Q1 2023 Armstrong World Industries Inc. Earnings Call
Welcome to the Q1 'twenty two 'twenty three Armstrong World Industries incorporated 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.
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Please be advised that today's conference is being recorded I would now like to hand, the conference over to Theresa Womble, Vice President of Investor Relations and corporate Communications. Please go ahead.
Thank you good morning, and welcome everyone to our call on today's call Vic Grizzle, our CEO and Chris <unk>, Our CFO will discuss Armstrong World Industries' first quarter 2023 results.
And our 2023 outlook to accompany these remarks, we have provided a presentation that is available on the investors section of our website our discussion of operating and financial performance will include non-GAAP measures within the meaning of SEC Reg G. A reconciliation of these measures with the most direct.
Comparable GAAP measure is included in the earnings press release and in the appendix of the presentation. We issued this morning.
Again are available on the investors section of our website.
During this call we will be making forward looking statements that represent the deal we have with our financial and operational performance as of today's date April 26, 2023. These statements involve risks and opportunities that may differ materially from those expected or implied we provided detailed.
Discussion of the risks and uncertainties in our SEC filings included with the 10-Q filed earlier. This morning, we undertake no obligation to update any forward looking statement beyond what is required by applicable securities law.
And now I'll turn the call over to Vic.
Thank you Teresa and good morning, and thank you all for joining our call today.
We reported this morning represent a solid start to 2023 as our team successfully executed on our strategic initiatives and controlled costs against a backdrop of economic uncertainty.
Consolidated net sales increased 10% year over year, while adjusted EBITDA grew 9% and adjusted free cash flow increased more than 50%.
Our mineral fiber segment was a key contributor to the good start with double digit sales and adjusted EBITDA growth as well as adjusted EBITDA margin expansion of 20 basis points.
We delivered 9% mineral fiber volume growth in the quarter largely due to a recovery in sales following what was a challenging first quarter of 2022.
As you will recall in the first quarter of 2022 several of our distribution partners were reducing inventories after a period of accumulating higher levels of inventory in anticipation of improving market conditions as well as to buffer against supply chain disruptions and persistent inflationary pressures.
We believe first quarter sales. This year in this channel was strong versus that comparison and have returned to more normal patterns that are consistent with maintaining historical inventory levels.
This is also true for sales of our ceiling grid products from our wave joint venture.
And we were pleased with the 14% earnings growth achieved in the quarter from our wave joint venture.
Architectural specialties had a slower start to 2023 with year over year sales growth of 3%.
And a $1 billion decline in adjusted EBITDA we.
We experienced lower sales growth in the quarter tied to lower order intake in the fourth quarter of 2022 compounded by additional project delays in the quarter.
All of this against a strong performance quarter last year.
That had 26% sales growth as projects that had been delayed throughout 2021 move forward as supply chain and labor constraints throughout the commercial construction industry had improved.
Even with the slow start we remain comfortable with our full year outlook and our specialties segment.
His comfort is driven primarily by the continuation of strong bidding activity across all our verticals with notable strength in transportation and health care end markets.
There appears to be more and larger projects out there tied to the infrastructure bill that have schedules into 2024 and beyond.
And this bodes well for our architectural specialty products.
We're also encouraged that our increasingly diverse product portfolio is providing additional demand from new spaces in commercial buildings.
Driving solid order intake for product categories, like tectum felt wood and metal.
All in all while we're pleased with how we started 2023, we remain cautious for the balance of the year.
We continue to see challenges ahead for the commercial construction market and we know we must remain focused on execution and cost management to deliver our outlook of solid topline growth with margin expansion across both segments.
Our current view remains that market demand for the full year will be challenged.
We continue to expect a mild recession to occur in the second half of the year, although the exact timing and duration remains uncertain.
We also see continued weakness were returned to office activity has stalled.
And in some sectors of the economy that have slowed their investments.
These factors along with escalating interest rates have pressured the office vertical more than others.
Now that said, it's a fair reminder, that the office vertical represents less than a third of our mineral fiber segment revenue more.
Broadly overall bidding activity did turn positive in the quarter with pockets of strength in areas like transportation and municipal spending with investments in airports Metro stations in convention centers Health care is also an active area.
Along with education and Datacenters, while it's too early to conclude anything from this positive level of activity.
Stabilization of demand that can occur from the diversity of end markets and how it can dampen demand in a downturn is noteworthy.
While we continue to face a challenging and uncertain backdrop, we remain focused on what we can control like how we manage our plants to achieve quality and productivity. Our overall cost structure, our innovation efforts and our investments for future growth.
As we announced in February we've made some difficult decisions around trimming our costs and re prioritizing certain investments in light of market weakness and we will remain disciplined with all of our discretionary spending.
As we move forward, what I've been very impressed with so far this year is how our teams have embraced our mission to deliver profitable growth with expanding margins and strong cash flow generation.
The work our teams are accomplishing accomplishing it is notable and is helping US set up for long term success. This includes our production teams who have done a tremendous work to exceed their productivity targets in the quarter.
And even with the strong performance they delivered in 2022.
Our sales teams and our new structure have also worked hard to achieve both our volume and pricing goals and we're also pleased to share that our business development team remains active with good activity in the pipeline.
Progress has also continued across our key growth initiatives.
With our automated design service project works, we remained focused on making that a project.
Design process as efficient as possible to the benefit of architects designers and contractors, we're expanding this automated service by including more and more of our product portfolio in this tool.
And we are now able to offer the services earlier in the process to help architects and designers matched their conceptual ideas of design with the best product solutions.
We're currently on track to double the number of projects using project works this year.
Our online sales platform canopy by Armstrong also had a strong start to 2023 with strong increases across all key metrics.
We continue to be very pleased with our progress with this unique offering for our category and with the validation that we can find and serve new customers through this digital platform.
And last we continue to further develop our healthy spaces initiative, while increasing sales growth and our healthy spaces protopope product portfolio.
We continue to fine tune our value proposition around total indoor environmental quality, which includes air temperature sound and light.
And we do this as we do this we are seeing some promising opportunities in the connection between these attributes and sealing solutions that improve the overall health and sustainability of our building.
Early days, but it's increasingly clear that ceilings have an important role to play in healthy sustainable buildings of the future.
Now, let me pause there for a moment elect Chris provide some additional details on our quarterly financials, Chris Thanks, Nick and good morning to everyone on the call as a reminder, Rob my remarks, I'll be referring to the slides available on our website and slide three which details our basis of presentation.
On slide six we discuss our mineral fiber segment results mineral fiber sales growth of 12% was driven by 9% volume growth and 3% <unk> growth.
As Vic mentioned the increase in volumes was largely due to the weaker prior year period.
Sully, our home center sales channel outperformed the prior year as inventory levels increased in this channel during the quarter.
These home center inventory levels can fluctuate and our typically timing in nature and can cause lumpiness in our volume results quarter to quarter.
Rounding out the volume drivers in the first quarter, our growth initiatives led by digital and an extra shipping day contributed three points of growth more than offsetting the impact of a softer market in the quarter.
Mineral fiber <unk> of 3% was driven by positive like for like price, partially offset by unfavorable mix.
Geographic mix was the biggest headwind this quarter as markets with lower <unk> generally outperform markets with higher <unk> and to a lesser extent, we saw product mix headwind within the home Center channel.
We believe these mixed headwinds are temporary.
Mineral fiber segment, adjusted EBITDA grew by $10 million or 13% and EBITA margin expanded by 20 basis points compared to the prior year led by the volume benefits that I just mentioned.
Favorable <unk> fell through at near historic levels, Despite the mixed headwind.
Our plants had a good start to the year and exceeded their productivity targets in the quarter.
Wave equity earnings were also favorable as compared to the prior year driven by lower steel costs flowing through the P&L and higher volumes.
Recall that wave also had a weaker volume comparison due to the inventory level reductions in the prior year period.
Offsetting these gains were higher input costs and SG&A expenses as we continued to invest in our digital initiatives.
Turning to input costs on our February earnings call, we outlook and expected first quarter headwind related to inventory valuation.
This inventory valuation impact for the quarter was $6 million and largely in line with what we expected.
We anticipate a minimal inventory valuation impact for the rest of the year.
The remainder of the input cost headwind in the quarter was driven by continued raw material inflation.
Energy costs, specifically electricity, we're still inflationary but were not a material driver of the total input cost inflation versus the prior year.
Despite these headwinds mineral fiber adjusted EBITDA margins expanded by 20 basis points in the quarter.
While on the topic of energy costs I'd like to give a little more context to our natural gas exposure.
We don't normally hedge natural gas and typically pay market rates for our supply.
But given the volatility over the past year and natural gas prices. We have recently decided to lock in pricing for a portion of our natural gas needs with our current suppliers. We did this to add a level of stability to our cost structure, thereby derisking some of our natural gas exposure in 2023.
On slide seven we discuss our architectural specialties or Aes segment results.
Despite increased sales across most product categories. The segment saw a slowing of the rate of growth, partially driven by a slowdown in shorter lead time orders received in the fourth quarter, primarily with our metal products.
We also faced unfavorable project timing and a strong prior year comparison.
Despite the softer top line result, this quarter current order intake and backlogs remained supportive of our outlook for 2023.
Adjusted EBITDA margin took a step down and was negatively affected by softer sales levels. As this segment can be more impacted by lumpiness associated with project timing.
We continue to manage costs as we scale and grow this segment.
Slide eight shows our consolidated company metrics in which volume gains for the mineral fiber segment favorable AAV and favorable wave equity earnings more than offset inventory valuation impacts raw material inflation and higher SG&A expense.
Adjusted diluted net earnings per share increased 10% versus the prior year in line with adjusted EBITDA.
Adjusted free cash flow increased $10 million or about 50% versus prior year and youll see those drivers as we move to slide nine.
Slide nine shows first quarter adjusted free cash flow performance versus the prior year.
$10 million increase was driven by working capital improvement, primarily driven by inventories and an increase in wave dividends.
This was partially offset by higher capex and higher cash interest.
We are pleased to see year over year improvement as cash flow generation remains a strong focus for us in 2023 and key to our ability to fund all of our capital allocation priorities.
One of those priorities is returning excess cash to shareholders and we continue to deliver on this in the first quarter repurchasing $27 million of shares.
Since the inception of the share repurchase program in 2016, we have repurchased a total of $12 8 million shares for about $878 million.
As shown on slide 10, we are maintaining our full year 2023 guidance.
As you recall, we took actions in the first quarter to trim, our workforce in response to anticipated market conditions and these actions are expected to generate full year savings of about $6 million.
We remain on track to deliver these savings.
We also remain committed to driving sales growth in the range of 2% to 6% and adjusted EBITDA growth in the range of three to six 3% to 9%.
And as I just mentioned, we are focused on achieving another year of meaningful cash flow generation with guidance midpoint expectations, providing a healthy 19% adjusted free cash flow margin, despite a difficult market backdrop.
Additional assumptions are available in the appendix to this presentation.
And now I'll turn it back to Vic for some additional thoughts before we take your questions. Thanks.
Thanks, Chris before we get to your questions I'd like to take a step back from the results in our near term outlook to reflect on the core attributes of Armstrong.
That are foundational to our resilience and our ability to be a consistent cash flow generator throughout economic cycles.
As an Americas, only focused ceilings and specialty wall company, serving the commercial construction industry, we operate in an attractive category.
Where we have unique competitive advantages, including the largest portfolio and production footprint in North America, and the largest and best exclusive distribution network in the industry.
In addition, it's a category where our customers and our end users highly value our product innovation service and quality.
We also serve a diverse set of end markets as acoustical ceiling tiles are ubiquitous in commercial buildings.
These include Education health care retail transportation data centers and of course office, we believe our expansion that architectural specialties has further diversified our product portfolio.
It made us even more important and relevant to the A&D community by getting us into more statements spaces.
As mentioned earlier the portfolio effect of having this diversity is unique in its effective trading stability and all parts of the cycle. It's very unusual to see all verticals move up or down at the same time and this serves to dampen sales in an up cycle and dampened sales in downturns.
This creates stability in our earnings stream and is one of the reasons, we can consistently generate cash through all parts of the economic cycle again, a key attribute of the AWS story.
Another core attribute of Armstrong is our ability to drive.
<unk> growth in our mineral fiber business over the last 10 years, we've delivered a 5% CAGR.
Even through the challenges of Covid looking.
Looking further back we achieved positive AUR growth during the great financial crisis.
With our step up in innovation around sustainability and healthy spaces and our commitment to best in class service levels, we expect to continue to grow <unk> well into the future.
Rounding out these core attributes as our profitable 50, 50 joint venture, which is the most innovative and efficient manufacturer of grid products and.
In addition to a realized equity earnings each quarter. This venture has returned more than $1 billion in dividends to Armstrong since the great financial crisis.
Together the core attributes of our company have allowed us to generate $1 3 billion and adjusted free cash flow and adjusted free cash flow margins in excess of 20% since 2016.
Looking just at the period since the onset of Covid through the end of 2022 during what has clearly been a challenging market environment, we've delivered over $600 million of adjusted free cash flow.
Including more than $200 million in 2020, when shutdowns materially impacted our sales.
In spite of market headwinds, we anticipate delivering strong cash flow generation again this year, given our expectations to hold <unk> ahead of historical levels and grow initiatives.
And disciplined approach to our spending.
We have and will continue to be responsible and efficient allocators of capital as we seek to invest to generate near and long term value for our shareholders. This.
This includes direct returns to investors through dividends and share repurchases as well as investments back in our business and into complementary acquisitions. We have a strong track record for doing this since 2016, we have returned more than $1 billion in dividends and share repurchases. While also acquiring nine companies to expand.
Our capabilities within the architectural specialties segment.
So while none of us look forward to an economic downturn.
At <unk>, we believe we are well positioned to manage through all parts of the cycle, demonstrating our resilience and delivering cash flow growth.
And with that we'll be happy to take your questions.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.
The first question comes from Kathryn Thompson with Thompson Research. Your line is now open.
Hi, Thank you for taking my questions today.
Just one thing on the clarification on your volumes.
Up 9% and.
I believe last year in the same quarter volumes were off by 4%.
And then you said that there was a 300 basis point benefit from growth initiatives, an extra shipping day.
So to assume that.
If you actually had a modest organic growth in the quarter I just wanted to make sure that that logic holds with what youre seeing.
And then.
You cited a couple of end markets that we're seeing growth but.
Could you give some clarification in terms of what youre seeing in terms of volumes.
Other key end markets that are important to Armstrong. Thank you.
Yes, let me Catherine let me start with.
Kind of at a macro level and then I'll, let Chris.
Dissect some of the the build there on the volume.
The markets that we experienced in the first quarter were primarily.
Similar to what we saw in the fourth quarter as.
As we saw as you remember in the third quarter of last year, we started to see the discretionary spending around renovation.
Get pulled back and we expected that to continue in the fourth quarter.
That level of of softness in the market is very similar to what we saw in the first quarter. So I would say overall the markets that we expected in the first quarter.
Are largely stable versus what we saw in the fourth quarter.
So as we as you compare that to the first quarter of last year.
I'm going to let Chris dissect that a little bit and then I'll add some additional.
Comments on the additional verticals question, yes.
So thanks, Catherine so as we said in our prepared remarks mineral fiber volume down 9%.
The market was down low single digits and that was really offset by the three.
Three points attributable to bulk ship day and initiatives and then the remainder attributable to the prior year inventory comp and current year retail inventory build that we mentioned.
Yes on the cross.
Sorry, just to add to your second question there around the verticals.
I know the.
The watch out here is around the office market and.
Whats coming out with the office market frankly, what we have seen in the office market in the first quarter is very similar to what we saw in the fourth quarter I would say all of the markets kind of behave.
Similarly, so we haven't seen an additional downturn so all of the dynamics and then what we're reading about in the office market I.
I also mentioned in prepared remarks that the bidding activity across really all verticals frankly turned positive in the first quarter.
We're hesitating to conclude anything from that by the way because we as we have reported the last two quarters bidding activity had turned negative.
And so the fact that we had a positive it in quarter were not over weighting that at all but it is noteworthy that there is some there is some work out there really across all of the segments again, including office.
So we're going to watch that very closely as we go into the second quarter and beyond but.
I would say overall, a very stable relative to the fourth quarter softness that we have already experienced.
And do you feel like the Destocking has normalized.
That processes.
<unk>.
We do we do believe that at.
As well as our grid products right, Kathryn I think thats, maybe we're going to even including with our grid products that seem to hang on to a little bit longer last year.
And.
And as you see recovery you mean through this particular project, but just for your basic everyday patch and match are you seeing any recovery in those trends.
I would say no recovery just about the same.
No no additional downturn no additional softness but.
Again, I Wouldnt, certainly wouldn't say any recovery.
Okay and final follow up just before I hop back in the queue just on pricing.
A lot of industry, you've been fairly Brexit our industry are two price increases.
Each year.
Are you still on track with that.
And how do you feel for the full year. When you think about guidance in terms of that price cost balance.
Thanks, very much yes, yes, sure Kathryn as.
As we outlook, we wanted to get back to a regular.
Cadence on our price increases.
We are on track to continue that which is R.
Price increase of twice a year, we've implemented our price increase in February .
For our normal cadence.
We've gotten good traction on that that price increase.
We do anticipate to continue to be an inflationary environment, obviously, not as hyper inflationary as had been the last few years, but nevertheless, an inflationary environment. So it's important that we.
We execute on these price increases and our teams are doing that.
So we're on track to that normal cadence of twice a year.
The sizing of these increases will.
We will be sized as we get closer to those dates of the price increase to reflect the inflationary environment that we're in to make sure that we cover inflation with our pricing initiatives and expand margins as we've outlook.
We're still on track for that.
Okay. Thank you.
Thank you.
Please standby for the next question.
The next question comes from Susan Mcclary with Goldman Sachs. Your line is open.
Thank you and good morning, everyone.
Good morning, good morning.
My first question, maybe following up on some of the commentary that you made in the office and markets. There are you seeing that there is any differences geographically in your comments you said that youre seeing some greater activity in some of your lower margin markets.
Does that relate to the office area and some of the broader shifts that are happening in terms of population and job growth across the country.
Yes, I think so.
All of our regions were positive in the quarter. So.
Every region grew.
Including those that have.
Back to office, if you look at the castle back to office index that we all watch.
There are differences across the country and we've been we saw that in 2022, and we're going to continue to see that I think this year those markets that have higher levels of back to office.
Have more tenant improvement activity ongoing so I think there is.
There is a relationship there for sure but some of our some of the timing of.
It's really timing Susan as some of these regions that were stronger than other regions had a lot to do with the base period.
The comparison as well the first quarter last year as you know distributors, where we're at.
Destocking or taking their inventory levels down.
We also had some irregular performances. If you will is against that backdrop, some regions being really strong in fact, our highest AAV regions last year and first quarter were the strongest while a lot of <unk>.
Stocking, what's going on around them. So I think some of this is just timing on.
The disparity on sales by territory geographic regions as we reported on and that'll largely work its way out through as the year goes on here.
Okay, Alright, that's helpful. And then you also mentioned that you're seeing larger projects, especially in infrastructure areas. As a result of some of the bills that have been passed there as you think about the.
Acquisitions that you've done in the last couple of years in architectural specialties, the sort of range of product offerings that you have there now.
How is that changing your ability to go after those projects and what does that mean in terms of your visibility and the longer term margins for architectural specialties, the ability to get to that targeted range there.
Yes, I think it's a really good.
Question and there is a real strong could actually hear to our participation.
The second step backs in the last six months, we've quoted over 100 transportation jobs.
Over 100 transportation job just in the last six months and so there's a lot more activity on the transportation front than what we've experienced in the last several years, that's noteworthy but the fact that we're in these bids and we are quoting on this work is really directly connected to the expanded capabilities that we've added to the architectural specialties segment through our <unk>.
Acquisitions, our ability to do things with metal and wood as we talked about in our last call with the Kansas City Airport.
Our innovation around wouldn't be able to meet those requirements was unique in the marketplace. Because we had purchased the wood business and now we're in that that business. So I think there's a real strong connection the breadth of our portfolio is allowing us to not only participate in.
These large projects, which we couldn't us before but also be competitive and uniquely competitive.
These large projects versus more niche players, who don't have the the breadth and the platform.
Armstrong.
And so we're bringing some real competitive advantage I think to these projects.
Definitely a strong connection to what we've done over the last several years.
To be able to play now in these larger projects.
Okay.
That's helpful. Thank you and good luck.
Thank you Jim.
Please standby for next question.
The next question comes from Keith Hughes with Truest. Your line is now open.
Thank you question on mineral fiber cost the $6 million.
Inventory is that an inventory write up of specifically what is that that affected the quarter.
Hey, Keith it's Chris No. It was it's basically inventory evaluations think about it in terms of inflation.
Inflation and the timing of inflation rolling through the P&L as inventory sold its not a write off.
The timing inflation or inflation.
Okay Alright perfect.
On the <unk> it was pressured.
Is that a function of northeast, which tends to be your highest AEP just being weaker than other parts of the country and do you expect this to.
Be something we're going to see consistently over the next year.
No I think it's timing so just to again as I said earlier I think it's timing.
The northeast part of the country. It grew in the first quarter. It didnt grow as fast as some of the southern regions, but the comparison year over year is we had double digit growth in the northeast in the first quarter last year why while overall volumes were down 4% last year. So there was some outsized par.
<unk>.
Two two of our higher AAV areas that.
By comparison I would say they are positive underperformed some of the stronger growth territory.
In the month of April Keith I've already seen this reverse itself. So this is a timing I think phenomenon that will kind of normalize throughout the year.
Okay perfect. Thank you.
Thanks Please.
Please standby for the next question.
The next question comes from Garik <unk> with loop capital. Your line is now open.
Oh, hi, thanks.
I was wondering if you could provide a little bit more color just on your Nat gas hedges. How much are you hedged now any color on the duration of the hedges.
Do you expect cost to be up mid single digits. This year does your new hedging program impact that outlook at all.
Hey, Gary so.
As I said, we hedged a portion to be thinking about that in terms of.
Half of our exposure duration is really just for this year.
And relative to our guide earlier associated with mineral sorry, with natural gas and overall overall inputs.
Yes, it's not I wouldn't expect that to move the needle pretty pretty materially there, but it was contemplated.
We guide as we guided to our initial.
Nat gas and input cost exposure for the year.
Great. Thank you.
Wanted to follow up just on the mineral fiber volume outlook.
And just in conjunction with the <unk>.
Strong reported performance in the first quarter I don't know if you could provide a little bit more handholding on how you expect the cadence of volume growth.
Breast over the next three quarters.
Yes, yes, so in terms of volume think about the remainder of the year, while we don't provide quarterly guidance we.
Do expect NEK.
Negative volumes in the second quarter and really consistent with what we talked about in February really continued deceleration of volume progression for the remainder of the year again it comes back to the level of uncertainty and.
And cloudiness associated with the back half of the year and the mild recession that we incorporated into our guidance.
Understood. Thanks very helpful.
Sure. Please standby for the next question.
The next question comes from Phil <unk> with Jefferies. Your line is now open.
Hey, guys with.
With the regional bank failures and likely tighter lending conditions on CRE loans, how do you see that impacting your business and any color on timing and then Vic I guess it would be really helpful. If you could help US segment your customer base and type of work that you could see being impacted I would suspect like new construction would be but actually <unk>.
In fact, a little bit more but any color on how to think about like major Reno versus your patch and match business would be helpful. Thanks a lot.
Yeah, Phil so in the first quarter, we really have not seen any impact from all the things that we're reading about in the different.
Possibilities about ramifications.
I think our back half guidance.
Flex the level of uncertainty that that this adds to it and I think this is going to have to play out for us too to really understand what the full ramifications of this could be it really is balanced though.
When you think about the.
<unk>.
The things that you read about in class a office space in trophy, where there is high demand for that space and the additional <unk>.
Amenities and work that is doing to keep those buildings competitive in full.
That drives renovation activity and we're seeing that activity on one side of it that's not likely to stop.
So if.
If you step back and look at overall new.
New construction versus renovation I've said this before and I think this is going to play out in the back half of the year. This will be primarily impacting the renovation.
Or are those things that haven't already.
Started where you have sunk cost like you would have a new construction youre going to have discretionary pullback.
On those patch and match levels of work the major renovation work I.
I think thats, where were going to see additional softness in the back half of the year I think we're appropriately balanced in our outlook.
That's reflecting what could happen and tighter lending conditions.
And our back half outlook.
This has to play out for us to fully understand the full ramifications.
And I'll leave it there Phil.
Okay.
Or is that fair.
I guess from a cycle standpoint.
Really helpful kind of give us some <unk>.
Color on how you think about the free cash flow and the durability of AAV.
Is the playbook any little different this time around I know in the past volumes would fall pricing would hold and you would mix up ross' falling this time around I'm curious how does mix hold up given some of the challenges you are seeing in office and retail, which I assume is higher mix.
And potentially weak weakness in places like San Francisco, New York and help us think through the mix dynamic.
Going forward.
Yes, I think the best proxy is to go back and look at what happened in.
2008, nine and 10.
I don't think it could get any worse for that and in that case, we didnt see the trade down.
On mix, so we're not anticipating to see the same kind of or a different kind of a trade down activity.
On mix again, everything that I'm reading is that the highest demand office space continues to be class, a and trophy buildings.
And the vacancy rates are the lowest in those buildings as people trade up.
Older buildings 30 years and older.
That dynamic is going to keep the mix.
Appropriately.
Ah.
Size for us in our in our outlook and again.
Mix happens across the country not just in the major cities, where theres offices.
And then the final point I'll make on this is that new construction.
Is that was positive in Q4 of 2021 and all of 'twenty two.
To add a positive.
Tailwind in the back half of the year and into 'twenty, four and again, new construction tends to be higher a view products based on.
The nature of the new construction and putting in the latest and greatest technology.
So that's kind of a long winded answer, but I don't really see a dynamic here that that should change our expectation on driving higher <unk> and higher mixes.
And maybe I'll just make this long winded answer even longer by when I talk about the focus of this business now that we don't have an international division, we have a tremendous amount of focus on this Americas market, where we're innovating and bringing products to market even faster.
We've talked a lot about those with you I think the work that we're doing around healthy spaces. The work we're doing around sustainability.
All of these are bringing higher AAV products into the marketplace, even faster so there's a lot of.
Tailwind to <unk> growth just through the innovation that I think offsets any of those minor dynamics that you are alluding to so again, sorry for a long while long winded answer, but I do believe we have a positive AEP story well into the future here.
Okay Super Great color I appreciate it.
You bet. Thank you.
Please standby for the next question.
The next question comes from Stephen Kim with Evercore. Your line is now open.
Thanks, very much guys I appreciate the help so far.
Just wanted to touch on the mineral fiber volume first.
I guess first of all the extra shipping day.
That was actually not something we had expected. So can you help us understand just foresee are there any other future de adjustments, we should be thinking about later this year and then with respect to your volume I guess inclusive of any shipping day issues. I think previously you had talked about your outlook for the year that kind of a <unk>.
<unk> year over year changes kind of being like down low single digits in the front half and I think down high single digits in the back half versus what you had previously talked about you're not changing your guidance now, but you had a very strong <unk>, obviously and so I'm curious is there any help you can give us in terms of the.
Maybe a change in the shape of that sort of first half second half kind of year over year comparison.
Hey, Stephen so for the first quarter, obviously up one ship day. The only other ship date dynamic we have this year, it's Q3, where we're down one so overall flat on a ship date basis for the full year.
In terms of in terms of volume.
We do incorporate that shipping day dynamic into our into our guide.
And again, we outlook.
No.
Mineral fiber volume being in that mid single digit range for the year.
First half back half dynamic we're expecting.
Positive first half volume for mineral fiber, but you're right. The second half is in that high single digit range in terms of year over year comp and again thats due to the progression that I mentioned earlier with just sequential deceleration starting in the second quarter and.
Again really pronounced in the back half there due to the expected recession that we have incorporated into our outlook.
So I'm guessing because the first half is not going to be positive. It sounds like your second half outlook, it's still down high single digits, but maybe more high single digits. Then than previously thought is that that would be fair desk.
Yes, I think I think that's fair high single digits in the back half is fair.
Okay, and then when we think about wave.
Typically it's stronger seasonally in <unk> and <unk> and.
The reason why the seasonality might be different this year.
Although seasonality patterns away follows Armstrong Broadway right, because as most of the construction activities in the third quarter second and third quarter. So no change in the seasonality. There again I think that third quarter is part of that back half uncertainty where.
There is not enough.
Clarity around our customers' backlogs going into the back half so certainly I think with.
With the uncertainty in the back half, we could see a dampening or a change in the seasonal patterns.
Given our outlook for the second quarter and the first half of the year again, a lot of this first half volume that we're seeing Stephen is.
As carryover projects that didn't get completed last year, we've got delayed last year, that's really kind of feeding some of this addition to some of the favorable comps.
In the base period that.
Yeah.
That we talked about so.
Of course, there could be something.
Macro that dampens the quarter in the back.
The strongest quarter, which is the third quarter in our back half.
Yes for sure.
Great.
Very helpful. Thanks, so much.
Alright, thank you.
Please standby for the next question.
The next question comes from Jed <unk> with Bank of America. Your line is now open.
Hi, Good morning, it's Rafe. Thanks for taking my question I just wanted to follow up on the like for like pricing and mix impact for the quarter could you.
Sort of break out what the like for like pricing was either year over year quarter over quarter.
What the expectations are for the year and then did you see normal realization on the February price announcements.
Yes, our like for like pricing was as expected in the quarter.
Mentioned earlier that our February price increase we got good traction on as well.
So I think we're.
We wanted to be where we expect it to be on a like for like pricing objectives. Obviously.
Obviously that was offset by some of the <unk>.
Timing related mix headwinds.
In the first quarter that Dan, but I think the overall AAV growth, but the like for like pricing is where where again, where we expect it to bandwidth.
Yeah.
And then just as we think about the cadence through the year you sort of mentioned that you expect some of the mixed headwinds to reverse in the second quarter.
Would we should we expect outsized positive you would be in the second quarter because of that.
Outsized relative to what.
The full year guidance.
I Couldnt say that yes.
Yes, it's hard to call I mean, obviously.
And our guide for the year, we assumed when we talked about this back in February positive positive mix.
Go back to what we saw in the first quarter on the mix side was really timing related.
And expect.
That's a kind of reverse itself as you think about mix for the rest of the year and again still looking at positive mix for 2023.
Alright.
Very quickly on the retail sort of restocking that you saw can you sort of give some color on what you think drove that like it has sellout improved on the on the ceiling tile side some of the home center channels I.
I think that was a big one of the drivers to the volume upside in the first quarter.
Here sort of what youre seeing in that channel.
Well there is there is some resetting going on at one of the.
Big box retailers.
Sometimes it's a bit of a mystery on why they took their inventory levels down as far as they do and then build them up so quickly.
We've reported a number of times that does occur.
I'd say, that's more of the dynamic.
In the first quarter activity with one particular.
Big box retailer.
So so again I wouldn't point to some.
Large outsized point of sale data for example that that drove that this was really <unk>.
Inventory levels getting pretty low some some resetting activity going on there, which we normally do and work with our retail customers throughout the Iran.
And then a rebuild of inventory right behind that I think that's more of the actual and practical application.
Answer for what that that activity is about.
Okay. Thank you.
Yes.
Please standby for the next question.
The next question comes from Adam Baumgarten, with Zelman and Associates. Your line is now open.
Hey, good morning, everyone.
Thank you you mentioned that.
Any activity turned positive for the quarter and that continued into April .
I don't have April data, yet, we won't get that until next month. So.
I could answer that specifically, we're going to keep an eye on it again, we're not putting too much weight on it in the first quarter, but we're going to keep a close eye on it for the second quarter.
Okay got it and then just on the topic of natural gas just curious when you guys put in the hedging program and if you could remind us what percentage of your total comp is natural gas.
Yeah sure so energy and we don't we don't break it out kind of any more than that but energy is about 10% of our mineral fiber cogs input cost of our total cogs or mineral fiber.
Again, I mentioned, we were hedging about 50% of our natural gas exposure.
By way of the price locks talked about.
<unk> entered into towards the earlier part of the quarter.
So you can kind of look at look at the Nymex settlements and kind of get a feel for.
The pricing there.
And.
No.
Hopefully that's helpful. As you are thinking through.
The Nat gas.
Locking.
Got it and then just to confirm I think it's a question earlier on just overall input cost inflation assumed in the guidance.
Mid single digits last quarter is the way to think about that is roughly the same so.
Yes for the year mid single digits on input cost again, a little bit of variability obviously, depending upon how the rest of the year shakes out obviously on an dynamics associated with Nat gas, but certainly more heavily weighted there towards our raw material inputs were.
We see a lion's share of that of that inflation.
Got it thank you.
Youre welcome.
Please standby for our next question.
The next question comes from Joe.
<unk> Meyer with Deutsche Bank. Your line is now open.
Yes, thanks very much for the question just wanted to clarify on that last point about the hedging you mentioned that starting in the earlier part of the quarter is it simplistic.
Simplistic enough to think Youre talking about the early part of this quarter or was the early part of last quarter that you started it.
Yes, sorry, good question early part of Q1.
Okay got it.
And then just a quick clarification on the mix.
Then deduct at this point, but was there a benefit from lapping unfavorable channel mix related to the Destocking last year I don't think I saw the favorable geographic mix called out but it looks like you did call out the unfavorable channel mix in the prior year.
Well I don't recall, what was what was disclosed.
As disclosed last year in particular, I mean, it was a down quarter last year right based on the Destocking.
But.
I wouldn't put this.
Particularly all on Destocking, but I would say that in the first quarter of last year, we had areas, where our highest day of your products are sold that were stronger than the others.
And so part of this is just base period.
Comparisons driving some of this mix, which is again why we believe this is <unk>.
Transitory and will work its way through as we as we go in the year.
Okay. Thanks very much.
Okay.
Please standby for the next question.
The next question comes from John Lovallo with UBS. Your line is now open.
Good morning, guys. Thank you for taking my questions. The first one I just wanted to go back to Steven's question on the mineral fiber volume being a little bit better than expected in the first quarter and the full year expectation remaining the same.
Seem to imply that the back half outlook has gotten incrementally worse. So I just wanted to.
Clarify that and if so what what are you seeing that has changed your mind on that.
John One thing that we did mentioned in with Stephens question is some of the goodness that we saw in the first quarter and we point to this is the the inventory build and the retail channel.
We will come out right. So.
That's a timing related I wouldn't.
Okay.
We wouldn't expect to hold that for the whole year. So we didn't we didn't mention that in Stephen's question, but that's another factor in this.
It's overall equation is some of that goodness in the first quarter is timing related inventory build.
Got you, Okay, Alright, and then excuse me on the.
Digital growth initiative spending and mineral fiber I mean is that a lever for you guys to potentially pull back on if your end markets were to soften more than expected.
So I think we've done.
A tremendous amount of work in.
Effort around making room, so that we could continue our digital investment that traction that we're getting there is is making a meaningful contribution to the growth of the business.
So.
We've made room in our cost structure. So that we can continue to do that and again.
I think appropriately balanced in our outlook for the rest of the year given the uncertainty in the back half. So that we don't have to pull additional levers like that.
Got it thank you Vic.
You bet.
I show no further questions at this time I would now like to turn the conference back to Vic Grizzle for closing remarks.
Thank you I just wanted to say thank you everybody for joining today.
At the end of the first quarter, we feel like we're in a very different position. They were at the end of the first quarter last year, we're well positioned.
For tougher market conditions that were out looking.
And we.
We feel good about the position that we're in and ready to.
Tougher economic conditions that were out looking so thank you again for joining today and we'll look forward to talking to you next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect Goodbye.
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