Q2 2023 Armstrong World Industries Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the second quarter 2023, Armstrong World Industries Earnings Conference call.
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I would now like to hand, the conference over to your speaker today, the Risa Wombles VP of Investor Relations and corporate Communications. Please go ahead.
Thank you and welcome everyone to our call. This morning today, we have big Crystal, our CEO and Chris <unk>, our CFO to discuss Armstrong World Industries' second quarter, 2023 results and rest of year outlook.
Accompanying these remarks, we have provided a presentation that is available on the investors section of that Armstrong World Industries website.
Discussion of operating and financial performance will include non-GAAP financial measures within the meaning of the SEC Reg G. A reconciliation of these measures with the most appropriate comparable GAAP measure is included in the earnings press release and in the appendix of the presentation issued this morning.
Both of these are available on our Investor Relations website.
During the call we will be making forward looking statements that represent our view of our financial and operational performance as of today's date July 25th 2023. These statements involve risks and uncertainties that may differ materially from those implied or expected.
We provide a detailed discussion of the risks and uncertainties in our SEC filings, including 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.
Now I will turn the call over to Vic.
Thank you Theresa and good morning, everyone and welcome to our earnings call. We have lots of exciting things going on at the company, including a strong quarter of execution and the acquisition of bulk modern which we announced yesterday, so let's jump right in.
On a total company basis, we generated 10% year over year adjusted EBITDA growth on 1% net sales growth in the quarter.
Despite soft market conditions and continued economic uncertainty.
These results helped increase our year to date adjusted free cash flow to $103 million, a 60% increase from 2022 results.
Both the mineral fiber and architectural specialty segments contributed to the strong earnings and free cash flow growth at both segments delivered meaningful EBITDA margin expansion.
These are solid results and I'm pleased with how our team is executing thus far in 2023, managing softer market conditions, while increasing profitability and continuing to deliver on our growth initiatives.
And our mineral fiber segment sales ended the quarter essentially flat to 2022 levels.
Stronger UV performance of 7% offset a decline in sales volumes.
As mentioned on our first quarter call, we expected market demand to be softer versus prior year and.
And we had highlighted first quarter restocking activity in the home centers that would begin reversing out in the second quarter.
Also you May remember the second quarter last year was impacted by the unusual timing of our July 1st price increase versus our typical August timing.
Overall, we believe that sequentially underlying market demand was modest modestly softer than the FERC softer than the first quarter relevant indicators for our primary sectors were mixed overall in the quarter Dodge bidding activity softened Abi declined but remained in positive territory office vacancies.
Continue to rise, but at a slower pace.
And commercial leasing activity improved in the quarter for the first time in four quarters.
And now that we've begun to second half on the ground settlement has slightly improved with verticals like transportation health care and education remaining active partially offsetting soft replacement activity and tenant improvement work in the office vertical.
Okay.
The fact that we sell into a variety of verticals is important for us.
The office vertical which has been the most challenged area represents about 30% of our sales similar to the education vertical followed by health care retail and transportation.
Really move up or down at the same rate and this has helped cushion on our business from cyclical swings and we believe that it positions us well in this current environment.
Another highlight of the quarter was our mineral fiber <unk> performance of 7%.
This result was driven primarily by like for like pricing.
As often as we've often noted our ability to consistently achieve price is an important part of our value creation model.
We've captured our normal price realization for the increase that we announced early earlier in 2023.
And that has helped offset the inflation on raw materials, we're experiencing.
Our industry, leading value proposition enabled by the work of our sales team staying close to our customers and the efforts by our plants and customer service teams to maintain our best in class service levels and our new product innovation have all contributed to our consistent ability to earn our prices in the marketplace.
I would also like to highlight that our healthy spaces in digital growth initiatives were a positive contributor to mineral fiber sales in the quarter sales growth in our health zone product line continued at elevated levels.
And our sales through our online marketplace canopy doubled from 2022 levels.
Both of these helped to offset some of the negative impacts from the overall lower market activity.
Another highlight for the mineral fiber segment is that our plants did very well with delivering productivity gains despite lower volumes in the quarter.
Work by our plant teams demonstrates another of the core value creators for Armstrong, which is operational excellence in all parts of the cycle.
Our ability to consistently generate manufacturing productivity, while maintaining best in class quality and service throughout our network contributed to mineral fiber margin expansion this quarter and it's been a hallmark of our company's success.
These efforts along with our continued growth in AAV helped push mineral fiber quarterly adjusted EBITDA margin above 40%, but the first time since 2021.
Now moving onto architectural specialties.
Sales for this segment accelerated from first quarter results and were up 6% from a strong 2022 level.
We continue to see good activity in verticals like transportation health care and education, our order intake for the quarter in architectural specialties reached a historical high in the quarter importantly.
Importantly, we're also driving EBITDA growth and margin expansion in this important growth segment.
We're now seeing the benefits from the investments that we've made in the businesses.
We've acquired and are achieving the expected operating leverage on increased sales volumes.
Last before I turn it over to Chris.
I would like to briefly illustrate how our investments across the segments work together to deliver value for our customers and grow our business.
Through our successful project involving a hospital that we recently completed in Colorado.
This was a sizable project with typical complexities that required many different solution types to achieve the design et cetera. The architect.
The project began with the architect employing the use of project works are Preconstruction design service platform.
The architect was able to input the project requirements and develop a layout and project works that enabled multiple iterations to optimize the design of <unk>.
And costs and do it quickly and efficiently.
This project ultimately acquired a mix of 28 different Armstrong products across both our segments.
This included sustained smooth white acoustical tile, including our health stone products as well as a variety of bread.
Architectural specialty products, including our metal works blades.
The project ended up being a very strong specification for AWS since no. Other single manufacturer could offer the complete suite of products digitally enabled by our proprietary design platform. This is a.
A great example of how valuable the breadth of our portfolio of products and our innovative services can be for our customers, making it easier for architects to specify more armstrong products in more spaces, leading to stronger specifications and greater AUR growth.
Now I'll pause and turn it over to Chris for some more details on our financials, Chris Thanks, Vic and good morning to everyone on the call as a reminder, throughout my remarks, I'll be referring to the slides available on our website and slide three which details the basis of presentation.
On slide six we discuss our quarterly mineral fiber segment results.
Mineral fiber sales were essentially unchanged from the prior year as AAV growth of 7% was offset by lower volumes.
<unk> performance this quarter was driven by like for like pricing, while mix was essentially flat with positive product mix being offset by timing related channel mix headwinds our.
Our Q2 and mineral fiber.
<unk> result gives us confidence that we are on track to deliver above average historical performance for the full year.
The decrease in volume during the quarter was driven primarily by softer market demand and to a lesser extent the timing of year over year announced price increases and the resulting impact on sales that Vic mentioned earlier. In addition to the expected weaker home center sales from inventory build that we noted in our April call.
Mineral fiber segment, adjusted EBITDA grew by $6 million or 7% and adjusted EBITDA margin expanded by 260 basis points as compared to the prior year.
<unk> fall through was above historic levels and a key driver in expanding EBITDA margin.
Wave equity earnings were also favorable as compared to the prior year driven by price over inflation.
Our mineral fiber plants continued to execute well in the quarter and delivered meaningful productivity gains ahead of their targets.
Partially offsetting these gains were headwinds from lower volume and higher input costs.
While we experienced energy and freight cost deflation versus the prior year raw materials remain inflationary SG.
SG&A in the quarter was essentially unchanged versus the prior year as modest increases in selling expense in support of our digital initiatives were partially offset by the benefits from our previously announced cost savings initiatives.
On slide seven we discuss our architectural specialties or <unk> segment results.
With sales growth across most product categories the rate of growth in the quarter improved sequentially from Q1, and it's a better reflection of the growth we expect to see for the full year.
We continue to see strong transportation bidding activity and are keeping a close eye on order intake and backlogs.
We're particularly pleased with the order intake and backlog levels for our metal products, which are up which are both up more than 20% versus the same time last year.
This activity supports our excitement and investment in this growing category through our recently announced acquisition of bulk moderate for initial cash consideration of about $14 million Vik.
Nick will share some additional thoughts on this acquisition in a few minutes.
<unk> adjusted EBITDA margin took a step up in Q2, both sequentially and versus the prior year period, expanding 360 basis points versus the prior year through operating leverage on increased sales, we continue to leverage SG&A as we grow and expand EBITDA margins in this segment.
Slide eight shows our second quarter consolidated company metrics, where we were benefits from improved AAV wave equity earnings and lower manufacturing costs more than offset headwinds from lower volumes increases in input costs and higher SG&A expenses.
Consolidated adjusted EBITDA margin expanded 260 basis points with adjusted EBITDA up 10%.
Adjusted diluted net earnings per share increased 7% versus the prior year and adjusted free cash flow increased $28 million or 64% versus the prior year.
Slide nine highlights our consolidated company metrics through the first six months of the year, where we grew adjusted EBITDA by 10% and expanded margins 130 basis points.
These strong results reflect the execution operational efficiency and cost control discipline of the entire AWS. It.
Despite market headwinds.
Adjusted diluted net earnings per share increased 9% versus the prior year period, and adjusted free cash flow increased about $40 million or 60% versus the prior year.
Slide 10 shows our year to date adjusted free cash flow performance versus the prior year.
The increase was driven by working capital improvement, primarily in inventory and receivables and an increase in wave dividends.
This was partially offset by higher capex and higher cash interests.
We are proud of this year over year improvement through the first half of the year and remain focused on driving full year free cash flow growth to fund all of our capital allocation priorities.
We call that our first capital allocation priority is to invest in our business, where we see the highest returns.
Next we target strategic acquisitions, such as both modern that offer unique specifiable attributes and capabilities that leverage the strength of our business.
Last we seek to return excess cash to shareholders in the second quarter, we repurchased $30 million of shares and since the inception of the share repurchase program. In 2016, we have repurchased a total of $13 2 million shares for about $908 million we.
We ended the second quarter with $292 million remaining under the existing authorization.
Last week, we announced an increase in our existing share repurchase program.
Adding an additional $500 million to the authorization and extending the program through 2026.
This decision reflects confidence in our ability to generate adjusted free cash flow and our commitment to fund all of our capital allocation priorities to create long term shareholder value.
Slide 11 shows our full year guidance improved.
Visibility for the second half of the year has removed the worst case market downturn scenario from our expectations and as such we are modestly updating our full year 2023 guidance for sales adjusted EBITDA and adjusted diluted EPS.
And as I, just mentioned with the expectation of continued strong cash flow generation, we are raising the midpoint of our adjusted free cash flow guidance with an updated range of $240 million to $250 million with a midpoint free cash flow margin of about 19%.
Looking ahead recall that in the second half of 2023, we will be lapping a period of lower SG&A incentive compensation in the prior year as well as continuing investments to support our digital initiatives in the current year.
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.
Thank you Chris at the halfway point in the year I am pleased with where we are and I believe we are well positioned to deliver on our outlook for 2023, the resiliency of our AAV growth our productivity gains and now the meaningful contributions from our digital and healthy spaces initiatives when we need them. The most in a weaker market environment are clearly.
<unk> through our digital initiatives are on track to be EBITDA positive for the second half of the year and as of yesterday sales through canopy have already surpassed total 2022 sales results.
Our healthy spaces products are also gaining traction with sales up over 20% on a year to date basis, and we're pleased with our regulatory support they are gaining many of you may have read about the two new bills lawmakers are bringing forward in New York City.
That would require the city to create standards to measure monitor and report and enforce air quality insight schools municipal buildings.
These are bills that have been in the works since the pandemic, but due to the Canadian wildfires and the impact on air quality inside buildings. These bills have been accelerated.
These proposals followed recently updated guidance on ventilation and buildings from the center for disease control and prevention and adopted by Ash Ray that the air and space spaces be changed five times per hour to help reduce the number of pathogens in the air.
These are all positive trends that support our healthy spaces growth initiatives and the roll ceilings can play in creating healthy spaces.
Overall, I attribute our year to date results to two things.
Number one our teams strong execution being demonstrated through the up and the down cycles.
And number two the resiliency of our businesses core attributes, namely our strong market position in this uniquely attractive ceiling and wall category are best in class exclusive distribution partners, our ability to deliver consistent <unk> growth and our proven ability to achieve consistent annual manufacturing productivity gains.
All contribute to the extraordinary resilience of our company and our ability to expand margins and deliver free cash flow growth in all parts of a normal cycle.
This resilience and the resulting free cash flow growth allows for the deployment of free cash flow.
For both direct returns to our shareholders as well as on the growth initiatives and complementary acquisitions that deliver profitable growth.
Just last week as Chris mentioned, our board of directors approved a $500 million increase to the share repurchase authorization.
A shared confidence in our ability to sustain strong free cash flow into the future.
And our acquisitions continue to help us build the broadest portfolio of specialty architectural solutions in the industry and importantly, get Armstrong solutions into more projects and into more spaces.
And our latest acquisition bulk modern.
We announced yesterday it does exactly that.
Focus is a growing and profitable business focused on the design and engineering of architectural metal solutions for a wide variety of applications that are a natural extension of what we're doing in architectural specialties their.
Our solutions have patented designs that deliver project efficiency benefits by reducing material usage and installation.
The work they do will help us respond to the desire among architects and designers to have a seamless flow between the interior and exterior look of a building.
Additionally, theyre facades and rain screens, not only add aesthetic interest, but they also reduce the energy load of the building by deflecting solar heat.
This will be an increasingly desire design attribute as the embodied carbon and emissions of buildings becomes more and more in focus.
Pleased to welcome them to the AWS family and we have every confidence that we will be able to leverage our platform to accelerate their growth and increase their profitability.
We're excited about the momentum overall and architectural specialties.
Our expanding portfolio truly distinguishes us from our peers in terms of being a single source provider for complex projects such as those in the transportation vertical and.
And we continue to see increasing bidding activity for airport projects.
This increase in demand has been fueled by the recent infrastructure Bill which includes $5 billion in spending specifically for airports we.
We've previously discussed our significant win at the Pittsburgh Airport, but recently, we've also been awarded jobs at the Seattle Tacoma Airport and the airport in El Paso.
To date, we are tracking at least 200 more airport projects ranging from new terminals at JFK in New York in Chicago's O'hare to work in Nashville, Orlando and Jacksonville, just to name a few.
These opportunities are growing and.
And often involve a wide range of materials from mineral fiber wood metal and more of Armstrong's complete portfolio.
Given the scale and complexity of these projects.
And now Armstrong size and capabilities, we expect the tailwind from transportation to last beyond 2026, I think it's fair to say that five years ago, we wouldn't have been able to compete for these types of projects. We wouldn't have had the right portfolio or the capability to do it.
With the capabilities that we've added now with our unmatched scale we.
We are well positioned to capture the opportunity in front of us.
With that we'll be happy to take your questions.
Thank you at this time, we will conduct a question and answer session.
To ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
One moment, while we compile the Q&A roster.
Our first question comes from the line of Keith Hughes with <unk> Securities. Your line is open.
Please please make sure your line is muted.
Sorry about that.
Question on input costs.
The lowest number we negative but the lowest number we've seen since 'twenty one on mineral fiber could you talk about what.
What youre expecting in the second half of the year and what costs are moving in the right direction and what revenue per store in the wrong.
Sure Christy.
Yes.
Input cost side, we saw effectively.
We were flat on total input costs in the second quarter. What we're seeing is continued inflation on the raw materials side.
With some offsetting benefits from from energy and freight I think in the back half.
We'll continue to see that inflationary pressure on the on the raw side and some continued moderation in deflation on the on the energy and freight side. So all up all in we're looking at for the year call. It high single digit inflation on raws and on total input costs in the low single digit inflation range for for the.
Year, So continued back half pressure on raws.
With continued deflationary benefits.
In energy.
Okay, and just a question on demand you highlighted some of the trends.
In the prepared comments.
In terms of the guidance for volume in mineral fiber low to mid single digit declines.
Do you expect office to get worse in the second half of the year.
And of that number.
Yes, what we have.
We highlighted as you noticed there is some good activity is still out there and some of the other verticals office, we're still expecting to to be softer in the back half than we saw in the first half. This is based on a couple of things we can remember in the.
Back half of last year, we were tracking bidding activity in particular in this segment and it turned negative in the third quarter and fourth quarter last year. So that's informing a little bit of the pipeline of activity. That's that's.
Come mature in the back half of this year.
And the expectation that economic activity overall continues to to weaken in the back half now it's less less bad.
If you want to say it that way.
Then what.
We initially expected, but vacancy rates continue to increase in office, although at a slower rate.
<unk> supports I think a a softer office segment in the back half.
Yeah.
Okay, great. Thank you.
Thank you thanks Keith.
Okay.
One moment for our next question.
Our next question comes from the line of Garik <unk> with loop capital markets. Your line is open.
Oh, hi, Thank you I just wanted to follow up on the last question with respect to office and some of the verticals.
Highlighted.
Just to be clear are you seeing a weakening in the office demand environment.
Point.
Has that stabilized wanted to ask you highlighted strength in airports the projects that youre bidding on your servicing.
Currently.
Should we assume that the.
Volume from the ore.
Airport and transportation bidding working.
Largely the benefit of architectural specialty if you wanted to be clear on that.
Yes, let me add to.
To the comment on office because.
The things that I described in my previous answer really around some of those leading indicators around projects major renovation and new construction.
And we have good visibility.
From those leading indicators at least as a as an indicator the part of it that we experienced last year and we're continuing to experience is that discretionary part of the market smaller renovation work.
We've heard a lot of times as our flow business that kind of just shows up through distribution cash and carry counters.
There is a lot less visibility there and theres a high level of discretion there.
So as we expect.
<unk>.
The lack of clarity.
To exist into the back half of the year I think around interest rates in a row.
The depth of the landing that we're expecting as.
As an economy I think as long as those remain.
Or exists with lack of clarity I think we're going to get a hold back on those discretionary type of jobs, where we've been experiencing that and I think that we should expect to continue to experience that.
In the back half now it does seem like.
We've we've experienced the depth or are they not the depth, but the the worst of it.
But.
Our guidance is built around an expectation that.
This could continue to drift a little bit lower before it gets better and Thats what were expecting in the back half of your question around transportation is a good one that.
Yes, the majority.
You can imagine the surface area of the <unk>.
Matter of square footage that goes into these large airport projects. The majority of that is architectural specialties, and that's where we see.
A large benefit is on the architectural specialty side with that said.
There is a lot of mineral fiber that goes into these spaces as well and so leveraging our entire portfolio is a significant advantage for us and the specification process to get all the space is covered.
<unk> mineral fiber in these jobs, but I think your premise of your question is correct that this is a primary primarily a benefit for the architectural specialty business.
Great. Thanks for the color I wanted to follow up on pricing.
You have any follow up.
So on your ability to get pricing.
Moving forward given some of the Choppiness.
And markets.
Yeah.
Any color around your plan.
I was here in the second half of the year.
Yes, I would point you to the second quarter or just to start off with that because we.
Is it pretty choppy quarter, a lot of ins and outs based period.
Noise and so forth market did get softer and.
And as we we alluded to the majority of our AAV growth was like for like pricing.
So.
I think that's a good <unk>.
Signal of confidence that <unk>.
Even in these kind of conditions, we're going to continue to price ahead of inflation and as Chris outlined going into the back half, we still expect some raw material inflation, and we will be pricing into that.
Two to make sure that we continue to expand margins.
Understood. Thank you very much.
You bet.
Thank you one moment for our next question.
Our next question comes from the line of Kathryn Thompson with Thompson Research Group. Your line is open.
Hi, Thank you for taking my questions today.
To clarify on your guidance here today.
So we with A&D.
Second quarter.
But by and stance was much.
Marissa spoke to tackle sickle patient and when you.
Below that implied guidance.
Tears at mineral fiber volumes could be down low single digits to mid single digits.
Christians more softly most single digits.
Just to sort of swap in terms of expectations for.
Mount Piper volumes as we head into the back half of the year.
Based on what's in your pipeline.
Any type of expectation you may have.
Yes.
I wanted to take that yes, hey, Catherine so in terms of the back half of the year relative to mineral fiber volume, we're looking at volume down in the high call. It high mid single digit range in the second half of the year and as Vic mentioned.
The backdrop and the overall uncertainty tied to the macroeconomics still exists so cautious as we approach the back half of the year really monitoring.
The markets.
As we as we noted in our guidance.
That improvement in volume was really due to the fact that we removed our worst case market scenario and took that off the off the table but.
That being said, it's still a lot of uncertainty as we head into the back half year and I would just say on AAV continued to point to.
Above average mineral fiber <unk> growth and continued focus on expanding margins and mineral fiber and you can see with our updated.
Assumptions, there we took our mineral fiber EBITA margin up.
With that with that revision.
Yes.
And then shifting to weight it really.
Wanting to understand if there any meaningful differences between your mineral fiber volume trends and your volumes.
Coupled with your overall.
We are seeing and we benefited from lower steel cost.
But.
You also see steel.
<unk> as it related to.
<unk> earnings for the remainder of the year.
Yes on the on the wave Kathryn.
We sell it as a package right. So it really kind of follows each other very closely so way volume in mineral fiber volume.
Should be pretty well linked theres some base periods.
Noise, given coming out of the pandemic that have moved that around a little bit, but I think the general assumption is going to be right more times than not that these kind of follow and track each other very closely.
Okay, great. Thank you very much.
You bet. Thank you.
One moment for our next question.
Our next question comes from the line of Philip <unk> with Jefferies. Your line is open.
Hey, guys.
Vic I guess, you mentioned, how youre bidding activity helped inform your view on the demand outlook. This year. So curious how's that progressing so far this year and do you have enough visibility call visibility to have a view of the second half of this year as a trough in mineral fiber volumes or could we see another shutdown in.
2024.
Yeah, So Phil.
The bidding activity I'm referencing is the Dodge bidding activity that we track on a quarter to quarter basis, and was referencing that Dodge bidding activity.
In the back half of last year.
And if you remember and I think this is where youre referencing in the first quarter after the third quarter and the fourth quarter turned negative in the Dodge bidding activity results. The first quarter was surprisingly positive just ever so slightly positive and I noted that as being noteworthy, but we werent over weighting that because you can.
Get some quarter to quarter noise in there.
And in the second quarter that Dodge bidding activity turned negative again.
What.
It was interesting I tried to compare.
The rate and pace of this dodge bidding activity trend.
And then the back half if you look at it at a half.
It was.
More negative than what we saw in the first half so to say maybe better the first half of this year.
Level of negativity decelerated and an improved.
The rate and pace of the softness so.
I'm not sure exactly what that means in terms of a trough to get to the second part of your question.
<unk>.
The jury is still out I think on the timing of the depth of the economic activity overall, so I'll stop short of forecasting that.
But certainly I think in the back half, we we feel like it's going to be.
Bit softer than what we've experienced in the first half as informed and a consistent I think with some of the leading indicators that we're referencing.
And then where it goes from there I think we have to wait and see as we get into the third and fourth quarter further.
That's helpful.
And then given a soft demand backdrop, I mean, the ability to grow EBITDA quite impressive Vic the team's done a great job on the AAV side I was quite impressed by the <unk>.
SG&A and manufacturing lines, especially from the mineral fiber side can you expand on what's driving some of that upside there is that level contribution sustainable as we look out into the back out this year and is there more to do I guess, perhaps in 2024.
So it takes for Hey, Bill So yes on the manufacturing side, yes, we expect to see probably continued productivity in the back half we had a really strong productivity performance in the fourth quarter. So we're going to be lapping that in Q4 on the manufacturing side. So we expect a strong Q3, a little bit of flattish nest.
In Q4.
On the on the overall call it SG&A district remember we had.
Some timing items in the back half of the year as I noted in my in my script, we were lapping some adjustments that were made in the back half of 2022, and so I expect to see us to continue to.
Invest in our initiatives.
As we as we finish out the year, but we'll be very mindful of the rate and pace of our discretionary spend and investments given the overall play out of the economy and the volume.
Okay.
Yes, Chris is there more you could guys could do potentially in 2024 on the productivity side of demand remains weak.
Yes, I'll stop short of commenting on 2024, but we look at productivity every year and continue to drive to try and drive productivity improvement year in and year out and Thats part of what we've talked about in terms of our overall productivity goal of 3% improvement on adjusted Cogs in mineral fiber.
And specifically to the back half, yes, there is more to go here.
Our teams are really focused on.
They have really good line of sight projects that they're working on so we're not done I think really good progress in the first half of this year.
The team is not finished we got some more to do in the back half.
I appreciate all the color. Thank you.
You betcha.
One moment for our next question.
Our next question comes from the line of Susan Macquarie with Goldman Sachs. Your line is open.
Thank you good morning, everyone.
Good morning.
My first question is <unk> mentioned that Youre seeing an overall improvement in the projects that are coming through for architectural specialties. Just the mix. There that's moving higher for you can you talk about the sustainability of that trend and what that will mean for the cadence at which you can continue to see an improved margin in that segment as you.
Target that 20, or low 2020 plus percent range.
Yes, I mean, we are as you know we've been on this journey to improve the.
The overall EBITDA margin in that business too.
It would be a really world class level of greater than 20% and get get to that level. We were there before.
Before the pandemic.
As you'll remember and we're working our way to get back there, bringing some of our newer acquisitions along the way.
And.
What's getting you know we had a 200 basis points improvement and that EBITDA margin last year. We're on track with the terrific performance in the second quarter on that to get backs are to gain another 200 plus basis points of improvement this year.
So we're well on our way to being there next year at that 20% EBITDA level and what's driving that Susan is is really.
A combination of really good operating leverage on the investments that we made I remember that was one of the headwinds is that we invested ahead of growth that put some burden on the business and.
And we had to grow into those investments and get really good operating leverage and that was that's probably been a major major driver of it so far and there is still more to go as we continue to get tailwind from some of these larger projects like transportation.
As we continue to do a better job on specifications. So we can continue to take share in this category.
Theres volume.
Opportunities to continue to grow that's going to continue.
Continued our operating leverage part of that equation. So again, we're confident I think the team is focused on this we're we're demonstrating to ourselves we can get this good operating leverage we're doing a good job on pricing these projects.
With this new operating model in mind.
We have confidence that we're going to continue to march towards that this year and into next year.
Okay.
And then following up on that a bit.
It was good to see you back in the M&A market in July with with Bach closing in there as you think about capital allocation. What are you seeing in terms of the M&A pipeline I know that you also increased your repurchase authorizations that youre thinking about the balance between the different uses and how.
Now that could come together.
Yes, we're really pleased with the both modern acquisition, it's a great fit for our business.
The leaders are staying on with US, which is a huge plus the very talented.
Designers just can be a great great add to it.
An extension of our business too so I'm really really pleased with that.
And I would just say we.
We never left.
The acquisitions or the business development game. This is Ben.
The first in a while so.
I understand that but we're actively involved in this we still think this is a great use of our cash.
To accelerate our penetration into the specialty segment, especially at a 20% EBITDA level and higher ROIC.
So I think this is.
This is <unk>.
Number two priority after as Chris outlined our number one priority using our free cash is to get us to invest back into this is high ROIC business of ours.
But secondly, using acquisitions and cash to bolt on more and more capabilities to make us even stronger in the marketplace and more valuable to our customers.
And then third what the authorization we have even more.
Headroom here too to continue to buyback our shares in support of growth dividend. So no change as youre, probably hearing so no change in our priorities in terms of our cash flow I think theres just.
Now that we're coming out of our July meeting.
Which you know we typically review with our board our three year strategic plan.
I think theres, a lot of confidence coming out of that room with the strategy. We have in place and the projected cash flows that we can continue to do all three of these priorities in a again a very.
We understand fortunate position with this business to be able to do all three of those capital allocation priorities, given our strong free cash flow K.
Capability.
Yes, okay. Thanks for the color Vic and good luck with everything.
Yes. Thank you. Thank you.
One moment for our next question.
Our next question comes from the line of Adam Baumgarten with Zelman and Associates. Your line is open.
Hey, good morning, everyone.
Earlier in the year, you guys talked about.
A return to a more normal price increase cadence of usually February and August August mineral fiber price increase out there in the market.
Yes, the risk.
Okay got it.
Magnitude if you could.
Oh sure sure.
Is it 7% or 7%.
Sorry make sure I get the right number out about 7%.
We were successful in that February price increase where.
We're in the marketplace with the August price increase to get back to this normal cadence with our distribution partners in particular.
Yes.
Yes, again as we as you know at last year's price increases were much bigger right.
We want to get back to our normal cadence and then price fees. Our size. These these price increases in relation to the level of inflation that we're seeing to make sure that we cover inflation can are able to expand our margins. So yes.
The August one is.
<unk> been communicated.
Got it thanks, and then if I just look at the revenue growth guidance you maintained the midpoint, but you didn't take up mineral fiber volumes modestly and you have over five months of the bulk acquisition as there may be a modest offset to those tailwind.
Yes, no I mean I think.
I outlined earlier the range.
It was contemplated in assessing multiple potential scenarios. So as we look towards the back half of the year I just continue to point to the uncertainty associated with the broader macroeconomic environment.
And continue to drive <unk> performance for the year and.
Looking to expand margins in connection with that so.
That's kind of how we're looking at the second half and the implied volume down.
Mid single digits in the second half.
Okay, Great best of luck.
Thank you.
One moment for our next question.
Our next question comes from the line of Stephen Kim with Evercore. Your line is open.
Okay. Thanks, very much guys I wanted to follow up on arc spec in the particularly the acquisition pipeline.
But you look at both Martin and it seems like.
Do a lot on the exteriors of buildings and I was curious as to whether you could talk about whether you see an opportunity there to maybe get a little bit bigger on in terms of exterior versus interior.
Opportunities and then also could you describe a little bit when.
And when you look at that business, sorry, not the bulk modern business, but the architectural specialty segment overall.
As the mix of product that you manufacture versus source has that changed over time and do you expect it to.
Yeah, so let's.
Steven Let me, let me take that.
So question in particular and the fit I think it's important to take a step back and recognize what we've been doing in architectural specialties over the last 10 years.
And when we acquire these companies we're acquiring capabilities.
That.
Allow us to participate in more spaces in a commercial building for example, when we weigh back and you'll remember this when we bought tectum.
That moved us to the wall space with a very unique product and so it really gave us a platform to expand our wall business beyond the ceiling plane.
Okay.
Similarly, when we bought ACG I ACI had.
Terrific products for the walls, they had micro perforations that that allowed these products to go on the walls.
So.
Our capabilities have been through these acquisitions have allowed us to extend our business to new spaces.
When I think about the bulk deal it's very similar they have very unique metal design capability.
That are not structural in nature that extend us into a new space on the building, which is in the exterior building.
Primarily for driving sustainability solutions.
So it's a real natural fit with our metal business overall in terms of capabilities.
And with their design expertise and their creative problem solving on the exteriors. It extends our reach into that that exterior space. If you will an additional space in a commercial building. So I'd say, we continue we're going to continue to pursue these spaces just like we have with from ceilings to <unk>.
Walls, we're going to continue to pursue these.
As we have success and demonstrating our ability to win in those those spaces leveraging these capabilities.
As overall as a <unk>.
As our mix youre getting to our supply chain.
As you know, we we have a hybrid makes cell by cell model, we don't make everything that we sell and have specified in the marketplace.
That mix is.
Uh huh.
Evolved over time.
Around that 50% in and out type of.
Level and proportionality and again as we buy companies that kind of moves and then we continue to flex and our third party network.
With this <unk> acquisition, we're going to continue to leverage their third party network as well as opportunities to move some of this new business and as some of our existing factories to optimize the supply chain.
Round.
The capacity inside.
Being able to flex with this high growth into our third party network. So we're committed to that.
Steve It is kind of a long winded answer, but we're committed to that hybrid makes cell by cell model that has evolved over time, but it's not far from the 50 50.
In any given period.
Gotcha. That's helpful can you quantify the opportunity the broader opportunity.
The size of the market for these sort of decorative exterior type products versus what we're generally we think of as sort of more interior.
<unk> opportunities that are expected historically targeted and then.
Can you give us a sense for I think you mentioned that there would be an impact from lower incentive comp you had lower incentive compensation kind of come in last year I think in the back half I kind of memory, whether it's third or fourth quarter can you just sort of remind us sort of how that's going to affect things.
We go forward over the next couple of quarters.
Yes, Stephen this is Chris I'll take that last question first yes, we saw the benefit in 2022. So my point in looking at and kind of modeling out SG&A is that we're going to be lapping that tailwind in the back half of 'twenty. Three so as you think about SG&A progression that was just one thing to kind of remind everyone about.
Yes, David on the first the sizing the opportunity I think.
Right now, we're going to stick to the incremental <unk> of this new space as we go with this new acquisition and then maybe over time this will become.
Clearer for everybody it's obviously.
You could pick any numbers right, so I'd, rather not get into that at this point, but it is incremental to our existing business and we're excited about that.
Okay. That's fair enough. Thanks, a lot guys.
Okay. Thank you. Thank you.
One moment for our next question.
Our next question comes from the line of John Lovallo with UBS. Your line is open.
Good morning, guys. Thank you for taking my questions as well.
The first one here is how are you thinking about mineral fiber mix in the second half I mean, it seems like it may have been a bit below expectations in the first half. So just curious if this is timing and do you expect improvement as we move into the second half.
Yes.
Yes, let me start and I'll, let Chris add some color.
Mix.
Our mix up it's been a very important part of our overall adv grocery over many years that right because the industry once the naturally mix up everytime. It doesn't renovation it puts new stuff in and as long as you're innovating into that design curve you are pulling the latest and greatest products that drive a pause.
The product mix in our our mix continues to be our product.
Product mix.
John continues to be positive and has remained positive even through the downturn.
So the one thing that happens in the mix that we ended up talking a lot about is the mix between channels right that can which is very timing related because the patterns. In these these these channels can be slightly different depending on inventory builds and so forth and we end up talking about that.
So it's one of those things thats more difficult to forecast frankly, because as you know customers in a quarter, if they decided to build inventory, we're going to support that and that can outside.
Outsize that channel in the quarter, especially if it's a lower AAV Chan.
Channel. So it's one of the harder things to forecast just to be honest with you and that's that's probably some of the variability that youre alluding to so with that context, let me just because Christmas gadget. Yes. Additionally added just a little more color on the timing element of it you saw kind of the timing.
In the first quarter and then again in the second quarter. So it just speaks to the variability.
And the challenge in forecasting that element of AAV, but again, just highlighting our guide.
<unk> for the year at being above average mineral fiber <unk> growth.
This is really what we've incorporated here in terms of our full year revised guidance.
Okay that makes sense I guess, what I'm, what I'm trying to kind of wrap my head around here you said, if you look at the full year mineral fiber adjusted EBITDA margin outlook of 37, 5%. It's about call. It 300 basis points below the second quarter result of 44%. It just seems like that's unusually wide.
Looking historically, so just trying to figure out what's what's sort of driving that.
I think it's the level of uncertainty in the back half frankly, John I think.
We're still keeping some wide ranges, where we think its appropriate just given some of the lack of visibility in some of these areas, but I think we're managing the business.
To grow our <unk> and to make sure that that falls through to expand margins in the mineral fiber business I think thats, what youre seeing so far I think that's what you can expect in the second half.
Okay. Thank you guys.
Good luck.
Thank you our next question Im sorry, one moment for our next question.
Our next question comes from the line of race <unk> with Bank of America. Your line is open.
Hi, good morning, Thanks for taking my question.
A follow up on the mineral fiber.
Just what does the guidance imply for realization on that August price hike.
And then what's sort of been the acceptance of the channel and that the installers on cotton pricing just kind of given the softer environment that's out there.
Yes, I would say right. This is Chris.
Expected realization is really in line with our historical price realization so no change there.
Nothing really to speak about in terms of state of receptivity and the and with our with our channel partners.
Got it Okay, and then as we think of the mineral fiber.
Volume guidance for the second half of the year.
Obviously, you kind of raised the high end of the target narrow down low to mid single digit sort of mid single digits, but whats good kind of specific thing that changed that kind of gave you said, where you're getting more visibility that's giving you.
Confidence.
Increase that and then can you just talk about the cadence between <unk> and <unk>.
On a year over year basis, like you have a much easier comp in the fourth quarter, but I think that the outlook has kind of softened through the year, just how should we think about that in the back half.
Yes, I'm going to stop short of giving quarterly call it volume guidance, but.
<unk> earlier about what we'd expect in the in the back half and really just keep in mind the seasonality associated with the business with Q2 and Q3 typically the strongest quarters from a from a seasonality perspective, but.
A lot of uncertainty.
Associated with again the back half.
So I'd just point to the second half volume volume comments that I made.
Of being down high mid single digits in the second half of this year, but could you want to talk and Ralph on the confidence or what we're seeing we're now into the third quarter I would say the biggest change really.
For us versus where we were at the beginning of the year on on the back half is the on the ground sentiment and conversations with our customers and the activity. They see some of their backlogs that are building. So they have better visibility to their backlogs.
Not great, but better than what we had at the beginning of the year and Thats given us.
Some confidence that kind of the worst case scenario that we had in the downside of our guidance.
Likely to happen given what our customers are seeing now in terms of their activity. So I would say we're looking at all the indicators, we really triangulate a lot of different things to try to get a read.
The pipeline of activity coming into the market.
I would say that's probably the biggest changes what we are hearing from our customers sets.
That's been.
Encouraging.
Alright, thank you.
Thanks.
With today's question and answer session. At this time I would like to turn it back to Vic Grizzle, President and CEO .
For closing remarks.
Yeah, again, I want to thank everybody for joining our call today.
Again, I think we're in a really good position for us to finish the year out and deliver on our guidance ranges and I'm really pleased with how our teams are executing and how the resiliency of our model is coming to light and shining through and again, we look forward to talking to you in a quarter now.
On the continuation of good execution and the resilience of our business model. Thank you all and have a good week.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Goodbye.
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Dan.
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