Ladies and gentlemen, thank you for standing by. And welcome to the Fourth Quarter 2019 Armstrong World Industries Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.

[Operator Instructions] Please be advised that today’s conference may be recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Mr. Tom Waters, Vice President of Corporate Finance. Please go ahead, sir..

Thank you, Catherine. 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 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 our 10-K, which will be filed shortly.We are finalizing customary control and documentation work with our auditors.

This will have no impact on the financials reported in our press release and the earnings call deck. Forward-looking statements speak only as of the date they are made.

We undertake no obligation to update any forward-looking statement 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 will turn the call over to Vic..

Thanks, Tom, and good morning, everyone. And thank you for joining our call. It’s good to be with you today to review our fourth quarter results, which kept another strong year for Armstrong.In the quarter, sales grew 3%, adjusted EBITDA improved 14%.

This represents the 39th time in the last 40 quarters in which we have delivered positive EBITDA growth and a 12% growth CAGR since 2009, demonstrating again the stability and consistency of our business.

In the quarter EBITDA margins expanded 330 basis points and adjusted EPS was up 40%.At a moment Brian will walk you through more of the financial details. But first I want to touch on a few of the key business results.

In the Mineral Fiber segment, average unit value or AUV for short was up more than 5% with both mix gains and like-for-like pricing positively contributing in the quarter.Consistent with our third quarter results and our outlook price realization continue to normalize from the high increases we reported in the first half of the year, which was driven by strong price realization carried over from a more inflationary 2018.

Price gains once again outpaced input costs and contributed to margin expansion.On the mix side, we continue to realize above market growth from our new product innovations like sustain, which are free from Red List chemicals and our Total Acoustics line, which feature the ideal combination of sound absorption and sound blocking, and DESIGNFlex which adds colors, sizes and shapes in Mineral Fiber, Metal and Wood Ceilings and Walls.

These products continue to illustrate how innovation is valued by our customers and can continue to drive mix higher in the Mineral Fiber segment.For the full year, Mineral Fiber AUV was up over 5%, consistent with both our historical average and our 2019 guidance.

Mineral Fiber volume was down 2% at quarter as expected, with ongoing softness in the lower end of our product range directly connected to the big box channel and continued uneven R&R activity across the various verticals.Volume growth in our higher end products was up high single digits in the quarter. That’s has been the case all year.

Consistent with that with what we have said before commercial activity in the U.S. continues to be favorable, with both bid activity and backlogs remaining positive.New construction and larger remodel projects continue to trend favorably across the U.S., while smaller R&R projects continue their uneven activity across the various verticals.

The big box channel improved, but remained a headwind and Canada remained soft.As we start 2020, we are seeing early returns from our channel specific initiatives that we discussed in October.

Canada, Latin America and big box collectively are trending positively and are expected to continue this positive trend into 2020.In the quarter, adjusted EBITDA margins in the Mineral Fiber segment expanded at an impressive 430 basis points, driven by a multiple of factors.

Pricing once again exceeded input cost inflation, our new innovative products continue to drive higher mix gains, manufacturing productivity was strong, WAVE had another solid quarter and SG&A expense was lower year-on-year, so a broad base of contribution to impressive margin expansion.Turning now to our Architectural Specialty segment, where sales were up 5% in the quarter.

In the quarter, we experienced a supply disruption from a key vendor of standard products.

This was caused by a quality issue that our teams identified and then stopped shipments to prevent a negative impact on our customers.Now of the majority of the Architectural Specialty business is made up of highly customized products, there is also a group of catalogue products that are primarily metal and wood products offered in standard shapes and sizes.

This supply chain disruption pushed out lead times in the quarter of these standard products which resulted in a temporarily loss of sales.We know what happened, we know what the issue is, we have worked with our vendor to correct the issue and as at the start of the New Year, lead times and shipments have returned back to normal levels.As of today, shipments of these products are up 40% sequentially, giving us confidence we have successfully restored the flow of these standard products back into the market.

With this issue impacting our momentum coming into the year and the fact that we are lapping large transportation projects, we could see a softer year-on-year start in the Architectural Specialties segment.

But for the year overall, the custom portion of our business has strengthened from this same time last year and gives us confidence in another year of double-digit growth.Again, as a reminder, the Architectural Specialties business is project-intensive business and the timing of large projects can create unevenness quarter-to-quarter and makes it difficult to gauge this -- the activity in this business simply on a quarter-to-quarter comparison.The visibility and the growth of the backlog is a meaningful indicator for what to expect for the year.

Again sitting here today in February, our backlog is up double digits versus this same time last year.We continue to work on acquisition opportunities in this segment and expect to close one to three additional transaction -- transactions in 2020, as we further build out our industry-leading product portfolio and capabilities.In the fourth quarter, we closed the acquisition of MRK Industries, a manufacturer of specialty metal ceilings and walls.

MRK has been a key supplier to us for several years, including supporting the success of the Grand Central Terminal project in New York City.

We are happy to have their unique manufacturing and design capabilities, and their management knowhow inside the Armstrong family.For the full year, total company sales were up 6%, crossing over $1 billion in sales, adjusted EBITDA was up 14% to $403 million, margins expanded 270 basis points and adjusted free cash flow was up13%, when excluding the special WAVE dividend in 2018, a strong year with positive contributions from both segments and on almost every line of the P&L.Price, mix and volume all contributed meaningfully to sales growth and margins.

Our plants had excellent operating performance and sequentially improved throughout the year.

SG&A as a percent of sales improved and WAVE equity earnings were up 9%, truly a team effort with string steady execution to deliver solid financial performance for us to build on in 2020.One of the highlights of the year was the operating performance at our Mineral Fiber plants.

I have talked throughout the year about our plant reliability metric, a multi-input measure of overall manufacturing performance that captures things like uptime, yield and throughput, and how recent performance have been trending up and is approaching all-time highs.This trend continues in the fourth quarter and I am anticipating that we will establish a new record in 2020.

This performance is a combination of focused leadership and the plant level, numerous teams executing project-after-project to reduce cost, while improving both quality and service.These improvement efforts were aided by our digital factory initiatives as well.

At the end of 2019, we had deployed 1,300 centers in our plants providing us with temperature and vibration data to analyze and deploy preventive measures.

This analysis will enable us to reduce scrap rates and increase uptime.We are only in the early innings with this initiative and we have plans underway to deploy an additional 1,300 centers during 2020.

This gives me great confidence that the manufacturing productivity improvements we saw in 2019 are repeatable in 2020 and beyond.Most importantly, in our plants, our manufacturing teams continue to work in a safe manner.

2019 was our 10th straight year with a recordable injury rate of less than 0.9%, which represents world-class safety levels.As we look ahead to 2020, we expect to experience a similar market environment to 2019 and supportive of growth and consistent with what we have outlined in our value creation model.

New commercial construction starts in 2019 should provide a moderate tailwind in 2020, with end market demand expected to be mixed across the various verticals.We feel good about the office, education and the transportation end markets.

We expect relatively flat performance in the healthcare vertical and we anticipate another soft year for the retail market.

As I mentioned before, Canada, Latin America and the big box channel have stabilized and should continue to improve throughout the year.With that, I will pause and turn over -- the call over to Brian for some more details on the financials.

Brian?.

Thanks, Vic. Good morning to everyone on the call. Today I will be reviewing our fourth quarter and full-year 2019 financial results and providing initial guidance for 2020.

But before I begin, as a friendly reminder, I will be referring to the slides available on our website and slide three details our basis of presentation.Beginning on slide four for our fourth quarter results, sales of $247 million were up 3% versus prior year. Adjusted EBITDA increased 14% and margins expanded 330 basis points.

Adjusted diluted earnings per share of $1.11 grew 40%, driven by increased earnings, a lower tax rate, reduced interest expense and a lower share count.With regards to taxes, our quarterly tax rate was 14% versus 23% in Q4 2018.

For the full year, our tax rate, adjusted only for the WAVE gain we discussed last quarter was 19% versus 22% for the full year of 2019.

Both the quarterly rate and the full-year rate were favorable to our outlook.During the fourth quarter, we determined that tax reserve adjustments were necessary to our deferred tax assets related to stock-based compensation. Additionally, the fourth quarter tax rate benefited from the expiration of state statutes of limitations.

Going forward, we expect a more stable tax rate in the mid-20s, with cash taxes in the 25% -- 20% to 25% range.Adjusted free cash flow declined by $17 million or 19% over the prior year as we are lapping last year’s $25 million WAVE special dividend.

These special dividends typically occur every three years to four years as WAVE’s earnings grow and they delever.

Absent the WAVE special dividend in the base period, adjusted free cash flow was up $8 million or 13%.Net debt is $71 million higher than last year, driven primarily by the acquisitions of ACGI and MRK, share repurchase activity and dividend payments.

As of the end of the year, our net debt to EBITDA is 1.4 times and leaves us plenty of capacity to fund our strategic and capital allocation priorities.In the quarter, we repurchased $50 million of stock. Since the inception of the repurchase program, we have bought back 9.2 million shares at a cost of $562 million for an average price of $61.05.

As of the end of the year, we had a $138 million remaining under our share repurchase program, which runs through October 2020.Turning now to slide five, adjusted EBITDA increased 14% with every line item contributing positively.

The Architectural Specialty segment drove volume growth and the Mineral Fiber segment contributed AUV gains, strong manufacturing performance and a strong quarter from WAVE.Input cost were a tailwind and SG&A expenses were modestly lower year-on-year, partially due to some one-time items in the base period related [Audio Gap] fourth quarter of 2018, we had a special dividend from WAVE of $25 million and we repatriated $9 million from international WAVE locations related [Audio Gap] for the period are flat with prior year and total free cash flow was up 13%.Slide seven begins our segment reporting, in the quarter, Mineral Fiber sales grew $6 million or 3% versus prior year, AUV improvements were driven by like-for-like pricing increases and continued mix gains, volume was down 2% in the quarter driven by the factors that’s reviewed, softness at the low end of our product portfolio, uneven flow business and a weak economy in Canada.Adjusted EBITDA was up $10 million or 15% versus prior year as margins expanded 430 basis points.

AUV gain strong performance from our manufacturing operation and a strong quarter from WAVE were the key drivers of earnings growth.

SG&A expenses were also lower in the quarter, partially impacted by the onetime items in Q4 2018 that I mentioned earlier.Moving to Architectural Specialty segment on slide eight, quarterly sales increased 4% versus prior year.

Vic addressed the factors impacting Architectural Specialty sales including the large transportation projects in the base period and an issue with a supplier that extended lead times which impacted our sales.You will see in our 10-K that we have increased our disclosure on sales related to our acquired businesses.

As part of our acquisition strategy, when we integrate these new businesses, we typically move our sourcing to optimize productivity.Consequently, this new disclosure includes changes in-sourcing between our existing manufacturing and the acquired businesses.

This is why we choose to frame our guidance in terms of the total business, which includes all acquisitions closed prior to January 1, 2020.

Separately, we are targeting to close one to three acquisitions in 2020, which will be incremental to our greater than 15% guidance for Architectural Specialties.Adjusted EBITDA in Architectural Specialties was up 2% versus prior year in the quarter as cost associated with our acquired companies, and our investments in sales and design support added expense.

EBITDA margins excluding businesses acquired in 2019 expanded 90 basis points.Turning now to slide nine, for the full year, sales of $1.038 billion were up 6% versus prior year and adjusted EBITDA increased 14% versus prior year, driving EBITDA margin expansion of 270 basis points.Adjusted diluted earnings per share of $4.78, grew a very strong 31% driven by increased profitability, lower taxes and a reduced share count.

Year-to-date, adjusted free cash flow grew $8 million or 3% versus prior year, excluding the 2018 WAVE special dividend, free cash flow was up $33 hours or 16% versus prior year.Slide 10 details the bridge of our results for the year. Strong AUV performance in the Mineral Fiber segment was the key driver to our increased profitability.

When combined with volume gains in the Architectural Specialties segment, solid manufacturing performance increased profitability at WAVE and lower SG&A spending. These factors resulted in adjusted EBITDA up 14% versus prior year.

Manufacturing productivity gains more than offset to fixed costs embedded in our acquisitions.Slide 11 displays the drivers of adjusted free cash flow for the year.

Strong operating cash flow performance, driven by earnings growth was the key factor in 2019 performance.Slide 12 provides our initial guidance for 2020, we once again expect sales to grow in the high-single digits with future acquisitions incremental to that growth, continued AUV expansion in the Mineral Fiber segment combined with increased penetration and year-on year-contributions from our 2019 acquisition of ACGI will drive sales higher in Architectural Specialties.Our profitability will also be aided from continued manufacturing productivity and increased contributions from WAVE.

Adjusted EPS growth will benefit from lower interest expense and a lower share count that will offset a higher tax rate as our tax rate normalized in 2020.

We expect to grow our industry-leading cash flow, double digits to 25% of sales or greater than 5% or $5 per share.Before turning the call back to Vic, there is a non-operating finance item that I like to discuss.

As you have likely seen, just last week, we entered into an agreement to transfer over $1 billion of pension obligations related to approximately 10,000 retirees to Athene Annuity and Life.While Armstrong has had an overfunded pension for many years and has not made a cash contribution in more than 10 years, the size of the total obligation over $1.4 billion is significant for a company our size.

As such, this transaction significantly reduces tail risk on our balance sheet relative to the plan.

It protects our retirees and leaves the remaining plan with an even greater overfunded position.As a result of this transaction, we expect to record a non-cash expense in the range of $350 million and $400 million in the first quarter of 2020, as a component of non-operating expense to reflect a partial planned settlement charge.As with other non-cash pension expense and income, we will exclude this from our adjusted financial results.

We will not have to make any cash contributions to the pension as a result of this transaction and do not anticipate contributions in the coming years.

This is a great transaction for our retirees, Armstrong and our shareholders, a win-win-win for all parties.To close, I am pleased with the results the business delivered in 2019, sales up 6%, and adjusted EBITDA up 14%, we were able to execute two more strategic acquisitions further building out our Architectural Specialties capabilities and I am confident that we have the plans in place to once again deliver high single-digit sales growth and double-digit adjusted EBITDA growth, consistent with our value creation model.We have a strong balance sheet and we generate very strong free cash flow every year.

We believe the strong cash generation of our business is truly unique and special. We can use this annual cash generation and liquidity to further invest in our business, fund acquisitions and return cash to shareholders. We expect 2020 will be another strong year of free cash flow generation.With that, I will turn it back over to Vic..

Thanks, Brian. 2019 was another year of solid, steady performance here at Armstrong where we continue to change the trajectory of our sales growth, while expanding margins and improving our overall competitiveness.

2019 was the third straight year we delivered sales growth greater than 6% after many years of low single-digit growth.We grew adjusted EBITDA not by double digits again. We commercialized DESIGNFlex and launched game-changing innovation in ACOUSTIBuilt.

We accelerated our digitalization initiative to provide more frictionless customer experience and improved manufacturing productivity.In 2019, we celebrated the 20-year anniversary of the Armstrong Ceilings Recycling Program. It’s the longest running recycling program of its kind.

To-date, we have recycled more than 200 million square feet of ceiling panels, saved more than a million tons of virgin raw materials and diverted more than 100,000 tons of waste from landfills.We completed two more acquisitions in Architectural Specialties, making it five in the last three years.

We closed on the sale of our businesses in Europe and Asia, ultimately realizing $290 million of benefit for our shareholders. This makes us an Americas-only business with minimal exposure to tariffs or the impact of the Coronavirus.We have refinanced our credit agreement, extending maturities, adding flexibility and lowering our borrowing costs.

We repurchased over $130 million of stock and increased our quarterly dividend by 14%.And finally, we elevated our design capabilities and capacity, and made organizational investments to enable our strategic priorities in 2020 and beyond.

And in 2020, we will build on this momentum for another exciting year where we expect to grow sales in the high-single digits, expand margins and deliver best-in-cash free cash flow.We will bring new innovation to market in the form of both new products and new digital tools.

We will build on our broadest architectural specialty portfolio through both innovation and new acquisitions to drive penetration in specialty ceilings and wall space at a double-digit rate.Our plants are poised to deliver another strong your productivity and WAVE will continue to increase their contribution and remain seamlessly linked with Armstrong on innovation and product development.Our balanced approach to capital deployment remains.

We are going to invest back into our business through high-return projects.

We are going to execute on one to three acquisitions a year and return cash to shareholders through our dividend and share repurchase program.We will maintain a prudent balance sheet, and as Brian just discussed, we have already taken action this year to transfer $1 billion of pension obligations off our balance sheet to reduce any tail risk.

I am excited about the opportunity and the momentum we have going into 2020.

The teams are aligned, they are focused and equipped to deliver another great year.As you have heard me say before Armstrong remains committed to being the standout leader in innovative products and digital solutions to provide the best possible experience for our customers and we are committed to making a difference in the spaces where people live, work, learn, heal and play.Now, with that, we will be happy to take your questions..

Thank you. [Operator Instructions] And our first question comes from Stephen Kim with Evercore ISI. Your line is open..

Yeah. Thanks very much, guys. Good quarter and encouraging outlook. I wanted to ask you though a little bit about the -- in the Arc Spec this delay. Understanding that you have been indicated but it’s pretty much normalized at this point. Your guidance seems to assume that this impact was about $10 million the way we reckoned it.

Did you are going to get that back and then proceed along with the trajectory of the business in addition to that? And assuming so, I am curious why wouldn’t you see you that recovery and some very good numbers in the first half of the year, because you said that, we are off to kind of a slower start in that business and I was trying to reconcile that those two things..

Yeah. Stephen, first of all, I said, to have a tough first quarter or slower start to the first quarter with some of this standard product flowing into the quarter.

So I think the first half going to be fine, I think, we are just out looking that we are looking at, excuse me, we are in the base period we are lapping too very large transportation projects. That coupled with a bit of the softer start and the standard product category.We are just saying, hey, it could be a little bit of a softer start to the year.

But when you look at the backlog, our backlog and our custom product, which is the majority of the business as you know is very strong, and we are very encouraged by what we are seeing and everybody I have talked to out in the marketplace in terms of the bid activity continues to be strong.So I am optimistic about the year.

I think we are just out looking that this quality issue that we resolved and behind us has probably gotten us off to a slower start than we would have expected or hope for in the first quarter..

In that first -- okay. It sounds like you are not really making a comment about the second quarter though..

Not so much..

You don’t expect this to linger into the second quarter necessarily?.

I do not. I do not..

Okay. Got it. Yeah. Okay. Curious is to if you could talk about the manufacturing productivity outlook in terms of how meaningful this could be, it sounds like certainly things are going very well.

It sounds like in addition to the improvements you saw in the quarter, you installed these 1,300 sensors knowing that that’s just one aspect of the productivity initiatives, but it sounds like you did that right at the end of the year so it probably didn’t have a huge impact on 4Q and yet you have generated $8 million or so of improvement in the last two quarters of the year, curious as to what we should be thinking about that into the front half and maybe even beyond in 2020 and what’s included in your outlook?.

Yeah. I am very pleased with the teams in the plant. I mean, we have a big focus on productivity anyway. So that’s kind of a base. We have very strong leadership teams in our plants.

They are really focused on productivity.And as you were mentioning, the digital initiatives are kind of adding on to our already very strong base of productivity and the sensors that we added at the early part of the year.

So the first half of last year are really what we saw in the third quarter and we talked about some of those impacts in the third quarter and that carried through to the fourth quarter.So, the -- from them, we have been continuing to deploy sensors and we will be deploying those sensors even into the first half of this year, which is why we are expecting to see some continuing productivity improvements from the first phase of sensors, but also the second phase.

And again, I think, this is going to be additive, not displacing or replacing the already productivity initiatives that we have already launched in the plants.So, again, I really like what our plants are doing, the focus that they have.

I think this -- the digital tools are giving them another level of data and ability to analyze the data to be even more preventive than we have in the past, and again, that shows up in better uptime, reduced scrap, and so that really shows up in our P&L.So I am very proud of the work the team is doing there and it gives me, again, as I said in my prepared remarks, a lot of confidence going into 2020.

And we will continue to build on this, by the way, Stephen. We will keep -- we have got more initiatives behind these sensors that we want to add to our plants and our operations, so it’s 2020 and beyond really..

Got it. Great. Thanks very much..

Great. Thank you..

Thank you. And our next question comes from Michael Wood with Nomura. Your line is open..

Hi. Good morning..

Good morning, Mike..

I wanted to ask you about this dynamic, guys you were talking about with the large remodel, new construction being strong and smaller projects being more uneven.

I am curious if you have seen this before, what do you think is really the underlying cause of that weakness in the smaller projects?.

Yeah. These smaller projects, Mike, tend to be discretionary in nature.

So, certain -- if certain dynamics or indicators aren’t in place for some of these verticals, as we have talked about, I mean, just to carry that through, if certain dynamic show up, then their discretionary spend, they can delay these until the next year.We saw this in the education sector for several years as we talked about, when state and local budgets were really pinched, a lot of those school renovations or maintenance work was delayed, and again, very discretionary in nature, they could wait until the following year.So I don’t think that’s the case in education in particular now, because I think we are seeing some improvement there both in state and local budgets, and the discretionary spend as we report in the last summer months was better and we anticipate that to continue.

But that can be, again, vertical to vertical you can have discretionary spend and it really shows up in a lot of those smaller projects..

Okay. Great. And can you also give us some color on the impact of the home center in Canadian business, really I am just trying to get the underlying U.S. Mineral Fiber volumes excluding the retail portion..

Mike, is your question specific to fourth quarter?.

Yes..

Yeah. In the fourth quarter, both in box and -- which is our retail channel and our Canadian sales continued to be negative volume in the quarter. We did see a slight positive in Latin America, which was a continuation of the improvement we have been reporting there.

Collectively, they were continued -- they continue to be down and as a headwind for us in the quarter.Now, they are less down than they were, and as we have talked about, we have got several initiatives in each of these three areas that we have been working and I expect those to continue to improve from where they are today into a more positive area in 2020..

Great. Thank you..

Thank you, Mike..

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

Hey, guys. Thank you for taking my questions. The first one, Vic, it sounds like your commentary on the bidding activity is pretty encouraging.

I am just curious versus the last quarter has anything changed either positively or negatively or is this still kind of a steady state?.

Yeah. I think the market is pretty much what we saw -- currently what we are seeing now is what we saw at the end of the year.

Our shortfall in the fourth quarter in the Architectural Specialties in particular was very much supplier based, not market based.And I was out in the field quite a bit this first quarter talking to both contractors and distributors, and the sentiment is positive.

So, I think, we are kind of carrying through the same market level of activity that we experienced in 2019..

Okay. That’s helpful.

And then in terms of your EBITDA outlook, Brian, what are you modeling in terms of material cost inflation?.

Yeah. A similar backdrop low-single digits overall net inflation..

Great. Thanks, guys..

Thanks, John..

Our next question comes from Susan Maklari with Goldman Sachs. Your line is open..

Thank you. Good morning..

Good morning..

Good morning..

My first question is just, when we do think about 2020 and noting the comments you made around the project activity.

But how much are you thinking about revenues coming from price relative to the volume growth?.

Yeah.

In the Mineral Fiber, Susan [Audio Gap] you are talking about Mineral Fiber segment specifically?.

Yes. Yes..

Yeah. Yeah. In Mineral Fiber, we are expecting that we are going to continue on the same AUV rate and ace that we have been on, which is in that 4% to 6% range.

So if you look at our topline of about 5% growth in Mineral Fiber, that implies somewhere around a flat to slightly positive Mineral Fiber volume for the year, which is an improvement over 2019..

Okay. That’s helpful. And then, I just wanted to get a little more color on how you are thinking about capital allocation. I know that you mentioned the potential for one to three acquisitions this year.

How do you think about the balance sheet and leverage, I mean, the leverage has come down pretty significantly and thinking about the cash generation this year, it seems like it could really further come in.

So I don’t know is there anything you can share with us in terms of a target maybe as it relates to leverage or how you are thinking about that balance?.

Sure. Susan, this is Brian. We have said that anything below three we are pretty comfortable with. As you look at our cost of capital is the same anywhere below 3. Right now we are sitting at 1.4 times and that’s towards the lower end.

But we will keep monitoring how frequently we are doing the acquisitions and using that capital to make those acquisitions..

Our capital allocation -- Susan to your question that, the capital allocation for us remains that -- our first priority with the high returns that we get in this business to invested back in the business.

That’s our number one priority is to support the growth initiatives that we have in our core business.And then, one to three acquisitions, I’d be very disappointed if we only did one this year.

I think we have the opportunity with a building pipeline and encouraging pipeline that we could do more than one this year.And that’s our second priority, and then, of course, the third is, to return to shareholders through our share repurchase program, as well as our dividend. So those allocation and priorities remain the same for us..

Okay. Great. Thank you..

You bet..

Thank you. And our next question comes from Kathryn Thompson with Thompson Research. Your line is open..

Hi. Thank you for taking my questions today. The first is really on supply chain and wanted to double check to ensure that your supply chain is not seeing any impact mostly from raw materials related to China and Coronavirues. Really we want to be assured that there isn’t any potential trickledown effect to your supply chain? Thank you..

Yeah. Virtually, Kathryn, virtually no impact or no effect from the Coronavirus on our supply chain..

Okay. Perfect. Thank you..

Yeah..

And appreciate the color you have given on backlogs and the nature of my question really more have to do from a product standpoint, looking more in terms of what is driving demand.

Could you flush out how demand is driven by legacy Mineral Fiber versus Architectural Specialties, we are assuming that demand is less driven by traditional tiles following destitute and more driven by continued market adoption of Architectural Specialty products. So really this is a question of not just for 2020 but beyond that? Thank you..

Yeah. Thanks. Yeah. No. Thanks for the question Kathryn. Our Architectural Specialties, if you take a step back and its being -- it’s more bias toward new construction, okay? So that’s number one. And so we -- there’s more new construction activity than there is -- in terms of growth then there is R&R activity.

So that’s a bias in a positive direction that way.But for the most part, our growth in Architecture Specialty is really market penetration and share gain in that segment.

It’s a relatively -- it’s a fragmented space versus very different than the Mineral Fiber space and so there is lot of pockets for us to move into and to leverage our scale and our presence with the architectural community.So that’s really, I think, the main drivers between Architectural Specialty and expect that business to continue to grow at double-digit rates, which is as you know far above where the demand for Mineral Fiber is today.With that said, I think, in the Mineral Fiber business, we continue to see high single-digit volume growth at the high end of our portfolio through the new innovative products that we are bringing out, through the special occasion work that we are doing with architects and I can -- I expect that to continue, especially when I see the adoption rate that we are seeing with DESIGNFlex and Total Acoustics and now ACOUSTIBuilt.The level of interest that we are seeing around the ACOUSTIBuilt is very impressive.

It’s very encouraging that there is a real nice home in new spaces were we are not selling Mineral Fiber today to grow that business.So -- but I think you can really see Architectural Speciality should continue to lead as an overall growth engine on the volume side.

We are going to continue to grow the high end of the portfolio in Mineral Fiber and we are going to grow our AUV in Mineral Fiber overall..

Great. Thank you..

Thank you, Kathryn..

Our next question comes from Keith Hughes with SunTrust Robinson. Your line is open..

Thank you.

Question in architectural specialties, throughout 2019, some manufacture expenses, SG&A expenses related acquisitions worth like, do we see similar negatives given your acquisition plans here in 2020?.

Well, it’s tough to speculate on what new acquisitions, Keith, if that’s your question, if we -- the new acquisitions we add, if they will be headwinds. Most of these smaller companies we are buying are headwinds to our already high levels of productivity and EBITDA levels.So if you question is around that, it’s hard to comment on those.

The acquisitions that we have in place like Plasterform, the Steel Ceilings acquisition, now ACGI, we continue -- we should continue to see productivity and manufacturing improvements and margin improvements in those businesses as we have seen historically with some of our other acquisitions. I would expect that to continue..

Okay.

Looking beyond 2020, are you getting to the size in Architectural Specialties that you can immediately flex your cost base on a smaller acquisition that you do?.

Keith, say some more. Make sure….

Well, so, for example, in sales that you have already have the infrastructure set up so that you can bolt them in without some of the buildup work you have had to do since you really started this program a couple of years ago, are you at that point yet?.

I don’t see a slowing down or a need to slow down. The feathering end of our design capacity, if you will, we have been kind of feathering that in as we go. But certainly as we get our base larger, we can flex more into these smaller acquisitions with less resources.

It’s just through good efficiency and productivity and how we use those resources.I continue to be encouraged by how efficient we are in Architectural Specialties and been able to absorb these acquisitions and increase our efficiency and how we serve those acquisitions.

And I would expect us to continue to feather in SG&A, A, as you go approach versus big batches of capacity put in..

Okay. Thank you..

Does that answer your question, no?.

Yes. It does. Thank you..

All right. Thanks, Keith..

Thank you. Our next question comes from Justin Speer with Zelman & Associates. Your line is open..

Thanks, guys. Appreciate it.

Just on that SG&A point just and thinking about 2020, do you expect SG&A expense to be up in line with revenue growth or do you think that you continue to grow that below revenue growth as you look ahead?.

Yeah. Justin, this is Brian. I would expect us to continue to invest in SG&A, so it will grow slightly above our sales growth rate..

Okay. And then in terms of the quarter impacts at Architectural Specialties from the supply chain issue.

Can you maybe help us understand the magnitude of the impact there and just the nature of the issue there, just what happened?.

Yeah. The nature of the issue there, Justin, was a manufacturing quality issue.

Without getting into the specifics of what the manufacturing, it wasn’t meeting the Armstrong standards and the team made a decision to stop ship and so we fixed it so we wouldn’t have a negative impact in the marketplace on these standard products.So it was a manufacturing-related quality issue that caused the lead times to go out on our products.

That’s a very lead time sensitive part of our portfolio as well. So to break it out, it’s in that $3 million to $4 million in the quarter, is the way to think about that that level of impact..

Okay. And then in terms of -- just in terms of the thinking about the nature of the growth going forward, you mentioned some difficult comparisons from transportation-related projects.

I guess, maybe help us understand when those fell into your model and why -- because I don’t see organic growth being a big issue in terms of year-over-year comparison in the first half from last year? But maybe help us get a sense for maybe the timing of some of the work as you think about phasing in, and ultimately, what you are thinking organic growth when excluding acquisitions, when excluding MRK, any other acquisitions, what organic growth looks like For 2020?.

Yeah. Sure. So first of all, on MRK, I just want to be clear, there is no sales contribution really to MRK. They were pretty much a captive supplier for us, as we talked about last quarter and they have unique capabilities that we wanted in-house. So there’s not a lot of new customers or new sales coming with that acquisition.

So margin enhancement but not topline, so just to be clear and level set on that.Last year in the first quarter, we had two really large projects, they are both transportation projects.

The Grand Central Station and in New York City, as well as LAX out west, and we were shipping both of those in the same quarter.Again, two large projects like that can kind of skew the base period, if you don’t repeat two more large projects which we won’t be repeating in the first quarter.

We have some nice large projects that will ship later in the year, but they won’t be in the same base period.So that’s the headwind we are talking about.

They got feathered in second quarter and third quarter last year, so we -- it will be just different and I think in this first quarter where we had the bulk of the shipments going in the first quarter.

Our organic growth outlook continues to be double-digit for next year, in spite of that, I would say, a slower start to the year because of the base period comparison..

Okay. And then last question for me is just the penetration porfolio this year 2019 versus last year for premium price product in the Mineral Fiber business.

Can you give us some context for where that is and where do you think you are going to take it for 2020?.

Is your question around the pricing? I am sorry, Justin, just say a little more like….

Yes. Just the premium -- yeah, the premium price product that in terms of the mix, you mentioned that it will more commoditize, I guess, lower priced product was weaker in the quarter.

But big picture, what are you looking for mix in terms of penetration of portfolio towards that better mix product away from lower mix, I don’t know if you break it out, but just curious what it looks like today versus maybe last year?.

Yeah. It’s really a continuation of what we have seen in the last few years around mix contribution to the AUV.

Again, mid-to-high single digits in terms of volume growth at the premium segment, as you called it, the higher end of our Mineral Fiber portfolio is what we have been experiencing over the last several years and we expect that to continue into 2020. And that’s anywhere from 2.5% to 3.5% contribution to -- of mix contribution to the AUV.

That’s the way to think about it..

Okay. Got it.

But in terms of absolute volumes, what percentage of the business -- of your total businesses than higher price point product?.

Yeah. We don’t really break it out that way and I will tell you the reason why, because everybody’s definition of premium or high-end products is different, and to avoid that confusion, we just don’t break it out that way..

Understood. Thank you, guys. Appreciate it..

Thanks, Justin. You bet..

Thanks, Justin..

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

Hey, guys. I guess for -- margins for AS has taken a little step back, part of that is intentional with investments you are making and sounds like you continue to step up SG&A.

So appreciating you can’t predict M&A personally, with these investments kind of coming into more fruition in some of these M&A deals that you have done fully integrated? Do you expect EBITDA margins in AS to be up, flattish, down, how should we think about it directionally?.

Hey, Phil. It’s Brian. So absent any new acquisitions we expect it to be flat to up..

Okay..

If we do one to three like our intent, we will see some headwinds on the EBITDA margin as we still ramp up scale in those acquired businesses..

Yeah. I will put a finer point on that, Phil, just to say, so maybe for everybody’s. The margin in our business from legacy businesses, if you will, not the new acquisitions, but the margins in those businesses is positive.

We continue to incrementally improve the efficiency in the operations of those business.The headwind we have is when we acquire these new businesses, and of course, their margins are much lower than ours and until we bring our productivity best practices, until we drive the efficiency to get their margins to ours or even greater like we did in the second case, those are -- that’s the headwind you see.

But I think it’s important to note that the base business, the Architecture Specialties business continues to improve its EBITDA margins with even on margins year-after-year..

Got it. Okay. That’s really helpful. And then based on AUV guide, it implies continued momentum, which I think is quite impressive considering inflation is going to be pretty muted this year.

Can you give us a sense how to think about the split between mix versus pricing in 2020 and if there were any key product lines that’s driving that mix improvement, it seems like its accelerating?.

Yeah. So, Phil, it’s Brian again. Historically, we have had a 50-50 split between that AUV for like-for-like pricing and mix. Don’t anticipate it being too different from that as we move forward. We have been that way for almost 20 years now. So don’t anticipate any real big shift in that ratio..

Got it. And just one question….

Yeah..

Sorry..

Yeah. You said -- your question about the high end, it comes back to the conversation we were having on Mineral Fiber.

As we look at some of the innovation we have launched, Total Acoustics, SUSTAIN, even DESIGNFlex, those parts of the Mineral Fiber business are growing faster than the lower end of that portfolio range and so that’s going to continue to drive that mix up..

Got it. And just on that note, embedded in your guide, you are -- are you anticipating any noticeable contributions from some of these newer products like ACOUSTIBuilt and DESIGNFlex in 2020? Thanks a lot..

I think ACOUSTIBuilt is going to be a very small contributor to that. It’s just getting started. It’s in the spec process. I do expect us to grow sales nicely there. But against a very large base I wouldn’t see a huge contribution from that. But from DESIGNFlex and SUSTAIN and Total Acoustics, which we are a couple years into now.

I expect to see a nice contribution from those products to continue..

Okay. Thanks a lot..

All right. Thank you..

Thank you. Our next question comes from David MacGregor with Longbow Research. Your line is open..

Yeah. Good morning and congrats on a good quarter. Just wanted to explore a couple of things that had been discussed previously on the call, I guess, first of all with regards to manufacturing productivity and kind of encouraging part of the story.

How much capital is required to continue driving progress, in other words, just progress capital-dependent at this point?.

Yeah, Dave, this is Brian. We are typically spending about 7% of sales. You see in our guidance it’s -- for 2020, we are guiding $70 million to $80 million of CapEx..

Right..

Roughly half of that is really repairs and maintenance, and the other half is for productivity..

But I guess I am asking specifically about the digital productivity initiative and you are talking about all the sensors and the work that you are doing there.

I am just trying to get like a sense of whether further progress there is capital dependent?.

Yeah. It’s relatively -- we are not breaking that out, so just we won’t build a breakout, I will give you the exact number. But I can tell you it’s a relatively smaller percentage of the 50% of the CapEx that Brian just outlined for you..

Okay. That’s good to hear.

And the second question, just you mentioned in the press release additional investments in selling and design capacities, and I guess, the question is was this more feet on the street, are you able to quantify the impact on the P&L and how should we think about the payback on these investments and how fast this will benefit revenue growth?.

Yeah. I think the rate and pace in which we have feathered this SG&A in, you can go back and look at the last three years.

I think we have really done a nice job in feathering it in and so that we are adding at the right pace and same pace as our growth and so it’s getting at door and we are getting a great return, when you look at the EBITDA expansion over those last three years, in spite the fact that we are adding this SG&A around and adding the capacity.It’s both feet on the street, David, as well as back office, project managers, CAD designers and supporters of the design part of the business So, I think, about it that way, it’s both really close to the customers, but also in the back office to support the more intensive design work, especially that comes with things like DESIGNFlex and Architectural Specialty products..

Got it. Thanks very much. Congrats on the progress..

Okay. Thank you very much..

Thank you. And I am showing no further questions at this time. I’d like to turn the call back to Mr. Vic Grizzle for closing comments..

Yeah. Just a quick thank you for everybody for joining the call, we look forward to seeing many of you out on the road the next couple of weeks and then everybody back here in late April for our first quarter call. Thank you and have a nice day..

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone have a great day..