Q1 2022 Armstrong World Industries Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 to Armstrong World Industries, Inc. Earnings Conference call. At this time, all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one.
One on your telephone if you require any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker, Mr. Russo Womble director of Investor Relations. Please go ahead.
Thank you Sherry and welcome to everyone on the call. This morning.
We will have Vic grizzle, our CEO and Brian Macneal, our CFO discussed Armstrong World Industries' first quarter 'twenty 'twenty results as well as our outlook for the rest of the year, our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of the SEC regulation G. Iraq is back until.
The Asian of these measures with comparable GAAP measures is 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.
As a reminder, during this call we will be making forward looking statements that represent the best view of the company of our financial and operational performance as of today's date April 26, 2022. These statements involve risks and uncertainties that may differ materially from those expected or implied we.
A detailed discussion of the risks and uncertainties in our essence 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 securities law.
Now for those of you following along with our presentation. Please turn to slide four as I turn the call to Vic.
Thank you Teresa and good morning, everyone and thank you for joining our call today to discuss our first quarter 2022 results as we reported in our earnings release today, we delivered year over year topline growth of 12% and adjusted EBITDA growth of 3% versus the first quarter of 2021.
These consolidated results represent a very strong quarter for architectural specialties segment and muted performance for our mineral fiber segment due to distributor inventory adjustments that I will discuss in more detail in a few moments.
There continues to be a growing number of positive indicators pointing to a continuation of the market recovery.
This combined with the strength of our architectural specialties performance this quarter and increasing traction of our growth initiatives supports our confidence in maintaining our full year guidance for sales and EBITDA growth for 2020 two.
First let's look at the performance for architectural specialties first quarter sales of $79 million or 24% increase year over year was a single quarter record for this segment the.
The increase was aided by shipments for projects delayed in the second half of 2000 2021 as.
As well as a continuation of share gains and the recovery in the commercial construction market.
We were encouraged to see shipments for architectural specialty projects across various verticals, including office education transportation and hospitality.
One I wanted to highlight as this new Irving Institute building at Dartmouth College, There's 55000 square foot building will be home to the colleges sustainability office and their center for energy sustainability and innovation.
It has been designed to be the highest performing building on the campus from an energy efficiency and overall sustainability perspective, the design teams specified our metal radiant ceiling panels as part of the holistic solution to achieving their sustainability goals, while maintaining health and comfort for the occupants.
These radiant ceiling panels or a product line, we acquired back in 2018, when we purchased steel ceilings they've.
They've been a great addition to our portfolio of healthy and sustainable products as they helped to lower carbon emissions and reduce energy costs.
First quarter EBITDA for the architectural specialty segment increased 88% from the prior year to $13 million and I'm, particularly pleased with the expansion of our EBITDA margin to 16.3% that's up 560 basis points.
This improvement in profitability is a strong step toward our targeted EBITDA margin of at least 20% for the segment.
The increased shipment levels helped drive this result as have the efforts of our team on pricing to offset inflationary pressures and to maintain strong operational performance.
It's worth noting that this strong top and bottom line growth was all generated through organic activity and reinforces our strategic rationale for expanding this segment and the additional market opportunities. It provides.
Maybe the most notable highlight in this segment for the quarter was the robust order intake for architectural specialties.
The new order intake in the first quarter increased 23% from prior year levels.
This is lifted our project backlog above where it was when we entered the year.
And this is an important indicator of what we believe our improving market conditions.
In the mineral fiber segment, we continued to deliver strong price performance with ANV growth of 12%.
We again demonstrated our unique ability to consistently achieve like for like pricing ahead of inflation. This also drove gross margin expansion for the segment.
Sales volume, however fell year over year, and EBITDA declined 5% from 2021 results contributing to this lower EBITDA result was a nearly $3 million decline in equity earnings from our wave joint venture.
Now both the decline in mineral fiber sales volumes and the lower equity earnings from wave are directly. The result of efforts of our independent U S distribution channels to reduce inventories to more normalized inventory levels.
Now we are aware and anticipated some headwinds.
Two mineral fiber sales volumes, given our January 3rd or January 3rd price increase that shifted the typical January by had volume into December .
But the magnitude of the inventory reductions we experienced in the quarter was greater than expected.
Now it's unusual for us to be talking about distributor inventory levels, because they're typically very steady and follow normal seasonal patterns given our best in class service levels. Our distributors know they can count on us to consistently deliver in a timely fashion as we have continued to do throughout the pandemic.
However, the lingering effects of the pandemic, along with unprecedented challenges of rapid inflation and uncertainty throughout the broader supply chain created a unique set of circumstances for our distributors.
Distributor inventory levels increased throughout 2021, as they sought to secure supplies of all products at higher rates in anticipation of further price price increases.
Potential supply chain bottlenecks and against the backdrop of increasing bidding activity in the market.
And it's not just our ceilings only anomaly the breadth of this issue across the building products industry can be seen in the chart. We provided in our earnings call deck.
Of data from the U S Bureau of economic analysis that shows historical inventory to sales ratios for building product wholesalers, highlighting the fact that inventories in the fourth quarter of 'twenty 'twenty. One grew at more than three X the rate of sales on a year over year basis. This measure was also higher in the fourth quarter of 2021 at any point.
And the last 25 years escalating from an upward trend that began in the second quarter last year.
So again unprecedented conditions of rapid inflation labor availability supply chain disruptions against the backdrop of higher demand in construction activity have driven inventories to higher.
Levels and created this anomaly.
And given our conversations with those distributors, we believe that they are now approaching those more normalized levels.
We believe the effort by our distributors to right size their inventories does not reflect underlying market conditions.
Recent discussions with our distributor partners point to solid activity and optimism and they indicate ceiling volume growth in line with what we expect underlying market demand to be in 2022.
Further to the divergence of this particular inventory dynamic end market activity sales of mineral fiber products through our retail and wholesale channels continued to be positive.
And most of the sales in these channels represent more real time demand, particularly for patch and match and light construction projects.
Broader market indicators also continue to reflect improving market conditions.
For example, the castle back to work index continues to strengthen with the rate over the past few weeks hitting an all time high since the start of the pandemic at 43%.
Project bidding activity remains strong, particularly in renovation work, where we've seen four consecutive quarters of at or above 20% growth in project counts.
New construction starts measured in square feet are also up double digits led by transportation retail and office.
<unk> results for the architectural billing index were also very strong remaining well into expansion territory for billings nationally with a rating of 58 versus 51 in December .
And again sales in the architectural specialties with less inventory buffer due to the custom nature of the segment was up double digits.
Beyond these market factors were also pleased with the continued progress of our healthy spaces in digital growth initiatives.
Increases in sales attributed to both of these initiatives helped to offset some of the inventory drawdown in our U S distribution channel and are expected to be key contributors to our growth outlook for 2022.
I'll provide some more additional details.
Details on these initiatives after Barack Brian provides a.
A few more details on our financial results Brian over to you.
Thanks, Vic and good morning to everyone on the call today I'll be reviewing our first quarter 2022 results as well as our updated 2022 guidance 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 first quarter results net sales of $283 million were up 12% versus prior year adjusted EBITDA grew 3% and adjusted EBITDA margin contracted 270 basis points adjust.
Adjusted diluted earnings per share of one dollar and two cents improved 7% versus the prior period and adjusted free cash flow declined 13%.
We continue to have a strong balance sheet that allows us the flexibility to execute on all our capital allocation priorities.
One of those priorities is returning cash to shareholders in the quarter, we repurchased $30 million of shares or about 300000 shares at an average price of roughly 100 hours per share.
Since the inception of the share program in 2016, we have repurchased 10 8 million shares for a total cost of $716 $2 million or an average price of $66 27 per share.
As of the end of Q1 2022, we currently have $484 million remaining under our repurchase program, which runs through December 2023.
Continuing to look at slide five you'll see our adjusted EBITDA bridge versus the prior year, the $2 million gain was driven by favorable <unk> of $19 million, primarily due to favorable like for like pricing and volume of $2 million driven by growth in the architectural specialties or a S segment.
A S growth was able to more than offset the mineral fiber headwind in the quarter and I'll touch on that in a minute offsetting these gains were increased SG&A expenses higher input costs and lower equity earnings from our wave joint venture.
SG&A expenses were driven higher mostly by increased selling expenses, which includes spending on our digital growth initiatives.
Input costs increased primarily due to raw material inflation in addition to energy and freight inflation.
Inflation came in higher than our expectations continuing to accelerate from Q4 levels.
Lower equity earnings were driven by lower volumes and increased SG&A.
Slide six summarizes our mineral fiber segment results in the quarter sales were up 8% versus prior year. The bright spot for mineral fiber continues to be a V performance Adv of 12% carried the quarter more than offsetting the decline in sales volume.
Positive AAV results from.
It was driven by like for like pricing, partially offset by a slight headwind from channel mix.
In addition to the volume headwind Victor discussed from our distributor inventory reductions volumes were negatively impacted by one less shipping day, when compared to the prior year, which translates to roughly a point and a half impact.
Based on input from our distribution partners sell out from their yards in Q1 was on average low to mid single digits and they continue to expect positive volume sell out this year.
Moving to mineral fiber EBITA, you'll see adjusted EBITDA decreased $4 million or 5%.
Fall through to EBITDA from favorable <unk> was more than offset by the reduction in sales volumes increased input cost input increased SG&A expenses and lower equity earnings from our wave joint venture.
The volume headwind was isolated mainly within our U S distribution channel, which also drove some channel mix headwind the.
The other channels performed largely in line with our expectations.
A bright spot being volume growth in Latin America of over 20%.
As I mentioned input costs are being driven by raw material inflation. In addition to increased energy and freight costs. Our teams have done a nice job of continuing to price ahead of inflation.
It requires hard work and discipline and I'm happy to report that drove gross margin expansion for mineral fiber in the quarter.
Again, it's something we do not take for granted.
We continue to closely monitor the rate and pace of inflation and planned to adjust future price increases accordingly.
SG&A costs were driven by an increase in selling expense, which includes investments supporting our growth initiatives.
Lower wave equity earnings were driven by lower volumes and higher SG&A, which were partially offset by price over inflation.
Volumes were lower primarily due to the same distributor inventory reduction we saw in mineral fiber.
Grid volumes seem to have actually been more impacted due to the hyperinflation of steel and supply constraints experienced throughout 2021.
Moving to slide seven we can see the first quarter results for architectural specialties or a S segment.
Sales were up $16 million or 24% versus prior year. This increase was driven by increased product shipments for previously delayed projects improved performance from recent acquisitions compared to the prior year.
And transit and traction from our pricing actions throughout the segment.
This record setting performance reflects organic growth and market penetration supporting our vision for growth for the <unk> segment.
Adjusted EBITDA was up 88% and adjusted EBITDA margins expanded 560 basis points versus the prior year.
Driving the increase in adjusted EBITDA as fall through from the increase in sales dollars.
S. G&A expenses were slightly higher than prior year, driven by investments in recent acquisitions selling capabilities and increases in incentive comp.
While the S segment had a great quarter, and we tip, our hats to our team.
We consistently pointed out that quarter to quarter comparisons can be lumpy due to the project nature of this segment.
We remain confident in our net sales growth of greater than 10% for the full year.
Slide eight shows adjusted free cash flow performance for Q1, 2022 versus the prior year first quarter.
A 13% decline in adjusted free cash flow was driven by lower cash disbursements from the wave joint venture.
I'd also like to unpack the first party here the adjusted operating cash flow, while cash earnings were favorable in the quarter, an increase in inventory levels and accounts receivable were headwinds compared to the prior year.
We also had higher than prior year payout of incentive compensation in the first quarter of 2022, driving headwind related to accounts payable and accrued expenses.
Finally, as a friendly reminder, the first quarter is typically our weakest cash flow quarter.
As we move to slide nine you'll see our full year guidance for 2022, which is unchanged for the four key metrics on the left side of the page.
I would like to point out some updates to assumptions in Purple Bowl tax on the right side of the page.
While the full year outcome is unchanged our assumptions of how we arrive there are have changed we estimate that the impact of normalizing distributor inventory levels is approximately 2% or a range of 15 to 20 million dollar headwind to mineral fiber volumes for the full year.
A majority of that occurred in Q1.
That is partially offset by a 1% improvement.
Our expectations of our initiative performance for the full year.
This nets us to our mineral fiber volume growth of 1% to 3% versus February guidance of 2% to 4%.
Offsetting this revision we now expect positive mineral fiber a V of 10% to 12% up from February guidance of 8% to 10%.
In total our adjusted EBITDA outlook remains unchanged as we are confident in the AWS teams' ability to drive manufacturing productivity and manage SG&A costs as additional levers to achieve our full year targets.
Despite a slower than expected start to the year for adjusted EBITDA. We're confident about the year ahead as Vic noted conversations with our distribution partners surrounding market demand remains optimistic.
A S segment is off to a nice start for the year, our plants are running well and our team's ability to remain agile and responsive enables us to flex the rate and pace of our spending throughout the company as we progress through the year with that I'll turn it back to Victor wrap up before we take your questions.
Yeah, Thanks, Brian and before we get to your questions I'd like to share a few thoughts on the longer term growth outlook for Armstrong I know many of you on the call attended our Investor day back in early March where we laid out our vision for growth over the next five years.
Vision is grounded in our belief in the ability of the company to do the following two things drive increasing value from our investments in architectural specialties segment through topline growth and margin expansion and two to deliver mineral fiber volume growth at attractive margins through both a market recovery and the execution of our healthy spaces.
In digital growth initiatives.
As we've outlined today, we are pleased with how the architectural specialties segment is performing and making great progress on both the top line growth and EBITDA margin expansion targets, it's encouraging to see how our expanded portfolio of unique high designed highly innovative products is enabling us to sell more products into more commercial.
Buildings.
Improving the trajectory of mineral fiber volume growth is work in progress based on both our promising recovery in commercial construction activity and scaling the positive impact of our investments and our healthy spaces in digital initiatives.
We continue to gain momentum with our healthy spaces initiative sales of these products are growing since the end of June in 2020 . One we have more than doubled the number of projects for healthy spaces being worked on by our team.
And in the quarter, we closed our largest vide shield project to date for a school district and in the southwest intra.
Interest in the complete healthy spaces portfolio out in the field is increasing and we attribute this to strengthening to the growing appreciation for the broader definition of a healthy indoor space based on the four key elements of indoor environmental quality air temperature light and sound.
Each of these are critical for human health and wellbeing and I invite you to check out our revamped healthy spaces pages on the Armstrong website to see more details on how we are working to create a broader portfolio of solutions to deliver I E Q to the built environment.
We're also delighted with the recent initiative announced by the White House called the clean Air and building challenge among their recommendations are enhanced air filtration, including in room cleaning devices, such as our vital shield product.
We are engaging with the EPA on this initiative as it is clearly in line with our view that every indoor space should be a healthy space.
Our digital initiatives are an additional critical component to our longer term growth strategy here, we're continuing to invest in our three digital initiatives canopy project works and our lead optimization engine.
All are performing well and building momentum.
Specifically with canopy, we're re vamp ramping on all key metrics, including a 50% sequential increase in the number of orders per quarter, and a 49% sequential increase in quarterly revenue compared to the fourth quarter of 2021.
We're also excited about how.
The adoption of our automated design service project works is expanding we've added more products and capacity to the platform and it's increasingly being used.
Looking at the year over year increase in projects process by project works clearly shows this increasing from less than 100 in the first quarter last year to over 700 this year.
And finally I'd like to highlight one additional project that we recently won new Deutsche Bank workplace on Columbus Circle in New York City similar to many large employers throughout North America as the bank began to prepare for bringing people back into the office.
They needed a new vision of what their office space should be a healthy and more collaborative space.
We were brought into the project early and leverage project works as we worked with the designers on the specific products needed to bring their vision to life.
Ultimately we completed this project with specifications for three different product categories, including our lira from our total acoustics mineral fiber product line as.
As well as metal and felt products from our architectural specialties segment.
This project is a representative example of the renovation required and the key elements of our growth strategy, including the role of our digital initiatives to build inefficiencies for our customers and how our broad portfolio of products uniquely positions Armstrong to serve new renovation demand.
Successes like this illustrate our unique focus as an Americas specialty ceilings and walls company.
And enhances our competitive position in the marketplace now with the need for healthier spaces, we are uniquely positioned to capture the resulting new renovation activity as well as access meaningful new sources of demand with our digital initiatives.
And with that now we'll be happy to take your questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone we ask that you. Please limit yourself to one question and one follow up question.
Then return to the queue.
Jay Your question press the pound key please standby, while we compile the Q&A roster.
Our first question will come from Keith Hughes with <unk>. Please go ahead.
Thank you. Thank you for all the detail.
Mineral fiber volume.
Particularly around the sell out from your distributors.
My question is on your inventories or inventories that could be faster than sales here in the first quarter.
To get your inventory longer you're going to have to slow your mineral fiber production.
As we head into the second quarter.
Yeah, Keith if I understand your question, it's our internal inventory levels and in our plants for example, our own warehouses. Yeah. Yeah. You know, we we flow into that inventory as well as our.
Our our customers inventory levels, and we flex our our product mix Accordingly, and we were able to do that and one of the things about that this quarter flat.
Flexing into that.
That.
Normal demand cycle that we had in the first quarter, serving our distributors' inventories, we were able to maintain productivity in the plants and that was very helpful for us to offset some of the you know the shortfall in the mineral fiber volume. So this was kind of.
It's kind of business as usual for us in terms of monitoring our production with different inventory levels and we've maintained our inventory level.
At a healthy healthy level in the first quarter as a result of that.
So no change in production rates in the second quarter to kind of bring this back down.
Normal normal seasonality will be you know increasing actually as we would normally do in a second and third quarter seasonality pattern. So no big changes there.
Okay and I guess final question, we're on the same topic.
Given that there seems to be this building backlog as you referred to.
Uh-huh comments on nonresidents demand, particularly for memory.
Thanks.
Is there a chance distributors are pooled these down to flooring, we get that to a shortage situation.
Demand potentially takes off faster.
Channel is.
And how would you how would you address that.
Well certainly we have the ability with sprint capacity in our plants to respond to a meaningful uptick in the marketplace. We we've looked at scenarios with double digit increases in demand for example on a volume basis. We we have plenty of flex capacity, we could respond to.
Two in the event that.
They did take their inventory levels down to lower levels.
We're required to service an uptick in demand we could we could respond. So we're not worried about that I think we're in constant contact with our distribution partners.
Balancing out in different branches as you know keep it it's not just one or two distributors right Theres 300 branches in getting the inventory levels right and all of those branches is really the the conversations that we're having on a day to day basis with our distributors. So again plenty of spread capacity and ability for us to to serve if we saw an uptick in the <unk>.
Second and third quarter.
Okay. Thank you.
Thank you.
Thank you. Our next question will come from Phil <unk> with Jefferies. Please go ahead.
Hey, good morning.
Hey, Phil.
Hey, good morning, your full year wanted to 2% mineral fiber volume guidance implies a 3% to 5% growth profile. The rest of the year. So a nice step up.
How do you kind of see that building through the year since it sounds like Youre still probably a little hangover effect into Q from the distributor inventory drawdown and how how much line of sight do you have.
Yeah, I think well Orlando site hasn't really changed really other than you know looking at the the triangulation of the indicators right and of course, the sentiment from our distribution channel.
Which remains very very positive I think the seasonality pattern is going to rule. The day here I think second quarter is going to step up and be stronger.
With positive volume growth and then third quarter as you know is our strongest quarter of the year and we expect our strongest growth to be in the third quarter.
So I would say the seasonality pattern is going to really drive that step up in volume to get us to the that 1% to 3% outlook that we have.
That's helpful.
And Vic I mean outside of look the shop floor start on volumes. It sounds like your outlook seems a little more upbeat certainly that sell out commentary from you to assure it was pretty encouraging reason why I ask is just like the last quarter or maybe even a quarter before that you were talking to how activity was still pretty choppy.
Any color on the R&R side, how that's kind of playing out and I was pretty encouraged to hear that you know within your guidance for mineral fiber you upsize your growth initiatives contribution by 100 basis points any color at all on some of those initiatives, where you're seeing some wins and just confidence in securing that demand backdrop.
Yeah, I think the AR that was an important thing you can imagine right. Phil when you see this kind of you know that.
<unk> draft right on on demand signals from the from the distribution channel, it's really important to understand where that's coming from right and again. It was really important for us to understand but also I think for everybody to understand that this was not a demand signal.
That.
Distributors were seeing from the market in fact, I spoke directly to our two.
Just distributors.
And both of them said.
That the market is improving and the activity is strong and robust and they expect that to continue for the year. So.
And separate conversations they are both seeing a more robust market. This inventory drawdown was merely a function of where they ended the year and of course, a little bit more of a buy ahead from our our price increase that we move from February to January that moved a lot of that by had volume into into the fourth quarter. So that was important right for.
As to understand that this was not connected to demand.
Our response to demand they were seeing in the marketplace.
And so.
When we look at all of these indicators in your reference to my Mic.
Positivity here there were more indicators this quarter that are showing positive signs.
And we try to highlight as many of those.
So that plus the growth initiatives that you're referencing in both digital and healthy spaces that continue to get traction and contribute real volume.
I think that that's a source of maintaining our guidance and keeping our outlook intact for the rest of the year.
Okay. Thanks, a lot.
Hmm.
Thank you. Our next question will come from Kathryn Thompson with Thompson Research. Please go ahead.
Hi, Thank you for taking my questions are just on a follow up on inventory.
Inventory destocking.
Wave C similar.
Destocking because we we see we have heard that from a steel framing industry in general and then part and parcel with that how are your distribution partners thinking strategically going forward.
In terms of inventory stocking levels, particularly as we shift from a just in case the person testing time. Thank you.
Yeah, Yeah that's.
Yeah, I think theres, some theres some opportunity right for that but first of all on the wave question Catherine.
It was definitely what what wave saw and what we saw as a resulting equity earnings from wave was exactly the.
The result of inventory drawdowns and in fact, maybe to even a greater extent because as you know steel prices were escalating.
Dramatically last year, we had a nine price increases last year. So the buy ahead and trying to stay stocked with the potential threat of steel shortages out there probably drove even higher levels.
Of of grid products in the in the distribution channel than ceiling tile products. So clearly that's a direct.
They had they they saw a direct impact from that inventory reduction.
So Katherine your second question around <unk>.
Philosophical or a different business approach to managing inventory I did not get the flavor.
And in my discussions with them that they were changing their approach necessarily I think they had a desire to get back to more normalized levels, especially when it comes to Armstrong products because they can write our service levels. We demonstrated all through 2021 that we weren't going to disrupt their their service XP.
Patients have their jobs, we had material available we were shipping on time.
And we were we were meeting all of their needs. This is an area where they could they can take the opportunity to move not to just in time necessarily but they could certainly get out of that just in case mode and get to more normalized levels and that was the discussion I've had with them that that that's their desire is to get down to more normalized levels.
Okay, Great and then a follow up question understanding the chair.
Essentially north American business.
What if any impact are you seeing from either.
Unintended consequences that from Ukrainian and Russian conflict and or the shutdown in Shanghai.
Yeah.
Katherine we're monitoring that very closely and and I can I can tell you that the impact for US is minimal at best at the point right now or at worst at the point right now.
But we're watching for ripple effects rate that could be influencing our.
Our feed stream that influences another featuring influences us eventually but right now the impact on us is minimal.
Outside at some small things that we may get from from Asia here or there.
But again, we're going to we're going to continue to monitor it very closely but minimal impact so far.
Okay, great. Thank you.
You bet.
Thank you. Our next question will come from Garik <unk> with loop capital. Please go ahead.
Oh, hi, Thank you I was wondering how much of a 5 million dollar increase in SG&A was driven by increased compensation versus the increase in growth investments and just more broadly how should we think about the.
The impact of growth growth investments going forward through the rest of the year.
Go ahead, Bryan Kipp Garik.
Ryan so the.
The incentive piece was just just over a million dollars of most of that increase was driven by the investments in the Ah <unk>.
Growth initiatives.
Okay, and should we expect something like a $4 million per quarter run rate and growth investments one of the most of the year.
It will be.
Monitoring that rate and pace of that investment as they continue to gain traction and we're wrapping some of the investments we made last year. So it might not quite be as high as you indicated.
But it's in that couple of million dollars a quarter range.
Got it and just just a follow up question to an earlier comment you.
Right.
I'm, a pretty correctly, you expect volumes to be positive in <unk>.
Two Q and mineral fiber I, just wanted to confirm that consideration.
Just to put a percentage growth comp in the year ago period.
Okay, so a little bit of inventory destocking in distribution. He was in the early part of the second quarter.
Yeah. That's again, we're not we're not guiding to quarterly outlooks, but I would expect us to to.
To get back to our seasonal pattern.
On volume growth outside of this.
Inventory reduction a headwind if you will and so.
Let me just leave it at that for now because I expect us to.
We'll see where we end up versus our base compared but we should be bouncing back to more positive levels off of this first quarter drawdown.
Got it okay. Thank you very much.
You bet. Thank you.
Thank you. Our next question will come from Susan Mcclary with Goldman Sachs. Please go ahead.
Thank you good morning, everyone.
Good morning question is.
Going back to the inventory situation in mineral fiber, you've noted that some of that related to the change in the cadence of the pricing that you've put through.
Any way impact how you think about that.
Forward in terms of pricing.
There may be more willingness.
Stick with your historical cadence as opposed to kind of being as reactionary to inflation as it does change over the course of time or anything else that we should be aware of as you kind of look forward and learn from this experience.
Yeah, Susan I really don't think there's going to be a major shift on how our distributors handle our price increases or the timing of our price increases we really are looking at the inflationary environment and timing and the magnitude as well as the timing of these price increases accordingly to that I think what we are experiencing in the <unk>.
Quarter really is a confluence of factors that was happening.
You know against unprecedented conditions in 2021 and many distributors building products were facing.
It's more a confluence of that than a change in our philosophical approach or business approach to inventory management.
Okay. Okay. That's helpful. And then my second question is you know over the last couple of quarters, we've been talking about various end markets that have been maybe recovering a little bit faster some that have been lagging.
Whatever it is one relative to the other as.
As you sort of look at where you stand today and thinking about the improvements that you're talking about as we go through the balance of the year and comments from distributors would you say that there are certain end markets, where you're really seeing more of a substantial pick up.
Or it feels like we're getting past some of the COVID-19 headwinds and the other things that have been impacting those end markets or geographies and are finally really coming together.
Yeah.
Switching all of the verticals and the activity continues to be strong account against all of those verticals. In fact, all segments. All verticals were positive in the in the first quarter in terms of bidding activity.
What we're saying is.
And watching very closely Susan is the office segment in particular.
So it continues to to improve sequentially quarter over quarter.
We're listening and watching for the tenant improvement part of that marketplace, which you know as people get back to the office and they're doing their renovation activities. That's a key driver of the office segment that we're paying close attention to.
And it's it's anecdotal information right now because we really don't have data around that but the anecdotal information we're hearing from contractors and distributors in the field is that that's improving and the outlook for that continues to improve and I think that's a positive signal yet against the backdrop of you know really solid bidding activity.
And as I started reporting on this in the second quarter of last year. So we've had really four quarters in a row now where we've had greater than 20%.
Hum growth in activity and it's really been broad based across all the verticals.
Okay. That's good to hear thank you and good luck with everything.
Yeah. Thank you.
Thank you. Our next question will come from Adam Baumgarten with Zelman. Please go ahead.
Hey, good morning, everyone I'm, just curious if you could give us some color on the monthly volume trends you saw as you move through the quarter and into April I guess, what I'm trying to get out is did you see in mineral fiber some level of improvement as we move through the quarter and into April .
Yeah, I think the the monthly cadence was really.
It was indeterminate frankly because of some of the.
Drawdown in activity that was going on month to month. So there wasn't a lot of insight from the month to month activity.
So it would be tough to comment on that and to provide any insight for you on that it was pretty even throughout the quarter to be honest with you and and lacked any kind of direction based based on different distributors drawing down at different rates.
Across the quarter.
I wish I could give you something better than that but I don't think that that could be helpful. With any insight from that I I didn't really get any insight from the month to month activity.
Okay got it and then just on the the channel mix headwinds that you guys had do you expect those two it sounds like they should get better as we move through the year, but starting in the second quarter should that kind of reverse given the the hopefully higher level of distributor demand.
Yeah, It's it's it's it's.
It's expected to get better and improve of course as we get this as are our highest margin our highest a V channels. So as it you know.
Starts to mirror more of what we see in the marketplace in terms of demand.
We should we should rightsize that mix that.
But that mix headwind that we saw in first quarter.
Got it thanks a lot.
Yeah.
Thank you. Our next question will come from Stephen Kim with Evercore ISI. Please go ahead.
Hey, guys.
Apologies if I can just did want to just sort of follow up on that one more time. So you know the quarterly cadence was in the quarter. You said it I think in determinant sounds like at the time of your call in late February .
Havent seen something there that would have you know for you connected the dots to say okay. This is something that's going to draw down the volumes.
We are in late April and at our I guess I just wanted to get clarity or are you actually at this point now actually seeing the turn carved or is it through your conversations with the distributors that you have confidence that a couple of months from now you will have seen that materialize, but you actually aren't.
Exactly seen it yet.
The two is a closer representation of what your what youre trying to communicate.
Yeah, let me be clear Stephen on the February a reference that you made and sitting in February we were expecting some inventory drawdowns in our conversations with distributors.
Just on again the price increase moving from February to January and some buy head in late December .
Ahead of that price increase again normal activity, we would expect it to see the drawdown in January and in effecting even into February .
That was kind of going as expected I think it got elongated from there and that's where as I was saying in my prepared remarks that it was greater than what we expected and it's continued into.
And it continued into March we have one particular distributor whose end of year closing is April <unk>.
And we'll continue and has continue their inventory management up until they were closing and we felt that and we've seen that.
And so but in our conversations all of them are saying, they're at or approaching these normalized levels that they plan to be at at this moment of this call.
Does that help answer the question you had yes.
Okay, Yes that is very helpful. So thanks very much for that.
Second question is.
Last quarter I believe you mentioned something about education budgets, you know not having been spent I don't have a didn't have details around that I was curious if you could refresh us on that.
That situation changed and maybe if you could give us some sense for the magnitude of that.
Yeah, our understanding back in February when we talked about this was.
There are a large a large amount of the yes or funds.
Had not been spent yet and we're yet to be spent and therefore some opportunities for us I'm sure Theyre spending them as we go now that that's the intent they have two years to spend all of that money now so we believe they're actively.
In the market are spending.
Spending the money in fact, we seized on some of that in a a school district down the southwest with a very large water, we're very pleased with that.
I couldn't give you actual where they are.
In terms of the spending on the escrow funds now, but we still believe there's a good amount of that those funds that are still available for us and we're actively pursuing them.
Okay, great. Thanks, very much guys.
You bet.
Thank you. Our next question will come from Jon <unk> with UBS. Please go ahead.
Good morning, guys. So thank you for taking my questions. The first one on the wave earnings. It seems you guys were pretty clear that they were negatively impacted by the lower volumes and do you see inventory levels at the distributors.
Are you expecting that to sort of normalize in.
And I'm with the mineral fiber volumes and how should we think about sort of the equity earnings for the full year.
Yeah, John we are expecting that where again.
The sell through rate that we were seeing both tile and grid is.
It's drawing these inventories down.
In the distribution channel. So we see this kind of normalizing hand to hand, our service through the wave joint venture is equally as excellent as our tile service through Armstrong so.
We believe that there these are moving in tandem and should normalize together.
On the outlook question, Brian you want to take that yeah sure yeah.
Yes, so we continue to see a wave implement pricing ahead of inflation or above inflation. So we expect positive equity earnings for the full year.
Much like we guided back in February there's no change there.
Got it Okay. That's helpful and then on.
On the architectural specialty new order growth I mean that was pretty impressive I mean it.
It seems like it was pretty broad based but can you maybe just give a little bit more color on some of the and channel mix there.
Hum on the channel mix I'm, sorry about that sorry, you're a little bit a little bit more of how it was dispersed among the customer okay.
Across the across the verticals that are different sorry on us.
Yeah Yeah.
Yeah, you know upper education was was very active so colleges and universities.
We highlighted one of the projects but.
They seem to have good money right now so we're following that very closely and there are some some good projects and activity.
That part of the education segment in particular as well as hospitality.
We have some exciting new products for open plenum design and John you'll remember we talked a lot about this two or three years ago was a headwind to mineral fiber volume growth.
But.
The fastest growing part of the architectural specialty business was our felt business.
And felt is primarily used in fixing open plenum designs that need acoustical solutions. So what the open look but they need.
They need products in this space to provide acoustical.
Performance and so that was the fastest growing part of the business overall and our field team is doing a terrific job our new acquisitions in that area are doing a terrific job and I'm really glad to have him right now.
Thanks, guys.
Hmm.
Thank you. Our next question will come from Ken Zenner with Keybanc. Please go ahead.
Good morning, everybody.
Hey, Ken.
The 12%.
Obviously, there's a lot of inflation everywhere and you are guiding to unit growth.
Is it reasonable to assume that you know your assets I'm just thinking about the total.
<unk> costs right when someone does the ceiling when they remove walls, where they reposition stuff you know youll tend to get a whole referred in the office environment could you maybe give us again context for the input costs that you grid ceiling tile relative to a project. Just so we can have a sense of you know what that is.
Will that result in demand destruction, just to give us a little context there.
And then I have a follow up to that as well.
Yeah.
Typically and we've reported this externally somewhere around the total.
The total project cost ceilings, representing about 3% to 5% of an installed cost so relatively small.
And when you look at the rate of inflation across the building product spectrum.
Things like drywall installation and steel studs are up much more than ceiling tiles are up.
And if you look just look at the size and the increases that they're they're implementing in the marketplace now partly that's due Ken as you know some of our inputs more of our inputs are less volatile unless commodity like.
With the exception of our grid business that they use of steel, but our mineral fiber tile business.
Has less volatile inputs and allows us to you know I would say.
Drive price increases at a more moderate rate relative to other building products.
So I'd say, we're still in that 3% to 5% I don't think that's been debt, but that proportionality has been changed by the inflationary environment.
Okay. Good.
State that context, and then obviously with architectural you know youre going to continue to go after.
Chair or opportunity.
That are out there, but maybe.
When we saw 099, which obviously COVID-19 is different but we did have a little kickback, but then.
We saw a rise last year and volume I understand you're.
Clearly outlining inventory issues in the first quarter.
But is there.
To me it always goes to the market share of mineral wall I do think Youre, obviously picking up revenue and architectural specialties as well as your price but.
Has your view changed about the market share.
Terms of square footage of.
The ceiling tiles and it's just it's just that each piece seems to be a little lower than the prior because I'm trying to tie that off because you're obviously generating pas.
Positive resident renewed positive EBIT growth similar to perhaps.
Heavy materials like rocks can the industry structure, so favorable but I'm just wondering if that volume side.
If you can see it really kind of stabilizing.
Thank you.
Yeah, I think you're asking about the category share I believe and.
First of all I, there's nothing that tells me that the category share of mineral fiber has changed materially and I still believe it's driven by renovation rates from renovation activity since 70, 75% of the demand for mineral fiber comes from renovating existing spaces. So.
We still with that.
That that pie of mineral fiber opportunities can flex depending on these renovation rates and I believe we're coming into a more.
And accelerated renovation rate opportunity given COVID-19 the need for healthy spaces sustainability. Some of the macro drivers, we believe will be favorable to renovation rates. The other part of your question kind of hinted around the architectural specialty growth versus mineral fiber volume growth and I want to make this point again to be clear of that.
There's no cannibalization going on here between.
Architectural specialty growth in mineral fiber volume growth.
The price points are tenex different.
And so spaces that are going to use.
Mineral fiber are not going to use architectural specialties and vice versa. They were just in different places within the same building and so it's one of the I think synergistic.
Values of this adjacency is that they're very complementary.
And and not cannibalizing each other.
So again kind of a long winded answer for he can but I think.
Theres nothing Thats changed on my.
Expectations around the category share and mineral fiber.
Excellent no I appreciate that.
I just think it's important to have that perspective. Thank you.
Yep. Thank you Ken.
Thank you. Our next question will come from Dan Oppenheim with Credit Suisse. Please go ahead.
Thank you very much and I think it's really been addressed here, but.
<unk>.
Thank you.
DOCSIS, one distributor, where there's an April fiscal year end.
And then.
It's basically what you are seeing.
Orders coming in now for sales in May.
Corporate activities.
We're confident that we've fully worked through that inventory.
Yeah.
Again, you know.
There's a couple of distributors.
So it's not one answer for all of those Dan I think generally speaking.
The majority of this inventory correction is behind us.
And we're we're onto the increasing seasonality for the second quarter.
Yeah.
Okay. Thanks very much.
Okay. Thanks, Dan.
Thank you. Our next question will come from Rafe <unk> with Bank of America. Please go ahead.
Hi, good morning, Thanks for taking my question.
Can you talk about your outlook for cost inflation in 2022, and then maybe how does that compare to last quarter.
What you were expecting and then specifically natural gas prices have surged. So can you just talk about your exposure there.
Yep Yep.
Yes, yes, yes.
Yeah, So right Greg Great question.
When we provided guidance in February we said that inflation would stay elevated at around 5%.
We're now seeing that in the 7% to 8% range.
As you pointed out we're seeing increases in energy specifically.
Specifically on the natural gas.
Raw materials.
Very specifically wastepaper there.
And then of course freight so we've updated the total cogs cost of goods sold bucket inflation outlook.
Into that 7% to 8% range.
Thank you that's helpful and then just.
Following up on some of the comments from earlier I think Steve you sort of flattish sequentially, but you've announced a lot of pricing can you just talk about the channel mix impact to the quarter and then maybe how do we think about the cadence of price realization through the year. Thank you.
Yeah rates it was.
The channel mix headwind.
Was smaller than normal I'd say, so most of that <unk>, 12% increase in the quarter was driven by like for like pricing, we don't typically break down that AAV performance into its specific components, but.
Fair to say that a very significant portion of that 12%.
Was driven by a little bit higher pricing realization offset slightly by that by some channel mix headwind as we look forward.
No we haven't we haven't disclosed yet the rate or timing of our next price increase typically that's in August .
But we'll we'll continue to monitor this.
Increase in inflation and put a rate in a time it accordingly.
Okay. Thank you.
Thank you I'm showing no further questions in the queue. At this time I would now like to turn the call back over to Mr. Vic Grizzle for any closing remarks.
Yes, Thank you and thank you all for joining again.
You know I've been with the company 11 years, and we've never had to talk about distributor inventory corrections like we've experienced in the first quarter. So it truly is an anomaly and I think it's a reflection.
Of the unprecedented market conditions and times that we're in.
With that being said, we're very comfortable that this is not a market signal.
The market is continuing to in line with our expectations and continued to improve.
And the second part of that is that our teams here at Armstrong continued to execute very well theres no execution.
Execution issues on this.
In these results, we've executed very well as a team and we expect to continue that.
Throughout the rest of the year. So thanks again for joining and everybody have a nice day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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Right.
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