Good day and thank you for standing by. Welcome to the Q3 2021 Armstrong World Industries, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. .

I would now like to turn the conference over to your speaker today, Theresa Womble, Director of Investor Relations. Please go ahead..

Thank you, and welcome, everyone to our call this morning. Today we have, Vic Grizzle, our CEO, Brian MacNeal, our CFO, to discuss Armstrong World Industries' third quarter 2021 results, our rest of year outlook and progress on our growth initiatives.

Our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measure is included in our press release and in the appendix of the presentation we issued this morning.

Both are available on our Investor Relations website. During this call, we will be making forward-looking statements that represent the view we have of our financial and operational performance as of today's date, October 26, 2021. These statements involve risks and uncertainties that may differ materially from those expected or implied.

We provide a detailed discussion of the risks and uncertainties in our SEC filings, including the 10-Q filed earlier this morning. We take no obligation to update any forward-looking statements beyond what is required by applicable securities laws.

Now, for those of you following along with our presentation, please turn to slide four as I turn the call our to Vic..

Thanks Theresa. Good morning everyone and thank you for joining on call today. This morning we announced another quarter of recovery from the COVID impact to results of 2020.

We delivered strong third quarter topline growth, up 19% versus 2020 results, with Mineral Fiber sales increasing 15% and architectural specialty sales improving 31%, adjusted EBITDA of $99 million was 8% ahead of prior year results.

We are pleased to have achieved these results against the backdrop of choppy market recovery, increasing inflation and supply chain disruptions throughout the construction industry.

Unrelated to these challenges, we also experienced a rare manufacturing equipment failure causing lower than expected production rates in September, which Brian will discuss in greater detail in a moment.

Despite these challenges and the rare production issue we reaffirmed the midpoints of our full year 2021 guidance and expect to have a strong finish to the year. To that point these continue to be unprecedented times. Inflation remains a strain on raw material, freight, labor and energy costs throughout the construction industry.

At AWI, we have moved proactively throughout the year to increase prices and stay ahead of these inflationary pressures. And consistent with our performance over the past decade, we have successfully stayed ahead of inflation.

We recognize this as unique and it's a testament to the strength of our industry leading service model and the high quality innovative products we manufacture that allows us to earn those price increases in the marketplace.

Specifically, within our Mineral Fiber segment we reported third quarter AUV growth of 14%, which is the highest level we've achieved since we separated from the flooring business in 2016, and this growth was largely driven by like-for-like pricing improvements.

And not unrelated inflationary pressures, supply chains throughout the economy have also been under unprecedented pressure. Again our teams throughout the organization have been on top of their game. They have remained agile and dedicated to limiting disruptions to our customers and partners.

This is critical because of our best-in-class service models an important component of our value proposition to our distributors and to the contractors who depend on them. Because of this importance, we set a high bar for our service performance.

While many companies may track two or three service performance metrics, we track six, as part of what we call our perfect order measure. These include order-fill accuracy, on-time delivery, shipping damage, billing accuracy, product defects and returns.

And I can share with you with great satisfaction that this measure not only remained above our 90% threshold throughout 2021 for the Mineral Fiber segment in particular, but it is improved in the third quarter. So, I'm proud of how our teams have executed to handle these unprecedented challenges internally to meet our customers needs.

Now externally these challenges have impacted our business in the form of project delays impacting both our Mineral Fiber and architectural specialty segments.

Despite these challenges, Mineral Fiber sales volumes increased in the third quarter versus prior year on the strength of the R&R part of our business, that has more than offset the impact of these project delays and to lower new construction activity. Our sales rate per shipping day also showed sequential improvement in the quarter.

In fact, September's sales rate per day eclipsed that of 2019, and the quarterly results for this metric has now improved sequentially for the last five quarters.

From a profitability perspective, the Mineral Fiber segment generated strong gross margins compared to prior year reflecting positive like-for-like pricing, improved mix and our ability to overcome the production headwind I mentioned earlier with other productivity efforts. And in fact, this was the best gross margin level since 3Q of 2019.

Our WAVE joint venture delivered another strong quarter, as they have maintained excellent pricing discipline to stay ahead of inflationary pressures. We're also pleased with the performance of one of the group's newest innovation called SimpleSoffit.

Now like many of our innovations we've introduced SimpleSoffit drive and drive efficiencies for our customers and for those who ultimately install our products.

Soffit framing is a common design feature that requires a significant use of labor and materials on commercial construction jobs, and has a variety of complexities based on interior design and the accommodation of HVAC systems.

Now given the pressures on labor, we realized creating savings in this area could be a significant value generator for our customers. What the team that WAVE introduced are pre-fabricated soffit framing systems that are engineered using our automated design software to match the design specs and come pre-packaged and easy to handle flat boxes.

Because of their design our SimpleSoffit systems can be installed up to three times faster than traditional methods with less material and labor hours. SimpleSoffit are making a significant difference in terms of speed and costs on the sites where they have been used.

Including some high profile projects such as the new PG&E headquarters in California, the Kansas City International Airport and for hockey fans out there the UBS Arena at Belmont Park where the New York islanders will drop the puck for the first time in mid-November.

We're very excited about how this new innovative product has gained traction and the value it's creating for our customers. And the architectural specialty segment had a strong top-line quarter as well, improving -- and improving margin performance.

In addition to the contributions from our 2020 acquisitions, sales and earnings from the organic business rebounded nicely from prior year lows. We've also successfully introduced price increases for these products and that is helping address some of the inflationary pressures on this segment as well.

New construction and major renovation activity improved, but was uneven due to project delays. Even with those challenges and our continued growth investments in this segment, architectural specialties, EBITDA margin improved 350 basis points sequentially and I expect these improvements to continue back above the 20% level.

We remain optimistic about the 2022 and 2023 outlook for architectural specialties given the fact that we are on track to exit 2021 with a very strong order backlog and bidding activity remains robust. As new construction activity regains momentum we expect sales growth to further accelerate in this segment.

The broader industry indicators that we track also support our growing optimism for both the AS and the Mineral Fiber segments, as many of these have continued to improve or remained in positive territory in the third quarter.

GDP forecasts remain above 5%, the architectural billing index ended September well into expansionary territory at 56.6 up from August reading of 55.6. Similar to the second quarter, Dodge Data for both bidding and construction starts improved double digits.

These are strong indicators for growth in 2022 and 2023, and with our recent investments we are well positioned to capture additional growth as the market recovers. Now, with that, I'll turn the call over to Brian for more detailed look at our financial performance.

Brian?.

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

On slide five, we begin with our consolidated third quarter 2021 results. Adjusted net sales of $292 million were up 19% versus prior year. Adjusted EBITDA grew 8% and EBITDA margins contracted 320 basis points. EBITDA margins contracted due to continued investments in SG&A and lower manufacturing productivity.

Adjusted diluted earnings per share of $1.17 was 9% above prior year results. Adjusted free cash flow was 28% above prior year results. Our balance sheet remains healthy as we end at the quarter with $439 million of available liquidity including a cash balance of $94 million and $345 million of availability on our revolving credit facility.

Net debt at the end of the quarter was $533 million and our net debt-to-EBITDA ratio of 1.5 as calculated under the terms of our credit agreement remains well below our covenant threshold of 3.75. In the quarter we repurchased 187,000 shares for $20 million or an average price of about $107 per share.

As of September 30th, we had $544 million remaining under our repurchase program, which expires in December 2023. Last week we announced a 10% increase in our quarterly dividend.

This is our third increase in the last three years and when paired with our share repurchases is a reflection of our commitment to our balanced and disciplined capital allocation priorities that continue to be investing in the business, expanding into adjacencies through acquisitions and returning capital to shareholders.

You can see our consolidated third quarter EBITDA Bridge from the prior year results on this slide as well. The $8 million adjusted EBITDA gain was primarily due to favorable AUV driven by positive like-for-like pricing and favorable channel mix, increased volume driven by the 2020 acquisitions and contributions from WAVE equity earnings.

This favorability was partially offset by higher SG&A cost, increased input costs on freight, raw materials and energy, and an increase in manufacturing costs driven by the 2020 acquisitions.

The increase in SG&A was driven by more normalized discretionary spending compared to the prior year cost reductions, and increase in variable compensation, investments for future growth in our healthy spaces and digital initiatives and the 2020 acquisitions.

Not surprisingly, like many other manufacturing companies, we felt inflation impacts throughout our supply chain, albeit less than some of other building product companies.

While our strong supplier partnerships have never been more important and our teams have done a great job of managing through this challenge, we expect inflationary pressure to continue into the fourth quarter. We now see cost of goods sold inflation somewhere in the 4.5% to 5.0% range for the full year 2021.

As demonstrated historically and in this quarter, we'll work to drive like-for-like pricing above inflation. Our Mineral Fiber segment results are on slide six. In the quarter sales increased 15% mostly due to favorable AUV previously mentioned.

We saw sequential improvement in our sales per shipping day metric and continue to track this closely in comparison to both 2020 and 2019. AUV fell through to EBITDA at historical highs as a result of the price increases we announced in February, May and August, and again is the outcome of our ability to price ahead of inflation.

Mineral Fiber segment adjusted EBITDA increased 10% driven by the AUV gains and another strong quarter of equity earnings from the WAVE joint venture. The team at WAVE has done a great job of pricing ahead of a steel inflation and managing issues across the supply chain.

These gains were partially offset by higher SG&A spending due to the return of prior year cost reductions, increased variable compensation and investments to support our growth initiatives.

Input cost trended higher this quarter due to raw material, energy and freight inflation, which remains a top focus areas for us as we end the year and prepare for 2022. In addition, we experienced a $3 million headwind due to unplanned maintenance activities at two of our larger plants.

This caused downtime at both plants and drove lost productivity, higher scrap costs and additional freight costs to maintain our best-in-class service levels. Both situations were remediated during the quarter, and I'm happy to report that the plants are running very well in October. This is an atypical event for AWI.

As many of you know, we consistently drive plant productivity year after year. Moving to architectural specialties or AS segment on slide seven, third quarter adjusted net sales grew 31% or $19 million with the 2020 acquisitions of Turf, Moz, and Arktura contributing $16 million and organic sales increasing $3 million.

AS segment adjusted EBITDA increased 1% as improved sales from the 2020 acquisitions and the organic business more than offset project push-outs, higher SG&A and increased manufacturing cost.

The adjusted EBITDA margin for the segment improved 350 basis points sequentially from the second quarter, but contracted 500 basis points when compared to the third quarter of 2020 results.

This segment is still being pressured by inflationary conditions continued along with a recent spike in project delays due to commercial construction, labor disruptions and supply chain challenges. The project push-outs are delaying some revenue to Q4 and 2022.

In September, we announced an additional round of price increases for AS products, which have already gone into effect. We've had AS price increases in each quarter of 2021. Slide eight shows the drivers of our consolidated results for the nine month period including a breakout of the impact for our 2020 acquisitions.

Sales for the first nine months of the year were up 18% and adjusted EBITDA increased 10%. The year-to-date results are driven by higher volumes as the second quarter left a prior year more significantly impacted by the pandemic.

Favorable AUV and increased WAVE equity earnings, which were partially offset by higher SG&A spend and increased manufacturing and input costs. Adjusted diluted earnings per share increased 12% to $3.28. Slide nine shows year-to-date adjusted free cash flow performance which is flat versus the prior year.

Increases in cash earnings, working capital improvements and WAVE related dividends were offset by an increase in income tax payments and higher CapEx spending following a reduced prior year in an effort to manage cash and liquidity during the pandemic. Our cash generation through the first nine months is in line with our expectations.

We summarize our updated guidance for 2021 on slide 10. Please note, this guidance update assumes no significant pandemic related shutdowns or material job delays due to supply chain issues.

We are narrowing our guidance ranges for all key metrics and would now we expect year-over-year revenue growth of 17% to 18%, adjusted EBITDA growth of 13% to 15%, adjusted EPS growth of 14% to 16% and adjusted free cash flow of down 7% to 2%. The right side of the page highlights updates for the prior -- from the prior guidance communicated in July.

You'll notice the increase in Mineral Fiber AUV range from 9% to 11%, as our teams continue to do a great job of realizing price from our three Mineral Fiber increases this year. We're bringing down the range of our Mineral Fiber volume to 1% to 2% as near -term choppiness remains and projects are delayed into the out months and 2022.

We continue to invest in our healthy spaces and digital initiatives and believe they will be meaningful contributors to our future growth. But the larger impact on volume for the current year is the project delays previously discussed.

This is a shift in contribution between the 2020 acquisitions and the organic business to the AS segment as revenue impacts are felt from the project delays. We now expect the 2020 acquisitions to contribute about 30% growth and AS organic in the mid-to-high single digit range.

In conclusion, I'm proud of the work our teams have accomplished throughout the third quarter in the face of supply chain challenges and a renewal of COVID-19 concerns. It certainly wasn't easy, but they delivered a solid quarter.

These are challenging times, but I remain optimistic that our investments in the future whether it's in people, growth initiatives, innovation or partnerships will unlock the next level of growth for AWI. With that, I'll turn it back to Vic for slide 11..

Thanks, Brian. Before we get into the Q&A session, let me share a little bit more about how we see our current position and the progress on key initiatives and what that means for the future here at Armstrong. Inflation and supply chain challenges are likely to persist into next year.

But at AWI, we're demonstrating that we can manage our way through this successfully delivering price ahead of inflation and minimizing the impact from supply chain disruptions. Market conditions are continuing to improve, albeit in an uneven and choppy like fashion. People are returning to offices and kids thankfully are back in classrooms.

And new construction activity is returning. Despite the unevenness in the recovery, we have remained focused on strengthening our competitive advantage and improving our long-term growth trajectory.

Our strong financial position has allowed us to continue investing in our growth initiatives such as healthy spaces and digital innovation and those efforts are progressing well and gaining traction.

Our healthy spaces product sales have continued to improve quarter-on-quarter and there are clear signs of the growing recognition of the role ceilings can play in ensuring indoor spaces are healthy. For example, we have seen a significant uptick in our demand for health zone products. This is the first line of our healthy spaces solutions.

As a reminder, these products were introduced a few years back to meet the needs of the healthcare environments in terms of disinfectability and washability, which are now attributes important to any and all indoor spaces. On a year-to-date basis sales of these products have increased 38% versus 2020 and over 20%versus 2019 levels.

What's most encouraging is that approximately 60% of these sales are now coming from outside of the healthcare vertical. This is validating the broader need and the transferability of existing healthy space solutions to more general purpose applications such as offices schools and hospitality.

VidaShield and AirAssure, the two products that we introduced at the end of last year, again, still early days, but the progress is encouraging. Sales of these products in the third quarter doubled from the second quarter sales levels.

And we have more than doubled the number of active projects in the quarter and are conducting several trials on large scale projects. On the digital front, we continue to invest across several initiatives with a focus on speed and cost benefits for our customers.

One such initiative is project works, which is our digital design and pre-construction service. This service automates the design process from concept to build materials, drastically increasing the speed of design while allowing design iterations along the way in minutes or in hours versus days.

In addition, once the design is complete, we can provide an accurate build materials that makes the lives of contractors much easier. This is a service that is deepening our collaboration with architects, designers and contractors in a mutually beneficial way.

It's helping us secure additional specifications and ultimately to sell more products into more commercial spaces. We're excited about the number of projects being processed by project works and how it's strengthening Armstrong's leadership position in the commercial construction industry.

In summary, our advancement of digital and product innovation despite the ongoing challenges of the evolving COVID pandemic is a testament to the power of focus we have as an America's only ceiling especially walls company.

This power focus has been critical throughout the pandemic as we kept all of our plans in operation and made no cuts to our sales and marketing efforts.

Our unique and powerful focus has also helped us manage through the challenges of inflation and supply chain disruptions to maintain our long track record of achieving price over inflation and maintaining our best-in-class service levels. Throughout this uncertain period we have not slowed our efforts to execute on our company strategy.

Our customer relationships are stronger now than ever. And our ongoing product and digital innovation is providing important top-line growth opportunities. As our markets continue to recover, we're in an excellent position to capitalize on this recovery, and to deliver increased levels of value creation for our shareholders.

And with that, we'll be happy to take your questions..

And our first question is from Keith Hughes of Truist. Your line is open..

Thank you. Just two questions. First you'd said in the beginning of the call, your September daily sales rate is greater than it was in 2019.

Is that on all products? Or is that a Mineral Fiber comment?.

Well, it's true for both, Keith. It's true for our Mineral Fiber products in particular which is what we were referencing, because we know really that's probably the best proxy for what's in the underlying market conditions.

But with our acquisitions and the growth that we've got going in an architectural specialties which has continued this year, it's well above 2019 levels. So it's true for both cases. But I think more importantly it's true for the Mineral Fiber business.

And again, we're trying to get to that proxy when the market is recovered back to pre-pandemic levels..

Okay. And you would talk about -- well, given that, I assume there must have been some kind of a dip in orders.

Was that August, July? I guess my question is how did that quarter play out sequentially?.

Yes. I mean, it really plays to the choppiness that we're seeing, right? We'll have a strong month and then we'll see a pause in the month and the next month and then a strong month. So it's actually very uneven and choppy reflecting a couple things. I think broadly as the markets recovering, but also some of the delays in these projects.

Some projects are delayed a couple of weeks. Some projects are being delayed months. So a lot of that added up together is creating some of this chop. And certainly, in August I'll just comment, say that, that was where we were seeing the height of the delta variant and it certainly impacted activity broadly as an event I will say in the month.

But again, then you see what happened in September shortly after that. So that's -- I think it's a good reflection of what we're seeing right now in this recovery, directionally it's recovering, but it's really uneven and choppy as we go through this..

Okay. Thank you..

You bet..

And our next question is from Garik of Loop Capital. Your line is open..

Oh, hi, thanks. I'm just wondering if you could provide a little bit more color just on the supply chain challenges that you're seeing.

Is it more on transportation bottlenecks or raw material bottlenecks or is it more on the end market side in which project timing continues to get pushed out? So, any additional color on those challenges would be great?.

Sure. The supply chain -- I'd like to break it up on the internal part, which is kind of our own inputs and supply chains feeding our plants and feeding our customers, that's really I'll say, our supply chain.

There's been challenges in our own supply chain whether it's from the freeze that happened earlier in the year from Texas and disrupted some of the chemical product supply chains, or from the hurricane. So there was several incidences along the way that put pressure on the supply chains for us. We have managed through those beautifully.

And I feel like we're very fortunate. We've been able to manage amongst our plants and balance that out and we have not disrupted our service to our customers in any way from those supply chain disruptions. So, on that side, very little impact if no impact to our business frankly.

On the other side where these projects are being impacted and therefore we're being impacted whether it's other building materials earlier in the building phase are delayed or and are -- they are delayed and it's both material, it's labor.

I'm hearing more labor in the conversation now than I'm hearing materials, which was different than the second quarter. So as both material and labor now contribute to supply chain disruptions on projects that's the impact that we're seeing in our business in terms of when they need a ceiling product for those particular jobs.

And so that's what we're referring to when we talk about the supply chain disruptions that are impacting our top line and our ability to fully recover.

Did I answer your question? And that give a little bit more color for you?.

Yes. That's good. Thank you. My final question is on architectural specialties. You cited confidence in a return to 20% EBITDA margin, because something that you did back in 2019. You had nice sequential improvements. Any guess as to what needs to happen to get back up to 20% EBITDA margin recognizing you're absorbing some of the acquisitions.

But how quickly could that possibly happen again?.

Yes. I think the key really there is absorption. So it's absorption on the new acquisitions as you reference. But also as we talked about earlier in the year, we came into the year with record backlogs in some of our production sites.

And we invested to add capacity in those sites and we were preparing ourselves for really strong backlogs and be able to deliver on those backlogs and a continuation frankly as we saw beyond the current backlog, but the activity that we were pursuing in the marketplace.

With the project delays that have happened this year that slowed our rate of absorption against those new investments in our core business let alone absorbing the acquisition. So, I think the answer to your question for us, we're working our way through is really absorption.

Absorption of the new acquisition and absorption of the investments that we've made in some of our manufacturing sites..

Great. Thanks for that..

You bet..

And our next question is from Susan Maklari of Goldman Sachs. Your line is open..

Thank you. Good morning..

Good morning..

Good morning..

My first question is, can you give us a bit more detail on the manufacturing equipment failure that you cited in September? Any commentary around the magnitude of what happened there and how maybe it's impacted third quarter deliveries, but then also fourth quarter, if there's any kind of reverberation there?.

Go ahead, Brian..

Sure. Hey Susan, good morning. So we had some unplanned maintenance at two of our bigger Mineral Fiber plants I mentioned in our prepared remarks. And what that did was cause us to lose some shifts and even some production days.

Now the good news is we were able to move production around and continue with our great service as Vic mentioned on our perfect order measure, it actually improved in the month of September, but it was temporary. And so, we fixed that problem and the plants are running very well through the month of October.

And we don't expect any more headwind from that maintenance item in both plants..

Yes. So Susan, no impact in the fourth quarter. That's fixed and behind us..

Okay. All right. That's helpful. And then, my follow-up is, wondering if you can give a little bit more details on inflation and maybe especially talk a bit about your exposure to energy prices. We've gotten some questions from people. Obviously, we've seen natural gas and other energy prices moving up over the last couple of months or so.

Just talk about overall the cost environment and what you're seeing there?.

Sure Susan. Yes. Like everybody, we are seeing that natural gas increase. It was the highest inflationary item we had in the quarter. And -- but it runs roughly somewhere between 8% to 10% of our total cost of goods sales is our total energy cost bucket. And so that natural gas is clearly increasing year-over-year.

Freight was up also and so were raws, which is one of the reasons as we step back we increased our full year look on inflation to 4.5% to 5% for total cost of goods sold. So not like history. Not seeing quite the inflationary impact that other companies see.

But we're being very attentive to it and making sure we're getting that price realization to more than cover that..

Okay. All right. That's helpful. Thank you..

Thank you, Susan..

And our next question is from Kathryn Thompson of Thompson Research. Your line is open..

Hey, good morning. This is actually Brian Barros for Kathryn. Thank you for taking my questions. First one I guess, I wanted to see - so, a few of the other building product companies we speak with kind of have talked about, there's so much bidding out there, but then that's not necessarily turning into awards at the same pace.

I guess your comments on bidding so far seems to match that first part.

But I guess with the current environment, how's like the timeline change to realize those bids and turn those into projects and that flow through to sales for you guys?.

Yes. I think the bidding activity that we're referencing, it sounds like, Brian, the same thing that you're hearing is, it's a leading indicator of activity that's out there, not necessarily timed to sales. And the way we dissect this data is we look at the types of activity, bidding activity that are out there.

Because we know new construction bidding activity is a much longer cycle before it turns into a ceiling sale. And renovation and there's alterations in between renovations. So we kind of look at it and as a leading indicator in terms of six to 24 months out.

How that's changed? I think is yet to be determined in terms of the delay and the timing -- the normal timing of these projects between that six and 24 month time frame. Certainly, what we're seeing today is the delay in when projects can get started, because of available labor and material.

In addition to the projects that already started and the delaying in getting those completed. That's really important also right for the labor to be able to move from the job that they're on to the next job is these completions and the timing of these completions has to get in sync with the start of new jobs.

So there's definitely some struggle and some mismatching of labor and material with existing projects in the starting of new projects. And I think that's part of the choppiness that we're experiencing..

Understood. Thank you. And then follow-up I guess similar to kind of your comments and the question just answered. The delayed project that we saw in the quarter it seemed like they were across both segments.

Would you characterize that as more a blip in the quarter, kind of with the delta variant impact you mentioned I think in August? Or is this kind of more of an indication of more to come, more delays in Q4 and even into 2022 as you work through all the issues with labor material shortages and stuff?.

I think this choppiness is going to persist. I think we're not out of the woods in terms of supply chains healing themselves, catching up to demand. I think there's still a labor component that still has to get caught up. So no, I think this choppiness could persist, which is I think reflected in our outlook for the rest of the year..

Got it. Thank you..

Thank You, Brian..

And our next question is from Adam Baumgarten of Zelman. Your line is open..

Hey, good morning everyone. Just thinking about pricing, like-for-like pricing.

How should we think about the carryover effect from all the price you've pushed through this year into next year at this point?.

I'll take this..

Sure..

Good morning, Adam. So, every year we do have that carryover. And what we have to -- what we manage through is we do protect project pricing in many cases. So, there's always that lag effect of that full carry over year-over-year.

Historically, we've been sort of in the 30% to 35% range of price realization versus what we've announced and we see that continuing..

Okay. Got it.

And then just switching gears to SG&A, I mean, would you say that by the end of 2021 that you'll be back to more normal levels and therefore we should see less of a drag on margins next year as you continue to grow?.

I'll take..

Yes..

I'll add some ..

Yes, sure..

So Adam, you hit it, right? I mean, these -- the last year and this year are a little abnormal. We're still growing in and getting the leverage from our sales on that SG&A. And so, we'll continue to see that as a percentage of sales move down.

But what we're encouraged by is some of the innovation investments whether it's digital or product that we're able to make to accelerate some of our growth on the top line..

Adam, let me just add a some additional color to that too, because we're very intentional about where we are right now with our SG&A. We made a conscious decision in 2020 to not cut the capacity organization, to leverage our financial strength in that time to invest into growth and to maintain the organizational capacity.

And you'll remember, because you know as well that in 2018 and 2019, 2018 and 2019, we were right-sizing the organization to become an America's only focused company, right, because we had a global organization. We were divesting over international. That was closing in 2019.

And we were readying ourselves for America's only cost structure, which we had done. And our SG&A as a percent of sales had really gotten to some very competitive levels I'll say.

So we were -- in 2020 we intentionally went into this knowing that we'd have a couple years here where we would have higher SG&A to get out in front and to reposition ourselves for stronger growth coming out of the pandemic. So again, we're kind of where we expected and wanted to be given the growth initiatives that we're investing in.

But over time this isn't a long-term position for us to be in. We expect to get absorption and leverage on the SG&A as we get back to 2019 levels, number one. That's kind of the first level of absorption that we need to get back to and then the traction from these growth initiatives we expect to get leverage on that SG&A.

So this isn't where we're going to land and stay. But over the next couple of years we expect to generate leverage and to drive that SG&A as a percent of sales back down to more normal levels. Hope that helps..

Great. Thank you..

And our next question is from Yves Bromehead of Exane BNP Paribas. Your line is open..

Good morning. Thank you for taking my question. I'll have one question. I just want to know if you could comment a bit on price elasticity. I mean, prices for yourself on the Mineral Fiber is already up double digit. I guess as you go into 2022 you'll definitely need a more price increases as well.

So, when you reflect on what is needed to offset costs and the impact it could have on demand, are you starting to see also some delays or cancellation due to the fact that you've got more inflation on your products and some competing products as well?.

The short answer to that is, Yves, no. The backdrop and I think the level of inflation on other building products is far greater than Armstrong's line of products in many cases. So, we don't see demand being impacted on these projects or the start of new projects as a result of inflationary pressures at this point..

Okay. And if I could just follow-up with one more. I mean, you mentioned that the backlog on architecture specialties was at a very high level when you entered the year, but given delays you sort of were not able to sort of reach those.

Are you able to give us a level and indication of what was the backlog in terms of year-on-year growth when you arrived in 2021 for AS and even maybe for MF?.

Yes. I don't remember that number off the top of my head. I know we revealed the level of percentage it was up over prior year, but it was at a very high level. I remember it being record levels of backlog coming into the year.

And what I said earlier is that the rate of absorption of that new investment that we're making behind that backlog has slowed down. We fully expect to fully absorb that investment and get leverage on that investment going forward. But on top of that backlog we've continued to build the backlog all throughout 2021.

So we expect again to exit the year into 2022 with a very healthy architectural specialty backlog..

Great. Thank you very much..

You're welcome..

And our next question is from Ken Zener of KeyBanc. Your line is open..

Good morning everybody..

Good morning, Ken..

Good morning, Ken..

So, pricing remains quite robust. Is that you're asking for more price. But is that partly reflecting your enhanced competitiveness in this environment, because if you're facing challenges I assume your other competitors are facing them as well.

Could you maybe talk a little bit about pricing, inventory, competitive landscape?.

Ken, I think our pricing is very strong as you're alluding to. And again there's an inflationary backdrop and there's lots of inflation out there. So we're staying ahead of that with our customers.

But we know, we have to earn our price increases, right? And the way to hold on to more of that price is you have to earn it with value creation on service or innovation. And as an America's focus company now, we have tremendous focus on new product innovation and our service levels have never wavered through this pandemic.

And I think that really is making us stand out as a unique supplier even our competitors and our immediate competitors in this space have not had or have had service issues along the way. And so, I feel very good about that and again it's important for us to earn these price increases as we try to stay out ahead of the inflationary pressure..

Great. And it sounds like inventory is not such an issue. I mean, you had the plant outage, but inventory we hear about delays. I mean, is that an issue that you guys are seeing? Thank you very much..

Ken, we're not seeing any inventory gyrations up or down. We're having a very -- we have a very -- we didn't miss any deliveries and shipments to customers through this. I mean, we've been able to manage that with our inventory levels. We're maintaining our inventory levels. I know our distributors are maintaining responsible inventory levels.

I'd say, it's a non-event in terms of the overall service equation. And we don't expect to allow it to get to that point either..

Thank you..

Thank you, Ken..

And our next question is from Stephen Kim of Evercore ISI. Your line is open..

Yes. Thanks very much guys. Good results and thanks for all the commentary here. I wanted to drill a little bit into the AUV and price. You've indicated that you've done a great job as you always do staying ahead of inflation. But this was such an unusual year and you were so proactive it seems in getting ahead of the price.

What I'm wondering is whether or not the back half of 2021 is actually seeing a little bit more than normal net benefit price over cost. And just as we're trying to model next year, just what we should be expecting.

It would be helpful to know whether you think you're seeing any a little bit more than normal price cost benefit in the back half of this year?.

Well, I would say, Stephen, we're seeing what we would expect to see against the backdrop of inflation historically and again you know this well that our AUV components of like-for-like pricing and mix have trended around the 50-50 mark in terms of their contribution over time.

In deflationary periods we get a little less like-for-like and a little more mix, and in inflationary periods we get a little bit more like-for-like to compensate for that. I would say, what we're seeing now is a bias in that mix much more to the like-for-like that reflects the inflationary environment that we're in.

And yes, we're staying ahead of the inflationary pressures that we're seeing. We had three price increases this year, which we -- as you know, we normally have two. And we expect to continue on the cadence of our price increases to stay ahead of the inflation.

And yes, as long as we're in this inflationary backdrop I would expect our AUV mix to be much more tilted toward the like-for-like pricing as a result of that..

Yep. Okay. Yes. Such an interesting dynamic. So that's helpful. Thanks for reminding us about that. Second question I guess relates to -- I'm going to go with the share repurchase. You stepped that up a little bit here. In the past, we've seen you be fairly aggressive on share repurchase.

I'm curious whether or not we can read into the trend here stepping up in 2Q is something to look forward to either in the back half of this year or what you're kind of thinking into 2022?.

Stephen, I wouldn't over read into that. I'll share how we think about this. And the way we think about this and the way we're behaving around this is that, it's kind of the flex for us. If we're not doing acquisitions or we obviously with a strong cash flow given, and then without doing acquisitions we may have more to flex into a share repurchase.

Now we did just increase our dividend by 10%, which is a nice vote of confidence in our outlook for cash flow generation going forward. But I think the way we think about the share repurchase is it's an opportunity for us depending on available cash based on our first two priorities.

So investing back in our business and of course the bolt-on acquisitions being our second priority. And I might just mention there Steve, we're still open for business there. It's true we haven't done an acquisition or close an acquisition this year, but we're still active in this area and our pipeline still looks very robust.

So I feel like that, that's going to be a continuing second priority for us back behind investing in our business. And then available cash left over, we plan to flex into our share repurchase, which we have a long runway to in terms of the authorization there..

Yes. Okay, great. Thanks very much..

Okay. Thanks Stephen..

And next question is from Phil Ng of Jefferies. Your line is open..

Hey guys. It's Maggie on for Phil. I guess first on Mineral Fiber volumes, just trying to marry the commentary around sales per shipping day improving and then the implied volume decline next quarter.

Can you talk about some of the drivers in there? And is the choppiness you've talked about more timing related with projects getting pushed out or are you actually starting to see new projects and the pipelines flowing?.

Well, we're certainly seeing new projects flowing and by reflecting our backlog and so forth. But the delays are the existing projects underway that are late and getting ready for a ceiling. So those are the kind of delays that we're seeing in the kind of the near-term choppiness. Let me comment on the fourth quarter reference that you have.

In the fourth quarter last year -- so this is a bit of part of this anomaly that we're still in from last year to this year. We had a very large inventory build from a couple of our big box customers that has created an unusual base period for us to do so. I wouldn't read into -- there's an acceleration of project delays or something like that.

That would be the wrong -- we don't see it that way. But this is more of a base period comparison that I think you're modeling into..

And Vic I would add to that. While we're seeing some of that delay in projects more so on the AS side, but a little bit on the Mineral Fiber side that R&R piece of the business and Mineral Fiber has been a good bright spot..

Okay. That's really helpful. And then switching over to margins, the 4Q guide implies the real inflection there.

I was wondering if that's being driven by maybe the full impact of the August price increase or any other big factors to call out there and is one segment leading that margin recovery or is it pretty evenly split?.

Yes, Maggie. As you as you look at the different each segment, Mineral Fiber's margin contraction was really a reflection of this $3 million manufacturing headwind we experienced in Q3. That's the primary driver.

On the AS side, as Vic mentioned, digesting the acquisitions and getting the scale for some of the investments we made that's being more impacted by some of the job delays in that AS segment..

Okay. Thanks guys..

Okay. Thank you..

And there are no further questions at this time. I will now turn the call over back to Vic Grizzle, President and CEO for his closing remarks..

0Great. Thanks again everybody for joining us today. And we're pleased with where we are, finishing out a very choppy quarter in terms of the recovery. But we do expect to finish the year strong.

Again, I continue to be encouraged by the macro view of what we're seeing in terms of GDP remaining strong, greater than 5% forecast for this year, greater than 4% for next year, the level of bidding activity and as I talked about earlier across all verticals, which reflects I think the broad-based nature of the recovery and the activity, which is what you get when you have a 4% or 5% GDP market environment.

So I continue to be encouraged by that and the traction that we're getting from our growth initiatives. So look forward to updating you on those at the end of the next quarter. But again, thank you for joining us today..

This concludes today's conference call. Thank you for participating. You may now disconnect..