Welcome to the Q1, 2023 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. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Theresa Womble, Vice President of Investor Relations, and Corporate Communications. Please go ahead..

Thank you. Good morning, and welcome everyone to our call. On today's call, Vic Grizzle, our CEO; and Chris Calzaretta, our CFO will discuss Armstrong World Industries first quarter 2023 results, and our 2023 outlook. To accompany these remarks, we have provided a presentation that is available on the Investor section of our Web site.

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

Those, again, are available on the Investor section of our Web site. 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, April 25, 2023. These statements involve risks and uncertainties that may differ materially from those expected or implied.

We provide a detailed discussion of our risks and uncertainties in our SEC filings, including the 10-Q filed earlier this morning. We undertake no obligation to update any forward-looking statements beyond what is required by applicable securities law. And now, I'll turn the call over to Vic..

Thank you, Theresa, and good morning and thank you all for joining our call today. The results we reported this morning represent a solid start to 2023 as our team successfully executed on our strategic initiative and controlled cost against a backdrop of economic uncertainty.

Our consolidated net sales increased 10% year-over-year, while adjusted EBITDA grew 9%, and adjusted free cash flow increased more than 50%. Our Mineral Fiber segment was a key contributor to the good start, with double-digit sales and adjusted EBITDA growth, as well as adjusted EBITDA margin expansion up 20 basis points.

We delivered 9% Mineral Fiber volume growth in the quarter largely due to a recovery in sales following what was a challenging first quarter of 2022.

As you will recall, in the first quarter of 2022, several of our distribution partners were reducing inventories after a period of accumulating higher levels of inventory in anticipation of improving market conditions as well as to buffer against supply chain disruptions and persistent inflationary pressures.

We believe first quarter sales this year on this channel were strong versus that weak comparison, and have returned to more normal patterns that are consistent with maintaining historical inventory levels.

This also true for sales of our ceiling grid products from our WAVE joint venture, and we were pleased with the 14% earnings growth achieved in the quarter from our WAVE joint venture. Architectural Specialties had a slower start to 2023 with year-over-year sales growth of 3%, and a $1 million decline in adjusted EBITDA.

We experienced lower sales growth in the quarter tied to lower order intake in the fourth quarter of 2022, compounded by additional project delays in the quarter.

All this against a strong performance quarter, last year, that had 26% sales growth as projects that had been delayed throughout 2021 moved forward as supply chain and labor constraints throughout the commercial construction industry had improved. Even with the slow start, we remain comfortable with our full-year outlook in our Specialties segment.

This comfort is driven primarily by the continuation of strong bidding activity across all our verticals, with notable strength in transportation and healthcare end markets. There appears to be more and larger projects out there tied to the infrastructure bill that have scheduled into 2024, and beyond.

And this bodes well for our Architectural Specialties products. We're also encouraged that our increasingly diverse product portfolio is providing additional demand from new spaces and commercial buildings. This is driving solid order intake for product categories like TECTUM, felt, wood, and metal.

All in all, while we're pleased with how we started 2023, we remain cautious for the balance of the year. We continue to see challenges ahead for the commercial construction market, and we know we must remain focused on execution and cost management to deliver our outlook of solid top line growth with margin expansion across both segments.

Our current view remains that market demand for the full-year will be challenged. We continue to expect a mild recession to occur in the second-half of the year, although the exact timing and duration remains uncertain. We also see continued weakness where return-to-office activity has stalled.

And in some sectors of the economy, that have slowed their investments. These factors, along with escalating interest rates, have pressured the office vertical more than others. Now that said, it's a fair reminder that the office vertical represents less than a third of our Mineral Fiber segment revenue.

More broadly, overall bidding activity did turn positive in the quarter, with pockets of strength in areas like transportation and municipal spending with investments in airports, metro stations, and convention centers. Healthcare is also an active area, along with education and datacenters.

While it's too early to conclude anything from this positive level of activity, the stabilization of demand that can occur from the diversity of end markets and how it can dampen demand in a downturn is noteworthy.

While we continue to face a challenging and uncertain backdrop, we remain focused on what we can control, like how we manage our plants to achieve quality and productivity, our overall cost structure, our innovation efforts, and our investments for future growth.

As we announced in February, we've made some difficult decisions around trimming our costs and reprioritizing certain investments in light of market weakness. And we will remain disciplined with all of our discretionary spending.

As we move forward, what I've been very impressed with so far this year is how our teams have embraced our mission to deliver profitable growth with expanding margins and strong cash flow generation. The work our teams are accomplishing is notable, and is helping us set up for long-term success.

This includes our production teams who have done a tremendous work to exceed their productivity targets in the quarter, continuing in the strong performance they delivered in 2022. Our sales teams and their structure have also worked hard to achieve both our volume and pricing goals.

And we're also pleased to share that our business development team remains active with good activity in the pipeline. Progress has also continued across our key growth initiatives.

With our automated design service, Project Works, we remain focused on making the project design process as efficient as possible for the benefit of architects, designers, and contractors. We're expanding this automated service by including more and more of our product portfolio in this tool.

And we are now able to offer the services earlier in the process to help architects and designers match their conceptual ideas of design with the best product solutions. We're currently on track to double the number of projects using Project Works this year.

Our online sales platform, Canopy by Armstrong, also had a strong start to 2023, with strong increases across all key metrics. We continue to be very pleased with our progress with this unique offering for our category, and with the validation that we can find and serve new customers through this digital platform.

And last, we continue to further develop our Healthy Spaces initiative while increasing sales growth and our Healthy Spaces product portfolio. We continue to fine-tune our value proposition around total indoor environmental quality, which includes air, temperature, sound, and light.

And as we do this, we are seeing some promising opportunities in the connection between these attributes and ceiling solutions that improve the overall health and sustainability of a building. Still early days, but it's increasingly clear that ceilings have an important role to play in healthy, sustainable buildings of the future.

Now, let me pause there for a moment and let Chris provide some additional details on the quarterly financials.

Chris?.

Thanks, Vic, and good morning to everyone on the call. As a reminder, throughout my remarks, I'll be referring to the slides available on our Web site, and slide three which details our basis of presentation. On slide six, we discuss our Mineral Fibers segment results.

Mineral Fibers sales growth, of 12%, was driven by 9% volume growth and 3% AUV growth. As Vic mentioned, the increase in volumes was largely due to the weaker prior-year periods. Additionally, our home center sales channel outperformed the prior year as inventory levels increased in this channel during the quarter.

These home center inventory levels can fluctuate, and are typically timing in nature, and can cause a lumpiness in our volume results quarter-to-quarter.

Rounding out the volume drivers in the first quarter are growth initiatives, led by digital, and an extra shipping day contributed three points of growth, more than offsetting the impact of a softer market in the quarter. Mineral Fiber AUV, of 3%, was driven by positive like-for-like price partially offset by unfavorable mix.

Geographic mix was the biggest headwind this quarter as markets with lower AUVs generally outperformed markets with higher AUV. And to a lesser extent, we saw product mix headwind within the home center channel. We believe these mix headwinds are temporary.

Mineral Fiber segment adjusted EBITDA grew by $10 million or 13%, and EBITDA margin expanded by 20 basis points compared to the prior year, led by the volume benefits that I just mentioned. Favorable AUV fell through at near history levels despite the mix headwinds.

Our plants had a good start to the year and exceeded their productivity targets in the quarter. WAVE equity earnings were also favorable as compared to the prior year, driven by lower steel costs flowing through the P&L, and higher volumes.

Recall that WAVE also had a weaker volume comparison due to the inventory level reductions in the prior-year period. Offsetting these gains were higher input costs and SG&A expenses as we continued to invest in our digital initiatives.

Turning to input costs, on our February earnings call, we outlooked an expected first quarter headwind related to inventory valuation. This inventory valuation impact for the quarter was $6 million, and largely in line with what we expected. We anticipate a minimal inventory valuation impact for the rest of the year.

The remainder of the input cost headwind in the quarter was driven by continued raw material inflation. Energy cost, specifically electricity were still inflationary, but were not a material driver of the total input cost inflation versus the prior year.

Despite these headwinds, Material Fiber adjusted EBITDA margins expanded by 20 basis points in the quarter. While on the topic of energy cost, I would like to give a little more context to our natural gas exposure.

We don't normally hedge natural gas and typically pay market rates for our supply, but given the volatility over the past year in natural prices, we have recently decided to lock-in pricing for a portion of our natural gas needs with our current suppliers.

We did this to add a level of stability to our cost structure, thereby, de-risking some of our natural gas exposure in 2023. On slide seven, we discuss our Architectural Specialties or AS segment results.

Despite increased sales across most product categories, the segment saw a slowing of the rate of growth, partially driven by a slowdown in shorter lead time orders received in the fourth quarter, primarily with our metal products. We also faced unfavorable project timing and a strong prior year comparison.

Despite the softer top line result this quarter, current order intake and backlogs remain supportive of our outlook for 2023. Adjusted EBITDA margin took a step down and was negatively affected by softer sales level as this segment can be more impacted by lumpiness associated with project timing.

We continue to manage cost as we scale and grow this segment. Slide eight shows our consolidated company metrics, in which volume gains from Mineral Fiber segment, favorable AUV, and favorable WAVE equity earnings more than offset inventory valuation impacts, raw material inflation, and higher SG&A expense.

Adjusted diluted net earnings per share increased 10% versus the prior, in line with adjusted EBITDA. Adjusted free cash flow increased $10 million or about 50% versus prior year. And you will see those drivers as we move to slide nine. Slide nine shows first quarter adjusted free cash flow performance versus the prior year.

The $10 million increase was driven by working capital improvement primarily driven by inventory and an increase in WAVE dividend. This was partially offset by higher CapEx and higher cash interest.

We are pleased to see year-over-year improvement as cash flow generation remains a strong focus for us in 2023 and key to our ability to fund all of our capital allocation priorities. One of those priorities is returning excess cash to shareholders. And we continue to deliver on this in the first quarter, repurchasing $27 million of shares.

Since the inception of the share repurchase program in 2016, we have repurchased a total of $12.8 million shares for about $878 million. As shown on slide 10, we are maintaining our full-year 2023 guidance. As you'll recall, we took actions in the first quarter to trim our workforce in response to anticipated markets conditions.

And these actions are expected to generate full-year savings of about $6 million. We remain on track to deliver these savings. We also remain committed to driving sales growth in the range of 2% to 6% and adjusted EBITDA growth in the range of 3% to 9%.

And as I just mentioned, we are focused on achieving another year of meaningful cash flow generation with guidance midpoint expectations providing a healthy 19% adjusted free cash flow margin, despite a difficult market backdrop. Additional assumptions are available in the appendix for this presentation.

And now, I'll turn it back to Vic for some additional thoughts before we take your questions..

Thanks, Chris. Before we get to your questions, I would like to take a step back from the results and our neat-term outlook to reflect on the core attributes of Armstrong that are foundational to our resilience and our ability to be a consistent cash flow generator throughout economic cycles.

As America's only focused ceilings and specialty wall company serving the commercial construction industry, we operate in an attractive category where we have unique competitive advantages, including the largest portfolio and production footprint in North America, and the largest and best exclusive distribution network in the industry.

In addition, it's a category where our customers and our end users highly value our product innovation service, and quality. We also serve a diverse set of end markets, as acoustical ceiling tiles are ubiquitous in commercial buildings. These include education, healthcare, retail, transportation, datacenters, and, of course, office.

We believe our expansion in Architectural Specialties has further diversified our product portfolio, and made us eve more important and relevant to the A&D community by getting into more state and spaces. As mentioned earlier, the portfolio effect of having this diversity is unique in its affect of creating stability in all parts of the cycle.

It's very unusual to see all verticals move up or down at the same time, and this serves to dampen sales in an upcycle and dampen sales in downturns. This creates stability in our earnings stream, and is one of the reasons we can consistently generate cash through all parts of the economic cycle. Again, a key attribute of the AWI story.

Another core attribute of Armstrong is our ability to drive AUV growth in our Mineral Fiber business. Over the last 10 years, we've delivered a 5% AUV CAGR, even through the challenges of COVID. Looking further back, we achieved positive AUV growth during the Great Financial Crisis.

With our step-up in innovation around sustainability and healthy spaces, and our commitment to best-in-class service levels, we expect to continue to grow AUV well into the future. Rounding out these core attributes is our profitable 50-50 joint venture, which is the most innovative and efficient manufacturer of grid products.

In addition to realized equity earnings each quarter, this venture has returned more than $1 billion in dividends to Armstrong since the Great Financial Crisis. Together, the core attributes of our company have allowed us to generate $1.3 billion in adjusted free cash flow and adjusted free cash flow margins in excess of 20% since 2016.

Looking just at the period since the onset of COVID, through the end of 2022, during what has clearly been a challenging market environment; we've delivered over $600 million of adjusted free cash flow, including more than $200 million in 2020 when shutdowns materially impacted our sales.

In spite of market headwinds, we anticipate delivering strong cash flow generation again this year given our expectations to hold AUV ahead of historical levels, and grow initiatives, and disciplined approach to our spending.

We have and will continue to be responsible and efficient allocators of capital as we seek to invest to generate near and long-term value for our shareholders. This includes direct returns to investors through dividends and share repurchases, as well as investments back in our business, and into complimentary acquisitions.

We have a strong track record for doing this. Since 2016, we have returned more than $1 billion in dividends and share repurchases, while also acquiring nine companies to expand our capabilities within the Architectural Specialties segment.

So, while none of us look forward to an economic downturn, at AWI, we believe we are well-positioned to manage through all parts of the cycle, demonstrating our resilience and delivering cash flow growth. And with that, we'll be happy to take your questions..

[Operator Instructions] The first question comes from Kathryn Thompson with Thompson Research. Your line is now open..

Hi, thank you for taking my questions today. Just one thing on the clarification on your volumes, up 9%, and I believe, last year, in the same quarter volumes were off by 4%.

And then you said that there was a 300 basis point benefit from growth initiatives, an extra shipping day, so to assume that you actually had a modest organic growth in the quarter. One, I just want to make sure that that logic holds with what you're seeing.

And then you cited a couple of end markets that were seeing growth but it -- could you give some clarification in terms of what you're seeing in terms of volumes for other key end markets that are important to Armstrong? Thank you..

Yes, Kathryn, let me start with at a macro level, and then I'll let Chris dissect some of the build there on the volume. The markets that we experienced in the first quarter were primarily similar to what we saw in the fourth quarter.

As we saw, as you'll remember, in the third quarter of last year, we started to see the discretionary spending around renovation get pulled back. And we expected that to continue in the fourth quarter. That level of softness in the market is very similar to what we saw in the first quarter.

So, I would say, overall the markets that we experienced in the first quarter are largely stable versus what we saw in the fourth quarter. So, as you compare that to the first quarter of last year, I'm going to let Chris dissect that a little bit, and then I'll add some additional comments on the additional verticals question..

So, thanks, Kathryn. As we said in our prepared remarks, Mineral Fiber volume down 9%, the market was down the low single digits, and that was really offset by the three points attributable to both ship day and initiatives. And then the remainder attributable to the prior-year inventory comp and current-year retail inventory build that we mentioned..

And across -- sorry, Kathryn, just to add to your second question there around the verticals. I know the watch-out here is around the office market and what's going on with the office market. Frankly, what we have seen in the office market in the first quarter is very similar to what we saw in the fourth quarter.

I would say all of the markets kind of behave very similarly. So, we haven't seen an additional downturn through all of the dynamics and then what we're reading about in the office market. I also mentioned in our prepared remarks that the bidding activity across really all verticals, frankly, turned positive in the first quarter.

And we're hesitating to preclude anything from that by the way, because as we have reported, the last two quarters, bidding activity had turned negative.

And so, the fact that we had a positive bidding quarter, we're not overweighting that at all, but it is noteworthy that there is some workout there really across all of the segments, again, including office.

So, we're going to watch that very closely as we go into the second quarter, and beyond, but I would say, overall, a very stable relative to the fourth quarter softness that we have already experienced..

And do you feel like the destocking has normalized, but that process is [partially] (ph) behind you?.

We do believe that. As well as our grip products, right, Kathryn, I think that's maybe we are going at. Even including with our grid products, it seemed to hang on a little bit longer last year..

And as you see recovery, I mean some of those are for bigger projects, but just for your basic everyday patch and match, are you seeing any recovery in those trends?.

I would say no recovery, just about the same. Again, no additional downturn, no additional softness, but again I certainly wouldn't say any recovery..

Okay. And final follow-up just before I hop back in the queue, just on pricing, seen a lot of industries, you've been fairly regular you beating the industry for acute price increases each year. Are you still on track with that and how do you feel for the full-year, when you think about guidance in terms of that price-cost balance? Thanks very much..

Yes, sure, Kathryn. As we all look, we wanted to get back to a regular cadence on our price increases. We are on track to continue that, which is our price increase of twice-a-year. We've implemented our price in February per our normal cadence. We've gotten good traction on that price increase.

We do anticipate to continue to be in an inflationary environment, obviously not as hyperinflationary as it'd been the last two years, but nevertheless an inflationary environment. So, it's important that we execute on these price increases, and our teams are doing that.

So, we're on track to that normal cadence of twice-a-year, that the sizing of these increases will be sized as we get closer to those dates of the price increase to reflect the inflationary environment that we're in to make sure that we cover inflation with our pricing initiatives and expand margins as we've outlooked. We're still on track for that..

Okay, thank you..

Thank you..

[Operator Instructions] The next question comes from Susan Maklari with Goldman Sachs. Your line is open..

Thank you and good morning everyone..

Morning..

Morning..

My first question is following up on some of the commentary that you made in the office end markets there. Are you seeing that there's any differences geographically? In your comments, Vic, you said that you're seeing some greater activity in some of your lower-margin markets.

Does that relate to the office area and some of the broader shifts that are happening in terms of population and job growth across the country?.

Yes, I think so. All of our regions were positive in the quarter. So, every region grew, including those that have back-to-office, if you look at the Kastle Back-to-Office index that we all watch, there are differences across the country. And we saw that in 2022, and we're going to continue to see that, I think, this year.

Those markets that have higher levels of back-to-office have more tenant improvement activity ongoing. So, I think there is a relationship there for sure, but some of the timing of -- is really timing, Susan, as some of these regions that were stronger than other regions had a lot to do with the base period comparison as well.

The first quarter last year, as you know, distributors were destocking or taking their inventory levels down. We also had some irregular performances, if you will, as against that backdrop, some regions being really strong.

In fact, our highest AUV regions last year, in first quarter, were the strongest, while a lot of destocking was going on around them. So, I think some of this is just timing on the disparity on sales by territory or geographic regions as we reported on. And that will largely work its way out through as the year goes on here..

Okay, all right, that's helpful. And then you also mentioned that you're seeing larger projects, especially in infrastructure areas as a result of some of the bills that have been passed there.

As you think about the acquisitions that you've done in the last couple years in Architectural Specialties, the range of product offerings that you have there now, how is that changing your ability to go after those projects? And what does that mean in terms of your visibility and the longer-term margins for Architectural Specialties, the ability to get to that targeted range there?.

Yes, I think it's a really good question, and there's a real strong connection here to our participation. I mean, to take a step back, in the last six months, we've quoted over 100 transportation jobs; over 100 transportation jobs just in the last six months.

And so, there's a lot more activity on the transportation front than what we've experienced in the last several years. That's noteworthy, but the fact that we're in these bids and we're quoting on this work is really directly connected to the expanded capabilities that we have added to the Architectural Specialties segment through our acquisitions.

Our ability to do things with metal and wood, as we talked about in the last call, with the Kansas City Airport, our innovation around wood and be able to meet those requirements was unique in the marketplace because we had purchased a wood business, and now we're in that business. So, I think there's a real strong connection.

The breadth of our portfolio is allowing us to not only participate in these large projects, which we couldn't have before, but also be competitive and uniquely competitive in these large projects, versus more niche players who don't have the breadth and the platform of an Armstrong.

And so, we're bringing some real competitive advantage, I think, to these projects. Definitely a strong connection to what we've done over the last several years, to be able to play now in these larger projects..

Okay, that's helpful. Thank you, and good luck..

Thank you..

Thank you..

[Operator Instructions] The next question comes from Keith Hughes with Truist. Your line is now open..

Thank you.

Question on Mineral Fiber costs, the $6 million in inventory, is that an inventory write-up or specifically what is that with effect to the quarter?.

Hey, Keith, it's Chris. It's basically inventory valuations. Think about it in terms of inflation and the timing of inflation rolling through the P&L as inventory sold. It's not a write-off; it's just the timing of inflation..

Okay, all right, perfect. And the same question on the AUV, I think it's pressured with geography, is that a function of the northeast, which tends to be at your highest AUV just being weaker than other parts of the country.

And do expect this to be something we're going to see consistently over the next year?.

No, I think it's timing. So, again as I said earlier, Keith, I think it's timing. The northeast part of the country, it grew in the first quarter.

It didn't grow as fast as some of the southern regions, but the comparison year-over-year is we had double-digit growth in the northeast in the first quarter, last year, while overall volumes were down 4% last year.

So, there was some outsized participation in two of our higher AUV areas that, by comparison I would say, even though they are positive, underperformed some of those stronger growth territories. So, in the month of April, Keith, I've already seen this reverse itself. So, this is a timing, I think, phenomena that will normalize throughout the year..

Okay, perfect. Thank you..

Thanks..

[Operator Instructions] The next question comes from Garik Shmois with Loop Capital. Your line is now open..

Hi, thanks. I was wondering if you could provide a little bit more color just on your nat gas hedges.

How much are you hedged now, and any color on the duration of the hedges? And I think you expected costs to be up mid-single digits this year, does your new hedging program impact that outlook at all?.

Hey, Garik. So, yes, as I said, we hedged a portion. Be thinking about that in terms of about half of our exposure. Duration is really just for this year.

And relative to our guide earlier associated with natural gas and overall inputs, it's not -- I wouldn't expect that to move the needle pretty materially there, but it was contemplated as we guided to our initial nat gas and input cost exposure for the year..

Great, thank you.

Wanted to follow up just on the Mineral Fiber volume outlook, and just in conjunction with the strong reported performance in the first quarter, I don't know if you could provide a little bit more handholding on how you expect the cadence of volume growth to progress over the next three quarters?.

Yes. So, in terms of volume, think about the remainder of the year, while we don't provide quarterly guidance, we do expect negative volumes in the second quarter, and really consistent with what we talked about in February, really continued deceleration of volume progression for the remainder of the year.

Again, it comes back to the level of uncertainty and cloudiness associated with the back-half of the year and the mild recession that we've incorporated into our guidance..

Understood. Thanks for your help..

Sure..

[Operator Instructions] The next question comes from Phil Ng with Jefferies. Your line is now open..

Hey guys. With the regional bank failures and likely tighter lending conditions on CRE loans, how do you see that impacting your business and any color on timing? And then, Vic, I guess it would be really helpful if you could help us segment your customer base in type of work that you could see being impacted.

I would suspect that new construction would be potentially impacted a little more, but any color on how to think about major [rene] (ph) versus your patch-and-match business would be helpful? Thanks a lot..

Yes, Phil, so in the first quarter we really have not seen any impact from all the things that we're reading about and the different possibilities about ramifications. I think our back-half guidance reflects the level of uncertainty that this adds to it.

And I think this is going to have to play out for us to really understand what the full ramifications of this could be.

It really is balanced though when you think about the things that you read about in Class A office-based and trophy, where there is high demand for that space, and the additional amenities and work that is doing to keep those buildings competitive and full.

That drives renovation activity and we're seeing that activity on one side of it; that's not likely to stop. So, if you step back and look at overall new construction versus renovation, I've said this before, and I think this is going to play out in the back-half of the year. This will be primarily impacting the renovation.

More of those things that haven't already started where you have some cost like you would have in new construction, you are going have discretionary pullback on those patch and match levels of work. The major renovation work, I think that's where we are going to see additional softness in the back-half of the year.

I think we are appropriately balanced in our outlook that's reflecting what could happen in tighter lending conditions in our back-half outlook. I think this has to play out for us to fully understand the full ramification. And, I'll leave there, Phil..

Okay, that's more than fair. I guess from a cycle standpoint, Vic, it was really helpful to kind of us some color on how you think about the free cash flow and the durability of AUV. Does the play look any real different this time around? I knew in the past volumes would fall and pricing would hold and you would mix up gross falling.

This time around I am curious how does mix holdup given some of the challenges you are seeing in office and retail which assume the higher mix and potentially weakness in places like San Francisco, New York, and help us think through the mix dynamic going forward..

Yes. I think the best proxy is to go back and look at what happened in 2008, '09, and '10. I don't think it can get any worse than that. And in that case, we didn't see the trade down on mix. So, we are not anticipating to see the same kind of or a different kind of a trade down activity on mix.

Again, everything that I am reading is that the highest demand office space continues to be class A and trophy buildings. And the vacancy rates are the lowest in those buildings as people trade up from older buildings through the years and older. I think that dynamic is going to keep the mix appropriately sized for us in our outlook.

And again, mix happens across the country not just in the major cities where there is offices. And then, the final point I'll make on this is that new construction is what was positive in the Q4 of 2021 and all of '22 could add a positive tailwind in the back-half of the year and into '24.

And again new construction tends to higher AUV products based on the nature of the new construction and putting in the latest and greatest technology. So, that's kind of a longwinded answer, Phil, but I don't really see a dynamic here that should change our expectation on driving higher AUVs and higher mixes.

And maybe, I'll just make this longwinded answer even longer by when I talk about the focus of this business now that we have an international division, we have a tremendous amount of focus on this Americas market where we are innovating and bringing products to market even faster. We have talked a lot about those with you.

I think the work that we are around healthy spaces, the work we are doing around sustainability, all of these are bringing higher AUV products into the marketplace even faster. So, there is a lot of tailwind to AUV growth just through the innovation that I think offsets any of those minor dynamics that you are alluding to.

So, again, such a longwinded answer, but I do believe we have a positive AUV story well into the future here..

Okay, super. Great color and I appreciate it..

Thanks..

You bet, thank you..

[Operator instructions] the next question comes from Stephen Kim with Evercore. Your line is now open..

Thanks very much guys. I appreciate the help so far. Just wanted to touch on the Mineral Fiber volume first, I guess first of all, the extra shipping day that was actually not something we had expected.

So, can you help us understand -- just foresee, are there any other future day adjustments we should be thinking about later this year? And then, with respect to your volume I guess inclusive of any shipping day issues, I think previously you had talked about your outlook for the year that kind of have shape of year-over-year changes kind of being like down low single digit in the front half.

And I think down high single digit in the back-half is what you had previously talked about. You are not changing your guidance now, but you had a very strong 1Q obviously.

And so, I am curious is there any help you can give us in terms of maybe a change in the shape of that sort of first-half, second-half kind of year-over-year comparison?.

Hey, Stephen. So, for the first quarter obviously up one ship day, the only other ship day dynamic we have this year is Q3 where we are down one, so, overall, flat on a ship day basis for the full-year. In terms of volume, we do incorporate kind of that shipping day dynamic into our guide.

And again, we outlooked Mineral Fiber volume being in that mid single digit range for the year. First-half, back-half dynamic, we are expecting positive first-half volume for Mineral Fiber, but you are right, the second-half is in that high single digit range in terms of year-over-year comp.

And again, that's due to the progression that I mentioned earlier with just sequential deceleration starting in the second quarter, and again, really pronounced in the back-half there due to the expected recession that we have incorporated into our outlook..

So, I am guessing because the first-half is not going to positive, it sounds like your second-half outlook is still down high single digit and maybe more high single digit than previously thought? That would be a fair guess?.

Yes, I think that's fair. High single digit in the back-half is fair..

Okay. And then when we think about WAVE, I think typically it's stronger seasonally in 2Q and 3Q.

Any reason why the seasonality might be different this year?.

While the seasonality pattern WAVE follows Armstrong broadly, right, because most of the construction activities in the third quarter -- second and third quarter, so no change in the seasonality there.

Again, I think the third quarter is part of that back-half uncertainty where there is not enough clarity around our customer's backlog going into the back-half.

So, certainly I think with the uncertainty in the back-half, we could see a dampening or a change in the seasonal pattern given our outlook for the second quarter and the first-half of the year. Again, a lot of this first-half volume that we are seeing, Stephen, is carry over project that didn't get completed last year or got delayed last year.

That's probably kind of eating some of this, addition to some of the favorable comp in the base period that we talked about. So, I think, of course, there could be something macro that dampens the quarter in the back -- the strongest quarter which is the third quarter in our back-half..

Yes, for sure. Okay, great. That's very helpful. Thanks so much..

Great..

Thank you..

[Operator instructions] The next question comes from Rafe Jadrosich with Bank of America. Your line is now open..

Hi, good morning. It's Rafe. Thanks for taking my question. Just wanted to follow up on the like-for-like pricing and mix impact for the quarter.

Could you sort of break up what the like-for-like pricing was either year-over-year, quarter-over-quarter? What the expectations are for the year? And then, did you see normal realization on the February price announcement?.

Yes. Our like-for-like pricing was expected in the quarter. I mentioned earlier that our February price increase we got good traction on as well.

So, I think where we want it to be or where we expect it to be on our like-for-like pricing objectives, obviously that was offset by some of the timing related mix headwinds in the first quarter that dampened I think the overall AUV growth, but like-for-like, pricing is where again where we expect it to be and where we are comfortable..

And just as we think about the AUV cadence through the year and you mentioned that we expect some of the mix headwind to reverse in second quarter.

Should we expect outsized, positive AUV in the second quarter because of that?.

Outsized relative to what, Rafe?.

To the full-year guidance?.

I couldn't say sitting at today..

Yes, it's hard to call. I mean obviously in our guide for the year, we assume we got to have this back in February positive mix.

I just go back to we saw in the first quarter on the mix side, it was really timing related and expect that to kind of reverse itself as you think about mix for the rest of the year, and again, still looking at positive mix for 2023..

All right.

And then just very quickly, on the retail restocking that you saw, can you give some color on what you think drove that? Has sellout improved on the ceiling tile side at some of the home center channels? I think that was a big -- one of the drivers to the volume upside in the first quarter, and interested to hear what you're seeing in that channel?.

Well, there's some resetting going on at one of the big-box retailers. Sometimes it's a bit of a mystery on why they take their inventory levels down as far as they do and then build then up so quickly. As we've reported a number of times, that does occur.

I would say that's more the dynamic in the first quarter activity with one particular big-box retailer. So, again, I wouldn't point to some large outsized point of sale data, for example, that drove that.

This is really inventory levels getting pretty low, some resetting activity going on there, which we normally do and work with our retail customers throughout the year on, and then a rebuild of inventory right behind that. I think that's more of the actual and practical application -- or answer for what that activity is about..

Okay, thank you. Good luck..

Yes..

[Operator Instructions] The next question comes from Adam Baumgarten from Zelman & Associates. Your line is now open..

Hey, good morning everyone. Vic, you'd mentioned that bidding activity turned positive for the quarter.

Did that continue into April?.

I don't have April data yet, we won't get that until next month. So, I couldn't answer that specifically. We're going to keep an eye on it. Again, we're not putting too much weight on it in the first quarter, but we're going to keep a close eye on it for the second quarter..

Okay, got it.

And then just on the topic of natural gas, just curious when you guys put in the hedging program, and if you could remind us what percentage of your total COGS is natural gas?.

Yes, sure. So, energy, and we don't break it out any more than that, but energy is about 10% of our Mineral Fiber COGS inputs costs -- sorry, of our total COGS to Mineral Fiber. Again, I mentioned we're hedging about 50% of our natural gas exposure by way of the price locks that we talked about.

Kind of entered into towards the earlier part of the quarter, so you can look at the NYMEX settlements and get a feel for the pricing there. And hopefully that's helpful as you're thinking through the nat gas locking..

Got it. And then just to confirm, I think there was a question earlier on just overall input cost inflation assumed in the guide. It was mid-single digits last quarter.

Is the way to think about that as roughly the same still?.

Yes, for the year, mid single-digits on inputs costs. Again, a little bit of variability, obviously, depending upon how the rest of the year shakes out, obviously, on dynamics associated with nat gas, but certainly more heavily weighted there towards our raw material inputs where we see a lion's share of that inflation..

Okay, got it. Thank you..

You're welcome..

[Operator Instructions] The next question comes from Joe Ahlersmeyer with Deutsche Bank. Your line is now open..

Yes, thanks very much for the question. Just wanted to clarify on that last point about the hedging, you've mentioned it starting in the earlier part of the quarter.

Is it simplistic enough to think you're talking about the early part of this quarter or was this the early part of last quarter that you started it?.

Yes, sorry. Good question, early part of Q1..

Okay, got it. And then just a quick clarification on the mix, know it's kind of been beaten to death at this point. But was there a benefit from lapping unfavorable channel mix related to the destocking last year? I don't think I saw a favorable geographic mix called out, but looks like you did call out the unfavorable channel mix in the prior year..

Well, I don't recall what was disclosed last year in particular. I mean, it was a down quarter last year, right, based on the destocking. But I wouldn't put this particularly all on destocking, but I would say that, in the first quarter of last year, we had areas where our highest AUV products were sold that were stronger than the others.

And so, part of this is just base period comparisons driving some of this mix, which is, again, why we believe this is transitory and will work its way through as we go in the year..

Okay, thanks very much..

[Operator Instructions] The next question comes from John Lovallo with UBS. Your line is now open..

Good morning guys, and thank you for taking my questions. The first one, I just wanted to go back to Stephen's question on the Mineral Fiber volume, it being a little bit better than expected in the first quarter and the full-year expectation remaining the same.

I mean, that would seem to imply that the back-half outlook has gotten incrementally worse. So, I just wanted to clarify that.

And if so, what are you seeing that has changed your mind on that?.

John, one thing that we didn't mention with Stephen's question is some of the goodness that we saw in the first quarter, and we point to this is, the inventory build in the retail channel, which will come out, right? So, that's a timing-related, we wouldn't expect to hold that for the whole year.

So, we didn't mention that in Stephen's question, but that's another factor in its overall equation, is some of that goodness in the first quarter is timing-related inventory build..

Got you. Okay, all right.

And then on the digital growth initiative spending in Mineral Fiber, is that a lever for you guys to potentially pull back on if your end markets were to soften more than expected?.

Well, I think we've done a tremendous amount of work and effort around making room so that we could continue our digital investment. The traction that we're getting there is making a meaningful contribution to the growth of the business. So, we've made room in our cost structure so that we could continue to do that.

And again, we're, I think, appropriately balanced in our outlook for the rest of the year given the uncertainty in the back-half so that we don't have to pull additional levers like that..

Got it, thank you, Vic..

You bet..

I show no further questions at this time. I would now like to turn the conference back to Vic Grizzle for closing remarks..

Thank you. I just want to say thank you everybody for joining today. At the end of the first quarter, we feel like we're in a very different position than we were into the first quarter last year. We're well-positioned for tougher market conditions that we're outlooking.

And we feel good about the position that we're in and ready to perform in tougher economic conditions that we're outlooking. So, thank you again for joining today, and we'll look forward to talking to you next quarter..

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