Armstrong World Industries, Inc. (AWI) Q1 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2022 Armstrong World Industries Inc Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker, Ms. Theresa Womble, Director of Investor Relations. Please go ahead.

Thank you, Sheri, and welcome to everyone on the call this morning. Today, we’ll have Vic Grizzle, our CEO; and Brian MacNeal, our CFO, discuss Armstrong World Industries’ first quarter 2022 results as well as our outlook for the rest of the year. Our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of the SEC Regulation G. A reconciliation of these measures with comparable GAAP measures is included in the earnings press release and in the appendix of the presentation we issued this morning. Both are available on our Investor Relations website. As a reminder, during this call, we will be making forward-looking statements that represent the best view of the company of our financial and operational performance as of today’s date, April 26, 2022. These statements involve risks and uncertainties that may differ materially from those expected or implied. We provide a detailed discussion of the risks and uncertainties in our SEC filings, including the 10-Q filed earlier this morning. We take no obligation to update any forward-looking statement beyond what is required by applicable securities law. Now for those of you following along with our presentation, please turn to Slide 4, as I turn the call to Vic.

Thank you, Theresa, and good morning, everyone, and thank you for joining our call today to discuss our first quarter 2022 results. As we reported in our earnings release today, we delivered year-over-year top-line growth of 12% and adjusted EBITDA growth of 3% versus the first quarter of 2021. These consolidated results represent a very strong quarter for our Architectural Specialties segment and muted performance for our Mineral Fiber segment, due to distributor inventory adjustments that I will discuss in more detail in a few moments. There continues to be a growing number of positive indicators pointing to a continuation of the market recovery. This combined with the strength of our Architectural Specialties performance this quarter and increasing traction of our growth initiatives, supports our confidence in maintaining our full year guidance for sales and EBITDA growth for 2022. First, let’s look at the performance for Architectural Specialties. First quarter sales of $79 million, a 24% increase year-over-year, was a single quarter record for this segment. The increase was aided by shipments for projects delayed in the second half of 2021 as well as a continuation of share gains and the recovery in the commercial construction market. We were encouraged to see shipments for architectural specialty projects across various verticals, including office, education, transportation and hospitality. What I wanted to highlight is this new Irving Institute building at Dartmouth College. This 55,000 square foot building will be home to the college’s sustainability office and their center for energy, sustainability and innovation. It has been designed to be the highest performing building on the campus from an energy efficiency and overall sustainability perspective. The design team specified our metal, radiant ceiling panels as part of the holistic solution to achieving their sustainability goals while maintaining health and comfort for the occupants. These radiant ceiling panels are a product line we acquired back in 2018 when we purchased steel ceilings. They’ve been a great addition to our portfolio of healthy and sustainable products as they help to lower carbon emissions and reduce energy costs. First quarter EBITDA for the Architectural Specialties segment increased 88% from the prior year to $13 million and I’m particularly pleased with the expansion of our EBITDA margin to 16.3%. That’s up 560 basis points. This improvement in profitability is a strong step toward our targeted EBITDA margin of at least 20% for the segment. The increased shipment levels helped drive this result as have the efforts of our team on pricing to offset inflationary pressures and to maintain strong operational performance. It’s worth noting that this strong top and bottom line growth was all generated through organic activity and reinforces our strategic rationale for expanding this segment and the additional market opportunities it provides. Maybe the most notable highlight in this segment for the quarter was the robust order intake for Architectural Specialties. The new order intake in the first quarter increased 23% from prior year levels. This has lifted our project backlog above where it was when we entered the year and this is an important indicator of what we believe are improving market conditions. In the Mineral Fiber segment, we continued to deliver strong price performance with AUV growth of 12%. We again demonstrated our unique ability to consistently achieve like-for-like pricing ahead of inflation. This also drove gross margin expansion for the segment. Sales volume, however, fell year-over-year, and EBITDA declined 5% from 2021 results. Contributing to this lower EBITDA result was a nearly $3 million decline in equity earnings from our WAVE joint venture. Now both the decline in mineral fiber sales volume and the lower equity earnings from WAVE are directly the result of efforts of our independent U.S. distribution channels to reduce inventories to more normalized inventory levels. We were aware and anticipated some headwinds to mineral fiber sales volumes, given our January 3 price increase that shifted the typical January buy head volume into December. But the magnitude of the inventory reductions we experienced in the quarter was greater than expected. Now it’s unusual for us to be talking about distributor inventory levels because they are typically very steady and follow normal seasonal patterns, given our best-in-class service levels. Our distributors know they can count on us to consistently deliver in a timely fashion as we have continued to do throughout the pandemic. However, the lingering effects of the pandemic along with unprecedented challenges of rapid inflation and uncertainty throughout the broader supply chain created a unique set circumstances for our distributors. Distributor inventory levels increased throughout 2021, as they sought to secure supplies of all products at higher rates and anticipation of further price increases, potential supply chain bottlenecks and against the backdrop of increasing bidding activity in the market. And it’s not just a ceilings only anomaly, the breadth of this issue across the building products industry can be seen in a chart we’ve provided in our earnings call deck. A data from the U.S. Bureau of Economic Analysis that shows historical inventory to sales ratios for building product wholesalers highlighting the fact that inventories in the fourth quarter of 2021 grew at more than 3x, the rate of sales on a year-over-year basis. This measure was also higher in the fourth quarter of 2021 at any point in the last 25 years, escalating from an upward trend that began in the second quarter last year. So again, unprecedented conditions of rapid inflation, labor availability, supply chain disruptions against the backdrop of higher demand and construction activity have driven inventories to higher levels and created this anomaly. And given our conversations with those distributors, we believe that they are now approaching those more normalized levels. We believe the effort by our distributors to right size their inventories does not reflect underlying market conditions. Recent discussions with our distributor partners, point to solid activity and optimism, and they indicate ceiling volume growth in line with what we expect underlying market demand to be in 2022. Further to the divergence of this particular inventory dynamic and market activity, sales of mineral fiber products through our retail and wholesale channels continue to be positive. And most of the sales in these channels represent more real time demand, particularly for patch and match and light construction project. Broader market indicators also continue to reflect improving market conditions. For example, the Kastle Back to Work index continues to strengthen with the rate over the past few weeks, hitting an all-time high since the start of the pandemic at 43%. Project bidding activity remains strong, particularly in renovation work where we’ve seen four consecutive quarters of at or above 20% growth in project counts. New construction starts measured in square feet are also up double digits, led by transportation, retail and office. March results for the Architectural Billing Index were also very strong, remaining well into expansion territory for billings nationally with a rating of 58 versus 51 in December. And again, sales in architectural specialties, with less inventory buffer due to the custom nature of the segment, was up double digits. Beyond these market factors we’re also pleased with the continued progress of our healthy spaces and digital growth initiatives. Increases in sales attributed to both of these initiatives, helped to offset some of the inventory drawdown in our U.S. distribution channel and are expected to be key contributors to our growth outlook for 2022. I’ll provide some more additional details on these initiatives after Brian provides a few more details on our financial results. Brian, over to you.

Thanks, Vic. Good morning to everyone on the call. Today, I’ll be reviewing our first quarter 2022 results as well as our updated 2022 guidance. Before I begin as a friendly reminder, I’ll be referring to the slides available on our website. And Slide 3 details our basis of presentation. On Slide 5, we begin with our consolidated first quarter results. Net sales of $283 million were up 12% versus prior year. Adjusted EBITDA grew 3% and adjusted EBITDA margin contracted 270 basis points. Adjusted diluted earnings per share of $1.2 cents improved 7% versus the prior period and adjusted free cash flow declined 13%. We continue to have a strong balance sheet that allows us the flexibility to execute on all our capital allocation priorities. One of those priorities is returning cash to shareholders. In the quarter, we repurchased $30 million of shares or about 300,000 shares at an average price of roughly a $100 per share. Since the inception of the share program in 2016, we’ve repurchased 10.8 million shares for a total cost of $716.2 million or an average price of $66.27 cents per share. As of the end of Q1 2022, we currently have $484 million remaining under our repurchase program, which runs through December 2023. Continuing to look at Slide 5, you’ll see our adjusted EBITDA bridge versus the prior year. The $2 million gain was driven by favorable AUV of $19 million, primarily due to favorable like-for-like pricing and volume of $2 million driven by growth in the Architectural Specialties or AS segment. AS growth was able to more than offset the mineral fiber headwind in the quarter and I’ll touch on that in a minute. Offsetting these gains were increased SG&A expenses, higher input costs and lower equity earnings from our WAVE joint venture. SG&A expenses were driven higher, mostly by increased selling expenses, which include spending on our digital growth initiatives. Input costs increased primarily due to raw material inflation, in addition to energy and freight inflation. Inflation came in higher than our expectations, continuing to accelerate from Q4 levels. Lower equity earnings were driven by lower volumes and increased SG&A. Slide 6 summarizes our mineral fiber segment results. In the quarter, sales were up 8% versus prior year. The bright spot for mineral fiber continues to be AUV performance. AUV of 12% carry the quarter more than offsetting the decline in sales volume, the positive AUV results from – was driven by like-for-like pricing partially offset by a slight headwind from channel mix. In addition to the volume headwind Vic discussed from our distributor inventory reductions, volumes were negatively impacted by one less shipping day when compared to the prior year, which translates to roughly a point and a half impact. Based on input from our distribution partners, sell out from their yards in Q1 was on average, low to mid single-digits, and they continue to expect positive volume sell out this year. Moving to mineral fiber EBITDA, you’ll see adjusted EBITDA decreased $4 million or 5%, the fall through to EBITDA from favorable AUV was more than offset by the reduction in sales volumes, increased input costs, increased SG&A expenses and lower equity earnings from our WAVE joint venture. The volume headwind was isolated mainly within our U.S. distribution channel, which also drove some channel mix headwind. The other channels performed largely in line with our expectations, a bright spot being volume growth in Latin America of over 20%. As I mentioned, input costs are being driven by raw material inflation, in addition to increased energy and freight cost. Our teams have done a nice job of continuing to price ahead of inflation, requires hard work and discipline, and I’m happy to report that drove gross margin expansion for mineral fiber in the quarter. Again, it’s something we do not take for granted. We continue to closely monitor the rate and pace of inflation and plan to adjust future price increases accordingly. SG&A costs were driven by an increase in selling expense, which includes investment supporting our growth initiatives. Lower WAVE equity earnings were driven by lower volumes and higher SG&A which were partially offset by price over inflation. Volumes were lower primarily due to the same distributor inventory reduction we saw on mineral fiber. Grid volumes seem to have actually been more impacted due to the hyperinflation of steel and supply constraints experienced throughout 2021. Moving to Slide 7, we can see the first quarter results for Architectural Specialties or AS segment. Sales were up $16 million or 24% versus prior year. This increase was driven by increased product shipments for previously delayed projects, improved performance from recent acquisitions compared to the prior year and traction from our pricing actions throughout the segment. This record setting performance reflects organic growth and market penetration supporting our vision of growth for the AS segment. Adjusted EBITDA was up 88% and adjusted EBITDA margins expanded 560 basis points versus the prior year. Driving the increase in adjusted EBITDA is fall through from the increase in sales dollars. SG&A expenses were slightly higher than prior year driven by investments in recent acquisitions, selling capabilities and increases in incentive comp. While the AS segment had a great quarter and tip our hats to our team, we consistently point out that quarter-to-quarter comparisons can be lumpy due to the project nature of the segment. We remain confident in our net sales growth of greater than 10% for the full year. Slide 8 shows adjusted free cash performance for Q1 2022 versus the prior year first quarter. The 13% decline in adjusted free cash flow was driven by lower cash disbursements from the WAVE joint venture. I’d also like to unpack the first part here, the adjusted operating cash flow, while cash earnings were favorable in the quarter and increase in inventory levels and accounts receivable were headwinds compared to the prior year. We also had higher than prior year payout of incentive compensation in the first quarter of 2022 driving headwind related to accounts payable and accrued expenses. Finally, as a friendly reminder, the first quarter is typically our weakest cash flow quarter. As we move to Slide 9, you’ll see our full year guidance for 2022, which is unchanged for the four key metrics on the left side of the page. I would like to point out some updates to assumptions in purple bold text on the right side of the page. While the full year outcome is unchanged, our assumptions of how we arrive there have changed. We estimate that the impact of normalizing distributor inventory levels is approximately 2% or a range of $15 million to $20 million headwind to Mineral Fiber volumes for the full year. A majority of that occurred in Q1 that is partially offset by a 1% improvement expectations of our initiative performance for the full year. This nets us to a Mineral Fiber volume growth of 1% to 3% versus February’s guidance of 2% to 4%. Offsetting this revision, we now expect positive Mineral Fiber AUV of 10% to 12% up from February’s guidance of 8% to 10%. In total, our adjusted EBITDA outlook remains unchanged as we are confident in the AWI’s teams’ to drive manufacturing productivity, and manage SG&A costs as additional levers to achieve our full year targets. Despite a slower than expected start to the year for adjusted EBITDA, we’re confident about the year ahead. As Vic noted conversations with our distribution partners surrounding market demand remains optimistic. The AS segment is off to a nice start for the year. Our plants are running well, and our teams’ ability to remain agile and responsive enables us to flex the rate and pace of our spending to wrap the company as we progress through the year. With that, I’ll turn it back to Vic to wrap up before we take your questions.

Yes. Thanks, Brian. And before we get to your questions, I’d like to share a few thoughts on the longer-term growth outlook for Armstrong. I know many of you on the call attended our Investor Day back in early March, where we laid out our vision for growth over the next five years. This vision is grounded in our belief and the ability of the company to do the following two things, drive increasing value from our investments and our Architectural Specialty segment through top line growth and margin expansion, and two to deliver Mineral Fiber volume growth at attractive margins through both the market recovery and the execution of our healthy spaces and digital growth initiatives. As we’ve outlined today, we are pleased with how the Architectural Specialty segment is performing and making great progress on both the top line growth and EBITDA margin expansion targets. It’s encouraging to see how our expanded portfolio of unique, high design, highly innovative products is enabling us to sell more products into more commercial buildings. Improving the trajectory of Mineral Fiber volume growth is work in progress based on both a promising recovery and commercial construction activity and scaling the positive impact of our investments in our healthy spaces and digital initiatives. We continue to gain momentum with our healthy spaces initiative. Sales of these products are growing. Since the end of June in 2021, we have more than doubled the number of projects for healthy spaces being worked on by our team. And in the quarter, we closed our largest VidaShield project to date for a school district in the Southwest. Interest in the complete healthy spaces portfolio out in the field is increasing. And we attribute this to strengthening to the growing appreciation for the broader definition of a healthy indoor space based on the four key elements of indoor environmental quality, air, temperature, light, and sound. Each of these are critical for human health and wellbeing. And I invite you to check out our revamped healthy spaces pages on the Armstrong website to see more details on how we are working to create a broader portfolio of solutions to deliver IEQ to the built environment. We’re also delighted with the recent initiative announced by the white house called the clean air and building challenge. Among their recommendations are enhanced air filtration including in-room cleaning devices, such as our VidaShield product. We are engaging with the EPA on this initiative, as it is clearly in line with our view that every indoor space should be a healthy space. Our digital initiatives are an additional critical component to our long-term growth strategy. Here we’re continuing to invest in our three digital initiatives, Kanopi, project works and our lead optimization engine, all are performing well and building momentum. Specifically with Kanopi, we’re revamp – we’re ramping on all key metrics, including a 50% sequential increase in the number of orders per quarter, and a 49% sequential increase in quarterly revenue compared to the fourth quarter of 2021. We’re also excited about how the adoption of our automated design service project works is expanding. We’ve added more products and capacity to the platform and it’s increasingly being used. Looking at the year-over-year increase in projects processed by project works clearly shows this increasing from less than a 100 in the first quarter last year to over 700 this year. And finally, I’d like to highlight one additional project that we recently won. It’s a new Deutsche Bank workplace on Columbus Circle in New York City, similar to many large employers throughout North America as the bank began to prepare for bringing people back into the office, they needed a new vision of what their office space should be a healthy and more collaborative space. We were brought into the project early and leveraged project works as we worked with the designers on the specific products needed to bring their vision to life. Ultimately, we completed this project with specifications for three different product categories, including our Lyra from our Total Acoustics Mineral Fiber product line, as well as metal and felt products from our Architectural Specialty segment. This project is a representative example of the renovation required and the key elements of our growth strategy, including the role of our digital initiatives to build in efficiencies for our customers and how our broad portfolio products uniquely positions Armstrong to serve new renovation demand. Successes like this illustrate our unique focus as an America specialty ceilings and walls company and enhances our competitive position in the marketplace. Now with the need for healthier spaces, we are uniquely positioned to capture the resulting new renovation activity, as well as access meaningful new sources of demand with our digital initiatives. And with that, now we’ll be happy to take your questions.

Thank you. [Operator Instructions] Our first question will come from Keith Hughes with Truist. Please go ahead.

Thank you. Thank you for all the detail specifically on the mineral fiber volume particularly around the sellout from your distributors. I guess, my question is in your inventory, your inventory’s up and could bit faster than sales are in the first quarter to get your inventory line, you’re going to have to slow your mineral fiber production down as we head into the second quarter.

Yes. Keith, if I understand your question, it’s our internal inventory levels in our plants, for example, our own warehouses. Yes. We flow into that inventory as well as our customer’s inventory levels and we flex our product mix accordingly. And we were able to do that. And one of the things about that this quarter flexing into that – kind of that abnormal demand cycle that we had in the first quarter, serving our distributors inventories, we were able to maintain productivity in the plants. And that was very helpful for us to offset some of the shortfall in the mineral fiber volume. So this is kind of – it’s kind of business as usual for us in terms of monitoring our production with different inventory levels. And we’ve maintained our inventory level at a healthy level in the first quarter as a result of that.

So no change in production rates in the second quarter to kind of bring this back down.

Normal seasonality will be increasing actually as we would normally do in a second and third quarter seasonality pattern, so no big changes there.

Okay. And I guess final question, the same topic. Given that there seems to be this building backlog, as you referred to your comments on non-residents demand, particularly for mineral fiber all products. Is there a chance distributors have pulled these down too far and to get back to a sorted situation, if demand potentially take that faster than what the channel is expecting and how would you address that?

Well, certainly we have the ability with sprint capacity in our plants to respond to a meaningful uptick in the marketplace. We’ve looked at scenarios with double digit increases in demand, for example, on a volume basis. We have plenty of flex capacity, we could respond to in the event that they did take their inventory levels down to lower levels. We required to service an uptick in demand, we could respond. So we’re not worried about that. I think we’re in constant contact with our distribution partners, balancing out in different branches, as you know, Keith, it’s not just one or two distributors, right? There’s 300 branches and getting the inventory levels, right. All of those branches is really the conversations that we’re having on a day to day basis with our distributors. So again, plenty of sprint capacity and ability for us to serve if we saw an uptake in the second and third quarter.

Okay. Thank you.

Yes. Thank you.

Thank you. Our next question will come from Philip Ng with Jefferies. Please go ahead.

Hey, good morning.

Hey, Phil.

Hey, good morning. Your full year 1% to 2% mineral fiber volume guidance implies a 3% to 5% growth profile the rest of the year, so a nice step up. How do you kind of see that building through the year since it sounds like there’s still probably a little hangover effect and 2Q from that distributor inventory draw down and how much line of sight do you have?

Yes, I think – well, our line of sight hasn’t really changed really other than looking at the triangulation of indicators, right. Of course, sentiment from our distribution channel, which remains very, very positive. I think the seasonality pattern is going to rule the day here. I think second quarter is going to step up and be stronger and with positive volumes growth. And then third quarter, as you know is our strongest quarter of the year. And we expect our strongest growth to be in the third quarter. So I would say the seasonality pattern is going to really drive that step up in volume to get us to that 1% to 3% outlook that we have.

Okay. That’s helpful. And Vic, I mean, outside of like the slower start on volume, it sounds like your outlook seems a little more upbeat, certainly that sellout commentary for me to assure was pretty encouraging. The reason why I ask is like the last quarter, maybe even a quarter before that you were talking about how activity was still pretty choppy. Any color on the R&R side, how that’s kind of playing out. And I was pretty encouraged to hear that within your guidance for mineral fiber, you upsize your growth initiative contribution by 100 basis points, any color on some of those initiatives? Where you’re seeing some of the wins and just confidence in securing that demand backdrop?

Yes. I think that was an important thing you can imagine, right? Phil, when you see this kind of downdraft right on demand signals from the distribution channel, it’s really important to understand where that’s coming from, right? And again, it was really important for us to understand. But also I think for everybody to understand that this was not a demand signal that distributors were seeing from the market. In fact, I spoke directly to our two largest distributors and both of them said that the market is improving and the activity is strong and robust, and they expect that to continue for the year. So in separate conversations, they’re both seeing a more robust market. This inventory drawdown was merely a function of where they ended the year. And of course, a little bit more of a buy head from our price increase that we moved from February to January that moved a lot of that buy head volume into the fourth quarter. So that was important, right, for us to understand that this was not connected to demand or response to demand they were seeing in the marketplace. And so, when we look at all these indicators and your reference to my positivity here, there were more indicators this quarter that are showing positive signs. And we try to highlight as many of those. So that plus the growth initiatives that you’re referencing in both digital and healthy spaces that continue to get traction and contribute real volume. I think that’s a source of maintaining our guidance and keeping our outlook intact for the rest of the year.

Okay. Thanks a lot.

Thank you. Our next question will come from Kathryn Thompson with Thompson Research. Please go ahead.

Hi. Thank you for taking my questions. Just on a follow-up on inventory destocking. Did WAVE see a similar move in terms of destocking, because we’ve seen – we have heard that from the steel framing industry in general? And then part and parcel with that. How are your distribution partners thinking strategically going forward in terms of inventory stocking levels, particularly as we shift from just in case versus just in time. Thank you.

Yes. Yes. That’s a – yes, I think there’s some opportunity right for that. But first on the WAVE question, Kathryn it was definitely – what WAVE saw and what we saw as a resulting equity earnings from WAVE was exactly the result of inventory drawdowns. And in fact, maybe to even a greater extent, because as you know, steel prices were escalating dramatically last year, we had nine price increases last year. So the buy ahead and trying to stay stocked with the potential threat of steel shortages out there probably drove even higher levels of grid products in the distribution channel than ceiling tile products. So clearly that’s a direct – they saw a direct impact from that inventory reduction. So Kathryn, your second question around philosophical or a different business approach to managing inventory, I did not get the flavor in my discussions with them that they were changing their approach necessarily. I think they had a desire to get back to more normalized levels, especially when it comes to Armstrong products because they can’t, right? Our service levels, we demonstrated all through 2021 that we weren’t going to disrupt their service expectations or their jobs. We had material available. We were shipping on time. And we were meeting all their needs. This is an area where they can take the opportunity to move not to just in time necessarily, but they could certainly get out of the just in case mode and get to more normalized levels. And that was the discussion I’ve had with them that, that’s their desire is to get down to more normalized levels. Our service levels, we demonstrated all through 2021 that we weren’t going to disrupt their service expectations and their jobs. We had material available. We were shipping on time. And we were meeting all their needs. This is an area where they can take the opportunity to move not to just in time necessarily, but they could certainly get out of the just in case mode and get to more normalized levels. And that was the discussion I’ve had with them that, that’s their desire is to get down to more normalized levels. Our service levels, we demonstrated all through 2021 that we weren’t going to disrupt their service expectations and their jobs. We had material available. We were shipping on time. And we were meeting all their needs. This is an area where they can take the opportunity to move not to just in time necessarily, but they could certainly get out of the just in case mode and get to more normalized levels. And that was the discussion I’ve had with them that, that’s their desire is to get down to more normalized levels.

Okay. Great. And then a follow-up question, understanding that you’re essentially North American business. What, if any, impacts are you seeing from either unintended consequence impact from the Ukrainian-Russian conflict and/or the shutdown at Shanghai? Thank you.

Kathryn, we’re monitoring that very closely. And I can tell you that the impact for us is minimal at best at the point right now or at worst at the point right now. But we’re watching for ripple effects, right, that could be influencing a feed stream that influences another feed stream influences us eventually. But right now, the impact on us is minimal. Outside of some small things that we may get from Asia here or there. But again, we’re going to continue to monitor very closely, but minimal impact so far.

Okay, great. Thank you.

You bet.

Thank you. Our next question will come from Garik Shmois with Loop Capital. Please go ahead.

Hi, thank you. I was wondering how much of the $5 million increase in SG&A was driven by increased compensation versus the increase in growth investments? And just more broadly, how should we think about the impact of growth investments going forward through the rest of the year?

Go ahead, Brian.

Yes. Garik, it’s Brian. So the incentive fees was just over $1 million. So most of that increase was driven by the investments in the growth initiatives.

Okay. And should we expect something like a $4 million per quarter run rate and growth investments in the rest of the year?

Yes, we’ll be monitoring that rate and pace of that investment as they continue to gain traction, and we’re wrapping some of the investments we made last year. So it might not quite be as high as you indicated, but it’s in that couple of million dollars a quarter range.

Got it. And just a follow-up question to an earlier comment that you made, Vic. I think I’ve heard you correctly, you expect volumes to be positive in 2Q in Mineral Fiber. I just wanted to confirm that, considering at least a tough percentage growth comp in the year ago period, and I think you still are facing a little bit of inventory destocking distribution, at least in the early part of the second quarter?

Yes. That’s – again, we’re not guiding to quarterly outlooks, but I would expect us to get back to our seasonal pattern on volume growth outside of this inventory reduction headwind, if you will. And so let me just leave it at that for now because I expect us to – we’ll see where we end up versus our base compare, but we should be bouncing back to more positive levels off of this first quarter drawdown.

Got it. Okay, thank you very much.

You bet. Thank you.

Thank you. Our next question will come from Susan Maklari with Goldman Sachs. Please go ahead.

Thank you. Good morning everyone. My next question is going back to the inventory situation in Mineral Fiber. You have noted that some of that related to the change in the cadence of the pricing that you’ve put through. Does it, in any way, impact how you think about the go forward in terms of pricing? Is there may be more willingness to kind of stick with your historical cadence as opposed to kind of being as reactionary to inflation as it does change over the course of time? Or anything else that we should be aware of as you kind of look forward and learn from this experience?

Yes, Susan. I really don’t think there’s going to be a major shift on how our distributors handle our price increases or the timing of our price increases. We really are looking at the inflationary environment and timing and the magnitude as well as the timing of these price increases accordingly to that. I think what we are experiencing in the first quarter really is a confluence of factors that was happening against unprecedented conditions in 2021 many distributors building products we’re facing. So, I think it’s more a confluence of that than a change in a philosophical approach or business approach to inventory management.

Okay. Okay. That’s helpful. And then my second question is, over the last couple of quarters, we’ve been talking about various end markets that have been maybe recovering a little bit faster or some that have been lagging whatever it is, one relative to the other. As you sort of look at where you stand today and thinking about the improvements that you’re talking about as we go through the balance of the year and comments from distributors, would you say that there are certain end markets where you’re really seeing more of a substantial pickup or it feels like we’re getting past some of the COVID headwinds and the other things that have been impacting those end markets or geographies and are finally really coming together.

Yeah. You know, I’m watching all of the verticals. And the activity continues to be strong against all of those verticals. In fact, all segments, all verticals were positive in the first quarter in terms of bidding activity. What we’re seeing is and watching very closely Susan as the office segment in particular, although it continues to improve sequentially quarter-over-quarter, we’re listening and watching for the tenant improvement part of that marketplace, which as people get back to the office and they’re doing their renovation activities, that’s a key driver of the office segment that we’re paying close attention to. And it’s anecdotal information right now because we really don’t have data around that. But the anecdotal information we’re hearing from contractors and distributors in the field is that, that’s improving. And the outlook for that continues to improve. And I think that’s a positive signal we had against the backdrop of really solid bidding activity. And I started reporting on this in the second quarter of last year. So we’ve had really four quarters in a row now where we’ve had greater than 20% growth in activity. And it’s really been brought based across all the verticals.

Yeah. Okay. That’s good to hear. Thank you. And good luck with everything.

Yeah. Thank you.

Thank you. Our next question will come from Adam Baumgarten with Zelman. Please go ahead.

Hey, good morning, everyone. Just curious if you could give us some color on the monthly volume trends you saw as you moved through the quarter and into April, did I guess what I’m trying to get at is did you see a Mineral Fiber some level of improvement as we moved through the quarter and into April?

Yeah, I think the monthly cadence was really was indeterminate, frankly, because of some of the draw down inactivity that was going on month-to-month. So there wasn’t a lot of insight from the month-to-month activity. So it’d be tough to comment on that and to provide any insight for you on that. It was pretty even throughout the quarter, to be honest with you and lacked any kind of direction based on different distributors, drawing down a different rates across the quarter. Wish I could give you something better than that, but I don’t think that I could be helpful with any insight from that. I didn’t really get any insight from the month-to-month activity.

Okay. Got it. And then just on the channel mix headwinds that you guys had, do you expect those to, sounds like they should get better as we move through the year, but it’s starting in the second quarter, should that kind of reverse given the hopefully high level of distributor demand?

Yeah. It’s expected to get better and improve. Of course, as we get. This is our highest margin, our highest AUV channel. So as it starts to mirror more of what we see in the marketplace in terms of demand, we should right size that mix, that mix headwind that we saw in the first quarter.

Got it. Thanks a lot.

Thank you. Our next question will come from Stephen Kim with Evercore ISI. Please go ahead.

Hey guys. Yeah. Apologies. Like I just did want to just sort of follow up on that one more time. So the quarterly cadence was in the quarter, you said, I think indeterminate sounds like at the time of your call in late February, you hadn’t seen something there that would’ve for you connected the dots to say, okay, this is something going to draw down the volumes. Here we are in late April. And I guess I just wanted to get clarity. Are you actually, at this point now actually seeing the turn carved, or is it through your conversations with the distributors that you have confidence that a couple of months from now you will have seen it materialized, but you actually aren’t exactly seeing it yet, which of the two is a closer representation of what you’re trying to communicate?

Yeah. Let me be clear. Stephen, on the February reference that you made. Sitting in February, we were expecting some inventory drawdown in our conversations with distributors. Based on, again, the price increase moving from February to January and some buy had in late December ahead of that price increase. Again, normal activity, we would expect it to see the draw down in January and affecting even into February. So that was kind of going as expected. I think it got elongated from there. And that’s where as I was saying in my prepared remarks, that it was greater than what we expected. It’s continued into – it continued into March. We have one particular distributor whose end of year closing is April and we will continue and has continued their inventory management up until their closing. And we’ve felt that and we’ve seen that. And so – but in our conversations, all of them are saying they’re at or approaching these normalized levels that they plan to be at this moment of this call. Does that help answer the question you had?

Yes.

Okay.

Yes. That is very helpful. So thanks very much for that. Second question is, last quarter I believe you mentioned something about education budgets not having been spent. I don’t have – I didn’t have details around that. I was curious if you could refresh us on that. Has that situation changed and maybe if you could give us some sense for the magnitude of that?

Yes. Our understanding back in February, when we talked about this was there a large amount of the ESSER [ph] funds had not been spent yet and were yet to be spent and therefore some opportunities for us. I’m sure they’re spending them as we go now that that’s the intent. They have two years to spend all of that money now. So we believe they’re actively in the market spending the money. In fact, we seized on some of that in a school district down the Southwest with a very large order. We’re very pleased with that. I couldn’t give you actual where they are in terms of the spending on the ESSER funds now, but we still believe there’s a good amount of that – those funds that are still available for us and we’re actively pursuing them.

Okay, great. Thanks very much, guys.

You bet.

Thank you. Our next question will come from John Lovallo with UBS. Please go ahead.

Good morning, guys. Thank you for taking my questions. The first one on the WAVE earnings, it seems you guys were pretty clear that they were negatively impacted by the lower volumes and the inventory levels at the distributors. Are you expecting that to sort of normalize in tandem with the mineral fiber volumes and how should we think about sort of the equity earnings for the full year?

Yes, John, we are expecting that. We’re again, the sell through rate that we’re seeing both tile and grid is drawing these inventories down and the distribution channel. So we see these kind of normalizing hand to hand our service through the WAVE drive venture is equally as excellent as our tile service through Armstrong. So we believe that they’re – these are moving in tandem and should normalize together. On the outlook question, Brian, do you want take that?

Yes, sure. Yes. So we continue to see WAVE implement pricing ahead of inflation or above inflation. So we expect positive equity earnings for the full year. Much like we guided back in February, there’s no change there.

Got it. Okay. That’s helpful. And then on the architectural specialty, new order growth, I mean, that was pretty impressive. And it seems like it was pretty broad based, but can you maybe just give a little bit more color on some of the end channel mix there?

On the channel mix more about that…

I am sorry. Sorry. A little bit more of how it was dispersed among the customers?

Okay. Across the verticals that are very different, sorry. Yes. Yes.

Correct.

Yes. Yes. Upper education was very active. So colleges and universities we highlighted one of the projects, but they seemed to have good money right now. So we’re following that very closely and there’s some good projects and activity that part of the education segment in particular as well as hospitality. We have some exciting new products for open plenum design. And John, you remember, we talked a lot about this two or three years ago. It’s a headwind to mineral fiber volume growth. But the fastest growing part of the architectural specialty business was our felt business and felt is primarily used in fixing open plan of designs that need acoustical solutions. So want the open look, but they need – they need products in the space to provide acoustical performance and so that was the fastest growing part of the business overall. And our felt team is doing a terrific job. Our new acquisitions in that area are doing a terrific job and yes, we’re really glad to have them right now.

Thanks guys.

Thank you. Our next question will come from Ken Zener with KeyBanc. Please go ahead.

Good morning everybody.

Hey, Ken.

Good morning.

The 12%, obviously there’s a lot of inflation everywhere and you are guiding to unit growth. Is it reasonable to assume that your assets, I’m just thinking about the total project cost, right? When someone does the ceiling when they remove walls or they reposition stuff, you’ll tend to get a whole re-furb in the office environment. Could you maybe give us again context for input cost that you grid the ceiling tile relative to a project, just so we can have a sense of what that is? Will that result in demand destruction? Just give us a little context there? And then have a follow up to that as well.

Yes. Typically we’ve reported this externally. Somewhere around the total – of the total project cost ceilings represented around 3% to 5% of an installed cost, so relatively small. And when you look at the rate of inflation across the building product spectrum, things like drywall and insulation and steel studs are up much more than ceiling tiles are up. And you look – just look at the size and the increases that they’re implementing in the marketplace. Now, partly that’s due can, as you know, some of our inputs – more of our inputs are less volatile and less commodity like with the exception of our grid business that that uses steel. But our mineral fiber tile business has less volatile inputs and allows us to; I would say drive price increases at a more moderate rate relative to other building products. So I’d say we’re still in that 3% to 5%. I don’t think that’s been that, that proportionality has been changed by the inflationary environment.

Good. Appreciate that context. I mean, obviously with architecture you’re going to continue to go after share or opportunity that are out there. But maybe when we saw 09 – 08, 09 which obviously COVID is different, but we did have a little kickback, but then we saw a rise last year in volume. I understand you’re clearly outlining inventory issues in the first quarter, but is there, it’s to me it always goes to the market share of mineral wall. I do think you’re obviously picking up revenue in architectural specialties as well as your price. But there has your view changed about the market share in terms of square footage of the ceiling house and it’s just – it’s just that each peak seems to be a little lower than the prior [indiscernible]. I’m trying to tie that off, because you’re obviously generating positive revenue and positive EBIT growth similar to perhaps heavy materials like rocks, because the industry structure is so favorable. But I’m just wondering if that volume size, if you can see it really kind of stabilizing? Thank you.

Yes. I think that you’re asking about the category share, I believe. And first of all there’s nothing that that tells me the category share of mineral fiber has changed materially and I still believe it’s driven by renovation rates and renovation activities since 70%, 75% of demand for mineral fiber comes from renovating existing spaces. So we still – that that pie of mineral fiber opportunities can flex depend on these renovation rates. And I believe we’re coming into a more, an accelerated renovation rate opportunity given COVID, the need for healthy spaces, sustainability. Some of the macro drivers we believe will be favorable to renovation rates. The other part of your question kind of hinted around the architectural specialty growth versus mineral fiber volume growth. And I want to make this point again to be clear that there’s no cannibalization going on here between Architectural Specialties growth and Mineral Fiber volume growth. The price points are 10x different. And so spaces that are going to use Mineral Fiber are not going to use Architectural Specialties and vice versa. They’re just in different places within the same building. And so it’s one of the, I think, synergistic values of this adjacency is that they’re very complementary and not cannibalizing each other. So again, kind of a long-winded answer for you, Ken, but I think there’s nothing that’s changed on my expectations around the category share in Mineral Fiber.

Excellent. I appreciate that I – respective. Thank you.

Yes, Ken.

Thank you. Our next question will come from Dan Oppenheim with Credit Suisse. Please go ahead.

Thanks very much. And I think it’s primarily been addressed here, which is the inventory – talk to this one distributor where there’s an April fiscal year-end really then is basically what you’re seeing orders coming in now for sales in May than our step up in activity, sort of confidence that we’ve fully worked through that inventory [indiscernible] ?

Again, there’s a couple of distributors. So it’s not one answer for all of those, Dan. I think, generally speaking, the majority of this inventory correction is behind us. And we’re on to the increase in seasonality for the second quarter.

Yes. Okay. Thanks very much.

Okay, thanks Dan.

Thank you. Our next question will come from Rafe Jadrosich with Bank of America. Please go ahead.

Hi, good morning. Thanks for taking my question. Can you talk about your outlook for cost inflation in 2022? And then maybe how does that compare to last quarter? What you’re expecting? And specifically natural gas prices have surged. So can you just talk about your exposure there?

Yes.

Yes.

Over to you, Brian.

Yes. So great question. When we provided guidance in February, we said that inflation would stay elevated around 5%. We’re now seeing that in the 7% to 8% range. As you pointed out, we’re seeing increases in energy, specifically on the natural gas. Raw materials, very specifically waste paper there. And then, of course, freight. So we’ve updated the total cost of goods sold bucket inflation outlook into that 7% to 8% range.

Thank you. That’s helpful. And then just following up on some of the AUV comments from earlier, I think AUV is sort of flattish sequentially, but you’ve announced a lot of pricing. Can you just talk about the channel mix impact to the quarter? And then maybe how do we think about the cadence of price realization through the year? Thank you.

Yes, Ray, it was – the channel mix headwind was smaller than normal, I’d say. So most of that AUV 12% increase in the quarter was driven by like-for-like pricing. We don’t typically break down that AUV performance into its specific components, but fair to say that a very significant portion of that 12% was driven by a little bit higher pricing realization, offset slightly by that – by some channel mix headwind. As we look forward, we haven’t disclosed yet the rate or timing of our next price increase. Typically, that’s in August. But we’ll continue to monitor this increase in inflation and put a rate and a timing accordingly.

Okay, thank you.

Thank you. I’m showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Vic Grizzle for any closing remarks.

Yes. Thank you, and thank you all for joining again. I’ve been with the company 11 years, and we’ve never had to talk about distributor inventory corrections like we’ve experienced in the first quarter. So it truly is an anomaly. And I think it’s a reflection of the unprecedented market conditions and times that we’re in. With that being said, we’re very comfortable that this is not a market signal, that the market is continuing to – in line with our expectations and continue to improve. And the second part of that is that our teams here at Armstrong continue to execute very well. There’s no execution issues on this – in these results. We’ve executed very well as a team, and we expect to continue that throughout the rest of the year. So thanks again for joining, and everybody, have a nice day.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.