Good day, ladies and gentlemen and welcome to the Second Quarter 2019 Armstrong World Industries Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call may be recorded.I would now like to introduce your host for today's conference, Tom Waters, Vice President of Corporate Finance. Please go ahead, sir.

Thank you. 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 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 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 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 will 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, another solid quarter for the company. We delivered sales growth of 9% adjusted EBITDA improved 14% and margins expanded 160 basis points. With this strong quarter, we are completing a solid first half of 2019. For the half, sales were up 8% EBITDA is up 15% and margins expanded by 240 basis points. Both of our segments are performing well and accelerated throughout the half. And therefore, we remain confident in our 2019 guidance.In a moment, Brian's going to walk you through the details of the results by segment, but I first want to touch on a few of the key takeaways. In the Mineral Fiber segment, average unit value, or AUV, was up more than 6%, with both like-for-like pricing and mix improvements positively contributing in the quarter.Our industry leading innovation continues to be the key driver of mix improvement, with sales of Mineral Fiber products at the high end of our portfolio, growing double digits in the quarter. Recent new product launches including the Sustain and Total Acoustics product families are leading the way, but we are now also seeing contribution from DESIGNFlex, which we launched last summer. Architects and designers are beginning to see the creative possibilities afforded by this leading-edge new offering and we are encouraged by the initial new business results.Our new product vitality measure, which is a measure of sales of new products introduced in the last five years, is now over 40%. For perspective, this measure is up from the low-teens as recently as five years ago. This has been a focused effort by our team and we are now seeing the fruits of this work. Year-to-date Mineral Fiber AUV is up over 7%.…

Thanks Vic. Good morning to everyone on the call. Today, I'll be reviewing our second quarter 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 now to slide 4 for our second quarter results, sales of $272 million were up 9% despite one less shipping day versus Q2 of 2018. Adjusted EBITDA increased 14% with margins expanding 160 basis points. Adjusted diluted earnings per share of $1.27 grew 31%. As profitability increased, we lowered our share count 5% via buybacks and our booked tax rate was 400 basis points lower than last year.Adjusted free cash flow declined by $14 million over the prior year. Cash earnings improved, but were offset by a $20 million income tax refund in 2018 and lower payables in 2019. Net debt increased by $63 million, driven by a lower cash balance due to the acquisition of Steel Ceilings and ACGI as well as share repurchase activity. In the quarter, we repurchased $28 million of stock. Since the inception of the repurchase program, we have bought back 8.3 million shares or 15% of our outstanding float at a cost of $479 million for an average price of $57.42. Currently, we have over $200 million remaining on our share repurchase program which runs through October of 2020.Turning now to Slide 5, adjusted EBITDA increased $13 million as strong AUV gains driven by both like-for-like pricing and improved Mineral Fiber product mix fell to the bottom-line. Volume gains were driven by Architectural Specialties. Inflation moderated in the quarter, but remained a slight headwind. Year-to-date inflation is running in the range of 2% to 3%.As Vic mentioned our plants continue to run well and delivered gains that offset the…

Thanks, Brian. At the halfway mark, 2019 is shaping up nicely. Overall, market conditions are largely as we expected entering 2019 and our teams are executing very well. So we remain confident on our full year guidance, which delivers high single-digit revenue growth and double-digit EBITDA increases consistent with the growth trajectory we outlooked at our Investor Day last November.Our value creation drivers namely: AUV improvement in Mineral Fiber; accelerated growth through share gains and acquisitions in Architectural Specialties; a balanced approach of feathering in investments to support the growth, while maintaining margin expansion; and returning cash to shareholders are all being executed as planned. And of course, innovation remains paramount in Armstrong, not only in new products, but now also in digital technology.Our digitalization initiatives are well underway and include design and visualization tools to improve the speed and accuracy of the architectural specification process. We are developing capabilities to provide virtual and augmented reality project visualization, while simultaneously creating design drawings, installation instructions and a real-time bill of materials. What used to take weeks will soon take hours. This technology will allow the AWI team to earn specifications for its industry-leading product innovations as well as improve our customers' experience along the way.Armstrong is committed to being the leader in innovation to providing the best possible experience for our customers and committed to making a difference in the spaces where people live, work, learn, heal and play.So with that, we'll be happy to take your questions.

[Operator Instructions] And our first question comes from the line of John Lovallo with Bank of America. Your line is now open.

Hey, guys. Thank you for taking my questions. The first one it seems like of the Mineral Fiber volume headwinds that you called out last quarter that LatAm is probably the one that didn't improve as expected, which would imply that Big Box and weather both got a little bit better. Is this the right way to think about it? And if it is, how big is LatAm as a percentage of your Mineral Fiber business?

Yes. John that's the right way to think about it. It's -- we have weather-related issues in parts of the country and in Canada in particular we called out. And then also some of the inventory corrections in the Big Box area. All of those areas improved sequentially in the quarter as we expected it to and as we talked about in the first quarter. The one that didn't improve enough and now knowing what we know now about that market, I don't expect Latin America in particular to bounce back or have enough time in the remainder of the year to bounce back. It eventually will bounce back.I think we're in good shape down there, but I don't think that that's going to help us in the second half of the year. Therefore, that gets us to the lower end of our previous guidance range on volume. But the rest of the areas are again they're working their way through the system as we expected them to do. And as far as sizing, we don't break out LatAm specifically. But as I said in my prepared remarks, it's a smaller channel for us overall relative to the other channels that we have.

Got you. Okay. That's helpful. And then of the Mineral Fiber AUV in the quarter was there any meaningful divergence between kind of the historical 50-50 split between price and mix?

It was kind of like the first quarter as we out looked. It was a little heavier on the like-for-like versus mix. But again, as the year plays out we expect that to be closer to a 50-50.

Okay. Thanks guys.

Yeah. Thanks, John.

Thank you. And our next question comes from the line of Kathryn Thompson with Thompson Research. Your line is now open.

Hi. Thanks for taking my question today. Just to – a follow-up on the AUV mix question. Given that it's a little heavier for like-for-like I assume this is from more the pricing actions from last year flowing through than current year pricing actions?

Yeah. Kat, that's the way to think about it. As we talked about in the first quarter, we're lapping some of the aggressive price increases we were doing based on the inflationary environment last year. As you know, we are going heavier with our price increases in the second quarter last year. So it wasn't a full quarter. That's why you saw some moderation there, but that's the right way to think about it.

And how should we think about it as we look over the next 12 months given pricing actions that are out in the market now?

Yeah. I think we're going to be comping again a lot of those successful actions last year and raising price to compensate for the heavy inflation. So I think you'll see some moderation on the price side. I expect the mix – and it's been favorable all year – I think that part of the equation should continue for us. I'm very confident about the mix continuing. So like I said, I think overall we're going to end at a very similar place than we normally do, or historically have with about a 50-50 mix of price and mix.

Okay. Perfect. Just in terms of new products could you give update on the ACOUSTIBuilt rollouts? Also just a clarification of how big you think that opportunity is? Thank you.

Yeah. The ACOUSTIBuilt continues to gain a lot of attention and a lot of interest in the marketplace. I personally have been involved in some conversations with architects that are very interested in the combination of having that monolithic white smooth white look with the acoustical performance of Mineral Fiber. We have that in the same product as a revolutionary combination of features and benefits. So there's a lot of interest. We're in the early days of working through a specification cycle. So as we talked about this is not a meaningful impact in 2019. But I'm very pleased with the interest level. We've had several installations. We've closed already our first couple of jobs in that material and they've all gone very well. So, very pleased with it. Early days, and we're going to refrain from sizing the total market opportunity until we get further into the rollout. But again, we continue to think this is a meaningful opportunity and we're excited about it.

Okay. And then final question really is more on technology understanding that most of the construction industry is populated by Luddites. How is this self-serviced quote rollout going? And do you still see this as a meaningful cost saving for Armstrong? Thank you.

Yeah. Thanks for the question. I think we're really excited about this one quote system that we have that as we broaden our portfolio of products that, we continue to be easy to do business with and we provide access to this broad portfolio in a very frictionless way. So this one quote system that we have that's turning into a quote-to-order one-quote-to-order system, which is the next generation is just making that easier and easier for our customers to interact with us. So the adoption rate of that was extremely high and went very quickly. And we continue to get traction with again the second generation of that, which is taking – once you have a one quote in the system be able to have that go from a quote to an order in a seamless fashion as well.So again, this is I think the beginning and we're in the early innings of rolling out more of this digital technology that makes it just as – makes us just so much more easy to do business with. And again, I'm very encouraged by the adoption rate in the marketplace and the feedback I got personally from the ability to have this one quote system.

Great. Thank you so much.

More to come on that. Thank you, Kat.

Thank you.

Thank you. And our next question comes from the line of Ken Zener with KeyBanc. Your line is now open.

Good morning, gentlemen.

Good morning.

Good morning, Ken.

Hi. You know, I'm not sure -- so this talk about today you've had incredible run all year. Someone asked you in the third quarter conference call and I think that's what the weakness is kind of reflecting is this persistence of volume decline in mineral wall exceptional price/mix. Vic, you talked to -- I think you said 40% vitality rate?And then the lower margins obviously in AS investments et cetera, et cetera. Can you just go over your view? The volume declines you said were coming from Latin America. Are those -- but you held your guidance right? So -- but I mean is Latin America volume which you're not going to break out I understand it seems to me that that margins would be less in that product mix that you're delivering there. Is that accurate? Or is that not accurate?

No that's accurate. I think the -- and we've talked about it. It's a smaller channel for us. It's a developing market where you tend to sell lower-value product mix into and therefore lower margin. So that's -- I think you got it right Ken.

And then because price/mix is so strong people just wonder how long, you can have isolating mineral. I think personally you have to look at them both together because you're covering the space in the building. But do you foresee all the this 40% vitality rate I mean when you record flex design and this stuff I mean is that going to go through -- I assume that's going through volume with price/mix? Or is that -- how are you going to be recording that so we don't misinterpret the volume that's occurring in that category as it relates to price/mix benefits?

As I talked about Ken, the main driver of the AUV improvement has been this mix impact from the new innovations from Total Acoustics to Sustain to DESIGNFlex which to your question will -- it's a Mineral Fiber product so it goes through our price-volume mix breakout. So it's going to be contributing to mix in a big way. ACOUSTIBuilt is another one that's going to be a Mineral Fiber product that's going to continue to support a higher value mix. So again, I think, I'm really encouraged by the vitality index that we've been tracking over the last several years. It tells us a lot of things.And it should tell you this. It should tell you that the innovation that Armstrong is bringing to the market is relevant innovation and that the market wants. And we're really letting the market drive our innovation efforts. And I think this is an affirmation that again the products that we're bringing are the right features and benefits and at the right price point that customers are willing to pay. And that's why think it's so encouraging. And I'd say that's why you should also be encouraged because of the long cycle with this innovation that this mix up story is going to continue at Armstrong.

Right. Thank you very much.

Thank you, Ken.

Thank you.

Thank you. And our next question comes from the line of Michael Wood with Nomura Instinet. Your line is now open.

Good morning. This is Ryan calling on for Mike. Maybe just a little bit on cost inflation. Just curious how inflation is tracking your initial 3% to 3.5% range from earlier this year?

Yes, Ryan. We're down below that now. We're in that 2% to 3% range. I'd say 2.5% To 3% is a little bit more accurate but in that 2% to 3% range.

Okay, great. And then just a little higher level. Just from your vantage point how the commercial construction market is faring year-to-date what you see for the second half and then maybe a little bit on what you're seeing for 2020?

Yes. Ryan, this is Vic. Let me take that. I think as I mentioned in my prepared remarks the market is about what we expected it to be. Education in particular I had been out looking that we were expecting a better education market this summer season than we saw last year. And that has materialized. It's modestly better than last year. It's driven by healthier state and local government spending. And that's also been supported by some improving education starts over the last 18 months or so. So I think that's been a nice materialization of what we were expecting to see.Health care remains flat, overall. Retail's down slightly. And office continues to hang in there in the low single-digits. So I'd say overall the market is about what we expected. And I'll add to that a little bit of color from my visits out to the field meeting with contractors and distributors even architects that are very bullish about the second half of the year, given their quoting activity and their backlogs. So again, we feel good about what we're seeing in front of us right now from a market standpoint.

Appreciate it. Thank you.

You bet.

Thank you. And our next question comes from the line of Garik Shmois with Longbow Research. Your line is now open.

Hi. Thank you. I'm just wondering if you could touch on the cash flow in the quarter. You're reiterating your outlook, but assume net working capital was a little bit of a headwind. So wondering how that tracks in the second half of the year just the confidence if that reverses.

Sure, Garik. It's Brian. We're pretty confident in it. I mentioned, I called out; we had some -- in the first half last year we got a $20 million refund on taxes. And so we normalize -- we're starting to wrap that. And for the quarter specifically, working capital was a headwind, but a slight benefit on the half. So, we expect it to follow a consistent performance in the back half like we saw last year and deliver our guidance.

Okay. Thanks. And then just to follow-up just on volumes in Mineral Fiber. Just wanted to be clear. Is it really the only change in your guidance related to LatAm? And then also just with respect to the expected volume growth in the second half of the year, you touched on education coming in a little bit better than you've previously expected. There's also that the main change in, I guess, the verticals tracking in the second half versus your initial expectations?

Yeah. I think all the verticals are about what we expected. Again, the one that we had to kind of wait and see on was education, because it's such a seasonal market. But as I said earlier, it's materialized as we had hoped it would.So I think the main headwinds as we talked about we got to a slow start in the first quarter driven by some of these weather and timing-related issues. And I still think those are working their way through with the exception of Latin America being, I think, a little bit more of a headwind and probably a longer time frame than we'll have time for in 2019. But I think overall I think that's -- I think we're seeing the market that we expected.

Hey, Garik. This is Brian. The other thing I'd add to the education is interestingly enough we're starting to see is a mix-up there. And even K-12. So it's not universities. So it's encouraging mix up too.

Okay. That's helpful. Thank you very much.

Yeah.

Thank you. And our next question comes from the line of Keith Hughes with SunTrust. Your line is now open.

Thank you. Vic back to your comments on your work in the field and some of the general bullishness of the contractors and other customers. Are they seeing demand spill over into 2020? Did you have that long of a vision that the start of 2020 will look as robust as the second half of 2019?

Well, as you know they have a lot less, right? But in our longer project cycle business like in Architectural Specialties, I am hearing some good activities spilling over into 2020 already.So as you know the contractors and distributors aren't going to get too far out front because of their visibility. But it's more positive than it's -- than people are being negative if that helps, and I'm really seeing again on the longer cycle projects in Architectural Specialties. So it's early days. It's early to tell, but that's one sentiment that I'm picking up in the marketplace.

One follow-up too on the mix question. Are you seeing more higher-end projects come in? Or do you just think you're winning more share at higher end right now?

Well, I think there's some up-selling going on with these new features and benefits that are available now, like we're talking about with Total Acoustics and Sustain for example. So a lot of this stuff, Armstrong is involved and we're on. But there's a trade up going on with these new offerings.So I think there's a lot of that going on. I do believe that we do a really good job on the specification side of the business, driving the specifications at the high end of the market. So I think we're doing a really good job at the high end there.

Okay. Thank you.

Thanks.

Thank you. And our next question comes from the line of Stephen Kim with Evercore ISI. Your line is now open.

Thanks very guys. Good quarter. Just as a housekeeping item, a couple of housekeeping items here. Days impact, what do you think that had -- what kind of influence that had in the quarter? And did I hear you say that you thought that the office segment was up mid-single digits or low single digits?

Yeah. So on the days impact, it's about 1.5% is the way to think about that on the quarter both on volume and revenue. What I said on office Stephen was that it continue to be positive. And it's in the low single-digit positive is what we're seeing so far in the marketplace. And again there's some really good new construction activities that are supporting that as well.

Got it. Okay. And then second question related to the SG&A savings in Mineral Fiber and investments in Architectural Specialties. Can you break out like what some of the largest contributors to the savings are? What drove the increase in those two numbers, one positive, one negative? And is the 2Q savings run rate pretty good to use going forward?

Stephen this is Brian. So no we've completed the benefit of the restructuring and it's a combination of cost of goods sold and SG&A. We've profiled $10 million in the first half of this year. So that run rate that we saw for Mineral Fiber is not a run rate, which is roughly $4 million in the quarter. But the investments we're making, for example, in AS and remember even though we break these into segments, it's really one big business right because there's multiple products a broad portfolio in every job. And so we're adding some more CAD designers in the upfront technical folks that help with project-oriented specifications.

Okay. That makes sense. Sort of keying off of that, Vic you had talked about the visualization initiatives and the innovations that are being implemented on that front. Just want to make sure I understand are these desktop-based applications? Are these website driven? Where are the designers going to utilize this functionality and these features? Are they sitting at their own offices? Or do they have to go to a distributor location to interact with these, sort of, what is -- where is the -- what's the user interface like?

Yeah. Initially these are desktop applications because of the size of these files. Eventually they'll migrate to cloud-based solutions is our hope and the plan. But yeah the opportunity right now is in both in their office where we have to take our system in. But we have a site on campus now that they can come to and we can do live work on campus or we can do it virtually through an Internet feed. So there's multiple ways to interact. But right now they're desk based solutions.

Would it be your guess that where this really takes, kind of, like a potential quantum leap forward would be when they can actually do it in the convenience of their own office whenever they get around to it be having a cloud based system? Or is there something about the way, in which the designers work and interact with your products such that that won't necessarily be the case like it would be if I'd say in certain other products and design situation?

No we certainly expect this to get to a point where it's easy enough to use and they can do it in a cloud based environment. That's definitely the plan and the direction. I think our customers want this to be available as a tool for them to use as they see fit within their design cycles. So that's definitely the direction we're moving.

Okay. And in terms of time frame to get there?

We're not really prepared to say publicly. It's kind of an ongoing development and we'll keep you updated as we go. But right now it's locked in or sitting in a desktop solution for the time being.

Okay. Well, great. Thanks very guys.

Thanks.

Thanks.

Thank you. And our next question comes from the line of Phil Ng with Jefferies. Your line is now open.

Hi guys. To get to your flat volume guidance for Mineral Fiber would imply you would see a pretty notional pickup in the back half. Is part of the confidence that's driving that uptick driven from the trends you're seeing in July and perhaps the education piece you flagged?

Yeah. I'd say what we're seeing in July is consistent with that outlook, and again, in my comments earlier about the education season. So, I'd say, yeah. I'd say that's right.

Okay. Big piece of the education piece, all right, sounds good. And then, good to hear you're seeing some pretty positive feedback on DESIGNFlex. Have you started to see any meaningful contribution whether it's on the AUV line or on shipments? And then as for the ACOUSTIBuilt piece, I know it's going to be more of a 2020 event. Is the opportunity more on commercial? Or there's some opportunity on the resi side as well? Thanks.

Yeah. I'd say DESIGNFlex, it's still early and relatively small to the overall size of the business. So, it would probably be in the rounding air on the mix line. But again, I think we're gaining ground there. And it is starting to materialize in terms of revenue, which is very nice to see.The ACOUSTIBuilt has application on both sides, both residential and commercial. But where we're focused right now is where we have the opportunities is initially on the commercial side of the business. But we clearly see opportunities on both sides.

Got it. All right. Thanks a lot.

You’re welcome.

Thank you. And our last question comes from the line of Justin Speer with Zelman & Associates. Your line is now open.

Hi. Guys. Appreciate the time. Just a few questions. One starting out with the Architectural Specialties side, the growth in margin expectations, as you look to the back half, if you can help characterize what you're thinking, the comparisons, particularly on the growth side in the third quarter were fairly difficult. But just getting some characterization there would be helpful.

Yeah. I think -- again, I think what we talked about earlier in terms of the segment activity and the way that our customers are feeling about their backlogs, we are copying some tougher price comps, because a lot of the price activity in the second half -- occurred in the second half of last year. So again, that's why we expect to see some of that moderate on a comp basis.But we should have some stronger volume in the second half as we talked about. And so, I think the combination there keeps us in the high single-digit top line growth. And then the plants and the active teams are operating very, very well. So, hope to -- we expect to continue to see double-digit earnings growth on the bottom line.

And particularly, for the Architectural Specialties business that high-single is a good number to kind of model towards?And then, I guess the second question on that is just on the margins side. Given the investments that you're making, how you're thinking about that lining up in the back half as well for that business.

Yeah. Again, I think we're expecting to see margin expansion in that business. I would expect double-digit top line growth to continue in that business.

Okay.

Again, they're continuing to take share in the -- I would say the base business materials that we're currently in, as we ramp up some of these new acquisitions as well. So, I expect to see some continued momentum in that business in the second half.

Okay. And in terms of the spending, are you -- is that going to sequence down in terms of the margins? You said, you expect expansion in terms of the -- I guess, the magnitude of expansion on the volumes. What are you baking in your guidance there?

Brian, you want to take that?

Yeah, sure. So, Justin a couple of things there. One, we're not going to be shy about making some investments. Again these investments show up mostly in AS, but they benefit the total company. And we want to make those rightful choices and investments that help sustain this nice high single-digit growth. So, I can't give you an exact number. There's typically a couple million dollars, a quarter one to two, a quarter for the total company. Again most of that show up in AS. But again, we're not going to hesitate to make some of those investments in order to sustain that top line.

Perfect. And this next question is more intermediate term in nature, and you've had some acquisitions here, but just maybe an update on what you think for your current platform as it stands today Architectural Specialties, in particular, what your I guess the addressable market size or definition. And how fast do you think that market is growing or expected to grow in the coming year or two? Of course you're taking share, but just trying to get a baseline or handle on the addressable market.

Yeah. The addressable market Justin, it's tough to be very, very specific about it, but we've talked about it being -- it's greater than $1 billion market opportunity in that specialty, ceilings and walls.And so, again our share position would be, although, we're the leader in this space, you can see the nature of the fragmentation in that space. So that's the opportunity for us to continue to execute against that.And again, our pipeline of acquisitions continues to develop nicely to support that penetration in that market.

Excellent, and then, last question for me, is just on the SG&A leverage, obviously, very good on some of the actions that you've taken for the overall business. What are you embedding for SG&A, either as a percentage of revenue or maybe a dollar run rate figure?Recognizing there's seasonality in the business. But dollar run rate figure, what's a good run rate to think about for the balance of this year and maybe on an annualized basis?

So, Justin I'd say, annualized, we're running right around that 15% of sales. And so that affords us as we grow sales to make some investments back in the business. But our longer-term value creation is right around that 15% of sales.

Okay. So the 15% you think is a good number to use or close to it for the full year, despite a very, very good first or particularly the second quarter very good there. So we should see that step up a little bit in the back half?

Yeah. And this year I'd say, we're running a little heavier than that. Because of some of the acquisitions we closed last year. But, overall longer term, it's right around that 15% mark.

All right, I really appreciate your time guys, congratulations to you.

Thank you, Justin. Thank you.

Thank you. And that does conclude today's question-and-answer session. I would now like to turn the call back to CEO, Vic Grizzle for any further remarks.

Yeah. Just want to thank everybody for joining our call today. Again, we feel very good. I want to thank our employees too, for just terrific execution in the first half of this year. And we look forward to updating you after our third quarter performance.Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.