Good morning. My name is Colby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2023 Armstrong World Industries Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I’ll now turn the call over to Theresa Womble, Vice President of Investor Relations and Corporate Communications. You may begin.

Thank you, Colby, and welcome everyone to our call this morning. On today’s call, Vic Grizzle, our CEO; and Chris Calzaretta, our CFO will discuss Armstrong World Industries third quarter 2023 results and our rest of year outlook. To accompany these remarks, we have provided a presentation that is available on the Investors section of the Armstrong World Industries website. Our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of SEC Reg G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the earnings press release and in the appendix of the presentation issued this morning. Both are available on our website. During the call, we will be making forward-looking statements and these statements represent the view we have of our financial and operational performance as of today’s date, October 24, 2023. These statements involve risks and uncertainties that may differ materially from those expected or implied. We provide a detailed discussion of the risks and uncertainties in our SEC filings, including the 10-Q filed earlier this morning. We take no obligation to update any forward-looking statement beyond what is required by applicable securities law. And now, I’ll turn the call to Vic.

Thank you, Theresa, and good morning, everyone, and thank you all for joining our call this morning. As most of you have seen in our press release this morning, we delivered strong third quarter results. We generated strong sales and earnings growth while still facing weak market conditions that dampened overall demand in both our Mineral Fiber and Architectural Specialties segments. Our results were stronger in the quarter than we expected, largely due to the fact that we did not experience a further deterioration of market activity as initially expected, and due to the outstanding execution by our teams. Now, before we get into more of the details of these results, I’d like to recognize the strong execution by our teams in the quarter and, in fact, throughout the entire year. I appreciate the efforts spent across the company to deliver the highest quality products with the best service levels in our industry, while also successfully implementing our growth initiatives. So, thanks to the entire Armstrong team. For the quarter, total company adjusted EBITDA increased 19% on a 7% increase in net sales. Total company adjusted EBITDA of $125 million marks the highest quarterly result in the history of our business with adjusted EBITDA margin expanding 380 basis points. Both our segments Mineral Fiber and Architectural Specialties reported record setting quarterly sales and earnings with robust margin expansion. These results are truly emblematic of the resilience of our business with a strong market position, a diverse set of end markets and effective growth initiatives, all providing strength and stability to our sales and earnings even when one or two of our verticals are under pressure. Now, taking a closer look at our Mineral Fiber segment, we delivered 7% sales growth and 18% adjusted EBITDA growth. The strong sales results were…

Thanks, Vic, and good morning to everyone on the call. As a reminder, throughout my remarks, I’ll be referring to the slides available on our website and Slide 3, which details our basis of presentation. On Slide 6, we discuss our quarterly Mineral Fiber segment results. Mineral Fiber sales growth of 7% was driven by strong AUV partially offset by lower volumes. AUV performance was driven by like-for-like pricing along with favorable mix. The positive mix benefit in the quarter was driven by channel mix. This strong AUV result marks another solid quarter of execution by our teams, and we remain on track to deliver AUV growth for the full year above our historical average of 5%. The decrease in Mineral Fiber volumes during the quarter was driven by overall softer market demand, the impact of one less shipping day, and lower sales volumes within our Latin America channel partially offset by the incremental contribution from our growth initiatives. While third quarter Mineral Fiber volumes were lower than prior year, they were well ahead of our expectations. As Vic mentioned, the two drivers were a better than expected market and timing within our home center customer channel. Mineral Fiber segment adjusted EBITDA grew by $16 million or 18% to a record setting $105 million, and adjusted EBITDA margin expanded by 380 basis points. Driving this gain in margin expansion was AUV fall-through to EBITDA and lower input costs. While raw materials remain inflationary, tailwinds from energy and freight deflation provided a benefit as we lapped a prior year period that saw double-digit input cost inflation. Input costs this quarter also benefited from favorable inventory valuation impacts related to timing of input costs flowing through the P&L. Recall that in the first quarter of 2023, we had a $6 million headwind…

Thanks, Chris. Before we get to your questions, I’d like to take a moment and provide some additional context on the overall market backdrop, impacting both of our segments. As I mentioned earlier, in the back half of the year, we expected a lower level of economic activity to drive further deterioration of underlying market demand, namely on the renovation side. Instead, market demand appears to have stabilized at this lower level in the back half of the year. We continue to believe that the market weakness is mainly impacting discretionary spending on renovation and replacement activity, and primarily in the office vertical. Overall demand remains pressured by interest rate uncertainty, low office leasing activity, which creates the churn leading to renovation events and broader overall economic uncertainty. But as we’ve reported, our business serves a wide range of vertical markets and project types. Education, with government funding support and healthcare were both positive in the quarter. These are helping to offset continued office weakness. In addition, as we outlook earlier this year, new construction starts from late 2021 and throughout 2022 contributed positively in the quarter. In consideration of more recent data, the data overall remains mixed. Dodge starts and bidding activity across many of the verticals has moved in and out of positive territory. Good funding conditions remain for education, healthcare and transportation. And in office, although, financial headwinds persist, the demand side of office appears to be stabilizing with growth in office employment continuing, more back to office mandates and less subleasing activity. So even though our view on the market has modestly improved for 2023, there does remain a healthy level of uncertainty and concerns on the macroeconomic level. With that said, our strong results against these weaker market conditions are demonstrating the strength and the…

[Operator Instructions] Your first question comes from the line of Susan Maklari from Goldman Sachs. Your line is open.

Thank you. Good morning, everyone, and congrats on a great quarter.

Thank you, Susan.

Thanks, Susan.

Yes. My first question is, talking a bit about demand. Vic, in your comments you mentioned some delays that you’re seeing in some of the projects out there, also the discretionary side, especially in office, that continues to stay weak. I guess, when you think about what is driving that. What do you think needs to change in order to see us turn the corners there and what are some of the things you’re watching for?

Yes. I think overall, I think the level of uncertainty remains in the marketplace. Even though, the uncertainty was driving a lot of the back half expectations for softer economic conditions that didn’t materialize. I still think given the geopolitical issues and I think interest rates, there’s still some uncertainty around their overall impact on the economy. And I think that gives especially in the discretionary area of renovation work, I still think there’s some pause there and I think that has to clear up before we can kind of get back to business with this discretionary renovation activity. On your first comment, with regards to some of the delays, speaking really to the Architectural Specialties side of the business, as we’ve talked about many times on this call, the Architectural Specialties business being so project intensive can have some ebbs and flows quarter-to-quarter. And as we get larger and larger projects in our backlogs, namely these airport projects, for example, a little bit of delay in some of those projects can really influence the quarter-to-quarter ebbs and flows. And that’s, I think, what we’re seeing and I was highlighting in terms of the overall activity and some of the project delays, some of those can move our numbers quarter-to-quarter. But overall, we’re so well positioned in that space. We’re really excited about the Transportation segment overall.

Okay, that’s helpful color. And as a follow-up, you saw a very nice lift in the Architectural Specialties margin this quarter. Clearly, kind of getting on a quarterly basis closer to that longer term guide that you’ve given us, how do you think about the sustainability of the improvement that you’ve seen? And any thoughts on the path forward from here?

Yes. Susan, we’re pleased, but we’re not surprised, right? The team has been working very hard on the right levers to pull to improve, namely the operating leverage. And it’s inside the plants. It’s the area outside of the plants, but as I called out in my prepared remarks, I’m really pleased with what our plants are doing to drive efficiencies and productivity. The operating leverage that we’re getting on the SG&A side is also notable. I think they’re pulling all the right levers, they’re executing, again, we’re very pleased with that case [ph]. We’re not surprised with their execution. And I think this is sustainable. As we go forward, we’re going to continue to work those levers around good productivity in the plants, getting the operating leverage on our investments that we’ve been making over the last year or so in this business. We believe we’re well on our way back to that 20% minimum target.

Okay. All right. Thanks for all the color and good luck.

You bet. Thank you.

Your next question comes from the line of Garik Shmois from Loop Capital Markets. Your line is open.

Hi thanks and congrats on the nice quarter. Wanted to ask first, with respect to the volumes in Mineral Fiber, and I think you saw benefits at home center. Just curious as to what drove that. I think you were expecting some destocking. It doesn’t seem like that occurred. But maybe if you could talk to sell-in versus sell-through and some of the underlying trends that you’re hearing about there?

Yes. On the home center, very specifically, the – which is our big box channel that we often talk about how that ebbs and flows quarter-to-quarter, right, with their drawdown on inventory and the buildup of inventory. And there was a pretty noticeable inventory build around some new products that we were gearing the stores up for resetting of inventory around some of these new products that, again, we were very open about that in the first half and there was some strong inventory build behind that. And when you look at the point-of-sale data, and they share their point-of-sale data with us, you can see that the point-of-sale data was mimicking pretty much what we were seeing in the overall market. And so this is a pretty good buy ahead of demand, and we expected that to be coming out, and they expected more of that to be coming out in the back half as they got up and running in their stores. So it didn’t come out as fast. I don’t think any of us expected the market conditions that we saw in the third quarter, and we’re seeing in the back half that might have slowed down some of their intentional drawdown. That’s really for them, I think, probably to answer better than me. But overall, we did not see the drawdown in inventory at the same level we expected. What we are out looking is that they still intend to do that, and we expect that – more of that to come out in the fourth quarter. And you’ll see that in sort of our fourth quarter expectations. So did I get to your question there? Does that answer your question?

Yes, you did. No, that’s helpful. Thank you. And then I just wanted to ask on – I think you called out, if I heard it correctly, about two points of volume growth due to some of your growth initiatives that you said Canopy in particular. Curious as to maybe how sustainable this type of growth, maybe not pinning you to do 100 basis points per quarter, but should we expect some noticeable volume growth from some of these initiatives on a go-forward basis?

Well, I think we outlooked – we reported 2% contribution to our volume growth in the quarter. We have been talking about a 1% to 2% contribution. So I believe we’re right in that range of what we expect on an ongoing basis in terms of contribution from these initiatives. I’d like to mention that healthy space has also contributed. We had a terrific quarter on the Canopy platform. That team is doing a terrific job turning it profitable. But also in our healthy space initiative, we continue to have positive contribution from our Healthy Spaces initiative. And our overall activity to help stimulate more renovation events in this large installed base that largely needs renovated. We’re trying to make – give them the catalysts and the reasons to do it in an easy way to get it done. So, I think we’re going to continue to see one point to two points of contribution from these growth initiatives going forward.

Got it. Thanks again.

Yes. Thank you.

Your next question comes from the line of Keith Hughes from Truist. Your line is open.

Thank you. A question on the fourth quarter is kind of the implied guide. There’s going to be a little bit of weakness in EBITDA at the midpoint. Can you talk about what’s going to be the makeup on the fourth quarter, how it’s going to trend?

Yes, Keith, I’ll take that. This is Chris. Yes, if you look – you can kind of see the implied fourth quarter volume, again that’s really driven by – relative to our previous expectations. It’s a little better market. But also, as Vic mentioned, some of that retail home center volume that we expected to come out earlier this year. We’ve got that pegged to come out in the fourth quarter, which is really contributing to that year-over-year volume decline in the fourth quarter. And then also, if you look at kind of how we’ve thought through and modeled some of the assumptions with SG&A. There’s a little bit of a heavier SG&A comp compared to the prior year due to some promotional spending that we have on some new product launches as well as higher incentive comp where we’re lapping a softer base period there due to some benefits that were taken in the prior year period. So just a couple of points of input there as I think about the fourth quarter. The other piece maybe to mention is on the AS side, a little bit softer AS finish to the year due to anticipated project delays, which again can be choppy from time to time.

Okay. And then what about input costs in Mineral Fiber, I know it was a positive in this quarter. What are you thinking full for?

Yes. So better-than-expected freight and energy costs there, so some deflation there. Raws were about as expected. I’d say, looking forward, on a full year basis, we’re now out looking for total input costs about flattish, so maybe some slight inflation there versus prior year in percentage terms with raw materials in that high single-digit range.

Okay. Thank you.

You’re welcome. Thanks, Keith.

Thanks, Keith.

Your next question comes from the line of Phil Ng from Jefferies. Your line is open.

Hi Vic, congrats on a really strong quarter. And then the commentary on office was pretty constructive about at least you’re seeing some signs it’s starting to stabilize. You gave us some great color in terms of bidding, quoting activity on AS. Any color on what you’re seeing on those same KPIs for your Mineral Fiber business? Should we kind of assume that things are starting to stabilize and you can get back to trend line from a growth standpoint in 2024? Or there’s still some risk it could route [ph] base lower?

Overall bidding activity was fairly consistent with what we saw in 2Q, still slightly down from a year ago. And then by vertical, again, kind of moving quarter-to-quarter in and out of positive negative territory. So not some big numbers one way or the other. I kind of look at those numbers as within the margins as directional. So renovation being still the drag on overall bidding activity with new construction being fairly positive. So, I don’t know, it just feels like, Phil, that even the bidding activity seems to be kind of bouncing along a new bottom here, if you will, that feels fairly sideways moving, if you will. So, I think that’s overall for the business. That’s kind of what I can see in the numbers.

And Vic, can you remind us how big is your more discretionary rental piece in terms of overall volumes for Mineral Fiber?

Well, rental is 70% of our business, 30% is in the new area. And then of that rental, you can – of that 70%, you can split it half and half as larger renovation projects versus more patch and match, if you will, type projects. There’s discretionary elements of both of those. So certainly, people who can wait as we talked about last year, are waiting, and I think we continue to see some of that. Although as time goes and some of the uncertainty clears up for certain parts of the market, such as healthcare and education we’re seeing some of those delayed projects come back into the marketplace. So it’s going to continue to ebb and flow, again, it feels like there’s some stabilization here in terms of the directional. It’s not getting better, it just – it didn’t get worse. I think again, I think that’s consistent within the overall bidding and quoting activity that we’re seeing.

Okay. That makes perfect sense. And then, Vic, I appreciate the great color you guys provided on some of that home center dynamic. But I understand one of your competitors had operational issues on the mineral fiber set for a higher value product. Was that an opportunity for you to pick up some share during the quarter? And how do you kind of see that transpiring over the course of the year?

Yes. We’re aware of the issue you’re talking about. And we did get calls. We were able to help some of their customers out in the short term. If it wasn’t material and it’s not material in terms of any share shifts go – share moves in this industry over time. So not material really in the quarter, nor do we expect this to be a continuing share move for the rest of the year.

Okay. Appreciate the color. Thank you.

Yes. You bet.

Your next question comes from the line of Rafe Jadrosich from Bank of America. Your line is open.

Hi good morning. Thanks for taking my question. It’s Rafe. Can you just break out what the inventory revaluation impact was in the third quarter? And is there any impact anticipated for in the fourth quarter guidance?

Hey, Rafe, it’s Chris. Yes, yes, we don’t call out the inventory valve impact there in the quarter. But as I said in my prepared remarks, given the fact that input costs and material, raw materials have moderated a bit as compared to their previous levels. You see the benefit of that flowing through the P&L by way of what we call inventory valves. So we’ve picked up and recouped a bit of the headwind that we experienced earlier this year. There’s an assumed benefit in the fourth quarter. And we’re going to be pretty close just shy of the full year headwind that we saw in the first half kind of coming close to offsetting within the year. So hopefully, that adds a little bit of context. If raws moderate even further, that could potentially drive some additional tailwind there. But that’s the dynamic and how that works. It’s not a write-off of inventory. Again, it’s just the timing of inflation rolling through the income statement.

Got it. And the first half was $6 million of impact of a headwind?

Yes, the first quarter was $6 million.

Got it. Okay. That’s helpful. And then just in the fourth quarter guidance implies a deterioration in Mineral Fiber volume growth versus the 2019 level, compared to the third quarter. And we’re not losing a selling day year-over-year in the fourth quarter. The guidance sort of implies actually worse year-over-year growth despite the easiest comp. Does the guidance still assume deterioration in economic activity from here? What are you seeing kind of 3Q to date and sort of what’s implied in that guidance from an end demand outlook.

Yes. Sure. So it assumes a market that’s down called in that low single-digit range, which is pretty consistent with what we’ve seen throughout the course of this year. And then as Vic and I both mentioned, it assumes that retail, call it home center volume coming out in the fourth quarter. So that’s really the top line. And then as it pertains to EBITDA, again, a little bit heavier SG&A as we’re lapping a period where we saw some benefits on incentive comp last year, higher incentive comp this year and then a little bit of promotional spend associated with some new product launches, which drives that kind of that EBITDA walk for you.

Great. Thank you. Very helpful.

You’re welcome.

Your next question comes from the line of Kathryn Thompson from Thompson Research Group. Your line is open.

Hey, thanks for taking my question today. Just one on the JV did a little bit better than expectations and understanding, I just want to get a little bit of better understanding of the driver for that? And in particular, are there any new growth initiatives within the JV that are really finally contributing to the overall earnings.

Yes. Very similar, I think, to our Mineral Fiber business, Kathryn, the market backdrop, the volume was better than expected. I think that was a nice contributor, but they’re doing a nice job in continuing to manage their steel purchases and their steel inventory levels and the pricing around that to make sure that we’re driving margins back to where they need to be. The team is doing a good job overall operationally, contributing to that. So I think it’s those building blocks probably in an outsized way, just a better market backdrop than that was initially expected.

Okay, and thanks for that. And then I know you touched on this, but I just want to pull string a little bit more on this. You talked about just a better end market mix contributing to – especially to Mineral Fiber. How easy or difficult, given the current market conditions, is it to do that? And then also how do you – how does one differentiate and not necessarily on the tile side, but just kind of the combination of what you’re able to provide. How has that contributed to overall a little bit better performance other than just the broad market which you’ve touched on?

I don’t sure understand your question. Are you talking about. I’m sorry, go ahead.

Well, really, how easy or difficult is it to shift your end market mix? End market mix. And how easy is that? Or is it just like to draw like mix for the end market just happened to be better? Or is this more a concerted effort on your end?

Well, we’re present with the architects that are driving all of these end market specifications. So we can support the architects where they have the work and where they have the business. And again, that’s a really important asset of ours is to have this presence in the architectural community because their workload shifts based on the market activity and we’re connected to them at the hip and making sure that we’re supporting on those types of projects. So I’d say it’s fairly easy for us to move where the market activity is going because of our presence and our strong seat at the table with the architects.

Okay, great. Thanks very much.

You bet.

Your next question comes from the line of John Lovallo from UBS. Your line is open.

Good morning, guys. Thank you for taking my questions as well. I guess the first one, Vic, you talked about maybe a little bit of choppiness in the market, some stabilization in certain markets. But if we think about on the Mineral Fiber side, the 2% to 4% volume target through 2026. Any updated thoughts there on the ability to achieve that?

Well, I think the building blocks are still there. You’re referring to the 2% to 4% longer-term growth rate in Mineral Fiber; remember the building blocks there were a market recovery back to 2019 levels and then one to two points of contribution from our growth initiatives. Again, we still expect there’s nothing structurally change to the point that we don’t think we’re going to get back to 2019 volume levels. And as we’ve reported in this quarter, we’re getting some nice contribution to the high end of that one to two point range for our growth initiatives. So my thoughts, and we’re not in a position to change that outlook at this point. It may get pushed out some depending on when the market recovery becomes part of that equation. But all the building blocks, John, are still there for us to get back to a 2% to 4% Mineral Fiber growth level.

Okay. That’s helpful. And then when we think about Canopy and the higher win rate that you’re experiencing there, curious what do you think is driving that? I mean, I guess a couple of questions. How sustainable do you think it is? Who are you competing against? And is it really just that underserved as a market where there’s this longer-term runway?

Yes. No, I think on the Canopy platform, we’re demonstrating that there is an underserved customer out there that doesn’t know where to go to get their ceiling tiles renovated and frankly, they think it’s very expensive to do. They’re finding out that it’s not that hard to do or giving them a place to go and to transact. And so – and the type of customers that are coming to this site and buying from us are not typical Armstrong customers. These are customers that don’t know Armstrong for the most part and don’t know where to go to get ceiling tiles. And we’re creating this cost-effective way to reach out, educate them, make them aware and help them get this done in a very easy way. It’s kind of the easy button, if you will, is the Canopy by Armstrong platform. Your reference to the win rate is more with our project works, my comments around project works. We’re adding value here to these designs that architects are developing. We’re helping them to iterate more productively, they can do this in a matter of days versus weeks. And we’re strengthening our ability to – strengthen the specification, if you will, and that’s improving our win rate on projects as they go through the channels, from the GCs to the contractors, all the way down through distribution. So that was my reference is we’re adding value here. We’re driving incremental both volume and AUV growth through this value-added service. And our traction in the A&D community is continuing to grow. So we’re in the early innings of this, but we’re really encouraged by the incrementality of such an automated design tool.

Understood. Thank you very much.

Thank you, John.

Your final question comes from the line of Adam Baumgarten from Zelman & Associates. Your line is open.

Hey, good morning, everyone. Just curious on the volume trends across the product suite, Mineral Fiber throughout the quarter. Anywhere where it is particularly strong or weak across either high or low end or kind of mid-range type products? And then just on mix within the segment, was that a more impactful positive this quarter versus maybe the prior few quarters?

Yes, it’s a good question. Our product mix continues to be positive. The growth at the higher end of the market continues to be greater than at the lower end of the market. Again, renovation activity, people want to put in the newest stuff when they renovate. So there’s a natural draw at the higher end of our portfolio. And the rate of innovation and new product introduction is at its highest level. And we’re – that innovation is getting pulled and specked by the architects and then that continues to help drive a richer mix at the higher end of the portfolio. That’s been going on for a number of years. And it’s materializing also in this year. And as we’ve seen in past downturns and garden variety type recessions is that we continue to grow at the high end faster than at the low end. And therefore, this supports growing your AUV even in a down market in a down cycle. And that’s – I think that’s on full display here in 2023.

Got it. Okay. Thanks. And then just if we think about just the volume growth or the modest volume declines in the quarter, how do you think that stacks up versus maybe the industry? And do you think you gained share in the quarter or kind of just grew with the market for the most part.

Well, I think the market is down low single digits as we were talking about consistent with what we’ve seen in the rest. I think the difference is our growth initiatives. And if you really carefully our growth initiatives are about growing the size of the pie by accelerating the rate of renovation, creating more renovation events that are just kind of late and sitting there. So I think we’re ahead and we’re able to capture more of that renovation here in the short term as we create it. So I would just put it in that bucket in terms of where the growth is coming from, offsetting some of the market weakness that we see.

Okay. Got it. Thanks. Best of luck.

Thank you.

There are no further questions. I’ll now turn the call back over to Vic Grizzle, President and CEO, for closing remarks.

Thank you. Just to close real quickly here, we’re very pleased obviously with our results in the third quarter. I think we’re particularly pleased that we could demonstrate the resilience and the strength of our business model in a more garden variety like downturn that we’re experiencing in 2023. It’s a testament to all of our employees that are working very hard and diligently on executing our strategy. And again, we’re very pleased with being able to demonstrate that. And to finish the year strong to have a full year to demonstrate the resilience and strength of our business. Thank you all for joining this morning and our call. Thank you for your questions.

This concludes today’s conference call. You may now disconnect.