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Text: Before we get into Armstrong's fourth quarter and full year 2020 financials, I want to take a moment to recognize what we've all been through, on a personal level, these last 12 months.
Our 2,700 Armstrong employees, our communities, our partners, suppliers, our customers and our shareholders have, no doubt, been impacted by the multiple crisis we've all faced.
And I want to share my admiration for the creativity and the teamwork and many acts of selflessness that I have witnessed within our own organization and in our communities.
It's been an extraordinary year.
And I wish us all a healthy and prosperous 2021.
I have a lot to cover today.
I'll begin by reviewing our financial results with some commentary on fourth quarter market conditions.
And then I'll recap our 2020 accomplishments, and there are many, including launching new products in response to the threats posed by COVID-19, AirAssure and VidaShield.
And then I will discuss the increasing importance of Healthy Spaces before turning the call over to Brian to provide a detailed review of our financial performance for both the quarter and the year.
With regard to the marketplace, in the fourth quarter, we saw sequential improvement, pretty much as we expected.
The various end markets and channel activity continued to be mixed by territory and vertical.
New Orleans, for example, exhibited quarter-over-quarter strength related to hurricane damage and the Pacific Northwest continued to improve.
Meanwhile, the Upper Midwest and Southern California moderated.
The number of healthcare projects bid during the quarter picked up nicely but was offset by slower activity in education.
So although we saw overall sequential improvement, underlying conditions remain choppy and drive near-term uncertainty as building owners seek to determine the best path forward to adapt their facilities to enable the safe return of occupants.
For the full year, 2020 sales of $937 million were down 10% from 2019.
Adjusted EBITDA of $330 million was down 18% from 2019, coming in at the high end of our guidance range.
Adjusted free cash flow for the year was a strong $212 million or 23% of sales, once again demonstrating the strength of Armstrong's best-in-class value creation model even in the face of a pandemic-driven sales declines.
Full year 2020 results were characterized by a significant drop in sales in the second quarter as the pandemic struck and certain markets were effectively shut down by government mandates.
Since the second quarter, we have experienced sequential improvements on both a month-to-month and a quarter-to-quarter basis.
In the Mineral Fiber business, in addition to significant volume declines, we were faced with two unusual mix headwinds that impacted AUV or average unit value.
Beginning in the second quarter, we experienced significant negative territory mix as our key seven territories, including the New York metro area, were disproportionately affected by the construction shutdowns.
This trend moderated and continued to improve in the fourth quarter.
A compounding AUV headwind was channel mix, driven by stronger sales to big-box customers as work from home became a reality for many.
This was a good result from a volume perspective and reflects the hard work of our teams with these channel partners.
However, price points in this channel are lower than our overall average and drove a headwind on mix fall through, particularly in the most recent quarter.
We expect these timing-related trends to normalize beginning in the second quarter of 2021.
Core product mix, the underlying driver of AUV improvement for the past 10 years has continued to be positive in 2020 as our higher-end solutions, including the Total Acoustics and Sustain families, outperformed the lower price range of our portfolio, reflecting the continued desire of architects and building owners to improve the performance and aesthetics of their spaces.
The other component and underlying driver of AUV is like-for-like pricing.
Once again in 2020, we delivered positive like-for-like pricing and price greater than input cost inflation.
Operationally, our plants ran well, adopting new safety protocols.
And we were able to maintain high levels of quality, service and productivity.
I'm extremely proud of the way our manufacturing teams innovated to find ways to keep our plants operating and servicing customers throughout this year and do it safely.
Architectural Specialties experienced similar disruptions as large renovation and new construction projects were delayed at the outset of the pandemic.
But as with Mineral Fiber, sales recovered sequentially as markets reopened and contractors adapted to the new safety protocols.
The Architectural Specialties business exited 2020 with a record backlog and is well positioned for 2021.
Now more than any year in my memory, 2020 was about more than just financial results.
In a year of a health crisis and a resulting economic crisis and a social crisis on top of that, 2020 was about responding to short-term priorities while preserving the foundation for longer-term opportunity.
When the pandemic first hit, our priorities were protecting the health and safety of our people, adapting our business practices to maintain connectivity and collaboration with our customers and continuing to supply essential products with a special emphasis on serving healthcare projects.
Once the immediacy of the crisis passed, we made several strategic decisions based on the belief that the pandemic will end and the innate human desire for connection and community will once again return us all to offices, schools and shops.
We made decisions to conserve cash and manage expenses, to retain our talent and preserve organizational capability and capacity that we have worked really hard to build over the past several years.
We remain committed to our digital and M&A initiatives.
And we pivoted our new product development efforts to meet the need for Healthy Spaces with an emphasis on improving indoor air quality.
Now sitting here today, I believe those decisions were the right ones and are delivering on our objective of emerging from this crisis a stronger, more capable and competitive company.
As you recall, when the pandemic hit, we suspended our share repurchase program and trimmed capital expenditures prudently to conserve cash.
We identified and acted on $40 million of temporary cost savings that would not impact our growth and value creation opportunities.
With the return of some stability in the marketplace, we have resumed our share repurchase program, we are returning our capital expenditures to pre-pandemic levels and we are enhancing our investments in our digital and Healthy Space initiatives.
As we have reported, we did not furlough our salespeople.
We did not lay off resources or slow work on key initiatives.
In fact, we launched new digital tools, like Projectworks, to keep our sales teams better connected to customers.
And we added resources to our organization in order to accelerate the work around these and other key strategic initiatives.
Specifically, we launched a new digital platform in the fourth quarter that will enable Armstrong to drive Mineral Fiber volume growth.
I'm going to provide more details on this in a moment.
But I believe these actions collectively will further extend Armstrong's leadership position and allow us to accelerate growth as the economy recovers.
Now looking back on 2020, acquisitions were also a bright spot.
Despite the challenges presented by COVID, we were opportunistic and pursued and completed three transactions with Turf, Moz and Arktura.
These companies each bring unique and exciting capabilities as well as talent that cement Armstrong's leadership in felt products, custom metal capabilities and maybe most importantly bring design and technology capabilities that can be integrated and scaled across our entire company.
Our M&A pipeline remains active.
And we continue to have the capability to execute additional acquisitions and partnerships.
In new product introductions, we also had a strong year.
We launched 35 new products in 2020.
That's a 50% increase from our normal pace of activity.
I could not be more proud of our NPD team.
And I know that they are working very hard to develop important, groundbreaking new products and solutions to further contribute to the healthy space demand that we'll all have in 2021 and beyond.
Several of these new products came about from a pivot that we made when it became apparent that the COVID-19 pathogen was largely transmitted through the air as an aerosol.
Even with enhanced access protocols for our labs and test chambers, our team brought to market at record speed the 24/7 Defend portfolio to address the need for healthier, safer spaces and to specifically improve indoor air quality.
In November, we launched the AirAssure family of ceiling tiles.
AirAssure is a gasketed ceiling solution that forms a tight seal to the grid system.
It's designed to reduce air leaks through the ceiling plane by up to four times over standard ceilings.
Reducing air leaks can significantly increase the effectiveness of HVAC systems by forcing more air to flow through return air vents, where it can be filtered and purified, therefore, enabling better air quality.
In addition to allowing more filtering and cleaning of air, AirAssure can also reduce the risk of pathogens traveling from space-to-space in a building.
And by doing so, again AirAssure can protect a greater number of people.
Also in November, we paired the patented VidaShield ultraviolet air purification system with Armstrong Ceiling panels to provide cleaner, safer air in pretty much any commercial space.
This system, concealed in the ceiling plane, draws air into a chamber integrated into the ceiling tile, exposes the air to UV light to neutralize the harmful pathogens and then returns the cleaner air to the room.
VidaShield can be used with our ceilings as a stand-alone solution.
Or even better, it can be integrated with AirAssure panels.
These two new products are just the beginning of a robust pipeline of Healthy Space solutions, which represents a multiyear renovation opportunity for Armstrong.
The big picture of Healthy Spaces is critically important.
As you likely know, we spend 90% of our time indoors.
So it stands to reason that these spaces where we live our lives ought to be a safe, healthy and sustainable as possible.
They should be deliberately and holistically planned, designed and built to be protective, reassuring and comfortable.
In my view, this has always been true, but the pandemic has redefined what we mean and what we want in our healthy and well spaces.
And the need for solutions in this area is more pressing than ever.
The way we think about the performance of spaces we inhabit has changed and expanded forever.
As a CEO, I think a lot about my employees and how they're doing and how this is impacting their lives in a myriad of ways.
When we return to the office, I want them to feel safe and secure so that we can focus on doing our best work.
I know that we are at our best and most creative when we are together.
We're excited that Armstrong can play a crucial part of bringing Healthy Spaces to people.
To help us learn more and bring healthier spaces to life faster, we are installing our 24/7 Defend solutions in our own facilities, and we are retrofitting one of the existing buildings on our corporate campus to be a Healthy Spaces living lab.
This Healthy Space pilot will showcase what we've learned so far about ceiling systems and will provide a space for us to collaborate, innovate with other leading interior component manufacturers.
By working together, we will be able to better design integrated, holistic and effective Healthy Spaces solutions.
Healthy Spaces remains the dominant topic in the commercial construction conversations today.
92% of architects and designers surveyed said they are having conversations with their clients on how to make their spaces healthier and safer.
As you all know, Armstrong has always had a strong presence in the A&D community.
And its presence is strengthening as we are at the forefront of these conversations on how to create healthy spaces.
Today, I'll be reviewing our fourth quarter and full year 2020 results and provide guidance for 2021.
But before I begin, as a friendly reminder, I'll be referring to the slides available on our website.
Beginning on slide four for our overall fourth quarter results.
Sales of $239 million were down 3% versus prior year, a continued sequential improvement from the third quarter, when year-over-year sales were down 11%.
Adjusted EBITDA fell 19% and margins contracted 580 basis points.
Adjusted diluted earnings per share of $0.77 fell 31% as our 2019 fourth quarter tax rate benefited from stock-based compensation deductions.
Adjusted free cash flow declined by $3 million versus the prior year.
Our cash balance at quarter end was $137 million and, coupled with $275 million of availability on our revolving credit facility, positions us with $412 million of available liquidity, down $42 million from last quarter as we completed the Arktura acquisition during this past quarter and down $18 million from the fourth quarter of 2019.
Net debt of $578 million is $12 million higher than last year as a result of our acquisitions, partially offset by cash earnings.
As of the quarter end, our net debt-to-EBITDA ratio is 1.8 times versus 1.5 times last year as calculated under the terms of our credit agreement.
Our covenant threshold is 3.75 times.
So we have considerable headroom in this measure.
Our balance sheet is in solid shape.
In the quarter, we repurchased a 126,523 shares for $10 million for an average price of $79.04 per share.
Since the inception of our repurchase program, we have bought back 9.7 million shares at a cost of $606 million for an average price of $62.35.
We currently have $594 million remaining under our share repurchase program, which expires in December 2023.
slide five illustrates our Mineral Fiber segment results.
In the quarter, sales were down 7% versus prior year but improved sequentially from the third quarter, when year-over-year sales were down 14%.
COVID-19-driven volume declines continued at a reduced rate.
And AUV was a headwind as relative strength in the big-box channel and, to a lesser degree, territory mix put pressure on sales and adjusted EBITDA in the quarter.
Positive like-for-like pricing and favorable product mix continued their year-long positive trend.
Adjusted EBITDA was down $15 million or 19% as the volume decline in channel-driven AUV weakness fell through to the bottom line.
This table also clearly illustrates the quarterly progression of volume trends, which while still negative, have improved sequentially.
In the quarter, continued manufacturing productivity, our cost reduction initiatives and lower raw material and energy costs aided profitability.
SG&A was a headwind as we ramped up investment in growth initiatives that Vic mentioned.
WAVE equity earnings were down due to lower sales volume.
Moving to Architectural Specialties or AS segment on slide six.
Sales were up $6 million or 13% as the 2020 acquisitions of Turf, Moz and just recently, Arktura, contributed $11 million in the quarter and offset COVID-driven organic sales decline of 9%.
AS organic sales also improved sequentially from the third quarter when year-over-year sales were down 14%.
Despite flat sales, direct margins expanded significantly, driven by the higher margins of Turf, Moz and Arktura acquisitions relative to our base AS business and ongoing productivity in the network, particularly at acquired facilities.
Manufacturing costs and SG&A were up, driven by the cost of Turf, Moz and Arktura and higher overhead allocations.
Our AS business continues to win significant projects to build a strong pipeline.
Among others, in the fourth quarter, we were awarded the Virgin Voyages port of Miami Terminal V project.
This job includes metal, glass, reinforced gypsum, wood and mineral fiber products, a comprehensive solution that demonstrates Armstrong's competitive strengths.
This multimillion-dollar project is scheduled to begin shipping late this year but will primarily benefit 2022 sales.
slide seven shows drivers of our consolidated adjusted EBITDA results for the quarter.
We've enhanced this page to break out the impact of our 2020 acquisitions.
Sales from our 2020 acquisitions offset organic volume declines.
Mix, organic SG&A investments and WAVE equity earnings were only partially offset by positive like-for-like pricing, deflation and manufacturing productivity.
Our 2020 acquisitions added a net $3 million adjusted EBITDA benefit and delivered a 27% adjusted EBITDA margin.
slide eight shows our adjusted free cash flow performance in the quarter versus fourth quarter of 2019.
Cash flow from operations was down $8 million on lower sales and partially offset by lower capital expenditures of $5 million.
As referenced in the footnotes and detailed in the appendix, adjusted free cash flow excludes two significant and largely offsetting adjustments.
First, we received $13 million related to environmental insurance recoveries in the quarter.
Second, we made a $10 million one-time endowment-level contribution to the Armstrong World Industries Foundation with funds earmarked from a portion of the $22 million of proceeds from the sale of our Qingpu, China facility that we received earlier in the year.
These items are excluded from adjusted free cash flow as they are unrelated to our core quarterly performance.
slide nine shows our full year results.
Versus prior year, sales were down 10% and adjusted EBITDA was down 18%.
Adjusted earnings per share was down 24%, driven by a lower 2019 base period tax rate due primarily to deferred state tax adjustments and, to a lesser degree, the stock-based compensation deduction that impacted Q4 in 2019.
slide 10 is the full year adjusted EBITDA bridge.
Again, COVID-related volume declines are the main driver as they impacted EBITDA by $65 million and were partially offset by volume-driven contributions of $14 million from our 2020 acquisitions.
COVID volume declines also drove the WAVE results.
Mix headwinds from the territory and channel drivers we have called out impacted the AUV fall-through to adjusted EBITDA.
As Vic mentioned, product mix and like-for-like pricing were both positive in 2020.
Input cost deflation and the savings we are driving in manufacturing and SG&A, despite our acquisitions and growth investments, helped mitigate the sales fall-through to EBITDA.
slide 11 reflects full year adjusted free cash flow of $212 million.
As with the quarter, operating cash flow and dividends from WAVE were lower.
Capital expenditures reflect the delaying action we took to prioritize and conserve cash in 2020.
Interest expense is lower as a result of our refinancing in September 2019.
In a year significantly impacted by the pandemic, we delivered a 23% adjusted free cash flow margin.
slide 12 is our guidance for 2021.
Against a backdrop of a recovering economy.
We anticipate revenue in the range of $1.03 billion to $1.06 billion, or up 10% to 13% versus prior year.
Driving this growth is a return to positive mix starting in the second quarter, continuation of like-for-like pricing with the backdrop of rising inflation, which will result in the resumption of our historic 4% to 6% AUV growth rate.
In addition, our digital growth initiative, kanopi, that Vic will discuss in a moment, will support Mineral Fiber growth.
Healthy Spaces product sales will contribute to both volume and mix gains.
The Architectural Specialties segment will benefit from the full year impact of our 2020 acquisitions as well as a resumption of organic sales growth.
We expect adjusted EBITDA to grow 9% to 13% as the benefits of sales growth falls through and we continue to drive productivity in our plants and benefit from improved results at WAVE.
We will continue to invest in our growth initiatives and, as previously communicated, reinstate some of the 2020 temporary cuts in SG&A in 2021.
At the midpoint, our EBITDA margin of 35% is slightly down in 2021, driven by the impact of 2020 acquisitions on a full year basis.
Adjusted free cash flow will be 19% of sales as we resume our historic levels of capital spending and as working capital expands to support sales growth.
We expect to return to our greater than 20% historical average in the short term.
page 13 is not something we typically share as our seasonality across the quarters is usually very consistent year-to-year.
However, given the disruption experienced in 2020, the seasonal pattern of our year-on-year sales will be unusual in 2021.
So we've included this page to assist you with your modeling.
Sales in Q1 will still be impacted by the pandemic and one less shipping day but will sequentially improve versus Q4 of 2020.
We expect Q2 sales to improve as we wrap the significant decline in Q2 of 2020 in the benefit of our 2020 acquisitions.
In conclusion, I'm excited about the outlook of 2021.
With an improving health and economic backdrop, an evolving portfolio of Healthy Spaces products and a new digital tools and capabilities, Armstrong is well positioned to advance our value creation model in 2021.
2020 was a busy and, by any measure, a productive year.
We took care of our people first, and we built out our capabilities and capacity for future growth.
We took care of our customers.
We didn't shut them down.
We stayed connected with them digitally and kept them supplied.
We launched 35 new products, many industry-leading, to serve today's most pressing needs for improving indoor air quality, including our AirAssure and VidaShield products.
We established a dedicated Healthy Spaces team for a holistic approach to lead the industry forward in the new normal.
We completed three strategic acquisitions, again a record level of activity for us.
And we advanced our digitalization initiative, just to name a few.
And there's more to come in 2021 with digitalization remaining front and center.
I mentioned earlier and Brian mentioned our new digital platform, kanopi, which is focused on identifying and cost effectively serving more of the renovation and smaller new construction marketplace.
I want to provide a little more history here and perspective as to what this is and what opportunities this provides for Armstrong.
For the past several years, we have been talking to you about our digital initiatives, and we've shared a number of them with you, initiatives to make our customer experience frictionless, to better enable design collaboration, to improve our service levels, to increase reliability and quality in our manufacturing operations.
During 2020, we took steps to increase the intensity and the pace of these efforts.
And the result is kanopi, a solution we have never discussed publicly before and a critical enhancement to our existing business model.
kanopi by Armstrong, spelled with a lower case K, is online and I invite you to visit the website at kanopibyarmstrong.com, to explore its capabilities.
Utilizing artificial intelligence and machine learning, kanopi provides early access and enhanced visibility to a large part of the market opportunity we were previously unable to efficiently track.
This technology allows us to influence an Armstrong solution and makes follow-through easier.
kanopi offers facility owners and managers an end-to-end solution, including diagnostic tools, consulting and precertified installation services.
Online, consumer-friendly and fulfilled by our existing best-in-class distribution network, kanopi will tap into pent-up renovation demand in smaller-scale commercial spaces.
We are investing in the sales and technical resources to roll kanopi out on a national level throughout 2021.
The Projectworks and kanopi represent an unrivaled set of digital platforms in the ceiling space, providing access and solutions to previously inaccessible opportunities.
We are using digital capabilities and Healthy Spaces solutions to drive Mineral Fiber volume growth, irrespective of the underlying market.
As Brian mentioned, this will help 2021 as the projects ramp up.
But I'm really excited about what these initiatives can deliver in the medium and long term.
Another area of focus you will see from us in 2021 is around ESG.
Armstrong has always been a company with a strong sense of community, purpose and responsibility.
Those of you who have spent time with us know of our commitment to safety, sustainability and ethical behavior.
We have a long history of community involvement and support.
We strive to be good stewards of the planet.
We were the first to develop a closed-loop recycling program for ceiling tiles and to remove Red List chemicals from our ceilings.
We've instituted effective wastewater management and minimized carbon emissions from our ovens.
We are passionate about developing products that make indoor spaces healthier and more sustainable, higher-performing and more aesthetically appealing, as demonstrated by our recent AirAssure and VidaShield product launches.
In the past 18 months, there's been a good deal of effort behind the scenes on ESG-related matters.
We've hired experienced professionals, Helen Sahi, as our Director of Sustainability; and Salena Coachman, to lead our diversity and inclusion initiatives.
We've appointed Mark Hershey, our General Counsel, to head up this effort from a management perspective, ensuring it has a champion on my leadership team.
And our Board's Nominating and Governance Committee has become the Nominating, Governance and Social Responsibility Committee to demonstrate the complete alignment in these critical areas.
We will be launching an enhanced sustainability website this spring and publishing a full sustainability report this summer.
This will transparently document our efforts but also publicly challenge us to get better.
These disclosures will convey our program goals and our targets, align our reporting to leading standards and frameworks and reflect our commitment across our three pillars of focus: people, planet and products.
I've always believed that Armstrong is a good corporate citizen.
And that said, I also believe we can improve.
And I want to challenge the organization and make ourselves accountable for getting even better.
Finally, regarding ESG initiatives, Brian mentioned we recently made a contribution to the Armstrong World Industries Foundation that will ensure that the foundation can increase and sustain its support for the communities, where Armstrong employees live and work for many years to come.
Armstrong is a clear leader in the commercial construction market.
And we have been for many, many years.
We've most recently demonstrated this with AirAssure and VidaShield, two exciting new solutions that demonstrate Armstrong's product leadership.
We have strengths on multiple fronts, which will allow a market leader like Armstrong to return to the top and bottom line growth trajectories we've established before the pandemic hit.
Together with our industry-leading position, our digitalization investments, our Healthy Spaces platform and our commitment to ESG, Armstrong is well positioned for the near term and the long term.
The Healthy Spaces revolution is only just beginning.
And I believe it will be a powerful catalyst driving renovation activity for years to come.
A catalyst turbocharged by a health crisis and backed by a newfound awareness as to how fundamental our health and the health of the built environment is to the strength of our economies and our communities.
We are both ready for and excited about the opportunities ahead.
This is all aligned with our commitment to continue to deliver strong results for our shareholders, making a positive difference by creating healthier spaces where we live, work, learn, feel and play.

user
q4 sales fell 3 percent.
continues to expect sequential improvements in our end markets.
expects to grow sales 10% to 13% in 2021.
sees adjusted ebitda growth of 9% to 13% in 2021.

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