Good day, ladies and gentlemen, and welcome to Third Quarter Armstrong World Industries Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] I would now like to turn the conference over to your host, Tom Waters, Vice President Corporate Finance; you may begin.

Thank you, Nicole. 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 armstrongceilings.com. 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 MacNeal 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. 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'll turn the call over to Vic.

Thanks, Tom, and good morning, everyone. It's good to be with you today to review our quarterly results and our outlook for the remainder of 2018. Third quarter was a busy quarter with strong results; our topline expanding 11% in the quarter was the best performance in seven years. Adjusted EBITDA grew double-digits, free cash flow grew 20%, our team earned enough like-for-like pricing to cover inflation, we closed another acquisition in architectural specialties, and we received the entire $330 million in cash from the sale of our international operations. The third quarter results were strong in both sales and EBITDA, both up double-digits. Total company sales growth of 11% continues the positive trend that began in 2017; we have broken out of the multi-year pattern of low single-digit growth and have delivered high single-digit growth for the second year in a row. With the acquisition of Steel Ceilings in the quarter, our second this year; and together with an improving acquisition pipeline our confidence is growing that we can continue strong sales growth. Sales in our Mineral Fiber business were up 7% driven by strong like-for-like pricing and mix gains which together drove higher average unit values or AUV. Price realization in the quarter was sequentially stronger than the first two quarters of the year. In both, the quarter and year-to-date periods we have earned price increases ahead of the inflationary headwinds. Our sales and distribution partner teams have done a fantastic job on pricing in these inflationary times. Also supporting our higher AUV was the improvements in mix driven by stronger sales in our high-end products, the Total Acoustics and Sustain families both grew significantly faster than the overall Mineral Fiber category. Mineral Fiber volume overall was fractionally down in the quarter, a modest improvement in the education…

Thanks, Vic. Good morning to everyone on the call. Today I'll be reviewing our third quarter and year-to-date 2018 results, but 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 in addition to our customary adjustments and consistent with our basis of presentation principles in the quarter and year-to-date we adjusted just under $3 million of costs associated with the Rock Fund [ph] litigation matter as these costs are discrete, unusual and not reflective of our true operating results. Turning now to Slide 4 for our third quarter results; sales of $260 million were up 11% from the third quarter 2017, and adjusted EBITDA increased 10%. Gross margins expanded driven by like-for-like pricing, mix and productivity, including the restructuring benefits previously announced. EBITDA margins did contracts slightly due to the impact of recent acquisitions that contribute the sales growth but was not a meaningful contributor to EBITDA. Adjusted diluted earnings per share were up 23% aided by our share repurchase program. Year-to-date, including the accelerated share repurchase program which closed in October, we have repurchased just under 4 million shares for $256 million. Since the inception of our repurchase program in the third quarter of 2016, we have bought back over 6.9 million shares for $300 million at an average price of just under $55 per share. Adjusted free cash flow improved by $12 million or 20% over the prior year quarter. Net debt decreased by $241 million driven by the receipt of the gross purchase price of the sale of our international businesses. Turning now to Slide 5; adjusted EBITDA increased $9 million as the strong AUV gains Vic mentioned fell to the bottom-line. In the quarter like-for-like pricing realization expanded…

Thanks, Brian. Before we open it up for questions, a few additional summary comments. 2018 remains on pace to be a record year. As an America's focused ceilings and specialty wall company, we've been investing in innovation, manufacturing and selling capabilities to extend our leadership position. These investments are now bearing fruit delivering both, top and bottom line growth. The revitalization of our Mineral Fiber business is well underway; we are achieving unprecedented adoption rates with Total Acoustics and Sustain Products. DESIGNFlex, our newest most innovative product line has now launched into the market, and we have already received our first specifications. And the Architectural Specialties business continues to outpace the market. We are driving impressive organic sales growth, expanding margins as we go, and adding new capabilities via M&A. And we remain focused on the balance and disciplined approach to capital deployment to enhance shareholder value. In 2016, when we separated flooring business, we said; we would first look to invest in our business and we've done that. We've invested $100 million to reinvigorate the Mineral Fiber category with innovations like Sustain, Total Acoustics, and now DESIGNFlex. We also said that we would execute a bolt-on acquisition strategy, and that's Architectural Specialties space, and we have been successful in this endeavor as well as we've now completed three acquisitions in this attractive category. We said we would address the poor returns in our international business which we have now done through the sale to Knauf. And finally, we said we would return cash to shareholders. As a high margin high free cash flow business, we've been able to deliver on this commitment too. In the past two years we have returned nearly $380 million through our ongoing share repurchase program. For as much as that has been accomplished thus far, there is still lot more to do; so I'm looking forward to seeing many of you here in Lancaster next week at our Investor Day to share with you what's next for AWI. We have an exciting future to share with you as an America's focused industry-leading building products company. So thank you for your attention. And with that, I'll open it up for questions.

[Operator Instructions] And our first question comes from Nishu Sood from Deutsche Bank.

First question; I just wanted to take a step back view here. Obviously, a very strong and encouraging sales performance, you're taking up your sales guidance on the higher AUV realization, as well as Architectural Specialties, and a little bit from the acquisition as well. EBITDA is coming up less, if we're going to take a step back is that mainly driven by the increasing costs? And as we kind of look ahead, you've always had strong price realization; so how [indiscernible] we're kind of play the tape forward, how -- and what does that imply for as we look ahead in terms of margins and EBITDA gates [ph]?

Nishu, this is Vic; and then, Brian can add some color to on some of the incrementals but -- we're very pleased with the top line as you've noted. It's good AUV of course and it's much needed in inflationary times like this and we're again covering inflation with like-for-like pricing. The mix shouldn't be overlooked here as well, we had very strong growth in the Mineral Fiber segment at the high-end of our product portfolio which drove half of the AUV gains. So I want to call attention to that, that's really helpful also and continue to drive the top line in the Mineral Fiber segment. And then as you noted, the Architectural Specialties team is doing a great job; and when I think about and look at the Architectural Specialty business, every material group in the Architectural Specialties space is driving double-digit growth. That speaks to the broad-based nature of the activity in that space and how present our team has become in this space across the country. And I'll add to that; that several jobs over $1 million in size we were serving in the quarter. So again, very broad-based and multiple sized projects, not just very large projects. As that business has been lumpy overtime but I'm very encouraged by the broad-based nature of the business, both in size, as well as across the categories. So that's going to continue and we expect good things to continue from that business to add to the top line. The shortfall on EBITDA in the quarter came down to really three things; we had slower growth in our WAVE business which adds to that EBITDA line and that was basically primarily due to timing of purchases, late in the second quarter ahead of price increases and we anticipated that we would have some lumpiness in the in grid volume from WAVE The second was we had some accrual true-ups on/around management incentives due to the strong performance on cash flow. I think Brian hit that very well in terms of how well this team is driving cash flow improvements. And so there were some true up costs in the quarter that were specifically linked to those. And then finally, we had some startup issues with the West Coast D.C. and in connection to the closure of our St. Helens plant, we talked about some of those in the second quarter, we had some of those that fell off or fell over into the third quarter. And of course, we got those behind who says we finish the third quarter. But those are the three things really, it wasn't a higher inflation cost really driving some of that shortfall. It's some of these one-timers I would say in the quarter.

Got it, great and that's very helpful. Second question; on Architectural Specialties, the power that we're now -- product innovation and the acquisitions and channeling it through your industry-leading distribution network. You're gaining share, I think that's fair to say or clear to say, is there some way that you can help us understand the pace of your market share gains? Clearly it seems to have accelerated, the power of the business model has come through; can you just help us to kind of bracket that and what pace the market share gains are going?

The best I can on that Nishu; I mean it's really difficult to pinpoint the number but let me just again, frame the Architectural Specialty business as business that's tied to new construction more, so we've got a bias more to new construction versus renovation. So when you look at new construction, as we've talked about in terms of the markets trends, the new construction is the strongest part of the demand out there in the marketplace today. So we do believe there is somewhere in that mid-to-high single-digit growth new construction activity available out there. So I think that's probably as close to a benchmark as you could say that the Architectural Specialties segment is growing is somewhere in that mid-to-high single-digit growth. So there we go; you bench the delta between our growth rate versus that is probably the best proxy I could give you.

And our next question comes from John Lovallo from Bank of America Merrill Lynch.

Mineral Fiber volume in the quarter was down slightly, called it one percentage off of a negative five comp in the third quarter of '17 and it looks like the fourth quarter comp is I think positive one. Recognizing that there were some lumpiness in the retail channel it's seems like you need something like in the order of 150 basis points of year-over-year EBITDA margin improvement to offer potentially this kind of flattish volume to the low end of your outlook. I'm just curious, if we're missing something here or if that math sounds about right?

A couple of things there; one, as you look at the calendar, we do pick up an extra shipping day in the fourth quarter versus year ago. So as you think about the volume piece as specifically all Mineral Fiber volume, as Vic mentioned, we had some timing of inventory with our Bigbox channel and we're seeing nice double-digit growth in October already for that timing. And then the third piece is, as you drive that down to the bottom-line we mentioned that we'll see about $9 million of restructuring cost benefit in the back half, we saw probably about four of that, and we did see four of that in Q3; so we're expecting five more to flow through in Q4. So that should help bridge as you look at the elements of AUV drivers, some inflation, and then the restructuring benefits.

And then, it looks like account accounts payable spiked pretty meaningfully in the third quarter. I'm not sure if you've hit on this already but could you just remind us what drove this and if you expect that to reverse in the fourth quarter?

Yes. It spiked because we saw some sales right towards the end of the quarter, especially around AS, and then we expect that reverse in Q4. Overall, our cash conversion cycle is one of the best, it's like 17-18 days in total.

And our next question comes from Stephen Kim from Evercore ISI.

I guess I just wanted to ask in terms of looking forward in Mineral Fiber business; do you see any -- anticipate any changes in the competitive dynamic at all with the change in ownership of USG by being bought [ph]?

We get this question a lot, again people are thinking about that and we're watching for it obviously, any meaningful change in the marketplace. I can tell you there has been no meaningful change in the competitive landscape. And you know, we'll have to wait and see under new ownership what our competitors do. But at the end of the day, what we focus on is really what our customers are trying to go and what they're trying to solve for, and as long as we stay ahead of whoever is our competition and meeting those customer needs we continue to drive I think these kinds of results. But really, no meaningful change to report on that.

And then I guess as a follow-up, you -- I just wanted to clarify your answer to John's question about 4Q; I think you mentioned that there's an extra shipping day, you also talked about the fact the home center lumpiness, looks like it's recovering here in October, and that's great. But just I was hoping maybe you could frame what do you think the impact on 4Q for the entirety of 4Q may be as a result of the recovery of this lumpiness or the offset to the lumpiness being a headwind in 3Q just because we don't know what -- exactly what the seasonality looks like if you're trying from October, November, December in terms of the size of the overall sales pool and that sort of thing. So you can just give us a sense of what you think that effect -- that benefit may be in 4Q?

Stephen, I think you're referring specifically to that -- the seasonality in that retail channel. I'll be honest with you, there is not a ton of seasonality in that channel; the lumpiness comes from the inventory management in the channel, and of course then we get large chunks of orders corresponding to those swings in inventory. So it's more of that dynamic than actual seasonality but what we see in the retail channel given what we're experiencing in October, and you can go back and compare this over several quarters; if you remember, actually last year third quarter we had a pretty strong buy by the retail channel. By one of our channel partners in particular, that drove a pretty big buy and so we were comping a tough base to start off with, again back to that lumpiness. But when we look at the full year and even the second half, this kind of evens out based on what we're seeing in October; so we're going to be as a Mineral Fiber business, we're going to be right in that range of zero to two that we've been out looking all year. We feel confident that what we're seeing in October is going to make sure that we enable landing in that zone. So, we're -- we like what we see in October, and again, I think it's going to even itself out and put us exactly where we expect it to be.

Stephen, I would add to that. As you think about that point that Vic just made, that's really around the question on the Mineral Fiber volume, right, so you pick up an extra day plus lumpiness but then as you think about the EBITDA target, we've got to hit in order to hit midpoint. In Q4 real strong AUV in Q3, right, we're showing our bridge there and roughly $12 million of benefit from AUV and the Mineral Fiber segment. Obviously, given seasonality Q4 won't be as high as that dollar value but the percent will hang pretty close to it. Obviously, AS sales growth and then the restructuring of $5 million benefit that we should see in Q4 to bring us to a total of 10 for the year.

And our next question comes from Phil [ph] from Jefferies.

I was wondering if you could provide some color on how to think about margin and seasonality of the Plasterform and Steel Ceilings businesses? And what's a good base for how to think about that going into 4Q? I now Steel Ceilings closed sometime in the middle of 3Q. Thanks.

The seasonality of Steel Ceilings and Plasterform, I think will follow very much like the Architectural Specialty business, and like our Mineral Fiber business as well; we tend to have a lot more activity in the second and third quarters than we do the first and the fourth quarters. So those two businesses should follow very similar patterns as the rest of our business, frankly. On specific to the earnings progression of those two companies; as I reported, those two companies were relatively new acquisitions to us, of course in the third quarter, and brought very little EBITDA contribution while it added almost two points to our overall top line it didn't bring a lot of EBITDA contribution. And again, that's not too dissimilar to what we experienced Tectum when we first bought Tectum. And what we expect to do with Steel Ceilings and with Plasterform is bring the efficiencies and the scale of the Armstrong go-to-market capabilities, to make those businesses more efficient and scalable so that we can drive earnings growth. So I think we'll be driving a disproportionate growth level in those two businesses as we catch up to where those businesses should be performing under the Armstrong System. So, again that may be a little out of phase with the overall seasonality that your question was referencing. So hopefully that answers [ph].

Just on the margin side; what's kind of the expected timeline to bring those margins upto the overall company level?

We're working at it right away, so we're after it right now but we've already started that process. I think a good proxy for how we'll ramp those is what we've done at Tectum and it's been an 18 to 24 month period of some capital but also some of the process improvements to get to the high EBITDA margins that we have in Tectum. So it's -- I think a good one to two year timeframe is a good proxy.

And then just one follow-up; it sounds like the [indiscernible] purchase program close at the beginning of 4Q. Is there any more share repurchase baked into the full year EPS guidance or is that just share repurchases today?

Our share repurchase program still has plenty of authorization left in it, we'll continue to look at open market and other form of vehicles for share repurchases in November/December but this -- the ASR itself is completed.

And our next question comes from [indiscernible].

So you caught up the $12 million of AUV achieved during the quarter. Can you give us a sense of what you're seeing in incremental freight and input cost inflation currently, and how this will impact your 4Q results given that your price attempts are largely behind you now?

Now freight in itself is a smaller piece of our total cost of goods sold, obviously raw materials are much higher. We did see in the quarter a deceleration of that inflation, so July was much higher than August and September. And if you recall, last year the freight inflation really started in Q4 a year ago 2017, so we're starting to wrap that. So as we look out at the inflation headwinds, we think we've got ample AUV strength to offset that.

And then just higher level; what gave you the confidence to increase your Architectural guidance to greater than 20% from double-digit previously; like what changed from before?

In the Architectural Specialty business, we have a little more visibility because of the project nature of that business; and so we have a good idea of what's going to ship the rest of the year already given, again, the visibility of those projects. So I think -- and three strong quarters already behind us in terms of top line performers of that business that gave us the confidence to go ahead and raise the guidance on AS.

And our next question comes from Keith [ph] from SunTrust.

Question shifting back a little bit to Mineral Fiber for a minute or I guess maybe include Architectural Specialties. Is the pace of order activity change at all during the quarter and to October either in the new construction or renovation this year of your business?

I think the order pattern was pretty consistent, you take out those months where you have a lot of education activity in the summer months, early part of third quarter. But when you look at across the months in both Mineral Fiber and Architectural Specialties, it was pretty consistent.

The retail segment was the one outlier where we saw some softness, and then we picked it up in October. So, a little bit of shifting there.

On the cost side, will the cost insulation in the fourth quarter will be similar to what we saw in the third from where we stand right now?

Yes, I think the overall cost curve seems to be flattening out a bit in the third quarter, later in the third quarter. And again as Brian referenced, we're starting to lap where we saw some meaningful increases in the fourth quarter last year. So, again, I feel like we're -- they're not -- they are freight expenses in particular, we're not finished with those. I think those are going to continue to move higher even into next year as -- those are structural issues in that segment that are going to drive costs higher. But raw materials seems to be leveling out here and I think we've got enough price in to cover those increases.

And finally, I know you talked and you're describing some of the adjustments, the cost of litigations with Rock hold [ph]; can you give us any kind of update where that litigation stands right now?

As you know, we can't comment too much about the litigation activity, it's in it's process. And we continue to -- as we get through phases of that litigation, we continue to be confident that there's not a lot of basis of the claims here, and that we're going to prevail in that lawsuit. But it is kind of in it's own litigation process and cooking along. It is on an accelerated rate versus what we expected it to be, but it's continuing and will continue on into the fourth quarter at least; and again, I think there's nothing in this case that's come out that would that would give us any pause for confidence that we're going to prevail this.

And our next question comes from Ken Zener from KeyBanc.

I'm looking forward to connect week; so I assume some of these things you'll hair dressing [ph]. But your volume -- your guidance is here to cheer for this year, looks like it will be at the lower end of that, same range. Last year Mineral wall kind of down but your pricing is so strong in this quarter pricing and mix just was I think almost perhaps a record from a percentage basis. Longer term, do you feel you guys actually need volume growth as your report it or is -- perhaps just the industry changing, given all Architectural Specialties, the price saying the [ph] mix as we saw this quarter. Do you feel like you even need it in volume necessarily and your industry at this point given how much the mix shift is changing? And that's it, thank you very much.

Listen, we're working hard to create demand for Mineral Fiber ceiling solutions. We've got several initiatives that are driving demand for Mineral Fiber solutions, this whole DESIGNFlex platform, we're going to talk to the group about next week in more detail is the most innovative exciting innovation to come to the Mineral Fiber category in a long time, if not ever. And it is all around renewing the interest to specify these types of solutions in the ceiling space; so we are focusing on not only creating value for customers through services and products that earn higher prices and higher AUVs but we are also incentivizing and working hard to drive innovation that wants them that or that drives them to want to specify more Mineral Fiber ceilings. So we're working hard on all of those fronts; price, volume and mix. And we're going to share some of that with you next week when you're in Lancaster.

And our last question comes from Katherine Thompson from Thompson Research.

I wanted to start with the Architectural Specialties segment; growth 37% in the quarter, it looks like acquisition was 11% of that. So can you guys just talk about the remaining 26% broken up between the two categories you called out; I think new construction and market penetration. Thank you.

I think on the architecture specialty space, again, it's more biased to new construction or major renovation activity. So I would just kind of put all of Architectural Specialties in that bucket versus the renovation. I think there is large renovation project that certainly capture Architectural Specialty business but I'd buys it [ph] more toward the new construction work. And as I mentioned earlier in my comments, Architectural Specialties across all of it's material groups were up double-digits in the quarter; so very broad-based activity. And I also highlighted the size of the job; so from small to larger size there was a nice balance in the shipments in third quarter as well. So again, I think that really speaks to the broad-based participation that Armstrong has now in this category.

I think I was also talking about new construction versus market penetration, not renovation sorry. If there is any difference between those two or it's still just one kind of a new construction in general?

I'll go back to my earlier comments around the rate of new construction; it's still in that mid-to-upper single-digits. So I mean you can almost assume the rest of that that thing is penetration, I think that's the best proxy to think about it that way.

And if you could just dig into the new construction a little more, I think you kind of mentioned large and small projects where about even but were there any other types of projects or geographies that are doing well or worse than others? If you could dig it into that it would be appreciated. Thank you.

On the new construction side it is a pretty broad-based across the country still, so all the major metropolitan areas are seeing positive construction, new construction growth. The one segment I'll call out is office which has been and continues to be kind of the more robust vertical in the new construction category, although we're seeing some renewed activity in healthcare and education on the new construction site as well. But office has really been I think the more robust vertical in the new construction activity.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Vic Grizzle, CEO; for any further remarks.

I just want to thank everybody for your participation today. And again, we're looking forward to our Investor Day next week. And for all those that are going to be there we look forward to hosting you here on our campus. So until then, thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program, you may all disconnect. Everyone, have a great day.