AWI - NYSE

Good morning, ladies and gentlemen. Thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Armstrong World Industries Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Thank you. And I would now like to turn the conference over to Theresa Womble, Vice President of Investor Relations and Corporate Communications. You may begin.

Thank you, Abby, and welcome, everyone, to our call this morning. Today, we have Vic Grizzle, our CEO; and Chris Calzaretta, our CFO, to discuss Armstrong World Industries second quarter 2024 results and rest of year outlook. We have provided a presentation to accompany this call, and it's available on our Investor Relations section of the Armstrong World Industries website. Our discussion of operating and financial 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 measure is included in the earnings press release and in the appendix of the presentation issued this morning; both are available on the Investor Relations website. During this call, we will be making forward-looking statements that represent the view we have of our financial and operational performance as of today's date, July 30, 2024. 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 we filed this morning. We undertake no obligation to update any forward-looking statements beyond what is required by applicable securities law. Now I'll turn the call over to Vic.

Thank you, Theresa, and good morning, everyone, and thank you for joining our call today. Today, we reported another quarter of strong and record-setting results and an increase in our guidance for the full year 2024. It was a quarter of strong execution on all fronts as we continue to drive consistent growth from our initiatives and operate very efficiently. So let me begin by thanking our nearly 3,500 employees now including our team members of 3form for their continued efforts and commitment to the execution of our strategy through the production of the highest quality products and the best-in-class service levels that differentiate Armstrong in the marketplace every day. Together with their commitment to excellence and winning the right way with integrity and respect, Armstrong will continue to be successful for many years to come. Turning to our financial results this quarter, we generated total company revenue growth of 12% and adjusted EBITDA growth of 13%, with total company margin expansion. This marks five quarters in a row that we have achieved year-over-year adjusted EBITDA margin expansion for the company. Adjusted net earnings per share increased 17%, marking the sixth consecutive quarter of year-over-year adjusted EPS growth, all against a muted market backdrop. Our Mineral Fiber segment delivered net sales growth of 7% year-over-year with strong average unit value or AUV, along with increased sales volumes driven by stabilizing market demand, which I will talk more about shortly and contributions from our growth initiatives. These initiatives include our automated design platform ProjectWorks and Canopy, our online platform and new product innovation efforts. Both innovative digital platforms are advancing in their capabilities and are making an increasing impact on our business. In the quarter, Canopy sales increased over 20% from prior year results and had its largest shipment month ever in June. Canopy also positively contributed to EBITDA in the second quarter. With ProjectWorks, we continue to integrate more of our products into our digital catalog, expanding our coverage and increasing the number of projects where we can improve the design to construction process. More and more architects and contractors are using ProjectWorks. And for the first half of the year, the quoted value of projects moving through this platform has increased a remarkable 52% from the first half of 2023. Further ProjectWorks is strengthening our engagement with architects and contractors positioning us to win more specifications and sell more product into more spaces. The growth of both of these digital initiatives is further differentiating Armstrong in our industry. With these contributions from our growth initiatives and contributions from continued AUV growth, moderating input costs and earnings from our WAVE joint venture, Mineral Fiber EBITDA increased 10% and our EBITDA margin percent improved by 130 basis points, reaching nearly 42% in the quarter. Our plants also continue to operate at a high level, operating efficiently and delivering high-quality products. Again, these results reflect another quarter of strong performance and execution. Now turning to our Architectural Specialties segment. Net sales increased 26% year-over-year, largely due to the inclusion of our 3form acquisition in April as well as contribution from our 2023 acquisition of BOK Modern. In addition to the inorganic contribution, we saw growth in custom project sales across several product categories. Now as previously reported, we've been awarded large airport projects, including Pittsburgh and Seattle, International Airports. And now more recently, we have been awarded projects at the Tampa and Fort Myers airports as well as other smaller regional airports across the country. We continue to expect federally funded transportation projects to be a multiyear opportunity for our AS segment. Our quarter-to-quarter sales in this segment are likely to continue to be choppy and uneven due to the project timeline variability due to a variety of dynamics. These include labor availability, inflation and speed of project funding. That said, quoting activity remains healthy and our backlog remains strong for the overall segment. Adjusted EBITDA for the AS segment, with the inclusion of 3form increased 25% with a margin of 18.4%. Importantly, adjusted EBITDA margin for the organic AS results continue to improve. We look forward to continuing the integration of 3form onto the Armstrong platform and expect to see margin improvements as we do this. Although it is still early days in the 3form integration, we are pleased with their performance in the second quarter and how the integration is progressing. We continue to be excited by the unique capabilities of 3form using color, texture and light to elevate the design of a space. Our other recent acquisition BOK Modern also has performed in line with our expectations, and we believe their ability to design and develop integrated architectural metal systems for interior and exterior applications positions us well for further growth in this category. Now before I turn the call over to Chris for additional financial details, I'd like to comment on the underlying market conditions we are experiencing. Broadly speaking, market conditions seem to have stabilized and have a sideways moving field to them. With this and feedback from our customers, we have modestly improved the outlook for the second half of the year, although a level of uncertainty remains around interest rates, inflation and the overall impact on the economy. While the office sector continues to be challenged, it is stabilizing with pockets of improved regional activity. We're seeing the early signs of renewed activity in some of the depressed markets like San Francisco, with the rise in AI demand for office space. We've also seen tech projects that had been paused throughout the Pacific Northwest start up again. And we're seeing a rebound in project bidding in the Mid-Atlantic in the New York Metros. These activities are in the early stages, but are encouraging signs. Other verticals like health care and education are holding steady, Transportation continues to be strong and data centers remain an area of rapid growth and provide higher value grid and component sale opportunities. We are currently tracking over 100 data center projects across the country. We're also seeing steady growth in new construction bidding activity and the latest Dodge forecast for new construction starts in 2024 remains in positive territory. These are good signals for 2025 and into 2026. And as we've demonstrated over the past several years, the benefit of our balanced set of end markets is one of the key stabilizing attributes of our business enables us to deliver consistent, profitable growth. Now I'll pause and turn it over to Chris for some more details on our financials. Chris?

Thanks, Vic, and good morning to everyone on the call. As a reminder, throughout my remarks, I'll be referring to the slides available on our website, and Slide 3, which details are basis of presentation. Beginning on Slide 6, we discuss our second quarter Mineral Fiber segment results. Mineral Fiber sales were up 7% in the quarter, primarily driven by favorable AUV of 6% and 1% from higher volumes. Favorable like-for-like pricing and, to a lesser extent, positive mix, drove the strong AUV result versus prior year. Higher volumes were driven by stabilizing demand as well as contributions from our growth initiatives. Mineral Fiber segment adjusted EBITDA grew by 10%, expanding adjusted EBITDA margin by 130 basis points to 41.7%. Adjusted EBITDA margin expansion was driven by the fall-through of AUV and lower input costs. These benefits more than offset an increase in SG&A. Manufacturing productivity in the quarter more than covered inflation and a temporary uptick in plant-related costs. Lower input costs were driven primarily by freight and energy deflation as well as a benefit from inventory valuation. And the increase in SG&A was driven primarily by higher incentive compensation and higher employee costs due to inflation. The strong second quarter adjusted EBITDA margin result for Mineral Fiber marks the sixth consecutive quarter of year-over-year adjusted EBITDA margin expansion for this segment and demonstrates our focused efforts to drive consistent margin expansion despite uncertain market conditions. On Slide 7, we discuss our Architectural Specialties or AS segment results. Sales growth of 26% in the quarter was driven primarily by contributions from our recent acquisitions of 3form and BOK Modern as well as organic sales growth driven by some of the larger transportation projects that we have previously mentioned. We're happy to report that the 3form business performed as expected in the quarter and the integration work is on track. Including the acquisitions of 3form and BOK, second quarter total AS adjusted EBITDA margin was 18.4% and compressed by 10 basis points. AS organic sales patterns continue to be impacted by project dynamics and can be lumpy quarter-to-quarter. Despite lower-than-expected organic sales growth, we were pleased to see adjusted EBITDA margin expansion organically. We also expect to see the AS organic portion of the business continue to expand margins over the second half of the year. We remain on track to deliver the approximately 18% adjusted EBITDA margin target we had outlooked for the total AS segment in April. Slide 8 highlights our second quarter consolidated company metrics. We delivered 12% sales growth and 13% adjusted EBITDA growth with 10 basis points of adjusted EBITDA margin expansion, along with 17% growth in adjusted diluted net earnings per share. The drivers of the second quarter adjusted EBITDA growth are largely similar to the first six months of the year. And as we turn to Page 9, we present our first half consolidated company metrics, which reflect continued margin expansion. Notably, through the first six months of the year, with sales up 9% and adjusted EBITDA up 14%, margins expanded 160 basis points versus the prior year period. Adjusted diluted net earnings per share increased 20% due primarily to higher net earnings. Adjusted free cash flow increased 2%, and I'll comment further on that in a moment. Adjusted EBITDA growth for the year-to-date period was driven primarily by AUV fall-through and higher volumes, partially offset by an increase in SG&A costs. The recent acquisitions drove a majority of this volume benefit as well as a sizable portion of the increase in SG&A. WAVE equity earnings were also a strong driver of growth in the first half, helping to expand Mineral Fiber and total company adjusted EBITDA margins. Slide 10 shows our year-to-date adjusted free cash flow performance versus the prior year. The 2% increase was driven primarily by higher cash earnings and lower capital expenditures. Higher cash earnings were more than offset by unfavorable working capital changes, most notably timing-related changes in accounts receivable and an increase in cash paid for income taxes largely due to higher earnings. This is captured with an adjusted operating cash flow on the bridge. The single-digit adjusted free cash flow growth result is lower than we expected through the first half of 2024, and it is timing related. Accordingly, we expect this working capital impact to reverse in the second half of the year, resulting in double-digit adjusted free cash flow growth for the full year. Our proven ability to consistently deliver strong adjusted free cash flow growth allows us to invest in all of our capital allocation priorities. As we discussed on our April call, in the second quarter, we acquired 3form for a purchase price of $94 million net of cash acquired. Along with this sizable acquisition, we continue to make capital investments back into the business and return value directly to shareholders through our regular quarterly dividend and share repurchases. In the second quarter, we paid $13 million of dividends and repurchased $10 million of shares. As of June 30, 2024, we have $692 million remaining under the existing share repurchase authorization. With a healthy balance sheet and ample available liquidity, our intent to complete additional acquisitions remains unchanged, and we remain committed to advancing all of our capital allocation priorities. Slide 11 shows our updated full year 2024 guidance. We are raising our guidance on all our key metrics to reflect our solid second quarter performance and improved expectations for the second half of the year. While macro uncertainty continues, we believe market conditions have stabilized. Accordingly, we have removed the downside scenario from our outlook. We now expect full year Mineral Fiber volume to be down about 1% on these better-than-expected market conditions. We also expect full year Mineral Fiber AUV to be above the 5% historic average. We now expect total company net sales growth of 9% to 11% for the full year and expect total company adjusted EBITDA growth in the 10% to 13% range, up from our prior expectations of 8% to 13% growth. The change in our adjusted EBITDA guidance versus our prior guide provided in April is driven by improved mineral fiber profitability due to higher volumes, better AUV and lower input costs. There are no material changes to our AS segment guidance. For the full year, we expect adjusted free cash flow to grow at 10% to 14% and expect adjusted diluted net earnings per share to grow at 13% to 16%. Please note that additional assumptions are available in the appendix of this presentation. As we look to the back half of 2024, we remain committed to driving profitability and continuing to deploy cash to generate growth and create value for shareholders regardless of the market environment. And now I'll turn it back to Vic for further comments before we take your questions.

Thanks, Chris. As we have summarized, our business is performing well in this current environment. We're on track in 2024 to deliver annual revenue and earnings growth as we have in each year since 2020 in a muted commercial construction market, all while we continue to make investments for our future, investments to support the growth of our company through acquisitions like BOK Modern and 3form as well as through investments in our operations for productivity and in innovation to continue bringing new products to market aligned with next-generation market needs and aligned with longer-term secular trends for the built environment. In the last couple of quarters, we've discussed the rising demand for building solutions that can reduce the energy cost and the environmental impact generated by buildings. We are making great strides with product innovation focused specifically on energy savings and decarbonization. This includes our TEMPLOK energy-saving ceiling products, which are the industry's first ceiling tiles that can help regulate temperatures within buildings and reduce energy costs through a unique application of phase change material coupled with our mineral fiber tiles. This is the first ceiling product that pays for itself over time by generating energy savings of up to 15%. This economic return provides building owners and facility managers a reason to replace existing ceilings. We also recently launched an industry-leading line of Low Embodied Carbon products or LEC that helps tackle the challenge of embodied carbon in commercial buildings. The new Ultima LEC ceiling tiles are the lowest embodied carbon tiles on the market today, while maintaining its typical acoustical and aesthetically appealing attributes. Together, these products make a meaningful impact on the overall carbon footprint of a building and its operation. Although these products are in the early stages of their launch, the feedback from industry groups and the A&D community confirm these products are on trend for where things are going. And we expect the demand for these types of solutions to grow given the increased attention to decarbonization and the energy efficiency by industry standard setters, federal initiatives and increasingly state and local regulators. One example to note is the proposed lead version five standards from the U.S. Green Building Council that seeks to establish ambitious new standards for sustainable building practices with several guiding principles, including decarbonization, resilience and health. These standards call for additional reductions in operational and embodied carbon. Maintaining those standards will require finding additional sources of energy savings and decarbonization like the benefits provided by both our LEC and energy saving products. For perspective, there are close to 3 billion square feet of building space currently certified by the U.S. Green Building Council. Armstrong has a long history of supporting customers to achieve their lead project goals and working with the Green Building Council to drive real-world positive change through innovation. We're also pleased that our TEMPLOK product was named one of 17 new technologies that will be tested by a program run by the Department of Energy with the General Services Administration called the Green Proving Ground. This is a multiyear testing and validating program for innovative building technologies using the U.S. government's real estate footprint as testing sites. This program looks for new technology that can drive down operational costs in several buildings and help lead market transformation through the deployment of new technologies. Jetta Wong, GSA's senior adviser recently called the face-change ceiling tile made by Armstrong World Industries, a game changer because construction companies don't need special training to install the new tiles. We are thrilled to be part of this program and to be the only ceiling-based and phase change material solution included in the program. Again, we're in the early process of educating our customers on the benefits of these new products and building market demand. But interest is growing, and we have already taken orders with our largest order to date placed just last week. These products are important catalysts for the renovation activity that could lead to mineral fiber volume growth in the future. The innovation around new products is a key element, enabling AUV growth. And as many of you know, Mineral Fiber AUV is one of the core value drivers for our company and has been for over a decade. And with new products like low embodied carbon and TEMPLOK energy-saving ceilings, we are expecting AUV growth to continue. We are demonstrating, again, that ability in 2024. Investing in our AS segment is also a core value driver as we seek to grow revenue through acquisitions and market penetration while increasing the profitability of the businesses we bring on to the platform. In 2016, when we separated from our flooring business, this was just a $100 million business for Armstrong. In 2024, we are on track for this segment to well exceed $400 million in revenue. We are demonstrating success in penetrating the specialties category and doing so profitably. Our investments in digital growth initiatives, Canopy and ProjectWorks also support the overall business and are contributing to both sales volume and AUV growth. I'd also like to highlight our best-in-class service model and specifically within that, the critical role our distribution partners play in providing that last mile of service. Their partnership and excellent service supports growth for our metal fiber, our grid and architectural specialty products and it's essential for our success. We clearly have the best of the best distribution partners. All in all, our teams are executing well and 2024 is unfolding better than expected. We remain well positioned to continue delivering consistent profitable growth in these overall muted but stabilized market conditions. With that, now we'd be happy to take your questions.

[Operator Instructions] And your first question comes from the line of Susan Maklari with Goldman Sachs. Your line is open.

Thank you. Good morning, everyone.

Hi Suan.

Good morning.

Hi. My first question is, you made some comments in your opening remarks about stabilized conditions and getting some feedback from your customers that is supporting this improved view that you have for the back half. Can you give us a bit more commentary on what you're hearing from them? And then you also mentioned that there's some depressed markets that are coming back, which is encouraging. Can you talk a bit about what you're seeing there, what those projects are? And how we should think about what that could mean for mix shift as well as perhaps some of these newer offerings start to gain even more momentum with some of those markets coming back?

Yes. Susan, the -- as you know, we talked to our customers and with their visibility into their backlogs as a key input to how we think about the market conditions and so forth. And specifically, I think your question relates specifically more to office because that is probably the one that has been the biggest drag overall with healthcare and education, kind of hanging in there, transportation being strong. So let me address the office segment in particular, because I was referencing some of those new projects in the Pacific Northwest in particular, that were on hold. These were large office buildings for the tech companies that were put on hold that have come now back online as part of the encouraging signout out West in particular and in San Francisco with the artificial intelligence demand for moving into some of that lower-cost office space in downtown San Francisco. But when if I flight helicopter back up and look at broadly speaking, there's some real signs out there that support the stabilization view and what we're experiencing, what it feels like in the marketplace. Leasing activity in the office space was up 15% in the quarter. That's the highest quarterly volume since the pandemic. And connected to that, when you look at the sublease vacancy rates, they declined in the last three quarters. So consecutively in the last three quarters, with Q2 actually having the steepest rate of decline. So that's a really encouraging sign when you think about the availability, especially some of this Tier 2 and Tier 3 space. There's also -- I thought it was a very interesting survey that many of you may have read about was the P&C survey of CFOs that 65% of the CFO survey expect their office square footage to increase in the next 12 months. And some of you may remember, just two years ago, a similar survey of CFOs had exactly the opposite. They were looking to reduce their footprint. So that's another positive sign, I think, for overall demand in the office space. Again, together with some of the green shoots we're talking about in our distressed markets like San Francisco and some of the Mid-Atlantic areas as well. So I would say there are several things that are supporting, I think, the stabilization feel that we have in the marketplace and the conversations we're seeing with our customers.

Yes. Okay. That's helpful color. Sorry, go ahead.

No, I was just going to say -- I think the second part of your question was really on how this contributes to the mix shift? And certainly, when markets like San Francisco, New York, Chicago and some of the larger metros, we have some of the richest value products going into those markets. It's always going to be helpful for those markets. When they come back, it will always be helpful to our mix overall to what we sell in those markets. So positive -- that's a positive sign also for additional product mix going forward.

Yes. Okay. Thank you for all that color. That's helpful. And then turning to Architectural Specialties, you've seen those margins holding really nicely in this quarter. Any commentary on as we look out and we think about some of these initiatives and these conditions that are coming through, how we get to that 20% perhaps next year? And how you're thinking about the integration of the recent M&A within that target?

Yes. I think the play we're running on the kind of the organic part of our business and improving the margins is it's been very clear around the operational excellence we have to drive getting the throughput and the productivity from those investments we've been making in those businesses, so we could grow them and grow them profitably. So it's continuing to get that operating leverage and then really good discipline inside the marketplace, how we service and win these projects. That's part of what we do, and we're bringing that. I think it's just running that same play. We saw a benefit from that again in the second quarter. We're expecting that to continue each quarter as we go is to get better and better at that and drive those margins organically to that 20% level. So I like where we are. I think we're on the right track there. Of course, the 3form acquisition, we're kind of starting at zero here. We have to run our play to scale this business on the Armstrong platform. I like the progress we're making there. We're already after the synergies that we saw in the business case coming into that acquisition. So I think we're just going to go up about doing our work, driving the synergies, both the cost side and the revenue side to improve the margins in that business going forward. It's a very similar play that we've been running. Susan, I think you're very familiar with that, we've been running for the last several years. We expect to continue to do that.

Yes. No, I am familiar with it, and it's coming together well. So thank you for that color and good luck with everything.

Thank you, Susan.

And your next question comes from the line of Keith Hughes with Truist. Your line is open.

Thank you. In the quarter, could you just talk about -- you've done some of this, but I just wanted to get a list. In the quarter in Mineral Fiber, what markets were positive and which markets were negative?

Well, Keith, the markets that we spoke to, the health care and education. Education got off to a good start. As you know, it's later in the second quarter. It's mostly a third quarter dynamic, but we continue to see strength in the health care, especially on the East Coast and the West Coast, frankly, with a lot of the work connected to universities, both east and west. So it's all strength in health care and education. Certainly, the transportation, the bidding activity around transportation was very strong. Data centers continues to be very strong. And the Retail is kind of hanging in there. So flattish overall. But I think that's probably the bulk of the verticals for us.

And the office is still in there. You said some positive things for the future of office.

Yes. Sure. I left that off, but I talked a lot about that in the last one. So yes, I would say it's moving sideways, but it's still at a lower level. overall. That's a drag overall on the other verticals for sure.

Okay. And if you look at your backlog in office, some of the positives you talked about in this call, would it be next year before something like that could potentially turn in a positive direction?

I think for the most part, we're -- again, it's stable. I'd say we're -- the stabilization that we're seeing now, if these green shoots continue to materialize with the lag on some of these projects, you got to believe most of this impact is in '25. But it does give us confidence that we don't have the softening that we were expecting in the back half, and that's the main driver behind raising the guidance for the back half. There's some benefit, but really, to your point, Keith, the bulk of the benefit is in '25 and in '26.

Okay. Architectural Specialty has remained positive organically. It tends to have more of a higher construction component to it. How has that been able to continue the growth despite and there's obviously some headwinds on construction?

Yes. We're still living off of positive new construction activity that occurred in the late part of 2022. As you know, that's an 18- to 24-month lag. So we're still seeing the benefit of some of that. But don't overweigh that because the large renovation projects are also equally as important as new construction in the Architectural Specialty business, it's about a 50-50 split between the two. And we're seeing some good activity there, and of course, in those verticals that we talked about, transportation and health care and to a lesser degree in the education segment.

Okay, great. Thank you very much.

Thank you.

And your next question comes from the line of Adam Baumgarten with

Hi. Good morning, everyone. Just thinking about AUV, I know you mentioned above 5% AUV growth for the year. It did about 7%, it looks like in the first half. Should we expect a similar year-over-year increase in the back half of the year? I know there's a price increase out there that I'm assuming you guys expect realization on -- so just some more color on the cadence of AUV as we move through the year.

Yes. So Adam, it's Chris. Yes, the back half of the year, a little bit softer on AUV as compared to the first half of the year. Really expect to get positive mix but -- and also positive price, but a little bit to a lesser extent on price than the first half of the year. And again, thinking about kind of some of the dynamics we've been facing in terms of deflation. So a little bit of a deceleration there on AUV in the back half, but certainly strong price contribution and positive mix.

Okay. Got it. And then just switching to AS just on the airport projects. You mentioned I think it was four or so, and I'm sure there's others. Maybe if you could size given the existing wins you have the cumulative opportunity from a revenue perspective and maybe some help on timing of when that actually hits the P&L.

We're shipping in the Pittsburgh Airport project now and Seattle soon. So we -- some of the larger projects, and again, these are outsized projects to our normal average project size. So -- but these projects, as I mentioned, some of the smaller regional projects, they can be kind of normal, smaller normal-sized renovation projects. And then on the other end of the continuum, right, you have the Pittsburgh and some of these very large new projects. We have some that are in between that as well. So it's a whole continuum of different sized projects. But they're hitting the P&L. Certainly, in the back half of this year, we'll see that and into '25 and into '26. As I said in my remarks, with the bidding activity and the number of airport projects that we're tracking across the country, this is at least a three, four year tailwind in terms of that particular sector on the Architectural Specialty business in particular.

Adam, maybe if I could just add a little more context around the phases -- different phases of those projects. A lot of them are multiphase within these transportation jobs. So that can lend to choppiness, lumpiness as those individual phases are completed and shifting. So we'll see sometimes some choppiness like we've talked here in the second quarter associated with those types of larger SCOT projects.

Okay, got it. Thanks. Best of luck.

Thank you.

Thank you.

And your next question comes from the line of Garik Shmois with Loop Capital. Your line is open.

Hi, thank you. I think in prior quarters, you've spoken to project delays. I think it was maybe particularly acute after Q1. I'm just wondering if it's fair to assume that the pace of delays has slowed. And if so, maybe what's bringing some of those projects back.

I think we're still seeing -- we're still seeing delays. I think the reason we're seeing delays has actually changed a bit. It was more supply chain related in the last, I would say, 12 to 18 months. It's been more labor and funding, especially these large projects, some of the lumpiness of the funding can influence the rate and pace of these projects. So we're seeing a little bit of the difference -- the mix of drivers, but I wouldn't say it's better or worse in terms of overall delays. They're episodic depending on the projects and the type of projects. But yes, that's, to Chris' point, that's causing some -- could cause some of the quarter-to-quarter lumpiness.

Okay. Got it. That's helpful clarification. And then just on SG&A, the increase in the quarter. I was wondering if you could maybe just size directionally how much was inflation, how much was performing comp? How much was the acquisition impact? So maybe just how to think of the SG&A piece in the back half of the year?

Yes. So yes. So in the quarter, obviously, you saw incentive comp that's based on performance. And again, within SG&A, you have that inflation, call it the salaries and wage inflation, that's also included in the SG&A line. But largely, the contribution to SG&A here is related to the 3form acquisition. So kind of when I think about that contribution for the quarter, that was really the driver of the SG&A increase here in the second quarter. And on a more normalized run rate basis, that's something to continue to model in given the 3form SG&A loaded.

Got it. Okay, thanks for that.

Your next question comes from the line of Kathryn Thompson with Thompson Research Group. Your line is open.

Hi, good morning. This is actually Brian Biros on for Kathryn. Thank you for taking my questions. On the improved outlook in the second half, maybe can you just break that out between new construction versus R&R.? It seems maybe the new side is seeing slightly more of the improved outlook based on your comments, if I'm interpreting that correctly. But if you could address how that breaks out between the two would be interesting to hear.

Yes, really difficult to break them out. But I would say the pattern that we've seen in the first half is I think indicative of what we're expecting to see in the back half, we -- it's fair to say, Brian, that the new construction part of the market is still positive as we are, I think, benefiting from some of those starts, as I mentioned, in the last half of 2022, and they continue to be positive -- starts continue to be positive. I think we're really seeing the softness on the renovation side and in particular, the discretionary renovation side as I think people are still waiting for some of this uncertainty to clear up. So I wouldn't say there's a big departure here in our outlook in terms of new versus renovation activity in the back half versus the first half.

Got it. And then with, again, better outlook, raised guidance, I assume that means you'll at least have slightly better throughput on the Mineral Fiber production lines. I guess, given the throughput business, the margins, is there any way to quantify or think about that productivity or margin benefits in the second half?

Well, I think the way to think about that is we're on track to deliver our productivity goals. We were slightly ahead in the first half. And again, with this modestly improved outlook on the volume side, we should really have a good degree of confidence that we're going to be at or above our productivity targets for the year. So we feel good about that. And again, the profitability of the company and our ability to manage both the cost side as well as the AUV side should continue to follow through and deliver profitable growth. We're expecting to expand margins -- maybe to your point, Brian, we're expecting to expand margins both in Q3 and Q4 to continue that trend that we've been on.

And maybe one other thing to add is within Mineral Fiber, our adjusted EBITDA margin is increasing. If you look at our full year assumptions for 2024, it was greater than 40%. We're now at about 41% to Vic's point around overall margin expansion.

Got it. Helpful. Thank you.

Your next question comes from the line of Philip Ng in with Jefferies. Your line is open.

Hi, guys. It is pretty encouraging that you're signaling that the market is stabilizing here. I think you teased this a little bit in the last question, that it sounds like new construction is still pretty good because you're lagging some of the strength you saw in back half 2022 are not full resilient. Is this how you could think about it. Any more color on how major rental has been, and it sounds like it's still weaker but is it at a point where it's less bad? Just give us a little more context on how these three buckets have performed?

Yes. I would say it continues -- it's stable. It's part of the stabilization equation for me is that we're getting a sideways kind of feel in terms of the number of projects and the value of these projects on the renovation side. And it's a fine line between some of those major renovation work and some of the discretionary renovation activity. So I wouldn't put too fine a line in between the 2, but they both seem like they're stabilizing. Even though at this kind of lower level, they're kind of moving sideways and stabilized. And again, the positive, we're still benefiting from some of the positive new construction activity, as you mentioned.

Okay. So that's helpful. So it sounds like you at least have some level of confidence, things are stabilizing in the back half. So when we kind of look at the 2025, a lot to unpack here, right? You kind of called out a handful of green shoots that could be a good guy for next year and then going to 2026, new construction starts for Dodge have obviously weakened, I think, the last 1.5 years or so. And rates are coming down, right? So help us kind of unpack all those different cross currents in terms of how we should think about 2025? Is that a year where things gotten in flat? Or kind of still move sideways? Is there some risk that you could get a double dip, -- like how should we kind of contextualize your recovery into 2025?

Yes. I think the fact that we're stabilizing here, and again, troughs and recessions are best called in the rearview mirror, right? So we're not going to go that far at this point. But I think it's really encouraging that at this stage that we're stabilizing here. And it's really early to kind of call '25 at this point, but the fact that we're stabilizing here -- and the green shoots that I talked about are encouraging. Actually, the Dodge starts -- the new construction starts have turned positive this year and are forecast to be positive in 2024. As I mentioned in my remarks, that's good for '25 and '26. So I think we'll have to wait and see as some of this uncertainty in the back half of the year clears up to get a better picture to where we inflect and that's where we inflect in '25. But again, you've got to believe it's encouraging these signs for the overall commercial construction activity.

Okay. And then transportation has been a nice tailwind for your AS business. Can you remind us how big transportation is for AS at this point percentage-wise?

Well, for the overall business, it's about 10% vertical for us. So it's one of our smaller verticals, but just fortunately contributing to the Architectural Specialty part of our business. So we haven't broken it out specifically for our segments, but you can get a flavor, I think, for -- it's a nice contributor, a nice tailwind for the business.

Okay. Thank you.

Thank you.

And your next question comes from the line of Rafe Jadrosich with Bank of America. Your line is open.

Hi. Good morning. Thanks for taking my question. First, I want to -- the steel prices have moved down a lot so far this year. And I wanted to ask if you can remind us how that impacts your margins and earnings and you have volatility in fuel prices? And then also like how that flows through with the WAVE JV?

Do you want to take the accounting side of this and just...

Yes. Okay. So Rafe, we basically WAVE has consistently been able to demonstrate price costs and actively manage monitoring and managing the pricing there. We saw some pricing in line with some inflation that we've seen in steel. And typically, it's about a quarter lag in terms of this deal coming in to this -- because it's actually running through and hitting the P&L. So it's not about a quarter lag there. But the business has been very successful in continuing to manage and drive AUV and drive that margin expansion by way of managing, monitoring steel and pricing accordingly.

Yes. Let me just add because I think it's been a really good job by our WAVE team and the Armstrong selling organization to manage pricing because we did get some steel volatility, right? After the auto unions renewed in the last part of last year, November, December, we saw some really -- despite big spikes, I would say, in terms of steel pricing, we had to react very quickly. We raised price in December, which we very rarely do and then again in February to get out in front of it. And to your point, it's moderated since then. But our team has done a nice job to try to stay out in front of that. And Rafe you know well, that shows up through equity earnings, right? We -- the -- we look at the margin expansion inside that joint venture, but it shows up for us in terms of an equity earnings stream.

Got it. That's really helpful. And then I wanted to follow up on some of the comments you had about on the green proven ground program. I know it just got announced, but can you just talk about like potential opportunity there longer term? And then do you have a sense overall, how much of your end markets in aggregate are tied to government spending or to government like real estate, just so we have this sense of the opportunity?

Yes. This program is really exciting. There's a little over $3 billion earmarked for this program to go out and basically try to accelerate the pull-through of innovation that can drive decarbonization as well as energy savings. So -- and of course, the Federal Government just have a very large footprint, as I mentioned in my remarks. So this is a really exciting validating, brings a lot of credibility to the technology and should be an accelerator when we think about the adoption rate of the technology in the building construction market. So we're really excited about that. And again, we're in the early innings of that, but very excited to be part of it and the only ceilings company with this technology that's being considered. So very excited about that. The overall institutional footprint of the commercial construction market, we participate across all of these verticals where institutional plays. And since we're playing across all of those, I think it's fair to say that we're equally distributed across these verticals and participating in the institutional versus noninstitutional segments of the market.

Thank you. That's very helpful.

Thank you.

And your next question comes from the line of Stephen Kim with Evercore ISI. Your line is open.

Yes, thanks very much, guys. Just wanted to do a little cleanup on a couple of housekeeping items. First, in SG&A, I think you talked in or expect that, that was mostly related to the incentive comp with reform. So we're going to continue to model that, I assume for another three quarters, if I heard you right. Could you talk about the SG&A run rate in Mineral Fiber because that was also a little higher than we thought. Should we similarly expect that to continue here for another few quarters? And then you talked about some timing issues in working cap. Just wondering what those were, if you could just clear that up for us.

Sure. Let me go back to SG&A and start with Mineral Fiber -- so the SG&A comment was in terms of the total company with the overall contribution to SG&A being driven by the acquisition. If I go back to Mineral Fiber specifically based on your question, about $3 million in the quarter was due to higher incentive compensation. We did see then employee costs, higher employee costs due to inflation. And if I then go to AS, that was largely the impact from the acquisitions. So if I kind of take a step back and think about it from a run rate basis, it's more the acquisition contribution that sticks and is incorporated into the run rate going forward. On working capital, what we saw was timing related to accounts receivable, and that will work itself out here in the second half of the year. No issues from a collectibility perspective, that's not what this is. It's really just the timing of AR and the timing items that will reverse here in the back half. Again, confident about that and again, confident in our updated guide on adjusted free cash flow.

Got you. So just to make sure I heard you correctly on Mineral Fiber, the $3 million of -- due to higher incentive comp, you don't necessarily expect that, that's going to continue at that higher rate going forward? Is that what you're saying?

Yes. That was -- yes, that was recorded in the quarter associated with our performance. So no, not to that extent going forward.

Perfect. That's very clear. Second question relates to ProjectWorks in Canopy. Vic, you talked about Canopy sales up 20% project work running through there about 52%. And I guess what I was curious about is as we think about these digital initiatives broadly, should we be thinking them as a discrete driver to growth or more in the line of continuous improvement? In other words, is there a way to sort of assess how much incremental sales you're getting from these or you expect to get from these initiatives? Or is the benefit going to be seen more kind of just in margin or rather just a sustained advantage versus your competitors? Just trying to get a sense for how we should be thinking about that as longer term.

Yes, it's a good question. And I understand the question, Stephen. For ProjectWorks, I think the best way to think about this is we're -- it's improving our engagement with architects and contractors to make them more efficient. It allows us, we believe, to help them realize their design intent more fully and maybe more uniquely with Armstrong solutions than others. So that really helps with both AUV and just kind of winning more of the specifications and holding on to the specifications. So may be the quality of the specifications improves. It's more on, I think, what you're asking around continuous improvement. That's probably the way to think about it, but it is additive in terms of our ability to drive higher value solutions into the marketplace because we've made it easy, right? And we've taken some of the risk out of it by -- through the ProjectWorks automation software. On the Canopy side, the incrementality is much higher, and we believe that we're tapping into a relatively untouched, underserved part of the market, smaller business owners that fall through the cracks, so to speak, don't know where to go or think it's too expensive to do renovation work, and we're helping them to accomplish the renovation they need to do through this platform. It educates them, kind of walk them through and then allows us to actually transact with them on the site. So that's more incremental is the way to think about that, both volume, and it's been positive on the AUV side as well so far. The healthy spaces and how this is evolving to be more complete, again, we had double-digit growth in our Healthy Spaces products in the quarter. That's really contributing to some nice volume growth. But again, I would put this one until we get the energy savings and the low embodied carbon, which have a real economic benefit to them until we get those with some higher traction in the market. I think you can assume that the healthy spaces initiative is really an EUV boost as well. So again, a lot of the technology that we brought to market to date has been really encouraging in support of continued AUV growth. And as you know, we -- AUV growth has been a hallmark of this business for over 10 years, consistently every year. And with the rate of innovation we're bringing around these platforms that we're talking about now, gives us a lot of confidence, we're going to continue to be able to drive AUV growth for the next 10 years.

Great. That's really helpful. Thanks very much for that.

You bet. Thank you.

And your final question comes from the line of John Lovallo with UBS. Your line is open.

Hi. Good morning, guys. Actually Matt Johnson on for John. I appreciate the time. I guess, first off, that we could just kind of zone in on Mineral Fiber volumes in the quarter. They are up a little over 1%. Again, how would you guys frame the relative contributions from market demand versus AWI's outperformance? And then given your outlook in the back half implies volumes are down around 1%, again, how you guys think about the relative contribution from, call it, the market versus your outperformance versus the extra shipping base.

Yes. So on the first two parts of that, the market is down in the low single-digit range. It's been kind of consistent there as we've been calling out the last couple of quarters. Our initiatives, our growth initiatives are offsetting to the tune of 1% to 2% has been, again, consistent contribution as they gain traction. So that low single-digit downmarket. And then the second quarter, we offset a large portion of that with a little bit of noise in the base period to compensate for that. So again, I'd say a very consistent market in that low -- down low single digits and then consistent contribution in the back half, we're expecting with our growth initiatives of 1% to 2% on the volume line. And on those shipping days, Chris, I'll let you...

Sure. So yes, we're up two shipping days versus the prior year and the back half of the year. So recall, in 2023, we saw higher retail activity than we've been talking about earlier this year in our guide for the full year and now incorporated in our guide for the rest of the year that some of that inventory is coming back out. So we assume that, that's going to happen and that largely offsets the additional two extra shipping days in the back half of this year.

Thanks for that. And then I guess based on the midpoint of your EBITDA guidance, it implies around $244 million of EBITDA in the back half could be up around $21 million year-over-year. So how is it that you guys are thinking about your EBITDA bridge in the back half when you guys look at volume, AUV, input costs, et cetera.?

Yes. I mean when you think about the back half of the year, maybe just to hit it at a high level, really strong first half performance that does suggest a little bit of deceleration, I talked earlier on AUV. Again, expect to get strong like-for-like price to a lesser extent on AUV in the back half of the year. But at the end of the day, when you think about the other pieces, we're seeing a bit of benefit here in the first half of the year related to inventory valuations, and that's not going to repeat in the back half of the year. We saw an outsized benefit from our WAVE equity earnings in the front half of the year to a much lesser degree, obviously, in the back half of this year. So that's kind of how I think about the back half and the modeling associated with that. But again, feel good about our guide and what we have published for full year '24.

And that concludes our question-and-answer session. I will now turn the conference back over to Mr. Vic Grizzle for closing remarks.

Yes. Thank you, and thank you all again for joining. Again, I'm very pleased with the way our teams are executing and performing in this kind of sideways muted market, extracting as much value as we can and growing margins consistently. So really pleased with how we're performing and looking forward to a better outlook in our back half. So again, thank you for joining, and we'll keep you posted on our next update.