Thomas Waters - Investor Relations Vic Grizzle - Chief Executive Officer Brian MacNeal - Chief Financial Officer.

Nishu Sood - Deutsche Bank Securities Inc.

Peter Galbo - Bank of America Merrill Lynch Michael Wood - Nomura Instinet Stephen Kim - Evercore ISI Keith Hughes - SunTrust Robinson Humphrey Michael Rehaut - JPMorgan Kenneth Zener - KeyBanc Capital Markets Garik Shmois - Longbow Research Philip Ng - Jefferies LLC Kathryn Thompson - Thompson Research Group Scott Rednor - Zelman & Associates.

Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Armstrong World Industries’ Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call may be recorded.

I would now like to introduce your host for today’s conference, Mr. Tom Waters. Sir, you may begin..

Thanks, Skyler. 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, Tom, and good morning, everyone. It’s good to be with you today to review the start of 2018 and update you on our outlook for the year. Overall, first quarter financial results were largely in line with our expectations with some moving parts within the segments, primarily due to the impact of weather.

First quarter revenue of $227 million was up 3% versus a strong first quarter in 2017, which benefited from a Big Box load-in and an extra shipping day. Revenues were also impacted by severe weather, as those of you on the East Coast can truly appreciate.

Notwithstanding the weather, underlying market conditions are improving as expected, and our sales guidance for the year is unchanged. In the Architectural Specialties segment, sales and earnings are off to a great start with revenue up 22%.

It’s our second consecutive quarter of more than 20% organic growth and margins expanded almost 700 basis points. The strategic investments we've been making over the last several years to expand our portfolio and build our capability in design services is paying off.

We are increasingly involved earlier in the design process and are more capable to deliver the most innovative solutions to architects, designers, and building owners. Our portfolio, our reputation, and our ability to service complex projects is driving meaningful share gains in this segment.

Our distribution partners are also investing in this growth initiative with us, extending our coverage and service capabilities. All of this has us in a position with the strongest pipeline to date. In addition, margin expansion from sales growth and SG&A leverage has been significant and will continue.

This is going to be a strong year for the Architectural Specialties business. Now turning to the Mineral Fiber segment, sales were up slightly year-over-year. Favorable average unit value, or AUV, resulted in over $10 million of sales growth with both mix and like-for-like pricing improving.

Sales of our higher-end products, including the newer Total Acoustics and Sustain families, continue to outpace more standard products and drove improved mix. Volumes were impacted by the three factors I mentioned earlier.

The Big Box base period load-in that did not repeat one less shipping day and the adverse weather conditions which combined led to a $10 million headwind in the quarter. Now however, we've seen sales and volumes accelerate in April which has been aided by the delayed weather-related volume from the first quarter.

And as of today, year-to-date Mineral Fiber volume is positive for the year, right where we expect it to be. Given where we are year-to-date and the underlying improving market conditions, we remain confident in our outlook for Mineral Fiber sales for the year.

Now of note in the quarter, we experienced strong growth in Latin America which had been declining for several quarters. And sales into Puerto Rico were particularly strong. Adjusted EBITDA in the quarter of $79 million was up 5% from Q1 2017 and margins expanded despite inflationary pressures.

Architectural Specialties sales along with AUV gains, manufacturing performance and solid SG&A management more than offset the volume declines in Mineral Fiber and inflation, especially in steel. The WAVE business is responding to higher steel costs and has acknowledged three price increases already this year.

These pricing actions are all well supported in the market and have gained traction throughout the quarter. We expect WAVE’s results to further reflect these increases in the second quarter and we remain confident that WAVE will deliver price greater than inflation for the full-year.

Now on our last call, I mentioned that I was looking forward to talking more about improved manufacturing performance in 2018, and our plans did not disappoint in the first quarter. Despite challenges and expenses associated with cold weather, they executed on all of our key manufacturing metrics.

I am pleased with their progress today and I expect this performance to continue. The first quarter also saw the ramp up of our automated flexible design line in Marietta, and their performance is on plan. This is truly going to be an exciting capability around specifiable features for the ceilings and walls market.

We continue to make progress in closing our St. Helens, Oregon facility, where production is scheduled to stop in late May. The total facility will be shut in the third quarter when our new distribution center in Phoenix is up and running.

As we mentioned on our last call, that this plant closure, combined with our plan to rightsize our G&A profile to reflect an Americas-only business, would yield cost savings in the range of $15 million to $20 million by the end of 2019.

Since then, we've identified and initiated additional actions and we are now confident that we will achieve the high end of the savings range. The sale of our EMEA and Pacific Rim businesses remains on schedule. And I am pleased to report that these businesses are performing very well.

We expect the necessary regulatory approvals will be granted in the third quarter and we continue to expect to realize $215 million net after tax cash in connection with the transaction and to return a majority of this cash to shareholders. Now with that, I'll turn it over to Brian for more details on our financial results. Brian..

Thanks, Vic. Good morning to everyone on the call. Today, I’ll be reviewing our first quarter 2018 results. Before we go into the financials as a friendly reminder, I’ll be referring to the slides available on our website. Slide 3 details our basis of presentation.

You will note on Slide 3 that we will no longer be presenting currency adjusted sales as movements in the Canadian dollar should not be material to our results. Turning to Slide 4, for our first quarter results, sales of $227 million were up 3% from first quarter 2017. Adjusted EBITDA increased 5% and margins expanded.

Adjusted diluted earnings per share were up 6% due to higher earnings and a lower share count. In the first quarter of 2018, we repurchased 1.2 million shares for $70 million. Since inception of our repurchase program in the third quarter of 2016, we have bought back 4.1 million shares for $194 million.

Adjusted free cash flow improved by $27 million over the prior year quarter due primarily to the receipt of cash from the insurance settlements we reached in the second half of 2017. Net debt increased by $35 million.

Turning now to Slide 5, adjusted EBITDA increased $4 million as improved AUV, SG&A leverage and manufacturing productivity more than offset headwinds from Mineral Fiber volume declines, inflation and lower earnings from WAVE.

WAVE equity earnings were lower this quarter due to a higher steel cost as well as the revised support cost arrangement we announced in the third quarter of 2017. Depreciation was higher in the quarter as a result of our recent capital investments.

Slide 6 shows our change in adjusted free cash flow, which grew $27 million compared to the prior year quarter. The main factor impacting cash flow in the quarter is receipt of $26 million of net insurance settlement proceeds, which impact that working capital.

Capital expenditures were lower as we've returned to a more normalized level of capital investment. Slide 7 begins our segment reporting. In a quarter, Mineral Fiber sales group 0.5% as 5% AUV gains more than offset volume declines driven by the three factors Vic mentioned, weather, the shipping day calendar and the Big Box load-in in the prior year.

EBITDA was flat as AUV gains and SG&A savings offset the volume declines and softer results at WAVE. WAVE has announced three price increases already this year. We've seen prices over inflation accelerate through the quarter and expect price to be greater than inflation for the full-year.

Moving to our Architectural Specialties segment on Slide 8, quarterly sales increased 22%. As you remember, we closed on the Tectum acquisition in January 12, 2017. So this growth is almost entirely organic in nature.

We had strong sales performance across all substrates with all product forms up in the 20% range including Metal, Wood, and Tectum products. Armstrong's broad specialty ceilings and walls portfolio coupled with our superior service and support capabilities is allowing us to increased penetration in this market.

Adjusted EBITDA in AS was up 70% and margins expanded 680 basis points and what is historically, our latest sales quarter. This quarter again demonstrate not only the topline potential of the Architectural Specialties business. But its ability to meaningfully help us grow the bottom line and expand segment margins to 24%.

Slide 9, updates our 2018 guidance. As Vic mentioned, our revenue guidance is unchanged from our initial guidance. Our adjusted EBITDA guidance is also unchanged as is cash flow which is up 20% to 30% versus 2017.

We are taking the bottom and top of our adjusted EPS ranges up $0.07 as our share repurchase activity is driving a lower expected share count for the year. We now anticipate EPS growth of 19% to 27%. Note that 2017 adjusted EBITDA has been increased to $319 from the previously reported $317 million with year-end results for consistent comparability.

This change is a result of an accounting standards change, which was effective January 1, 2018 requiring all components of our supplemental pension and post-retirement benefit plans excluding service costs to be recorded below operating income. This change only impacts the Mineral Fiber segment and has no other impact on 2017 results.

To close, our net leverage as of quarter end remained near the low end of our targeted range of two to three times adjusted EBITDA. And we have plenty of liquidity to support our capital allocation priorities, including innovation, share repurchase and M&A. With that, I'll turn it back to Vic..

Thanks Brian. All in all a good start to 2018 a year in which we are transitioning to an Americas-focused ceilings and wall company. As anticipated, we are seeing solid underlying market activity and we had another quarter where we expanded our EBITDA margins even in the face of inflationary pressures.

Our focus has continued on introducing more and more innovative and value added products for our customers. This allows us to continue a positive product mix of higher priced products to help drive growth and margins. As we move forward, we will continue to execute on our multi-pronged plan to grow sales and profits.

We are revitalizing the Mineral Fiber category with Total Acoustics, Sustain and now our enhanced flexible design range of products to continue to drive improved AUVs. The Architectural Specialties business is hitting on all cylinders to drive volume growth and expand margins.

Our manufacturing team is pivoted from a capital investment focus over the past several years and is now laser focused on driving productivity. We are taking steps to rightsize the G&A cost structure and drive savings and WAVE is taking the actions necessary to expand margins in this inflationary environment.

I want to directly address inflation, which is an obvious concern in the market. We are certainly seeing it in our businesses, particularly in steel and freight. However, we are committed to recapturing these costs through price increases, and I remind you that we have done this every year for the past decade.

This pricing discipline improving Mineral Fiber volumes and a terrific growth platform in Architectural Specialties gives us confidence that we will deliver a strong 2018. So thank you for your attention. And with that, I'll open it up for questions..

[Operator Instructions] Our first question comes from Nishu Sood with Deutsche Bank. Your line is now open..

Thank you. I first wanted to start on the Mineral Fiber volumes. So Vic, you mentioned that April has been strong enough such that the year-to-date volumes in Mineral Fiber’s are positive year-over-year.

That sounds like – and again, seasonality probably plays a role here, but it looks like your volumes were down kind of mid single-digits in 1Q overall. So that sounds like a pretty significant surge.

Can you just walk us through that? Obviously, there's often times lumpiness in Mineral Fiber volumes depending on projects, maybe January and February, such low volume months that's not as impressive as it sounds.

But if you could just kind of walk us through that the mechanics on the volumes in place?.

Yes. As you know, in most weather-related impacts, they are delayed – it's delayed demand, right it's not loss demand. And certainly in the areas where we saw the weather impact mainly in the month of March, Nishu we saw those replenishment orders come back in April in those same areas. So we can link it pretty well to the weather-related impact.

And the volume is up again well beyond seasonalities. And even when you adjust April for the two extra shipping days that we are seeing in April, the Volume is up in a meaningful way, obviously to offset the shortfall in the first quarter in the month of April alone. So again, I think we're exactly where we expected to be in terms of volume.

It's right within the guidance that we've laid out for the whole year. And again, that's against the backdrop that was a pretty strong first quarter. So again, we still feel very confident where we are year-to-date, and again, getting on the other side of the weather impact..

Got it, and what the weather effect since it sounds like it was obviously pretty noticeable, wouldn’t it have affected your unit mix in the first quarter, in other words would it have driven AUV up by depressing more kind of patch and match business or would it have depressed it because it delayed kind of more new construction projects?.

No, we didn't notice a difference across the categories. It was – when you can't ship – you can't ship whether it's a commodity or standard type product versus a custom product. You just can't ship. So it was across all the categories we felt the weather impact. But the mix was very strong.

As you noticed in the first quarter, we continue to win at the high-end of the market and with total Acoustics and our sustained products getting them specified and flowing in the market. We had really strong growth at the high-end of our product portfolio..

Got it. And one real quick clarification on the WAVE price catching up or I'm sorry price exceeding steel cost increases by the end of the year.

Does that mean you expect that for 4Q by itself when we get – as we get to the end of the year or will the price gains be strong enough that the entire year will see price exceeding steel - cost increases for WAVE for 2018 versus 2017?.

Yes, good question. We're already seeing the price catch up to inflation. Actually throughout the first quarter, as I mentioned WAVE is announced three price increases. Two are already implemented. And we started to see traction already through the first quarter, in fact in the month of March, we covered inflation with pricing.

So I like the trend line we're on. We should see better and better price with the additional price increase coming in May to make sure that we're covering and price inflation for the rest of the year. And yes, I do expect that total price realization should exceed total steel inflation for the year..

Thank you..

Thank you, Nishu..

Our next question comes from John Lovallo with Bank of America. Your line is now open..

Hey, guys. It’s actually Pete Galbo for John. Thanks for taking the question. All right, I guess the first question, is there any further depreciation step up expected into further St.

Helens plant that we should think about of the second quarter or is that now kind of fully accelerated at this point?.

Yes, we'll continue to see some accelerate depreciation roughly $4 million there. We took some accelerated depreciation in Q4 and then the $7.7 million we called out for Q1 and there will be a better another 4 on Q2..

Should anticipate in Q3 and Q4 then or continue a little bit end of the Q3?.

Not anticipate..

Okay.

And I guess just thinking about the Architectural Specialties business, obviously very strong volume there on an organic basis, just trying to think about how we should about the cadence of growth over the rest of the year just given you're – going to go up against much tougher comps in the back half?.

Yes, I think the way to think about it – is the way we look at this, we track a new business pipeline given that the Architectural Specialties business is quite a project intensive type business with very a little of a flow portion to the business.

So we have pretty good visibility in the pipeline and our pipeline is up meaningfully and supports a really strong second half of the year as well as the first half of the year. So I expect us to continue to drive solid double-digit topline growth for the remainder of the year and deliver on the outlook that we have for Architectural Specialties.

So again I'm really pleased with the margin expansion along with the topline growth in that businesses. We just fundamentally get better at serving this market..

Thanks guys..

Yes..

Your next question comes from Michael Wood with Nomura Instinet. Your line is now open..

Hi, good morning. Thanks for taking my question. You cited the year-to-date volumes in Mineral Fiber, it sounds like great middle of your guidance despite the tougher comps in a quarter. That's good to hear.

In the past you have often got off to a strong start and then is stated curious what you're hearing from customers with feedback on that Mineral Fiber outlook, particularly remodelling whether or not the strength is sustainable here?.

Yes. So the short answer, Mike is that we believe it's sustainable and we're going to have a solid year in Mineral Fiber. I spent a lot of time personally out in the marketplace in the first quarter, seeing architects and contractors. And it's a noticeable town in the marketplace right now with their backlogs and their level of activity.

And it seems to be broadened – the base seems to be broadening out in terms of the verticals as well, which I think gives as a good feeling about the remodel part of the business. Again, the new construction part of that business is pretty visible and we're tracking it very closely.

But I would just say, again the sentiment in the marketplace and the activity in the marketplace is stronger than it was last year and it's as we expected it to be at this time of the year..

Okay, great. And then with the retail load-in, I recall you had a relatively easy mix comp this quarter. I'm curious just overall where the price/mix and the incrementals are tracking versus your expectations year-to-date since you gave us the volume color.

And is that 5% year-over-year price/mix, should that step back a little bit in 2Q as that retail load-in effect fades?.

Brian, you want to take that?.

Sure. I think were happy with what we saw in the AUV performance plus 5%. The retail piece of that is much of a headwind quite frankly and so we'll continue to see AUVs in the remaining quarters consistent with our expectations..

Okay. Thank you..

Thanks Mike..

Our next question is from Stephen Kim with ISI. Your line is now open..

Thanks very much. Sorry about that guys, I actually hung up I think..

Okay..

I wanted to follow-up if I could on the acquisition pipeline that you see out there in the marketplace.

In particular, we have been – we have heard that smaller companies really benefit from being aligned with your distribution network in part because of the backing that you can provide with being such a large company with a lot long reputation in the market.

And so I was curious as to whether or not you were seeing the ability to apply those benefits more broadly into adjacent areas and if that's come through in some of your M&A conversation?.

The answer to that – Steve, the short answer is yes. And again, that's one of the premises I think to this particular part of our strategy is that these smaller scale companies do benefit from being attached to the go-to-market reaching capability that we have, not only geographically, but into the architectural offices.

And our distribution partners have been very helpful in covering the smaller projects as well as the big projects, but the smaller projects in addition and to – and provide a service profile that really is top notch.

So I think it's the combination of those things that really take a business like Tectum, which is our only public example at this point to show how we can leverage and drive revenue synergies as well as bottom line productivity synergies, which we're seeing in that business.

So that is the premise of it and I think we've got one to demonstrate that for. Relative to the pipeline, I would tell you that I continue to be encouraged by the development of our pipeline. Some of the things that we've been working on for the last six months have moved up in the process and we're adding new companies and targets to the pipeline.

So I continued to be optimistic about the progress that I think we're going to make on the M&A front throughout 2018..

That's great. And then regarding Tectum, I believe when we had chatted previously, you had talked about the walls category is being one that could be addressed by Armstrong as well. And I think that – correct me if I'm wrong, but I believe, Tectum, those are demountable walls.

And was curious as to whether you had a preference for the demountable versus non-demountable if there's any important distinctions to draw within that category?.

Well, you're right, Stephen, around one point that Tectum does bring a wall substrate and a wall business as part of that overall acquisition. And we've learned a ton by being inside the tents with Tectum on walls and we're learning a lot more.

It's not a demountable wall and – per se, but it is a very nice wall substrate that provides the Acoustics and some of the abuse-resistant properties that are required in those types of wall applications. So again, we continue to learn more about this.

And in our conversations with the Architects, there is more and more of an opportunity for acoustics and other design aesthetics to move to the wall, and it just plays very nicely to the Armstrong’s strength. So more to come there, I think we're learning a lot and the Tectum acquisition gives us a nice platform to build off of..

Great. Thanks for that. And just one housekeeping item. Productivity, I think was $2 million in the quarter, I just want to confirm that.

And are you still looking for about $10 million a year?.

Yes. Stephen, this is Brian. So that's $2 million of productivity, but I would mention what we call it out is some headwinds in costs associated with weather. As you could imagine throughout the quarter, it was really cold here in the Northeast, and so some of our plants ran into some additional costs associated with that.

So the productivity number was slightly ahead of that that offset those costs and we fully expected to deliver at least 10 for the year..

Great. Thanks very much guys..

Thanks Stephen..

The next question comes from Keith Hughes with SunTrust. Your line is now open..

Thank you. We've talked a lot about steel inflation on the call.

Just wanted to get back to the traditional tiles, what kind of inflation are you saying there and how do you expect that to run in the next several quarters?.

Hey, Keith, this is Brian. So we ranged 2.5% to 3%. We're hitting that range in the first quarter and expect don't see anything that's going to give us concern that we won't stay within that range for the full-year..

And that’s independent of the steel situation of WAVE, is that correct?.

That’s correct. So as you know WAVE comes to our – we account for that through equity earnings. So it's not in our cost of goods sold. But yes, WAVE is having higher, and steel inflation for that and as Vic mentioned, we've got a path to exceed that steel cost through our pricing actions..

And I was a little unclear on the answer to one other question.

Do you think on a price cost, will WAVE be back on the positive side in the second are is it going to come more in the second half?.

But we're not breaking it out by quarter, Keith, but again, as I said in that and my answer was that we saw in March the progression of the realization of price to cover the amount of steel inflation we saw in March, and I expect that to continue. So that the full-year that we should be back on the positive side of price realization for inflation..

Okay. Final question, the buyer of your ceiling business in Europe has been embroiled in a hostile bid here.

Is there any indication that this has changed the sale of the – your business?.

Our project to sell our EMEA and Pacific Rim business is on track, the regulatory applications have all been filed, and we are making progress there. So no change around that project..

Okay. Thank you..

You’re welcome..

Your next question comes from Michael Rehaut with JPMorgan. Your line is now open..

Thanks. Good morning, everyone. The first question I just had was just trying to think a little bit big picture on the Architectural Specialties, and obviously, continues to be an interesting part of the story, exciting part of the story. And I apologize that this is something that you've kind of spoken to in the past.

But if you think out like two or three or four years, pick a number, do you guys have any kind of gold post or targets that you want to see that business achieve either from a sales, size type of perspective or also for – in terms of margins.

And on the margins itself, obviously, we saw great improvement there this quarter given the sales volume growth. So kind of – part of the question here is to the extent that you have a size in your sites over the next two or three years.

What could that mean from a margin standpoint as well?.

Yes, Michael it is an exciting part of our business. There's no question about it. It's got a lot of facets to it and we continue to explore more and more of those as we get into this. I mean I'll tell you I think that we have highlighted this before Michael.

But our level of penetration into this segment is quite different than the Mineral Fiber segment. Relative share positions for Armstrong in this category are relatively low. So there's lots of penetration and growth opportunity, consolidating the industry as we move forward. And so there's a long runway of that moving forward.

And so we're not putting as a stake in the ground out in the future other than we should be growing double-digit growth in this segment for many years to come to get to a higher level of concentration in this segment, irrespective of what the market is doing.

And that's kind of the – I think the guidelines we put out there and for the last several years, we're demonstrating nice solid double-digit growth in that segment and I expect that to continue over the next several years..

All right. And then I appreciate that and I guess and thinking about the cadence for the year, it appears that you reiterated – obviously you reiterated your full-year sales guidance and as part of that the 10% plus on the Architectural Specialties.

I think obviously as the comps get a bit tougher in the back half, is it implicit in that guidance that we shouldn't be expecting the back half of the year to show perhaps a sub 10% organic growth just as things even out or could there just be at the end of the day some upside to that guidance?.

Yes, we’re sticking to the guidance, Michael. And I think that what I did mention earlier is still approach to repeat here and that is our pipeline and our visibility in the segment is pretty good the pipeline is up nicely and we expect that it will support the double-digit growth that we've outlook in the second half of the year.

I will say as we've seen in the past based on timing of projects and this being a very project intensive segment. You can see some quarter-to-quarter volatility, but on the year, again we're sticking to the guide and we expect to really strong year in Architectural Specialties this year..

Okay, and then just one last one if I could.

On the – for Mineral Fiber in the margins being able to offset, freight and material cost inflation with productivity and I just want to make sure if I heard that right that it was about a $3 million gain in productivity that offset the similar amount of inflation and that you reiterated your $10 million goal for the years that right or I apologies if I don't have those numbers exactly?.

Hey, Michael, its Brian. So we reported out $2 million of productivity in our bridge and I mentioned that there's some headwinds there from cost, so we're on track to deliver our $10 million or more of productivity for the year..

Great. Thank you..

Thanks Michael..

Our next question comes from Ken Zener with KeyBanc. Your line is now open..

Good morning, everybody..

Good morning..

As I was looking through the Q, I wonder this is the first time – and I just looked at the K, and I don't think I missed it, but were you breaking out what's called a major customer group within each segment? Is there anything that we could or should look to read into your business since you've broken out you know the business by distribution, U.S.

home centers or conversely is there something we shouldn't be reading into now that we can see that as different channels by quarter?.

Hey Ken, its Brian. No that's new disclosure now required as part of that new revrec, I wouldn't look into it from any other different angle than what we've been talking about before, so no real change there. You can see the composition of both AS and Mineral Fiber by the various distribution points..

Interesting, and then I guess related to looking at data.

Is there any call out, so obviously had load-in part in the home centers, you talked about whether this quarter, but when we look at 2Q and 3Q is there anything – I know school didn't come through, education didn’t come through, last year’s as much as you thought for example? Is there anything that you would call out for 2Q or 3Q that just so we don't get – realizing your guidance is there, but drilling into your different verticals a little bit, is there anything that we should be sensitive to you? Thank you very much..

Thanks Ken. There is nothing out of the ordinary and consistent with what I talked about earlier which is the segment activity is as we expected, and it's broader base four out of the five verticals are in the positive territory first quarter versus first quarter last year which is supportive of the environment that we're out looking to.

And we don't expect and we don't guide to, but we don't expect any unusuals in the second or third quarter relative to that outlook..

Thank you..

Our next question comes from Garik Shmois with Longbow Research. Your line is now open..

Hi, thank you. I'm just wondering about just the pace of the SG&A savings you are taking the guidance to the upper end of the prior year $15 million to $20 million range.

How should we think about that layering in 2018 and 2019?.

Hey. Garik, this is Brian. So we communicated $15 million to $20 million over the two years, and we're going to commit at the higher end of that. And half of that will now occur in 2018.

Obviously, it's more back half loaded in Q3 and Q4, so we'll see a departure from our normal splits of EBITDA percent of year first half, second half given that pickup of call it roughly $10 million in the second half..

Okay, thanks. And then just on the Architectural Specialties margin improvements, recognizing that the comp is fairly easy from a year-ago, but the incremental margin plus the consolidated EBITDA margin of the segment was a step-up year-on-year.

Just how should we think about that moving forward both on incrementals and on margins just kind of a mid-20’s margin and EBITDA, a very good way to think about and again, on the incrementals any guide posts would be helpful?.

Yes. I'll take it, and then Brian you could add some color if you like. But Garik, I think the way to think about this is with the sales volume that we had we really got good leverage on the infrastructure cost that we have in the business, namely SG&A.

So as long as we continue to get these kinds of organic growth rates, we should see similar levels of SG&A leverage. And the other underlying part of this is we're just getting more efficient to how we run this part of the business and how we serve customers. And our teams the skill level is just elevating with every quarter that goes by.

So I expect our margins to continue to expand. And again, you're going to have quarter-to-quarter noise I think based on what's going on in the quarter relative to some of those projects. But I expect the performance of this business to continue to improve by the margin level. So I hope that answers your question Garik..

Okay. Thank you..

Our next question comes from Phil Ng with Jefferies. Your line is now open..

Hey guys. Appreciate you rating your EPS guidance in a tough backdrop, big part of that is buyback.

Just want to make sure is that a function of the buybacks you’ve done already or you’ve counting for some incremental buybacks over the course of the year? And as you look to return some cash back to shareholders via your proceeds from the divesture, will that be more gradual potentially or you could look at ASR?.

So Phil, this is Brian. I call it this way, we continue to be confident in our ability to generate 20% to 30% improvement in free cash flow year-over-year. And in the quarter as we call it out, we had a net benefit from insurance proceeds of roughly $26 million and we chose to return that to shareholders through our existing share repurchase program.

As we look out over the year, we don't provide guidance on share repurchase what will reflect in our EPS guide is what we've actually done and we repurchased a pretty significant amount there in Q1..

Got it. And I guess, just for Q1 volumes were little lighter in Mineral Fiber, do you guys call out a few things that makes a lot of sense. But I did notice that your price increase was a little earlier than your competitors by a month or so.

I don't know if you're holding the line on pricing had any impact on volumes and if that’s kind of normalized if there's any moving on share shipping or anything of that nature? Thanks..

Now we don't believe, so Phil. It was really, again, the three things that we outlined that impacted volume..

Got it, thanks a lot..

Okay, thank you..

Our next question comes from Kathryn Thompson with Thompson Research. Your line is now open..

Hi, thank you for taking my questions today.

First, on Architectural Specialties, how much of the segment growth was carryover from large projects from the prior quarter? If you could give more color on size of project bids because what we are seeing in our primary search is more projects that are $1 billion type size and we've seen in the past and it maybe too early for you to see this type of project there, but curious if you are seeing that – seeing larger projects in your pipeline? Thank you.

Kathryn, nearly everything that we shipped to in the first quarter is something that we were working on in 2017. Some of it could have been from the fourth quarter that we were working on and shipping to, but certainly all the 2017 we were building that pipeline that that materialized in the first quarter.

As far as the size goes actually we have been shipping very large projects. The Grand Central Station, we've been very public about that $1 million plus projects and the pipeline is building out with some mid-size projects now which is very encouraging and I think speaks to the broader base activity in the marketplace.

So we're all over the big projects of course Kathryn could imagine, but one of the things that I did notice that's a little bit contrary to your question is, we’re noticing a lot more mid-size projects filling up projects filling up in the pipeline as well, which is again very encouraging for us..

Yes, Kathryn, it's a Brian. The other point I'd add and reemphasizes, we saw that over 20% growth across all material substrate. So Medal, Wood, Tectum itself, so a very nice broad base pickup in the Architectural Specialties business..

Okay, great.

With the wall systems, which we've discussed over the past couple quarters will bring on with Tectum, how have your conversations been with the A&D community and how open are they to the wall systems versus traditional gypsum, particularly given an environment of rising cost? Really mainly who understand – are you seeing a different type of conversation today to say versus two years ago?.

Well, I'm not going to get into much detail about the conversations we're having, specifically with our customers on this. But certainly the Tectum acquisition gives us a platform of products and applications in which those parts go into to move our conversation in different directions relative to walls.

In addition to the ceiling applications that they traditionally go into. So we're always looking for opportunities to expand our service and our support of the architectural community. They know we're committed as a part of our business strategy to sourcing them.

And again I spent personally a considerable amount of my time in the first quarter out talking to architects and contractors. And we talk about a lot of things you can imagine.

So I'll leave it there, but again the Tectum acquisition has been a terrific acquisition and is expanding the range of the conversation that we can have with the A&D community..

Okay, final question just on walls.

I know that we talked about the wallet, so any interest in getting into the software side or kind of the planning side of that business?.

Yes, Kathryn, I'm not going to comment on that. I mean again we're looking to expand our platform intact on this as appropriate..

Perfect. Thank you so much..

Okay, thank you..

And our next question comes from Scott Rednor with Zelman & Associates. Your line is now open..

Hi, good morning.

Brian, are there additional recoveries from the environmental, insurance, litigation for the balance of the years?.

Scott, we continue to talk to our carriers on that topic. One thing I'd call out is that we've probably got another $9 million to $10 million of P&L benefit available to us, anything above and beyond that would show up on the balance sheet, but nothing at this time to call out..

Just to clarify from a cash flow perspective, is the $26 million everything from last year or is there additional influence we should expect for the balance of the year..

The $26 million was the net number, you'll see in our Q that we call out $28.7 million in total gross recoveries, but then that's offset by that $2.7 million of expense and netted down to $26 million..

Okay. And when you think about the cash flow conversion of the business, if you took out the $26 million that you're getting this year from those actions last year seems like the conversion is probably a little bit below the 50% plus or minus conversion from adjusted EBITDA to free cash flow.

When you think about getting back to those levels in 2019 and beyond, what are the additional levers to get there?.

So first I'd say when we guide our midpoint to $183 million, which is up 20% to 30% year-over-year that excludes the environmental pieces. So that’s just cash from normal operations. The cash from the insurance proceeds was an additional benefit that like I mentioned we used to fund our share repurchase in the first quarter.

So we will continue to see nice growth in cash. We are normalizing on our CapEx spending. We continue to be very diligent in our working capital, and obviously cash taxes has been a nice benefit to..

Thanks for clarifying that Brian.

And then just lastly, have you guys discussed how large freight is as a percentage of COGS and just realizing that that's been an inflationary area across the building products?.

Yes. Roughly 10% of our cost of goods sold..

Thank you..

Thanks Scott. End of Q&A.

At this time, I'm showing no further questions. I'd like to turn the call back over to Vic for closing remarks..

Great. Thanks everyone. Yes, I hope you heard aside from the weather impact, we're right on track to deliver what’s going to be a strong year for AWI, 5% to 7% topline, greater than 10% EBITDA, and over 20% cash growth.

I do want to mention on a closing note, that I’m pleased to announce that we will be hosting an Investor Day here in Lancaster on Wednesday, November 7.

We're excited to show you the flexible design line at the Marietta plant, our revitalized range of Mineral Fiber ceiling systems, and the breath of our Architectural Specialties portfolio on that day. And we'll also be sharing where we're going next. So look forward to seeing all of you there. Again, thanks for your attention and have a good day..

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everyone have a great day..