Q3 2025 Armstrong World Industries Inc Earnings Call
Speaker #1: Ladies and gentlemen . Thank you for joining us . And welcome to the third quarter , 2025 Armstrong World Industries Incorporated Earnings Call .
Speaker #1: All lines have been placed on mute to prevent any background noise after today's prepared remarks , we will host a question and answer session .
Speaker #1: It is now my pleasure to turn the conference over to Theresia Womble , Vice President of Investor Relations and Corporate Communications . You may begin .
Speaker #2: Thank you . Nicole , and welcome everyone to our call this morning . Today we have Nick Grizzle , Victor Grizzle , our CEO , and Christopher Calzaretta , our CFO , to discuss Armstrong World Industries third quarter 2025 results and rest of your outlook .
Speaker #2: We have provided a presentation to accompany these results . That is available on the investors section of the Armstrong World Industries website . As a reminder , our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of the SEC regulation G , a reconciliation of these measures with the most directly comparable GAAP measures is included in the earnings press release and in the appendix of the presentation .
Speaker #2: We issued this morning . Again , both are available on the Investor Relations website . During this call , we will be making forward looking statements that represent the view we have of our financial and operational performance .
Speaker #2: As of today's date , October 28th , 2025 . These statements involve risks and uncertainties that may differ materially from those expressed or implied .
Speaker #2: We provide a detailed discussion of the risks and uncertainties in our SEC filings , including the 10-q . We issued earlier this morning .
Speaker #2: 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 .
Speaker #3: Thank you and good morning , everyone , and thank you for joining our call today to discuss our third quarter 2020 results . The progress we are making on our initiatives to deliver consistent , profitable top line growth and our expectations for the remainder of the year .
Speaker #3: Today, we announced record-setting third quarter net sales and earnings results with strong mineral fiber average unit value, or AUV. This marks a second consecutive quarter of mineral fiber volume growth and double-digit net sales growth in architectural specialties.
Speaker #3: On a consolidated basis , we delivered year over year top line growth of 10% , resulting in record setting quarterly net sales with robust performance in both our mineral fiber and architectural specialty segments , consolidated company adjusted EBITDA increased 6% , while adjusted net earnings per share increased 13% .
Speaker #3: Along with strong double digit free cash flow growth in both the quarter and in the year to date period , allowing for execution across all our capital allocation priorities .
Speaker #3: This includes the increase in our quarterly dividend of 10% . We announced last week , and our latest architectural specialty acquisition of a Canadian wood sealing manufacturer , Geometric .
Speaker #3: These results were driven by our differentiated and resilient business model , along with solid operational and commercial execution across our enterprise that once again allowed us to overcome lingering market softness and some timely related cost headwinds .
Speaker #3: I want to take this opportunity to thank our teams across the company that continue to execute at the highest level , that make these consistently strong results possible .
Speaker #3: So thank you . Like the last several quarters , we have remained laser focused on operational efficiency , commercial execution and our growth initiatives as we continue to navigate a dynamic and uncertain macroeconomic backdrop .
Speaker #3: These efforts not only contributed to strong top line growth , but also continued to support our industry leading profit margins even as we dealt with timing related costs .
Speaker #3: This quarter . While Chris will discuss these in a bit more detail , it's worth noting without these timing related expenses , we would again have expanded EBITDA margin in the Mineral Fiber segment , and at the total company level .
Speaker #3: And we remain poised to deliver margin expansion for the full year . On both of these metrics . Despite these timing related expenses , with our consistent underlying execution , the building blocks of Armstrong's formula for profitable growth remains strong .
Speaker #3: And on full display in the third quarter . And as a reminder of what these building blocks are , they include . First , our focus on delivering consistent AUV growth in mineral fiber , all driven by the innovation and quality that feeds the category dynamic to mix up .
Speaker #3: And our best in class service levels supported by technology that help us earn our pricing in the marketplace . Secondly , our laser focus on achieving consistent annual productivity gains throughout our operations .
Speaker #3: Thirdly , our investments to expand our product offerings and capabilities to continue our successful penetration in the architectural specialty segment . And lastly , our investments in digital growth initiatives like project works and Canopy that drive volume , AUV and contribute to margin expansion in the third quarter .
Speaker #3: In our middle fiber segment, net sales increased 6% versus 2024 results, primarily driven by strong AUV growth and a positive contribution from sales volumes.
Speaker #3: This marks the first time since 2022 that we reported back to back quarters of mineral fiber volume growth . This volume result was slightly ahead of our expectations as demand conditions in our markets remain relatively stable compared to our expectation of a modest slowdown expected mostly in the more discretionary type renovation activity .
Speaker #3: That said , the most notable volume growth driver was strong commercial execution and the contribution from our growth initiatives continuing to gain traction , enabling above market growth rates as well as positively contributing to our strong AUV performance .
Speaker #3: Adjusted EBITDA and the Mineral Fiber segment also grew 6% , reaching a third quarter record and a continuation of our strong performance in 2025 .
Speaker #3: On a year to date basis through September , Mineral fiber EBITDA has increased 9% , with margins expanding 160 basis points on a year over year basis .
Speaker #3: In overall flattish market conditions . Importantly , we continue to expect strong mineral Fiber adjusted EBITDA margin performance for the full year of approximately 43% , which would be the highest full year result since our last high watermark in 2019 .
Speaker #3: Now , before moving to discuss architectural specialties , results , I'd like to take a moment to highlight some of the ongoing efforts within our mineral fiber plants that contributed to our results , as they have all year .
Speaker #3: First , we continue to generate solid productivity gains in our operations at a similar rate as in the second quarter . And this helped partially offset the timing related expenses I mentioned earlier .
Speaker #3: We also continued our execution at a high level on quality and service . One measure we use to gauge our quality and service to customers at our mineral fiber plants is called our perfect order measure .
Speaker #3: That combines six different metrics that determine a perfect order in the eyes of our customer . The way it works is , if any line item on a customer order misses any of these metrics , it's a zero .
Speaker #3: On the scale of 100% . Perfect order . These metrics include things like accurate order , fill rates and on time delivery and billing quality .
Speaker #3: It's a tough measure , and rightly so , as this is what our customers expect and are willing to pay for . I'm pleased to report that our plant teams delivered a record result in this measure this quarter .
Speaker #3: It's service and quality results like these that builds customer trust and loyalty , that enables the retention of customers and pricing support for the value that we create .
Speaker #3: Now moving to the architectural Specialties segment . Our third quarter net sales in this segment increased 18% , driven by the benefits of both our 2024 acquisitions .
Speaker #3: Three Form and Xanor, along with solid organic growth. Adjusted EBITDA for the segment increased 10%, generating an adjusted EBITDA margin of approximately 19% on an organic basis.
Speaker #3: Adjusted EBITDA margins for the segment remained in line with our long-term target of 20% for the second quarter in a row, despite these timing-related expenses mentioned earlier.
Speaker #3: I'm pleased with how we continue to leverage our architectural specialties network and together with our new acquisitions and the benefits of more architectural specialty products incorporated into our project works platform , we continue to improve our ability to win more projects , and this is most evident in the continuation of double digit growth in orders and backlog for our architectural specialty products .
Speaker #3: We're also excited to welcome another acquisition , geometric , to our growing portfolio of products and solutions . Based in British Columbia , Canada .
Speaker #3: Geometric is a leading designer and manufacturer of wood , acoustical ceilings and wall systems that expands the variety of wood species we can offer our customers .
Speaker #3: With nine complementary wood species across multiple products , including highly sought after western hemlock . This company strengthens our wood portfolio and adds geographic diversification to our manufacturing footprint .
Speaker #3: Geometric . Geometric , on trend products and design expand our portfolio with more of the warm wood looks and biophilic designs that are in high demand from architects and owners .
Speaker #3: Their Western Canadian production location also enhances our ability to serve our customers in Canada and on the West Coast . We're excited to welcome the geometric team to Armstrong's industry leading specialties platform , along with our acquisitions , we continue to be delighted by how our digital initiatives are progressing and making a positive contribution to both our segments .
Speaker #3: I mentioned project works earlier as it continues to gain traction with architects , designers and contractors by quickly providing visualization of complex designs , eliminating the waste and the design process , and providing a complete bill of goods for clear and simple ordering .
Speaker #3: With increasing demands on limited construction , labor availability , project Works provides significant productivity value to our customers and strengthens our ability to hold on to project specifications throughout the construction process and ultimately improves our win rates in the market .
Speaker #3: Again in both the mineral fiber and architectural specialty segments . Another one of our digital initiatives , contributing nicely in the quarter is Canopy .
Speaker #3: Canopy, like project works, benefits both our business segments by providing an easy way for smaller customers to access a wide range of products through an online education and selling platform.
Speaker #3: And I'm pleased to share that the canopy platform had both record sales and EBITDA in the quarter , and continues to be a key differentiator for Armstrong .
Speaker #3: Now I'll pause and turn it over to Chris for more detail on our financial results. Thanks, Vic, and good morning to everyone on the call.
Speaker #3: As a reminder , throughout my remarks , I'll be referring to the slides available on our website . And please note that slide three details our basis of presentation .
Speaker #3: Beginning on slide six, we summarize our third quarter mineral fiber segment results. Mineral fiber net sales were up 6% in the quarter, primarily driven by a favorable AUV of 6% and a slight increase in volumes.
Speaker #3: The growth in AUV was primarily due to favorable like for like pricing , with a modest contribution from mix . The benefits of increased volumes and favorable mix were driven by the strong execution of our commercial sales organization , along with benefits from our growth initiatives .
Speaker #3: Mineral fiber segment adjusted EBITDA grew by 6%, and the adjusted EBITDA margin was 43.6%. Q3 Mineral Fiber EBITDA growth was primarily driven by the fall-through of AUV contribution from our wave joint venture on strong price-cost benefits and slightly higher mineral fiber volume versus the prior year.
Speaker #3: As Vic mentioned , our results were negatively impacted this quarter by some timing related discrete costs in both segments and mineral fiber . These costs primarily related to an increase in medical claims above our normal run rate , which mainly impacted manufacturing costs .
Speaker #3: In addition , our strong year to date financial performance and updated full year outlook resulted in higher incentive compensation in the quarter , which primarily impacted G&A .
Speaker #3: We do not expect the third quarter G&A results to be indicative of our go forward run rate . As a result of these , in quarter cost headwinds , Mineral Fiber adjusted EBITDA margin , compressed 30 basis points over the prior year for the Mineral Fiber segment .
Speaker #3: The total discrete costs in the quarter represented approximately $5 million of an outsized headwind , which is reflected in both manufacturing and G&A expenses .
Speaker #3: Excluding this cost segment , adjusted EBITDA margin in the Mineral Fiber segment would have expanded in the quarter versus the prior year period .
Speaker #3: On slide seven , we discuss our architectural specialties or as segment results , where we highlight net sales growth of 18% . This growth was driven primarily by contributions from our 2024 acquisitions , through reform and Xanor , both of which continue to perform better than expected , as well as a 6% increase in organic sales , driven by growth across most of our specialty product categories .
Speaker #3: As segment-adjusted EBITDA grew 10%, with an adjusted EBITDA margin of approximately 19%, which includes the dilutive impact of our recent acquisitions on an organic basis.
Speaker #3: We are pleased to have achieved an adjusted EBITDA margin of approximately 20% , Q3 as EBITDA growth was driven by the benefit of higher net sales , partially offset by higher manufacturing costs , as well as an increase in G&A expenses .
Speaker #3: Higher G&A expenses were primarily due to our 2024 acquisitions . In addition to an increase in selling expenses , driven primarily by higher net sales , as well as additional investments in selling capabilities .
Speaker #3: Slide eight highlights our third-quarter consolidated company metrics. We delivered 10% sales growth and 6% adjusted EBITDA growth, with total company adjusted EBITDA margin compression.
Speaker #3: Additionally , adjusted diluted net earnings per share grew 13% . Incremental volume from both segments . Strong AUV performance and solid equity earnings from wave drove our adjusted EBITDA growth in the third quarter versus the prior year period .
Speaker #3: These benefits more than offset higher SG&A expenses , which were primarily driven by our 2024 acquisitions , as well as the previously mentioned impact of discrete costs in the quarter .
Speaker #3: At the total company level , the total discrete costs in the quarter were approximately $6 million , which impacted both manufacturing and G&A expenses .
Speaker #3: Excluding this cost headwind , adjusted EBITDA margin at the total company level would have expanded slightly in the quarter versus the prior year period .
Speaker #3: Turning to page nine . We highlight our year to date consolidated company metrics , which reflect double digit net sales and adjusted EBITDA growth with margin expansion through the first nine months of the year .
Speaker #3: With sales up 14% and adjusted EBITDA up 15% . Margins expanded 20 basis points versus the prior year period , which includes the year to date dilutive impact of our 2024 acquisitions , adjusted diluted net earnings per share increased 21% and adjusted free cash flow increased 22% .
Speaker #3: The drivers of year to date adjusted EBITDA growth are similar to the previously mentioned third quarter drivers . Slide ten shows our year to date adjusted free cash flow performance versus the prior year .
Speaker #3: The 22% increase was driven primarily by higher cash earnings , lower income tax payments and dividends from our wave joint venture , partially offset by an increase in capital expenditures as we continue to invest back into the business .
Speaker #3: Our demonstrated ability to consistently deliver strong adjusted free cash flow and free cash flow allows us to execute on all of our capital allocation priorities.
Speaker #3: As a reminder , these are first to reinvest back into the business with a disciplined focus on opportunities that deliver high returns . Among our year to date investments was the enhancement of manufacturing capability at one of our mineral fiber plants to support the growth of our temp lock , energy saving ceiling offering .
Speaker #3: Target investments such as these underscore our commitment to executing executing our growth strategy while maintaining a balanced capital allocation approach . Our second capital allocation priority is to execute strategic acquisitions and partnerships that add unique attributes or capabilities to our business that will create value .
Speaker #3: Recently in the third quarter , we acquired the issued and outstanding shares of geometric for a purchase price of $7.5 million , subject to customary post-closing adjustments for working capital and future Earnout potential .
Speaker #3: Lastly , our third priority is to provide direct returns to shareholders through dividends and share repurchases . On this front . And as Vic mentioned last week , we announced a 10% increase to our quarterly dividend , marking the seventh consecutive annual increase since the inception of our dividend program in 2018 .
Speaker #3: This . Increase reflects our Board of directors continued confidence in our growth strategy and ability to consistently generate strong adjusted free cash flow .
Speaker #3: Additionally , in the third quarter , we provided a direct return of $40 million comprised of $13 million in dividends and $27 million of repurchase shares .
Speaker #3: As of September 30th , 2025 , we have $583 million remaining under the existing share repurchase authorization . With a healthy balance sheet and ample available liquidity , we remain well positioned to execute our strategy .
Speaker #3: Slide 11 shows our updated full year 2025 guidance with strong year to date net sales and adjusted EBITDA growth and stabilizing market conditions .
Speaker #3: We are raising our full year guidance across all key metrics . We are pleased with the full year double digit growth outlook for net sales , adjusted EBITDA , adjusted diluted net earnings per share , and adjusted free Cash Flow .
Speaker #3: We now expect full year mineral fiber volume to be flat to down 1% , and improvement from our prior expectation of flat to down low single digits due to stabilizing market conditions .
Speaker #3: We expect AUV growth of approximately 6% , modestly lower than prior expectations on slightly stronger big box volume than expected in the third quarter .
Speaker #3: Additionally , we expect full year as sales growth to be approximately 29% , driven by robust contributions from our 2024 acquisitions , coupled with high single digit as organic growth .
Speaker #3: We continue to expect full year margin expansion in both segments , with a mineral fiber adjusted EBITDA margin of approximately 43% and an as adjusted EBITDA margin of approximately 19% , with an organic adjusted EBITDA margin of approximately 20% .
Speaker #3: Additionally , we now expect full year adjusted free cash flow growth of 342 million to $352 million , or 15 to 18% , over the prior year .
Speaker #3: Our improved outlook for adjusted free cash flow growth is primarily driven by higher expected net cash provided by operating activities, excluding an approximately $21 million full-year cash tax benefit related to the tax reform bill that was passed in July.
Speaker #3: As a reminder , this one time cash tax benefit relates to Unamortized research and Development Tax credit . Fully recognizable under the act .
Speaker #3: In 2025 and is excluded from our full year adjusted free cash flow guidance reconciliation , which is a normalised metric . Note that sales adjusted EBITDA and cash flow contributions from our recent acquisition of geometric are not expected to be material for the full year , with our strong year to date results and robust , robust full year outlook , we are confident that we will finish 2025 strong and enter 2026 with momentum .
Speaker #3: And now I'll turn it back to Vic for further comments . Before we take your questions . Thanks , Chris . 2025 is proving to be another strong performance year for Armstrong as we've successfully navigated uncertainty at the macroeconomic level and its ripple effect on our end markets .
Speaker #3: It's been a challenging year to call in terms of the level of market activity , as you all will recall , in February , we were expecting the market to be softer in the first half of the year , given the transition to the new administration and its potential new policies , and then a modest pickup in the back half .
Speaker #3: Once there was more clarity around what these new policies would be. However, beginning in April and through the second quarter (Q2), the macroeconomic outlook became cloudier as the impact of more significant tariffs increased the level of uncertainty, which led us to modestly adjust our volume outlook for the back half of the year.
Speaker #3: Now , sitting here today , we have not seen the anticipated modestly softer market conditions , but rather more of the same of flattish kind of stabilizing market conditions .
Speaker #3: And we expect these market conditions to continue for the remainder of the year . The Dodge first time bidding activity data , in terms of the number of projects continues to be at lower levels .
Speaker #3: However , the value of projects being bid overall has increased . Ahead of inflation and was up nicely in the quarter . A look at actual starts , which reflects how much of this bidding activity turns into actual projects , was mostly flat and coincides with the overall market conditions that we're currently experiencing .
Speaker #3: Looking at specific verticals , a recent research from JLL provides some positive signs for the office market . After two years of stabilization and signs of leasing footprints beginning to expand , US office vacancy rates declined in the third quarter .
Speaker #3: For the first time in seven years , their research notes that as a as occupancy of class A offices increases , the need for renovating class B office space is expected to accelerate factors influencing these trends include a continuation of return to office mandates and the potential for lower interest rate environment .
Speaker #3: While we've discussed that New York and cities across the Sunbelt have been quicker to recover their research now shows strengthening across more regions in the US .
Speaker #3: And this is encouraging data for the office vertical that represents about 30% of our demand profile . There . Transportation vertical remains strong from a bidding and start perspective and additional tranche of funds was recently released by the federal government specifically for airport projects .
Speaker #3: And we continue to expect airports and other transportation hubs to be a multiyear opportunity for Armstrong within these stabilizing market conditions . Our architectural specialty segment is experiencing broad based strength .
Speaker #3: In quoting and ordering , which is which in part is driven by Armstrong's ability to provide the broadest portfolio of specialty products with our industry recognized commitment to service and quality .
Speaker #3: In addition , we're continuing to see benefits from the sales and marketing optimization program that I mentioned last quarter . We strategically realigned the commercial team to drive greater efficiency and unlock selling capacity to better serve both our A and customers and our distribution partners , and more effectively sell our industry leading product portfolio .
Speaker #3: These changes , alongside our ongoing innovation and growth initiatives , are contributing to strong performance , delivering above market performance in terms of recent product innovation , we continue to be excited by the opportunity for our temp lock energy saving sealing products to drive future growth with temp locks , innovative use of phase change materials .
Speaker #3: These sealing products help regulate temperature and buildings and can meaningfully reduce the energy used for cooling and heating . We've also completed some successful validation projects , including a pilot project with the Palm Springs Unified School District in California , using temp lock , the results were compelling .
Speaker #3: Classrooms equipped with temp lock experienced a measurable reduction in cooling energy demand , and a nearly two hour delay before air conditioning was needed .
Speaker #3: Findings like these across the country and in various verticals , including education , healthcare and offices are validating the energy saving potential of our technology and reinforce our belief that templa could ultimately become the standard across the ceiling category .
Speaker #3: As the innovation leader , we are committed to continue to innovate , to make these energy saving products even better and more cost effective .
Speaker #3: This month, we launched an upgraded Temp Lock product line that is now part of our sustained portfolio of products that meets the industry's most stringent sustainability requirements.
Speaker #3: In addition , the latest version of Temp Lock has improved passive heating and cooling capacity at a higher fire rating and increased thermal comfort attributes .
Speaker #3: This . This makes it even more attractive and specifiable by architects and designers , and more compelling for building owners and operators . In the quarter .
Speaker #3: As Chris mentioned , we also completed a capital project at our Macon , Georgia plant to expand production capacity for this new , upgraded version of the product .
Speaker #3: In closing , with the strong results achieved thus far in 2025 , we are expecting continued momentum and a strong close to the year as our financial guidance indicates , we expect 2025 to be another record year with double digit top and bottom line growth .
Speaker #3: As we once again outperform the market , our consistent AUV growth architectural specialties , penetration , innovation , leadership and productivity gains remain our building blocks for profitable growth .
Speaker #3: And these building blocks , coupled with a healing office vertical and ongoing contributions from our growth initiatives , positions us well for another year of profitable growth in 2026 .
Speaker #3: And with that, now we'll be happy to take your questions.
Speaker #1: We will now begin the question and answer session . Please limit yourself to one question and one follow up . If you would like to ask a question , please raise your hand now .
Speaker #1: If you have dialed in to today's call , please press star nine to raise your hand and star six to unmute . Please stand by while we compile the Q&A roster .
Speaker #1: Your first question comes from the line of Susan McClary with Goldman Sachs . Your line is open . Please go ahead .
Speaker #4: Thank you . Good morning everyone .
Speaker #3: Morning , Susan .
Speaker #4: Nice job on the quarter. Vic, my first question is: Can you talk a bit about the benefit that you're seeing from the new products?
Speaker #4: How that's helping the mix component of that AUV in there . And also how that's coming through in terms of the strength of quoting and bidding activity that you talked to in your comments .
Speaker #3: Yeah , Susan , on our mix , we we continue to do very well at the high end of our portfolio . The even recent years are innovation around the smoother , wider look our our higher acoustical performance and the combination of the look and the higher acoustic performance is really coming through in 2025 .
Speaker #3: Again , we're growing at near double digits at the high end of our portfolio , and again , just really confirms that the technology that we're bringing to the marketplace at the high end and where and where the products are most specified , which is at the high end , is where Armstrong continues to do very , very well with our innovation .
Speaker #3: That's really on the on the mineral fiber side , because that's how we measure mixes at the mineral fiber business . And the architectural specialty business , although we don't measure mix the same way there because of the custom nature of that business , the , the innovation that we're bringing to the marketplace in both metal and wood are our turf , our felt products , they're all making an impact , driving what what , as I reported , double digit orders and and backlog growth and architectural specialties .
Speaker #3: And that's a really important the new products are really important there to make sure that we're winning the the large renovations and the new construction projects .
Speaker #3: So really pleased with how our innovation is driving mix in both the mineral fiber and the and the architectural specialty business . And again , double digit growth in our architectural specialty business like that , both in orders and and backlog is is really encouraging because we all know the market is not growing double digits .
Speaker #3: And so this is a good measure of how well we're penetrating and participating in that market .
Speaker #4: Yes . No . Absolutely . That's great . Are you there ?
Speaker #3: Yes . We can hear you .
Speaker #4: Okay . Sorry , I thought I thought I lost you for a second . No , that that all sounds really good . And I guess building on that right .
Speaker #4: Architectural specialties is getting close to that 20% margin target that you've had out there . Can you talk about , you know , the forward trajectory of that as we continue to see these acquisitions coming through and how we should think about where that can go over the course of the next year , if the environment does stay more challenging , like it is today .
Speaker #3: Yeah , certainly . I'm really proud of how our teams have driven the the improvements over the last four years , really in architectural specialties , every year , making an impact on operating leverage .
Speaker #3: And in doing a great job in the marketplace and pricing our products . And , you know , organically , even with some of the timing related headwinds that Chris mentioned , you know , organically , we're at the 20% level and we expect for this year for the first time on this side of the pandemic is to get back to that 20% level organically .
Speaker #3: And , of course , as soon as the base gets bigger . And our architectural specialty business organically , we can offset more and more acquisitions as we add them on .
Speaker #3: As you know, most of the acquisitions we are buying are dilutive until they get scaled up on our platform, and then we're able to drive the operating leverage to 20% or greater.
Speaker #3: The forward look on this is we've said very publicly , we think this is a really good spot for us to be as long as we have double digit growth opportunities in the marketplace , as long as we're continuing to penetrate the market and take share , we don't want to optimize on margins at the expense of growth .
Speaker #3: And so as long as we have that growth curve in front of us , and we do see that ahead of us , still for several years , we like greater than 20% , but we don't need to optimize much greater than that at the expense of growth .
Speaker #3: That's kind of how we're going to run the business.
Speaker #1: Your next question comes from the line of Tomohiko Sano with JP Morgan . Your line is open . Please go ahead .
Speaker #5: Good morning everyone .
Speaker #3: Good morning . Good morning .
Speaker #5: Thank you for taking my questions . My first question is EBITDA margin pressure . So while sales and EPs was strong , both consolidated and segment EBITDA margins declined year over year in Q could you elaborate on the timing related cost headwinds , such as higher incentive compensation and medical costs , and how you expect these to trend in ?
Speaker #5: Full ? Q and into 2026 , please ?
Speaker #3: Yes , Chris , you want to take that ? Sure . Good morning . Tomo . Yeah . So on the side . Let me just start with just an overarching comment around our , you know , mindset around cost control and the continued thinking around employing a cost control mindset , even in more stabilizing market conditions that we mentioned in our prepared remarks .
Speaker #3: So in the quarter , we had highlighted higher costs in the mineral fiber segment , and that was really driven by higher incentive compensation costs .
Speaker #3: You know , these are related both to our annual incentive plan and our longer term incentive plan . And the driver of these costs really relate to our year to date financial performance and our updated full year outlook that I , that I commented on in my remarks .
Speaker #3: And I also said , you know , we don't expect this third quarter SGA result in mineral fiber to be indicative of our quarterly run rate moving forward .
Speaker #3: You know , Vic mentioned the thinking around continuing to get to get leverage on our investments . And and that certainly is the case .
Speaker #3: We look to get operating leverage out of our investment base, and we'll continue to be mindful of the rate and pace of our spending.
Speaker #3: Again , the the compensation , the incentive compensation costs were really timing in nature . And were an outsized cost in the in the third quarter .
Speaker #3: Let me take the second part of your question next . Around medical and just take a step back a bit and talk about the higher medical costs that we experienced in the third quarter .
Speaker #3: We're self-insured from a medical perspective . So when higher medical claims are incurred , they impact the PNL directly . And what we saw was an uptick in several high cost claims in the third quarter .
Speaker #3: And these claims were above our normal run rate of medical experience. So while we do experience medical costs in the ordinary course, the number and the magnitude of what we saw in Q3 was atypical and would be very unusual to see that level of medical claims.
Speaker #3: In consecutive quarters as well.
Speaker #5: Thank you . Chris , and my follow up is Vic macro and market trends . You talk about office and also transportation mainly .
Speaker #5: But could you talk about education and healthcare and data centers and those kind of vertical ? Into Q4 and 2026 expectation , please .
Speaker #5: Thank you .
Speaker #3: Yeah . The education and healthcare segments continue to be I would say , stabilized as we experienced throughout the year . So no , no real inflection in in healthcare and education that we're seeing .
Speaker #3: In fact , healthcare remains slightly positive , both on the new construction and the renovation forecasts that that we're seeing . So so I would say kind of stabilized activity levels in the healthcare and education .
Speaker #3: Of course , the data center is the opportunity continues to to be very robust . And we're very active in in participating in that with our new products .
Speaker #3: We have a new launch of of tile products , as well as some of the grid products that that we've been talking to you about .
Speaker #3: We're also launching some additional structural grid products to go along to target that marketplace . So it's a it's an exciting opportunity . And it continues to have a lot of growth behind it .
Speaker #3: In addition to what we're seeing in transportation and the green shoots that I'm talking about in office .
Speaker #5: Thank you . Vic , that's very helpful .
Speaker #3: Great . Thank you .
Speaker #1: Your next question comes from the line of Keith Hughes with Truist Securities. Your line is open. Please go ahead.
Speaker #2: Hello .
Speaker #3: Hello. Thank you. Are you there?
Speaker #6: Oh , yeah . I'm here finally . Okay . Okay . Thank you . Okay . Question I'm sorry . So these expenses , it's healthcare related .
Speaker #6: Would those most likely come down over the next quarter or two to something more consistent than what we've seen in the past ? Is that the message you're trying to send ?
Speaker #3: Yeah , I think I think , it's fair to assume that both on the incentive comp and the medical side that that they'd be kind of more at a normal , normal run rate .
Speaker #3: Again , very atypical to see the , the , the outsized impact that we saw in medical this quarter . And again , that wasn't tied to a specific operation or event .
Speaker #3: But yeah , to your to your point , not not the expectation going forward .
Speaker #6: And what's the outlook for manufacturing costs in next few periods , or is inflation starting to creep in to the inputs .
Speaker #3: Yeah , I'd say on the manufacturing side , I mean for sure , you know , we have inflation , but you know , our ability to continue to to drive productivity in our plants remains one of the value creation drivers and building blocks of the business .
Speaker #3: So I'd expect more of a of a run rate that we saw for the first couple quarters of this year . Again , continued strength in both a continued cost control mindset across the enterprise , coupled with our with our productivity programs and productivity gains .
Speaker #6: Okay , final question for Vic . I hear you what you're saying on the office on the class , the class A has that started to occur yet in quantities that are moving the numbers or as office still lagging category ?
Speaker #3: Yeah , it seems to be a lot of ground level activity , which so it's moved from some of the bidding activity and some of the start activity that we've been tracking into .
Speaker #3: What I'm hearing in the , in the marketplace from a regional teams is that there's more tenant improvement type projects on the ground .
Speaker #3: There . So I think we're just beginning to see some of that . So I wouldn't say they're needle movers . It's they're real .
Speaker #3: It's a stabilized I would say vertical at this point . And with some green shoots in terms of the improvement that could be out there going into 2026 .
Speaker #6: Okay . Thank you very much .
Speaker #3: You bet . Keith , thanks .
Speaker #1: Your next question comes from the line of Adam Baumgarten with Vertical Research Group. Your line is open. Please go ahead.
Speaker #4: Hey , good morning guys .
Speaker #7: Question on the AUV . Just on the home center mix . It sounds like that impacted year over year . Mix benefits in the quarter .
Speaker #7: I know you said it was positive , but maybe less so than it's been in prior quarters I guess . Do you expect that mix headwind to abate in the fourth quarter ?
Speaker #7: And then if we think about the August price increase starting to flow through , should you see some level of year over year AUV improvement in the fourth quarter ?
Speaker #3: Yeah . You're you're right , Adam . The as you know , the retail business is a limited set of products . And lower AUV .
Speaker #3: So when we get some additional strength in one of those . Well in that channel , you're right it . Does drag down the overall mix .
Speaker #3: I will say , you know , we still these are profitable products and they're you know , profitable contributors to our bottom line .
Speaker #3: So we like that volume . But you're right on the AUV line . It can be a drag a bit on our normal AUV run rates .
Speaker #3: And that's what we experienced in the third quarter . You know , we don't expect that to continue into the fourth quarter . I just will caveat that that , you know , sometimes this is , you know , not forecastable in terms of some of their inventory replenishment or even draw downs as , as we've reported on in , in quarters past , but we're not expecting that to continue into the fourth quarter at this , at this stage .
Speaker #3: And I would just add on to that and say , we we still expect a strong AUV quarter in in Q4 . Again , that that was a big box that we mentioned in the third quarter .
Speaker #3: You know, kind of pressured the full year outlook, if you will, but still expecting a strong Q4 and about 6% AUV for the full year.
Speaker #7: Okay . Got it . Great . Thanks . And then just switching gears to AOS , just given kind of the strong backlog and order commentary that you made and some level of visibility , especially on larger projects , are you still or should we expect growth next year and maybe any kind of additional color in terms of end markets and kind of what's getting you excited about 2026 at this point ?
Speaker #3: Yeah , I mean , what's encouraging , Adam , in our order rate and our backlog build is not just for the rest of the year , which it is contributing to the rest of the year .
Speaker #3: In our confidence for the rest of the year . But how it's building for 2026 . So , yeah , we would expect to continue to grow in 2026 again , almost irrespective of what the market's doing , because as you know , most of our growth there is really through penetration , really taking share .
Speaker #3: So our expectations and the way it's building and our backlog , we would expect growth in 26 .
Speaker #7: Great . Thanks a lot . Best of luck .
Speaker #3: You bet . Thank you .
Speaker #1: Your next question comes from the line of Ralph Jadresic with Bank of America . Your line is open . Please go ahead . Ralph , a reminder to kindly unmute yourself .
Speaker #8: There we go . Sorry about that . Thanks for taking my question . Yes . Good morning . Good morning . First I want to just follow up on some of the comments on office , which is obviously been a headwind for I think you guys said seven years .
Speaker #8: Can you talk about if that comes back or we start to see an improvement ? Is there any either ASP or margin tailwinds , particularly either on the class A side or anything from a regional perspective ?
Speaker #8: And are you seeing specific green shoots on any of the San Francisco or New York ? Is is that is that meaningful in any way ?
Speaker #3: Well , I think what the data is showing now , and I mentioned this in my prepared remarks , is how it's broadening out beyond , you know , some of the major cities and the Sunbelt , as we've talked about how the South has been actually an early recovery zone for the office segment .
Speaker #3: So in addition to that , what the research says is actually much broader . Now . In fact , into 18 regions across the country are starting to see some positive activity .
Speaker #3: There , both on the leasing front and of course , that drives the renovation activity in the market . So that's encouraging . I think , as I mentioned earlier , we're still very early into seeing some of this work actually land into the marketplace .
Speaker #3: But the , the certainly the signs are , are encouraging and supported by some of the forecasts that that we're looking at as well .
Speaker #8: Okay . And then understand that it's tough to give a volume outlook into into 26 . But wondering if do you have any at least directional visibility on cost inflation ?
Speaker #8: AUV , SG&A , any of those points ? As we think about trends into next year ? And just like specific puts and takes .
Speaker #3: Yeah . Hey , Ralph . It's Chris , I'd say at this point , you know , we're still preparing . Our modeling and and going through assessing the market , etc.
Speaker #3: for 2026 . But if I could take a step back and just talk a little bit about , you know , the building blocks of the business and what we've talked about in terms of AUV growth , our ability to continue to drive productivity and really how we're thinking about SGA investments and margins next year .
Speaker #3: I'd say our thinking in the mindset really hasn't changed . I think those value creation drivers are in place will continue to invest and invest back into the business where there are the highest returns .
Speaker #3: And I think we'll we'll absolutely be thinking about EBITDA growth and margin expansion heading into next year . But absent that , you know , two to soon to to formulate any more details around the specific inputs of those .
Speaker #3: But I'd be thinking about the volume , the value creation drivers of this business on a relatively consistent basis going forward . I don't know if you want to add anything more .
Speaker #3: I think that's well said .
Speaker #8: Thank you . That's helpful .
Speaker #1: Your next question comes from the line of Brian Burrows with Thomson Research Group . Your line is open . Please go ahead .
Speaker #9: Hey, good morning, everyone. Thank you for taking my questions today.
Speaker #3: Hey , Brian . Good morning .
Speaker #9: Last quarter your outlook was for a slightly softer second half . Kind of driven by that uncertainty with discretionary commercial work expected to slow a lot of commentary today around market stabilizing here .
Speaker #9: Can you just help compare the current outlook to your expectations from three months ago . Kind of what stabilizing really means in this scenario .
Speaker #9: And I guess really just what is driving that kind of positive change from uncertain to stable ?
Speaker #3: Yeah . Brian , thanks for the question . It's a good question because if you remember the way we talked about some of this smaller , more discretionary type renovation activity is where we have the least amount of visibility in the marketplace , right ?
Speaker #3: It doesn't involve an architect . And they tend to be , again , smaller in nature . So it kind of shows up through distribution .
Speaker #3: So , you know , and really full disclosure of that . We don't have great visibility . And we've been using prior models to kind of predict what happens there , because we know because it's highly discretionary .
Speaker #3: It can move to the sidelines very quickly in higher degrees of uncertainty in the marketplace. We saw that; we experienced that in prior years, namely in 2022.
Speaker #3: And so , you know , with the forecast for the back half of lower economic activity , lower GDP and and expecting some of that activity overall in the economy to slow down , we expected that to create some uncertainty , additional uncertainty that would affect this discretionary renovation activity .
Speaker #3: As we all know , some of the economic activity is actually been revised upward . And we've not seen the slowdown in that discretionary work , as we were expecting .
Speaker #3: And remember , it was a slightly modest . So it wasn't a a significant downturn , but just some softening . There . We did not see that .
Speaker #3: But I'll say , you know , Brian , most encouraging in the quarter was on the volume side was the contribution from our initiatives and our growth initiatives .
Speaker #3: You know , given a little flatter plane here , we can really start to see the impact of our growth initiatives above and beyond .
Speaker #3: What is still relatively flattish to softer market conditions . So really pleased by the by that . And , and , you know , sitting here today where we are into the fourth quarter , we continue to not see a softening in that discretionary renovation activity pipeline .
Speaker #3: And so we're we're basically calling the rest of the year as we've been experiencing all year . And that's kind of more stabilized , flattish market conditions .
Speaker #3: And then executing very well . There to expand margins , grow , grow our earnings and our top line double digits .
Speaker #9: Good to hear . And then second question , I guess on the middle part of of margins strong this quarter , even with the discrete expenses even excluding discrete expenses , can you help unpack that number a little bit more here ?
Speaker #9: I think you provided some drivers , but maybe just putting it really into context around this level of margin you have with this level of volume and kind of just how that compares historically , because it's I , I believe it's a good number on a lower volume base .
Speaker #9: So, just any more context around how you guys are thinking about that? Yeah, I think.
Speaker #3: Yeah , that's again , another good question . Let me take that and Chris , I'll let you add some color to this .
Speaker #3: But I mean, really, when you look at it, in spite of some of those unusual and atypical expenses that Chris talked about, we delivered a 44% EBITDA margin in the Mineral Fiber segment.
Speaker #3: That's really strong . And and so when you think about for the rest of the year , we're going to finish at 43% .
Speaker #3: As I was saying in my prepared remarks . And that that's back to the highest watermark that we experienced before the pandemic in 2019 .
Speaker #3: So we're really encouraged by the way the business underlying is performing . And the building blocks of that , again , is really making sure we're getting good price realization to more than offset inflation in the marketplace , which we're continuing to do very well selling a richer mix into the marketplace , which we're doing very well , slightly offset , a little bit , as we talked about earlier on the retail channel .
Speaker #3: And then productivity continuing to drive meaningful productivity in our plants to help us offset inflationary costs . So that's what leads to really good margin performance in the business .
Speaker #3: And we expect that to continue . And Chris , I'll let you add any additional color there . Yeah , absolutely . You hit on all the all the key building blocks .
Speaker #3: The only additional item to mention there in terms of Mineral Fiber EBITDA margins is the contribution from wave equity earnings expected to grow about 6% this year .
Speaker #3: So again , with that , with that contribution really pleased with the overall EBITDA margin for the mineral fiber segment .
Speaker #9: Thank you .
Speaker #3: Thanks , Brian . Brian .
Speaker #1: Your next question comes from the line of Garik Shmois with Loop Capital . Your line is open . Please go ahead .
Speaker #10: Hey . Good morning . This is Zach Pacheco on for Garrett . Thanks for taking my question . Maybe just one more on the mineral fiber .
Speaker #10: Fiber margin over 43% that that pre-pandemic level . Do you guys kind of see a natural cap getting over that through ? Maybe just the industry dynamics or your level of investment , or how do you kind of kind of view taking that next step above that pre pandemic level ?
Speaker #3: Yeah , it's a common question . We get and honestly we just keep pointing back to the building blocks . What the drivers of margin .
Speaker #3: And really and that's a good measure of the efficiency in how we run the business . Right . In terms of making sure we're we're pricing and getting enough price to cover inflationary dynamics and driving productivity in the plants , innovating to make sure that we're bringing higher margin products , higher AUV and value products to the marketplace .
Speaker #3: Those same building blocks , we were just talking about , I think as long as those are present and we continue to invest behind those which we're committed to do , we continue to to look for greater efficiency and greater margins from here .
Speaker #10: Understood . And then just quickly , an update on the geometric acquisition from earlier in the quarter and kind of just the M&A environment in general , as you guys see it .
Speaker #10: Thanks .
Speaker #3: You bet . Yeah , the geometric is a great add for our business . Our architectural specialty business . And in particular for the wood platform which is one of the fastest growing platforms in the architectural specialty business .
Speaker #3: It's it's an exciting on trend look and feel that architects and owners are looking for . And this really adds to real dimensions of competitive advantage .
Speaker #3: Number one , the extension of the product portfolio to include a greater number of species really on trend type species . And our wood portfolio .
Speaker #3: And it gives us a geographic advantage . Also by being out west . So it's a really great add to the to the to the portfolio .
Speaker #3: And we we like these kinds of acquisitions that bring competitive advantage , additional capabilities for us to bring into the architects offices with the rest of our portfolio .
Speaker #3: So it's a good example . It's on the smaller side , but we're we're open for business in terms of our acquisitions . We have a dedicated team that's getting up every day , and it's working our pipeline .
Speaker #3: And we believe there's more of these bolt on type acquisitions out there for architectural specialty business . So more to come on on that front as well .
Speaker #10: Got it . Thanks .
Speaker #3: You bet .
Speaker #1: Your next question comes from the line of John Lovallo with UBS . Your line is open . Please go ahead .
Speaker #11: Hi , guys . Thanks for taking my questions as well . Here . I guess the first question . Hey , I guess the first question is just on the the mineral fiber volumes .
Speaker #11: You know , up slightly in the quarter . How do you think the performance there compared to the underlying market ?
Speaker #3: Yeah , it's really hard to put a very , precise number on that . But when the markets are flat , you know , they're they're anywhere from like plus or minus .
Speaker #3: You know , one maybe a half a point either way . So but what we do know is that the growth initiatives and the volume contribution from our growth initiatives really was a nice contributor to the overall upside that you saw that we experienced in the quarter .
Speaker #3: Markets are still relatively soft, so these conditions can actually be reflective of this. You know, of the market activity at a lower level than we've been experiencing all year.
Speaker #3: So I think that's that's the best way I can describe it , John , in terms of how the overall market is performing .
Speaker #3: .
Speaker #11: Okay . Got it . And then , you know , sticking on mineral fiber , it looks like sales to the distribution channel .
Speaker #11: We're actually very strong , up 9% year over year . What drove this kind of relative strength compared to the other channels ?
Speaker #3: Yeah I'd say John , just to continue to to point to our strong commercial execution . Really again , coupled with the the initiatives that that Vic mentioned , we continue to be pleased with the level of performance there in the quarter and are excited about just the way that that we've executed in that particular part of the market .
Speaker #11: Okay . Understood . Thank you guys .
Speaker #3: Yeah. Thanks, John.
Speaker #1: Your next question comes from the line of Philip Ng with Jefferies. Your line is open. Please go ahead.
Speaker #12: Hey , guys . Question for Chris . Can you give us an update how you're thinking about inflation broadly for the full year ?
Speaker #12: Some of the major inputs and whatnot, and the pace in the back half. And then in terms of productivity, you sounded pretty upbeat about what's still in front of you.
Speaker #12: You know, should we expect a pretty consistent steady dose of productivity that you still have available for 2026 to kind of tap into?
Speaker #3: Sure . Yeah . Thanks for the question . So yep , I'll take the the second part of that . First , in terms of productivity .
Speaker #3: Yeah . Pleased with our level of productivity in our plants . Certainly year to date in the quarter . And what we're expecting for the full year .
Speaker #3: And you know, going back to our comments around the value creation drivers and the building blocks of the business, I feel very confident about our ability to continue to get those productivity gains on a go-forward basis from an inflation perspective.
Speaker #3: Just a reminder in terms of , you know , kind of the call it the the categories of of inflation and mineral fiber , about 35% of our inflation of Cogs is raw materials .
Speaker #3: And then energy is about 10% . It's about 10% . So from a total input cost perspective for the full year , we're out looking low , single digit inflation with freight about flat compared to prior year raws .
Speaker #3: In that low single digit inflation range . And then energy in that low double digit inflation range . So hopefully that that gives you a little bit more color around the bits and pieces of how we're thinking about inflation on a percentage basis versus prior year for 25 .
Speaker #12: And, Chris, are there any big nuances between the front half versus the back half in terms of some of those inflation components? If it's moderating or if it's been pretty steady all year?
Speaker #3: Yeah , I'd say slightly slightly moderating a bit on in the in the back half , but but not not significantly .
Speaker #12: Okay . That's helpful . And Vic as has been a home run for you guys really strong growth strong organic growth . And I think you pointed out in your prepared remarks orders and backlogs are still growing at double digit clip .
Speaker #12: I think you mentioned if you could grow at double digit clip . I mean , 20% EBITDA margin is a good way to think about the business in the medium .
Speaker #12: Longer term . So my question really comes down to , you know , obviously you have some really tough comps in the first half of 25 .
Speaker #12: What's a good way to think about organic growth in that business ? When we look at it , 2026 is double digits the right way to think about it or that's the number that includes M&A ?
Speaker #12: I just want to be mindful of the tougher comps next year.
Speaker #3: Yeah . On the organic side , we we've been running at the in the high single digits this year . And you know we'll we'll stop short to forecast what that looks like for next year .
Speaker #3: But you know again with the the double digit growth in our order intake a lot of that's organic . So I would expect the growth for next year organically to continue to be at a really good clip .
Speaker #3: What exactly that is . You know , relative to this year . Yet I think we still have to do our work in our modeling on that to , to to accurately answer that .
Speaker #3: But I still expect good , solid , organic growth in that business . In addition to the inorganic bolt on acquisitions , we expect to continue .
Speaker #3: Okay .
Speaker #12: Thank you . Appreciate the color .
Speaker #3: If I could come back . Yeah . My comment on the moderating versus back half was really around what we expected back in July .
Speaker #3: So if I were to take a look at the fourth quarter, relative to our actual run rate for the first nine months of the first three quarters, there is a little bit of an uptick in energy and a little bit of an uptick in raws.
Speaker #3: But it's really not not that big , but relative to July , you know , a moderating expectation versus where we were last quarter for the full year .
Speaker #12: Okay, thank you. I appreciate it.
Speaker #3: Thanks . Thanks , Phil .
Speaker #1: Your final question comes from the line of Stephen Kim with Evercore ISI . Your line is open . Please go ahead .
Speaker #13: Hi . This is Latisha on for Steve . Thanks for taking the question . I just one quick one from me . You touched touched on it a little bit in the prepared remarks , but could you talk a little bit more about the digital initiatives and kind of how you've seen that the impact of that grow over time and evolve over time ?
Speaker #13: Maybe some lessons learned ? Thanks .
Speaker #3: Yeah . The ones that I called out in , in our my prepared remarks around project works . Let me let me just start there for a second , because I think this is an automated software platform that takes the intelligence of a long time of designing ceilings and automates those design rules and a platform that can help architects really expedite the iterations on different types of designs or iterations of designs and that's a huge productivity tool that the architects are are learning about .
Speaker #3: As we get more and more products onto the platform to meet their needs . In addition to that , because of this automated platform is based on historical data we can pump out very accurate bill of materials that allows them to really predict the project costing and also the ordering for the for the contractor .
Speaker #3: If you think about these really complex projects , there's a lot of parts and pieces that go into the installation of these on the job site .
Speaker #3: And we can get really precise with exactly the number of pieces and components that have to go . And that's really attractive for the contractor community to not have to guess about how much they need of something .
Speaker #3: So for both of those customer bases , this , this project works platform continues to grow every quarter , more and more users and more and more activity and and you know , we're really pleased with we think when we look at the data , the win rate of projects that go through project works is higher than when they don't because of the value that we're creating with architects and the contractors .
Speaker #3: So we continue to be very encouraged by the traction it's getting in the communities that we're operating in . Canopy was the other one that continues to adjust itself and serve this smaller customer that we feel like kind of falls through the cracks .
Speaker #3: That doesn't really know where to go or how to get there: ceiling repaired or replaced. And it leads them through an educational process that gets them to placing an order.
Speaker #3: It's turning out to be a very effective platform , and we continue to improve it every quarter . On making it even better and better of a customer experience .
Speaker #3: And so I was really pleased with the traction that it's getting , not only at the top line , setting a record top line , but really the profitability of that platform delivering a record EBITDA level of performance and contributing now to the overall business .
Speaker #3: So those two digital initiatives I was talking about , I think that's a little bit more color behind them . But we continue to to get really good operating leverage on both of those investments .
Speaker #13: Great , thanks . Thanks a lot .
Speaker #3: You're welcome .
Speaker #1: With no further questions in the queue, I will turn the call back over to Vic Grizzle for closing remarks.
Speaker #3: Great . Thank you . And thank you all for joining our call today . Again , we're on track to have another record year in 2025 .
Speaker #3: Really pleased with both double digit top and double digit bottom . And maybe most mostly the the traction that we're getting with our investments and the way that we're expanding margins in the business .
Speaker #3: So we're excited for finishing the year strong and setting up what is going to be another exciting year in 26 . Thank you again for joining our call .