Q2 2019 Earnings Call

July 29, 2019

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Operator: Good day, ladies and gentlemen. Welcome to the Q2 2019 Armstrong World Industries, Inc. Earnings Conference Call. At this time, all participants are in listen-only mode. Later we'll conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance, please press star on the 020 touch-tone telephone. As a reminder, this call may be recorded. I would now like to introduce yours for today's conference, Tom Waters, Vice President of Corporate Finance. Please go ahead, sir.

Good day, ladies and gentlemen, and welcome to the second quarter 2019, Armstrong World Industries incorporated earnings Conference call.

At this time all participants are in listen only mode. Later, we'll conduct a question and answer session and instructions will follow at that time.

If anyone should require operator systems. Please press star miserable sooner touch tone telephone as a reminder, this call may be recorded.

I would now like to introduce your host for today's conference Tom Waters, Vice President of corporate Finance. Please go ahead Sir.

Thank you good morning, and welcome. Please note that members of the media have been invited to listen to this call and the call is being broadcast live on our website at Armstrong ceilings Dot com.

Tom Waters: Thank you. Good morning and welcome. Please note that members of the media have been invited to listen to this call. The call is being broadcast live on our website at armstrongceilings.com. With me today are Vic Grizzle, our CEO, and Brian MacNeal, our CFO. Hopefully, you have seen our press release this morning. Both the release and the presentation Brian will reference during this call are posted on our website in the investor relations section. I advise you that during this call we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong World Industries, please review our SEC filings, including the 10-Q filed earlier this morning. Forward-looking statements speak only as of the date they are made.

With me today are Vic Grizzle, our CEO and Brian Macneal, our CFO .

Hopefully you have seen our press release this morning, and both the release and the presentation, Brian will reference during this call are posted on our website in the Investor Relations section.

I advise you that during this call we will be making forward looking statements that involve risks and uncertainties.

Actual outcomes may differ materially from those expected or implied.

For a more detailed discussion of the risks and uncertainties that may affect Armstrong World Industries. Please review, our SEC filings, including the 10-Q filed earlier this morning.

Forward looking statements speak only as of the date. They are made we undertake no obligation to update any forward looking statements beyond what is required by applicable securities law.

Tom Waters: We undertake no obligation to update any forward-looking statements beyond what is required by applicable securities law. Our discussion of operating performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation. Both are available on our website. With that, I will turn the call over to Vic.

In addition, our discussion of operating performance will include non-GAAP financial measures within the meaning of SEC regulation G.

A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation.

Both are available on our website.

With that I will turn the call over to Vic.

Thanks, Tom and good morning, everyone. It's good to be with you today to review our second quarter results another solid quarter for the company.

Vic Grizzle: Thanks, Tom. Good morning, everyone. It's good to be with you today to review our Q2 results, another solid quarter for the company. We delivered sales growth of 9%, adjusted EBITDA improved 14%, and margins expanded 160 basis points. With this strong quarter, we are completing a solid first half of 2019. For the half, sales are up 8%, EBITDA is up 15%, and margins expanded by 240 basis points. Both of our segments are performing well and accelerated throughout the half. Therefore, we remain confident in our 2019 guidance. In a moment, Brian's going to walk you through the details of the results by segment. I first want to touch on a few of the key takeaways. In the Mineral Fiber segment, Average Unit Value, or AUV, was up more than 6% with both like-for-like pricing and mix improvements positively contributing in the Q2.

We delivered sales growth of 9% adjusted EBITDA improved 14%.

And margins expanded 160 basis points with this strong quarter, we are completing a solid first half of 2019.

For the half sales were up 8% EBITDA is up 15%.

And margins expanded by 240 basis points, both of our segments are performing well.

And accelerated throughout the half.

And therefore, we remain confident in our 2019 guidance in a moment Brian's going to walk you through the details of the results by segment, but I first want to touch on a few of the key takeaways and the mineral fiber segment average unit value.

Or a movie.

Was up more than 6% with both like for like pricing and mix improvements positively contributing in the quarter our industry, leading innovation continues to be the key driver of mix improvement with sales of mineral fiber products at the high end of our portfolio.

Vic Grizzle: Our industry-leading innovation continues to be the key driver of mixed improvement, with sales of mineral fiber products at the high end of our portfolio growing double digits in the quarter. Recent new product launches, including the Sustain and Total Acoustics product families, are leading the way, but we are now also seeing contribution from DesignFlex, which we launched last summer. Architects and designers are beginning to see the creative possibilities afforded by this leading-edge new offering, and we are encouraged by the initial new business results. Our New Product Vitality Index, which is a measure of sales of new products introduced in the last five years, is now over 40%. For perspective, this measure is up from the low teens as recently as five years ago. This has been a focused effort by our team, and we are now seeing the fruits of this work.

Growing double digits in the quarter.

Recent new product launches, including the sustain and total acoustics product families are leading the way.

But we are now also seeing contribution from design flex, which we launched last summer.

Architects and designers are beginning to see the creative possibilities afforded by this leading edge new offering.

And we are encouraged by the initial new business results.

Our new product vitality measure, which is a measure of sales of new products introduced in the last five years is now over 40%.

For perspective, this measure is up from the low teens as recently as five years ago.

This has been a focused effort by our team.

And we are now seeing the fruits of this work.

Vic Grizzle: Year to date, Mineral Fiber AUV is up over 7%. We're confident in once again delivering AUV growth in the 5% to 7% range, consistent with our historical average. Now, as we discussed when reporting our Q1 results, weather and other timing-related headwinds impacted mineral fiber volume at the start of the year, and we anticipated steady improvement as the year progressed. That's what we saw in Q2, as volume improved sequentially, making up a meaningful portion of the shortfall. The relatively smaller channels, namely Latin America, continued to lag in the quarter, and given the political and economic conditions in those regions, we expect that these areas will remain a headwind in the second half, resulting in overall flatish volume for the year. Our Mineral Fiber operations are executing at a high level.

Year to date mineral fiber ASV is up over 7%.

We are confident in once again delivering aid the growth in the 5% to 7% range.

Consistent with our historical average.

Now as we discussed when reporting our first quarter results weather and other timing related headwinds impacted mineral fiber volume at the start of the year and we anticipated steady improvement as the year progressed and Thats. What we saw in Q2 as volume improved sequentially, making up a meaningful portion of the shortfall.

The relatively smaller channels, namely Latin America continued to lag in the quarter and given the political and economic conditions in those regions. We expect that these areas will remain a headwind in the second half, resulting in overall flattish volume for the year.

Our mineral fiber operations are executing at a high level in the quarter and year to date mineral fiber gross margins have expanded more than 300 basis points, our plant reliability metric our multi input measure of overall manufacturing performance continued its recent favorable trend.

Vic Grizzle: In the quarter and year to date, Mineral Fiber gross margins have expanded more than 300 basis points. Our plant reliability metric, a multi-input measure of overall manufacturing performance, continued its recent favorable trend and was near all-time highs in the quarter. Quality and service metrics were also excellent, and most importantly, safety performance remained strong. Now, it's early days, but we are beginning to see results from our digital factory initiatives, a subset of our overall digitalization strategy. To date, we have deployed hundreds of sensors throughout our Mineral Fiber plants, and are harvesting and analyzing the data using both human and artificial intelligence. Insights from this analysis are already allowing us to optimize how we run our production lines, resulting in lower scrap rates and increased uptime. I believe this technology will enable our solid track record of productivity to continue into the future.

And was near all time highs in the quarter.

Quality and service metrics were also excellent.

And most importantly safety performance remains strong.

Now it's early days, but we are beginning to see results from our digital factory initiatives, a subset of our overall digitalization strategy.

To date, we have deployed hundreds of sensors throughout our mineral fiber plants, and our harvesting and analyzing the data using both human and artificial intelligence.

Insights from this analysis is already allowing us to optimize how we run our production lines, resulting in lower scrap rates and increased uptime.

I believe this technology will enable our solid track record of productivity to continue into the future.

Architectural specialties continues its strong run with sales up 38% in the quarter the base business, which includes our 2018 acquisitions of plaster form and steel ceilings grew a strong 23%.

Vic Grizzle: Architectural Specialties continues its strong run, with sales up 38% in the quarter. The base business, which includes our 2018 acquisitions of Plasterform and Steel Ceilings, grew a strong 23%. Our Q1 2019 acquisition of ACGI contributed the rest of the growth. We continue to penetrate the specialty ceilings and walls market and expand our leadership position through the broadest portfolio, the best-in-class design capabilities, and the industry-leading service and quality through our distribution partners. Now, related to this combination of competitive strengths, I'd like to share a real example of a custom job we recently won. A major hotel project in Nashville called for a complex wood fabrication solution that, prior to the ACGI acquisition, was not an opportunity for us.

And our first quarter 2019 acquisition of GPI contributed the rest of the growth.

We continue to penetrate the specialty ceilings in walls market and expand our leadership position through the broadest portfolio.

The best in class design capabilities.

And the industry, leading service and quality through our distribution partners.

Now related to this combination of competitive strengths I'd like to share a real example of a custom job. We recently won.

A major hotel project in Nashville called for a complex would fabrication solution.

That prior to the C.G.I. acquisition was not an opportunity for us.

Vic Grizzle: However, with ACGI's advanced manufacturing capabilities, we were able to provide the required solution containing the highly engineered wood products necessary to achieve the performance and the aesthetic vision of the architect and building owner. This solution included 13 different wood product types, including curved panels, baffles, and radius trim, a rare combination for any single manufacturer. These specialty wood capabilities also opened the door for us to win a significant order of DesignFlex mineral fiber ceilings and drywall grid. No other single company is capable of delivering such a broad combination of products and technical support necessary to make this project a reality, a true one-stop shop experience for the architect and building owner. With the acquisition of ACGI, we now have in-house capabilities in the critical specialty substrates of metal, wood, and wood fiber.

However, with AC guys advanced manufacturing capabilities, we were able to provide the required solution containing the highly engineered wood products necessary to achieve the performance.

And the aesthetic vision of the architect and building owner.

This solution included 13 different wood product types, including curved panels baffles and radius trim, a rare combination for any single manufacturer.

These specialty would capabilities also opened the door for us to win a significant order of design flex mineral fiber ceilings and drywall grid.

No. Other single company is capable of delivering such a broad combination of products and technical support necessary to make this project a reality.

A true one stop shop experience for the architect and building owner.

With the acquisition of AC JCI, we now have in house capabilities in the critical specialty substrates of metal wood.

And Woodfibre combined with our glass reinforced shifts and capabilities that platform and our service team strategic supplier network.

Vic Grizzle: Combined with our glass-reinforced gypsum capabilities at Plasterform and our strategic supplier network, we have established a unique leadership platform in the specialties category. While we have come a long way in building these capabilities, there is still much more to come as we broaden and deepen our specialty ceiling and walls capabilities and accelerate growth for years to come. I'm particularly pleased that we were able to expand margins in the Architectural Specialties segment despite our investments and while overcoming the integration of lower-margin acquired businesses. We remain confident that our playbook of acquiring good businesses, bolting them onto the Armstrong sales and marketing platform, and investing in their manufacturing capabilities will yield significant growth, margin expansion, and create shareholder value. With that, let me turn the call over to Brian to go through some of the details. Brian?

We have established a unique leadership platform in the specialties category.

While we have come a long way in building. These capabilities there is still much more to come.

As we broaden and deepen our specialty sealing and whilst capabilities and accelerate growth for years to come.

I'm, particularly pleased that we were able to expand margins.

In the architectural specialty segment, despite our investments and while overcoming the integration of lower margin acquired businesses, we remain confident that our playbook of acquiring good businesses.

Bolting them on to the Armstrong sales and marketing platform and investing in their manufacturing capabilities will yield significant growth margin expansion and create shareholder value.

So with that let me turn the call over to Brian to go through some of the details Brian .

Brian MacNeal: Thanks, Vic. Good morning to everyone on the call. Today I'll be reviewing our Q2 results. Before we go into the financials, as a friendly reminder, I'll be referring to the slides available on our website. Slide 3 details our basis of presentation. Turning now to Slide 4 for our Q2 results, sales of $272 million were up 9% despite one less shipping day versus Q2 of 2018. Adjusted EBITDA increased 14%, with margins expanding 160 basis points. Adjusted diluted earnings per share of $1.27 grew 31%. As profitability increased, we lowered our share count 5% via buybacks. Our book tax rate was 400 basis points lower than last year. Adjusted free cash flow declined by $14 million over the prior year. Cash earnings improved but were offset by a $20 million income tax refund in 2018 and lower payables in 2019.

Thanks, Rick good morning to everyone on the call.

Today I'll be reviewing our second quarter results, but before we go into the financials as a friendly reminder, I'll be referring to the slides available on our web site.

Slide three details our basis of presentation.

Turning not now to slide four for our second quarter results sales of $272 million were up 9%. Despite one less shipping day versus Q2 of 2018.

Adjusted EBITDA increased 14% with margins expanding 160 basis points.

Adjusted diluted earnings per share of $1.27 grew 31% as profitability increased we lowered our share count 5% via buybacks and our book tax rate was 400 basis points lower than last year.

Adjusted free cash flow declined by $14 million over the prior year.

Cash earnings improved but were offset by a $20 million income tax refund in 2018 and lower payables in 2019.

Net debt increased by $63 million driven by a lower cash balance due to the acquisition of steel ceilings, and AC JCI as well as share repurchase activity.

Brian MacNeal: Net debt increased by $63 million, driven by a lower cash balance due to the acquisition of Steel Ceilings and ACGI, as well as share repurchase activity. In the quarter, we repurchased $28 million of stock. Since the inception of the repurchase program, we have bought back 8.3 million shares, or 15% of our outstanding float, at a cost of $479 million for an average price of $57.42. Currently, we have over $200 million remaining on our share repurchase program, which runs through October 2020. Turning now to Slide 5, adjusted EBITDA increased $13 million as strong AUV gains, driven by both like-for-like pricing and improved Mineral Fiber product mix fell to the bottom line. Volume gains were driven by Architectural Specialties. Inflation moderated in the quarter but remained a slight headwind. Year to date, inflation is running in the range of 2% to 3%.

In the quarter, we repurchased $28 million of stock.

Since the inception of the repurchase program. We have bought back 8.3 million shares were 15% of our outstanding float.

At a cost of $479 million for an average price of $57.42.

Currently we have over $200 million remaining on our share repurchase program, which runs through October of 2020.

Turning now to slide five adjusted EBITDA increased $13 million as strong HCV gains driven by both like for like pricing and improved mineral fiber product mix fell to the bottom line.

Volume gains were driven by architectural specialties.

Inflation moderated in the quarter, but remained a slight headwind.

Year to date inflation is running in the range of 2% to 3%.

Brian MacNeal: As Vic mentioned, our plants continue to run well and deliver gains that offset the added costs of our acquired businesses and investments in AS capabilities. SG&A costs were slightly favorable as our 2018 restructuring efforts overcame inflation, investments in AS, and the SG&A of our acquired companies. WAVE earnings were down $2 million as they are comping a very strong Q2 of 2018. WAVE remains on track to deliver earnings growth for the full year and margin expansion. Slide 6 shows adjusted free cash flow performance in the quarter versus the Q2 of 2018. Cash earnings growth improved and grew 46% but was offset by the tax and accounts payable headwinds I mentioned earlier. Other cash items were essentially flat year-over-year. Slide 7 begins our segment reporting. In the quarter, mineral fiber sales grew $7 million, or 4%.

As Vik mentioned, our plants continue to run well and delivered gains that offset the added costs of our acquired businesses and investments in asked capabilities.

As gene a costs were slightly favorable as our 2018 restructuring efforts overcame inflation.

Investments in Ats, and the SG nay of our acquired companies.

Wave earnings were down $2 million as they are comping, a very strong second quarter in 2018.

Wave remains on track to deliver earnings growth for the full year and margin expansion.

Slide six shows adjusted free cash flow performance in the quarter versus the second quarter of 2018.

Cash earnings growth improved and grew 46%, but was offset by the tax and accounts payable headwinds I mentioned earlier.

Other cash items were essentially flat year on year.

Slide seven begins our segment reporting.

In the quarter mineral fiber sales grew $7 million or 4%.

Brian MacNeal: AUV gains, driven by strong like-for-like pricing and continued mix improvements, more than offset volume declines. Despite a weak Latin American market, we maintained a positive outlook for volume in the second half of the year. Adjusted EBITDA was up $10 million, or 11%, as margins expanded 310 basis points. AUV gains were the biggest driver to improve the EBITDA. Productivity in the plants was solid, and we realized savings from the footprint optimization actions we took last year. Raw material costs were slightly higher than last year, while freight and energy costs were essentially flat. SG&A expenses were lower as a result of our cost-saving initiatives in 2018. As you will remember, we announced a $20 million restructuring program in the second quarter of 2018 to right-size our SG&A structure and optimize our manufacturing and distribution footprint for America's only business.

Avi gains driven by strong like for like pricing and continued mix improvements more than offset volume declines.

Despite a weak Latin American market, we maintain a positive outlook for volume in the second half of the year.

Adjusted EBITDA was up $10 million or 11% as margins expanded 310 basis points.

Avi gains with the biggest driver to improve EBITDA.

Productivity in the plants was solid and we realized savings from the footprint optimization actions, we took last year.

Raw material costs were slightly higher than last year, while freight and energy costs were essentially flat.

As gene a expenses were lower as a result of our cost saving initiatives in 2018.

And as you will remember, we announced a $20 million restructuring program in the second quarter of 2018 to right size, our SGN, a structure and optimize our manufacturing and distribution footprint for our Americas only business.

Brian MacNeal: We realized $10 million in savings in the second half of 2018, and we've now delivered another $10 million of savings across both manufacturing and SG&A in the first half of 2019. Moving to Architectural Specialties segment on Slide 8, quarterly sales increased 38%. Organic sales grew 12% as share gains continued. Base sales, which includes the acquisitions closed in 2018, grew 23%, and the ACGI acquisition contributed the rest. Adjusted EBITDA and AS was up 39% in the quarter as sales gains were partially offset by investment in sales support capabilities and the fixed costs of the acquisitions. As Vic mentioned, margins expanded as sales leverage and our integration efforts offset the headwinds of investments and lower margin acquisitions. EBITDA margins in the base business, which includes our 2018 acquisitions, expanded 40 basis points. Turning now to Slide 9, this provides our results for the first half of 2019.

We realized $10 million in savings in the second half of 2018.

And we have now delivered another $10 million of savings across both manufacturing and SDMA in the first half of 2019.

Moving to architectural specialties segment on slide eight.

Quarterly sales increased 38%.

Organic sales grew 12 as such as share gains continue.

Base sales, which includes the acquisitions closed in 2018 grew 23%.

And the ADC acquisition contributed the rest.

Adjusted EBITDA and EPS was up 39% in the quarter as sales gains were partially offset by investment in sales support capabilities and the fixed costs of the acquisitions.

As Vik mentioned margins expanded as sales leverage as sales leverage and our integration efforts offset the headwinds of investments and lower margin acquisitions.

EBITDA margins in the base business, which includes our 2018 acquisitions expanded 40 basis points.

Turning now to slide nine this provides our results for the first half of 2019.

Brian MacNeal: Sales of $514 million were up 8%. Adjusted EBITDA increased 15%, driving margin expansion of 240 basis points. Adjusted diluted earnings per share of $2.28 grew 25%, primarily driven by increased profitability. Slide 10 is the bridge for our first half results. Volume gains in Architectural Specialties were largely offset by declines in mineral fiber volume. AUV was the big driver of earnings growth, with both price and mix contributing meaningful gains. Year to date, we experienced moderate inflation and drove benefits from productivity gains in our 2018 restructuring. These improvements more than offset investments and the fixed manufacturing costs of acquisitions. SG&A also benefited from restructuring and more than offset investments and the SG&A of acquired businesses. Slide 11 displays the drivers of adjusted free cash flow for the first half of the year.

Sales of $514 million were up 8% and adjusted EBITDA increased 15% driving margin expansion of 240 basis points.

Adjusted diluted earnings per share of $2.28 grew 25%, primarily driven by increased profitability.

Slide 10 is the bridge for our first half results.

Volume gains in architectural specialties were largely offset by declines in mineral fiber volume.

Avi was the big driver of earnings growth with both price and mix contributing.

Meaningful gains.

Year to date, we experienced moderate inflation and drove benefits from productivity gains in our 2018 restructuring.

These improvements more than offset investments in the fixed manufacturing cost of acquisitions.

SGN a also benefited from restructuring.

And more than offset investments and the SGN area of acquired businesses.

Slide 11 displays the drivers of adjusted free cash flow for the first half of the year.

Brian MacNeal: Operating cash flows benefited from cash earnings, which were up 11%, but year-over-year were impacted by the $20 million tax refund we received last year. We remain on track to deliver $220 to $240 million of adjusted free cash flow for the year, a 9% increase at the midpoint when excluding the special dividend from WAVE in the base period. Slide 12 outlines our guidance for the year. We are reaffirming our sales, EBITDA, EPS, and cash flow guidance. The sale of our international business is nearing its conclusion, and we expect to close the transaction in Q3. I'll remind you that we received the proceeds for the sale last year, so the impact on 2019 financial performance will be minimal.

Operating cash flows benefited from cash earnings which were up 11%.

But year on year were impacted by the $20 million tax refund we received last year.

We remain on track to deliver $220 million to $240 million of adjusted free cash flow for the year.

A 9% increase at the midpoint when excluding the special dividend from wave in the base period.

Slide 12 outlines our guidance for the year.

We are reaffirming our sales EBITDA EPS and cash flow guidance.

The sale of our international business is nearing its conclusion and we expect to close the transaction in the third quarter.

I'll remind you that we receive the proceeds for the sale last year. So the impact on 2019 financial performance will be minimal.

To close I am pleased with the results we have been able to deliver so far this year with first half sales up 8% and adjusted EBITDA up 15%.

Brian MacNeal: To close, I'm pleased with the results we have been able to deliver so far this year, with first half sales up 8% and adjusted EBITDA up 15%. I remain confident that we have the plans in place to deliver high single-digit sales growth and double-digit adjusted EBITDA growth, consistent with our value creation model. With that, I'll turn it over to Vic.

I remain confident that we have the plans in place to deliver high single digit sales growth and double digit adjusted EBITDA growth.

Consistent with our value creation model.

With that I will turn it over to Vic.

Vic Grizzle: Thanks, Brian. At the halfway mark, 2019 is shaping up nicely. Overall, market conditions are largely as we expected entering 2019, and our teams are executing very well. We remain confident in our full-year guidance, which delivers high single-digit revenue growth and double-digit EBITDA increases, consistent with the growth trajectory we outlooked at our investor day last November. Our value creation drivers, namely AUV improvement, mineral fiber, accelerated growth through share gains and acquisitions in Architectural Specialties, a balanced approach of feathering in investments to support the growth while maintaining margin expansion, and returning cash to shareholders, are all being executed as planned. Of course, innovation remains paramount at Armstrong, not only in new products but now also in digital technology. Our digitalization initiatives are well underway and include design and visualization tools to improve the speed and accuracy of the architectural specification process.

Thanks, Brian at the halfway Mark 2019 is shaping up nicely.

Overall market conditions are largely as we expected entering 2019 and our teams are executing very well.

So we remain confident in our full year guidance, which delivers high single digit revenue growth and double digit EBITDA.

Increases consistent with the growth trajectory, we outlooked at our Investor Day last November .

Our value creation drivers, namely HCV improvement mineral fiber accelerated growth through share gains and acquisitions and architectural specialties.

A balanced approach of feathering in investments to support the growth while maintaining margin expansion.

And returning cash to shareholders are all being executed as planned.

And of course innovation remains Paramount in Armstrong not only in new products, but now also in digital technology.

Our digitalization initiatives are well underway and include design and visualization tools to improve the speed and accuracy of the architectural specification process.

Vic Grizzle: We are developing capabilities to provide virtual and augmented reality project visualization while simultaneously creating design drawings, installation instructions, and a real-time bill of materials. What used to take weeks will soon take hours. This technology will allow the AWI team to earn specifications for its industry-leading product innovations, as well as improve our customers' experience along the way. Armstrong is committed to being the leader in innovation, to providing the best possible experience for our customers, and committed to making a difference in the spaces where people live, work, learn, heal, and play. With that, we'll be happy to take your questions.

We are developing capabilities to provide virtual and augmented reality project visualization, while simultaneously, creating design drawings installation instructions and a real time bill of materials, what used to take weeks will soon take hours.

This technology will allow the Wi.

Keen to earn specifications for its industry, leading product innovations as well as improve our customers experience along the way.

Armstrong is committed to being a leader in innovation to providing the best possible experience for our customers.

And committed to making a difference in the spaces, where people live work learn heal and play.

So with that we'll be happy to take your questions.

Ladies and gentlemen, if you have a question at this time. Please press the Star then one kunar touchtone telephone.

Operator: Ladies and gentlemen, if you have a question at this time, please press the star and the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, please press your line on mute once your question has been stated. Our first question comes from the line of John Lovallo with Bank of America. Your line is now open.

If your question has been answered or you were stronger so from the queue. Please press the pound key.

To provide any background noise furniture. Please pose your line on mute your question has been steady.

And our first question comes from the line of John Lovallo with Bank of America. Your line is now open.

Hey, guys. Thank you for taking my questions. The first one it seems like of the mineral fiber volume headwinds that you called out last quarter that Lat am is probably the one that didn't improve as expected, which would imply that big box and whether both.

[Analyst] (Bank of America): Hey, guys. Thank you for taking my questions. The first one, it seems like of the Mineral Fiber volume headwinds that you called out last quarter, that LADAM is probably the one that didn't improve as expected, which would imply that big box and weather both got a little bit better. Is this the right way to think about it? If it is, how big is LADAM as a percentage of your Mineral Fiber business?

John Lovallo: Hey, guys. Thank you for taking my questions. The first one, it seems like of the Mineral Fiber volume headwinds that you called out last quarter, that LADAM is probably the one that didn't improve as expected, which would imply that big box and weather both got a little bit better. Is this the right way to think about it? If it is, how big is LADAM as a percentage of your Mineral Fiber business?

Got a little bit better is this the right way to think about it and if it is how big is Latam is a percentage of your mineral fiber business.

Yes, John this thats the right way to think about it it's.

Vic Grizzle: Yeah, John, that's the right way to think about it. We had weather-related issues in parts of the country and in Canada in particular we called out, and then also some of the inventory corrections in the big box area. All of those areas improved sequentially in the quarter as we expected it to, and as we talked about in Q1. The one that didn't improve enough, and now knowing what we know now about that market, I don't expect Latin America in particular to bounce back or have enough time in the remainder of the year to bounce back. It eventually will bounce back. I think we're in good shape down there. I don't think that that's going to help us in the second half of the year. Therefore, that gets us to the lower end of our previous guidance range on volume.

We had weather related issues in parts of the country and in Canada in particular, we called out.

And then also some of the inventory corrections.

In the <unk> and the Big box area all of those areas improved sequentially in the quarter as we expected it to and as we talked about in the first quarter.

The one that didnt improve enough and now going now knowing what we know now about that market I don't expect Latin America.

In particular to bounce back or have enough time in the remainder of the year to bounce back. It eventually will bounce back I think we're in good shape down there.

But I don't think that thats going to help us in the second half of the year. Therefore.

That gets us to the lower end of our our previous guidance range on volume, but the rest of the areas are again theyre, they're working their way through the system as we expected them to do.

Vic Grizzle: The rest of the areas are, again, they're working their way through the system as we expected them to do. As far as sizing, we don't break out LADAM specifically. As I said in my prepared remarks, it's a smaller channel for us overall relative to the other channels that we have.

And as far as sizing, we don't breakout Latam specifically.

But as I said in my prepared remarks, and it's a it's a smaller channel for us overall relative to the other channels that we have.

[Analyst] (Bank of America): Gotcha. Okay. That's helpful. Of the Mineral Fiber AUV in the Q2, was there any meaningful divergence between kind of the historical 50/50 split between price and mix?

John Lovallo: Gotcha. Okay. That's helpful. Of the Mineral Fiber AUV in the Q2, was there any meaningful divergence between kind of the historical 50/50 split between price and mix?

Got you Okay. That's helpful and then.

Of the the mineral fiber HCV in the quarter was there any meaningful divergence between kind of the historical 50, 50 split between price and mix.

It was a kind of like the first quarter as we outlook. It was a little heavier on the the like for like versus mix.

Vic Grizzle: It was kind of like the Q1 as we outlooked. It was a little heavier on the like-for-like versus mix. Again, as the year plays out, we expect that to be closer to a 50/50.

But again as the year plays out we expect that to be closer to a 50 50.

Okay. Thanks, guys.

[Analyst] (Bank of America): Okay. Thanks, guys.

John Lovallo: Okay. Thanks, guys.

Vic Grizzle: Yeah. Thanks, John.

Yes, Thanks John .

Thank you and our next question comes online of Kathryn Thompson with Thompson Research. Your line is now.

Operator: Thank you. Our next question comes from the line of Katherine Thompson with Thompson Research. Your line is now open.

Hi, Thanks for taking my questions today, and just to follow up on the next question.

[Analyst] (Thompson Research): Hi. Thanks for taking my questions today. Just to follow up on the AUV mix question, given that it's a little heavier for like-for-like, assume this is from more the pricing actions from last year flowing through than current year pricing actions?

Kathryn Thompson: Hi. Thanks for taking my questions today. Just to follow up on the AUV mix question, given that it's a little heavier for like-for-like, assume this is from more the pricing actions from last year flowing through than current year pricing actions?

Given that it's a little healthier for like for like a synthesis from.

More the pricing actions from last year flowing through the then current year pricing actions.

Yes, Kevin Thats, the way to think about it as as we talked about in the first quarter. We're lapping some of the aggressive price increases we were doing based on the inflationary environment last year.

Vic Grizzle: Yeah, Kathy, that's the way to think about it. As we talked about in Q1, we're lapping some of the aggressive price increases we were doing based on the inflationary environment last year. As you know, we were going heavier with our price increases in Q2 last year, so it wasn't a full quarter. That's why you saw some moderation there. That's the right way to think about it.

As you know we were going heavier with our price increases in the second quarter last year. So it wasn't a full quarter.

Thats why I saw some moderation there, but at the right way to think about it.

And how should we think about it as we look over the next 12 months given pricing actions that are out in the market now.

[Analyst] (Thompson Research): How should we think about it as we look over the next 12 months, given pricing actions that are out in the market now?

Kathryn Thompson: How should we think about it as we look over the next 12 months, given pricing actions that are out in the market now?

Vic Grizzle: Yeah. I think we're going to be comping, again, a lot of those successful actions last year in raising price to compensate for the heavy inflation. I think you'll see some moderation on the price side. I expect the mix, and it's been favorable all year, I think that part of the equation should continue for us. I'm very confident about the mix continuing. Like I said, I think overall, we're going to end at a very similar place than we normally do or historically have with about a 50/50 mix of price and mix.

Yes, I think we're going to be Comping again, a lot of those successful actions last year in raising price.

To compensate for the heavy inflation, so I think you'll see some moderation on the price side I expect the mix and it's been favorable all year.

I think that that.

Part of the equation should continue for us and I'm I'm very confident about the the mix continuing so like I said I think overall, we're going to we're going to end at a very similar place than we normally do or have historically have with about a 50 50 mix of price and mix.

[Analyst] (Thompson Research): Okay. Perfect. Just in terms of new products, could you give an update on the AcoustaBuilt rollout, also just a clarification of how big you think that opportunity is? Thank you.

Kathryn Thompson: Okay. Perfect. Just in terms of new products, could you give an update on the AcoustaBuilt rollout, also just a clarification of how big you think that opportunity is? Thank you.

Okay, perfect and just in terms of new products.

To give an update on the consumable.

Rollout also just a clarification of how big you think that opportunity. Thank you.

Vic Grizzle: Yeah. The AcoustaBuilt continues to gain a lot of attention and a lot of interest in the marketplace. I personally have been involved in some conversations with architects that are very interested in the combination of having that monolithic white, smooth white look with the acoustical performance of mineral fiber and have that in the same product is a revolutionary combination of features and benefits. There's a lot of interest. We're in the early days of working through a specification cycle. As we've talked about, this is not a meaningful impact in 2019. I'm very pleased with the interest level. We've had several installations. We've closed already our first couple of jobs in that material, and they've all gone very well. Very pleased with it, early days. We're going to refrain from sizing the total market opportunity until we get further into the rollout.

Yes. The occurs to bell continues to gain a lot of attention and a lot of interest in the marketplace. I personally have been involved in some conversations with architects that are very interested in the combination of having.

That monolithic white smoothed white look.

With the acoustical performance of mineral fiber and we have that in the same product is.

As a revolutionary combination of features and benefits. So theres a lot of interest we're in the early days of.

Working through a specification cycle. So as we've talked about this is not a meaningful impact in 2019.

But I'm very pleased with the interest level, we've had several installations, we've closed already our first couple of jobs.

And not material.

And they've all gone very well so very pleased with it.

Early days and.

We're going to refrain from sizing the total market opportunity until we get further into.

The rollout, but again, we we continue to think this is a meaningful opportunity and we're excited about it.

Vic Grizzle: Again, we continue to think this is a meaningful opportunity, and we're excited about it.

[Analyst] (Thompson Research): Okay. Final question really is more on technology, understanding that most of the construction industry is populated by Luddites. How is this self-service quote rollout going, and do you still see this as a meaningful cost saving for Armstrong? Thank you.

Kathryn Thompson: Okay. Final question really is more on technology, understanding that most of the construction industry is populated by Luddites. How is this self-service quote rollout going, and do you still see this as a meaningful cost saving for Armstrong? Thank you.

Okay and then final question really is broad technology understanding that most of.

The construction industry is populated by luddite.

How is the self service cloud rollout going and do you still see this is it meaningful cost savings for Armstrong. Thank you.

Yes, thanks for the question I think.

Vic Grizzle: Thanks for the question. I think we're really excited about this one quote system that we have that as we broaden our portfolio of products, we continue to be easy to do business with, and we provide access to this broad portfolio in a very frictionless way. This one quote system that we have that's turning into a quote-to-order, one quote-to-order system, which is the next generation, is just making that easier and easier for our customers to interact with us. The adoption rate of that was extremely high and went very quickly. We continue to get traction with, again, the second generation of that, which is taking once you have a one quote in the system, be able to have that go from a quote to an order in a seamless fashion as well.

We're really excited about this one quote system that we have that as we broaden our portfolio of products that it.

We continue to be easy.

To do business with them and we provide access to this broad portfolio in a very.

Frictionless way. So this one quote system that we have that's turning into a quote to order one quote to order system, which is the next generation is just making that easier and easier for our customers to to interact with us.

So.

The adoption rate of that.

Was extremely high and went very quickly.

And we continue to.

Get traction with again, the second generation of that which is taking once you have a one closing the system be able to have that go from a quote to an order in a seamless fashion as well.

So again this is I think the beginning and we're in the early innings of rolling out more of this digital digital technology that makes it just makes us so much more easy to do business with and again I'm very encouraged by the adoption rate marketplace and the feedback I got personally from.

Vic Grizzle: Again, this is, I think, the beginning, and we're in the early innings of rolling out more of this digital technology that makes it just so much more easy to do business with. Again, I'm very encouraged by the adoption rate in the marketplace and the feedback I got personally from the ability to have this one quote system. More to come on that.

The ability to have this one closed system.

Great more to come on so much. Thank you.

[Analyst] (Thompson Research): Great. Thank you so much.

Kathryn Thompson: Great. Thank you so much.

Vic Grizzle: Thank you, Kathy.

[Analyst] (Thompson Research): Thank you.

Kathryn Thompson: Thank you.

Thank you and our next question comes from the line of Ken Zener with Keybanc. Your line is now open.

Operator: Thank you. Our next question comes from the line of Ken Zenner with KeyBank. Your line is now open.

Good morning, gentlemen.

[Analyst] (KeyBank): Good morning, gentlemen.

Ken Zener: Good morning, gentlemen.

Vic Grizzle: Good morning. Morning, Ken.

Morning, Ken.

Yes, Im not sure yes on the stock today, you've had an incredible run all year.

[Analyst] (KeyBank): I'm not sure. The stock's off today. You've had an incredible run all year. There's something I asked you in the Q3 conference call, I think that's what the weakness is kind of reflecting, is this persistence of volume decline in mineral fiber, exceptional price mix. Vic, you talked to the 40% vitality rate. The lower margins, obviously, in AS investments, etc., etc. Can you just go over your view? The volume declines you said were coming from Latin America. Are those but you held your guidance, right? I mean, is Latin America volume, which you're not going to break out, understand it seems to me that the margins would be less in that product mix that you're delivering there. Is that accurate, or is that not accurate?

Ken Zener: I'm not sure. The stock's off today. You've had an incredible run all year. There's something I asked you in the Q3 conference call, I think that's what the weakness is kind of reflecting, is this persistence of volume decline in mineral fiber, exceptional price mix. Vic, you talked to the 40% vitality rate. The lower margins, obviously, in AS investments, etc., etc. Can you just go over your view? The volume declines you said were coming from Latin America. Are those but you held your guidance, right? I mean, is Latin America volume, which you're not going to break out, understand it seems to me that the margins would be less in that product mix that you're delivering there. Is that accurate, or is that not accurate?

Yes, I'm going to ask to you in the third quarter conference call and I think thats, what the weakness is kind of reflect Kansas persistence and volume decline in mineral wall.

Exceptional price mix that you talked to the 40, I think you said, 40% vitality rate.

And then the lower margins, obviously in a guess.

Investments et cetera et cetera.

Can you just go over your view is the the volume declines you said, we're coming from Latin America are those and but you held your guidance right. So, but I mean, as Latin America volume, but you're not going to breakout I understand it seems to me that that margins would be less in that product mix that youre delivering there is that accurate or is that not accurate.

Thats accurate I think the and we've talked about the smaller channel for us it's.

Vic Grizzle: That's accurate. I think we've talked about it. It's a smaller channel for us. It's a developing market where you tend to sell lower-value product mix into, and therefore, lower margin. I think you got it right, Ken.

It's a developing market, where you you tend to sell lower.

Lower value product mix into and therefore lower margin. So thats I think you got a right Ken.

And then.

[Analyst] (KeyBank): Because price mix is so strong, people just wonder how long you can have isolated mineral fiber. I think personally, you have to look at them both together because you're covering the space and the building. Do you foresee all this 40% vitality rate? I mean, when you record DesignFlex and this stuff, I mean, is that going to be going through, I assume that's going through volume with price mix, or is that how are you going to be recording that so we don't misinterpret the volume that's occurring in that category as it relates to price mix benefits?

Ken Zener: Because price mix is so strong, people just wonder how long you can have isolated mineral fiber. I think personally, you have to look at them both together because you're covering the space and the building. Do you foresee all this 40% vitality rate? I mean, when you record DesignFlex and this stuff, I mean, is that going to be going through, I assume that's going through volume with price mix, or is that how are you going to be recording that so we don't misinterpret the volume that's occurring in that category as it relates to price mix benefits?

Because price mix is so strong people just wonder how long you can have.

Isolating mineral I think personally I believe them both together because you are covering the space in a building but.

Do you foresee all these this 40% vitality rate I mean, when you record flex design in this stuff I mean is that going to be going through I assume that's going through volume with price mix or is that how are you going to be recording that so we don't.

Misinterpret the volume thats occurring in that category as it relates to price mix benefits.

Yes, as I talked about can the the main driver of the improvement.

Vic Grizzle: As I talked about, Ken, the main driver of the AUV improvement has been this mix impact from the new innovations, from Total Acoustics to Sustain to DesignFlex, which to your question, is a mineral fiber product, it goes through our price-volume mix breakout. It's going to be contributing to mix in a big way. AcoustaBuilt's another one that's going to be a mineral fiber product that's going to continue to support a higher-value mix. Again, I think I'm really encouraged by the Vitality Index that we've been tracking over the last several years. It tells us a lot of things. It should tell you this. It should tell you that the innovation that Armstrong is bringing to the market is relevant innovation and that the market wants. We're really letting the market drive our innovation efforts.

As has been this mix.

<unk> impact from the new innovations from total acoustics to sustain.

To design Flex, which to your question will is a mineral fiber product. So it goes through.

Our price volume mix breakout so it's going to be contributing to to mix in a big way acoustic belts. Another one that is going to be a mineral fiber product that's going to continue.

To support a higher value mix.

So again I think I'm really encouraged by the vitality index.

That that we've been tracking over the last several years.

It tells US a lot of things and it should tell you. This is should tell you that the innovation that Armstrong is bringing to our to the market is relevant innovation and that the market wants and were really letting the market drive our innovation efforts and I think this is an affirmation that again the products that we're bringing it to the right features and benefits and at the right price point.

Vic Grizzle: I think this is an affirmation that, again, the products that we're bringing are the right features and benefits and at the right price point that customers are willing to pay. That's why I think it's so encouraging. I'd say that's why you should also be encouraged because of the long cycle with this innovation that this mix-up story is going to continue at Armstrong.

That customers are willing to pay.

And that's why I think it's so encouraging and I'd say, that's why it should also be encouraged because of the long cycle with this innovation that this mix up story is going to continue at Armstrong.

Right.

[Analyst] (KeyBank): Right. Thank you very much.

Ken Zener: Right. Thank you very much.

Thank you very much thank again thanks.

Vic Grizzle: Thank you, Ken.

[Analyst] (KeyBank): Thank you.

Ken Zener: Thank you.

Thank you and our next question comes from the line of Michael Wood with the new more in.

Operator: Thank you. Our next question comes from the line of Michael Wood with Nomar Incinet. Your line is now open.

Instinet Your line is now open.

Good morning. This is Ryan going on for Mike maybe slowed on cost inflation, just curious how inflation is tracking your initial 3% to 3.5% range from with David earlier this year.

[Analyst] (Nomar Incinet): Good morning. This is Ryan Coyne on for Mike. Maybe just a little bit on cost inflation. Just curious how inflation is tracking your initial 3% to 3.5% range from earlier this year.

Ryan Coyne: Good morning. This is Ryan Coyne on for Mike. Maybe just a little bit on cost inflation. Just curious how inflation is tracking your initial 3% to 3.5% range from earlier this year.

Yeah, Ryan we were down below that now we're in that two to three range I'd say two and a half to three is is this a little bit more.

[Analyst] (KeyBank): Yeah, Ryan. We're down below that now. We're in that 2 to 3 range. I'd say 2 and a half to 3 is a little bit more accurate, but in that 2 to 3 range.

Ken Zener: Yeah, Ryan. We're down below that now. We're in that 2 to 3 range. I'd say 2 and a half to 3 is a little bit more accurate, but in that 2 to 3 range.

Accurate, but in that two to three range.

[Analyst] (Nomar Incinet): Okay. Great. Just a little higher level, just from your vantage point, how the commercial construction market is faring year to date, what you see for the second half, and then maybe a little bit on what you're seeing for 2020?

Ryan Coyne: Okay. Great. Just a little higher level, just from your vantage point, how the commercial construction market is faring year to date, what you see for the second half, and then maybe a little bit on what you're seeing for 2020?

Okay, Great and then just a little higher level just from your vantage point other commercial construction market is fairing.

Year to date, what you see for the second half and then maybe a little bit.

On what you're seeing for 20000.

Yes, Brian This is Mike let me take that I think.

Vic Grizzle: Yeah, Ryan. This is Vic. Let me take that. I think as I had mentioned in my prepared remarks, the market is about what we expected it to be. Education in particular, I had been outlooking that we were expecting a better education market this summer season than we saw last year, and that has materialized. It's modestly better than last year. It's driven by healthier state and local government spending. That's also been supported by some improving education starts over the last 18 months or so. I think that's been a nice materialization of what we were expecting to see. Healthcare remains flat overall. Retail's down slightly, and office continues to hang in there in the low single digits. I'd say overall, the market is about what we expected.

As I mentioned in my my prepared remarks, I'd say the market is about to about what we expected it to be.

Education in particular I had been Outlooking that we are we were expecting.

A better education market. This summer season than we saw last year and that has materialized.

It's it's modestly better than last year, it's driven by a healthier state local government spending.

And Thats also been supported by some improving education starts over the last 18 months or so so I think thats been a nice materialization of what we were expecting to see.

Healthcare remains flat.

Overall retails down slightly.

And office continues to hang in there in the low single digits. So I'd say overall the market is about what we expected and.

And and.

Vic Grizzle: I'll add to that a little bit of color from my visits out to the field, meeting with contractors and distributors, even architects that are very bullish about the second half of the year given their quoting activity and their backlogs. Again, we feel good about what we're seeing in front of us right now from a market standpoint.

I'll add to that a little bit of color from my visits out to the field meeting with contractors and distributors even architects that.

Our very bullish about the second half of the year.

Given their quoting activity in their backlogs.

So again, we feel good about what we're seeing in front of US right now from a market standpoint.

Appreciate it. Thank you you bet.

[Analyst] (Nomar Incinet): Appreciate it. Thank you.

Ryan Coyne: Appreciate it. Thank you.

Vic Grizzle: You bet.

Thank you and our next question comes from the line of Gary Hsueh Moyes with Longbow Research. Your line is now open.

Operator: Thank you. Our next question comes from the line of Garrett Shamois with Lombow Research. Your line is now open.

Hi, Thank you just wanted if you could touch on the.

[Analyst] (Lombow Research): Hi. Thank you. I'm just wondering if you could touch on the cash flow in the quarter. You're reiterating your outlook, but it seemed like working capital was a little bit of a headwind. Wondering how that tracks in the second half of the year and just the confidence that that reverses?

Garik Shmois: Hi. Thank you. I'm just wondering if you could touch on the cash flow in the quarter. You're reiterating your outlook, but it seemed like working capital was a little bit of a headwind. Wondering how that tracks in the second half of the year and just the confidence that that reverses?

Cash flow in the quarter, you're reiterating your outlook and assume that working capital.

It was a little bit of a headwind so I'm wondering how that tracks in the second half of the year the costs of that reverses.

Sure Garik its Brian .

Vic Grizzle: Sure, Garrett. It's Brian. We're pretty confident in it. I mentioned I quote out we had some in the first half last year, we got a $20 million refund on taxes. We're starting to wrap that. For the quarter specifically, working capital was a headwind, but a slight benefit on the half. We expect it to follow us consistent performance in the back half like we saw last year and deliver our guidance.

We're pretty confident in that I mentioned I called out we had some.

In the in the first half last year, we got a $20 million refund.

On taxes, and so will normalize we're starting to wrap that up.

And for the quarter, specifically working capital was a headwind but.

Their slate slight benefit on behalf, so we expect it to them.

Okay. Thanks, and then just a follow up just on the volumes.

[Analyst] (Lombow Research): Okay. Thanks. Just to follow up just on the volumes in Mineral Fiber, just wanted to be clear. Is really the only change in your guidance related to LatAm? Just with respect to the expected volume growth in the second half of the year you touched on education coming in a little bit better than you had previously expected, is also that the main change in, I guess, the verticals tracking in the second half versus your initial expectations?

Garik Shmois: Okay. Thanks. Just to follow up just on the volumes in Mineral Fiber, just wanted to be clear. Is really the only change in your guidance related to LatAm? Just with respect to the expected volume growth in the second half of the year you touched on education coming in a little bit better than you had previously expected, is also that the main change in, I guess, the verticals tracking in the second half versus your initial expectations?

Fiber just want to be clear is really the only change in your guidance related to last Ham and then also just with respect to the expected volume growth in the second half of the year you touched on education coming in a little bit better than you previously expected. It was also about the main change and.

I guess the verticals on track in the second half versus your initial expectations.

Yes, I think all the verticals are about what we expected and again the the one that we we had to kind of wait and see on was education, because it's such a seasonal market.

Vic Grizzle: Yeah. I think all the verticals are about what we expected. Again, the one that we had to kind of wait and see on was education because it's such a seasonal market. As I said earlier, it's materialized as we had hoped it would. I think the main headwinds, as we talked about, we got off to a slow start in Q1 driven by some of these weather and timing-related issues. I still think those are working their way through with the exception of Latin America being, I think, a little bit more of a headwind and probably a longer time frame than we'll have time for in 2019. I think overall, I think we're seeing the market that we expected.

But as I said earlier, it's it's materializes, we had hoped it would so.

I think the main headwinds as we talked about we got off to a slow start in the first quarter driven by some of these weather and timing related issues and I still think those are working their way way through with the exception of Latin America being.

I think a little bit more of a headwind.

Probably a longer timeframe than then we'll have time for in 2019, but I think overall I think thats.

I think we're seeing the mark that we expected Hey, Garik. This is Brian the other thing I'd add to the education is interestingly enough, we're starting to see some mix up there.

Brian MacNeal: Hey, Garrett. This is Brian. The other thing I'd add to the education is, interestingly enough, we're starting to see some mix-up there and even K through 12. It's an encouraging mix-up too.

And even K through 12, so it's not the university, so it's encouraging mix up too.

[Analyst] (Lombow Research): Okay. That's helpful. Thank you very much.

Garik Shmois: Okay. That's helpful. Thank you very much.

Okay. That's helpful. Thank you very much yes.

Vic Grizzle: Yeah.

Thank you.

Operator: Thank you. Our next question comes from the line of Keith Hughes with SunTrust. Your line is now open.

And our next question comes from the line of Keith Hughes with Suntrust. Your line is now open.

Thank you Vic back to your comments on your your work in the field.

[Analyst] (SunTrust): Thank you, Vic. Back to your comments of your work in the field and some of the general bullishness of the contractors and other customers. Are they seeing demand spill over into 2020? Do you have that long of a vision that the start of 2020 will look as robust as the second half of 2019?

Keith Hughes: Thank you, Vic. Back to your comments of your work in the field and some of the general bullishness of the contractors and other customers. Are they seeing demand spill over into 2020? Do you have that long of a vision that the start of 2020 will look as robust as the second half of 2019?

And some of the general bullishness of the contractors and other customers are they seeing demand spill over into 2022 do you have that wrong or the vision that started 2020 will work well look as robust second half an ITC.

Vic Grizzle: Well, as you know, they have a lot less, right? In our longer project cycle business, like in Architectural Specialties, I am hearing some good activity spilling over into 2020 already. As you know, the contractors and distributors aren't going to get too far out in front because of their visibility. It's more positive than people are being negative, if that helps. I'm really seeing, again, on the longer cycle projects in Architectural Specialties. It's early days. It's early to tell, but that's one sentiment that I'm picking up in the marketplace.

Well as you know they have a lot less right.

But in our longer project.

Cycled business like an architectural specialties.

I am hearing some good activity spilling over into 2020 already.

So as you know the contractors and distributors are going to get too far out in front because of their visibility but.

That it's more positive than it's it's.

Then people are being negative if that helps and I am really seeing again on the the longer cycle projects in architectural specialties. So it's early days early to tell but thats, one sentiment that I'm on picking up in the marketplace.

One follow up too on the mix.

[Analyst] (SunTrust): One follow-up too on the mix question. Are you seeing more higher-end projects come in, or you just think you're winning more share at the higher end right now?

Keith Hughes: One follow-up too on the mix question. Are you seeing more higher-end projects come in, or you just think you're winning more share at the higher end right now?

Question are you seeing or a higher end projects come out or you just think you're winning more share at the higher end right now.

Well I think there are some there is some up selling going on with these new features and benefits that are available now.

Vic Grizzle: Well, I think there's some upselling going on with these new features and benefits that are available now, like we were talking about with Total Acoustics and Sustain, for example. A lot of this stuff, Armstrong is involved. We're on. There's a trade-up going on with these new offerings. I think there's a lot of that going on. I do believe that we do a really good job on the specification side of the business, driving the specifications at the high end of the market. I think we're doing a really good job at the high end there.

Like like we were talking about with.

Total acoustics and sustain for example, so a lot of this stuff Armstrong is involved we're on.

But there is a trade up going on with these new offerings. So I think there is a lot of that going on I do believe that we.

We do a really good job on the specifications side of the business driving the.

The specifications at the high end of the market.

So I think I think we are doing a really good job at the high end there.

Okay. Thank you.

[Analyst] (SunTrust): Okay. Thank you.

Keith Hughes: Okay. Thank you.

Vic Grizzle: Thanks.

Thanks.

Thank you and our next question comes from the line of Stephen Kim with Evercore ISI. Your line is now open.

Operator: Thank you. Our next question comes from the line of Stephen Kim with Evercore ISI. Your line is now open.

Hi, Thanks, very much guys good quarter.

[Analyst] (Evercore ISI): Yeah. Thanks very much, guys. Good quarter. Just as a housekeeping item, a couple of housekeeping items here. Days impact, what do you think that had what kind of influence do you think that had in the quarter? Did I hear you say that you thought that the office segment was up mid-single digits or low-single digits?

Stephen Kim: Yeah. Thanks very much, guys. Good quarter. Just as a housekeeping item, a couple of housekeeping items here. Days impact, what do you think that had what kind of influence do you think that had in the quarter? Did I hear you say that you thought that the office segment was up mid-single digits or low-single digits?

Just as a housekeeping item a couple of housekeeping items here. These impact what do you think that had a we're going to influence do you think that had in the quarter and did I hear you say that you thought that the office segment was up mid single digits or low single digits.

Yes, so its on the days impact it's about 1.5% is the way to think about that on the quarter.

Vic Grizzle: Yeah. On the Days impact, it's about 1.5% is the way to think about that on the quarter, both on volume and revenue. What I said on office, Stephen, was that it continued to be positive, and it's in the low-single-digit positive is what we're seeing so far in the marketplace. Again, there's some really good new construction activities that are supporting that as well.

Both on volume and revenue.

What I said on on office, Steven It was that it continued to be positive and it's in the low single digit positive.

That is what we're seeing so far in the marketplace and again, there's some really good new construction activities that are supporting that as well.

Got it Okay, and then second question related to the FCC and any savings in mineral fiber on the investments and investments in architectural specialties.

[Analyst] (Evercore ISI): Got it. Okay. Then second question related to the SG&A savings in Mineral Fiber and the investments in Architectural Specialties. Can you break out what some of the largest contributors to the savings are, what drove the increase in those two numbers, one positive, one negative? Is the Q2 savings run rate pretty good news going forward?

Stephen Kim: Got it. Okay. Then second question related to the SG&A savings in Mineral Fiber and the investments in Architectural Specialties. Can you break out what some of the largest contributors to the savings are, what drove the increase in those two numbers, one positive, one negative? Is the Q2 savings run rate pretty good news going forward?

Can you break out like what some of the largest contributors to the savings are.

You know what drove the increase and in those two numbers, one positive or negative and is the Twoq you savings run rate pretty good news going forward.

Steven This is Brian So no. We we've completed the benefit of the restructuring and its a combination of cost of goods sold and SGN a.

Vic Grizzle: Stephen, this is Brian. No. We've completed the benefit of the restructuring, and it's a combination of cost of goods sold and SG&A. We had profiled $10 million in the first half of this year. That run rate that we saw for mineral fiber is not a run rate, which is roughly $4 million in the quarter. The investments we're making, for example, in AS, and remember, even though we break these into segments, it's really one big business, right, because there's multiple products, our broad portfolio on every job. We're adding some more CAD designers and the upfront technical folks to help with project-oriented specifications.

We'd profile $10 million in the first half of this year. So so that run rate that we saw for for mineral fiber is not a run rate.

Which is roughly $4 million in the quarter.

But the investments, we're making for example, and a <expletive> and remember.

Even though we break these in the segments. It's it's really one big business right because there's multiple products our broad portfolio on every job and so we're adding some more cat designers and the upfront technical folks to help.

With project oriented specifications.

Okay.

[Analyst] (Evercore ISI): Okay. Got it. That makes sense. Sort of keying off of that, Vic, you had talked about the visualization initiatives and the innovations that are being implemented on that front. Just want to make sure I understand. Are these desktop-based applications? Are these website-driven? Where are the designers going to utilize this functionality and these features? Are they sitting at their own offices, or do they have to go to a distributor location to interact with these? Sort of what's the user interface like?

Stephen Kim: Okay. Got it. That makes sense. Sort of keying off of that, Vic, you had talked about the visualization initiatives and the innovations that are being implemented on that front. Just want to make sure I understand. Are these desktop-based applications? Are these website-driven? Where are the designers going to utilize this functionality and these features? Are they sitting at their own offices, or do they have to go to a distributor location to interact with these? Sort of what's the user interface like?

It makes sense.

Sorta keying off of that Zick, you had talked about the visualization initiatives and the innovations that are being implemented on that front. Just wanted make sure I understand are these desktop based applications. These web site driven a weird the designers going to utilize you know this functionality. In these features that are sitting at their own offices or do they have to go to a distributor locations to interact with these you know sort of what is where's the the the what's the user interface like.

Yeah, initially is or desktop applications because of the the size of these files eventually they'll they'll migrate to cloud based solutions is our hope.

Vic Grizzle: Yeah. Initially, these are desktop applications because of the size of these files. Eventually, they'll migrate to cloud-based solutions is our hope and the plan. Yeah, the opportunity right now is both in their office, but we have to take our system in. We have a site on campus now that they can come to, and we can do live work on campus, or we can do it virtually through an internet feed. There's multiple ways to interact, but right now, they're desk-based solutions.

And in the plant.

Yeah the.

The opportunity right now is is in both in their office, but we have to take our system in but there there we have a site on campus now that they can come to when we can we can do life.

Like work on campus or we can do it virtually.

Through an internet feed so there's multiple ways to interact but right now they're desk based solutions.

Would it be your gas that where this really takes kind of like a potential quantum leap forward would be when they can actually do it and the convenience of their own office whenever they get around to it you know be having a cloud based system or is there something about the way in which are the designers work and interact with your products such that that won't necessarily be the case like it would be let's say in certain other products and design situation.

[Analyst] (Evercore ISI): Would it be your guess that where this really takes kind of a potential quantum leap forward would be when they can actually do it in the convenience of their own office whenever they get around to it, having a cloud-based system? Or is there something about the way in which the designers work and interact with your products such that that won't necessarily be the case like it would be, let's say, in certain other product and design situations?

Stephen Kim: Would it be your guess that where this really takes kind of a potential quantum leap forward would be when they can actually do it in the convenience of their own office whenever they get around to it, having a cloud-based system? Or is there something about the way in which the designers work and interact with your products such that that won't necessarily be the case like it would be, let's say, in certain other product and design situations?

Vic Grizzle: No. We certainly expect this to get to a point where it's easy enough to use, and they can do it in a cloud-based environment. That's definitely the plan and the direction. I think our customers want this to be available as a tool for them to use as they see fit within their design cycles. That's definitely the direction we're moving.

No, we certainly expect us to get to a point, where it's easy enough to use and they can do it in a cloud based environment, that's definitely the plan and the direction I think our customers want.

Just to be available as a tool for them to use as they see fit within their design cycles. So that that's definitely directionally moving.

Okay and in terms of timeframe to get there.

[Analyst] (Evercore ISI): Okay. In terms of time frame to get there?

Stephen Kim: Okay. In terms of time frame to get there?

Well not really.

Vic Grizzle: We're not really prepared to say publicly. It's kind of an ongoing development, and we'll keep you updated as we go. Right now, it's kind of we're sitting in a desktop solution for the time being.

You know prepared to say publicly it's <unk>, it's kind of an ongoing.

Development and well keep you updated as we go but right now whats, it's kind of locked in a we're sitting in a desktop solution for the time being.

Okay.

[Analyst] (Evercore ISI): Okay. Well, great. Thanks very much, guys.

Stephen Kim: Okay. Well, great. Thanks very much, guys.

Well, great. Thanks, very much guys. Thanks. Thanks.

Vic Grizzle: Thanks.

[Analyst] (Jefferies): Thanks.

Phil Ng: Thanks.

Thank you and our next question comes from the line of Phil Ng with Jefferies. Your line is now open.

Operator: Thank you. Our next question comes from the line of Phil Ng with Jefferies. Your line is now open.

Hey, guys to gets your flat volume guidance pretty minimal fiber would imply you would see in a pretty noticeable pick up in back half is part of the confidence years, that's driving that uptick driven from the trends you're seeing in July and perhaps the education piece you flagged.

[Analyst] (Jefferies): Hey, guys. To get to your flat volume guidance for mineral fiber would imply you would see a pretty noticeable pickup in back half. Is part of the confidence that's driving that uptick driven from the trends you're seeing in July and perhaps the education piece you flagged?

Phil Ng: Hey, guys. To get to your flat volume guidance for mineral fiber would imply you would see a pretty noticeable pickup in back half. Is part of the confidence that's driving that uptick driven from the trends you're seeing in July and perhaps the education piece you flagged?

Yeah, I'd say, what we're seeing in July is consistent with that outlook and again I in my comments earlier about the education season, So I'd say, yes, I'd say that's right.

Vic Grizzle: Yeah. I'd say what we're seeing in July is consistent with that outlook and again, in my comments earlier about the education season. I'd say yeah. I'd say that's right.

[Analyst] (Jefferies): Okay. Big piece of the education piece. All right. Sounds good. Good to hear you're seeing some pretty positive feedback on DesignFlex. Have you started to see any meaningful contribution, whether it's on the AUV line or on shipments? As for the AcoustaBuild piece, I know it's going to be more of a 2020 event. Is the opportunity more on commercial, or there's some opportunity on the rising side as well? Thanks.

Phil Ng: Okay. Big piece of the education piece. All right. Sounds good. Good to hear you're seeing some pretty positive feedback on DesignFlex. Have you started to see any meaningful contribution, whether it's on the AUV line or on shipments? As for the AcoustaBuild piece, I know it's going to be more of a 2020 event. Is the opportunity more on commercial, or there's some opportunity on the rising side as well? Thanks.

Oh got big piece of the education piece, Alright sounds good and then I'm glad to hear you're seeing some pretty positive feedback on design flex have you started seeing that or see any meaningful contribution whether its on the way you view line or on on shipments and as for the accused to build piece I know, it's got to be more of a 2020 that.

Is the opportunity more on commercial or is there some opportunity to rising side as well. Thanks.

Yeah, you know I'd say design flags, it's it's still early in relatively small to the overall size of the business. So it would probably be in the rounding error of you know on the on the mix aligned.

Vic Grizzle: Yeah. I'd say DesignFlex, it's still early and relatively small to the overall size of the business. It would probably be in the rounding area of on the mixed line. Again, I think we're gaining ground there, and it is starting to materialize in terms of revenue, which is very nice to see. The AcoustaBuild has application on both sides, both residential and commercial. Where we're focused right now is where we have the opportunities is initially on the commercial side of the business. We clearly see opportunities on both sides.

But again I I think we're gaining ground there and it is starting to materialize in terms of revenue, which is very nice to see.

The acoustic built has application on both sides, both residential and commercial so where we're focused right now is where we have the opportunities is initially on the commercial side of the business, but we clearly see opportunities on both sides got it all right. Thanks a lot.

[Analyst] (Jefferies): Got it. All right. Thanks a lot.

Phil Ng: Got it. All right. Thanks a lot.

Vic Grizzle: You're welcome.

You're welcome.

Thank you.

Operator: Thank you. Our last question comes from the line of Justin Spear with Zellman Associates. Your line is now open.

And our last question comes from the line of Justin Spirit with Zelman Associates. Your line is now open.

[Analyst] (Zellman Associates): Hey, guys. Appreciate the time. Just a few questions. One, starting out with the Architectural Specialties side, the growth and margin expectations as you look to the back half, if you can help characterize what you're thinking. The comparisons, particularly on the growth side in Q3, are fairly difficult. Just getting some characterization there would be helpful.

Justin Speer: Hey, guys. Appreciate the time. Just a few questions. One, starting out with the Architectural Specialties side, the growth and margin expectations as you look to the back half, if you can help characterize what you're thinking. The comparisons, particularly on the growth side in Q3, are fairly difficult. Just getting some characterization there would be helpful.

Hi, guys I appreciate the time, just a few questions one starting out with the architectural specialties side that.

The growth in margin expectations as you as you look to the back half. If you can help characterize you know what you're thinking yeah. The comparisons pick on the growth side and the third quarter fairly difficult, but just getting some characterization there would be helpful.

Yeah I think.

Vic Grizzle: Yeah. Again, I think what we talked about earlier in terms of the segment activity and the way that our customers are feeling about their backlogs, we are copying some tougher price comps because a lot of the price activity occurred in the second half of last year. Again, that's why we expect to see some of that moderate on a comp basis. We should have some stronger volume in the second half, as we've talked about. I think the combination there keeps us in the high-single-digit top-line growth. The plants and the teams are operating very, very well. We expect to continue to see double-digit earnings growth on the bottom line.

Again, I I think what we talked about earlier in terms of the.

The segment activity and the way that our customers are feeling about their backlogs.

Where we are comping, some tougher price comps because a lot of the price activity in the second half occurred in the second half of last year. So again, that's why we expect to see some of that moderate on a on a comp basis, but we should have some stronger volume in the second half as we've talked about.

And so I think the combination there.

Keeps us in the mid to high single digit topline growth.

And then the plants and the teams are operating very very well so.

Hope do we expect to continue to see double digit earnings growth on the bottom line.

And in particular for the for the for the architectural specialties business at high single is a good number to kinda to kind of model towards.

[Analyst] (Zellman Associates): Particularly for the Architectural Specialties business, that high-single is a good number to kind of model towards. Then I guess the second question on that is just on the margin side, given the investments that you're making, how you're thinking about that lining up in the back half as well for that business.

Justin Speer: Particularly for the Architectural Specialties business, that high-single is a good number to kind of model towards. Then I guess the second question on that is just on the margin side, given the investments that you're making, how you're thinking about that lining up in the back half as well for that business.

And then I guess the second question on that is just on the margin side, given given the investments that you're making how.

How you're thinking about that lining up in the back half as well for that business.

Yeah again, I think we're we're expecting to see margin expansion in that business I would expect double digit topline growth to continue in that business I'm OK again, they're continuing to take share in the I'd say the base business. The materials that we're we're currently in.

Vic Grizzle: Yeah. Again, I think we're expecting to see margin expansion in that business. I would expect double-digit top-line growth to continue in that business. Again, they're continuing to take share in, I would say, the base business materials that we're currently in as we ramp up some of these new acquisitions as well. I expect to see some continued momentum in that business in the second half.

As we ramp up some of these new acquisitions as well so I expect to see.

So continued momentum in that business in the second half.

Okay and then in terms of the spending are you is that going to sequence down in terms of the margins. He said.

[Analyst] (Zellman Associates): Okay. In terms of the spending, is that going to sequence down in terms of the margins? You said you expect expansion in terms of, I guess, the magnitude of the expansion on the volumes. What are you baking in your guidance there?

Justin Speer: Okay. In terms of the spending, is that going to sequence down in terms of the margins? You said you expect expansion in terms of, I guess, the magnitude of the expansion on the volumes. What are you baking in your guidance there?

You expect expansion it's in terms of the.

That's the magnitude of the expansion the volumes what what are you baking in your guidance there.

Brian you want to take that feature so Justin I'm, a couple of things there one.

[Analyst] (Jefferies): Brian, you want to take that?

Phil Ng: Brian, you want to take that?

Vic Grizzle: Yeah. Sure. Justin, a couple of things there. One, we're not going to be shy about making some investments. Again, these investments show up mostly in AS, but they benefit the total company. We want to make those rightful choices and investments that help sustain this nice high-single-digit growth. I can't give you an exact number. There's typically $2 million a quarter, 1 to 2, a quarter for the total company. Again, most of that shows up in AS. Again, we're not going to hesitate to make some of those investments in order to sustain that top line.

We're not going to be you know shy about making some investments again these investments show up mostly in they ask but they benefit the total company and we want to make those wasteful choices and investments that help sustain this nice high single digit growth. So I can't give you an exact number you know there's typically a couple of million dollars a quarter one to two quarter for the total company again most of that shows up in a S.

But again, we're not going to hesitate to make some of those investments in order to sustain that topline.

Perfect and then the next question of more intermediate term in nature and.

[Analyst] (Zellman Associates): Perfect. Perfect. This next question is more intermediate-term in nature, and you've had some acquisitions here. Just maybe an update on what you think for your current platform as it stands today in Architectural Specialties in particular, what your, I guess, the addressable market size or definition and how fast you think that market is growing or expected to grow in the coming year or two. Of course, you're taking share, but just trying to get a baseline or a handle on the addressable market.

Justin Speer: Perfect. Perfect. This next question is more intermediate-term in nature, and you've had some acquisitions here. Just maybe an update on what you think for your current platform as it stands today in Architectural Specialties in particular, what your, I guess, the addressable market size or definition and how fast you think that market is growing or expected to grow in the coming year or two. Of course, you're taking share, but just trying to get a baseline or a handle on the addressable market.

You know you've had some acquisitions here, but just maybe an update on what you think the <unk> for your current platform as it stands today.

In architectural specialties in particular, what what you're.

I guess, the the addressable market size or definition.

And how fast do you think that market is growing are expected to grow in the coming year or two of course, you're taking share, but just trying to get a baseline or a handle on the addressable market.

Yeah, the addressable market Justin is.

Vic Grizzle: Yeah. The addressable market, Justin, it's tough to be very, very specific about it. We've talked about it being it's greater than a billion-dollar market opportunity in that specialty ceilings and walls. Again, our share position would be although we're the leader in this space, you can see the nature of the fragmentation in that space. That's the opportunity for us to continue to execute against that. Again, our pipeline of acquisitions continues to develop nicely to support that penetration in that market.

It's it's a tough to be very very specific about it but we've we've talked about it being it's greater than a billion dollar market opportunity in that specialty ceilings and walls.

And so again, our share position would be a although we're the leader in this space you can see the nature of the fragmentation in that space. So that's the opportunity for us to continue to execute against that.

And again, our pipeline of acquisitions continues to develop nicely to support that that that penetration in that market.

Excellent last question for me is just on the on the yesterday leverage obviously very good.

[Analyst] (Zellman Associates): Excellent. Last question for me is just on the SG&A leverage, obviously very good on some of the actions that you've taken for the overall business. What are you embedding for SG&A, either as a percentage of revenue or maybe a dollar run rate figure? Recognize there's seasonality in the business, but dollar run rate figure, what's a good run rate to think about for the balance of this year and maybe on an annualized basis?

Justin Speer: Excellent. Last question for me is just on the SG&A leverage, obviously very good on some of the actions that you've taken for the overall business. What are you embedding for SG&A, either as a percentage of revenue or maybe a dollar run rate figure? Recognize there's seasonality in the business, but dollar run rate figure, what's a good run rate to think about for the balance of this year and maybe on an annualized basis?

On somebody actions that you've taken for the overall business what it what are you embedding for SGN, a either as a percentage of revenue were maybe a dollar run rate figure a recognizing there's seasonality in the business, but dollar run rate figure what's a good run rate to think about for the balance of this year and maybe on an annualized basis.

So Justin I'd say annualize where were running right around that 15% of sales into that affords us as we grow sales to make some investments back in the business, but our our longer term value creation is right around that 15% of sales.

Vic Grizzle: Justin, I'd say annualized, we're running right around that 15% of sales. That affords us, as we grow sales, to make some investments back in the business. Our longer-term value creation is right around that 15% of sales.

[Analyst] (Zellman Associates): Okay. The 15%, you think it's a good number to use or close to it for the full year despite the very, very good first or particularly the Q2 very good there? We should see that step up a little bit in the back half.

Justin Speer: Okay. The 15%, you think it's a good number to use or close to it for the full year despite the very, very good first or particularly the Q2 very good there? We should see that step up a little bit in the back half.

Okay. So so the 15% do you think is a good number to use or close to it.

For the full year. Despite the very very good first or particular second quarter very good there. So we should see that step up a little bit in the back half.

Vic Grizzle: Yeah. This year, I'd say we're running a little heavier than that because of some of the acquisitions we closed last year. Overall, longer term, it's right around that 15% more.

Yeah <unk> this year I'd say, we're running a little heavier than that because of some of the acquisitions, we closed last year, but overall longer term. It's it's written on that 15% more.

All right.

[Analyst] (Zellman Associates): All right. I really appreciate the time, guys. Congratulations.

Justin Speer: All right. I really appreciate the time, guys. Congratulations.

I really appreciate the time guys.

Fortunately, thank you Jess and thank you.

[Analyst] (Jefferies): Thank you, Justin. Thank you.

Phil Ng: Thank you, Justin. Thank you.

Thank you and that does conclude todays question and answer session or whenever let's turn the call back to CEO Vic Grizzle for any further remarks.

Operator: Thank you. That does conclude today's question-and-answer session. I would now like to turn the call back to CEO Vic Grizzle for any further remarks.

Vic Grizzle: Yeah. I just want to thank everybody for joining our call today. Again, we feel very good. I want to thank our employees too for just terrific execution in the first half of 2019. We look forward to updating you after our Q3 performance. Thank you.

Yeah, just want to thank everybody for joining our call today again, we.

We feel very good I want to thank our employees to four just terrific execution in the first half of this year.

And we look forward to update you after our third quarter performance. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program. You may all disconnect everyone have a great day.

Operator: Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.

Okay.

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