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Text: With me on the call today are Vic Grizzle, our CEO; and Brian MacNeal, our CFO.
Actual outcomes may differ materially from those expected or implied.
Both are available on our website.
It's good to be with you today to review our first quarter results.
A solid start to what we expect will be a robust year of growth for Armstrong.
Overall in the quarter, we continue to see sequential improvement and the recovery of our markets.
Our total company daily shipping rate sequentially improved and accelerated through the end of the quarter and that acceleration has continued nicely into April.
This first quarter comparison is against the last of the pre-COVID market conditions as we saw very little impact from our -- from COVID in our base period.
In this first quarter of 2021, adjusted revenue of $253 million increased 2% from prior year, driven by sales of our 2020 acquisitions, which more than offset COVID-driven volume reductions in our organic business.
Adjusted EBITDA of $85 million declined 12% from the prior year driven by COVID-related volume declines, continuing investments in our growth initiatives and the resumption of spending that was deferred when the pandemic hit.
The Mineral Fiber business has started the year as we expected.
Our Mineral Fiber daily shipping rate posted a third consecutive quarter of sequential improvement as people return to work and markets continue to reopen.
Like-for-like pricing exceeded input cost inflation, top-line mix was positive as sales of our premium products continue to outpace the rest of our product offerings and channel mix was once again a headwind, although to a lesser extent driven by relatively strong sales in the lower price point home center channel.
Channel mix as we have experienced during the pandemic has already begun to subside and is not expected to be a headwind going forward.
The territory mix challenges we faced for the past few quarters have diminished as New York City and the other six major metro areas we've recently called out are essentially in line with the rest of the country.
On the operations side, our Mineral Fiber plants ran well with solid productivity despite the challenges created by the winter storms.
And our WAVE joint venture performed well and was able to price ahead of rising steel costs to deliver a strong first quarter.
Our architectural specialty business delivered solid top-line growth of 25% versus prior year quarter driven again by our 2020 acquisitions of Turf, Moz and Arktura.
A real highlight in the quarter was the acceleration in order intake with the sequential organic order intake at a record level that's resulted in a stronger-than-expected backlog.
We continue to be encouraged by our win rates on projects and our ability to differentiate our offering versus our competition.
Given our strong backlog, we remain confident in delivering our 2021 sales outlook of more than 30% growth.
In the quarter, we continued our investment in architectural specialties to further extend our capabilities and our capacity to support our expectation of continuing strong growth in this segment.
Integration of our three new acquisitions continues to go well and I remain excited by the potential for incorporating their technology and design capabilities across the Armstrong platform.
Our acquisition pipeline is robust and continues to grow, and we have the balance sheet, liquidity and appetite to execute additional acquisitions and alliances.
In terms of the overall macroeconomic environment and marketplace conditions, markets have improved and are showing signs of gaining momentum.
I am encouraged by the trends we are seeing in the data and by the tone of the conversations with our customers and distribution partners.
Bidding activity continued to improve through the quarter and more projects delayed last year are being released.
GDP estimates are being revised upwards, which is a positive leading indicator for increasing renovation activity.
CEO confidence is rising and return-to-office statistics are improving signaling a desire for an expectation of return to the marketplace.
There's a strong desire to get students and teachers back in the classroom, where they can be most productive and to get work teams back together, so they can be most effective in collaborating, innovating and networking.
These trends along with the potential for trillions of dollars in government spending on infrastructure, including spending specifically targeted for renovating schools is creating greater optimism and a more favorable economic backdrop.
Along with stronger economic outlook inflationary pressures are ramping up.
The raw material most impacted in our operations thus far has been steel used primarily at our WAVE joint venture in the manufacturing of our suspension systems.
As a result, beginning back in December, we have implemented five price increases totaling more than 40%.
It's been a challenging body of work for both our sales teams and our distribution partners to manage, but they have performed well and as evidenced by WAVE's first quarter results.
We are also experiencing rising input and freight costs in our Mineral Fiber and Architectural Specialties segments.
As a result, we have announced a heavier-than-normal 10% price increase on Mineral Fiber products and pulled the effective date up to May, earlier than normal.
This is on top of the implemented February increase of 7%.
In Architectural Specialties, we have also increased pricing on standard products and are adjusting our quoting processes on custom projects.
With these actions, I remain confident that we will once again deliver like-for-like price realization greater than input cost inflation.
Overall, both segments are operating at a high level.
We have fortunately not experienced any supply chain disruptions, allowing for outstanding service levels.
And because of our recent digitalization initiatives, we are staying more closely connected to our customers and partners than ever before supporting a strong project backlog position.
And our teams are executing well on our price initiatives to stay ahead of inflation.
So with this healthy state of operation, a solid first quarter result and our market outlook for the remainder of the year, we are reiterating the full year 2021 guidance we provided in February.
Today, I will be reviewing our first quarter 2021 results and our guidance for the full year.
On Slide 4, we'll begin with our consolidated first quarter results.
Adjusted sales of $253 million were up 2% versus prior year.
These adjusted sales include approximately $700,000 of purchase accounting adjustments related to our 2020 acquisitions.
This is the last quarter for this adjustment.
Adjusted EBITDA fell 12% and EBITDA margins contracted 520 basis points.
As Vic stated earlier, this contraction was expected given the pressure that persists this quarter from COVID-related demand declines, the investments we continue to make in our growth initiatives and the fact that we have reinstituted the cost we temporarily cut last year.
Furthermore, as a reminder, when you look at our adjusted EBITDA reconciliation in the appendix on slide 12, Q1 of 2020 earnings as reported were significantly impacted by our Q1 pension annuitization.
Adjusted diluted earnings per share of $0.84 were 23% below prior year results.
This result includes $6 million or $0.09 of amortization expense related to our 2020 acquisitions.
Adjusted free cash flow declined by $13 million versus the prior year.
Our balance sheet remains in a strong position as we ended the quarter with $397 million of available liquidity, including a cash balance of $122 million and $275 million of availability on our revolving credit facility.
While net debt of $587 million was $43 million above Q1 2020 results, our net debt-to-EBITDA ratio of 1.9 times as calculated under the terms of our credit agreement remains well below our covenant threshold of 3.75 times.
We have considerable headwind in this measure.
In the second quarter, we repurchased 126,000 shares for $10 million or an average price of $79.60 per share.
Since the inception of our repurchase program in 2016, we have bought back 9.9 million shares at a cost of $616 million for an average price of $62.57 per share.
We currently have $584 million remaining under our repurchase program, which expires in December 2023.
Slide 5 summarizes our Mineral Fiber segment results.
In the quarter, sales declined 5% versus prior year due to the impact of COVID.
Mineral Fiber shipments exited the quarter on a positive note with March shipments flat to prior year on a rate-per-day basis.
Through Friday, April's month-to-date daily ship rate is up 58% versus prior year and higher than 2019.
The positive like-for-like pricing and favorable product mix continued.
But as Vic mentioned channel mix was a headwind in the quarter and affected the fall-through rate.
We expect this will be the last quarter we face this channel mix fall-through rate headwind.
Mineral Fiber segment adjusted EBITDA was down 10% as a result of the COVID-driven volume declines, SG&A spending to support our growth of investments and the reinstitution of the 2020 temporary cost reductions.
The Mineral Fiber plants ran well and drove productivity that fell through to the bottom line.
Input cost inflation was temporarily offset by inventory valuations, but inflation is clearly ramping up and driving our proactive pricing actions.
As Vic mentioned, WAVE has been pricing out ahead of rising steel costs.
Moving to our Architectural Specialties or AS segment on Slide 6.
Adjusted sales grew 25% versus prior year were $13 million as the 2020 acquisitions of Turf, Moz and Arktura contributed $17 million in the quarter and more than offset COVID-driven organic sales decline of $4 million.
EBITDA for our AS segment declined $3 million as EBITDA contributions from the 2020 acquisitions were more than offset by AS organic performance.
Sales for our AS organic business continue to be lumpy as projects were delayed out of the first quarter and we made growth investments in both capacity and capability to support our top line expectations for AS.
We remain confident in our sales guidance for the AS business as a result of the favorable trajectory of order intake in the first quarter that Vic mentioned.
As sales ramp up throughout the year, we expect EBITDA margins to improve.
Slide 7 shows drivers of our consolidated adjusted EBITDA results for the quarter including a breakout of the impact from our 2020 acquisitions.
Sales from our acquisitions essentially offset organic volume declines.
AUV was a positive contributor driven by like-for-like pricing in the Mineral Fiber segment, but was offset by higher SG&A.
Slide 8 shows adjusted free cash flow performance in the quarter versus the first quarter of 2020.
Cash flow from operations was down $13 million driven by lower earnings.
Keep in mind that the first quarter is typically our weakest for free cash flow generation as we build inventory to service the strong summer demand period.
We remain confident that we will deliver the 19% free cash flow margin that we have guided too for the year.
Slide 9 summarizes our guidance for 2021.
We are reiterating our overall expectations to grow sales 10% to 13%; adjusted EBITDA 9% to 13%; adjusted earnings per share 5% to 15%; and deliver free cash flow yield of 19%.
April is off to a good start and we are optimistic with the trends developing in the second quarter.
It is too early to make any adjustments to our annual guidance and we will provide an update on our guidance in July when we have more data.
Slide 10 reiterates the seasonality we expect for sales in 2021.
This is not something we typically share as our seasonality is usually very consistent year-to-year.
However, given the disruptions experienced in 2020, the seasonal pattern of our year-on-year sales will be unusual in 2021, so we've included this page to provide additional insights.
In conclusion, I remain positive about the outlook for 2021, with an improving health and economic backdrop, an evolving portfolio of healthy spaces products, and new digital tools and capabilities, Armstrong is well positioned to advance our value creation model in 2021.
Before we get to some Q&A, I want to touch on a few important initiatives in the company namely ESG, Healthy Spaces, and our new digital platform Kanopi by Armstrong.
On our last call I mentioned that, ESG would be an area of focus for us in 2021 and beyond.
As we build on our history of community engagement and corporate responsibility, it's increasingly important to all our stakeholders and it has a natural fit with our mission, our history, our culture and our strategy.
As many of you have seen earlier this month, we launched a redesigned sustainability section of our website that reflects our three pillars of focus: People, planet and product and establishes our 2030 goals in these areas.
In addition, work is under way and on track to complete our first sustainability report this summer.
This comprehensive report will address the needs of GRI, SASB and TCFD.
And because of the importance of this work, I want to take a moment and recognize the great deal of effort and commitment by our teams that has gone into capturing our achievements thus far, baselining our opportunity for improvement and to developing meaningful long-term goals.
More to come on this total effort as we progress along this important journey, which aligns well with our strategic emphasis on Healthy Spaces.
As Healthy Spaces continues to be a focal point in economic recovery, ceilings are becoming increasingly more relevant.
As the capstone to an interior space, ceilings are critical for managing air flow and providing for optimal ventilation, as well as delivering acoustical performance in design aesthetics.
These trends are revitalizing the ceilings category and making this category more relevant for the current and future need of healthy indoor spaces.
And of course, this suits Armstrong well.
As the longtime category leader, Armstrong is becoming recognized as a thought leader on the importance of holistic space planning, design and construction, and the impact this approach can have on the confidence and well-being of people, while they're in doors, which is where we spend a large majority of our time.
We believe that the growth investments we've made in 2020 will bear fruit in 2021, with gains from new Healthy Spaces solutions and our new digital capabilities.
Our product innovations are on target for what a post pandemic market will demand.
Healthy Spaces is much more than an event-driven opportunity.
It's here to stay.
Healthy Spaces has always been important, but the pandemic has forever changed the definition of healthy and our health and safety expectations for indoor spaces.
Architects, designers, facility managers, business owners are all looking for solutions that bring people back into commercial spaces and make them more suited for future use.
As offices dedensify and expansive collaborative space has become the norm, the need for acoustical performance in ceilings will only increase, as we -- as will the need to better clean and manage air flow.
Ceilings are central to providing these solutions.
Our 24/7 defend family of products including AirAssure, CleanAssure and VidaShield ceiling solutions are designed specifically to help improve air quality and ventilation sustainably.
What's encouraging is that despite being launched just five months ago, 24/7 defend products have been sold into all of our core sectors: office, education, healthcare, retail and transportation.
This clearly demonstrates the broad-based opportunity for Healthy Spaces.
These product innovations timed for the Healthy Spaces catalyst coupled with our new digital platform of Kanopi by Armstrong, positions Armstrong well to capture the evolving market recovery opportunity.
Launched earlier this year, kanopi by Armstrong that's what a small K is online at kanopibyarmstrong.com.
Kanopi utilizes artificial intelligence and machine learning to provide early access and enhanced visibility to a large part of the market opportunity, we were previously unable to efficiently track.
This technology is allowing us to influence an Armstrong solution, and is making purchasing easy.
Kanopi provides facility owners and managers an end-to-end solution, including diagnostic tools, consulting and pre-certified installation services.
Online consumer-friendly and fulfilled by our best-in-class distribution network, kanopi is tapping into pent-up renovation demand in smaller scale commercial spaces and driving Mineral Fiber volume growth.
Early results are encouraging.
We are seeing growth across all our critical metrics website traffic orders, order value and sales.
To date, each month has been significantly better than the last, and I expect this will continue throughout the year.
Again, we are encouraged by the improving market conditions and the increasing relevance of the ceiling category.
And we are especially excited about the market opportunities ahead that Armstrong is so well positioned to capture that will enable us to deliver on our commitment, to deliver strong results for our shareholders, and on our mission to make a positive difference by creating healthier spaces, where we live work learn heal and play.

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maintaining 2021 guidance: net sales of +10% to +13% and adjusted ebitda of +9% to +13%.

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