahoma.
Well, it's it's true for both Keith.
It's true for our mineral fiber products.
In particular, which is what we were referencing because we know really that's that's probably the best proxy for whats in the underlying market conditions.
But with our acquisitions and the growth that we've got going in architectural specialties, which has continued this year its well above 2019 levels. So it's true for both cases, but I think more importantly, it's true for the mineral fiber business and again, we're trying to get to that proxy when the market has recovered back to pre pandemic levels.
Okay.
And you had talked about.
Given that I assume there must have been some kind of a dip.
And orders while August July I guess my question.
Play out sequentially.
Yes, I mean, it really plays to the Choppiness that we're seeing rate will have a strong month and then we'll see a pause in the month and next month and then a strong months. So it's actually a very uneven and choppy, reflecting a couple of things I think.
Broadly as the market's recovery, but also some of the delays in these projects. Some projects are delayed a couple of weeks. Some projects are being delayed months. So a lot of that added up together is creating some of this chop and certainly in August I'll, just comment and say that.
That was where we were seeing the height of the Delta variant and it certainly impacted.
Activity broadly.
As an event I will say in the month, but again then you see what happened in September shortly after that so I think it's a good reflection of what we're seeing right now in this recovery Directionally, it's recovering, but it's really uneven and choppy as we as we go through this.
Okay. Thank you.
Got it.
And our next question is from Garik <unk> of loop capital. Your line is open.
Oh, hi, thanks.
If you could provide a little bit more color just on the supply chain challenges that youre seeing.
Is it more on.
Transportation bottlenecks for raw material bottlenecks or even more.
On the.
End market side, and which project timing continues to get pushed out.
Any additional color on some of those challenges will be great.
Sure.
The supply chain.
I'd like to break it up on the on the internal part, which is kind of our own inputs and supply chain feeding our plants and feeding our customers.
Really I would say our supply chain.
There has been.
Challenges in our own supply chain, whether it's from the the freeze that happened earlier in the year from Texas and disrupted some of the chemical product.
Apply change.
From the Hurricane So there was several incidents as along the way that put pressure on the supply chain for US we have managed through those beautifully and I feel like we're we're very fortunate we have we've been able to manage amongst our plants and balance that out and we have not.
Disrupted our service to our customers in any way from from those those supply chain.
Disruptions.
So on that side.
Very little impact if no impact to our business frankly on the other side, where these projects are being impacted and therefore, we're being impacted whether it's other building materials earlier in the building phase are delayed.
And are they are delayed and it's both material, it's labor I'm hearing more labor and the conversation now that I'm hearing materials, which was different than the second quarter. So as both material labor now contribute to supply chain disruptions on projects.
That's the impact that we're seeing in our business in terms of when they need a ceiling product for those those particular jobs.
And so that's what we're referring to when we talk about the supply chain disruptions that are impacting our topline and our ability to.
<unk>.
To fully recover.
That answer your question in that give a little bit more color for you yes.
Yeah. That's good. Thank you my follow up question on architectural specialties.
Are you the confidence in a return to 20% EBITDA margin, maybe something that you did back in 2019.
You had.
Sequential improvement any.
Any guess as to what needs to happen to get back up to 20% EBITDA margins, recognizing you're absorbing some of the acquisitions.
But how quickly could that possibly happen again.
Yes, I think the key really there is absorption so its absorption on the on the new acquisitions as you referenced but also as we talked about earlier in the year, we came into the year with record backlogs and some of our production.
Production sites and we invested.
To add capacity in those sites and we were preparing ourselves for.
Really strong backlogs and be able to deliver on those backlogs and a continuation frankly as we.
As we saw beyond the current backlog, but the activity that we were pursuing in the marketplace with the project delays that have happened this year that slowed our rate of absorption.
Against those new investments in our core business, let alone absorbing the acquisition. So I think the answer to your question for for US what we're.
Working our way through is really absorption absorption of new acquisition and absorption of the investments that we've made and some of our manufacturing sites.
Great Thanks for that.
You bet.
And our next question is from Susan Mcclary of Goldman Sachs. Your line is open.
Thank you good morning.
Good morning, good morning.
My first question is can you give us a bit more detail on the.
Manufacturing equipment failure that you cited in September any commentary around the magnitude of what happened there and how maybe it's impacted third quarter deliveries, but then also fourth quarter. If there was any kind of reverberation there.
Quite Brian sure.
Hey, Susan good morning.
So we had some unplanned maintenance at two of our bigger mineral fiber plants I mentioned in our prepared remarks, and what that did was.
Cause us to lose some shifts and even some production days.
Now the good news is we were able to move production around and continue with our great service as Rick mentioned on a perfect order measure it actually improved in the month of September.
But it was temporary and so we've fixed that problem and the plants are running very well through the month of October and we don't expect any more headwind from from that maintenance item in both plants. So Susan no impact in the fourth quarter, but that fixed and behind us.
Okay, Alright, that's helpful. And then my follow up is I'm wondering if you can give a little bit more details on inflation, and maybe especially talk a bit about your exposure to energy prices. We've gotten some questions from people is obviously, we've seen natural gas and other energy prices moving up over the last.
Couple of months or so just talk about overall, the cost environment and what youre seeing there.
Sure Susan.
Like everybody we are seeing that natural gas increased it was the highest inflationary item we had in the quarter.
And but it runs roughly somewhere between 8% to 10% of our total cost of goods sales is our total energy cost bucket.
And so that that natural gas is clearly increasing year over year freight was up also and so we're roles.
This is one of the reasons as we step back we increased our full year look on inflation to four 5% to 5% for total close to goods sold so not like history, not seeing quite the inflationary impact that other companies see but we're being very attentive to it and making sure we're getting that price realization to more.
More than cover that.
Okay, Alright thats helpful. Thank you.
Thank you Sir our next question is from Catherine Thompson of Thompson Research. Your line is open.
Hey, Good morning. This is actually Brian Biros on for Catherine. Thank you for taking my questions first one I guess on the sea. So a few of the other building product companies, we speak with kind of I've talked about so much bidding out there, but then that's not necessarily turning into awards at the same pace.
I guess your comment on bidding so far seem to match that first part.
The current environment.
Like the timeline change to realize those bid.
And from those projects and that flow through to sales for you guys.
Yes, I think the bidding activity that were referencing it sounds like Brian the same thing that you're hearing is it's a leading indicator of activity that's out there right not necessarily.
Timed to sales.
And the way we dissect this data as we look at the types of activity bidding activity that are out there because we know new construction bidding activity is a much longer cycle right before it turns into a ceiling sale.
And renovation and.
And theres alterations in between renovations, so we kind of look at it and and.
As a leading indicator in terms of <unk>.
6% to 24 months out.
How that's changed.
As yet to be determined in terms of the delay in the timing the normal timing of these projects between that 6% and 24 month timeframe certainly what we're seeing today is the delay in when projects can get started because of available labor and material.
In addition to the projects that are already started and the delay in getting those completed that's really important also right for the labor to be able to move from the job that they are on to the next job is these completions and the timing of these completions has to get in sync with the startup of new jobs. So there's definitely some.
Some struggle in some mismatches of labor and material with with existing projects and the starting of new projects and I think thats part of the Choppiness that we're experiencing.
Understood. Thank you and then.
Follow up I guess similar to kind of your.
Your comments and the questions just answered the delayed projects that we saw in the quarter there across both.
<unk> segment.
Would you characterize that as more of a blip in the quarter kind of what the Delta.
<unk> impact you mentioned I think in August or is this kind of more of an indication of more to come more delays in Q4 and even into 'twenty two as we work through all the issues with labor material shortages and stuff.
I think this choppiness is going to persist I think were.
We're not out of the woods in terms of supply chain healing themselves catching up to demand.
I think there is still a labor component that still has to get caught up.
So no I think this choppiness could persist.
Which is I think reflected in our outlook for the rest of the year.
Got it thank you thank.
Thank you Brian.
And our next question is from Adam Baumgarten of Zelman Your line is open.
Hey, good morning, everyone.
Just thinking about pricing like for like pricing.
How should we think about the carryover effect from all of the price you've pushed through this year into next year at this point.
Okay.
Sure.
Good morning, Adam So every year, we do have that carryover.
And what we have to what we managed through is we.
Do protect project pricing in many cases so.
There is always that lag effect of that full carried over a year.
Year over year.
Historically, we've been sort of in that 30% to 35% range of price realization versus what we've announced in and we see that continuing.
Okay got it and then just switching gears to SG&A I mean would you say that by the end of 'twenty one.
Are we back to more normal levels and therefore, we should see less of a drag on margins next year as you continue to grow.
Yes.
Okay, I'll add some color, yes, sure so Adam yet.
You hit it right I mean, these the last year and this year a little abnormal.
We're still growing in and getting the leverage from our sales on that SG&A.
So we'll continue to see that as a percentage of sales move.
Move down.
And but what we're encouraged by some of the innovation.
<unk>, whether it's digital or product that we're able to make to accelerate some of our growth on the topline Adam Let me just add some additional color to that too because we were very intentional about where we are right now with our SG&A. We made a conscious decision in 2020.
To not cut the capacity of the organization to leverage our financial strength and that time to invest into growth and to maintain the organizational capacity and.
Youll remember because you know as well that in 18 and $19 18, and 19, we were right sizing the organization to become an Americas only focused company right. Because we had a global organization. We are divesting of our international that was closing in 19, and we're readying ourselves for Americas, only cost structure, which we had done.
And our SG&A as a percentage of sales it really gotten to some very competitive levels I'll say, so we were in 2020, we intentionally.
Went into this knowing that we would have a couple of years here, we would have higher SG&A to get out in front and to reposition ourselves for stronger growth coming out of the pandemic. So again, we're kind of where we expected and wanted to be.
Given the growth initiatives that we're investing in but over time. This isn't a long term position for us to be and we expect to get absorption and leverage on the SG&A as we get back to 2019 levels number one that's kind of the first level of.
Absorption that we need to get back to and then the traction from these growth initiatives, we expect to get leverage on that SG&A. So this isn't where we're going to we're going to land and ste.
But over the next couple of years, we expect to generate leverage and to drive that SG&A as a percent sales back down to more normal levels.
That helps thank you.
Yes.
And our next question is from Bill <unk> of Exane BNP Paribas. Your line is open.
Good morning. Thank you for taking my question I have one question I just wanted to know if you could comment a bit on price elasticity.
Prices for yourself on.
On the mineral fiber is already up double digit I guess as you go into 2022, you'll definitely need more price increases as well so.
When you reflect on what is needed to offset costs and the impact. It could have on demand are you starting to see also some delays or cancellation due to the fact that you've got more inflation on your products and some competing products as well.
The short answer to that is no.
The the backdrop and I think the level of inflation on other building products is far greater than.
Armstrong <unk> line of products in many cases so.
We don't see.
Demand being impacted on these projects or the start of new projects as a result of inflationary pressures at this point.
Okay, and if I could just one more.
And you mentioned that the backlog on architectural specialties was at a very high level. When you entered the year, but given delays you sort of were not able to sort of reach those are you able to give us.
11 indications.
Backlog in terms of feet on your growth when you arrived in 2021 four.
For Aaas, and even maybe for MF.
Yes, I don't remember that number off the top of my head I know we revealed.
Yes.
The level of percentage it was up over prior year, but it was at a very high level I remember it being record levels of backlog coming into the year.
And and what I said earlier is that the rates of absorption of that new investment that we're making behind that backlog has slowed down we fully expect to fully absorb that.
That investment and get leverage on that investment going forward.
But on top of that backlog, we've continued to build the backlog all throughout 'twenty. One so we expect again to exit the year into 'twenty, two with a very healthy.
Architectural specialty backlog.
Great. Thank you very much.
Youre welcome.
And our next question is from Dan Ken Zenner of Keybanc. Your line is open.
Good morning, everybody.
Ken again.
So pricing remains.
Quite robust is that.
Youre asking for more price, but partly reflecting.
Your enhanced competitiveness in this environment, because if youre facing challenges I assume your other competitors are facing them.
As well.
Could you maybe talk a little bit about pricing.
Inventory competitive landscape.
How can I think.
Our pricing is very strong as youre alluding to and.
Again, theres this inflationary backdrop and theres lots of inflation out there. So we are staying ahead of that.
With our customers.
But we know we have to earn our price increases right and.
The way to hold onto more of that prices you have to earn it with value creation on service or innovation.
And as an Americas focused company now we have tremendous focus on new product innovation and our service levels have never wavered through this pandemic.
And I think that really is making us stand out as a unique supplier even our competitors and are are.
Our immediate competitors in this space have not had.
Sure.
Have had service issues along the way.
So I feel very good about that and again, it's important for us to earn these price increases as we as we try to stay out ahead of the inflationary pressure.
Great and it sounds like inventory is not such an issue I mean you had.
Plant outage, but inventory we hear about delays I mean is that an issue that you guys are seeing thank you very much.
Ken we're not seeing any inventory gyrations upward down we're having a very we have a very we didn't miss any.
Deliveries and shipments to customers.
Our customers through this I mean, we've been able to manage that with our inventory levels were maintaining our inventory levels I know where distributors are maintaining responsible inventory levels.
I'd say, it's a non event in terms of the overall service equation.
And we don't expect to allow it to get to that point either.
Thank you.
Thank you Ken.
And our next question is from Stephen Kim of Evercore ISI. Your line is open.
Yes, thanks, very much guys good results.
And thanks for all the commentary here I wanted to drill a little bit into the <unk>.
And price.
<unk> indicated that <unk> done a great job as you always do staying ahead of inflation, but this was such an unusual year and you were so proactive it teams and getting ahead of the price what I'm wondering is whether or not the bank.
Gear the back half of 2021 is actually seeing a little bit more than normal net benefit.
Price over cost.
And just as we're trying to model next year, just what we should be expecting there would be helpful to know, whether you think youre seeing any a little bit more than normal price cost benefit in the back half of this year.
Well I would say stable.
We're seeing what we would expect to see against the backdrop of inflation historically and again you know this well.
At our <unk> components of like for like pricing and mix.
Have trended around the 50 50, Mark in terms of their contribution overtime and deflationary periods, we get a little less like for like in a little more mix and inflationary periods, we get a little bit more like for like.
To compensate for that I would say what we're seeing now is.
Our bias in that mix much more to the like for like that.
That reflects the inflationary environment that we're in.
And yes, we're staying ahead of the inflationary pressures that we're seeing.
We had three price increases this year, which as you know we normally have two.
And we expect to continue on the cadence of our price increases to to stay ahead of the inflation, yes as long as we're in this inflationary backdrop I would expect our <unk> mix to be much more tilted toward the like for like pricing as a result of that.
Yeah, Okay. Yeah. So it's an interesting dynamic so thats helpful. Thanks for reminding us about that.
Second question I guess relates to.
I'm going to go with the share repurchase.
Stepped that up a little bit here in the past we've seen you.
Be fairly aggressive on share repurchase I'm curious whether or not.
We can read into the trend here stepping up in Q2 with something that wouldn't look forward to.
Either in the back half of this year or what you are kind of thinking into 2022.
Yes, David I wouldnt over read into that I'll share.
How we think about this and the way we think about this the way we are behaving around this is that it's kind of the flex for us if we're not doing acquisitions are we.
Obviously with the strong cash flow given and then without doing acquisitions, we may have more to flex into a share repurchase that we didn't just increase our dividend by 10%, which is a nice.
Vote of confidence in our outlook for cash flow generation going forward.
But I think the way we think about the share repurchase is it's an opportunity for us depends.
Depending on available cash.
Based on our first two priorities of investing back in our business and of course, the bolt on acquisitions being our second priority.
And I might just mentioned, they're still we're still open for business there.
It's true we haven't done an acquisition or closed an acquisition this year, but we're still active in this area and our pipeline still looks very robust. So I feel like that that's going to be a continuing.
Second priority for us back behind investing in our business and then available cash leftover we.
Plan to flex into our share repurchase which we have.
A long runway to in terms of the authorization there.
Yeah, Okay, great. Thanks, very much okay. Thank you Steven.
And our next question is from sale of Jefferies. Your line is open.
Hey, guys, it's Maggie on for Phil.
I guess first on mineral fiber volume just trying to marry the commentary around sales per shipping day improving.
And then the implied volume decline next quarter on.
Can you talk about some of the drivers there and is the choppiness that you've talked about more timing related but the projects getting pushed out or are you actually starting to see new projects and the pipeline is growing.
Well, we're certainly seeing new projects flowing.
And by reflecting our backlog and so forth, but the delays or the existing projects underway that are late and getting ready for a ceiling. So those are the kind of delays that we're seeing in the kind of the near term Choppiness. Let me comment on the fourth quarter referenced that you have in.
In the fourth quarter last year. So this is a bit of a part of this anomaly that were still in from last year to this year.
Had a very large inventory build from.
A couple of our big box customers that has created I know.
Any unusual base period.
So I wouldn't read into theirs.
An acceleration of project delays or something like that that would be the wrong that we don't see it that way.
But this was more of a base period comparison that I think you're you're modeling into.
And Vic I would add to that.
We're seeing some of that delay in projects more so on the ASI, but a little bit on the mineral fiber side that R&R piece of the business and mineral fiber has been.
A good bright spot.
Okay, that's fair.
Very helpful and then switching over to margin. The <unk> guide implies that real inflection. There I was wondering is that thing driven by maybe the full impact of August price increase or any other big factors to call out there and it's one segment, leading that margin recovery or is it pretty even.
Please go ahead.
Yes Maggie.
Look at the different each segment mineral fibers margin contraction was really a reflection of this $3 million manufacturing headwind.
We experienced in Q3, that's the primary driver on the on the S side as Vic mentioned digesting the acquisitions and.
Getting the scale for some of the investments we've made that's being more impacted by some of the job delays in that segment.
Okay. Thanks, guys.
Okay. Thank you.
And there are no further questions at this time I will now turn the call over back to Vic Grizzle, President and CEO for his closing remarks.
Great. Thanks, again, everybody for joining us today, and we're pleased with where we are fin.
Finishing out a a very choppy.
Quarter in terms of the recovery and but we do expect to finish the year strong.
I continue to be encouraged by the macro view of what we're seeing in terms of GDP remaining strong greater than 5% forecast for this year greater than 4% for next year the level of bidding activity.
And as I talked about earlier across all verticals, which reflects I think the broad based nature of the recovery in the activity, which is what you get when you have a four 5% GDP.
Market environment. So I continue to be encouraged by that and the traction that we are creating from our growth initiatives.
We look forward to updating you on those at the end of the next quarter, but again, thank you for joining us today.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yes.
Sure.
Okay.
Yes.
Okay.
Yes.
Sure.
Okay.
Yes.
Okay.
[music].
Yes.
[music].
Yes.
Yes.
Thanks.
Okay.
[music].
Yes.
Okay.
Yeah.
Okay.
Okay.
Yes.
Okay.
Yes.
Okay.
Okay.
Okay.
Sure.
Yes.
Yes.
Okay.
Okay.
Yes.
Yes.
Yeah.
Yes.
Sure.
Yes.
Okay.
Sure.
Yes.
Okay.
Okay.
Yes.
Okay.
[music].
Yes.
Yes.
Okay.
Okay.
Okay.
Yes.
[music].
Yes.
Yes.
Yes.
Okay.
Sure.
Sure.
Sure.
Sure.
[music].
[music].
[music].