Good morning, ladies and gentlemen, and welcome to the Armstrong World Industries Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. I would now like to turn the conference over to your host, Mr. Tom Waters, Investor Relations Officer. Sir, you may begin.

Thanks, Bridget. Good morning, everyone, and welcome. Please note that members of the media have been invited to listen to this call, and the call is being broadcast live on our website at armstrongceilings.com. With me today are Vic Grizzle, our CEO; and Brian MacNeal, our CFO. Hopefully, you have seen our press release this morning, and both the release and the presentation Brian MacNeal will reference during this call, are posted on our website in the Investor Relations section. I advise you that during this call, we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong World Industries, please review our SEC filings, including the 10-Q filed earlier this morning. Forward-looking statements speak only as of the date they are made. We undertake no obligation to update any forward-looking statements, beyond what is required by applicable securities law. In addition, our discussion of operating performance will also include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation. Both are available on our website. With that, I'll turn the call over to Vic.

Thanks, Tom, and good morning, everyone. It's good to be with you today to review our second quarter results and update you on several recent important developments. Second quarter results were solid with both sales and adjusted EBITDA up double digits. We had strong volume growth in both segments. We achieved solid like-for-like price increases to offset inflation, and WAVE delivered a record quarter. Overall, our results in the first half of the year were solid and in line with our guidance. And as we enter the busy summer period, we remain confident in our 2018 outlook. Total company second quarter revenue of $249 million was up 10% versus the second quarter of 2017, and adjusted EBITDA of $95 million was up 12%. Free cash flow was up 140% in the quarter, and year-to-date, free cash flow has tripled to almost $100 million. The Architectural Specialties segment had another strong sales quarter with revenue of $42 million, up a strong 18% from last year. Adjusted EBITDA in the quarter of $9 million was up 5% resulting in a 22% EBITDA margin. Architectural Specialties' sales growth was broad-based with all major substrates up at least 15%, including metal, wood, and the Tectum products. Big projects continue to provide tailwinds to the business as we completed the Salt Lake City Airport renovation in the quarter, and our pipeline of large jobs remains strong and includes major transportation projects at LAX, the Royal Caribbean Terminal in Miami, and the Grand Central Station among others. Architectural Specialty margins compressed in the quarter due to the timing of investments in selling and design capabilities, and the mix of products sold in the quarter. Now, you will remember we've discussed that we can see some quarter-to-quarter variance in our results due to the timing of investments…

Thanks, Vic. Good morning to everyone on the call. Today, I'll be reviewing our second quarter and year-to-date 2018 results. But before we go into the financials, as a friendly reminder, I'll be referring to the slides available on our website. Slide 3 details our basis of presentation. Turning to slide 4 for our second quarter results, sales of $249 million were up 10% from the second quarter 2017. Adjusted EBITDA increased 12% and margins expanded 70 basis points. Adjusted diluted earnings per share were up 16% aided by our share repurchase program. In the second quarter, we repurchased 620,000 shares for $35 million. Since the inception of our repurchase program in the third quarter of 2016, we have bought back over 4.7 million shares for roughly $230 million at an average price of just over $48 per share. Adjusted free cash flow improved by $39 million or 140% over the prior-year quarter due primarily to improve working capital performance in the quarter. Net debt increased by $21 million as cash balances are lower than last year and debt is also lower. Turning now to slide 5, adjusted EBITDA increased $10 million, as volume gains in both Mineral Fiber and AS flowed to the bottom line. AUV was positive and offset inflation. Input costs include $2 million of inflation as well as other spending primarily related to freight costs associated with our change manufacturing and distribution footprint. SG&A increased due to investments in AS capabilities and legal costs in the Mineral Fiber business. WAVE had an excellent quarter as profitability was up 22%. Slide 6 shows our change in adjusted free cash flow, which grew $39 million compared to the prior-year quarter. Working capital improved by $18 million year-over-year with one-time items in both the base period and current year…

Thanks, Brian. 2018 is on pace to be a record year here at AWI. The strategic initiatives and advanced manufacturing investments we talked about are bearing fruit. As an Americas-focused ceilings and specialty wall company, we have been investing to extend our leadership position in both product solutions and support services. We're already achieving success with Total Acoustics and Sustain products, and now with the formal launch of DESIGNFlex, we are further extending our leadership into next-generation interior space solutions and reinvigorating the Mineral Fiber ceilings category. And our innovation pipeline has never been better. The Architectural Specialty business continues to hit on all cylinders. We are driving impressive organic sales growth, expanding margins as we get better at executing in this specialty space, and we are winning and delivering iconic projects. Add in three strategic acquisitions in the past 18 months and a robust M&A pipeline, and this is not only a great business today, but it has an exciting future as well. We just completed a review of our three-year strategic plan with our board of directors and I'd have to say the alignment and the confidence has never been higher. This confidence is clearly demonstrated in the expanded repurchase authorization that I mentioned earlier. The cash generation of this business is unique and we will continue to deploy it to invest in our business, to acquire bolt-on acquisitions, and return it to our shareholders. So thanks again for being with us today and, with that, I'll open it up to questions.

Our first question comes from the line of Stephen Kim with Evercore ISI. Your line is open.

Yeah. Thanks very much, guys. I appreciate the color. I was curious if you could talk in the Mineral Fiber's business. I think you talked about the 0% to 2% in terms of the volume for the year, but we had a little bit of volatility in the first six months. You talked about that in terms of the 1Q in April and so forth. And so I was curious if you could talk a little bit about what you saw in July and whether your expectation would be that you could be in that 0% to 2% range in each of 3Q and 4Q as well as for the year.

Yeah, Stephen, this is Vic. Going back first to the volatility that we talked about right from March to April based on weather, so when you look at the first half, we're in that 0% to 2% range that we're out-looking for the whole year. So, that coupled with the market conditions that we're seeing into the third quarter and what we expect to see the rest of the half or rest of the second half, which is very consistent with the first half, frankly, we remain confident in that 0% to 2% outlook that we provided for Mineral Fiber.

That's great. Helpful. And then if we could talk a little bit about – in the slide, I think, you made reference to LatAm and home centers having an impact in terms of lower mix, but also, higher volume. I was curious if you think this is going to be an ongoing trend that we should be factoring in, in any way or if it was primarily a 2Q phenomenon?

Yeah. Really, it's been predominantly a first half phenomenon. I would say in the first quarter, we also saw, and we spoke to this our LatAm, and in particular in the Puerto Rico area, we called out based on some of the rebuilding that's going on there. So, I expect that to continue. I think the sales through the home centers is a bit of an indicator on some of the R&R activity that we're seeing broadly in the market. So, we would expect that to continue. As you know with the home centers, you can get some lumpiness quarter-to-quarter based on their inventory adjustments as we've talked about in the past. But the sell-through that we're seeing through those home centers, we expect to continue into the second half.

Great. Okay. Thanks very much, guys.

Yeah. Thanks, Stephen.

Our next question comes from the line of Nishu Sood with Deutsche Bank. Your line is open.

Thank you. So, obviously, great sales trends in Architectural Specialties. Continuing acquisition, the acquisition pace has stepped up here as well. As we kind of look across the initiatives you have going in Architectural Specialties, the three you've made over the last two years here, plus the Flex form, is there kind of a broad strategic overlay that you can guide us to that's kind of guiding these acquisitions, or should we think about the more, as you know, this is opportunistic, there's you know, obviously, an incredible array of specialties ceiling materials, and it's more opportunistic as you fill in your product portfolio.

Yeah. Good question, Nishu. I think the strategic overlay – let me separate – the two that you mentioned were the DESIGNFlex which is really a mineral fiber initiative to reinvigorate that category from a two-by-two white side down ceiling tile to shapes, colors, and sizes that can really I think reenergize what architects want to design around. So that is separate from the Architectural Specialties. So, let me just talk about that for a second because I think this is – the feedback that we got from the AIA show and the initial launch into the marketplace is very exciting. And it's very encouraging that we're over the right target in what architects want to do with that space going forward. So they want the aesthetic, they want the statement that comes from the ceiling plane, but they also need the acoustics and this is a great combination of capabilities for architects to design around. So, we're very encouraged by that and again the strategic overlay for DESIGNFlex is to drive Mineral Fiber sales growth. So, that's one of the initiatives that's going to support that. On Architectural Specialties, these are really adjacent capabilities that we don't have in our portfolio today that we want to augment what we currently take to market, to broaden the basket of solution capabilities to help architects with a one-stop shop approach to solve all of the spaces within the commercial buildings and it's a very fragmented space as we talked about in the past. So, the best way for us to bolt on this capability and to acquire this – or to get this capability is to acquire this capability as it exists in the marketplace today and then bolt it on to Armstrong's capabilities and specification skill sets to get these products' spec'd. So again, there's two strategic overlays here: grow the Mineral Fiber business through DESIGNFlex and creating more options around next-generation design requirements from architects; and number two, is to add to the product capability in Architectural Specialties through bolt-on acquisitions to play in more spaces within the commercial buildings. And that's really what's driving our – and we're being very purposeful about adding unique capabilities to the portfolio, not all the capabilities, but the unique capabilities to the portfolio. Again leveraging Armstrong's scale and our ability to go-to-market.

Yeah, Nishu, just real quick to add to that, Vic mentioned that we're being purposeful and we are. As you know, we have a good balance of make versus buy in this business and the AS business drives over a 50% ROIC. So, we're very purposeful in our M&A to make sure they are unique capabilities that stand out.

Got it. Got it, thanks. I appreciate the color there. And second question, Brian, you called out transportation expenses as a result of the reconfiguration of your distribution network with the shutting of the West Coast facility and the distribution center being opened. Should we take that as one-off expenses related to the plant closure and the transition to the distribution center or are these more ongoing as a result of the new layout? And obviously, there's been pressure on freight expenses. So, how does that play into the picture as well?

Sure. So, I called out both the freight inflation which is ongoing but the one-time nature of the extra transportation, extra cost we experienced in the quarter was really around the closure of St. Helens. As we move that production into our other plants at the same time demand increasing, we saw some additional overtime related to that and some additional transportation. So they are more one-time in nature. We're all facing that freight inflation as a separate item.

Okay. Thank you.

Thank you and our next question is from Michael Rehaut with JPMorgan. Your line is open.

Hi, this is Elad on the line for Mike. I just had a couple. So, first on Architectural Specialties, how big do you guys see the segment getting over the next three to five years and how much of that's going to be organic versus inorganic. And I presume that the raised guide, the greater than 15% versus greater than 10% is mostly organic, but maybe if you could – it's mostly inorganic, sorry, but if you could just break that down for us a little bit.

Well, in Architectural Specialties, we've experienced in the first half solid double-digit growth. In fact, it's up 20% organically. So, we're seeing some very nice market penetration activity there and some good traction in the new project pipeline that we've been executing against. So, we expect that to continue and what we're out-looking in that business and I think what you can expect in that business is that we should have solid double-digit organic growth. And then, as we add somewhere in the neighborhood of one to three bolt-on acquisitions in this space a year to further accelerate on top of the double-digit growth inorganically. So, it's hard to predict what those inorganic opportunities and the timing of those. So, it's really tough to answer your question very directly on that, but the plan and the play that we're running around that is continued solid double-digit organically, winning these projects and servicing those. And then again opportunistically adding those targeted bolt-on acquisitions that add to the capabilities that we need going forward. And, again for a ranging standpoint, somewhere between – they're ranging $10 million to $50 million in size as a typical acquisition in this space.

Okay. And just thanks. And the follow-on on that just to get a little more clarity around margin potential going forward. Do you see a lot of potential for the margin in architectural to expand beyond where they currently are?

Yeah. We expect to – again, a lot of these companies are not as profitable as our base business. And so as we add companies to this we plan to expand and improve their margins. At the same time and as we've demonstrated if you look back over the last couple of years, at the same time we're getting more efficient and we're getting better at servicing this specialty space, and we're improving margins. And I would expect that to continue for us in the next several years.

Okay. Thank you.

Thank you.

Our next question comes from the line of John Lovallo with Bank of America. Your line is open.

Hey, guys. Thank you for taking my call. First question is I just want to make sure I'm understanding this correctly. So Mineral Fiber volume in the first quarter I think was down 5% year-over-year. And then I think you guys mentioned on the last call that April was enough to kind of flatten the volume out for the year, so I guess up 5%. So it seems to imply that all of the 5% volume in the second quarter that you've reported today was April. I'm not sure if I'm understanding that correctly, so I guess the question is, were May and June kind of flattish and then, what are you seeing into July? Thank you.

Yeah. I mean to answer your question very directly, as I said in my prepared remarks that without the overflow from March into April which we spoke about that in April, volumes were up in the quarter of 3%. So, we had positive volume growth throughout the quarter.

Okay. Got you. And then maybe as a follow-up here, the $9 million of SG&A savings in 2018, was that – maybe I heard this one, was that lowered, was that $10 million previously and the target heading into 2019, is that still $10 million?

Yeah. John, so what we said, it's for the full year it's going to be $10 million, $9 million of that's in the back half. It's more than just SG&A just for clarity, it's total restructuring savings. It's both manufacturing and SG&A. And next year, we expect another $10 million which will bring the full program to the high range of $20 million.

Okay. Thank you, guys.

Thanks, John.

Thanks for calling – I'm sorry, our next question is from the line of Kathryn Thompson with Thompson Research. Your line is open.

Hey. This is Brian Biros on for Kathryn Thompson. Thank you for taking our questions. I wanted to ask about the Steel Ceilings acquisition announced this morning, if you had any idea of the total addressable market for the Steel Ceilings' products. And then, specifically for the Steel Ceilings Company, where you think that might go in the next two to three years on growth.

Yeah. The Steel Ceilings is an exciting acquisition for us. They bring some additional capability that we don't have in the portfolio today, especially around radiant ceilings and security ceilings for prisons, for example, or other institutions. So there's some real exciting products and capabilities that will be additive to our overall capability. They also bring some of the other basic capacity that we currently have, but it's added capacity for us to serve this market. We've not broken out exactly how big this specific metal ceilings market is, but it's part of $1 billion market opportunity that we're targeting in the specialties market here in North America. So you can look at our sales in this category and know and recognize that we've got a long ways to go to reach more significant market share level. So lots of room to grow here and we're excited about the acquisition.

Got you. And a quick follow-up on that. Do they have a national sales footprint or are they more regionally focused in certain parts of the Americas?

Yeah. There are a national organization. They use a combination of indirect and direct. And again this will be a great opportunity to bolt this capability and merge that into Armstrong's national sales organization. So that's our plan to do that to really leverage this capability.

Got you. Thank you.

Yeah. Thanks Brian.

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

Hey, guys. This is Maggie on for Phil. Going back to Mineral Fiber volumes. Can you quantify the impact from the extra shipping day in the quarter. And also if there was any pre-buys in the tile business or the WAVE JV? Thanks.

I'm sorry, Maggie, I didn't catch the first part of the question.

Oh, I'm sorry. Could you quantify the impact from the extra shipping day in the quarter?

Do you want to take that Brian?

Sure. Yeah. So, Maggie, we've said in our prepared remarks about a 1.5%. We rounded that to 2% for the timing of what shipped in Q1 into Q2 and from a pre-buy standpoint...

Go ahead.

Yeah, I'd say minimal pre-buy, I mean, at all on the Mineral Fiber side, a little bit more on the WAVE side given the number of price increases we've done, but very minimal on the Mineral Fiber side.

Got it. And just a quick follow-on, curious if you're seeing any signs that trend in shipments for Mineral Fiber is accelerating given the strong economy and maybe any benefits from corporate tax cuts? Thanks.

Yeah. The overall market has improved. There's no question about it. We outlooked an improved market at the beginning of the year, and we're experiencing a better market environment than we had last year. So, we are in a more positive market. When you look at some of the stats going around, the value put in place for example is positive really in all the segments. Transportation, in particular, has been particularly strong based on start activity in 2017. So there's some I'd say solid activity. I've been in the marketplace in the last four months several times talking to both contractors and distributors, architects, everybody is very busy and their backlogs are strong. And a lot of them are saying it's not been this strong in a long time. So, I think there's a lot of good activity out there. We're experiencing, I think, the market that we expected which is really nice. Thanks for the question.

All right. Thanks, guys.

Our next question is from the line of Justin Speer with Zelman & Associates. Your line is open.

Just wanted to tease out the guidance of $345 million to $360 million. What was the incremental acquired EBITDA that will be in that number or is that the right way of thinking about the $345 million to $360 million is including the incremental M&A?

Justin, it will be – I mentioned in my prepared remarks, just about $1 million will be the impact of the EBITDA for the acquired business.

Perfect. And thinking about the multiples paid on EBITDA, what did you pay for those assets on EBITDA, if you can characterize that. And also just in terms of the competitive landscape on the M&A side with other insurance maybe getting into this space, if you can characterize what you're seeing on that front. What are you looking at your funnel?

Yeah. So, I mean obviously we look at both pre and post synergies but given the value that we bring to these acquisitions and the capabilities they bring to ours, both of these are in that and typically they are seven to eight multiple post-synergies. And so we mentioned roughly $24 million of purchase price. We expect that $20 million of sales next year and we expect these margins to – they're currently reported low in their own internal private businesses but they'll start to expand like we've seen at TECTUM and get close to that AS overall margin of 22%.

Excellent. And then, on the M&A side, are you seeing any competitive incursions on the M&A side that are changing economics at all in your models of these acquired – of these candidates?

Yeah. Sorry, Justin. This is Vic. So on that front, there's not really a significant change in the competitive aspects of these acquisitions. In fact, several of the acquisitions, they're not in a process. And so, we've had a direct conversation and had a direct process with them. But with that said, a lot of these companies are growing nicely and they're benefiting from an improved market condition as well. So, that's part of the conversation I think, their current state and their future outlook as we negotiate with these companies. But again, I would say there's nothing material to talk about in terms of a change in the competitive landscape around M&A.

And last question for me, and just these proceeds that are coming from the asset sales. It looks like they're going to be I guess your placeholders for buybacks. Have you guys considered a special dividend or any other avenue? I know you have M&A obviously in the hopper, you have buybacks but is there even maybe potential for a dividend on top of that?

Well, right now, we have – again, back in November when we closed or signed this agreement with Knauf to sell our international assets, we had indicated at that point, it was our intention that we would return a majority of this to shareholders. And so, we're still on that path to do that and we've had a lot of time to think about all the options. So, I think you've identified the vehicle at least that we plan to move forward with in returning these proceeds. But with that said, longer term, a balanced approach to shareholder return is our goal and we plan to keep that in view.

Appreciate it guys. Have a great day.

Yeah. Thank you.

Our next question is from the line of Ken Zener with KeyBanc. Your line is open.

Good morning, everybody.

Hey, Ken.

Hey, Ken.

Big picture question here, I was just looking through your last deck, can you give us some reference point where we are in 2018 versus kind of the peak that we had, and I guess it was 2006 or whatever, like what's the percentage that we're down in volume for your mineral wall business or the industry, however you want to think about it?

Yeah. Volumes in the Mineral Fiber ceilings business and I would probably say, across a lot of the building product spaces, are still down in that 25% range in volumes.

And I know last year, I think you had – one of the things I've always asked you guys about is the office versus retail versus the education, transportation, other categories which is more cyclically depressed. But last year third quarter we had some issues related to education given that it's July. My kids are at least going back to school in about two-and-a-half weeks, can you comment if there are any comp issues relative that we should be kind of prepared for. I know you kind of guided that 0% to 2% for the year but because third quarter is outsized with education, is there any insight you can provide us there in terms of what you're seeing?

Yeah. It's still early but I would say that it's better than it was last year. And, you remember the story last year, Ken, that a lot of these states made mid-year corrections to their budgets and diverted funds away from education, both K-12 and higher education. So we track that by the way and we can tell you that fewer states have made funding adjustments so far than they did last year, and that supports I think the better environment that we're seeing right now.

Okay. And then, in the specialty – the architectural, was there something that – I would have thought this going into generally new construction you'd had pretty good visibility, was that revenue growth, I mean, that organic increase, I mean, or was the increase tied to the M&A. I guess, I know that EBIT contribution was $1 million for the year, but was it that M&A that led you to do that or are you actually just seeing a lot more business coming through. Sorry for the clarification.

Well, when you look at our first half, Ken, we're up 20%. So, we've had a stronger first half. The project pipeline has filled up very nicely and the teams are executing against that wonderfully. So it was prudent for us to, and we do have visibility. When you look at our backlog and our pipeline, we do have pretty good visibility to what's going to happen in the second half. So, that gives us confidence to go ahead and raise the top line guidance in that business.

Good. Congratulations.

Thank you very much, Ken.

Thanks Ken.

And our next question is from Judy Merrick with SunTrust. Your line is open.

Yes. This is Judy for Keith Hughes. Thanks for taking my call. Just one more follow-up on the Architectural Specialties business on the margin, you called out the timing of the selling expenses and some of the investments that you're making, was there anything else that kind of stands out maybe in the base business or was your manufacturing costs in line with what you anticipated?

Yeah. There was two things really, we talked about the timing of some of those expenses and again they can be lumpy as we feather them in, and we've had a history for the last five years of doing I think a good job overall on a year-to-year basis of feathering in support resources that fall into SG&A. But it's a lot of designers and CAD operators and project managers that we feather those in to support future growth at a rate and pace that allows us to grow with the business and expand margins. So quarter-to-quarter, you can get a little bit of lumpiness on that and that's what we're seeing. The other thing that we saw in the second quarter is, and we can see this again quarter-to-quarter is, your mix can change a bit based on project activity and we saw a little bit of a headwind from the mix in the Architectural Specialties business in the second quarter. So, a lot of that just kind of works its way out over time throughout the year, which gave us the confidence again to say, hey, top line is going to be better than we thought and we're going to expand margins in that business in 2018.

Yeah. Judy, just to add just a little bit more to that. We came out of Q1, AS had a margin of 24%. Last year, it was 22% and we made a point on the call that we're going to see some of that lumpiness. I mean in Q2, we're at 21.5%. We expect the full year to be above that 22% we delivered last year but we will get some movement in between quarters.

Okay. Great. Thank you for the clarification.

Thanks, Judy.

Our next question comes from the line of Garik Shmois with Longbow Research. Your line is open.

Hi. This is Jeff Stevenson in for Garik. I just had a quick question on tariffs, and I was just wondering how we should be thinking about inflation over the rest of the year and what actions do you think you'll have to take if any with your supply chain?

Yeah, Jeff. This is Vic. So, on the tariffs, the major impact for Armstrong's business is around steel. Our grid systems are obviously very dependent on steel supply. We do import some steel internationally. And we've been talking about this quite regularly over the last six months, so the actions that you're asking about are the price – passing along these tariffs and the higher steel costs onto customers through price increases and we've executed a number of them already this year. So we're already responding to the tariffs and the inflation. Some of this inflation will continue to linger, we believe in the second half, and we're poised with another price increase in August to make sure that we're staying out in front of that. Again, I'm pleased to report in the second quarter the pricing actions that we talked about in the first quarter have materialized and good price over inflation in the quarter. So, we're going to continue to run that and stay ahead of inflation as we've done for many years now.

Okay. Great. Thank you. And then, just a quick question on your guidance, how should we be thinking about the mix impact into your AUV guidance for this year?

Yeah, Jeff. This is Brian. We've incorporated any potential mix headwind in that guidance of 3% to 4%.

Okay. Thank you.

Great. Thanks, Jeff.

Thanks, Jeff.

Thank you and I'm not showing any further questions. I'll now turn the call back over to Vic Grizzle, CEO, for closing remarks.

Great. Thanks, everybody, for being with us today. Again, we're on track to deliver a strong year in 2018. Very encouraged by our board's vote of confidence to authorize an additional $300 million of share repurchases. And again, we're excited about the second half and I appreciate everybody's attendance today. We look forward to talking to you next quarter.

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.