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Edited Transcript of AWI earnings conference call or presentation 24-Feb-20 4:00pm GMT

·48 min read

Q4 2019 Armstrong World Industries Inc Earnings Call LANCASTER Mar 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Armstrong World Industries Inc earnings conference call or presentation Monday, February 24, 2020 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Brian L. MacNeal Armstrong World Industries, Inc. - Senior VP & CFO * Thomas J. Waters Armstrong World Industries, Inc. - VP of Treasury & IR * Victor D. Grizzle Armstrong World Industries, Inc. - President, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * David Sutherland MacGregor Longbow Research LLC - CEO, Director of Research & Senior Analyst * John Lovallo BofA Merrill Lynch, Research Division - VP * Justin A. Speer Zelman & Associates LLC - MD of Research * Kathryn Ingram Thompson Thompson Research Group, LLC - Founding Partner, CEO & Director of Research * Keith Brian Hughes SunTrust Robinson Humphrey, Inc., Research Division - MD * Michael Robert Wood Nomura Securities Co. Ltd., Research Division - Research Analyst * Philip H. Ng Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst * Stephen Kim Evercore ISI Institutional Equities, Research Division - Former Senior MD & Head of Housing Research Team * Susan Marie Maklari Goldman Sachs Group Inc., Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2019 Armstrong World Industries Earnings Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Tom Waters, Vice President of Corporate Finance. Please go ahead, sir. -------------------------------------------------------------------------------- Thomas J. Waters, Armstrong World Industries, Inc. - VP of Treasury & IR [2] -------------------------------------------------------------------------------- Thank you, Catherine. Good morning, and welcome. Please note that members of the media have been invited to listen to this call, and the call is being broadcast live on our website at armstrongceilings.com. With me today are Vic Grizzle, our CEO; and Brian MacNeal, our CFO. Hopefully, you have seen our press release this morning, and both the release and the presentation Brian will reference during this call are posted on our website in the Investor Relations section. I advise you that during this call, we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong World Industries, please review our SEC filings, including our 10-K, which will be filed shortly. We are finalizing customary control and documentation work with our auditors. This will have no impact on the financials reported in our press release and the earnings call deck. Forward-looking statements speak only as of the date they are made. We undertake no obligation to update any forward-looking statement beyond what is required by applicable securities law. In addition, our discussion of operating performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation. Both are available on our website. With that, I'll turn the call over to Vic. -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Tom, and good morning, everyone, and thank you for joining our call. It's good to be with you today to review our fourth quarter results, which capped another strong year for Armstrong. In the quarter, sales grew 3%, adjusted EBITDA improved 14%. This represents the 39th time in the last 40 quarters in which we delivered positive EBITDA growth and a 12% growth CAGR since 2009, demonstrating, again, the stability and consistency of our business. In the quarter, EBITDA margins expanded 330 basis points, and adjusted EPS was up 40%. At a moment, Brian will walk you through more of the financial details. But first, I want to touch on a few of the key business results. In the Mineral Fiber segment, average unit value, or AUV for short, was up more than 5% with both mix gains and like-for-like pricing positively contributing in the quarter. Consistent with our third quarter results and our outlook, price realization continued to normalize from the high increases we reported in the first half of the year, which was driven by strong price realization carried over from a more inflationary 2018. Price gains once again outpaced input costs and contributed to margin expansion. On the mix side, we continued to realize above-market growth from our new product innovations like Sustain, which are free from Red List chemicals and our Total Acoustics line, which feature the ideal combination of sound absorption and sound blocking, and DESIGNFlex, which adds colors, sizes and shapes in mineral fiber, metal and wood ceilings and walls. These products continue to illustrate how innovation is valued by our customers and can continue to drive mix higher in the Mineral Fiber segment. For the full year, Mineral Fiber AUV was up over 5%, consistent with both our historical average and our 2019 guidance. Mineral Fiber volume was down 2% in the quarter as expected, with ongoing softness in the lower end of our product range, directly connected to the Big Box channel and continued uneven R&R activity across the various verticals. Volume growth in our higher-end products was up high single digits in the quarter, as has been the case all year. Consistent with that, with what we've said before, commercial activity in the U.S. continues to be favorable, with both bid activity and backlogs remaining positive. New construction and larger remodel projects continue to trend favorably across the U.S., while smaller R&R projects continue their uneven activity across the various verticals. The Big Box channel improved but remained a headwind, and Canada remains soft. As we start 2020, we are seeing early returns from our channel-specific initiatives that we discussed in October. Canada, Latin America and Big Box collectively are trending positively and are expected to continue this positive trend into 2020. In the quarter, adjusted EBITDA margins in the Mineral Fiber segment expanded at an impressive 430 basis points, driven by a multiple of factors. Pricing once again exceeded input cost inflation, our new innovative products continue to drive higher mix gains, manufacturing productivity was strong, WAVE had another solid quarter, and SG&A expense was lower year-on-year. So a broad base of contribution to impressive margin expansion. Turning now to our Architectural Specialties segment, where sales were up 5% in the quarter. In the quarter, we experienced a supply disruption from a key vendor of standard products. This was caused by a quality issue that our teams identified and then stopped shipments to prevent a negative impact on our customers. Now with the majority of the Architectural Specialties business is made up of highly customized products, there is also a group of catalog products of primarily metal and wood products offered in standard shapes and sizes. This supply chain disruption pushed out lead times in the quarter of these standard products, which resulted in their temporary loss of sales. We know what happened. We know what the issue is. We've worked with our vendor to correct the issue. And as at the start of the new year, lead times and shipments have returned back to normal levels. As of today, shipments of these products are up 40% sequentially, giving us confidence we've successfully restored the flow of these standard products back into the market. With this issue impacting our momentum coming into the year and the fact that we're lapping large transportation projects, we could see a softer year-on-year start in the Architectural Specialties segment. But for the year overall, the custom portion of our business has strengthened from the same time last year and gives us confidence in another year of double-digit growth. Again, as a reminder, the Architectural Specialty business is a project-intensive business and the timing of large projects can create unevenness quarter-to-quarter and makes it difficult to gauge the activity in this business simply on our quarter-to-quarter comparison. The visibility and the growth of the backlog is a meaningful indicator for what to expect for the year. Again, sitting here today in February, our backlog is up double digits versus the same time last year. We continue to work on acquisition opportunities in this segment and expect to close 1 to 3 additional transactions in 2020 as we further build out our industry-leading product portfolio and capabilities. In the fourth quarter, we closed the acquisition of MRK Industries, a manufacturer of specialty metal ceilings and walls. MRK has been a key supplier to us for several years, including supporting the success of the Grand Central Terminal project in New York City. We are happy to have their unique manufacturing and design capabilities and their management know-how inside the Armstrong family. For the full year, total company sales were up 6%, crossing over $1 billion in sales, adjusted EBITDA was up 14% to $403 million, margins expanded 270 basis points and adjusted free cash flow was up 13%, when excluding the special WAVE dividend in 2018. A strong year with positive contributions from both segments and on almost every line of the P&L. Price, mix and volume all contributed meaningfully to sales growth and margins. Our plants had excellent operating performance and sequentially improved throughout the year. SG&A as a percent of sales improved and WAVE equity earnings were up 9%, truly a team effort with strong steady execution to deliver solid financial performance for us to build on in 2020. One of the highlights of the year was the operating performance at our Mineral Fiber plants. I've talked throughout the year about our plant reliability metric, a multiinput measure of overall manufacturing performance that captures things like uptime, yield and throughput and how recent performance have been trending up and is approaching all-time highs. This trend continued in the fourth quarter, and I'm anticipating that we will establish a new record in 2020. This performance is a combination of focused leadership and at the plant level, numerous teams executing project after project to reduce costs while improving both quality and service. These improvement efforts were aided by our digital factory initiatives as well. At the end of 2019, we had deployed 1,300 sensors in our plants, providing us with temperature and vibration data to analyze and deploy preventive measures. This analysis has enabled us to reduce scrap rates and increase uptime. We're only in the early innings with this initiative, and we have plans underway to deploy an additional 1,300 sensors during 2020. This gives me great confidence that the manufacturing productivity improvements we saw in 2019 are repeatable in 2020 and beyond. Most importantly, in our plants, our manufacturing teams continue to work in a safe manner. 2019 was our 10th straight year with a recordable injury rate of less than 0.9, which represents world-class safety levels. As we look ahead to 2020, we expect to experience a similar market environment to 2019 and supportive of growth and consistent with what we've outlined in our value creation model. New commercial construction starts in 2019 should provide a moderate tailwind in 2020, with end market demand expected to be mixed across the various verticals. We feel good about the office, education and the transportation end markets. We expect relatively flat performance in the health care vertical, and we anticipate another soft year for the retail market. As I mentioned before, Canada, Latin America and the Big Box channel have stabilized and should continue to improve throughout the year. With that, I'll pause and turn over -- the call over to Brian for some more details on the financials. Brian? -------------------------------------------------------------------------------- Brian L. MacNeal, Armstrong World Industries, Inc. - Senior VP & CFO [4] -------------------------------------------------------------------------------- Thanks, Vic. Good morning to everyone on the call. Today, I'll be reviewing our fourth quarter and full year 2019 financial results and providing initial guidance for 2020. But before I begin, as a friendly reminder, I'll be referring to the slides available on our website and Slide 3 details our basis of presentation. Beginning on Slide 4 for our fourth quarter results, sales of $247 million were up 3% versus prior year. Adjusted EBITDA increased 14% and margins expanded 330 basis points. Adjusted diluted earnings per share of $1.11 grew 40%, driven by increased earnings, a lower tax rate, reduced interest expense and a lower share count. With regards to taxes, our quarterly tax rate was 14% versus 23% in Q4 2018. For the full year, our tax rate, adjusted only for the WAVE gain we discussed last quarter, was 19% versus 22% for the full year of 2019. Both the quarterly rate and the full year rate were favorable to our outlook. During the fourth quarter, we determined that tax reserve adjustments were necessary to our deferred tax assets related to stock-based compensation. Additionally, the fourth quarter tax rate benefited from the expiration of state statutes of limitations. Going forward, we expect a more stable tax rate in the mid-20s with cash taxes in the 25% -- 20% to 25% range. Adjusted free cash flow declined by $17 million or 19% over the prior year as we are lapping last year's $25 million WAVE special dividend. These special dividends typically occur every 3 to 4 years as WAVE's earnings grow and they delever. Absent the WAVE special dividend in the base period, adjusted free cash flow was up $8 million or 13%. Net debt is $71 million higher than last year, driven primarily by the acquisitions of ACGI and MRK, share repurchase activity and dividend payments. As of the end of the year, our net debt-to-EBITDA is 1.4x and leaves us plenty of capacity to fund our strategic and capital allocation priorities. In the quarter, we repurchased $50 million of stock. Since the inception of the repurchase program, we have bought back 9.2 million shares at a cost of $562 million for an average price of $61.05. As of the end of the year, we had $138 million remaining under our share repurchase program, which runs through October 2020. Turning now to Slide 5. Adjusted EBITDA increased 14%, with every line item contributing positively. The Architectural Specialties segment drove volume growth and the Mineral Fiber segment contributed. AUV gains, strong manufacturing performance and a strong quarter from WAVE. Input costs were a tailwind, and SG&A expenses were modestly lower year-on-year, partially due to some onetime items in the base period (technical difficulty). The biggest change in the quarter is the distributions from WAVE. I'll remind you that in the fourth quarter of 2018, we had a special dividend from WAVE of $25 million, and we repatriated $9 million from international WAVE locations related to the sale of our international business. Absent these items WAVE cash contributions for the period are flat with prior year, and total free cash flow was up 13%. Slide 7 begins our segment reporting. In the quarter, Mineral Fiber sales grew $6 million or 3% versus prior year. AUV improvements were driven by like-for-like pricing increases and continued mix gains. Volume was down 2% in the quarter, driven by the factors Vic reviewed, softness at the low end of our product portfolio, uneven flow business and a weak economy in Canada. Adjusted EBITDA was up $10 million or 15% versus prior year as margins expanded 430 basis points. AUV gains, strong performance from our manufacturing operation and a strong quarter from WAVE were the key drivers of earnings growth. SG&A expenses were also lower in the quarter, partially impacted by the onetime items in Q4 2018 that I mentioned earlier. Moving to Architectural Specialties segment on Slide 8. Quarterly sales increased 4% versus prior year. Vic addressed the factors impacting Architectural Specialty sales, including the large transportation projects in the base period and an issue with a supplier that extended lead times, which impacted our sales. You will see in our 10-K that we have increased our disclosure on sales related to our acquired businesses. As part of our acquisition strategy, when we integrate these new businesses, we typically move our sourcing to optimize productivity. Consequently, this new disclosure includes changes in sourcing between our existing manufacturing and the acquired businesses. This is why we choose to frame our guidance in terms of the total business, which includes all acquisitions closed prior to January 1, 2020. Separately, we are targeting to close 1 to 3 acquisitions in 2020, and which will be incremental to our greater than 15% guidance for Architectural Specialties. Adjusted EBITDA in Architectural Specialties was up 2% versus prior year in the quarter as costs associated with our acquired companies and our investments in sales and design support added expense. EBITDA margins, excluding businesses acquired in 2019 expanded 90 basis points. Turning now to Slide 9. For the full year, sales of $1.038 billion were up 6% versus prior year, and adjusted EBITDA increased 14% versus prior year driving EBITDA margin expansion of 270 basis points. Adjusted diluted earnings per share of $4.78 grew a very strong 31%, driven by increased profitability, lower taxes and a reduced share count. Year-to-date, adjusted free cash flow grew $8 million or 3% versus prior year. Excluding the 2018 WAVE special dividend free cash flow was up $33 million or 16% versus prior year. Slide 10 details the bridge of our results for the year. Strong AUV performance in the Mineral Fiber segment was the key driver to our increased profitability. When combined with volume gains in the Architectural Specialty segment, solid manufacturing performance, increased profitability at WAVE and lower SG&A spending, these factors resulted in adjusted EBITDA up 14% versus prior year. Manufacturing productivity gains more than offset the fixed cost embedded in our acquisitions. Slide 11 displays the drivers of adjusted free cash flow for the year. Strong operating cash flow performance, driven by earnings growth was the key factor in 2019 performance. Slide 12 provides our initial guidance for 2020. We once again expect sales to grow in the high single digits, with future acquisitions incremental to that growth. Continued AUV expansion in the Mineral Fiber segment, combined with increased penetration and year-on-year contributions from our 2019 acquisition of ACGI will drive sales higher in Architectural Specialties. Our profitability will also be aided from continued manufacturing productivity and increased contributions from WAVE. Adjusted EPS growth will benefit from lower interest expense and a lower share count, that will offset a higher tax rate as our tax rate normalizes in 2020. We expect to grow our industry-leading cash flow, double digits to 25% of sales or greater than 5% or $5 per share. Before turning the call back to Vic, there is a nonoperating finance item that I'd like to discuss. As you've likely seen, just last week, we entered into an agreement to transfer over $1 billion of pension obligations related to approximately 10,000 retirees to Athene Annuity and Life. While Armstrong has had an overfunded pension for many years and has not made a cash contribution in more than 10 years, the size of the total obligation over $1.4 billion is significant for a company our size. As such, this transaction significantly reduces tail risk on our balance sheet relative to the plan. It protects our retirees and leaves the remaining plan with an even greater overfunded position. As a result of these transaction -- of this transaction, we expect to record a noncash expense in the range of $350 million and $400 million in the first quarter of 2020 as a component of nonoperating expense to reflect a partial planned settlement charge. As with other noncash pension expense and income, we will exclude this from our adjusted financial results. We will not have to make any cash contributions to the pension as a result of this transaction and do not anticipate contributions in the coming years. This is a great transaction for our retirees, Armstrong and our shareholders. A win-win-win for all parties. To close, I'm pleased with the results the business delivered in 2019, sales up 6% and adjusted EBITDA up 14%. We were able to execute 2 more strategic acquisitions, further building out our Architectural Specialties capabilities. And I'm confident that we have the plans in place to once again deliver high single-digit sales growth and double-digit adjusted EBITDA growth, consistent with our value-creation model. We have a strong balance sheet, and we generate very strong free cash flow every year. We believe the strong cash generation of our business is truly unique and special. We can use this annual cash generation and liquidity to further invest in our business, fund acquisitions and return cash to shareholders. We expect 2020 will be another strong year for free cash flow generation. With that, I'll turn it back over to Vic. -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Thanks, Brian. 2019 was another year of solid, steady performance here at Armstrong, where we continue to change the trajectory of our sales growth, while expanding margins and improving our overall competitiveness. 2019 was the third straight year, we delivered sales growth greater than 6% after many years of low single-digit growth. We grew adjusted EBITDA by double digits, again. We commercialized DESIGNFlex and launched game-changing innovation in ACOUSTIBuilt. We accelerated our digitalization initiative to provide more frictionless customer experience and improved manufacturing productivity. In 2019, we celebrated the 20-year anniversary of the Armstrong Ceilings Recycling Program. It's the longest-running recycling program of its kind. To date, we have recycled more than 200 million square feet of ceiling panels, saved more than 1 million tons of virgin raw materials and diverted more than 100,000 tons of waste from landfills. We completed 2 more acquisitions in Architectural Specialties, making it 5 in the last 3 years. We closed on the sale of our businesses in Europe and Asia, ultimately realizing $290 million of benefit for our shareholders. This makes us an Americas-only business with minimal exposure to tariffs or the impact of the coronavirus. We refinanced our credit agreement, extending maturities, adding flexibility and lowering our borrowing costs. We repurchased over $130 million of stock and increased our quarterly dividend by 14%. And finally, we elevated our design capabilities and capacity and made organizational investments to enable our strategic priorities in 2020 and beyond. And in 2020, we will build on this momentum for another exciting year, where we expect to grow sales in the high single digits, expand margins and deliver best in cash free cash flow. We will bring new innovation to market in the form of both new products and new digital tools. We will build on our broadest Architectural Specialties portfolio through both innovation and new acquisitions to drive penetration in specialty ceilings and wall space at a double-digit rate. Our plants are poised to deliver another strong year of productivity. And WAVE will continue to increase their contribution and remain seamlessly linked with Armstrong on innovation and product development. Our balanced approach to capital deployment remains. We're going to invest back into our business through high-return projects. We're going to execute on 1 to 3 acquisitions a year and return cash to shareholders through our dividend and share repurchase program. We will maintain a prudent balance sheet. And as Brian just discussed, we've already taken action this year to transfer $1 billion of pension obligations off our balance sheet to reduce any tail risk. I'm excited about the opportunity and the momentum we have going into 2020. The teams are aligned, they're focused and equipped to deliver another great year. As you've heard me say before, Armstrong remains committed to being the standout leader in innovative products and digital solutions to provide the best possible experience for our customers. And we are committed to making a difference in the spaces where people live, work, learn, heal and play. Now with that, we'll be happy to take your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question comes from Stephen Kim with Evercore ISI. -------------------------------------------------------------------------------- Stephen Kim, Evercore ISI Institutional Equities, Research Division - Former Senior MD & Head of Housing Research Team [2] -------------------------------------------------------------------------------- Good quarter and encouraging outlook. I wanted to ask you, though, a little bit about the -- in the Arc Spec, this delay. Understanding that you've been indicated that it's pretty much normalized at this point, your guidance seems to assume that this impact was about $10 million the way we recon it that you're going to get that back and then proceed along with the trajectory of the business in addition to that. And assuming so I'm curious, why wouldn't you see that recovery and some very good numbers in the first half of the year because you said that we're off to kind of a slower start in that business? And I was just trying to reconcile that -- those 2 things. -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Yes. Stephen, first of all, I'd said, we're off to a tough first quarter and a slower start to the first quarter, with some of this standard product flowing into the quarter. So I think the first half is going to be fine. I think we're just out looking that -- we're looking at -- we're -- in the base period, we're lapping 2 very large transportation projects. That, coupled with a bit of the softer start in the standard product category, we're just saying "Hey, it could be a little bit of a softer start to the year." But when you look at the backlog, our backlog and our custom product, which is the majority of the business, as you know, is very strong, and we're very encouraged by what we're seeing. And everybody I've talked to out in the marketplace in terms of the bid activity continues to be strong. So I'm optimistic about the year. I think we're just out looking that this quality issue that we resolved and behind us has probably gotten us off to a slower start than we would have expected or hoped for in the first quarter. -------------------------------------------------------------------------------- Stephen Kim, Evercore ISI Institutional Equities, Research Division - Former Senior MD & Head of Housing Research Team [4] -------------------------------------------------------------------------------- In the first. Okay. You're not -- it sounds like you're not really making a comment about the second quarter, though? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Not so much. -------------------------------------------------------------------------------- Stephen Kim, Evercore ISI Institutional Equities, Research Division - Former Senior MD & Head of Housing Research Team [6] -------------------------------------------------------------------------------- You don't expect it to linger You don't expect this will linger into the second quarter, necessarily? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [7] -------------------------------------------------------------------------------- I do not. I do not. -------------------------------------------------------------------------------- Stephen Kim, Evercore ISI Institutional Equities, Research Division - Former Senior MD & Head of Housing Research Team [8] -------------------------------------------------------------------------------- Okay. Got it. Yes. Okay. Curious as to -- if you could talk about the manufacturing productivity outlook in terms of how meaningful this could be. It sounds like certainly, things are going very well. It sounds like in addition to the improvements you saw in the quarter, you installed these 1,300 sensors, knowing that that's just one aspect of the productivity initiatives. But it sounds like you did that right at the end of the year. So it probably didn't have a huge impact on the 4Q and yet you've generated $8 million or so of improvement in the last 2 quarters of the year. Curious as to what we should be thinking about that into the front half and maybe even beyond in 2020? And what's included in your outlook? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [9] -------------------------------------------------------------------------------- Yes. I'm very pleased with the teams in the plant. I mean we have a big focus on productivity anyway. So that's kind of a base. We have very strong leadership teams in our plants, they're really focused on productivity. And as you were mentioning, the digital initiatives are kind of adding on to already very strong base of productivity. And the sensors that we added at the early part of the year, so the first half of last year, are really what we saw in the third quarter, and we talked about some of those impacts in the third quarter and that carried through to the fourth quarter. So from that, we've been continuing to deploy sensors and we'll be deploying those sensors even into the first half of this year, which is why we're expecting to see some continuing productivity improvements from the first phase of sensors, but also the second phase. And again, I think this is going to be additive, not displacing or replacing the already productivity initiatives that we've already launched in the plants. So again, I really like what our plants are doing, the focus that they have. I think the digital tools are giving them another level of data and ability to analyze the data to be even more preventive than we have in the past. And again, that shows up in better uptime, reduced scrap, and so that really shows up in our P&L. So very proud of the work the team is doing there, and it gives me, again, as I said in my prepared remarks, a lot of confidence going into 2020. And we'll continue to build on this, by the way, Steve. We'll keep -- we've got more initiatives behind these sensors that we want to add to our plants and our operations. So it's 2020 and beyond, really. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- And our next question comes from Michael Wood with Nomura. -------------------------------------------------------------------------------- Michael Robert Wood, Nomura Securities Co. Ltd., Research Division - Research Analyst [11] -------------------------------------------------------------------------------- I wanted to ask you about this dynamic guys that you were talking about with the large remodel, new construction being strong and smaller projects being more uneven. I'm curious if you've seen this before? And what do you think is really the underlying cause to that weakness in the smaller projects? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [12] -------------------------------------------------------------------------------- Yes. These smaller projects might tend to be discretionary in nature. So certain -- if certain dynamics or indicators are in place for some of these verticals. As we've talked about -- I mean just to carry that through, if certain dynamics show up, then their discretionary spend, they can delay these until the next year. We saw this in the education sector for several years, as we talked about, when state and local budgets were really pinched. A lot of those school renovations or maintenance work was delayed. And again, very discretionary in nature, they could wait until the following year. So I don't think that's the case in education, in particular now because I think we're seeing some improvement there, both in state and local budgets, and the discretionary spend, as we reported in the last summer months was better. And we're anticipating that to continue. But that can be again, vertical to vertical, you can have discretionary spend, and it really shows up in a lot of those smaller projects. -------------------------------------------------------------------------------- Michael Robert Wood, Nomura Securities Co. Ltd., Research Division - Research Analyst [13] -------------------------------------------------------------------------------- Okay. Great. And can you also give us some color on the impact of the home center and Canadian business? Or really, I'm just trying to get the underlying U.S. Mineral Fiber volumes, excluding the retail portion? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [14] -------------------------------------------------------------------------------- Mike, is your question specific to fourth quarter? -------------------------------------------------------------------------------- Michael Robert Wood, Nomura Securities Co. Ltd., Research Division - Research Analyst [15] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [16] -------------------------------------------------------------------------------- Yes. In the fourth quarter, both Big Box, which is our retail channel and our Canadian sales continue to be negative volume in the quarter. We did see a slight positive in Latin America, which was a continuation of the improvement we've been reporting there. Collectively, they were continued -- they continue to be down and as a headwind for us in a quarter. Now they're less down than they were. And as we talked about, we've got several initiatives in each of these 3 areas that we've been working, and I expect those to continue to improve from where they are today, into a more positive area in 2020. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Our next question comes from John Lovallo with Bank of America. -------------------------------------------------------------------------------- John Lovallo, BofA Merrill Lynch, Research Division - VP [18] -------------------------------------------------------------------------------- The first one, Vic, it sounds like your commentary on the bidding activity is pretty encouraging. I'm just curious versus the last quarter, has anything changed either positively or negatively? Or is this still kind of steady state? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [19] -------------------------------------------------------------------------------- Yes. No, I think the market is pretty much what we saw. Currently, what we're seeing now is what we saw at the end of the year. Our shortfall in the fourth quarter in Architectural Specialties, in particular, was very much supplier-based, not market-based. And I was out in the field quite a bit this first quarter, talking to both contractors and distributors. And the sentiment is positive. So I think we're kind of carrying through the same market level of activity that we experienced in 2019. -------------------------------------------------------------------------------- John Lovallo, BofA Merrill Lynch, Research Division - VP [20] -------------------------------------------------------------------------------- Okay. That's helpful. And then in terms of your EBITDA outlook, Brian, what are you modeling in terms of material cost inflation? -------------------------------------------------------------------------------- Brian L. MacNeal, Armstrong World Industries, Inc. - Senior VP & CFO [21] -------------------------------------------------------------------------------- Yes. A similar backdrop, low single digits overall net inflation. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Our next question comes from Susan Maklari with Goldman Sachs. -------------------------------------------------------------------------------- Susan Marie Maklari, Goldman Sachs Group Inc., Research Division - Analyst [23] -------------------------------------------------------------------------------- My first question is just, when we do think about 2020 and noting the comments you made around the project activity, but how much are you thinking about revenues coming from price relative to the volume growth? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [24] -------------------------------------------------------------------------------- Yes. In the Mineral Fiber Susan -- you're talking about Mineral Fiber segment, specifically? -------------------------------------------------------------------------------- Susan Marie Maklari, Goldman Sachs Group Inc., Research Division - Analyst [25] -------------------------------------------------------------------------------- Yes, yes. -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [26] -------------------------------------------------------------------------------- Yes. Yes. In Mineral Fiber, we're expecting that we're going to continue on the same AUV rate and pace that we've been on, which is in that 4% to 6% range. So if you look at our top line of about 5% growth in Mineral Fiber, that implies somewhere around a flat to slightly positive Mineral Fiber volume for the year, which is an improvement over 2019. -------------------------------------------------------------------------------- Susan Marie Maklari, Goldman Sachs Group Inc., Research Division - Analyst [27] -------------------------------------------------------------------------------- Okay. That's helpful. And then I just wanted to get a little more color on how you're thinking about capital allocation? I know that you mentioned the potential for 1 to 3 acquisitions this year. How do you think about the balance sheet and leverage? I mean the leverage has come down pretty significantly. And thinking about the cash generation this year, it seems like it could really further come in. So I don't know, is there anything you can share with us in terms of a target, maybe as it relates to leverage? Or how you're thinking about that balance? -------------------------------------------------------------------------------- Brian L. MacNeal, Armstrong World Industries, Inc. - Senior VP & CFO [28] -------------------------------------------------------------------------------- Sure, Susan. This is Brian. We've said that anything below 3, we're pretty comfortable with. As you look at our cost of capital is the same anywhere below 3. Right now, we're sitting at 1.4x, and that's towards the lower end. But we'll keep monitoring how frequently we're doing the acquisitions and using that capital to make those acquisitions. -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [29] -------------------------------------------------------------------------------- Our capital allocation, Susan, to your question, the capital allocation for us remains that our first priority with the high returns that we get in this business, to invest back in the business. That's our #1 priority is to support the growth initiatives that we have in our core business. And then 1 to 3 acquisitions, I'd be very disappointed if we only did 1 this year. I think we have the opportunity with a building pipeline and encouraging pipeline that we could do more than 1 this year. And that's our second priority. And then of course, the third is the return to shareholders through our share repurchase program as well as our dividend. So those allocation and priorities remain the same for us. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- And our next question comes from Kathryn Thompson with Thompson Research. -------------------------------------------------------------------------------- Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO & Director of Research [31] -------------------------------------------------------------------------------- The first is really on supply chain and want to triple check to ensure that your supply chain is not seeing any impact mostly from raw materials related to China and coronavirus. And really, what we want to assure is, there isn't any potential trickle-down effect to your supply chain? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [32] -------------------------------------------------------------------------------- Yes. Virtually -- Kathryn, virtually no impact or no effect from the coronavirus on our supply chain. -------------------------------------------------------------------------------- Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO & Director of Research [33] -------------------------------------------------------------------------------- Okay. Perfect. And I appreciate the color you've given on backlogs and the nature of my question really more has to do from a product standpoint, looking more in terms of what is driving demand, could you flesh out how much demand is driven by legacy Mineral Fiber versus Architectural Specialties? We're assuming that the demand is less driven by traditional tiles following destitute. And more driven by continued market adoption of Architectural Specialty products. So really, this is a question not just for 2020, but beyond that. -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [34] -------------------------------------------------------------------------------- Yes. No, thanks for the question, Kathryn. Architectural Specialties, if you take a step back, it's being -- it's more biased toward new construction, okay? So that's number one. And so we -- there's more new construction activity than there is -- in terms of growth than there's R&R activity. So that's a bias in the positive direction that way. But for the most part, our growth in Architectural Specialties is really market penetration and share gain in that segment. It's a relatively -- it's a fragmented space versus very different than the Mineral Fiber space. And so there's lots of pockets for us to move into and to leverage our scale and our presence with the architectural community. So that's really, I think, the main drivers between Architectural Specialties, and I expect that business to continue to grow at double-digit rates, which is, as you know, far above where the demand for Mineral Fiber is today. With that said, I think in the Mineral Fiber business, we continue to see high single-digit volume growth at the high end of our portfolio through the new innovative products that we're bringing out, through the specification work that we're doing with architects, and I expect that to continue, especially when I see the adoption rate that we're seeing with DESIGNFlex, the Total Acoustics and now ACOUSTIBuilt. The level of interest that we're seeing around ACOUSTIBuilt is very impressive. It's very encouraging that there's a real nice home in new spaces where we're not selling Mineral Fiber today to grow that business. So -- but I think you can really see Architectural Specialties should continue to lead as a overall growth engine on the volume side. We're going to continue to grow the high end of the portfolio of Mineral Fiber, and we're going to grow our AUV in Mineral Fiber, overall. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Our next question comes from Keith Hughes with SunTrust Robinson. -------------------------------------------------------------------------------- Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [36] -------------------------------------------------------------------------------- A question on Architectural Specialties, throughout 2019, some manufacturing expenses, SG&A expenses related to acquisitions were at play. We see similar negatives given your acquisition plans here in 2020? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [37] -------------------------------------------------------------------------------- Well, it's tough to speculate on what new acquisitions, Keith, if that's your question. If we -- the new acquisitions we had, if there will be headwinds, most of these smaller companies we're buying are headwinds to our already high levels of productivity and EBITDA levels. So if your question is around that, it's hard to comment on those. The acquisitions that we have in place like Plasterform, the Steel Ceilings acquisition, now ACGI, we continue -- we should continue to see productivity and manufacturing improvements and margin improvements in those businesses as we have seen historically with some of our other acquisitions. I would expect that to continue. -------------------------------------------------------------------------------- Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [38] -------------------------------------------------------------------------------- Okay. Looking beyond 2020, are you getting to the size in Architectural Specialties that you can immediately flex your cost base on a smaller acquisition that you do? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [39] -------------------------------------------------------------------------------- Keith, you say some more? Let's... -------------------------------------------------------------------------------- Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [40] -------------------------------------------------------------------------------- Well, so for example, in sales that you've already have the infrastructure setup so that you can bolt them in without some of the buildup work you've had to do since you really started this program a couple of years ago. Are you at that point yet? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [41] -------------------------------------------------------------------------------- I don't see us slowing down or a need to slow down, the feathering in of our design capacity, if you will. We've been kind of feathering that in as we go. But certainly, as we get our base larger, we can flex more into these smaller acquisitions with less resources. It's just through good efficiency and productivity and how we use those resources. I continue to be encouraged by how efficient we are in Architectural Specialties and being able to absorb these acquisitions and increase our efficiency in how we serve those acquisitions. And I would expect us to continue to feather in SG&A, pay-as-you-go approach versus big batches of capacity put in. Does that answer your question? -------------------------------------------------------------------------------- Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [42] -------------------------------------------------------------------------------- Yes, it does. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Our next question comes from Justin Speer with Zelman & Associates. -------------------------------------------------------------------------------- Justin A. Speer, Zelman & Associates LLC - MD of Research [44] -------------------------------------------------------------------------------- Just on that SG&A point, just -- and thinking about 2020, do you expect SG&A expense to be up in line with revenue growth? Or do you think that you can continue to grow that below revenue growth as you look ahead? -------------------------------------------------------------------------------- Brian L. MacNeal, Armstrong World Industries, Inc. - Senior VP & CFO [45] -------------------------------------------------------------------------------- Yes. Justin, this is Brian. I would expect us to continue to invest in SG&A. So it will grow slightly above our sales growth rate. -------------------------------------------------------------------------------- Justin A. Speer, Zelman & Associates LLC - MD of Research [46] -------------------------------------------------------------------------------- Okay. And then in terms of the quarter impacts at Architectural specialties from the supply chain issue, can you maybe help us understand the magnitude of the impact there and just the nature of the issue there, just what happened? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [47] -------------------------------------------------------------------------------- Yes. The nature of the issue there, Justin, was a manufacturing quality issue. Without getting into the specifics of what the manufacturing, it wasn't meeting the Armstrong standards. And the team made a decision to stop ship it so we fix it, so we wouldn't have a negative impact in the marketplace on these standard products. So it was a manufacturing-related quality issue, that caused the lead times to go out on our products. That's a very lead time-sensitive part of our portfolio as well. So to break it out, it's in that $3 million to $4 million range in the quarter is the way to think about that level of impact. -------------------------------------------------------------------------------- Justin A. Speer, Zelman & Associates LLC - MD of Research [48] -------------------------------------------------------------------------------- Okay. And then in terms of -- just in terms of the thinking about the nature of the growth going forward, you mentioned some difficult comparisons from transportation-related projects. I guess maybe help us understand when those fell into your model? And why the -- because I don't see organic growth being a big issue in terms of year-over-year comparisons in the first half from last year. But maybe help us get a sense for maybe the timing of some of the work as you think about phasing it in? And ultimately, what you're thinking organic growth when excluding acquisitions, when excluding MRK, any other acquisitions, what organic growth looks like for 2020? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [49] -------------------------------------------------------------------------------- Yes, sure. So first of all, on MRK, I just want to be clear, there is no sales contribution really to MRK. They were pretty much a captive supplier for us, as we talked about last quarter. And they have unique capabilities that we wanted in-house. So there's not a lot of new customers or new sales coming with that acquisition. So margin enhancement, but not top line. So just to be clear and level set on that. Last year in the first quarter, we had 2 really large projects. They're both transportation projects. The Grand Central station in New York City as well as LAX out West, and we were shipping both of those in the same quarter. Again, 2 large projects like that can kind of skew the base period if you don't repeat 2 more large projects, which we won't be repeating in the first quarter. We have some nice large projects that will ship later in the year, but they won't be in the same base period. So that's the headwind we're talking about. They got feathered in, in second and third quarter last year. So we -- it will be just different. And I think in this first quarter where we had the bulk of the shipments going in the first quarter. Our organic growth outlook continues to be double digit for next year. In spite of that, I would say, a slower start to the year because of the base period comparison. -------------------------------------------------------------------------------- Justin A. Speer, Zelman & Associates LLC - MD of Research [50] -------------------------------------------------------------------------------- Okay. And then last question for me, just the penetration of portfolio this year, 2019 versus last year for premium priced product in the Mineral Fiber business. Can you give us some context for where that is and where you think you're going to take in 2020? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [51] -------------------------------------------------------------------------------- Is your question around the pricing? I'm sorry, Justin, just say a little more. Like the... -------------------------------------------------------------------------------- Justin A. Speer, Zelman & Associates LLC - MD of Research [52] -------------------------------------------------------------------------------- Just the premium -- yes, the premium price product that -- in terms of the mix, you mentioned a little more commoditized, I guess, lower -- more lower-priced product was weaker in the quarter, but your big picture, what are you looking for, for mix in terms of penetration in the portfolio towards that better mix product away from lower mix? I don't know if you break it out that way or not, but just curious what it looks like today versus maybe last year? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [53] -------------------------------------------------------------------------------- Yes. It's really a continuation of what we've seen in the last few years around a mix contribution to the AUV. Again, mid- to high single digits in terms of volume growth, at the premium segment, as you called it, the higher end of our Mineral Fiber portfolio is what we've been experiencing over the last several years, and we expect that to continue into 2020. And that's anywhere from 2.5% to 3.5% contribution to -- a mix contribution to the AUV. That's the way to think about it. -------------------------------------------------------------------------------- Justin A. Speer, Zelman & Associates LLC - MD of Research [54] -------------------------------------------------------------------------------- But in terms of absolute volumes, what percentage of the business of your total business is in that higher priced point product? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [55] -------------------------------------------------------------------------------- Yes. We don't really break it out that way. And I'll tell you the reason why is because everybody's definition of premium or high-end products is different and to avoid that confusion, we just don't break it out that way. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- Our next question comes from Philip Ng with Jefferies. -------------------------------------------------------------------------------- Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst [57] -------------------------------------------------------------------------------- I guess for margins for AS has taken a little step back. Part of that is intentional with investments you're making, and it sounds like you're continuing to step up SG&A. So appreciating you can't predict M&A personally, with these investments kind of coming into more fruition in some of these M&A deals that you've done, fully integrated, do you expect EBITDA margins in the AS to be up, flattish, down? How should we think about it directionally? -------------------------------------------------------------------------------- Brian L. MacNeal, Armstrong World Industries, Inc. - Senior VP & CFO [58] -------------------------------------------------------------------------------- Phil, it's Brian. So absent any new acquisitions expected to be flat to up. If we do 1 to 3, like our intent, we will see some headwinds on the EBITDA margin as we still ramp up scale in those acquired businesses. -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [59] -------------------------------------------------------------------------------- Yes. I'll put a final point on that, Phil, just to say, maybe for everybody's benefit. The margin in our business from legacy businesses, if you will, for -- not the new acquisitions, but the margins in those businesses is positive. We continue to incrementally improve the efficiency and the operations of those business. The headwind we have is when we acquire these new businesses. And of course, their margins are much lower than ours. And until we bring our productivity best practices, until we drive the efficiency to get their margins to ours or even greater like we did in the second case, those are the headwind you see. But I think it's important to note that the base business, the Architectural Specialties business, continues to improve its EBITDA margins year after year. -------------------------------------------------------------------------------- Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst [60] -------------------------------------------------------------------------------- Got it. Okay. That's really helpful. And then based on your AUV guide implies continued momentum, which I think is quite impressive considering inflation is going to be pretty muted this year. Can you give us a sense how to think about the split between mix versus pricing in 2020? And if there were any key product lines that's driving that mix improvement? It seems like it's accelerating. -------------------------------------------------------------------------------- Brian L. MacNeal, Armstrong World Industries, Inc. - Senior VP & CFO [61] -------------------------------------------------------------------------------- Yes. So Phil, it's Brian, again. Historically, we've had a 50-50 split between that AUV for like-for-like pricing and mix. Don't anticipate it being too different from that as we move forward. It's been that way for almost 20 years now. So I don't anticipate any real big shift in that ratio. -------------------------------------------------------------------------------- Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst [62] -------------------------------------------------------------------------------- Got it. And just one quite... -------------------------------------------------------------------------------- Brian L. MacNeal, Armstrong World Industries, Inc. - Senior VP & CFO [63] -------------------------------------------------------------------------------- Your question about the high end, it comes back to the conversation we were having on Mineral Fiber. As we look at some of the innovation we've launched, Total Acoustics, Sustain, even DESIGNFlex, those parts of the Mineral Fiber business are growing faster than the lower end of that portfolio range. And so that's going to continue to drive that mix up. -------------------------------------------------------------------------------- Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst [64] -------------------------------------------------------------------------------- Got it. And just on that note, embedded in your guide, are you anticipating any noticeable contributions from some of these newer products like ACOUSTIBuilt and DESIGNFlex in 2020? -------------------------------------------------------------------------------- Brian L. MacNeal, Armstrong World Industries, Inc. - Senior VP & CFO [65] -------------------------------------------------------------------------------- I think at is going to be a very small contributor to that. It's just getting started. It's in the spec process. I do expect us to grow sales nicely there. But against a very large base, I wouldn't see a huge contribution from that. But from DESIGNFlex and Sustain and Total Acoustics, which we are a couple of years into now, I expect to see a nice contribution from those products to continue. -------------------------------------------------------------------------------- Operator [66] -------------------------------------------------------------------------------- Our next question comes from David MacGregor with Longbow Research. -------------------------------------------------------------------------------- David Sutherland MacGregor, Longbow Research LLC - CEO, Director of Research & Senior Analyst [67] -------------------------------------------------------------------------------- Congrats on a good quarter. Just wanted to explore a couple of things that I discussed previously on the call. I guess first of all, with regards to manufacturing productivity, kind of encouraging part of the story. How much capital is required to continue driving progress? In other words, is progress capital dependent at this point? -------------------------------------------------------------------------------- Brian L. MacNeal, Armstrong World Industries, Inc. - Senior VP & CFO [68] -------------------------------------------------------------------------------- Yes. Dave, this is Brian. We're typically spending about 7% of sales. You'll see in our guidance. It's -- for 2020, we're guiding $70 million to $80 million of CapEx roughly half of that is really repairs and maintenance and the other half is for productivity. -------------------------------------------------------------------------------- David Sutherland MacGregor, Longbow Research LLC - CEO, Director of Research & Senior Analyst [69] -------------------------------------------------------------------------------- But I guess I'm asking specifically about the digital productivity initiatives. And you were talking about all the sensors and the work that you're doing there. I'm just trying to get a sense of whether further progress there is capital dependent? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [70] -------------------------------------------------------------------------------- Yes. It's relatively -- we're not breaking that out. So just -- we won't be able to break it out to give you an exact number. But I can tell you it's a relatively smaller percentage of the 50% of the CapEx that Brian just outlined for you. -------------------------------------------------------------------------------- David Sutherland MacGregor, Longbow Research LLC - CEO, Director of Research & Senior Analyst [71] -------------------------------------------------------------------------------- Okay. That's good to hear. And then second question, just you mentioned in the press release, additional investments in selling and design capacities. I guess the question is, was this more feet on the street? Are you able to quantify the impact on the P&L? And how should we think about the payback on these investments? And how fast this will benefit revenue growth? -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [72] -------------------------------------------------------------------------------- Yes. I think the rate and pace in which we've feathered this SG&A and -- you can go back and look at the last 3 years. I think we've really done a nice job in feathering it in. And so that we're adding at the right pace and same pace as our growth. And so it's getting absorbed. And we're getting a great return, when you look at the EBITDA expansion over those last 3 years. In spite the fact that we're adding this SG&A around and adding the capacity. It's both feet on the street, David, as well as back office, project managers, CAD designers and supporters of the design part of the business. So I think about it that way. It's both really close to the customer, but also in the back office to support the more intensive design work, especially that comes with things like DESIGNFlex and Architectural Specialties products. -------------------------------------------------------------------------------- Operator [73] -------------------------------------------------------------------------------- And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Vic Grizzle for closing comments. -------------------------------------------------------------------------------- Victor D. Grizzle, Armstrong World Industries, Inc. - President, CEO & Director [74] -------------------------------------------------------------------------------- Yes. Just a quick thank you to everybody for joining the call. We look forward to seeing many of you out on the road the next couple of weeks. And then everybody back here in late April for our first quarter call. Thank you, and have a nice day. -------------------------------------------------------------------------------- Operator [75] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.