Kristy Olshan - Armstrong World Industries, Inc. Victor D. Grizzle - Armstrong World Industries, Inc. Brian MacNeal - Armstrong World Industries, Inc..

Stephen Kim - Evercore ISI Kathryn Ingram Thompson - Thompson Research Group LLC Jason A. Marcus - JPMorgan Securities LLC Michael Wood - Nomura Instinet Scott Rednor - Zelman & Associates Nishu Sood - Deutsche Bank Securities, Inc.

John Lovallo II - Bank of America Merrill Lynch Robert Wetenhall - RBC Capital Markets LLC Keith Hughes - SunTrust Robinson Humphrey, Inc. Will Randow - Citigroup Global Markets, Inc. Garik S. Shmois - Longbow Research LLC Kenneth R. Zener - KeyBanc Capital Markets, Inc. Jim Barrett - C.L. King & Associates, Inc..

Good day, ladies and gentlemen, and welcome to the Q2 2017 Armstrong World Industries, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's introductions, we will host a question-and-answer session, and our instructions will follow at that time. As a reminder, this conference may be recorded.

It is now my pleasure to hand the conference over to Ms. Kristy Olshan, Director of Investor Relations. Ma'am, please proceed..

Thank you, Brian. Good morning and welcome. Please note that members of the media have been invited to listen to this call, and the call is being broadcast live on our website at armstrongceilings.com. With me today are Vic Grizzle, our CEO; and Brian MacNeal, our CFO.

Hopefully, you have seen our press release this morning, and both the release and the presentation Brian MacNeal will reference during this call are posted on our website in the Investor Relations section. I advise you that during this call, we will be making forward-looking statements that involve risks and uncertainties.

Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong World Industries, please review our SEC filings, including the 10-Q filed earlier this morning. Forward-looking statements speak only as of the date they are made.

We undertake no obligation to update any forward-looking statements beyond what is required by applicable securities law. In addition, our discussion of operating performance will include non-GAAP financial measures within the meaning of SEC Regulation G.

A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation. Both are available on our website. With that, I'll turn the call over to Vic..

Thanks, Kristy; and good morning, everyone. It's good to be with you today to discuss our second quarter and to summarize our first half results. Let me begin in the second quarter. Globally, we delivered over 6% top line growth on a constant-currency basis, with all regions contributing to this result.

Execution of our growth initiatives are resulting in solid top line acceleration, and as expected, led to margin expansion in the quarter. We continue to invest in innovation, and our industry-leading efforts are delivering solid growth and are supporting higher average unit values.

Improving market conditions in our international markets also aided our results. Architectural Specialties continues to deliver strong growth, with sales up over 20% globally in the quarter. Our Tectum acquisition, which is now part of our Architectural Specialties portfolio, continues to perform well and integration remains on schedule.

Together, solid execution of our growth initiatives and solid execution in our manufacturing plants resulted in good margin growth in the second quarter, as we expanded adjusted gross margins globally by 210 basis points and adjusted EBITDA margins by 190 basis points.

As we reported in the first quarter, the core value drivers in this business remain strong and continue to drive margin expansion, higher volumes, realization of positive like-for-like pricing covering inflation, industry-leading innovation driving favorable mix and Lien-driven productivity gains drove solid margin expansion over what you all will remember was a very strong prior-year quarter.

Now focusing on our Americas segment, sales in the Americas were up solidly, up over 5% in the second quarter on top of 6% growth in the second quarter of last year. Solid mid-single-digit growth in average unit value, or AUV, drove the sales growth along with higher volumes.

Our average unit value achievement improved sequentially from the first quarter, as we continue to benefit from selling a richer mix of products and additional realization of positive like-for-like pricing from our February price increase.

Sales growth at the high-end of the mineral fiber product portfolio was again positive and continues to outpace growth across the rest of our portfolio, demonstrating that our investments to drive profitable organic growth through innovation are working.

Similarly, volumes improved in the second quarter over mid-single-digit volume growth in the prior year quarter. Our U.S. Commercial channel drove the volume improvement which more than offset softness in Canada, Latin America and the Big Box channel.

Architectural Specialties products in the Americas continued to deliver strong growth, with sales up double-digits versus a strong prior-year quarter. And I'm pleased that we returned to our traditional cadence of margin expansion in the Americas, delivering solid margin growth.

Adjusted EBITDA margins expanded by 140 basis points, with similar adjusted gross margin expansion in the quarter.

The margin drivers for the Americas were similar to those of the global business as our core value drivers of positive like-for-like pricing over inflation, favorable mix, higher volumes and productivity gains all enabled margin expansion over again a very strong prior year quarter.

Our International business also contributed solidly to our top line growth, delivering nearly 8% constant-currency sales growth over the prior year quarter. Consistent with last quarter, improvement in our end markets and continued traction from our growth initiatives drove this result.

In particular, we saw a nice pickup in the activity in emerging markets, which were up 20% over the prior year. In addition, our growth initiatives are contributing with our Architectural Specialties products up double-digits in our international markets.

I'm also pleased to see the work we've been doing around cost reductions contributed to margin expansion again this quarter. Now there's more to do here, but a continuation of steady progress. Adjusted EBITDA margins improved in our International business by 230 basis points, and gross margins improved by 380 basis points over the prior year quarter.

Now summing up the first half, globally, we delivered just over 8% top line growth on a constant-currency basis, with all regions contributing nicely to this result.

First half sales drivers were similar to drivers in the quarter as our growth initiatives around innovation led to higher AUVs along with strong double-digit growth in Architectural Specialties against a backdrop of improved market conditions.

In the first half, globally, adjusted gross margins expanded by 110 basis points and adjusted EBITDA margins improved by 50 basis points. Similar to the quarter, higher volumes, favorable AUV and productivity gains more than offset inflation.

Our year-to-date adjusted EBITDA margin expansion was negatively impacted by higher SG&A expenses, which as we communicated in the first quarter, was the result of higher expenses from the Tectum acquisition and the timing of increased investments in our selling organization in the Americas, which we began in the back half of 2016.

Normalizing for these items, SG&A expenses would have been almost flat year-on-year in the first half of 2017. Let me pause and turn the call over to Brian to discuss more of the details around our financial performance.

Brian?.

Thanks, Vic. Good morning to everyone on the call. Today I'll be reviewing our second quarter and first half results. But before we jump into the financials, as a friendly reminder, I'll be referring to the slides available on our website. Slide 3 details our basis of presentation used throughout this discussion.

The primary differences to our reported results are expenses related to the separation in the prior year and the adjustments made for our U.S. pension plan. As a reminder, we do not expect to make any cash contribution to our U.S. pension plan in 2017.

Turning now to slide 4, consolidated constant-currency sales of $330 million grew 6% versus the prior year quarter. Adjusted operating income increased double-digits, up 19%, while adjusted EBITDA increased 14% versus the prior year quarter.

We returned to our typical pattern of margin expansion as adjusted EBITDA margins expanded 190 basis points in the quarter. Adjusted diluted earnings per share were up over 31% due to the higher earnings and a lower share count as a result of our share repurchase activity.

Adjusted free cash flow improved by 19% over the prior year quarter due primarily to higher cash earnings. Borrowing on our revolver to finance our acquisition of Tectum, and a slightly lower cash position increased net debt by $27 million. Turning now to slide 5.

Adjusted EBITDA increased 14%, driven by strong AUV fall-through to profit, higher volumes and favorable manufacturing costs. AUV improvements in the Americas drove this result, growing high, mid-single-digits over the prior year quarter.

Both positive mix and positive like-for-like pricing led to the strong AUV fall-through as we continue to sell a richer mix of products and benefit from prior pricing actions. Globally, volume improved driven by the U.S. Commercial channel and a pickup in the emerging markets, which were up 20% over the prior year quarter.

Manufacturing productivity gains in the Americas and EMEA also contributed to this result as our supply to Asia accelerated. Higher input costs and SG&A expenses were up modestly this quarter. Slide 6 shows our change in adjusted free cash flow compared to the prior year quarter, which grew 19%, driven mainly by higher cash earnings.

Sales growth in all of our reportable segments led to favorability in cash earnings. Working capital negatively impacted adjusted free cash flow due to the impact of separation payments in the prior year quarter, and after excluding these payments working capital would have been slightly benefited adjusted free cash flow.

WAVE dividends were also down versus the prior year quarter as the special dividend we received in the second quarter of last year was not repeated. Turning now to our segments on slide 7. The Americas delivered a solid quarter with constant-currency sales up 5.4%, while wrapping a strong prior year quarter, which was up 6%.

AUV accelerated sequentially, from the first quarter, up 90 basis points, and growing mid-single-digits versus the prior year.

This quarter's strong AUV fall through rate demonstrates our ability to consistently sell high-value, higher-margin, mineral fiber products and our continued ability to realize the benefits of like-for-like pricing from our prior pricing actions. As a reminder, our AS sales are captured in volume.

Volume grew modestly against a strong prior year quarter where volumes were up mid-single-digits. Our largest general, U.S. Commercial, drove the volume gains this quarter, which were partially offset by declines in Canada, Latin America and the Big Box channel.

As expected and outlined on our last call, inventory builds in the Big Box channel did take some volume out of this quarter. Within our U.S. Commercial channel, Architectural Specialties delivered strong double-digit growth aided by Tectum, our newly acquired AS product line.

The high-end of the mineral fiber market continues to grow as our products with better visuals, enhanced transparency, sustainable attributes, and superior acoustics are becoming more appreciated and specified and continue to support a mix-up tailwind that will benefit us for many years to come.

Adjusted EBITDA increased over 9% and we expanded margins by 140 basis points, mainly due to our strong AUV fall-through rate to profit and aided by higher volumes and productivity. WAVE equity earnings were down slightly off their all-time record earnings quarter last year.

Moving to our EMEA segment on slide 8, quarterly constant-currency sales increased almost 8%, driven by AUV improvement and strength in the Middle East and Russia.

Adjusted EBITDA margins expanded 450 basis points, driven by the margin impact of higher volumes, positive like-for-like pricing and productivity gains as EMEA ramped up their supply to Asia. This more than offset some selling and marketing investments to drive the top line results and promote new product offerings in Europe.

Moving to our Pacific Rim segment on slide 9, quarterly constant-currency sales increased by 8%, driven by strength in China and India, which partially offset softness in Australia. I'm encouraged by the strength we're seeing in China as the office market bounces off the bottom and we continue to gain penetration into the education sector.

Adjusted EBITDA declined as outlined in our guidance, predominantly from the sourcing strategy changes as a result of the idling of our Qingpu plant. Turning now to our first half 2017 results on slide 10, constant-currency sales improved by 8%, driven by the broad-based strength across our reportable segments.

Adjusted operating income increased 14% and margins expanded by 110 basis points. Adjusted EBITDA grew double-digits, up 10%, while margins expanded by 50 basis points, driven by strength in the second quarter, which was more than offset the timing-related items that impacted the margins in the first quarter.

Adjusted diluted earnings per share improved by 22% due to higher earnings and a lower share count as a result of our share repurchase activity. Free cash flow almost doubled versus the prior year, driven by the higher cash earnings. On slide 11, you'll see the drivers of our consolidated adjusted EBITDA performance for the first half.

The drivers were similar to the quarter, but favorable volume and AUV along with lower manufacturing expenses, offsetting higher input costs and modest SG&A investments to drive top line results along with the integration of Tectum. Slide 12 details our first half change in adjusted free cash flow, which improved by over 90% against the prior year.

Drivers were similar to the quarter with higher cash earnings as a result of the higher sales growth being the primary driver. Slide 13 outlines our updated 2017 guidance. We are increasing our expectations for constant-currency sales, adjusted diluted earnings per share, and adjusted free cash flow.

Given our healthy sales growth in the first half of the year, and our expectations for improving performance in our international markets for the balance of the year, we now expect constant-currency sales to grow 6% to 9% over the prior year.

We're reiterating our adjusted EBITDA guidance as higher sales internationally fall through to profit a lower rate than our best-in-class adjusted EBITDA margins here in the Americas.

Our adjusted EPS guidance is increasing to reflect our share repurchase activity through the first half of the year and has an assumed share count of approximately 54 million diluted shares for the full year.

Given our stock price this quarter, we've been opportunistically buying in the market and repurchased about 0.5 million shares, representing a $21 million spend in the second quarter. This brings our total spend to $115 million since inception of the program last August. Repurchasing approximately 2.8 million shares or 5% of our float.

As of quarter-end, we had $35 million remaining under our current share repurchase authorization and we will continue to be opportunistic in the market.

We also increased our adjusted free cash flow guidance and now expect 28% growth year-over-year at the midpoint of the range, driven by better sales and capital spending coming in at the lower end of the range. I want to emphasize the broader organization remains keenly focused on prudent cash management.

Lastly, regarding our liquidity, we're within our targeted leverage range of 2 times to 3 times. In closing, I'm pleased with a solid quarter. Our core value drivers enabled good margin expansion as we grew adjusted EBITDA margins globally by 190 basis points.

As outlined in our last call, we did experience sequential margin improvement in the quarter and expect to continue to drive – grow margins year-over-year in the back half of 2017. With that, I'll turn it back to Vic..

Thanks, Brian. And in closing, as Brian mentioned, our team delivered a solid quarter, generating good momentum going into the second half. I continue to be impressed with the adoption rate of our some of our new product platforms like Total Acoustics and Sustain.

Our market-leading innovation efforts and our expanding Architectural Specialties capabilities are clearly differentiating us in the marketplace and enabling us to deliver higher growth rates than the overall market.

We saw higher AUVs, again, supported by our industry-leading innovation, continued share gains in the Architectural Specialties product category and continued improvement in our International business; all complemented by prudently-managed costs which enabled good margin expansion in the quarter.

I trust that you can see that Armstrong is no longer just a mineral fiber, suspended ceiling company. Armstrong has moved into the expanded market of total ceilings and is becoming a complete ceiling solutions company.

We are selling into more spaces than ever before with our broad portfolio, including Architectural Specialties and Tectum like products. And we are selling more into every space with our component products from our WAVE joint adventure. This strategy is about growth. Growth beyond the traditional core mineral fiber ceiling products.

And we plan to be more aggressive with our M&A efforts to accelerate our penetration into these new spaces, while leveraging our best-in-class distribution and our industry-leading specification capability. We couldn't be more excited about our future as we are well-positioned to further separate ourselves from our mineral fiber competitors.

And with that, we are happy to take your questions..

Thank you, sir. And our first question will come from the line of Stephen Kim with Evercore ISI. Please proceed..

Thanks very much, guys, and good quarter. Congratulations on that..

Hey, Steve. Thank you..

Thanks, Steve..

First question I had is the acquisitions.

Could you give us a sense for how much the acquisitions contributed in the quarter in terms of sales in dollars?.

Steve, we're not breaking out specifically by quarter. As you know, that acquisition, the Tectum acquisition, which we closed in January of this year, is estimated to add somewhere between $25 million and $30 million of sales this year. And on the annual basis, I think that's what we've publicly disclosed.

I continue to be very impressed with the Tectum team and the traction that we're getting in our distribution channel also with the Tectum products. The architectural community continues to be very excited about this product platform as well.

So I think, again, it's going very, very well, and the integration efforts that are ongoing are, as I stated, are right on track. So we couldn't be more....

Got it..

Positive about that..

Okay. Got it. So that gives us a ballpark for the business. And then, secondly, I guess, can you talk a little bit about the dynamics you're seeing in the U.S. business. You talked a little bit about the Big Box channel.

Can you give us a little bit of background on maybe what's happened there? Were there just some quarterly push from one quarter to the other? Or some timing issue there? And, obviously, you have this little bit larger than – well, substantially larger than normal price increase out in the marketplace.

If you could just sort of comment on maybe what the genesis of that was? I think that increased year-over-year percentage improvement in the price ask, and also how it's going..

Yeah, Steve. Let me comment on the Big Box. We pointed very specifically to this in the first quarter, right? We had a pretty nice demand profile in the first quarter that we pointed to. We anticipated that that might pull forward some volume out of the second quarter. So I really would point to that.

I really like what we're seeing in terms of our flow-through, our Big Box channels, the point-of-sale data is very encouraging. So I think this is a little bit of a timing between quarters as we talked about in the first quarter..

Good..

Relative to the price increase, Stephen, it's early to talk about how that's going so far. We're only a couple of weeks into that. But the justification for that price increase is in proportion to the level of inflation that we're seeing. We're committed to staying ahead of inflation.

And as we have in the first half of this year, we've done very well with our price realizations staying ahead of inflation. But as we're out looking an acceleration of inflation, we're making sure that we stay ahead of that. And that is the justification primarily – primary justification for the size of this price increase..

Okay. Excellent. Good luck, guys..

Thank you, Stephen..

Thanks, Steve..

Thank you. Our next question will come from the line of Kathryn Thompson with Thompson Research. Please proceed..

Thanks very much. And I appreciate that you are limited in what you can comment on Tectum. That said, in the past, when you were talking a little bit about guidance, you previously said that you expect Americas to contribute $32 million to $33 million, and Tectum around $4 million, that's what they contributed last year, and International, $1 million.

Has this contribution changed, particularly, since you pointed it out with your adjusted guidance? And along with that, could you give us a better understanding how rising inflation may play into your EBITDA guidance range? Thank you..

Yeah. So first of all, on the Tectum, no change. What we outlooked we're continuing to see, and we're very confident in how that's performing, as I said earlier. So no change there. What was the second question? So International....

Guidance, yeah..

Yeah. So, Kathryn, we did back in the original guidance show roughly $1 million for International, and that's clearly been outperforming. So I'd say that's now looking like $5 million..

And so with the delta, essentially with the EBITDA range being unchanged, I would assume, is the delta at the headwind more from inflation and higher SG&A? Just wanted to make sure I have the puts and takes of that EBITDA guidance, make sure I'm understanding it correctly..

Yeah, I think you're dead on. It's the inflation piece that's going to come in closer to the higher end as all building products companies are seeing some more headwinds on the inflation side, which is, again, back to Stephen's question, one of the justifications for the higher price increase..

Great. Thank you so much..

Yes. Thanks..

Thanks..

Thank you. Our next question will come from the line of Jason Marcus with JPMorgan. Please proceed..

Good morning. First question, just wanted to hit on the competitive environment that you're seeing right now in the U.S. in the ceiling tile business. And I think we heard last week from your major competitor that some price competition has ramped up a little bit.

But it looks like you guys are still continuing to get positive like-for-like pricing, which is great. Just wanted to see if you could run through your different product lines and working from the basic commodity product to the more premium product and just give us the dynamics you're seeing from a competitive pricing perspective..

Yes. So – hi, Jason. Yeah. The competitive environment is very similar to how I described it in the first quarter. It continues to be competitive. It was very competitive last year, it's been competitive actually for as long as I've been running the business, it's been very competitive. And it just continues to be competitive.

And really going through the segments, it's competitive across all of the product platforms. That's not anything different than what we've seen in the past. And I expect it to be as competitive as it is today going forward. But, as you alluded to, we're being very successful in selling value to our customers, we're getting paid for that value.

And we continue to be committed to driving positive like-for-like pricing across the entire portfolio as we did it again in the second quarter. So I'd say the competitive environment is tough. It's always been tough, and it will continue to be tough. And we're ready to win in that environment..

Okay. Great. And then, in the Americas, I think the margin showed some nice upside relative to what we were looking for, and I think it maybe came in a bit better than what you had pointed to when you spoke about what the quarter might look like in early June.

Just wanted to see what the primary sources of upside relative to your expectations a couple of months ago were..

Well, I think the drivers, as we stated, were clearly positive AUV, so better mix and better like-for-like pricing. We had good productivity and execution in our plants. And our teams did a really good job in controlling SG&A. So I think those are the three primary drivers that delivered the nice expansion.

And again, I wouldn't say it was a surprise for us, as you alluded to, but it came in very nicely. Thank you..

Okay..

Thank you. Our next question will come from the line of Mike Wood with Nomura Investment. Please proceed..

Hi. Thanks for taking my question. Maybe first question just on products. Curious when you launched the sustained product and what your early trends are there.

And if you can provide any color in terms of the growth rate you're seeing in the total acoustics line?.

Yeah, Mike. Good morning to you. Both of those platforms are, again, as I said in my statements, the adoption rate in the architectural community to these two platforms has been faster than any other product platforms that we've launched.

Total acoustics is – again, I'm not going to break out the exact growth rate, but we're finding architects changing specifications that they've already completed to a total acoustics product specification.

So it speaks a lot to, I think, how we're making it very simple for architects to specify acoustical performance with both dimensions in the same product. So that continues to gain traction and we're very pleased with that. And again, that's driving at the high-end of the portfolio a richer mix for us. Now the Sustain....

Great..

The Sustain, Mike, just to complete your question there, it's fairly new in the marketplace, but I can tell you, we have well into double-digit specification work that they're requiring a sustained solution in. And again, we're within just a few weeks of launching this. It's off the charts positive that – the response from the architects.

So we're going to continue to drive this forward. I think the architects are going to continue to pull it. And we're very excited about both of those platforms driving growth at the high-end of the portfolio again. Supporting our AUV and mix-up value driver..

That's good to hear.

And also, on the WAVE JV, with the pricing actions that you have in there to-date, have you recouped the steel inflation? Will we see that flatten out by third quarter in terms of price cost within WAVE?.

Yeah, I'll remind everybody. In our second quarter of last year, we had an all-time record quarter in our WAVE joint venture in terms of profitability. We had the lowest steel prices and we were holding on to market pricing. That created a – just really a perfect storm of margin spread there.

So when I look at our performance in the second quarter, I'm very pleased that we were able to get back to pretty close to flat margins against, again, a record quarter while we're digesting higher price – higher cost deal.

So our May price increase, as you know, we went out with a price increase in May, and reflection to the higher steel costs and the realization that we're getting there is very encouraging.

So although we didn't get back to full margin expansion in the quarter, I believe in the second half, we'll get back to – with this price increase in place, we'll get back to expanding margins in that business again..

Thank you..

You're welcome, Mike. Thanks..

Thank you. Our next question will come from the line of Scott Rednor with Zelman & Associates. Please proceed..

Hi. Good morning..

Good morning..

Good morning..

Question on the manufacturing input cost side, obviously, very nice improvement from last quarter when it was a headwind in 1Q and a benefit in this quarter.

Is any of that related to the sourcing change and just so you guys getting that ramped up here in 2Q where it was only partially in effect in 1Q? Or is there something else we should consider adds to that benefit in the quarter?.

Well, it's true, we did point to in our first quarter comments where we had some one-time start-up expenses for our sourcing changes both here in the Americas as well as in Europe. And so those are behind us now. And we're up and running. And so that was part of the story. But our plants ran better in the second quarter.

They initiated productivity programs and executed very well on those in the second quarter. So I think it was a combination of those two things that I think creates some nice momentum going into the second half..

Great. And then, on the Grand Central Station project that you guys alluded to with the press release last quarter, I know that some of that's been delayed, just the overall project.

But when's a realistic time that you guys think that will start impacting the P&L? And can you maybe give us some more color as to how impactful that could be for your business?.

Yeah. It's a great project. It's a very sizable project. It's obviously iconic.

And I highlighted this project in the first quarter, not because we highlight projects that we win frequently, but certainly I wanted to highlight this one for one point, and that is the capabilities that Armstrong has developed over the last two or three years has allowed us to not only participate in the Grand Central Station project but win it.

And that speaks to the capabilities that we're developing to participate in this expanded market of total ceilings and being a total ceilings solution provider. And so it's that type of project that's, I think, demonstrating the capabilities that Armstrong is developing.

And as I talked about in the first quarter, the real impact of that won't be until the first quarter of 2018. And from our vantage point, it seems to be right on track for us to deliver on – start to deliver those products in the first quarter of 2018. So everything's on track and we're executing against that schedule..

Thank you. Our next question will come from the line of Nishu Sood with Deutsche Bank. Please proceed..

Thank you. So in the first quarter, you had a really strong Americas, U.S. volume number. It looks to have backed off a little bit in the second quarter. Clearly, you had strong comps in both quarters.

How are you thinking about that heading into the back half of the year? Obviously, growth can be quite choppy from quarter to quarter, but the comps do get quite a bit easier, and you haven't taken your Americas volumes assumptions up.

So I was just wondering, are you thinking about the somewhat slowdown pace in 2Q as extending into second half? Or how should we think about that?.

Yeah. How we think about it is what we saw in the second quarter with the growth at the high-end of the portfolio with Architectural Specialties, a double-digit growth. It's pretty much in line with what we expected and what we expect to happen in the second half. So the comps, as you say, Nishu, do get a little bit easier in the second half.

But, overall, I think what we see in the marketplace in the second quarter lines up with what we expect to see in the second half..

Got it. Okay. Great. And Architectural Specialties, just a bigger picture question. Obviously, you've grown that business nicely. It's, I think, about 15%, 16% of sales last year.

How should we think about that mix progressing over time? Since that seems to be where the growth is, would you ever consider splitting it out as a division? Or how should we think about it growing in the next few years?.

Well, I think, as we've stated before, Nishu, this is a double-digit growth segment and product category for us overall.

I think, again, it's a lot less about what the market is doing, it's about us penetrating and participating more broadly in some of these spaces where we haven't played before, with the broad portfolio that we've built in Architectural Specialties. So the way to think about this is that we expect this to grow double digits for several years to come..

Okay. Thank you..

You're welcome..

Thank you. Our next question will come from the line of John Lovallo with Bank of America. Please proceed..

Hi, guys. Thanks for taking my questions as well. The first question, and I know you don't want to get too specific about Tectum.

But is it reasonable to assume that in the Americas, excluding Tectum, that volume was actually down in the quarter year-over-year?.

Again, Canada, Latin America, and the Big Box as we talked about early were all headwinds in the quarter in terms of volume growth. The U.S. business, overall volumes were fairly flattish overall.

But, again, as expected with the new construction part of the market growing, and again, against tough comps in the second quarter last year, which had very broad-based volume growth.

So again, we're pleased with the volumes that we saw in the second quarter, given the tough comps that we had, with higher volumes at the high-end of the market and Architectural Specialties growing double digits. So I would say that's again in line with what we expected in the second quarter..

Okay. Thank you.

And then, what is your exposure to OCC or waste paper? And is there any way you can quantify the impact in the quarter there?.

Yeah.

You want to take that, Brian?.

Yeah, sure. So we don't use OCC in our process. We do use waste paper. We are seeing inflation like many others, but not quite to the same extent. And we don't break down exactly how much that was a headwind for us.

But clearly, we're seeing some visible inflation, and as I mentioned to Kathryn, that's one of the offsets, I would say, in our guidance of why we held EBITDA where it was, and obviously, we just announced and supported a 10% price increase on our Americas tile business..

Okay. Thanks, guys..

Thanks..

Yep..

Thank you. Our next question will come from line of Bob Wetenhall with RBC. Please proceed..

Gentlemen, good morning. Very nice quarter..

Hey, Bob. Thank you..

Just want to understand, and I want to get kind of specific, is Architectural Specialties, which is growing double-digit pace, cannibalizing the core ceiling tile business in North America? Because I understand you guys gave some great detail on what's going on between Big Box and geographically in North America, but you're getting tons of growth out of this smaller-sized business.

And it seems like the core business is down low single-digits. Obviously, that's still an extremely profitable business.

Is part of what's going on with Armstrong, and I'm not trying to be just about this quarter, but picture, that the high-end business of Architectural Specialties growing so fast it's just eating into the core business? Or is that not the right way to think about it?.

Yeah. That's a good question. It's not the right way to think about it, because Architectural Specialties products are going into different spaces in commercial buildings. It's not going into the spaces of traditional mineral fiber, which is why this is an exciting growth platform for us.

As I said, we are playing in more spaces in a commercial building that require these Architectural Specialty products because we've expanded our product portfolio and capability there as well as our design capability. So it's not cannibalizing mineral fiber.

It's in addition to mineral fiber and allow us to participate in a broader base of spaces within commercial building. So thanks for the question. I think it's a great clarification..

Yeah. Thank you. And that's helpful to understand. Also, too, just kind of on the same train of thought, can you talk to us what is real like-for-like pricing, which seems like it's doing well? And you guys have some price momentum, and the way you're reporting it, it's tough to understand.

Is that because there is such a big mix shift up towards Architectural Specialties versus what like-for-like pricing is? How can we get an understanding? Or is that not the right question overall just because the way you go to market, whether it's patch and match on the R&R side, or newbuild commercial? Is that no longer an applicable question, because each job has its own unique characteristics, so we're kind of not looking at it, or thinking about it the right way?.

Yeah. Let me start, and I'll ask Brian to fill in here. But Brian mentioned this earlier, Architectural Specialties is in volume, it's not in mix, and it's not contributing to like-for-like pricing.

Our like-for-like pricing is measured on our mineral fiber – core mineral fiber products only, because we understand that's the important value driver here. So that's one point of clarification.

We don't break out like-for-like pricing versus mix as those can shift quarter to quarter, but we had positive – again, greater positive like-for-like pricing in the quarter, and we also had a very high positive mix in the quarter as well, contributing to the strong top line that you saw.

Brian, do you want any color commentary to that?.

Well, I think, Bob, I'd just add that the high end of total ceiling spaces is that Architectural Specialties metals and wood when we look at – as we've mentioned it in volume. As we look at mineral fiber, there's clearly a segmentation even below that product ranges.

And there's a high end within mineral fiber, where total acoustics sustain play a part. So there's a good distinction around how folks define that high end..

Got it. And, Brian, if I could just sneak one into you, you're raising revenue guidance for the year, you're keeping your EBITDA outlook consistent with what it was, and you're raising free cash flow as well.

Can you talk about how much of the rev raise is due to FX, and just explain why you're raising free cash flow but EBITDA stays constant? Thanks and good luck..

Yeah. Thanks, Bob. So as you look at the details of what we changed in our guidance, it's really the international growth, which has a lower fall-through rate, which is why we kept the EBITDA unchanged. On the cash guidance, we are coming in at the lower end of our CapEx spending, and also in the lower end of our cash tax rates.

So they're the two key drivers for the increase in free cash flow outlook..

Sounds good. Good luck..

Okay. Thanks, Bob..

Thanks..

Thank you. Our next question will come from the line of Keith Hughes with SunTrust. Please proceed..

Thank you. A question on WAVE, when Worthington put out their numbers, they showed a pretty significant decline in WAVE. Of course, their calendar is different than yours, which would imply June was a big month. You talked about some pricing in June.

Could you just talk about the differences there and how the volume – I know there's price increase, but how the volume from the grid product is doing versus tile?.

Yeah. The volume is actually doing very well. It's very consistent with tile. And so I think there's a little bit of period noise in there, because we had the price increase last year that pulled some volume forward and did some different comparisons in the quarter.

But, overall, again, I'm very pleased, Keith, with the volume and the pricing that we're starting to read through from our May price increases in the WAVE business, and the overall profitability of that business. So, as I said, we'll catch up in the second half as volumes hang in there and our price realization continues to build..

Okay. Thank you..

Thank you. Our next question will come from the line of Will Randow with Citigroup. Please proceed..

Hey. Good morning, and congrats on the progress..

Thank you, Will..

Thanks, Will..

In terms of leverage, you guys historically have been comfortable with a couple of hundred million dollars more on a net-debt-to-EBITDA basis.

How are you thinking about leverage in the capital structure, as well as returning cash to shareholders?.

Yeah. Well, this is Brian. We're pretty comfortable with the 2 times to 3 times leverage. We continue to focus on our capital allocation priorities of investing back in the business, accelerating our M&A to support our strategic initiatives, and completing our share repurchase. So we'll continue to be focused on those priorities..

And I guess, a follow-up from the past, in terms of the Russia plant and capacity utilization, as well as profitability, can you give us an update there?.

Yeah, I'll let you add some color, Brian, but just overall, the Russia plant continues to build out its capability and the volume there has been very strong throughout the year so far. We've added a second crew in Russia and continue to execute very well. I'm very proud of that team how that's ramped up in a very tough economic environment.

So as we add more volume and capacity to that plant in the ramp, it gains in its profitability as well.

Brian, I don't know if you want to add any more color to that?.

No, I'd say we generally don't break out country-specific stuff, but I know we've talked this topic before. So Russia will be both positive on the EBITDA and a cash flow basis this full year..

Great. Thank you..

Okay. Thank you..

Thank you. Our next question will come from the line of Garik Shmois with Longbow Research. Please proceed..

Hi. Thank you. Just wanted to ask about mix in retail. I think if we look back to the third quarter of last year, you called out an air pocket, so presumably, you have some fairly easy comparisons. You talked about point of sales being very good. In the second quarter, it was impacted obviously by inventory timing.

But if sales accelerate in retail in the third quarter presumably in the back half of the year, would that have any impact at all to overall mix?.

Yeah, it's a question of degrees, right? How big would the spike have to be to influence mix? It would have to be a pretty big spike, given the size of the U.S. Commercial business relative to the retail business. So we're not anticipating that. But the mix progress that we have in our U.S.

Commercial business continues to be very strong as we're growing at the high-end faster than the rest of the market. And as long as that continues, as it has for several years, it should be offsetting anything that's not an extraordinary spike in volume in the Big Box..

Okay. Thanks. And then, just a follow-up question is last week a competitor talked about staffing up in Architectural Specialties. You were kind enough to answer a question regarding the competitive landscape by segment.

But I'm wondering if you can talk about maybe the medium-term outlook in Architectural if the competitive environment does change, how well do you feel that you're protected against that?.

Well, in Architectural Specialties, there's a unique capability required, not only the product and the manufacturing capability of those types of products, but in the design capability. Anybody that wants to participate needs to make those investments and develop those capabilities over time.

Armstrong didn't develop those yesterday or last year, it's been a four-, five-year concerted effort to build these capabilities as we were not playing in this segment holistically four, five years ago. So I think you have to give appreciation to the capability required to win jobs and participate in this category.

Our competitors continue to be non-traditional mineral fiber competitors for the most part who are in that particular space and have been for a while and are very good competitors. And so we're continuing to improve our capabilities there to be more competitive.

And again, I love the traction that we're getting and the affirmation that we're getting from the specification community on Armstrong's capabilities to really handle any space within their commercial buildings that brings a lot of productivity to them. So I'm very pleased with our progress. We're going to continue to push forward with this..

Thank you..

You're welcome. Thank you..

Thank you. Our next question will come from the line of Ken Zener with KeyBanc. Please proceed..

Good morning, all..

Hey, Ken..

Hey, Ken..

So I'm going to ask two questions, if you don't mind. One of them just kind of – I think it's already been summarized, which is with Tectum, that's going through your volume, Architectural Specialties is going through volume. If Tectum was kind of 2.5 points, 3 points last quarter, I assume a similar rate this quarter.

Architectural Specialties, 15%-plus of sales growing double-digit. If you add those two up, that's kind of like 5%, running through volume. So it would imply that your core volume was down directionally like some others might have talked about.

However, and this is I think the key point that I don't understand, because Architectural Specialties is growing so nicely and it appears that you have a very early and perhaps defensible lead there.

The pricing that we're seeing on the core side, is that because you're geared so much to the higher end, given your market share on those traditional tiles? I'm just trying to understand if 80% of your profits are flowing through that really that higher-end as you would call it tile as opposed to the commodity where it's really vicious and not a lot of EBIT?.

Okay. Ken. Let me take that question, because it's very important understand. We have positive like-for-like pricing across the mineral fiber category of products..

Price points?.

Price points. It's like for positive like-for-like pricing. So positive pricing, pure pricing in the mineral fiber categories. It's not influenced by Architectural Specialties, mix or pricing..

Correct..

All right?.

All right..

So I want to make sure that's clear. At the high-end, we're getting additional not only price there but volume growth, which is contributing, obviously, to the profitability.

But we are getting like-for-like pricing across the portfolio, which is contributing – again, that's the bigger base, right? That's the bigger base of business, that is contributing very nicely to profitability, and will continue to be.

Is that clear?.

Yeah, it is. And I understand how Architectural Specialties is obviously going up in the volume side, but it's interesting – and it was kind of not before your time, but I mean, within your timeframe, the idea was that volume perhaps would recover in the U.S., tied to education, state spending, kind of a more commoditized product.

So you could actually see some net dilution from that volume growth from those categories because you're not the high-end office or retail space.

Is that still a fair roadmap to think about as how pricing might happen? Or is it just that, look, wherever the volume comes from, we're taking price like-for-like everywhere so you won't have that pricing dilution?.

That's correct. We take – we raise price – our announced price increases in the marketplace, they are broad-based and across to all product platforms and categories..

Thank you..

You're welcome..

Thank you. Our next question will come from line with Jim Barrett with C.L. King & Associates. Please proceed..

Good morning, Vic, Brian, Kristy..

Good morning..

Good morning, Jim..

Vic, in EMEA, you highlighted [technical difficulty] (51:38) in the Middle East, how is Continental Europe performing and specifically how is the UK performing considering the Brexit issue?.

Yeah. We have positive growth in UK. We have positive growth across really in most of our markets. The big drivers were – for EMEA were the Middle East, we had a very strong shipments quarter in the Middle East and Russia, again, was up double digits. So we had nice – emerging markets in the EMEA, the big drivers there.

But we had nice low-single-digit mid-single-digit growth across the rest of the regions..

Thank you. And, Brian, a question for you. You mentioned there was not a special dividend from WAVE this quarter.

Is there any reason why that joint venture is not even reasonably leveraged up to return cash to its owners other than its inherent cyclicality?.

No, I think, Jim, both parents look at that leverage on a consistent basis. The special dividend we highlighted that didn't repeat was really an overseas dividend from France that didn't repeat this quarter. So I think the WAVE JV continue to deliver, as you know, it's a 45% EBITDA margin business and generates a ton of cash for us.

So we don't expect any change in the flow of cash from that JV..

Okay. Thank you, both..

Great. Thanks, Jim..

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. So it's my pleasure to hand the conference back over to Mr. Vic Grizzle, Chief Executive Officer, for some closing comments or remarks.

Sir?.

Great. Yeah. Thank you very much, and thank you, everybody, for joining the call today. Again, very pleased with the quarter.

Our employees around the world are executing very well and are excited about the future of this business, and we do carry some nice momentum into the second half of the year, and we'll look forward to updating you after our third quarter. Thank you..

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may all disconnect. Everybody, have a wonderful day..