Armstrong World Industries(AWI) - 2019 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - In Q4 2019, sales grew by 3% to $247 million, adjusted EBITDA increased by 14%, and adjusted EPS rose by 40% to $1.11, driven by increased earnings and a lower tax rate [6][17][12] - For the full year, total company sales were up 6% to over $1 billion, adjusted EBITDA increased by 14% to $403 million, and margins expanded by 270 basis points [12][22] - Adjusted free cash flow declined by 19% year-over-year, but was up 13% when excluding the special WAVE dividend from 2018 [18][12] Business Line Data and Key Metrics Changes - In the Mineral Fiber segment, average unit value (AUV) increased by over 5%, while volume was down 2% due to softness in the lower end of the product range [6][8] - The Architectural Specialty segment saw sales increase by 5% in Q4, despite a supply disruption from a key vendor [9][10] - Adjusted EBITDA margins in the Mineral Fiber segment expanded by 430 basis points, while the Architectural Specialty segment's adjusted EBITDA was up 2% [9][22] Market Data and Key Metrics Changes - Commercial activity in the U.S. remains favorable, with positive bid activity and backlogs, while Canada and the big box channel showed continued softness [8][15] - The company expects a mixed demand environment across various verticals in 2020, with growth anticipated in office, education, and transportation markets, but a soft year expected for retail [15][12] Company Strategy and Development Direction - The company plans to continue focusing on innovation and new product development, with expectations for high-single-digit sales growth and double-digit adjusted EBITDA growth in 2020 [30][32] - The company aims to close one to three acquisitions in 2020 to enhance its Architectural Specialties capabilities [11][22] - A significant pension obligation transfer agreement was made to reduce balance sheet risk, which is expected to result in a non-cash expense of $350 million to $400 million in Q1 2020 [25][26] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the year ahead, citing strong backlog and custom product growth, despite a slower start due to supply chain issues [35][36] - The company anticipates a stable market environment similar to 2019, with continued focus on productivity improvements and digital initiatives [15][14] - Management highlighted the importance of maintaining a strong balance sheet and generating robust free cash flow for future investments and shareholder returns [27][30] Other Important Information - The company celebrated the 20-year anniversary of its recycling program, which has recycled over 200 million square feet of ceiling panels [29] - The company repurchased $50 million of stock in the quarter, with a remaining $138 million under its share repurchase program [19][12] Q&A Session Summary Question: Impact of supply chain issues on Architectural Specialties - Management acknowledged a supply disruption due to a quality issue with a vendor, which temporarily affected sales but has since been resolved [10][69] Question: Outlook for manufacturing productivity - Management expressed confidence in ongoing productivity improvements driven by digital initiatives and strong leadership in manufacturing [40][41] Question: Dynamics of smaller project spending - Management noted that smaller projects are often discretionary and can be delayed based on market conditions, but improvements in education sector budgets are expected to support growth [42][43] Question: Revenue growth expectations from price versus volume - Management expects continued AUV growth in the Mineral Fiber segment, with a flat to slightly positive volume outlook for 2020 [51] Question: Capital allocation strategy - Management emphasized reinvesting in the business as the top priority, followed by acquisitions and returning cash to shareholders [54][55] Question: Impact of Coronavirus on supply chain - Management confirmed that there has been virtually no impact from the Coronavirus on the supply chain [56] Question: Demand drivers for Architectural Specialties versus Mineral Fiber - Management indicated that growth in Architectural Specialties is driven by new construction and market penetration, while Mineral Fiber growth is supported by high-end product innovations [58][60]