Ladies and gentlemen, thank you for standing by, and welcome to the Q4 and Full Year 2020 Armstrong World Industries Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question-and- answer session. Please be advised that, today's conference may be recorded.

I would now like to hand the conference over to your host VP, Corporate Finance, Tom Waters. Sir, please go ahead..

Thank you. Good morning and welcome, everyone. 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@armstrongceilings.com. With me on the call 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 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 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’ll turn the call over to Vic..

Thanks, Tom and good morning, everyone. It's good to be with you today and thanks you again for joining. Before we get into Armstrong fourth quarter and full year 2020 financials, I want to take a moment to recognize what we've all been through on a personal level these last 12 months.

Our 2,700 Armstrong employees, our communities, our partners, suppliers, our customers and our shareholders have no doubt been impacted by the multiple crisis we've all faced. I want to acknowledge the challenges and the hardships many of you and all of us have experienced.

And I want to share my admiration for the creativity, the teamwork and many acts of selflessness that I have witnessed within our own organization and in our communities. It's been an extraordinary year, and I wish all a healthy and prosperous 2021. I have a lot to cover today.

I'll begin by reviewing our financial results with some commentary on fourth quarter market conditions, and then I'll recap our 2020 accomplishments and there are many, including launching new products in response to the threats posed by COVID-19, AirAssure and VidaShield.

And then I will discuss the increasing importance of healthy spaces before turning the call over to Brian, provide a detailed review of our financial performance for both the quarter and the year.

Then I'll be back and I'll close our prepared remarks by discussing in more detail what we've been working on in preparation for a post-pandemic market to further strengthen our company, mainly in the areas of growth, digitalization and sustainability..

Thanks, Vic and good morning to everyone on the call. Today, I'll be reviewing our fourth quarter and full year 2020 results and provide guidance for 2021. But before I begin, as a friendly reminder, I'll be referring to the slides available on our website, and slide 3 details our basis of presentation.

Beginning on Slide 4 for our overall fourth quarter results, sales of $239 million were down 3% versus prior year. A continued sequential improvement from the third quarter when year-over-year sales were down 11%. Adjusted EBITDA fell 19% and margins contracted 580 basis points.

Adjusted diluted earnings per share of $0.77 fell 31% as our 2019 fourth quarter tax rate benefited from stock-based compensation deductions. Adjusted free cash flow declined by $3 million versus the prior year.

Our cash balance at quarter end was $137 million and coupled with $275 million of availability on our revolving credit facility, positions us with $412 million of available liquidity, down $42 million from last quarter as we completed the Arktura acquisition during this past quarter and down $18 million from the fourth quarter of 2019.

Net debt of $578 million is $12 million higher than last year as a result of our acquisitions, partially offset by cash earnings. As of the quarter end, our net debt-to-EBITDA ratio is 1.8x versus 1.5x last year as calculated under the terms of our credit agreement. Our covenant threshold is 3.75x, so we have considerable headroom in this measure.

Our balance sheet is in solid shape. In the quarter, we repurchased a 126,523 shares for $10 million, or an average price of $79.04 per share. Since the inception of our repurchase program, we have bought back 9.7 million shares at a cost of $606 million for an average price of $62.35.

We currently have $594 million remaining under our share repurchase program, which expires in December 2023. Slide 5 illustrates our Mineral Fiber segment results. In the quarter, sales were down 7% versus prior year, but improved sequentially from the third quarter when year-over-year sales were down 14%.

COVID-19 driven volume declines continued at a reduced rate, and AUV was a headwind as relative strength in the big box channel, and to a lesser degree territory mix put pressure on sales and adjusted EBITDA in the quarter. Positive like-for-like pricing and favorable product mix continued the year-long positive trend.

Adjusted EBITDA was down $15 million or 19%, as the volume decline in channel driven AUV weakness fell through to the bottom line. This table also clearly illustrates the quarterly progression of volume trends, which while still negative have improved sequentially.

In the quarter continued manufacturing productivity, our cost reduction initiatives and lower raw material and energy costs aided profitability. SG&A was a headwind as we ramped up investment in growth initiatives that Vic mentioned. WAVE equity earnings were down due to lower sales volume. Moving to Architectural Specialties or AS segment on Slide 6.

Sales were up $6 million or 13% as the 2020 acquisitions of Turf, Moz and just recently, Arktura contributed $11 million in the quarter and offset COVID driven organic sales decline of 9%. As organic sales also improved sequentially from the third quarter when year-over-year sales were down 14%.

Despite flat sales, direct margins expanded significantly driven by the higher margins of Turf, Moz and Arktura acquisitions relative to our base AS business and ongoing productivity in the network, particularly at acquired facilities. Manufacturing costs and SG&A were up, driven by the cost of Turf, Moz and Arktura, and higher overhead allocations.

Our AS business continues to win significant projects to build a strong pipeline. Among others in the fourth quarter, we were awarded the Virgin Voyages Port of Miami Terminal 5 project. This job includes metal, glass, reinforced gypsum, wood and mineral fiber products, a comprehensive solution that demonstrates Armstrong's competitive strengths.

This multimillion-dollar project is scheduled to begin shipping late this year, but will primarily benefit 2022 sales. Slide 7, shows drivers of our consolidated adjusted EBITDA results for the quarter. We've enhanced this page to break out the impact of our 2020 acquisitions. Sales from our 2020 acquisitions offset organic volume declines.

Mix, organic SG&A investments and WAVE equity earnings were only partially offset by positive like-for-like pricing, deflation and manufacturing productivity. Our 2020 acquisitions added a net $3 million adjusted EBITDA benefit and delivered a 27% adjusted EBITDA margin.

Slide 8 shows our adjusted free cash flow performance in the quarter versus fourth quarter of 2019. Cash flow from operations was down $8 million on lower sales and partially offset by lower capital expenditures of $5 million.

As referenced in the footnotes and detailed in the appendix, adjusted free cash flow excludes two significant and largely offsetting adjustments. First, we received $13 million, related to environmental insurance recoveries in the quarter.

Second, we made a $10 million onetime endowment level contribution to the Armstrong World Industries Foundation with funds earmarked from a portion of the $22 million of proceeds from the sale of our QINGPU China facility that we received earlier in the year.

These items are excluded from adjusted free cash flow as they are unrelated to our core quarterly performance. Slide 9 shows our full year results. Versus prior year, sales were down 10% and adjusted EBITDA was down 18%.

Adjusted EPS was down 24%, driven by a lower 2019 base period tax rate due primarily to deferred state tax adjustments and, to a lesser degree, the stock-based compensation deduction that impacted Q4 in 2019. Slide 10 is the full year adjusted EBITDA bridge.

Again, COVID related volume declines are the main driver as they impacted EBITDA by $65 million, and were partially offset by volume-driven contributions of $14 million from our 2020 acquisitions. COVID volume declines also drove the WAVE results.

Mix headwinds from the territory and channel drivers we have called out impacted the AUV fall through to adjusted EBITDA. As Vic mentioned, product mix and like-for-like pricing were both positive in 2020.

Input cost deflation and the savings we are driving in manufacturing and SG&A, despite our acquisitions and growth investments, help mitigate the sales fall through to EBITDA. Slide 11 reflects full year adjusted free cash flow of $212 million.

As with the quarter, operating cash flow and dividends from WAVE were lower capital expenditures reflect the delaying action we took to prioritize and conserve cash in 2020. Interest expense is lower as a result of our refinancing in September 2019. In a year, significantly impacted by the pandemic, we delivered a 23% adjusted free cash flow margin.

Slide 12 is our guidance for 2021. Against a backdrop of a recovering economy, we anticipate revenue in the range of $1.03 billion to $1.06 billion or up 10% to 13% versus prior year.

Driving this growth is a return to positive mix starting in the second quarter, continuation of like-for-like pricing with the backdrop of rising inflation, which will result in the resumption of our historic 4% to 6% AUV growth rate.

In addition, our digital growth initiative, Kanopi, that Vic will discuss in a moment, will support mineral fiber growth. Healthy spaces product sales will contribute to both volume and mix gains. The Architectural Specialty segment will benefit from the full year impact of our 2020 acquisitions as well as a resumption of organic sales growth.

We expect adjusted EBITDA to grow 9% to 13%, and as the benefits of sales growth falls through, and we continue to drive productivity in our plants and benefit from improved results at WAVE. We will continue to invest in our growth initiatives, and as previously communicated, reinstate some of the 2020 temporary cuts in SG&A in 2021.

At the midpoint, our EBITDA margin of 35% is slightly down in 2021, driven by the impact of 2020 acquisitions on a full year basis. Adjusted free cash flow will be 19% of sales as we resume our historic levels of capital spending and as working capital expands to support sales growth.

We expect to return to our greater than 20% historical average in the short term. Page 13 is not something we typically share as our seasonality across the quarters is usually very consistent year-to-year. However, given the disruption experienced in 2020, the seasonal pattern of our year-on-year sales will be unusual in 2021.

So we've included this page to assist you with your modeling. Sales in Q1 will still be impacted by the pandemic and one less shipping day, but will sequentially improve versus Q4 of 2020. We expect Q2 sales to improve as we wrap the significant decline in Q2 of 2020 and the benefit of our 2020 acquisitions.

In conclusion, I'm excited about the outlook of 2021. With an improving health and economic backdrop and evolving portfolio of healthy spaces products and a new digital tools and capabilities, Armstrong is well positioned to advance our value creation model in 2021. With that, I'll turn it back to Vic..

people; planet; and products. I've always believed that Armstrong is a good corporate citizen. And that said, I also believe we can improve, and I want to challenge the organization and make ourselves accountable for getting even better. Finally, regarding ESG initiatives.

Brian mentioned, we recently made a contribution to the Armstrong World Industries Foundation that will ensure that the foundation can increase and sustain its support for the communities where Armstrong employees live and work for many years to come.

Armstrong is a clear leader in the commercial construction market, and we have been for many, many years. We've most recently demonstrated this with AirAssure and Vidashield, two exciting new solutions that demonstrate Armstrong's product leadership.

We have strengths on multiple fronts, which will allow market leader like Armstrong to return to the top and bottom line growth trajectories we've established before the pandemic hit.

Together with our industry-leading position, our digitalization investments, our healthy spaces platform and our commitment to ESG, Armstrong is well positioned for the near-term and the long term. The healthy spaces revolution is only just beginning, and I believe it will be a powerful catalyst driving renovation activity for years to come.

A catalyst turbocharged by a health crisis and backed by a newfound awareness as to how fundamental our health and the health of the built environment is to the strength of our economies and our communities. We are both ready for and excited about the opportunities ahead.

This is all aligned with our commitment to continue to deliver strong results for our shareholders, making a positive difference by creating healthier spaces where we live, work, learn, feel and play. As I said, I had a lot to cover this morning because there's a lot of exciting things going on here at Armstrong.

And I want to thank you though for your extra time and patience and interest. And with that, we'll be happy to take your questions..

Our first question comes from the line of Kathryn Thompson of Thompson Research..

Focusing on your new product launches this year.

Could you give an update on feedback from the field in terms of product acceptance with your new healthy space products? And how sanguine are you about the prospects on conversion to this new product line, particularly in large metro markets in coming months?.

Yes, Kathryn. No, we announced this at the end of October, as you know, and then we said that we would be ramping up production in December, which we've done. I'm happy to report that we won our first specifications already. We're shipping the product to the field already. We're installing already.

So I'm pretty pleased with how quickly the conversations have progressed since the last time that we spoke to all of you. And really, this is, as I said in my prepared remarks, this really is the predominant conversation that's going on with all our customers.

Everybody is trying to figure out how do we get back to restaurants and how do we get back to gymnasiums? How do we get back to the offices? It's been very public around how we get back to the schools, right, and get our kids back in -- and there's so much money being spent around how to get that done.

And some are grasping at the near-term things they can grasp at to, to make things happen. And more of the conversations have evolved to, okay, how do we make some of these features of a healthy space permanent. And those are the conversations that we're continuing to progress. Meanwhile, we're selling and shipping product today.

So the engagement, it's not like we have to make up the topic, right, Kathryn. The topic is already in the marketplace, and everybody is trying to figure it out. So we're over the right target in this conversation and getting in the middle of it with our 2 new solutions..

Could you put flavor of the types of projects? Is it new construction? Or is it more conversion?.

All the above. I mean, the A&D community is already looking to specify this product for new work that they're doing. Of course, major renovation work that we're doing. But we're also engaged with people who are looking at instead of patch and match, just replacing a couple of ceiling tiles.

They know they have to do something to broadly change the healthy nature of their space. So at all levels, again, there's not just one part of the market that's having this conversation or even one vertical that's having this conversation. Everybody is engaged in this conversation on how we need to create healthy spaces and what their options are..

Okay. And a quick follow-up. While the quarter saw a tailwind from lower raw material costs, we've seen material rise in key products to steel and other raw materials.

How are you managing inflation? And how does that fit into the guidance that you gave for the year?.

Yes, we're seeing inflation. Certainly, where we normally see it first, right? It's in steel in our grid business, that's in the WAVE business for us. We raised price in December as a result of that, we raised price again, in January and again, in February to stay ahead of the meaningful inflation that we're seeing there.

I think in the building product space, there's broad inflationary pressures and a favorable context when you think about our normal price increase rhythm on the tile side of the business. So we're expecting an inflationary environment, and we're baking that into our guidance..

Our next question comes from John Lovallo of Bank of America..

Maybe, Brian, starting with SG&A. On slide 5 and 6.

If we think about the $6 million year-over-year increase in Mineral Fiber, how much of that was growth related and likely to persist? And I guess the same thing on the $5 million for architectural specialties, how much of that is due to the acquisitions and likely to be sticky?.

Yes, John, on the Mineral Fiber question, a good bit of that was around the initiatives, right? It wasn't just one thing. We had higher business development costs, right, as we work through the acquisition of Arktura. Vic mentioned the digital platform, Kanopi, so additional investment there, some other digital initiatives we're working on.

So it's a number of things there. That impacted that Q4 as we readied for the growth we're seeing coming in, in 2021. Similar on AS, a good bit of that is the SG&A from the acquisitions, but there's also some investment there as we continue to expand that capability in the architectural specialty segment..

Okay.

And then maybe thinking just about the 4% to 6% Mineral Fiber AUV improvement in 2021, should that sort of mirror the sales cadence that you provided on Slide 13?.

John, what do you mean by the sales cadence to make sure I understand your question..

Yes, sorry, I'll be a little more clear.

Meaning that improvement on a sequential basis, should it be similar to what you're outlining on Slide 13, meaning that it could be slightly negative in the first quarter and then begin recovering nicely in the second quarter?.

Yes. I think that's fair. I think Q1, we have a full base period to compare ourselves to. And so although we'll see sequential improvement, it will still be against a comp that reflected pre-pandemic conditions. So I think that's a fair conclusion.

And then in Q2, we should see a continuing improvement against a favorable comparison, certainly in Q2, but even in the second half of the year. AUV has been one of those areas of strength for us for a number of years, and it's the underlying conditions that dry that are going to continue with like-for-like pricing and positive product mix.

I think the worst is behind us in terms of this channel mix and this territory mix that was artificially created by unevenness of government mandates across the country in terms of the effects of the pandemic. So I think we feel good about the AUV and getting back on our historical run rate..

Our next question comes from the line of Adam Baumgarten of Credit Suisse..

Please just kind of focusing on the top seven markets you've mentioned in the past. Just curious if you've seen growth there improve.

And at this point, growth in those markets in aggregate is above or below total company sales growth?.

Yes.

Brian, do you want to take that?.

Yes. Sure, Adam. We've seen that sequential improvement, especially as if we look at -- we have been prepared remarks on January, but January versus December. So they've converged. They're getting closer to the broader market. I think more importantly, though, the relative proportion of our total sales have gotten back to their historic levels.

So there's still some room to go there, but that's why we're confident in our '21 guidance with regards to that channel mix fall through or territory mix fall through..

Got it. And just -- I'm sorry, go ahead..

Adam, I was just going to add to that because back to John's question around AUV, I mean, I think the worst is behind us in terms of that mix headwind, which is -- was the negative contributor, if you will, in 2020. And so that shouldn't repeat in '21.

So because I think that part of the headwind, the top 7 metro areas that we've highlighted, the worst of that's behind us..

Yes. Okay. I guess that was my next question.

Should we think about the impact in '21 as more neutral from channel and territory mix? Or do you expect an actual tailwind this year versus last year?.

Well, I think the first quarter, as we talked about, is probably going to be still a headwind, and then we'll see some improving tailwinds in the remaining 3 quarters of the year. Net-net, we'll have to see how much of a tailwind. But net, we should see a slight tailwind from that..

Our next question comes from Susan Maklari of Goldman Sachs..

My first question is, you mentioned in your commentary that you're coming into 2021 with a record backlog in your Architectural Specialty segment. Can you talk a little bit more about what is driving that? I know you mentioned the project in Miami that you won with Virgin.

But what else is kind of starting to come together there? How should we think about the mix in that backlog? And perhaps, any color on the timing of that coming through?.

Yes. Susan, the -- we commented back in the third quarter that we took in as many orders in the third quarter last year as we did the prior year, really, and still in the middle of the pandemic. And I think that was reflecting the continued penetration of a broader product portfolio of the market and really, in all parts of the market.

So I think when you look at our backlog, I think it's a reflection of continuing penetration in all verticals in all segments of the market. We continue to take share and participate more broadly in the market.

And the more that we expand our portfolio, and of course, we've been doing this for the last 4 or 5 years, really intently expanding our portfolio so we could play in more spaces in every commercial building out there. And I think this is a manifestation that we're continuing to do that in penetration.

So not a lot of market tailwind here driving this, frankly. I think this is a bit of a broader participation of Armstrong in the market..

Okay. That's helpful. And then just following up on that. As we think about the digital initiative that you talked about and the ability to start to get into some of these smaller scale projects that are out there.

Can you give us some color around the margin profile of that business? How we should be thinking about it relative to the core operations? And perhaps, anything around the color, around the timing of how you expect this to really kind of ramp up and start to come through in the results over time..

Yes. Susan, the part of the market that we're going to get at with Kanopi, in particular, is a part of the market that is -- it's kind of dormant and lament there. There's -- we've talked about 35 billion to 40 billion square feet of installed base of Mineral Fiber tile that's out there, and some of it is quite old.

And a lot of it's bump into that, right? When we go into some of these places, and you look up and you see there's some pretty nasty and damaged tiles that need to be repaired. But there's a lot of friction. And what we mean by friction is people don't know what to do. They don't know how to fix it. They don't know where to go to fix it.

And this digital platform is going to make it easy for them to first of all make themselves aware and knowledgeable about how to fix it. And then this is a platform with our distribution arm to service that directly. And so we're excited about being able to reach a part of the market and make it really easy for them.

And what happens when you do that is you'll accelerate the rate of renovation of this large installed base. And that's what we're opening up here with this Kanopi platform. The margins you should expect, to your question.

The margins you should expect here are at par with the rest of our business with high fall through rates as you've come to know with the Mineral Fiber business..

Our next question comes from Ken Zener of KeyBanc..

What a year. You guys obviously have been managing through what is a lot of volatility in your core end market and with the regional concentration. So I appreciate the disclosures, additional disclosures that you guys are providing. So I just want to probe a little deeper. Your guidance for '20 in terms of 0 to 2 Mineral Fiber volume and 4% to 6% AUV.

please give us a little first half, second half cadence, if you would, just to think about price and volume relative to your figure, I think on page 13, that would be helpful.

It's my first question, if possible?.

Ken, so let me take a jab. Brian, feel free to help because, I mean, to split it by halves, it's a good question, and it's a tough one, though, because we know we have this deep trough in the second quarter to compare a continuation of sequential improvement for the fourth quarter to the first quarter into the second quarter.

So that could really be skewed by that, which is why we try to provide a little color on the page you're referencing in terms of our guidance. So it's going to be really hard to break out, I think, the cadence of AUV and Mineral Fiber. I think that's as good a color as we can provide you at the moment..

Understood. How about this then? You talked, I believe you said, Brian, positive price/mix in the second quarter, which implies something between where we were in fourth quarter end up in second quarter.

Is that accurate?.

Yes. Yes. we saw a lot of....

Therefore....

Yes, we saw a lot of headwind, if you recall, in the base period 2020 Q2 headwinds on that AUV, especially on a fall through. So we'll see that benefit in Q2..

Is that to say then where you're coming positive in 2Q and obviously to get to a 4% to 6% number for the year, it -- is most of the negative -- it's product mix and the channel mix, but that's you're obviously going to be pretty strong in the second half, just using math versus the first half trend that you just outlined?.

Yes, Ken.

With regards to AUV specifically, I'd say we won't see as much of a headwind in Q1, but it will definitely pick up as a benefit in Q2 through 4 because we benefit some of that proportionality of those key seven to get back to their normal -- they could still be down from a volume standpoint in Q1 slightly, but the proportionality of those key seven is improving..

Excellent. I appreciate that clarity. That's very helpful. If we could just take a step back, and Vic, I think you ought outlined a lot of initiatives. Now, DESIGNFlex was a huge investment you made in past years. Your exposed structures, market share gains for what had been ahead of warehouse venues or something like that.

With volume down in 2020, and volume just kind of being that flat grinding away trend in Mineral Fiber, I think it's -- because you guys have talked about stable market share for Mineral Fiber. So I think it's just being offset by your architectural gains.

Can you talk to, if this is really shaking your view about what Mineral Fiber is as a percent of office, retail space? That's my first question. And then second, California is still bright live. It's to say the least, it's trending differently than Florida and Texas.

Can you talk to what early insights are, not so much is it nation homogenous trend, but rather what you're seeing in Florida, Texas versus California? Because it's very different outcomes, whether it's kids in schools or economic growth..

On your first question, Ken, it hasn't changed my view of the role of Mineral Fiber as a category in all commercial spaces. The -- and in fact, it's confirmed, I think, that the Mineral Fiber technology that we're bringing around total acoustics and sustain.

And the more collaboration spaces that are required, acoustics are becoming even more and more important. Now you add on top of that, the fact that we need to better contain the virus. The virus isn't going away. Vaccine and all that we're going to live with this for a long period of time.

And so we have to be able to contain and then treat the air that it's contained in for the maximum safety of people. And so to do that, the suspended feeling systems that we sell and the gaskets are going to play an even more important role.

And I think -- I'll tell you, my takeaway so far is that the role of ceilings in interior spaces in terms of what they do to control airflow in a space is becoming more and more and better known. And that is going to be, I think, a very positive for the category overall in itself. If this should grow the category overall. So it's confirmatory.

I think on our view that there's an opportunity here to grow this category. So with your second question around, it's very uneven across the country about what's going on. On the East Coast and the West Coast, a lot of folks are still working from home. You go to the middle of the country and they're back to the offices, at least in some way.

So it's very mixed across the country. And then it's mixed across the verticals, too, around how different areas are treating schools. You're getting gets back into schools and the solutions around offices. So it's very mixed.

But I think the one common thing that I do see is that everybody is trying to solve for creating a healthier space to get people back into their spaces, whether you're a restaurant owner or a facility manager or an office building. And that's the conversation that we're engaging in across the country..

Our next question comes from the line of Keith Hughes of Truist..

This is Judy on for Keith Hughes. Just one quick clarification on your '21 sales guidance on the slide 13.

I believe you said that, did that include acquisitions, but the Q1 was one of the selling day, is that correct?.

Go ahead, Brian..

Yes. Our guidance for 2021 includes all the acquisitions completed in 2020..

Okay. Got you. And you also -- your sales guidance, you talk a lot about the impact of your growth initiatives and things are kind of specific to you. That aren't impacted by the market.

But do you have any kind of broad comments about the market growth or what the market growth in your guidance?.

Yes, Brian, let me take that. Because the way we're thinking about this is that we expect modest improvement in '21 versus '20. I think the worst is behind us in terms of the pandemic impact on the market. Now it's all about rate and pace that we improve from the 2020 base.

So we were thinking there's some modest improvement in the market in that guidance, 0 to 2. And then we think there's positive contributions, and we're baking that in from these growth initiatives that we talked about, specifically around the healthy spaces initiatives, the new products there as well as Kanopi, the new digital platform.

So we think that's the other part, and that's what been all contained within that guidance. But we do see some incremental improvement in the market in '21..

Our next question comes from the line of Nishu Sood of UBS..

First question I wanted to ask was about your AUV outlook that kind of return to the mid-single digits in the Mineral Fiber for '21.

You had the two mix related headwinds in '20 between the DIY headwind as well as the large markets, the kind of COVID headwind, how are you thinking about those playing out in '21? Because if those unwind, it might even give a boost beyond just the normal rate of price improvement. So I just wanted to get your thoughts around that, please..

Yes, it's a good question. It's because the underlying fundamental of AUV improvement is like-for-like pricing and product mix, right? Both of those remain positive in 2020, and we expect those to continue to be positive in '21 as a baseline.

But you're right, I think the channel mix -- and we talk about channel mix every once in a while, we'll have a quarter where the big box guys will do a big load in, right, for inventory, and we have -- we'll talk about its impact in the quarter.

But just like in other situations, this will kind of time its way out, and those will normalize throughout the year. And back to my earlier comment around the seven key territories that we highlighted where they were really -- that territory mix was a real headwind for us. Again, those -- that's already improving.

And so I wouldn't expect that to repeat and there could be a tailwind there actually as we get into the second half. I think you're alluding to that. And I think directionally, that's correct..

Got you. Got you. Great. And the second question, three acquisitions in 2020. Does that -- obviously, you folks have done a good job of integrating these acquisitions from a manufacturing perspective in the past, given that there are now three that have happened and especially the one in December.

Does that give you some pause about continuing in '21 at the same pace? Or would you remain opportunistic on that?.

Well, I think the answer to that and how we think about it an issue is that we need to continue to stay opportunistic about this, and add the organizational capacity as we go. But as you know, the timing of these is really hard to nail down because these companies aren't for sale. We're building relationships with them.

We're building common visions for the future of our businesses being together, and that takes time. So this could be very lumpy quarter-to-quarter, year-to-year, certainly. But I think the 1 to 3 cadence is a good cadence for us, both from an organizational capacity standpoint, but also from the landscape in which we see, we have opportunities.

So I still like that 1 to 3 cadence, and I think that's how we're thinking about it for '21..

Our next question comes from the line of Garik Shmois of Loop Capital..

Great. Just wondering on the Mineral Fiber AUV guidance in the context of inflation, does the outlook for the AUV growth, assuming normal cadence to price increases. So we have 1 here in February, we would expect 1 later in the year. As you look at the cost basket and you talk about inflation are ramping across many building product categories.

Do you think you'll need to go out more frequently with pricing relative to normal years?.

Yes. The under -- like we said earlier, right, Garik, a big contributor to AUV is the like-for-like pricing. And we do have a favorable backdrop when you -- as we come into '21 from an inflationary backdrop standpoint with other building materials already. Seeing some meaningful inflation. So at this point, we don't see a change in our cadence.

But as we always do, we size the price increase amount relative to the inflation that we're seeing. So I would expect us to run a very similar play this year, same cadence, but we'll size the price increase accordingly..

Okay. Dick, real quick. One point of clarity there. That's true for Mineral Fiber and AS. On the steel side, that affects our JV wave. We may see a slightly different cadence, as Vic already outlined. We've done three already..

Yes. Yes. That's clear. A follow-up question is just on the EBITDA margin outlook, looking for relatively flat for the year. But how should we think about it by segment, just given you've had some of the increase in SG&A in the fourth quarter. You talked about that a little bit on a prior question.

But how should we think about the combination of the increase in SG&A versus the inflationary impacts versus the integration of acquisitions? Should we expect Mineral Fiber margins to expand? Architectural specialties to decline? Or should we expect relatively flat margins by segment in 2021?.

Brian, do you want to take that?.

Sure. Yes, Gary, great question. Both should expand slightly. So call it, relatively the same as 2020. As we outlined, the acquisitions have to carry a higher EBITDA margin than the AS segment, so that's going to help pull that up. And on Mineral Fiber, it will be relatively flat..

Our next question comes from the line of Yves Bromehead of Exane BNP Paribas..

I just wanted to come back to the Kanopi segment. Could you maybe give us an indication of what's the addressable market potential here? And what it could represent in percentage of revenues in normalized world? That's my first question..

Yes. The -- Kanopi is a digital platform, to be clear. I know it's new, but it's a digital platform that allows us to access a good part of the market. We think that, that untapped or the market that is, let's say, it's not influenced directly by Armstrong, is in the neighborhood of $400 million to $500 million..

Sorry, what's the amount? I didn't catch that, sorry?.

$400 million to $500 million. The size of the market that we're targeting to influence..

Okay. And my second question I guess I wanted to get a better view as to how you address your clients when it comes to the new product segments in terms of safer indoor spaces and ceilings. I mean, if we take the example of schools, for example. I presume their first objective is to allow for social distancing to reopen.

So what's really the trigger to make them aware of the benefits of changing the ceiling tiles and having a safer indoor space and ventilation system.

How do you identify the right triggers there?.

Well, we're in discussions with them and the right trigger is really around air quality. And the indoor air quality. The one thing that they know is that they're not going to prevent kids or people to come to the schools without a virus.

The real trick is how do you protect the other students and the other people in the classrooms and in the schools in the event that, that happens, when that happens. So it's really around the transmission through -- throughout the year. So the trigger point is already there in that discussion.

And then the role of the ceiling and how the ceiling plays and being able to capture that air and get it treated and cleaned back into the space before it infects others or goes, as we've talked about, goes from classroom to classroom to classroom. That's the opportunity with our solution.

So the trigger really is around how do you get the cleanest, healthiest air on an ongoing basis in a classroom and throughout schools?.

Okay. And I guess just kind of curiosity, I mean, what's the success rate of putting those tiles, sitting in the classroom, someone has COVID-19. But because the air and the ceiling tiles have been changed and the whole system is safer, what's the percentage success of not catching COVID-19? door..

It's being tested in those very specific applications are referred to. But this is not a new technology or a new design approach.

If you look at how hospitals and operating rooms, clean rooms are designed today, they're designed with gasketted ceiling systems for that very purpose to contain whatever is in that space from going anywhere else in the building.

So this is a well-known technology and design approach to protect occupants from pathogens, both in the existing space, but also in the next spaces..

Our next question comes from Justin Speer of Zelman & Associates..

I just had a few questions. One, starting with the guidance, and really appreciate the handholding on the phasing of your guidance, but just wanted to get a sense for your confidence in those forecasts and that phasing implied in your presentation.

Is there a backlog in hand in Mineral Fiber? Or maybe customer discussions that provide confidence? Particularly, confidence in that second quarter and beyond, the second quarter growth path and beyond or is it still pretty muddy out there in terms of line of sight?.

Well, I'll say it this way, Justin, I think we have we have more clarity than we did a quarter ago or two quarters ago.

And so -- but that said, there's still a lot of uncertainty in the rate and pace at which people get back to the offices and kid to get back classroom the overall markets open up and get back to a better cadence than what they were on in the first half of last year. So there's still some uncertainty out there.

And I think the term that I hear from our customers and our -- both our distribution and our contractor partners and the activity level that we're watching in the marketplace in terms of bid activity is cautious optimism, that this is going to continue to improve throughout the year.

And I think we've got a very prudent set of guidance here that reflects, I think, a cautious optimism about a market that's modestly going to improve versus 2020, and we get back to executing in the market the way that we have traditionally executed. And I think that's the -- gives us a good level of confidence in our guidance..

Well, I guess, is there -- because I know you've got the kind of the new construction piece that's smaller and you've kind of got the refurb piece that's going to be a larger or constitute a larger piece of the business.

Maybe are there any like discernible trends there in terms of like year-over-year change in backlog for projects, particularly in Mineral Fiber, I'm more focused on the Mineral Fiber side of the ledger?.

Yes. I mean we have we have limited backlog visibility, right, on the Mineral Fiber business, given the majority of that business is renovation activity. But again, the level of activity on the mineral fiber side is encouraging in terms of it's sequential improvement.

And even when you think about the number of cases of COVID in the United States in November, December, January, were huge, right? And there was more than you had in the first two quarters. So I think that in spite of that, I think we're figuring out how to operate and to continue to open up in spite of those things.

And now with the vaccine, I think there's a lot of logic and support that this should incrementally continue to improve. And that that's what we're thinking and baking in here as well..

The other piece of this, probably it's smaller, but -- but we know that home improvement activity has been very strong.

I guess, how much was the home center growth in the quarter and I guess what is the sequencing of that? And what is your expectation into the first half and for the for the year for the home center growth? Because that's been a really robust grower, in general?.

Yes, it was strong in the third quarter, and it got stronger in the fourth quarter. We expect that to still show some strength in the first quarter, but then we'll see where we go from there. It should seasonally adjust now that we get back into the comps where home center started to see additional activity in the back half of the year..

Okay. And maybe I'll get may, hopefully some more context on how strong that was.

Was it like mid-teens or 20s? Or is it single digits in terms of the sequencing there?.

I don't have that off the top. Brian, I don't know if you have that or we could get back to you, Justin..

Yes. It was -- for the quarter, mid-teens for the year, low teens..

Awesome. Awesome. And then last question for me. Just in terms of that SG&A spend, I don't know how to think about that.

Did you pull SG&A expense into 2020 from 2021? Or maybe a way to think about how should we think about or how are you modeling absolute SG&A dollar spend this year versus 2020?.

Go ahead, Brian. Yes. So we would expect -- we exited the year roughly at 20% of sales. Given those temporary costs that we cut in 2020 and expect them to return in '21. For the full year '21, I would expect our SG&A to be just right around that 20% of sales rate, maybe a little lower. But as we've talked before, that's a rebound year.

And so our longer-term objective is not to run the business at a 20% of sales rate. That's just a reflection of the pivot between '20 and 2021..

Our next question comes from Phil Ng of Jefferies..

Vic, a lot of great color. Just curious, just from a financial crisis standpoint, the last cycle, you saw a pretty sharp snapback in volumes the first year out of the downturn, and it was pretty muted afterwards. For this year, guided to flattish volumes for Mineral Fiber.

But curious when you look out to 2022, how do you kind of envision that pace of recovery? I know there's nothing normal about this pandemic, but any color in terms of the pace of recovery when you kind of look out?.

Yes. I think you're right. To compare back to the financial crisis because when new construction goes down, we have seen a bounce back and renovation activity, and we saw that actually in the last couple of recessions. So we're expecting that's going to be the case again in '21. And we expect that to continue into '22 as well.

Now there's a lot of uncertainty between here and there, of course, but we're expecting that new construction is going to -- we're going to feel the effects of a bit of a pause on new construction activity.

And again, I remind people that it didn't go to zero, new construction activity did not stop altogether, it was down 10% to 15%, and that's 30% of our overall demand profile. So again, we expect that to be a bit of a headwind in '21 and '22, but offset by what you're referring to, Phil, which is a bounce back in renovation activity.

And we're counting on some of that in '21. I think we're being -- I think we're being enough -- we're showing some caution here enough, I think, given the uncertainty of but the numbers would say that this should continue into '22, and we should continue to see renovation activity pick up in '22..

Okay. Great. And some of your newer products on the health care side sounds really promising. I know wrapping this stuff take time, you just rolled it out.

But is the contribution going to be a little more impactful in the back half this year? Or should we think of this more of a 2022 opportunity?.

Well, no, I think we should continue to see whether we'll move the overall needle, I think you've got it in our guidance of 0% to 2% on the Mineral Fiber side. You got to capture -- we've got to capture there, I think.

But as you have alluded to, Phil, this does take some time to get some traction and to get some critical mass behind it, much like our total acoustics and some of our other launches have done. So I expect '22 to be much better in '21, of course. But I expect some continuation of sequential growth quarter-to-quarter throughout the year..

Got it. And just one last one.

What's the go-to-market strategy for your Kanopi offering? Will this be more direct to the end consumer? Or are you doing this in conjunction with your wholesale partners?.

It's going to be all the above. I think we have an opportunity to -- because of the digital platform, we have an opportunity to reach out to building owners, occupance of spaces. We have an opportunity to obviously support our distribution sales efforts and some of the specific markets that they're targeting.

Again, that's the -- I think one of the benefits of a digital platform, it does give you that flexibility to cost effectively reach in and touch very specific markets. Because of its digital format.

And I expect us to have a broader capability to touch more of the market and more of the stakeholders and influencers of these market segments with this digital platform..

Our next question comes from David MacGregor of Longbow Research..

Yes. Congratulations on the results, Vic. I guess, I wanted to ask you about acquisitions and go back to kind of a couple of previous questions, but you talked about the cadence lying ahead as being maybe one to three transactions. and I think I heard you say capacity, organizational capacity may be the way you're thinking about limiting factors.

I guess just to sort of focus maybe on the one versus the three transactions. You've got a good balance sheet, 1.8x EBITDA at the end of the quarter, but with depressed EBITDA that should be showing some level of recovery here. You clearly have the capacity to do larger transactions.

And I'm just wondering how you kind of reconcile the -- on the 1 hand, the possibility of doing larger transactions that would make a more material contribution to growth versus the opportunity set you're seeing in the funnel and that occupation -- or that organizational capacity that you referenced?.

Yes, Dave, we're not opposed to doing larger transactions. We -- and the areas of the market that we're hunting right now. We're trying to fill gaps of capabilities and capacity. They're not large companies that we've come across. So it's not like we're opposed to doing larger transactions.

So to your point, we clearly have the capability to do larger transactions. I think where we are in our evolution of this segment, Architectural Specialty segment, the opportunities aren't large transactions.

So as we continue to evolve and we continue to look at technology as a dimension of our overall space in which we're hunting, and we've expanded that to the -- to digital technology, we'll have to see what happens here. But we're not letting -- we're not avoiding larger transactions because of our cadence or because of our capacity, either way.

We're open for business on both large and smaller projects..

Do you foresee the possibility of your acquisition program taking you into adjacencies?.

Well, there -- when you say adjacencies, David, you're referring to something outside of ceilings and walls?.

Yes, I guess, something that your customer is buying, something else that your customer is buying that you could leverage off that distribution capability?.

Yes. Right now, we see....

The spec rating capability?.

Yes. I mean, we see plenty of opportunity for us to expand into the adjacencies within ceilings and walls. And we're doing that, we're expanding into other types of materials and capabilities and designed within ceilings and walls. And I think we have plenty of opportunity there. We don't need to go look for a different field to play in at this time.

Never say never, but again, where we are today, we have plenty of opportunities to stay focused on ceilings and walls..

Thank you. At this time, I'd like to turn the call back over to CEO, Vic Grizzle, for closing remarks.

Sir?.

I just want to -- thank you. I just want to thank everybody for hanging in there and for the terrific questions. We had a lot of material we went over today. Maybe driven by we had a lot to cover today, but I want to thank everybody for hanging in there. Thank you for your questions and your interest, and we look forward to talking to you next quarter.

Stay safe out there..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..