Armstrong World Industries, Inc. (AWI) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Second Quarter 2016 Armstrong World Industries Inc. Earnings 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] As a reminder, this conference is being recorded. I'd like to introduce your host for today’s conference, Ms. Kristy Olshan, Director of Investor Relations. Ma'am, you may begin.

Thanks, Terrence. 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 Web site at armstrongceilings.com. With me today are Vic Grizzle, our CEO, and Brian MacNeal, our CFO. Hopefully, you’ve seen our press release this morning and both the release and the presentation Brian MacNeal will reference during this call are posted on our Web site 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 Web site. With that, I will turn the call over to Vic.

Thanks, Kristy and good morning, everyone. An exciting quarter for us. And before I get into our second quarter results, I'd like to make a few comments about the share repurchase program we announced earlier this morning. You know, earlier this year, we communicated that it was a priority for us to work with our new Board of Directors to develop and implement a balanced capital allocation plan that would enhance and create value for our shareholders. I’m pleased that today our Board of Directors has approved $150 million in our repurchase program with the authorization on the program extending until July of 2018. The amount of the authorization is meaningful. It equates to just under 7% of our outstanding flow and it demonstrates our confidence in the strength of our business and our prospects for growth. You know, in particular, with our standout leadership position in the highly attractive ceilings industry, and the unique strengths and abilities that this business has to generate margins, that are among the highest of any publicly traded building products company. This program reflects our commitment to creating value for shareholders and is an important component of a balanced capital allocation plan. Now turning to our results, I will begin with an overview of our quarterly and year-to-date results and then provide some perspective on our market conditions, and our resulting outlook for the remainder of the year. I will then turn the call over to Brian MacNeal, our CFO, who will walk you through a more detailed discussions of the financials and our guidance. So for the second quarter, consolidated reported sales of $314 million were up $8 million or 2.7% from the prior year. On a comparable foreign exchange basis, sales were up almost 4%, driven by the second quarter in a row of broad-based volume growth in the Americas and continued improvement in our average unit value or AUV. The Americas business delivered a solid quarter on all fronts. In addition to solid volume growth, like-for-like pricing was up and we saw another quarter of strong double-digit growth at the high-end of our portfolio, which contributed positively to mix. Consolidated adjusted EBITDA of $82 million was up $14 million or 19% from the prior year, driven by the margin benefit of stronger volume in the Americas and continued improvement in AUV. Our WAVE joint venture also delivered a record earnings quarter on the back of lower steel prices and solid volume growth, contributing to higher margins. Lower SG&A costs, in particular, in our international businesses, also contributed to the higher margins in the quarter. I’m pleased that our international cost actions have more than offset market-related weakness to enhance margins. In total adjusted EBITDA margins expanded 340 basis points in the second quarter. On a year-to-date basis, consolidated reported sales of $602 million were up $4 million or just over half a percent versus the first half of 2015. On a comparable foreign exchange basis, sales were up over 2.5%.Consolidated adjusted EBITDA for the first six months of 2016 of $152 million was up $23 million or 19% from the prior year. Now as many of you’ve seen in our release this morning, we’ve redefined our reporting segments and will now report results on a geographic basis, under the Americas, EMEA and the Pacific Rim segments. We believe that this additional level of transparency will allow investors to better understand our business. So I will now take a few moment to discuss second quarter results for our new reporting segments. And beginning with our largest and most profitable business, sales were up in -- were up 6.3% in the Americas on a comparable foreign exchange basis. The sales improvement was driven by mid single-digit volume growth and AUV improvement as our customers continue to trade up to higher margin products. In addition, like-for-like pricing was positive. Similar to the first quarter, the volume growth was broad-based across the majority of our geographic regions and broadly across the portfolio. I’m particularly pleased that our growth initiatives contributed significantly to our results in the quarter. As our new products and design capabilities fueled double-digit growth at the premium end of the product portfolio. In both our quartile products, as well as our architectural specialty products. The strong growth in the architectural specialty products was driven by our increasing participation and custom ceiling solutions. The market is clearly gaining a greater appreciation for Armstrong's expertise and design. We are also experiencing growth in cloud and canopy solutions that are used for open plenum designs. Now although open plenum design is growing at a very small rate on a total square foot basis, it is becoming a profitable niche market for us and that we capture with higher value and higher margin solutions. In addition, we saw a continuation of the sales strength at the low end of the product portfolio in the first quarter carrying into the second quarter, indicating that R&R activity continues to improve. As we discussed in the first quarter, strength in the R&R is great for the business, since the margin benefit of volume leverage far outweighs the dampening impact of our overall AUV improvement from lower selling prices of replacement products. In the Americas, we delivered strong earnings growth, expanding adjusted EBITDA margins by 240 basis points. Margins expanded with the benefit of stronger volume, a record earnings quarter from WAVE and continued improvement in AUV. Our Americas business is in really good shape and with sales accelerating and solid execution operationally leading to expanded margins. Now turning to our EMEA business. On a comparable foreign exchange basis, sales were down 2%. The year-on-year decline continue to be driven by a weaker Middle East market as low oil price and on-going political instability in that region continued to negatively impact project funding. These conditions are likely to remain challenging in the near-term and so we are continuing to take cost reduction actions to right size the cost structure supporting these markets. Positively in the quarter, we saw improving sales in Russia and in continental Europe. Adjusted EBITDA in the EMEA business improved as we benefited from the cost reduction actions. Lower SG&A expenses offset market softness, expanding margins by 130 basis points. I’m encouraged with our progress, but we clearly have more to do here to improve our margins and our returns to expected levels. And finally in the Pacific Rim, sales came in as expected and improved sequentially from first quarter. On a comparable foreign exchange basis, sales in the quarter were up over a percent with the improvement driven by a rebound in India after a slow start to the year. Adjusted EBITDA improved nicely driven by an overall improvement in AUV and lower SG&A expenses as a result of cost reduction actions. Adjusted EBITDA margins in the Pac Rim expanded by 710 basis points. Now turning to our market outlook and guidance, in the first quarter, we discussed that our international businesses got off to a slow start and that we expected them to rebound in the second half of the year. While we did see sequential improvement in the second quarter in these businesses, we believe the uncertainty created by the recent decision of the U.K to leave the EU will impact business investment and delay project funding. We've already experienced some project delays in the region and while we continue to expect improvement in the second half, it's more likely to be less than what we had previously expected. As a result, we believe it is prudent to lower our revenue guidance for the full-year to reflect these conditions. We now expect full-year of constant currency sales to be in the $1.23 billion to $1.28 billion range. Now, in spite of this adjustment, we are maintaining our adjusted EBITDA guidance range of $310 million to $330 million as we expect our cost reduction actions and solid performance in the Americas to offset the sales weakness in our international markets. For the balance the year in the Americas, we expect to continue to see the sequential improvement in volumes from new construction start activity carrying into the second half of the year. As we discussed in the first quarter, we believe the year-on-year volume growth will moderate as we progress throughout the year due to the improvement in volumes we experienced in the back half of last year. The broad-based nature of the demand we’ve experienced this year is very encouraging. The increase in state and local spending is being felt as we are seeing more activity in education than we've seen in some time. We like the trend. We like what we’ve seen in the activity so far this year. I will remind everybody the visibility into our R&R demand remains limited. But as we look in the activity in July, we can see consistency and carryover from what we’ve seen in the first half and this further supports the increase in the U.S volume underpinning our revised guidance. So with that, I will turn the call over to Brian for a detailed review of our financials and guidance.

Thanks, Vic. Good morning to everyone on the call. In reviewing our second quarter results, I will be referring to the slides available on our Web site. I will now quickly review Slide 3, which details our basis of presentation used throughout this discussion. As you know, on April 1, 2016, we completed the separation of AFI. Accordingly, AFI's historical financial results have been reflected in AWI's consolidated financial statements as a discontinued operation for all periods presented. As a reminder, effective January 1, 2016, in anticipation of the separation, the majority of our historical corporate support functions and costs were incorporated into the three new operating segments. Slide 16 in the appendix summarizes the consolidated corporate cost pushdown, which equaled $60 million for Q2 and was held constant in the prior years for comparability purposes. Slides 13 and 14 detail the pro forma adjustment made the prior year for comparability purposes by our new reporting segments. Starting with Slide 4, consolidated sales for the quarter of $315 million were up almost 4% versus 2015 on a comparable foreign exchange basis. Adjusted operating income increased over 24%, which translated to 320 basis points of improvement. Adjusted EBITDA improved by 19%. Global margins expanded by 340 basis points versus the prior year quarter. The primary difference to our reported results are expenses related to separation, the non-cash impact of our U.S pension plan and a pushdown of stand-alone corporate costs into the reporting segments. Net debt was down $49 million driven by refinancing and debt repayments over the last 12 months. In the chart at the bottom of Slide 4, you will note the sales and adjusted EBITDA change by segment versus the prior-year period. On a comparable foreign exchange basis, sales in the Americas were up 6% driven by broad-based volume growth across the product range and higher AUV behind positive like-for-like pricing and mix. EMEA sales decreased 2% compared to Q2 of 2015 largely driven by the Middle East. Our Pacific Rim segment sales were up one versus the prior year quarter where growth in India and Australia offset a decline in China. Adjusted EBITDA for the Americas increased by $9 million or 14%. Much of this due to mid single-digit volume growth and a record earnings quarter from our WAVE joint venture. Equity earnings from WAVE were up $4 million or 25% behind double-digit sales growth and lower steel costs. Internationally, adjusted EBITDA grew by $1 million and $3 million versus the prior-year period for EMEA and the Pac Rim respectively behind strong cost controls. It's important to note that we improve adjusted EBITDA for all of our reporting segments in this quarter. Turning now to Slide 5, you will see our consolidated Q2 adjusted EBITDA bridge versus the prior year quarter. The increase in adjusted EBITDA of $14 million is up 19%, just about all lines of the P&L contributed. The key drivers of our consolidated EBITDA growth are volume growth in the Americas, volume growth at WAVE which in turn helped WAVE achieve a record earnings quarter which flows through our equity P&L line item and cost containment in SG&A. As mentioned earlier, we had positive AUV in the Americas, driven by higher sales at the premium end of our product range and positive like-for-like pricing. Our input costs benefited from lower energy costs that offset inflation in our direct materials. Our gross profit margins expanded by 100 basis points. Turning to our segments in further detail on Slide 6, the Americas absorbed nearly all of the stand-alone corporate cost pushdown. The $16 million includes $2.7 million of depreciation expense. These costs were held constant in 2015 to facilitate comparability between periods. Approximately 70% of the costs were expense to SG&A in the current year and allocated on a pro forma basis to SG&A in the prior year with the remainder impacting costs of goods sold. The Americas business, which includes Canada, had an impressive quarter. On a comparable foreign exchange basis, sales up were over 6%. Sales growth was driven by mid single-digit broad-based volume growth and higher AUV. Our strategic growth initiatives contributed to this volume growth as well. Premium products in our quartile business grew by double digits as we continued to listen to the demands of our customers and provide products that meet their design and their [indiscernible] needs. Architectural specialties grew over 25% within the quarter driven by our specification strength and design and product capabilities. We continue to be the choice of architects and designers as they continually turn to Armstrong to provide innovative and unique creative solutions in spaces. On a comparable cost basis, you can see the drivers of profitability on the bottom of the slide. I’m happy to see volume growth for the second straight quarter. In the quarter, we continue to make modest SG&A investments to enhance our selling capacity and capabilities. Adjusted EBITDA margins expanded by 240 basis points. Moving to our EMEA segment on Slide 7, please remember the EMEA segment includes Russia and the Middle East. Quarterly sales were down almost 2% on a comparable foreign exchange basis driven primarily by weakness in the Middle East, which was down over 40%. However, like Vic already mentioned, we're encouraged by the results in Russia for the quarter where sales were up over 15%. The drivers of profitability are listed on the bottom of the slide. The negative impact of lower volume was more than offset by the prior cost actions we’ve taken and continue to take in this region, which includes right sizing the Middle East organization and reductions in back office support. The segment drove adjusted EBITDA margin expansion of 130 basis points. Moving to our Pacific Rim segment, on Slide 8, please remember this segment is comprised mainly of China, India and Australia. Quarterly sales increased by 1% on a comparable foreign exchange basis driven by improvement in AUV. AUV was driven by both positive, like-for-like pricing and mix. Similar to the EMEA segment, prior cost actions we’ve taken and continue to take improved both manufacturing and SG&A costs. Adjusted EBITDA margins expanded 710 basis points. We will continue to be focused on improving the returns of both international segments. Our first half results start on Slide 9, and the drivers are very consistent with those for the second quarter. Consolidated sales of $607 million were up almost 3% versus 2015 on a comparable foreign exchange basis as 6% growth in Americas was offset by weakness in the international market. Adjusted operating income increased by over 24%, which equates to a 320 basis points of improvement. Adjusted EBITDA improved by nearly 19%. Globally adjusted EBITDA margins expanded by 340 basis points versus the prior-year period. The primary difference to our reported results is driven by separation-related expenses and non-cash impact of our U.S pension plan and a pushdown of our corporate costs into the reporting segments. Slide 10 details our first half consolidated adjusted EBITDA bridge versus the prior-year period. The increase in adjusted EBITDA of $23 million is up almost 19%. The key drivers of our EBITDA growth are volume growth in the Americas, WAVE equity earnings, also driven by volume and steel costs. SG&A cost containment and energy deflation which offset direct material inflation. The first half AUV performance was driven by the Q1 AUV items we discussed during the Q1 earnings call. As we saw in Q2, we do not expect the negative trend in the first half to continue into the second half. Manufacturing costs increased due to the strategic investments in our manufacturing capabilities in the Americas to support growth in the high-end of the product range. Slide 11 outlines our revised 2016 guidance. We now expect to deliver revenue growth of 1% to 5% versus prior year. Adjusted EBITDA guidance remains unchanged and is expected to range from $310 million to $330 million. Adjusted free cash flow remains unchanged at $80 million to $100 million, excluding the cash impact of separation. The cash impact of separation is expected to range from $50 million to $60 million, assuming normal accruals and payables at the end of 2016. The remaining separation activity relates mostly to IT actions needed to complete the physical separation of our SAP system and is expected to be completed in Q4. As a reminder, this guidance is presented on a stand-alone basis. The financial performance of AFI prior to separation is included in discontinued operations and 2015 has been adjusted on a pro forma basis for comparability purposes. The top line guidance reduction is driven by the continued softness in our international markets, specifically, sales in the Middle East have been negatively impacted by lower oil prices and continued geopolitical uncertainty in the region, which has driven many projects to be delayed. Furthermore, the Brexit referendum in the U.K has increased the likelihood that the second half in our EMEA segment will not improve as much as we originally outlook in Q1. We are reaffirming our EBITDA guidance based on the strength of our Americas volume growth and the cost reduction actions in our international business that offset the reduced sales and international. We expect our AUV achievement to improve in the second half versus the first half driven by continued mix improvement behind the volume growth and our premium offerings. The benefit of our August 1, 5% price increase in the Americas on our mineral fiber products and abatement of one-time items impacting AUV in the first quarter. We continue to focus on identifying additional actions to improve the EBITDA performance in our international markets. We continue to expect approximately $42 million of stand-alone corporate costs. Excluding the non-cash impact of our U.S pension, depreciation and a 1% to 2% cost savings over inflation. We will continue to invest modestly in sales and marketing to accelerate our architectural specialty share gains, total selling solution capabilities and new product initiatives. On a stand-alone basis, we anticipate SG&A will be in the range of 18% to 19% of sales. We expect interest expense to be around $45 million, excluding the $11 million charge that we recorded in the first quarter related to the settlement of interest rate swaps incurred with the refinancing of our new $1 billion credit facility as we separated AFI. This $11 million charge is a key driver to our revised EPS. Finally, I wanted to comment briefly on our share repurchase program announced this morning and that Vic referenced. Our Board approved a $2 year, $150 million share repurchase program based on the confidence in our outlook. Cash generation in our guided net debt leverage range of two to three times EBITDA. We expect to make repurchases in the open market and under trading programs in accordance with regulatory requirements. We expect to hold the repurchase shares as treasury stock. This share repurchase program gives us flexibility in the near-term as we work towards a balanced capital allocation plan. To wrap up, I understand that there is still a lot of moving pieces this quarter. And we are happy to, for the first time report segments based on geographies, Americas, EMEA, and the Pacific Rim. As you work to analyze these new changes in our reporting, Kristy and I will be available for follow-up questions after the call. With that, I will turn it back over to Vic.

Thanks, Brian. I would like to add that earlier this year, we highlighted our strategic imperatives to drive volume growth in the Americas and to improve the returns in our international businesses. We’ve made progress on both fronts with our Americas business delivering mid single-digit volume growth throughout the first half of the year and our international businesses delivered modest improvement in profitability. We clearly have more to do here but I’m pleased with our progress. In closing, I’m pleased with the quarter and our first half results. Adjusted EBITDA margins improved in every segment. The broad-based improvement in the U.S commercial markets, through the first half of this year, are very encouraging. We continue to execute well in achieving positive like-for-like pricing and driving mix toward the higher margin premium products. And while we are still in the early days, I’m pleased with the traction we are seeing around our key growth initiatives. And our share repurchase program is a strong vote of confidence from our Board of Directors and our management team in our future growth prospects and reflects our commitment to drive value creation for our shareholders. And with that, we will be happy to take your questions.

Thank you. [Operator Instructions] And Our first question comes from Nishu Sood from Deutsche Bank. Your line is open.

Thanks. This is Rob Hansen on for Nishu. So, the first question I had was just on the volumes, mid single digits, that’s pretty good. What is the difference between new construction and remodeling? And then in -- or renovation? And then in the renovation, have you seen the return of these patch and match smaller type projects or are there some sort of like larger remodeling project that you got during the quarter that help boost volumes?

Yes, Rob. This is Vic. Yes, but the volume -- mid single-digit growth is really terrific volume in our Americas, especially after what we’ve seen in terms of -- I'd say an elusive market recovery over the last several years. So we are very encouraged by the level of volume growth that we saw. As I mentioned, it continues to be broad based as well. As you remember in the second half of last year, we were starting to see new construction activity start to come into the volume curve. And so we saw volume growth toward the latter half of last year and we’ve seen the new construction activity continues to be a major contributor into the first half of this year. What that’s been coupled with to get to this level, this mid single-digit level of volume growth has been R&R activity. And to your question around the patch and match, for sure we are seeing a lot more patch and match type activity that is enabling, again, at supporting the high volume portion of our R&R segment. So it's broad based in terms of the geographic segments also which is also very encouraging versus just major cities, if you were to compare it against that. But it's also broad in terms of the portfolio which reflects up and down the portfolio. It's not only the new, but it's the patch and match, as well as the repair and remodel. Larger repair and remodel projects. So again, I would say the most encouraging thing about the mid single-digit volume growth in the Americas is how broad based it is, and that’s -- that gives us a lot of encouragement.

Interesting. That’s very helpful. And I just wanted to also ask about the share repurchase program. Just wanted to get some clarity. I think you mentioned in the script that it was going to be -- these are going to be systematic purchases, but I just wanted to double check and see if that or it may be opportunistic as well. And the other thing is should we expect you to complete the entire authorization by the time it expires in 2018?

So, Rob, this is Brian. Yes, it will be very systematic. And as I pointed out, the share repurchase program gives us great flexibility. And so, depending on where markets are and our progression around a balanced capital redeployment will drive whether or not we completely spend all of that over the two-year program.

Okay. Thanks, guys.

Thanks, Rob.

And our next question comes from Garik Shmois from Longbow Research. Your line is open.

Thank you. Just have a question on the volume outlook in North America, certainly, very good performance in the first half of the year. Notice that the guidance is still for about 1% to 4% growth. So it does imply some deceleration in North America if I read that correctly. Just wondering if you can just walk us through some of the -- maybe additional color on the put and takes on what you are seeing on the volume side? I know you’ve identified a little bit of a split where you are seeing new construction, R&R, but maybe talk a little bit on the different end markets?

Hi, Garik. This is Vic. We did raise the upper end of our range on volume growth in the Americas to reflect what has been a pretty strong first half on volume. The deceleration you are referencing, as I was saying earlier on the earlier question that we started to see volume growth in the second half of last year from the new construction segment activity. So we are expecting to have more difficult comps, if you will, than we did the first half on similar activity. So we are not expecting a deceleration in the market. But again, compared to the comps that we are expecting in the second half, I think that’s what you’re feeling there. And to your segment question or the end market segments, again, it's broad based. We’ve been talking mostly about strength in the office segment, the new construction office segment. We started to see some of the R&R in the office segment. But in the first half of this year with state local spending on education, we’ve seen in healthcare, the hospitality segment also has been nice, especially for our architectural specialty business. So, again, the encouraging thing about this volume growth is that it's broad based across all of the segments really. So again, that’s very, very encouraging to us.

Okay. Thank you. A follow-up question is on WAVE, certainly, very good performance …

And our next question comes from Ken Zener from KeyBanc. Your line is open.

Good morning, everybody.

Hey, Ken.

So the strength quarter in the first half is good. You’re highlighting slower growth because of tougher comps last year and as you cited, limited visibility. I think you’re constantly being cautious given the strength that you’re seeing. Looking at some publicly available distributed data through [indiscernible] sales had been up 6% which is pretty much what you guys are seeing in North America. Since you cited state spending, Vic, and education, my recollection is that a lot of that -- some of the education occurs during the summer period, it's more seasonal time when the students are gone. What would you expect to see in that vertical -- if the momentum was going to continue to perhaps accelerate? And why do you think that’s occurring there? Is the tax situation better, have they finally just said we have to get the students better ceilings?

Yes. So Ken, the first part of your question, I will just go back to what we’ve been seeing prior to this year in education has been flattish to slightly negative. Persistently in the education segment. So I think with a good education segment here in the summer, which it looks like we are off to a good one, would be in the low single-digit growth. So it's a pretty meaningful swing. But I would say a low single-digit growth education segment would be a very positive outcome. So -- what was the second part of your question, Ken, if you are still on?

Oh, I’m still on. Just kind of -- I think you answered it in terms of what you’re looking for, but also why do you think it's happening now? I mean, my view is that a lot of these states have been stretched by pension payments, obligations to the baby boomers has curtailed their investments in the specific assets. But is there any reason or something that you could point to that -- point to the strength now? And I will just insert my second question which is steel costs WAVE, how do you expect that to flow in the back half of the year? Thank you very much.

Yes. Why it's happening now, I think there is a couple of things here. Actually the data that I’m looking -- I understand the pension pressure which has recently been highlighted and that’s real. But when you look at the investment data for the state and local spending on structural investments or structural spend which is a breakout of the total spend, you can see that that’s ticked up, which is very favorable for R&R activity. So I think there is a little more spending going to the structural side of the business which helps us. The other part of this and we can't forget this is that through the years, as we’ve been watching education remain soft, the demand for damaged tiles and ceilings that need to be replaced has not gone away. It has been sitting there. There does become a point where it's no longer discretionary. They really just have to repair these ceilings and make the repairs. So I think there is a combination of those things going on that are providing an uplift in the education segment right now. As far as the outlook for the WAVE business and steel, as you all know, steel prices are going up. We announced a price increase earlier in the second quarter and we’ve been implementing that, and we feel very good about the realization of that. And all the other players in this space have also announced similar increases and are implementing that. So, we feel good that as the steel prices increase, that we will be covering those increases with the -- this current price increases that’s on the street now.

Thank you.

You are welcome.

Thank you. [Operator Instructions] And our next question comes from Kathryn Thompson from Thompson Research Group. Your line is open.

Hi. Thank you for taking my questions today or question today. It really centers on pricing and having a better idea of what makes -- how much the geography mix or pricing actions impact AUV in the quarter, particularly in the Americas? And along with that, I know you touched on previously regarding the WAVE impact to rise -- rise in steel costs, but if you could just clarify for listeners, if there is greater increases in certain categories such as steel studs and why is that not necessarily the case for your WAVE op? Thank you.

Sure. So, on pricing again, Kathryn, we saw like-for-like pricing move up and be positive in the second quarter. Consistent with what we saw in the first quarter. We did see deflation in the quarter so our price -- real price, like-for-like pricing over inflation was positive and really helped drive the 240 basis points of margin improvements that we saw in the Americas and 340 basis of margin increase across the globe. Your question around how does geographic mix impact that pricing, and as we’ve talked about in the past, there are regional differences in some of the pricing and also the product mix in which they use, in those regions. And so, geographic mix can have an influence on the overall AUV and the overall mix, affecting AUV. What I said, however, earlier is that the volume growth we are seeing is very broad based and across over 70% of our territories that we measure against. So I think there is very little geographic mix in the AUV numbers. It's really driven -- and we’ve had strong mix in the first half that’s really driven by the growth at the high-end of the portfolio. And it's been supported by a lot of the new products that we are driving namely around the total acoustics and the adoption rate and the architectural community around that type of the solution has been very encouraging for us. So our innovation and industry leading innovation, I will add, at that part of the product portfolio is really helping drive the mix. And that's what you're seeing in the AUV. Your -- second part of that question, Kathryn was around steel prices and maybe other steel manufacturers or components are driving higher steel prices. I think one of the things that we do to manage this business, as you know with pricing is we do a very good job in holding prices throughout the cycle, frankly. And so, we’ve become less cyclical in terms of our margins. In fact, if you go back historically as I think you've probably done, Kathryn, is looked at our margins over the steel price fluctuations and you will see that our margins have improved through those cyclical periods of steel prices. And that’s a reflection of how we manage our price. And our prices match not like a commodity, but it's really matched according to the innovation of the services that we bring and allows us to offset those cyclical troughs and peaks with steel prices. So it's a little different than I think you’re comparing it to. And we are going to continue to manage price in the marketplace that way. And that’s why we feel confident that we will continue to protect and grow margins in the face of higher steel costs.

Thank you very much.

You are welcome.

And our next question comes from Bob Wetenhall from RBC Capital Markets. Your line is open.

Hey, good morning. How is everybody?

Hey, good. Bob, how are you?

Good, Vic. Hey, I just wanted to touch base on Europe. And I know you guys are taking down the revenue outlook, but you didn’t really mention Brexit. And I’m trying to understand a little bit better how much of this is really FX related versus expectations for weaker demands. I know you had touched on increased uncertainty. How should we be thinking about EMEA in that context?

Yes. So indirectly, I did mention Brexit. But let me comment on it, because it's worth commenting that it's not so much foreign exchange. We are anticipating that the volume uptick that we would -- we were expecting in the second half of the year will be moderated, because of the uncertainty both in the U.K and continental Europe as they try to figure out what’s going to happen in terms of tariffs and other influences on investment. In fact, in the U.K., we’ve already seen several projects that were in the development stage, be postponed until there's some more clarity around this. So, I think in the short-term, we are going to see some projects that are more discretionary, get delayed. I think they will finish the projects they’ve already started. And then we will start to see potential of the new investments in '17 and '18. We start to see the impact of those decisions now in '17 and '18. So a dampening effect short-term of our expectations and then longer term, more uncertainty on new investment.

And, Vic, one piece I would add, Bob, just from a cost side is we are the only ceiling tile manufacturer in the U.K. And we ship product from there into the continent and then also from the continent into the U.K. And interestingly enough, those volumes are just about equal. So there is little bit of a natural hedge from some of FX movements on the cost side.

And our next question comes from Scott Rednor from Zelman & Associates. Your line is open.

Hi, good morning. Wanted to ask a question on the guidance, it's kind of two parts, I think it relates. So, if you took down international growth, North American growth didn’t change modestly, but the EBITDA bridge is similar. So when you think about the updated EBITDA guidance in the Americas, is that just WAVE or is there a better contribution margin than you thought coming into the year? Hopefully you could clarify that, Vic. And then, Brian, just quickly on the drop through to EPS, why the change in interest in share count versus your prior guidance? Thank you.

Go ahead.

So, Scott, the first question on -- we are seeing an improvement in the Americas and that’s how we’ve guided, we move at top end from the heightened 3% volume growth to 4%. So another point there. As we mentioned, we are making some investments, modest investments in our SG&A around selling specifically. And then also in our manufacturing cost line to support growth in the higher end of the product range. So there is some puts and takes on that Americas piece. On the question you’ve on EPS, we’ve revised some of our share counts down. It's not reflective of the share repurchase program. It's just getting greater visibility to the impact of some of our equity plans as we spun the company and separated floors AFI from the ceilings business. And then on the real impact, as I mentioned on my comments, EPS was largely driven by this -- by a $11 million charge for interest rate swaps, which was part of the refinancing activity coinciding with the separation of the company. And so that’s taken a hit on the EPS line.

So Brian, that’s not adjusted out of 1Q, the $11 million?

Yes, that's correct.

Okay. Thank you.

And our next question comes from James Armstrong from Vertical Research Partners. Your line is open.

Good morning. You had a really good quarter in the Americas, obviously you talked about margin pass-through and that you saw pricing and costs go opposite directions. Do you think that going into the back half, do you think that you will get pricing above costs or do you think costs will start to catch up just a little bit into the margin guidance, especially in the Americas going into the back half?

Yes. We’ve had a consistent track record of managing our price over inflation. We're expecting to continue that in the second half.

Okay. That helps. So bottom line, you expect to keep that above the 30 -- look at similar margins to what you had in the second quarter will flow through the back half of the year, would that be fair?

Yes. I think that’s fair.

Okay. Thank you.

You are welcome.

And our next question comes from Mike Wood from Macquarie. Your line is open.

My question was just on international. Can you give us a sense of what the dollar value was with the delayed EMEA projects and what you are hearing from clients in terms of what the decision for them is to proceed or not? And also if you could just comment on the China story. Just what’s the issue with the lack of growth? I know that’s been a penetration story longer term. Thank you.

Yes. With regards to the EMEA projects, the impact in the short-term like in the current quarter has been minimal, okay. I think the story there is really been our cost reduction actions have driven and more than offset softness in sales driven by the market conditions there. Again, the Middle East in the biggest driver of our softness in the European region with better strength at continental Europe, better strength in Russia. So, in the short-term, again, I think the overall Brexit impact has been minimal. Our outlook for the second half though is a little bit more guarded because of the potential impact on these delayed projects that we’ve already experienced and how that could impact our rebound in the second half. Again, that’s what made us feel like the prudent thing to do was to reduce our expectations on top line growth or volume growth in that region. And I’m sorry, the second part of the question?

Asia.

In terms of the China story [technical difficulty]. Let me comment on China, because China continues to be a market full of potential, but not today. It's one that’s very concentrated in the office segment. And with the restrictions on investment, both from the government side which has been the biggest driver, now on the private side, we’ve really felt the impact of that. And so the market continues to contract in the office part of the market. So -- well, that market continues to have very good long-term potential, and the short-term here, we're seeing a correction and a contraction there, which is why, again, we talked about in the last couple of quarters, the actions we are taking to take out SG&A. We’ve had a significant reduction in SG&A in China. We are also in the process of idling one of our plants in China to reflect the lower market demand there to take some period expense out, to really drive the profitability. So, you saw some progress there in the second quarter. We are pleased with that and we’ve got more to do. But again, China continues to be very challenging market for us. I will mention that India continues to be a good place for us. I love the traction I’m seeing in Australia, and even in Southeast Asia. So, China right now is where we are having most of the market-related issues.

Thanks for the color.

I hope that helps. Thank you.

And our next question comes from Will Randow from Citigroup. Your line is open.

Hey, good morning and thanks for taking my question. On the upcoming August 1st price increase, if I remember correctly last year, it underperformed your traditional hit rate. Do you think there is opportunity this year given the compass a bit easier to actually outperform, or how are you thinking about the take rate on that 5% price increase?

Yes, we feel good about the 5% price increase. We’ve had lots of conversations with our partners in the market, our distributions, our contractor partners. I think the environment is good and supportive of the price increase. So we are going ahead with the price increases as we always do with full commitment to it and -- but we are feeling good about the environment and the receptivity to the price increase at this time.

Still consistent with historical take rates then?

I think so.

I think we should expect that.

Thanks, guys.

You are welcome.

And our next question comes from Jason Marcus from JPMorgan. Your line is open.

Good morning. My question is on the seasonality of the margins. I know historically, you’ve typically seen a nice uptick in 3Q and I think a lot of that was probably driven by the Americas. Whereas I think the seasonality in EMEA and Pacific Rim has been a little bit more muted as you go to 3Q and then to 4Q. I wanted to get a sense of now that we’ve the profitability by region, how we should think about kind of the trend of 3Q to 4Q and how we should think about the margin expansion and contraction into 4Q?

I think you’re right. Americas, the third quarter tends to be the strongest quarter because of the construction activity in the summer. 1in the international markets, both Europe and Asia, they tend to be latter half of the third quarter and into the fourth quarter. So you get a little bit more weighting in the fourth quarter in those markets. So I think that’s the right way to think about how you'd expect overall strength in both the sales and their earnings from those regions.

Okay. And then, just if I could, I have one more question on architectural specialties. I just wanted to see if you could break out where you’re seeing the most growth from a geographic perspective. And then following the spin-off, your thoughts on M&A within that segment, I know it's something you may be talked about in the past but we haven't seen a whole lot of it at this point.

Yes, we’ve had -- in architectural specialties, that segment, we are seeing growth in really all of the regions. The one exception -- and it has been particularly strong in the U.S., which obviously is very good for us. But the one region that impacts the overall growth rate has been our reduction in the Middle East. And again that market is very challenged right now in terms of project funding and delays. And that has impacted the architectural specialty markets in the European region. But in Asia, very strong. In the Americas, very strong and a little bit lighter although positive in Europe, based on the headwind that we see in the Middle East. So it's very encouraging, great traction there. Love what I see in that segment. And what our teams are doing to penetrate that marketplace.

Okay, thanks.

You are welcome.

And our next question comes from Keith Hughes from SunTrust. Your line is open.

Thank you. I guess as you look at your Americas comps in the prior year, what kind of volume growth did you see in the third quarter of '15 [technical difficulty]? The Q gives a 2.5% revenue growth in the third quarter in the Americas in the old Armstrong, how much of that volume or what does the fourth quarter look like?

Yes. I’m not exactly sure I have that off the top of my head. I don't know -- Brian, do you have that number?

No. I think, Keith, we will follow-up with you and show you that flow in the back half of last year.

Okay. And just, probably sneak one other one in. You are talking about the swap settlement. Was that swap settlement in the first quarter or the second?

Yes. The swap extended in Q1. The cash got paid out in Q2, but it was right at the end of Q1 as we refinanced and separated the company.

So that’s just come into your EPS guidance in the second quarter, is that right? That was not part of what you gave in the first quarter?

You are correct. And we thought we'd have some other -- I'd say puts and takes on the EPS, but that $11 million swap was significant enough to really impact the outlook on the EPS.

Okay. So, it will be included from now on. Did you ever think of excluding that? I guess, you’re excluding a lot of other one-time stuff.

Right. And that’s the one we are including.

All right. Thank you.

And our next question comes from Jim Barrett from CL King & Associates. Your line is open.

Good morning, everyone.

Good morning, Jim.

Vic, could you talk a little bit about Russia? I was surprised to see growth there. Is that sustainable and what’s underpinning that?

Yes, that’s the right question. I mean, I think the Russian market has been very volatile in the last couple of years based on not only oil prices, but also just political activity. So the way I would characterize it, it's going to be choppy. And so we are not forecasting that there is an inflection point in Russia because we had a strong second quarter which it was a strong second quarter. We did have a weak first half last year so a little bit of comp helped there. But I expect it to be -- as long as oil prices stabilize and there is some stability in the region, the rate at which we are taking share in that market as we expand into Russia, I think it's going to be choppy, but directionally better from where we’ve been.

Thank you very much.

You bet.

And our next question comes from Sam Eisner from Goldman Sachs. Your line is open.

Yes, good morning, everyone.

Good morning, Sam.

So just on the pricing gains, can you perhaps give some color as to the mix versus like-for-like pricing gains if you maybe break out in the second quarter that $3 million? And then, in addition, when I look at your gross margins on a year-over-year basis, both for the three months ended June and the six months ended June, gross margins are down year-on-year. So, can you maybe just give a little bit color? I know you touched on a bit of the moment between SG&A and cost of goods, but just a little bit more information there would be great. Thanks.

Yes, Sam, this is Brian. So, historically, our AUV split between price and mix has been 50-50. Again, our frame that we continue to use is price over inflation. And so while we continue to see deflation, especially as we think about the energy impact, that mix changes slightly in the year-to-date in the Q2, but we generally don't go much deeper than that guidance on the components of that AUV. And then, I’m not sure I quite follow the margin question you had and I know we’ve got a call later today to follow-up, so we can address it there if that’s all right with you.

Well, I guess if I just look at your six months reported numbers in the 8-K that you filed today, you did 29.2% gross margins this year, 30.2% last year, so 100 basis point decline in gross margins. Can you may be discuss what the drivers of that are on a year-to-date basis?

Yes. So in the earnings call deck, we -- in the last page, we mentioned that we do have costs moving up into costs of goods sold for the stand-alone costs now. And so about 30% of the overall costs have moved up in there, which includes depreciation obviously on that reported basis. So, we can -- we will walk you through that bridge on our call later today.

And we have a follow-up question from Bob Wetenhall from RBC Capital Markets. Your line is open.

Hey, thanks for taking another question. I’m just trying to think out loud and get your views. You sound a little pessimistic on the outlook for European demand and Asia. I know you’ve been very disciplined on managing SG&A spend levels and that was shown with what you did in Asia last quarter. Do you’ve additional opportunity if you don’t see a recovery in volumes? You’re obviously seeing headwinds or just general softness in international markets. Is there room to improve the cost structure if you are not seeing a uptick in volume as you go through the back half of the year? And while we are on SG&A, do you see additional room in the U.S to tighten the belt, now that you’ve separated from foreign products? Thank you.

Yes. Thanks for the additional question, Bob, because we are not pessimistic on the international markets. We are being, I think, prudent on what we are seeing in the level of uncertainty to make sure that our outlook reflects what we expect to see there. Again, there is some positives going on in the region. It is a mixed bag with some of the markets like the Middle East, kind of overshadowing some of the other things that are positive going on in the region. China similarly in the Asia region. So we are being, I'd say, prudent and transparent on what we think is realistic to achieve in the 2016 year. With that said, we are very aggressive -- aggressively attacking the cost structure. We got long ways to go to get these businesses to the return on capital that we expect. And that’s really our business objective. So we’ve been out in front already of the software markets with our cost reduction actions, which has yielded good results in the second quarter. But we’ve got long ways to go and we are working that hard. So we are going to stay out in front of certainly the guidance that we put in terms of what we think these markets are going to do with our cost reduction actions that continue to make improvements in our bottom line, irrespective of what we see on the top line. So that’s what we are running to and we are feeling good about those plans. In terms of the U.S., there is parts of the SG&A structure that we do believe there is opportunity and we are working those. Now that we’ve got all of the stand-alone costs embedded in our business, there is clearly opportunities that we are going to be working. On the other side of it though, this is an opportunity, and we see opportunities to be investing in as you saw in some of the bridges, we’ve invested in some commercial capacity, we are investing in our innovation right here in North America, because this is where we believe there is a great return for opportunity for. So it's a little bit of a mixed bag on SG&A here in North America. So, hopefully that addresses your question there, Bob. Thanks for the question.

And at this time, I’m showing no further questions. I'd like to turn the call back to Mr. Vic Grizzle, CEO, for any closing remarks.

Great. I just want to thank everybody again for joining today. The questions were great. We are very pleased with the quarter and our first half results. This is the first quarter really for this management team as a stand-alone industry-leading ceiling company. And again, we’ve made good progress and I really like the progress we are making on our growth initiatives. So we plan to keep everybody posted on our progress there. So thanks everybody and have a good afternoon.

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