Q4 2024 Armstrong World Industries Inc Earnings Call
Good morning. My name is John and I will be your conference operator today. At this time, I would like to welcome everyone to the Armstrong World Industries fourth quarter and full year 2024 earnings call.
2025. These statements involve risks and uncertainties that may differ materially from those expected or implied we provide a detailed discussion of the risks and uncertainties and our SEC filings, including the 10-K filed earlier this morning.
We undertake no obligation to update any forward looking statement beyond what is required by applicable securities law.
Vic: Now I will turn the call over to Vic.
Vic: Thank you <unk> and good morning, and thank you all for joining our call today, we announced a record setting fourth quarter and full year 2024 results as our teams continue to execute our strategic priorities and deliver consistent growth.
Vic: At the total company level for the full year, our net sales increased nearly 12% from 2023 results and our adjusted EBITDA grew 13% with our adjusted EBITDA margin expanding 50 basis points.
Vic: Our adjusted free cash flow also rose, 13% and our adjusted diluted earnings per share were up 19%.
Vic: This marks the fourth consecutive year, we have generated net sales and earnings growth in the face of challenging market conditions.
Vic: This would not have been possible without the dedication and relentless focus on execution by our teams.
Vic: I'm extremely proud of our team's commitment to consistent execution excellence and innovation and serving our customers well all of which enabled these record setting results.
Vic: So I'm going to say, thank you to all of our 3600 Armstrong colleagues and to our distribution and channel partners, who we work closely with to deliver for our customers.
Vic: Both mineral fiber in architectural specialties segments positively contributed to these record setting results.
Vic: Mineral fiber ended the year with approximately 6% net sales growth, 11% adjusted EBITDA growth and adjusted EBITDA margin expansion of more than 200 basis points and.
Vic: And with the addition of two acquisitions three format Zaner architectural specialties generated year over year net sales growth of 27% and adjusted EBITDA growth of 24%.
Vic: Importantly on an organic basis. The architectural specialty segment also expanded adjusted EBITDA margin by 40 basis points to approximately 19%.
This furthers our progress toward our goal of a 20% margin in this segment.
Vic: Now turning to our fourth quarter results and mineral fiber, we achieved 9% average unit value or <unk> growth, which was the strongest quarterly growth rate of the year and was driven by both mix and like for like pricing.
Vic: For the full year <unk> grew 7% nicely above our historical average.
Vic: Similar to our results last quarter, our growth initiatives continue to contribute positively to the mineral fiber <unk> and volume results and largely offset softer market conditions.
Vic: Strong <unk> growth, along with solid productivity gains and impressive performance from our wave joint venture drove 10% mineral fiber EBITDA growth and 70 basis points of EBITDA margin expansion to 37, 5%.
Vic: This was the best fourth quarter EBITDA margin in the mineral fiber segment since 2019.
Vic: In fact, we generated year over year EBITDA margin expansion in this segment in each of the last eight quarters.
Vic: Delivering this consistent performance requires strong execution across the business.
Vic: Including our sales teams are manufacturing and innovation teams.
Vic: These results demonstrate the resilience of our growth model in all parts of the economic cycle.
Vic: Now turning to our fourth quarter results in architectural specialties sales.
Vic: Sales for this segment increased 41% with more than half of that growth driven by our recent acquisitions of book three form and Zaner.
Vic: The organic architectural specialty sales also continued to accelerate this quarter up 15% year over year with solid demand across our portfolio.
Vic: Order intake also increased on a broad based strength from our across our product portfolio.
Vic: As we've noted throughout 2024, we continue to see benefits from large transportation projects.
Vic: Acquisitions have been and continue to play an important role in expanding our portfolio of diverse materials and unique capabilities, enabling us to sell more into more spaces.
Vic: Since 2016, we've completed 12 acquisitions in the specialty space, creating the broadest portfolio of products and design capabilities with a world class manufacturing network. This.
This has become a clear competitive advantage as we a crowd that has opened new opportunities for growth.
Vic: This is particularly evident in the metal category.
Vic: Over the past decade, Armstrong has successfully developed and acquired World class metal design and manufacturing capabilities for interior ceilings and specialty walls.
Vic: As a result of this work we have established an industry leading position in interior architectural metal solutions in North America.
Vic: Now we are taking this industry leadership position to the extra year exterior of the building.
Vic: Our most recent acquisition Zaner accelerates our ability to grow our position in exterior architectural metal applications with a company that is globally known as the leading expert in the design engineering and fabrication of complex highly crafted exterior architectural metal projects.
Vic: Simply said for the most iconic exterior architectural metal projects architects and designers go designer.
Vic: The addition of senior allows us to accelerate our penetration to this adjacent highly specifiable market category Bill.
Vic: Building on the capabilities of Polk modern that we acquired in 2023.
Vic: We believe that metal exterior applications are a natural extension of our interior architectural metal platform within the architectural specialty segment with high growth potential with.
Vic: With the addition of this adjacency we estimate we've added another $1 billion to the addressable market for our architectural specialty segment.
Vic: Bringing its total addressable market to more than $2 5 billion.
Vic: We're excited to apply our growth model to this adjacent market and to continue our above market growth rate for years to come.
Vic: So let me pause there for a second and hand, it over to Chris for more details on our financial results.
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 our basis of presentation.
Chris: Beginning on slide six we discuss our fourth quarter mineral fiber segment results mineral fiber sales grew 8% in the quarter driven by strong AEP growth of 9%, partially offset by modestly lower sales volumes the.
Chris: The increase in <unk> was roughly balanced between both favorable mix and positive like for like pricing.
Chris: On volume one extra shipping day in the quarter, partially offset market conditions that continued to stabilize.
Chris: Mineral fiber segment adjusted EBITDA grew by 10% in the quarter with adjusted EBITDA margin, expanding 70 basis points to approximately 38% despite lower volumes.
Chris: Adjusted EBITDA margin expansion was primarily driven by the fall through of AAV and higher equity earnings from our wave joint venture.
Chris: Wave equity earnings were driven by favorable AAV higher volumes and lower steel costs.
Chris: These benefits more than offset an increase in mineral fiber SG&A, which was driven primarily by higher employee costs and a decrease in company owned officer life insurance gains related to deferred compensation plans as compared to the prior year period.
Chris: As Vic mentioned mineral fibers adjusted EBITDA margin of 37, 5% in the quarter was the best Q4 margin performance for this segment since 2019.
Chris: This level of financial performance highlights, our mineral fiber value creation drivers, including consistent AUC growth annual productivity gains and earnings from our wave joint venture.
With this solid fourth quarter performance full year mineral fiber adjusted EBITDA margin finished above 41% and was consistent with our previously outlook expectations.
Chris: On slide seven we discuss our architectural specialties or segment results.
Chris: <unk> sales growth of 41% in the quarter was driven primarily by contributions from our recent acquisitions of spoke three Forman zaner.
Chris: Importantly year over year organic sales growth continued to accelerate sequentially.
Chris: As we noted on our last two calls we expected to see the continuation of topline organic growth and the <unk> business along with continued organic margin expansion in the second half of 2024 and I'm pleased to report that we delivered organic sales growth of 15% with organic adjusted <unk>.
Chris: EBITDA margin expansion of 70 basis points.
Chris: <unk> segment, adjusted EBITDA grew 33% in the quarter and the year over year growth rate accelerated throughout 2024.
Chris: Higher sales more than offset increased SG&A from our recent acquisitions.
Chris: Order intake also strengthened over the second half of the year.
Chris: We also remain encouraged by the positive activity, we're seeing in the transportation vertical and are optimistic that our project pipeline will continue to build as we progress throughout the year.
Chris: For the full year 2024, adjusted EBITDA margin for the segment was approximately 18% and consistent with our previously outlook expectations, which did not include the December acquisition of Zaner.
Chris: We are pleased that the S organic adjusted EBITDA margin expanded 40 basis points to approximately 19% and was able to dampen the dilutive impact of our recent acquisitions on the <unk> segment's adjusted EBITDA margin for the year.
We expect continued progress on increased profitability and margin improvement of these recently acquired businesses.
Chris: Slide eight highlights our fourth quarter consolidated company metrics in which we delivered strong double digit growth for both sales and adjusted EBITDA adjusted.
Chris: Diluted net earnings per share grew 23% and total company adjusted EBITDA margin compressed 100 basis points, reflecting our recent acquisitions.
Chris: Excluding the recent acquisitions total company adjusted EBITDA margin expanded 40 basis points.
Chris: Adjusted EBITDA growth in the quarter was driven by the fall through impact of strong AEP performance increased <unk> sales and positive wave equity earnings. These.
Chris: These impacts were partially offset by increased SG&A, primarily attributable to our recent acquisitions.
Chris: These key drivers remained consistent with the full year period, as we turn to page nine as full year sales were up 12% and full year adjusted EBITDA was up 13%, resulting in 50 basis points of margin expansion.
Chris: Adjusted diluted net earnings per share were up 19% driven by higher pretax earnings a lower effective tax rate and lower shares outstanding.
The lower tax rate in the fourth quarter and full year 2024 was driven primarily by discrete items, a capital loss valuation allowance release related to the sale of real estate and a tax reserve benefit related to a tax year statute closure.
Chris: Adjusted free cash flow grew 13% and was that a healthy 21% of net sales and 61% of adjusted EBITDA.
Chris: In 2020 for our core values value drivers delivered profitable growth with incremental volume from recent acquisitions and growth initiatives consistent strong performance and healthy equity earnings contribution from wave.
Chris: These benefits more than offset the increase in SG&A, a significant portion of which was driven by our recent acquisitions.
Chris: Slide 10 shows our full year adjusted free cash flow performance versus the prior year.
Chris: The 13% increase was primarily driven by higher cash earnings, which was partially offset by higher cash taxes paid.
Chris: The strong adjusted cash flow margin profile of our business allows us to execute on all of our capital allocation priorities.
Chris: As a reminder, these are first to reinvest back into the business, where we see the highest returns.
Second to execute strategic acquisitions and partnerships to create shareholder value and third to return cash to shareholders through dividends and share repurchases in.
Chris: In the fourth quarter of 2024, we acquired the issued and outstanding shares of Zaner for cash consideration of $46 million reflective of a purchase price of $42 million inclusive of $16 million of cash acquired subject to customary post closing adjustments for working capital.
Chris: Additionally, in the fourth quarter, we repurchased $15 million of shares and paid $14 million of dividends.
Chris: As of December 31, 2024, we have $662 million remaining under the existing share repurchase authorization, which runs through the end of 2026.
Chris: We enter 2025 with a strong balance sheet and ample available liquidity and with our proven ability to consistently generate strong free cash flow, we remain committed to all of our capital allocation priorities.
Slide 11 presents our guidance for 2025.
Chris: With overall stabilizing market conditions, we expect choppiness throughout the year and flattish mineral fiber volume for the full year. We also expect mineral fiber <unk> growth above our historical average of about 5%.
Chris: Adding to mineral fiber growth, we expect organic growth to continue as we penetrate a highly fragmented market.
Chris: Note that results from three form will be incremental through the first four months of 2025 and results from Zaner will be incremental throughout almost the entire year.
Chris: We expect these two acquisitions together to drive more than half of the growth in total <unk> segment sales. This.
Chris: This results in total company net sales growth of 9% to 11%.
Chris: As you know our first quarter is typically one of the weaker quarters of our year for mineral fiber with our stronger quarters in Q2, and Q3 due to better weather conditions and timing of renovation and new construction activity.
Chris: While we don't provide quarterly guidance, we do expect a higher degree of variability quarter to quarter in 2025, as we navigate choppy market conditions.
Chris: Moving to adjusted EBITDA, we expect mineral fiber <unk> impacts to more than offset low single digit input cost inflation.
Chris: With this growth in the <unk> segment, the benefits from wave and continued focus on execution throughout the organization, we expect adjusted EBITDA growth of 8% to 12%.
Chris: We expect adjusted EBITDA margin expansion in both segments for the full year with a total company flat to prior year as we drive the integration of our recent acquisitions.
Chris: For the full year, we expect adjusted diluted net EPS and adjusted free cash flow to grow at rates similar to adjusted EBITDA.
Chris: You'll notice that our capital expenditure assumption is slightly higher as compared to recent years due to planned investments in our energy savings ceilings manufacturing capabilities in support of future growth.
Chris: Please note that additional assumptions are available in the appendix of this presentation.
Chris: We are well positioned to deliver strong results in 2025, as we continue to demonstrate the resilience of our business model. Despite a near term choppy market outlook.
Chris: Our teams have proven agile and have consistently advanced our strategy, while navigating uncertain market conditions in recent years and I expect that to continue in 2025.
Vic: And now I'll turn it back to Vic before we take your questions.
Vic: Thanks, Chris picking up on the market conditions that Chris just reference let me provide additional color there on how we're thinking about the markets in 2025.
Vic: Overall, we see demand in our key markets continuing to stabilize while we navigate the uncertainty from potential tariffs and new policies.
Vic: New construction starts were positive throughout 2024, driven by education transportation and data centers lagging those starts should be a positive contributor to our markets in 2000 22025.
Vic: Dodge bidding activity in the fourth quarter remained choppy and a sideways moving pattern as it has all year and we are encouraged by the increase in back to work mandates and higher leasing activity over recent quarters and the office vertical.
Vic: We also continue to benefit from large transportation projects as I mentioned as well as major entertainment and sports venues, including convention centers NFL and other sports stadiums still.
Vic: Still there remains a level of uncertainty that is likely to cause some additional choppiness in 2025 with potential tariffs and new policies and their impact on inflation and interest rates. These factors could create pauses and potential wait and see decisions impacting project timing.
Vic: That said, we know how to execute and uncertain market conditions and with our diverse set of end markets and our resilient business model, we are well positioned to deliver sales and earnings growth again in 2025.
Underpinning the strength of our business model and a key element of our value, creating building blocks as our industry leading innovation.
Vic: Our innovation is guided by market and customer needs and one of the strongest most prevalent need is for energy saving solutions as.
Vic: As we've shared before buildings consume nearly 40% of global energy and the U S. The built environment consumes nearly 75% of all electricity used.
Vic: And about half of that energy usage is to heat and cool buildings.
Vic: Given this there is a strong desire for companies like Armstrong to help reduce commercial building energy usage.
Vic: Beyond the economic benefit of energy savings Theres, a larger need for reducing the strain on our electrical grid system to support the expansion of AI and the build out of supporting data centers.
Vic: This need for energy savings is likely to be a catalyst for innovation and solutions across many industries for many years to come this mega trend across the industry has led Armstrong to our temp lock technology that addresses this challenge.
Vic: <unk> is a unique sealing product that contains phase change material that works as thermal energy storage passively absorbing and releasing heat in the building and reducing the cycles for heating and cooling.
Vic: With this new energy saving attribute our temp locks ceiling tiles can reduce heating and cooling costs and generate meaningful cost savings.
Vic: I'll also helping to reduce the strain of the built environment puts on the nations electrical just grid systems.
Vic: In January we along with our customers received some positive news when the U S Treasury and IRS issued final regulations under section 48.
Vic: Of the IR the internal revenue code.
Vic: This section expanded the energy investment tax credits under the inflation reduction reduction Act.
Vic: These final regulations confirm that solid liquid phase change material is a type of thermal energy storage property that may qualify for the <unk> investment tax credits under section 48.
Vic: <unk> as a phase change material may qualify for an investment tax credit of up to 50%.
Vic: This means that depending on the project customers installing temp lock in new construction or renovation projects may qualify for an investment tax credit that would allow them to paid less for a ceiling that does more.
Vic: In addition, just last week, we also learned that <unk> products are now part of the approved selection of sealing products available for the U S Government services agency, which manages the large portfolio of government office buildings.
Vic: These developments are part of the growing validation of these products in the marketplace and are encouraging milestones for an important long term initiative driving renovation and its potential impact on mineral fiber volume growth.
Vic: In closing again I want to thank our employees for their dedication and execution that enabled enabled us to deliver record results again in 2020 for.
Vic: This has been another important year for us as we further strengthen our value creating building blocks along with our overall competitive strength.
Vic: We continue the pursuit of our growth initiatives to offset soft market conditions.
Vic: In 2024 this included industry shaping innovation and technology like our temp lock energy saving sealing products that pay for themselves over time.
Vic: We've made significant strategic acquisitions that expand our addressable market and strengthen our ability to provide unique specifiable products to more parts of the building and now including its exterior.
Vic: And finally, we continued the advancement of our digital initiatives to both support <unk> and volume growth by serving markets untouched by our traditional channels with canopy by Armstrong and further deepening our relationship with architects designers contractors with project works.
Vic: These advancements have further strengthened our business model made Armstrong, even more resilient and position us well for continued growth in 2025 and beyond.
Vic: And with that we'll now be happy to take your questions.
Vic: Ladies and gentlemen, we will now begin the question and answer session.
Vic: As a reminder to everyone who has dialed in if you would like to ask a question. Please press star followed by the number one on your telephone keypad and if you would likely withdraw your question simply press Star. One again, if you are called upon to ask a question in our listening via loud speaker on your device. Please pickup your handset and ensure that your phone is not on mute when asking your question.
Vic: We kindly ask everyone to limit themselves to one question and one follow up. Thank you. Our first question comes from the line of this and Macquarie with Goldman Sachs. Please go ahead.
Speaker Change: Thank you good morning, everyone and congrats on a nice good morning, good morning.
Vic: Thank you.
Vic: Start by talking about the new products, because it sounds like youre, gaining some really nice momentum there that is starting to truly come through in the results can you talk a bit more vehicles about some of those initiatives that you are seeing out there how we should think about the guide for the mineral fiber <unk> to come in ahead of the historical range for 'twenty.
Vic: How much of that is coming from these initiatives relative to like for like pricing in there and just any additional color on and.
Vic: And how those products are coming through in the marketplace.
Sure. Thank you happy to address that.
Vic: Our initiatives over the last couple of years have contributed both to as you were saying <unk> growth and volume growth and we continue to see traction and our canopy platform. For example that is reaching a very small.
Vic: Nicky customer that kind of falls through the cracks and we continued to grow double didn't had double digit growth in 2024 on that platform again, we're very encouraged by.
Vic: The traction that we continue to get there and by the way to your question around the AAV canopy is a net.
Vic: Contributor to positive <unk> growth, our average unit value on the canopy platform is nearly <unk> of our average unit value for mineral fiber.
Vic: And so the project works is another example of where we continue to gain traction we nearly doubled the amount of projects through project works in 2024.
Vic: And again connected back to the AAV growth.
Vic: The <unk> through project works is five or six times, our average unit value.
Vic: Of mineral fiber volume, so again, a nice growth initiative, that's adding to current and future <unk> growth.
Vic: And then the energy savings, which I think is the specific of your question. The milestones that we got in the marketplace in terms of the support with tax credits.
Vic: <unk> being adopted by the GSA.
Vic: A real big milestones for overall market adoption of this new technology and a very new application for four ceiling tiles and I continue to be very encouraged by the fact that we're over the right target having a different level of conversation with customers who are looking to solve this synergy savings.
Vic: Challenge that they have.
Vic: And again, so when you look at the <unk> of our energy savings ceiling tiles again to tie it back to our <unk> growth.
Vic: Two or three ex our average unit value on on mineral fiber products. So.
Vic: When you think about the AAV growth into consistent <unk> growth that has been.
Vic: Our legacy of this business for the past 10, plus years and you think about this new technology in our new growth initiatives that we're bringing to the market you can't help me excited and encouraged by.
Vic: The opportunity to consistently and continue to grow our <unk> in this business.
Vic: Going forward.
Speaker Change: Yeah, Okay. That's great color, that's very exciting to hear that and then maybe turning to the discretionary R&R side I. Appreciate the commentary you gave on the broader market and how youre thinking about some of those factors coming in but can you talk a bit about that discretionary R&R piece, just given where rates have been in any.
Speaker Change: And any additional color on what youre seeing there and how youre thinking about that as we move through 2025.
Speaker Change: Yes, when you look at bidding activity overall.
Speaker Change: Kind of followed the same pattern, we saw all through 2024 with <unk>.
Speaker Change: One one quarter positive in the next quarter down next quarter positive next quarter down following this kind of choppy pattern, but sideways moving.
Speaker Change: That continued into the fourth quarter.
Speaker Change: And.
Speaker Change: The bidding pattern has been really consistent over the past nine quarters and this slight and to your question really the bidding activity has been strongest on the new construction side, which kind of matches what we've been seeing on the new construction starts which was positive throughout 2024 versus 2023.
Speaker Change: We've the discretionary renovation has been the weakness.
Speaker Change: Sure. This is the Genesis of your question the that renovation activity the discretionary type in particular has been on hold.
Speaker Change: While some of the uncertainty.
Speaker Change: Plays itself out.
Speaker Change: Given the level of uncertainty the renovation now its around tariffs and policy changes and things like that that discretionary renovation work continues to be on the sidelines.
Speaker Change: And so that is that's one we're going to be watching very closely in 'twenty five as some of the uncertainty around the overall market and the optimism around the overall market progresses throughout the year to see some of that renovation.
Speaker Change: Discretionary renovation come back into the marketplace again, I think in 2025, new construction is going to be a tailwind.
Speaker Change: As we lag those those new construction starts into 25, it's going to be a tailwind for us in 2025.
Speaker Change: And then when you look at the office segment in particular, we had the third consecutive quarter of leasing activity that increased in the fourth quarter.
Speaker Change: And it's at levels.
Speaker Change: Post pandemic highs now.
Speaker Change: Going into 2025 and the outlook for 2025 in the office segment is that vacancy rates are forecasted to improve in 2025.
Speaker Change: So we won't call this necessarily.
Speaker Change: Turning point at this point, but there are more green shoots of more optimism around one of the softer discretionary renovation verticals for us and Thats been the office segment.
Speaker Change: I hope that provides a little more color there.
Speaker Change: Yes, no that was great. Thank you for all of that Vic and good luck with everything.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Garik <unk> with loop capital. Please go ahead.
Garik: Oh, hi, Thank you I was wondering if you could provide a little bit more color on how we should be modeling the quarterly cadence for the year. You indicated you would expect to see more variability as you navigate some.
Speaker Change: Some of these choppy conditions.
Garik: Any additional handholding, whether it's.
Speaker Change: On the top line or on the margin would be great.
Chris: Yeah, Hey, Garik, it's Chris step on the mineral fiber side I'll speak specifically to mineral fiber volume.
Chris: We obviously don't don't guide to quarters, but if I take a step back and think about really the first half second half dynamic.
Chris: Outlook in flattish volume for the year in mineral fiber with a little more of softness in the first half of the year.
Chris: And then turning more favorable in the back half and that's really around trying to see and navigate how some of the uncertainty that's out there in the market kind of shakes out and winds up settling down so a little bit softer in the front half and more favorable in the back half of 'twenty five.
Chris: Okay.
Chris: That's helpful. I wanted to follow up on <unk>.
Chris: You're guiding to another year of above.
Chris: Normal <unk> growth.
Chris: Maybe speaking.
Shortly.
Chris: The previous question with respect to <unk>.
Chris: Favorable mix moving forward.
Chris: If we start to see some better demand conditions.
Chris: As you are expecting.
Chris: Is it reasonable to think that we might be entering into a period of being normal with EOG growth.
Chris: Therefore, we can mix.
Chris: And that could.
Chris: Could be above normal for an extended period of time here.
Chris: Yes, I think when I take a step back and think about the longer kind of the longer term horizon Vic mentioned, our innovation and some of our new products and the call. It the incremental AAV points relative to our existing AAV I think that provides some potential for additional growth.
In the future.
Chris: I think about 2025, I'd say between the first half of the year and back half of the year.
Chris: It's relatively balanced in terms of that AAV growth mature I mean, it's really a testament to our innovation pipeline staying close to our customers and really aligning with the needs in the market and I think our products and solutions are aligned to that and creates a lot of opportunity for us to continue to grow the AAV side of our equation.
Chris: Okay very good thanks best of luck. Thank.
Chris: Thank you.
Speaker Change: Next question comes from the line of Keith Hughes with <unk> Securities. Please go ahead.
Chris: Thank you.
Speaker Change: And in a couple of one individual market office with so it gets a lot of discussion.
Speaker Change: The order pattern, particularly in office renovation in the year, and what you're sort of expecting from that in 2025.
Speaker Change: Yes in that office vertical Keith.
Speaker Change: It was consistent with what we've been seeing a kind of a sideways kind of stabilizing.
Speaker Change:
Speaker Change: Pattern and office again this is the third fourth quarter was the third quarter.
Speaker Change: Consecutive of leasing activity improving the bidding activity also was notable.
Speaker Change: Notably positive in the fourth quarter and office.
Speaker Change: So I think it was.
Speaker Change: The order pattern was consistent in sideways moving stabilizing versus the soft downward motion that we've been experiencing over the last couple of years in the office vertical. So again I think it's a little early to be calling a recovery in the office segment, but certainly it's consistently moving sideways as as were trying.
Speaker Change: To establish at least a trough here.
Speaker Change: That's what we're modeling going into 'twenty, five as well not a big recovery in office, but I think the downward pressure is.
Speaker Change: Is behind Us on the office segment.
Speaker Change: Okay. One other question as we and as we enter 25, what what end user market is the strongest.
Speaker Change: Well I think transportation the data centers, which is now being broken out from office are real highlights in terms of opportunity growth there.
Speaker Change: Thank you.
Speaker Change: The health care continues to be positive in.
Speaker Change: And even though the essar funds are expiring in the education segment. It was a really good election season for state municipal bonds that is likely to backfill. The escrow funds. So I wouldn't say, it's going to be a real positive.
Speaker Change: But I don't think its going to be the negative.
Speaker Change: That something may be anticipated with the escrow funds tailing off.
Speaker Change: I kind of see it in that order for us Keith Alright, Thank you very much.
Speaker Change: You bet.
Speaker Change: Your next question comes from the line of Philip <unk> with Jefferies. Please go ahead.
Speaker Change: Hi, This is fiona on for Phil.
Speaker Change: <unk>.
Speaker Change: How do you expect the recent tariff on steel and aluminum to impact your wave earnings in 2025.
Speaker Change: Just wondering do you have the ability to push price higher.
Speaker Change: Yes, let me let.
Speaker Change: Let me take the tariff question here and.
Speaker Change: And maybe take a broader approach to your question because I think wave as part of the part of the question and part of the answer also here and then I'll ask Chris to put a fine point on the impact that that might have for us on a cost.
Speaker Change: Cost basis.
Speaker Change: With the tariffs that we know at or at least the potential tariffs that are out there and well publicized the short answer for the impact on Armstrong.
Speaker Change: Is quite limited.
Speaker Change: And when you look at.
Speaker Change: The limited nature, we still have mitigation plans on that limited impact to even further minimize the overall impact of that so let me let me break that down very quickly, we really are a north American supply chain.
Speaker Change: And really when you boil it down it's primarily a U S supply chain business.
Speaker Change: From the China tariffs that are in place, we buy very little from China, mostly MRO MRO or spare part type items that can be sourced locally and.
Speaker Change: In Mexico, we buy virtually nothing.
Speaker Change: We do have our Montreal plant for metal ceilings.
Speaker Change: That represents less than 3% sales for the company and as you know we have a pretty large footprint in the United States for metal ceiling manufacturing that we can mitigate by local sourcing.
Speaker Change: Some of those projects here in the U S to your question, though the steel and aluminum tariffs are the other place where.
Speaker Change: Armstrong could be impact and it's really.
Speaker Change: In our wave joint venture, we buy a small quantity of steel and aluminum from imports.
Speaker Change: In our wave joint venture for the production of our our grid systems.
Speaker Change: And we have local sources that we can move that import volume too.
Speaker Change: And of course.
Speaker Change: Our pricing discipline, we were factoring in any cost impact into our pricing plans sure.
Speaker Change: And the early part of 2025.
Speaker Change: So I will just say again, we have limited impact from the tariffs that we know both the ones in place, but the potential ones that we know about.
Speaker Change: And we have a strong track record of covering any inflationary impact from these tariffs with our pricing initiatives and to get very specific Chris I'll ask you to comment on the cost impact short and as Vic mentioned on the supply chain side for mineral fiber in architectural specialties relatively insulated there.
Speaker Change: Expectedly in less than a 1% impact on.
Speaker Change: Armstrong AWS <unk> cost of goods sold in 2025.
Vic: Taking a step back and looking at wave as Vic mentioned.
Vic: Less than 2% of their cost of goods sold on steel and aluminum and overall.
Vic: About this from a competitive and broader backdrop.
Vic: There's also a similar backdrop of other folks in the market place facing similar dynamics as it pertains to tariff impacts so relatively small we're insulated.
Vic: Minimal impact as I think about it in terms of supply chain impact on costs.
Vic: Thank you that's really helpful.
Vic: My follow up questions, we'll be in your 2025 guidance you mentioned, a choppy market outlets for mineral fiber do you expect volumes in that segment to probably inflect in 2026.
Vic: Yes.
Vic: Pause and stop short of guidance for 2026 again want to see how 2025 unfolds as Vic mentioned.
If there is a degree of uncertainty obviously choppiness associated with with the market. So our best view right now is flattish volume for mineral fiber and we'll see how we will see how the year progresses before thinking about 'twenty six but thanks for the question.
Vic: Thank you I appreciate the color.
Vic: Youre welcome.
Vic: Your next question comes from the line of Stephen Kim with Evercore ISI. Please go ahead.
Speaker Change: Hi, This is a T cell for Steve Thanks for taking the questions.
Speaker Change: So first in mineral fiber. It was mentioned that input costs became a headwind in the quarter could you kind of clarify which inputs and how we should think about.
Speaker Change: The pressure there as we move through 2025.
Speaker Change: Yes, sure. So let me let me, let me pause and take a step back and just talk about what we've assumed in.
Speaker Change: And our guide for 2025.
Speaker Change: <unk> from a total input cost perspective outlook in low single digit inflation.
Speaker Change: Just a reminder, labor is about 10% of our Cogs inflation and puts and mineral fiber <unk> 10, <unk> 10, and raws are about 35%. So all up total input costs in that low single digit inflation range from a freight perspective expecting inflation.
Speaker Change: On both the rate base.
Speaker Change: Basis, and fuel basis, so in that low single digit range raws low single digit inflation.
Speaker Change: For 25 and then.
Speaker Change: 10% or so inflation on energy and Thats really driven by natural gas and if you think about how pricing for natural gas has progressed from 'twenty four 'twenty five and kind of the latest outlook for 'twenty five that will make a make a lot of sense. So just kind of adds a little bit more color around how we're thinking about.
Speaker Change: About this year.
Speaker Change: Great that's super helpful.
Speaker Change: And then on arc spec among the Zaner acquisition.
Speaker Change: Can you help us kind of <unk>.
Speaker Change: Sure.
Speaker Change: The total percentage.
Speaker Change: Company sales that are in next areas now.
Speaker Change: Okay.
Speaker Change: Yeah, Chris Let me take this first and then I'll you can add.
Speaker Change: Debt.
Speaker Change: Thanks for the question because we're really excited about the acquisition.
Speaker Change: When you step back and look at architectural specialties since 2016.
Speaker Change: The average 20% CAGR growth since then.
Speaker Change: And we're out looking another 20% in 2025 and of course, that's a combination of organic penetration and for this.
Speaker Change: Specialties area, but also.
Speaker Change: Inorganic.
Speaker Change: Additions to the business and Zane or is just another another step of that one of the exciting things about the <unk> acquisition that coupled with the bulk acquisition is that it really does establish a design and manufacturing platform for.
<unk> for the exterior part of the building that opens up another $1 billion worth of.
Speaker Change: Total addressable market.
Speaker Change: That's about the size of the market. When we started in 2016 on this run of 20% CAGR growth. So the way, we think about and one of the reason why we're excited is that obviously opens up another.
Speaker Change: Opportunity pool for us to play in.
Speaker Change: But it gives us confidence that we can continue to the growth of architectural specialties for years to come as we have now renewed leg of penetration opportunities. In addition to future inorganic bolt on opportunities.
Speaker Change: I will mention again that.
Speaker Change: This is the third consecutive year in 2024 was the third consecutive year that we were able to expand margins in this business organically. So we're driving really strong top line and expanding expanding margins and we're demonstrating we have the right levers to pull to expand margins in this business. So we're excited about the segment overall.
Speaker Change: The <unk> acquisition, just gives us a whole another leg and capability with our bulk acquisition.
Speaker Change: To continue our growth into the future.
Speaker Change: Yeah, and just to add on as well to your to your question we.
Speaker Change: <unk> assumed about 20% topline growth in the <unk> segment for 25 more than half of that is related to inorganic contribution in the year.
Speaker Change: And overall segment.
Speaker Change: Expand margins for 2025, and as Vic mentioned we've.
Speaker Change: As the play we've run around acquisitions, where we can bring these unique specifiable attributes and capabilities into the company and continue to grow.
Speaker Change: Get value for shareholders by leveraging the Armstrong platform. So really excited about the opportunity to do that in 25 with our recent 24 acquisitions.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Your next question comes from the line of Frothy at Joseph Bank of America. Please go ahead.
Frothy: Hi, Good morning, it's great. Thanks for taking my question.
Speaker Change: Hey, good morning.
Frothy: Right.
Frothy: Starting with our 10 block can you talk about how you think about the potential either Tim or.
Market size of 10 block relative to some of the other growth initiatives you've had over the last few years like a healthy spaces or or canopy like how big could 10 block b.
Frothy: Overtime.
Frothy: Yes, that's a good question right because it's really when.
Frothy: When you think about this particular.
Frothy: <unk> technology and the application broadly speaking to drive renovation, it's a much much bigger opportunity, which is why we're excited about it that's why we're innovating around this.
Frothy: This this face change material.
Frothy: Has a lot of different avenues that we can go with it.
Frothy: So when you think about the installed base of mineral fiber at 39 billion square feet.
Frothy: And over time getting to the point, where why would you ever put another ceiling tile and it doesn't pay for itself over time it doesn't save you energy.
Frothy: That's.
Frothy: It's an exciting opportunity. So we're not sizing it publicly but you can get to just it's a very large opportunity and we think for many many years to come as we transition all of the installed base ceiling tile overtime to energy savings ceiling tiles.
Frothy: And then two more follow ups kind of on tap block.
Frothy: The some of the other growth initiatives, you've had there's been investment ramp associated with that.
Frothy: There is no need to put additional SG&A and.
Frothy: To drive that conversion.
<unk> contribution on tap block to kind of realize that market opportunity.
Frothy: The second question is like how do we think about block.
Frothy: Relative to your average today.
Frothy: Yes, the AAV contribution is somewhere in the neighborhood of two or three X of our average mineral fiber volume. So it's a nice adder and contributor to positive AUR growth over time.
Frothy: The answer to your SG&A question, we are already feathering in SG&A to support the market development and the.
The market acceptance, if you will the development of Av.
Frothy: Different customers that make decisions around this so we're already doing that and we will continue to do that into 2025, and we've factored that into.
Frothy: Our cost outlook.
Frothy: In addition to that you didn't ask but in addition to that Youll notice a little step up in our Capex spending.
Frothy: And that is to support some additional capacity creation, finishing capacity.
Frothy: <unk> and one of our plants too to support the energy saving ceiling tile production.
Frothy: So you wouldn't expect to step up and but beyond 'twenty five.
Frothy: You would not expect a step up in SG&A or capex beyond what you had.
Frothy: Already done to support the.
Frothy: The growth.
Frothy: Yes, I think there can be obviously rates at the rate and pace of sales growth there could be a little bit of a step up in SG&A, but.
Frothy: The way to think about it is relative to rate and pace on the Capex side no not not at this point in time, we think with the capacity that we're adding.
Frothy: It should support our short term growth outlook.
Frothy: But hopefully and again, we remain excited about the opportunity that <unk> offers so should that outpace our expectations.
Frothy: That level of AAV opportunity and mineral fiber volume growth, we remain excited about the potential that this product test.
Frothy: Okay, great. Thank you.
Speaker Change: Your next question comes from the line of John the volume with UBS. Please go ahead.
Speaker Change: Good morning, guys. Thanks for taking my questions as well first one is you're expecting flattish mineral fiber volume growth in 2025 curious first of all how that sort of compares to the market and then I think last quarter you guys had seemed reasonably confident in the ability to return to the more normalized kind of 2% to 4% volume growth. This.
Speaker Change: Here it sounds like markets has stabilized a bit maybe some green shoots so what's it going to take to get back to those.
Speaker Change: Those levels of growth.
Speaker Change: Yes.
Speaker Change: The implication for the market is in that plus or minus 1% range. We are still confident that our growth initiatives are going to add up to one point of growth offsetting.
Speaker Change: The softer market condition or adding to a flatter market condition, I think plus or minus 1% is a pretty good proxy for a choppy market going forward.
Speaker Change: As far as the 2% to 4% the 2% to 4%.
Speaker Change: Middle to long term outlook was the growth initiatives plus the market recovery back to 2019 levels.
Speaker Change: No I wouldn't say that we're out looking we're certainly not outlook in $2025 two to be a market recovery with a flattish market so to get back to the two to four we're going to have to have the market contribute to.
Speaker Change: To that to get to that two to four range.
Speaker Change: To complement our growth initiatives.
Speaker Change: We continue to be very optimistic about.
Speaker Change: Okay makes sense and then architectural specialty the EBITDA margin forecast of 18%.
Speaker Change: It seems like that's being impacted by some of the more recent acquisitions like <unk>. Just curious does this change or push out the outlook for kind of <unk>.
Speaker Change: Consolidated to 20% EBITDA margins in that segment.
Speaker Change: Well, we're going to continue to make progress as I mentioned earlier.
Speaker Change: This is the third consecutive year that we've expanded the margins organically in that business. So we're on the right path.
Speaker Change: As you know as we add.
Speaker Change: New acquisitions to this segment they come in at lower EBITDA margins.
Speaker Change: Given the scale of the lack of scale that they have.
Speaker Change: And the opportunity for us to scale. These businesses is the opportunity to drive operating leverage and improve the overall EBITDA margin business. We're running that play I think we're going to continue to do that but certainly when we bring on new acquisitions like youre, noting here there's work to do.
Speaker Change: For us to get those those businesses up to the 20% EBITDA.
Speaker Change: Level and again, I think I really feel good about.
Speaker Change: For three consecutive years really demonstrating that we have a right levers.
Speaker Change: That we're focusing on we're pulling them in the right way and making really good headway towards the 20%. So we remain confident that we're going to get this business to a 20% EBITDA business.
Speaker Change: Over time.
Speaker Change: Got it thank you guys.
Speaker Change: You bet. Thanks.
Brian Bureaus: Your next question comes from the line of Brian Bureaus with Thompson Research Group. Please go ahead.
Brian Bureaus: Hey, good morning, and thank you for taking my questions on the on the Zaner acquisition I guess, it seems like a larger step into the exterior space. It seems like a strategic decision to grow into that category. As you mentioned I guess, how do we think about further acquisitions to round up the exterior offering or is that more of a organic growth.
Brian Bureaus: From here to kind of attack that I think you mentioned $1 billion in new addressable market.
Brian Bureaus: Yes, Brian it's an exciting space for us and five years ago. This wouldn't have been a space that we could attack, but because of the metal design and fabrication capability that we've been building and developing partly through acquisitions as well.
Brian Bureaus: We really have a world class metal design and fabrication capability.
Brian Bureaus: That we can use now to take to the exterior side of the building and with the expertise and the brand of a company like Zaner. It really is an accelerator for us to participate and play.
Brian Bureaus: Organically now in this in this space, but again when you look at the sales of <unk> with bulk and $1 billion.
Brian Bureaus: Tam opportunity act puts us at less than 10% share and so again very similar place that we started with architectural specialties in over 10 years ago. So there's plenty of penetration opportunity here organically, but also there's going to be additional players.
Brian Bureaus: That we could bolt on to this business as we go.
Brian Bureaus: And we'll be we'll be open for business in that particular category as we are in the interior side.
Brian Bureaus: Sounds good and excited to see how that turns out I guess on the guidance.
Brian Bureaus: I guess what are the puts and takes to get maybe to the high and low end of guidance between volume AAV anything else that would kind of drive the range. It seems like volume might be the biggest driver of the range, but any more color would be helpful. Thank you.
Brian Bureaus: Yes, I'd say volume for sure, but if I just take a step back and take a broader look at the overall landscape in the market.
Brian Bureaus: In a little more clarity and.
Brian Bureaus: Some calmness supplied to the chop that we have outlook for the year. So I think a lot of it is going to be just around how the broader macro shakes out how the market shakes out which could provide some potential upside in.
Brian Bureaus: On the downside case.
Brian Bureaus: The lower end, so that's really the biggest variable the dynamic that.
Brian Bureaus: That we face here in 2025 and that quarter to quarter chop throughout the market.
Brian Bureaus: So.
Brian Bureaus: That's kind of how we how I would size the the ranges and the variability on the guidance.
Brian Bureaus: Thank you.
Brian Bureaus: Youre welcome. Thanks.
Brian Bureaus: As there are no further questions at this time I would now like to turn the call back over to Vic Grizzle, President and CEO for closing remarks.
Brian Bureaus: Thank you and thank you all again for joining and for your questions.
Speaker Change: As we we.
Speaker Change: We navigate some more turbulent market conditions going forward here I think our diverse set of end markets plays well for us to keep a very stable.
Speaker Change: Our stable business, our consistent ability to drive AUC growth, our ability to continue to drive productivity, even in soft market conditions.
Speaker Change: Really allow us the resiliency that we need in market conditions like this and we remain confident in our 2025.
Speaker Change: Outlook and look forward to updating you on our next call. Thank you very much.
Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect.
Speaker Change: Please wait the conference will begin shortly.
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Speaker Change: Peter.