Q4 2023 Armstrong World Industries Inc Earnings Call
Participants
Christopher P. Calzaretta; Senior VP & CFO; Armstrong World Industries, Inc.
Theresa Womble; VP of IR & Corporate Communications; Armstrong World Industries, Inc.
Victor D. Grizzle; President, CEO & Director; Armstrong World Industries, Inc.
Adam Michael Baumgarten; MD; Zelman & Associates LLC
Garik Simha Shmois; MD; Loop Capital Markets LLC, Research Division
John Lovallo; Senior US Homebuilding and Building Products Equity Research Analyst; UBS Investment Bank, Research Division
Kathryn Ingram Thompson; Founding Partner, CEO & Director of Research; Thompson Research Group, LLC
Keith Brian Hughes; MD; Truist Securities, Inc., Research Division
Philip H. Ng; Senior Research Analyst & Equity Analyst; Jefferies LLC, Research Division
Rafe Jason Jadrosich; Director in Equity Research and Homebuilder & Building Products Analyst; BofA Securities, Research Division
Stephen Kim; Senior MD & Head of Housing Research Team; Evercore ISI Institutional Equities, Research Division
Susan Marie Maklari; Analyst; Goldman Sachs Group, Inc., Research Division
Presentation
Operator
Thank you for standing by, and welcome to the Q4 and Full Year 2023 Armstrong World Industries Earnings Conference Call.
I would now like to welcome Theresa Womble, VP of Investor Relations and Corporate Communications to begin the call. Theresa, over to you.
Theresa Womble
Thank you, and good morning to everyone on our call. On today's call, Vic Grizzle, our CEO; and Chris Calzaretta, our CFO, will discuss Armstrong World Industries fourth quarter and full year '23 results and 2024 outlook. To accompany these remarks, we have provided a presentation that is available on the Investors section of the Armstrong World Industries website.
Our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the earnings press release and in the appendix of the presentation issued this morning. Both are available on the Investors section of the website.
During this call, we will be making forward-looking statements that represent the view we have of our financial and operating performance as of today's date, February 20, 2024. These statements involve risks and uncertainties that may differ materially from those expected or implied. We provide a detailed discussion of the risks and uncertainties in our SEC filings which include the 10-K filed earlier this morning. We undertake no obligation to update any forward-looking statement beyond what is required by applicable securities laws.
I will now turn the call to Vic.
Victor D. Grizzle
Thank you, Theresa, and welcome, everyone, to our call today. I'm delighted to have this opportunity to discuss our 2023 results and our expectations for 2024. For those of you who have been following us for a while, I'm sure you'll appreciate the sentiment of what a difference a year makes. We began 2023 with a rather cautious view as many did, with expectations of a negative market backdrop with high levels of uncertainty and in particular, in the back half of the year.
We're also coming off of 2022 results that were pressured by several factors like rapidly rising inflation, higher interest rates and overall economic uncertainty. Despite these factors and with softer office demand, the economy in our markets overall fared better-than-expected in 2023. Better-than-expected markets, along with our team's consistent and steady execution helped deliver our strong results for both the quarter and the year.
On a total company basis for the full year, we delivered record-setting net sales of $1.3 billion, which was a 5% increase from full year 2022 results. Our adjusted EBITDA grew 12% to $430 million representing 200 basis points of improvement in our adjusted EBITDA margin. This result was also 7% greater than our prior record for adjusted EBITDA of $403 million set back in 2019.
On an adjusted diluted EPS basis, we delivered growth of 12% and our adjusted free cash flow of $263 million grew 19% above prior year results. We are pleased with these strong results as they represent an ongoing demonstration of Armstrong's resilient business model with its strong market position, a diverse and balanced set of end market verticals and attractive growth initiatives. These attributes allow the company to deliver revenue and earnings growth with margin expansion, even in soft market conditions. These results also reflect the work of more than 3,000 employees who are passionate about our mission and our customers who drive our strategy, develop and execute the quality and the productivity projects in our plants, and ensure we maintain our best-in-class service levels for our customers. We want to thank them for the great work that they do.
In our Mineral Fiber segment, our fourth quarter sales increased 2% on flat sales volume versus prior year, which was better-than-expected due to the better-than-expected market conditions and retail sales. For the full year, with strong AUV and solid contributions from our WAVE joint venture, our Mineral Fiber segment delivered 5% net sales growth and 10% adjusted EBITDA growth with almost 200 basis points of adjusted EBITDA margin expansion, reaching a margin for the full year of just over 39%. Our plants also operated well in the quarter as evidenced by strong quality and service levels and for the full year, had strong productivity results and safety performance.
Now before moving to Architectural Specialties, I'd like to call attention to the positive impact we're getting from our growth initiatives. We estimate that these growth initiatives drove more than 1% to our Mineral Fiber volume growth for the full year and helped offset market weakness. These initiatives include the digital selling platform, Canopy by Armstrong and the automated design platform, ProjectWorks as well as our Healthy Spaces initiatives.
Sales through the Canopy platform continues to ramp and similar to the third quarter, Canopy was EBITDA positive in the fourth quarter. This cost-effective selling platform is allowing us to access the 60% of the installed base for Mineral Fiber that has limited access to the know-how and solutions for renovating their ceilings. The easy-to-use platform is creating more awareness of the many options for renovating with our large portfolio of solutions and is bringing a wide variety of new customers to Armstrong and our distribution partners.
Our ProjectWorks automated design service continues to advance nicely as well. This is a unique capability within our industry and is accelerating the speed and efficiency of customer project collaboration. ProjectWorks addresses the growing challenge architects and designers face in compressed completion cycles and higher number of projects to complete with the same number of architects on staff. In addition, ProjectWorks helps contractors and ultimately, the project owners reduce costs by eliminating waste through optimization of the design and the bill of materials. We're excited to get in front of more and more architects and designers and contractors and to expand the number of products that are incorporated on this platform. We are clearly over the right target here, and differentiating what we bring to projects beyond just great products.
And finally, our Healthy Spaces product portfolio continues to outpace our overall Mineral Fiber growth as these products gain traction in sectors like education and office verticals outside the original intended health care spaces. In 2023, sales of these products grew double digits and contributed to both volume and AUV growth. Overall, we remain pleased with the progress of our growth initiatives and the positive impact they are making on Mineral Fiber volume growth.
Now turning to Architectural Specialties. We delivered 4% sales growth in the quarter and 5% sales growth for the year, with contributions from recent acquisitions. We also continue to grow earnings for the segment and made progress toward improving profitability with adjusted EBITDA increasing 27% versus the prior year with margin expansion of 330 basis points. This marks the seventh time in the last 8 quarters that this segment has delivered period-over-period EBITDA margin expansion. For the full year, Architectural Specialties EBITDA margin expanded more than 200 basis points. With improved operating performance throughout 2023, we remain on our path to our target of 20% EBITDA margin for the Architectural Specialties segment.
Further supporting the organic growth in this segment, we remain encouraged by the quoting and bidding activity with airport projects across the country. Through the bipartisan infrastructure law passed in 2021, approximately $15 billion in federal funds has been earmarked for airport infrastructure development with $9 billion allocated through 2024. As we've mentioned, these are larger and more complex projects, typically with multiple product types sought by the architects and designers.
With the largest portfolio of Mineral Fiber and specialty ceiling and wall products, we are uniquely positioned to capture these opportunities, and we expect the transportation vertical to provide a nice tailwind in the Architectural Specialties segment for the next several years to come.
Now I'll pause and turn it over to Chris for some more detail on our financial results and our 2024 outlook. Chris?
Christopher P. Calzaretta
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 website, and Slide 3, which details our basis of presentation. On Slide 6, we discuss our fourth quarter Mineral Fiber segment results. Mineral Fiber sales grew 2% in the quarter primarily driven by AUV which represents a combination of like-for-like pricing and mix.
In the quarter, AUV growth was driven by favorable like-for-like pricing, partially offset by unfavorable mix. We continue to deliver strong price realization in line with expectations, but mix was a headwind, largely due to mix dynamics within our channels, which we believe are timing related. AUV remains a core value driver for the Mineral Fiber segment. And despite mix pressure in 2023, we delivered full year AUV growth of 5%, which is in line with our historical average. Mineral Fiber volumes were essentially flat in the quarter as contributions from our growth initiatives offset a softer market. While Mineral Fiber volumes were flat compared to the prior year, they were ahead of our guidance expectations as the market in the fourth quarter was broadly more resilient than we expected.
Additionally, sales volumes to retail customers were also better-than-expected. While retail sales provide upside to our volume expectations, it also contributed to an AUV headwind in the form of channel mix versus our outlook. Mineral Fiber segment adjusted EBITDA grew by $3 million or 3% and adjusted EBITDA margin expanded by 50 basis points in the fourth quarter. The follow-through of AUV and the contributions from WAVE equity earnings were the primary drivers for margin expansion versus the prior year period.
As expected, manufacturing costs were higher than prior year due to the lapping of a strong prior year period where we saw both outsized productivity and cost control gains. This was offset by lower input costs as raw materials remained inflationary but were more than offset by energy and freight deflation. Input costs in the quarter also included a benefit from favorable inventory valuation impacts related to the timing of moderating input costs flowing through the P&L.
SG&A increased $7 million versus the prior year, which was in line with our outlook. This increase versus the prior year period was primarily due to higher current year incentive compensation, combined with the lapping of a benefit in the prior year as well as higher promotional selling expenses in support of top line growth. Our teams continue to maintain a disciplined approach to cost control on our discretionary spending as we navigated soft market conditions. WAVE equity earnings grew $4 million as compared to prior year with favorable EBITDA margins and slightly higher volumes. Volumes were better-than-expected, largely due to more supportive market conditions.
On Slide 7, we discuss our Architectural Specialties or AS segment results. Sales growth of 4% in the quarter was led by contributions from our recent acquisitions which offset project-related timing impacts. As a reminder, AS revenue is more impacted by project time lines than Mineral Fiber. So quarters can tend to be lumpy and project scheduling or delays can have outsized impacts quarter-to-quarter.
A highlight in the quarter for AS was the segment's adjusted EBITDA margin of 18.4%, which expanded 330 basis points from the prior year period. This marks the third consecutive quarter with over 300 basis points of adjusted EBITDA margin expansion and resulted in a full year adjusted EBITDA margin of 18.1% for the segment. expanding over 200 basis points versus the prior year. As Vic noted earlier, we continue to be encouraged by this progress and remain well on our way to the 20% EBITDA margin level that we believe we can return to in this segment.
Slide 8 shows our fourth quarter consolidated total company metrics where benefits from higher volumes, improved AUV and higher WAVE equity earnings were partially offset by increased SG&A. Input costs in manufacturing largely offset each other. Consolidated adjusted EBITDA margin expanded 130 basis points with adjusted EBITDA up 7% and adjusted diluted earnings per share, up 13% versus the prior year period. Our 31.4% adjusted EBITDA margin was the strongest fourth quarter result since 2019, and we remain focused on continuing to drive adjusted EBITDA margin expansion.
Slide 9 highlights our full year consolidated company metrics. We grew adjusted EBITDA by 12% and expanded margins 200 basis points. Adjusted diluted earnings per share also increased 12% versus the prior year period, and adjusted free cash flow increased $42 million or 19%. I'm proud of the work that our teams have done throughout the year to deliver double-digit adjusted EBITDA growth, margin expansion and double-digit adjusted free cash flow growth in a soft market.
Slide 10 shows our year-to-date adjusted free cash flow performance versus the prior year. The 19% increase was driven primarily by working capital improvement and higher cash earnings, partially offset by an increase in capital expenditures, lower dividends from WAVE and higher cash interest. Recall that in the fourth quarter of 2022, we received a $25 million special dividend from WAVE that did not repeat in 2023. Excluding that special dividend in the prior year, we grew adjusted free cash flow by a robust 34%.
The ability to consistently drive free cash flow generation even in a soft market is one of the key strengths of Armstrong. A key strength that fuels a healthy balance sheet, advances innovation and enables us to execute on all of our capital allocation priorities. These priorities remain unchanged as we first look to invest back into the business by way of productivity and growth projects where we generate the highest returns.
Second, we target acquisitions and partnerships with differentiated and specifiable products and solutions that strengthen our broad product portfolio. And third, we provide value to shareholders through a growing dividend and share repurchases. And looking back on 2023, we delivered on all 3. In Q3, we noted the ongoing investment to expand our metal capacity and capabilities within our AS business to maximize returns in a growing category. In July, we completed the acquisition of BOK Modern, which is already providing incremental sales and EBITDA.
And in October, we increased our dividend by 10%, the fifth consecutive annual increase since dividend inception in 2018. And still, we continue to repurchase shares throughout the year. In the fourth quarter, we repurchased $35 million of shares and for the full year, we repurchased $132 million. Since the inception of our share repurchase program in 2016, we have repurchased a total of 14.2 million shares for $983 million or approximately 1/4 of our total shares outstanding at the -- since the end of 2015. As of the end of 2023, we have over $700 million remaining under the existing authorization. This disciplined and balanced approach to capital deployment continues to create value for our shareholders.
Slide 11 shows our full year 2024 guidance. We expect to carry the momentum of solid execution and focus on margin expansion from 2023 into 2024. We expect total company net sales growth in the 3% to 6% range. We expect our growth initiatives to partially offset modestly lower market demand, resulting in Mineral Fiber volume down in the low single-digit range. We expect Mineral Fiber AUV to be in line with our historical average of mid-single digits, returning to a more balanced split of price and mix and contributing to EBITDA margin expansion.
We also expect manufacturing productivity and normalizing levels of inflation in 2024. And paired with continued efforts for AS to penetrate a fragmented market and expand margins, we expect total company adjusted EBITDA growth in the 5% to 9% range. We expect adjusted diluted EPS and adjusted free cash flow to grow at a rate similar to adjusted EBITDA. Please note that additional assumptions are in the appendix of this presentation.
We anticipate 2024 to be similar to 2023, albeit with less market uncertainty. Our teams remain laser-focused on delivering profitable growth, margin expansion and adjusted free cash flow growth despite modestly softer market conditions. I'm excited to further this momentum as we continue to execute our strategy and create value for our shareholders.
And now I'll turn it back to Vic for further comments before we take your questions. Vic?
Victor D. Grizzle
Thanks, Chris. And before we get to your questions, I'd like to take a moment to share a few highlights from Armstrong's proven ability to consistently and steadily invest back in our business and innovation through all parts of the cycle. In January, we announced a new partnership with McKinstry, an innovative leading construction and energy services company to tackle another challenging aspect of commercial construction today. The waste and inefficiency in the installation of systems, devices and components needed to meet today's tenant requirements.
With an Equity Investment in Overcast Innovations and early-stage McKinstry Venture, we're codeveloping plug-and-play systems that streamline this increasingly complex process. This represents an integrated approach that goes well beyond ceiling tiles. Overcast works with architects to integrate HVAC, lighting, audiovisual components, sensors and other ceiling equipment into factory manufactured architectural ceiling solutions.
The partnership and investment are expected to accelerate Overcast growth through access to Armstrong's portfolio of ceiling solutions and go-to-market platform. By bringing together industry-leading Armstrong ceiling systems with Overcast pioneering integrated modular ceiling design, we can offer unique and sustainable solutions. Another area of focus has been innovation in our Healthy Spaces initiative and has evolved over time to include the energy efficiency and overall thermal comfort of commercial buildings. As you may know, buildings are responsible for nearly 40% of global energy consumption.
And in the U.S. alone, this energy consumption represents nearly 75% of all electricity used and 35% of the nation's carbon emissions. Importantly, over 50% of that energy consumption is used to heat and cool buildings. As part of our research and development efforts, we have focused on how ceilings can play a significant role in creating healthier and more sustainable spaces and enable energy efficiency for more sustainable buildings and ultimately accelerate the efforts of building owners and operators to achieve their net zero energy aspirations.
As we announced in December, Armstrong has acquired the technology to integrate Phase Change Material or PCM into our ceiling tiles to improve their thermal mass and thereby reduce the energy consumption of commercial buildings by as much as 15%. This performance is enabled by the heat absorption and release properties of PCM that can shorten the heating and cooling cycles to save energy. This technology enabled us to introduce Ultima Templok. The first of its kind and the first of what we expect to become a broader portfolio of energy-saving ceiling tiles.
Ultima Templok brings the same smooth white look, the same superior acoustical performance that our customers enjoy today, but now in a package that also saves energy. This is the first ceiling tile that will pay for itself over time. Our first customer for this new energy saving ceiling solution is the U.S. Department of Energy as part of an ongoing government study of new innovative technologies that offer energy efficiency and decarbonization benefits. Needless to say, this is an exciting innovation for the entire ceiling category and a brand-new way for building owners and operators to reduce energy costs and to make their buildings more sustainable. Our ongoing focus on innovation is a key element of our strategy that provides a unique value proposition to all of our customers.
Our innovation continues to add value and new attributes to the ceiling category, making ceilings more relevant and valuable to architects and designers and building owners, and it ultimately positions Armstrong well to consistently grow the AUV of our products and enhance our overall competitive advantage.
And finally, to wrap, despite expecting a modestly softer demand year ahead, we are carrying some good momentum into 2024. We demonstrated our unique resilience in 2023 by delivering profitable growth in a challenging market. And with modestly softer market conditions in 2024, we expect to do more of the same. The resilience of this business has been a hallmark for many years. And since the 2020 pandemic, we have generated sales and earnings growth each year even though the commercial construction markets have not fully recovered. This growth enables our ability to consistently invest back in the business to drive innovation into the market and fuel future growth. All this, in addition to providing direct returns to our shareholders through dividends and share repurchases, again, even during weaker economic times.
So with that, we'll stop here and be happy to take your questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from the line of Garik Shmois with Loop Capital Markets.
Garik Simha Shmois
Congrats on the quarter. Hoping you could speak a little bit as to what you're seeing so far in the first quarter, we've been hearing from other companies that weather has been a little bit of a headwind, not sure that's impacting you and then maybe speak to how you expect the slope of the year to progress both for sales and margins, anything to take into account there?
Victor D. Grizzle
Yes, Garik, on the direct part of your question, we've not seen any measurable impact on weather on the business in the first 6 weeks of the year here so far. So let me answer that directly. What we're seeing in the marketplace and what we expect to see, start back with the third quarter of last year, we saw a market that, again, was better than what we were expecting. And then in the fourth quarter, we saw a very similar market condition than -- that we saw in the third quarter.
So as we outlook the halves of the year in 2024, we kind of expect that the first and second quarter, first half of this year to be fairly similar to what we saw in the back half. It seems to be just kind of at this level just progressing along at this level. In the back half is where we have more uncertainty, again, with the lag effect of our business and the lag effect of higher interest rates, overall slower economic activity that's expected, we see that, that could potentially hit the discretionary part of our business, and we might see some softer market conditions and softer volumes in the back half of the year. That's our current outlook. Again, there's some uncertainty with regards to exactly what we're going to see.
And as Chris mentioned in his prepared remarks, we don't see the same kind of variation in the potential outcomes as we did going into '23. But still there's some uncertainty about what is the overall economic activity going to look like. So kind of a first half -- kind of as we've been seeing recently in recent quarters, maybe a little bit modestly softer conditions in the back half.
Garik Simha Shmois
I wanted to follow up on capital allocation. Just given your strong free cash flow position, balance sheet is in good shape. Just thoughts on priorities and maybe speak to the M&A environment as well.
Christopher P. Calzaretta
Garik, it's Chris. I'll take that. And then, Vic, if you wanted to add on a little bit on the M&A side. Yes, I mean, our approach to capital allocation priorities remain unchanged. I mean we invest back into the business first, where we see a lot of our highest returns. And then second, seek to grow by way of inorganic growth to create shareholder value and returning cash to shareholders continues to be our last priority, our third priority and we continue to flex with share repurchases. And as we've gone through our strategic planning and long-term planning for the business, we believe that there's value creation there. And following those disciplined capital allocation priority steps, they remain unchanged and believe that they're the best way to continue to deploy capital for the company.
Victor D. Grizzle
Yes. And to Chris' point, our second priority is the use of free cash flow to bolt-on acquisitions that add capabilities to the Armstrong platform. to accelerate where we're trying to go and especially in this fragmented specialties category. We still believe there's lots of opportunity there. We continue to pursue those opportunities.
I would say we're very active. Our pipeline is very active and fluid. I think a lot of the questions that we get are around how interest rates and so forth may be affecting our pipeline. Again, a lot of these companies that we're working with or trying to get closer to, are not in a sale process. And so we're not affected really by interest rates or the interest rate environment. So we continue to build these relationships with targeted companies that we think would add a lot of value by being on the Armstrong platform, and we'll continue to build those third-party relationships with those that we think we don't need to own the assets, and we can use our capital else place. So we remain active. We still believe that there's a good set of opportunities for us to go faster in the Specialties segment through these acquisitions and we'll continue to build and build that pipeline and hopefully get some of those across the finish line.
Operator
Our next question comes from the line of Philip Ng with Jefferies.
Philip H. Ng
Strong finish. 2 years, so congrats on the team. So Vic, it's good to hear that demand is off to a pretty solid start in the first half. Any color on how orders and bidding activity have trended lately particularly in some of the more challenged end markets like office and retail, are you starting to see those activity are bottom out here? And you commented about how the back half could be a little more weaker. Is that informed by your customers? Or are you just kind of baking in some conservatism?
Victor D. Grizzle
Yes. So first of all, Philip, on the bidding activity. Fourth quarter bidding activity was positive. And it was kind of choppy all throughout the last year as we reported in 2023. I would say overall bidding activity for the year was stable with the Q4, again, being positive. Interesting enough, as much as office gets talked about, I think it's worth noting that the office bidding activity positive in 2023 in both the number of projects and the value of projects.
We think this is another signal of this sector, in particular, stabilizing along with some of the other things that we talked about in our third quarter with leasing volumes increasing 14% in the quarter, the supply at the high end continues to get tighter, both in the Class A and A+ part of the marketplace, back-to-office mandates.
So 90% of the Fortune 100 employees are now back in the office, an average of 3 days a week. So there's lots of signs that are pointing to a stable office market in particular. And then that's, again, complemented by some additional strength that we're seeing in education and the retail in particular. So again, I would say overall, Phil, the market that we're experiencing in the back half of last year is what we're seeing so far, and again, it's very early in the year, but that's what we expect to see in the first half of this year.
In the back half, and to the second part of your question. So I think, this is both informed by our customers who have less visibility in their backlogs into the back half of the year, although it's different than it was at the beginning of '23, where there was a lot more concern about the back half of the year, they're still -- it's still informed by our customers who have less comfort, I think, in their backlogs for the back half of the year. And again, that's where some of the indicators lagged would say, that's where some of the weakness could show up. Again, a lot of this is probably more on the discretionary side. So we'll have to get closer to the back half to see exactly what happens on the discretionary side of this, which, again, we have a lot less visibility on some of that smaller discretionary project work.
Philip H. Ng
Okay. That's incredible color, Vic. And then for your AS business, you're guiding to, call it, 6% to 9% growth in 2024. I believe roughly about 2 points of M&A, but nonetheless, that's pretty strong growth. So I'm just curious where you're seeing some of the strength from an end market standpoint? You certainly called out infrastructure and transportation being a big part of that. Any way to kind of help us parse out how big is that piece of the business for AS?
Victor D. Grizzle
What I would point to, Phil, is the -- on the new construction side, if you recall, in the back half of 2022, we had pretty good new construction positive, new construction starts. We should benefit from that in 2024, continue to benefit from the lag of those new construction projects coming through. I think in the larger alteration projects, office and education, again, were positive. And I believe we're going to continue to see some of that benefit in both office and education. And you mentioned transportation. It's a relatively small from a square footage standpoint segment but it has big dollar opportunities when it comes to the Architectural Specialties segment. We remain very busy with our bidding activity there. We expect transportation to be a meaningful contributor to the overall Architectural Specialties segment growth in '24. And as I outlook, I think beyond.
Operator
Our next question comes from the line of John Lovallo with UBS.
John Lovallo
The first one is just on the comps in the first half in Mineral Fiber, in particular, I mean, they're a little bit tricky with, I think, a plus 9% in the first quarter. I think, on a volume load and then a minus 7% in the second quarter. How should we sort of think about those as we move into the first half of this year? And then along the same -- along similar lines, input cost inflation. There's a lot of moving pieces with energy and other items. How are you kind of thinking about that through the year?
Christopher P. Calzaretta
John, it's Chris. Thanks for the question. Yes, on the volumes in Mineral Fiber, so looking at first half, second half splits, we're guiding to Mineral Fiber volume being down in that low single-digit range with a little more softness in the back half than the front half, and that really nears the remarks that Vic made about the overall market. And you're right. First quarter, we're lapping a really strong comp of the first quarter of '23, where we saw some of that inventory build in retail. So a little bit of softness in Q1 and then kind of just the opposite in Q2 to the comp that you pointed out. But I'd overall say back half a little bit softer on the volume side than the first part of the year.
On input costs, you're right, we're basically out looking for full year total input cost inflation to be inflationary in the low single-digit range on a percentage basis and kind of break that out a little bit. Raw materials, we expect those to be inflationary, low single digits, freight to be slightly inflationary and then deflation in the area of energy driven primarily by nat gas. So again, total input cost inflation are in that low single-digit range for '24.
John Lovallo
That's really helpful. Okay. And then maybe just taking a step back here. The Investor Day targets you guys outlined 2% to 4% Mineral Fiber growth. I mean 2024, the expectation is for it to be down low single digits. As we progress through this year, how should we sort of think about the drivers of the improvement in Mineral Fiber volume? And maybe as you see the cadence over the next couple of years, if possible?
Victor D. Grizzle
Yes, John, let me take that. I think that when we think about those, of course, the world kind of changed in '22 right after that Investor Day conference. But when you look back at the building blocks of that guidance, and we sit here today and look at those building blocks, they haven't changed. They really are the same building blocks. I think we've got to get to the stabilization of the market. We did outlook, one of the building blocks is a recovering commercial construction market. And so as we get on the other side of '24 and move into a more positive backdrop for commercial construction with lower interest rates and so forth.
I think then we start to see the materialization of one of the main building blocks there, which is the overall recovery of the commercial construction marketplace. Again -- and then our growth initiatives on top of that and then acquisitions are coming along the way. We think the building blocks are still there for positive Mineral Fiber volume growth, which is your specific question, but the other building blocks for overall profitable growth for the company.
Operator
Our next question comes from the line of Susan Maklari with Goldman Sachs.
Susan Marie Maklari
Congrats on a good quarter. My first question is thinking about your guide for Mineral Fiber volumes to be down low single digits, can you give us sense of how much of that is driven by the underlying market and the conditions that you've talked to relative to some of those organic initiatives and the benefits that are starting to come through from those?
Victor D. Grizzle
Yes, I'll take it. Okay. Susan, yes, the volume -- I think the way to think about the volume build on this is we have an overall, I think, softer level of economic activity that is going to impact the overall business. And I can -- across all of the verticals will be subject to lower levels of activity. So that's kind of the backdrop. We're going to partially offset some of that with our growth initiatives, like we did in '23. We feel really good about the progress and the traction we're getting there.
The other thing that is going to come out is some of this retail inventory build that we talked about all through 2023, and we were expecting some of that to come out in '24, didn't come out. And so we're factoring that also in coming out in '24. So you've got a couple of puts and takes there. It's not all market softness. Again, we're out looking at a modestly softer overall economic backdrop. And again, partially offset with our growth initiatives and then a little bit of headwind from some of this inventory coming back out of the system in '24. Does that help?
Susan Marie Maklari
Yes. That is helpful. I mean we're trying to understand, it sounds like a lot of your organic initiatives have been gaining some nice momentum over the last couple of quarters and just how to think about the continued benefit of that over the coming quarters and where that can go relative to a softer market?
Victor D. Grizzle
Yes. So we expect that to continue -- that traction there to continue in '24 for sure.
Susan Marie Maklari
Yes. Okay. That's helpful. And then turning to the Architectural Specialties margins. You're obviously continuing to make some really nice progress there, getting close to that 20%. As you think about the setup for year, how are you thinking about the ability to actually get to that 20% or really within striking distance of it? And what are maybe some of the puts and takes that could come through in terms of the margin in that segment?
Victor D. Grizzle
Yes. We're really within striking distance, right? I mean the path that we're on is very encouraging in terms of getting the operating leverage that we needed to see from the capital investments we're making in the business, as well as some of the SG&A that we were investing ahead of growth a couple of years back. So we're on the -- I'd say, a good path there to get the operating leverage there. And then our pricing initiatives, too. We're doing a good job in making sure that we're pricing projects the right way. We're getting some of the acquisitions on our pricing platform.
So those things that we're doing, and we demonstrated it for 2 years in a row now, that's what we have to continue to do in 2024. And we won't make any short-term bad decisions to artificially get there, I think that's the discipline that we're using. Some of these large airport projects that we talk about, one of the things that we did in '23 is -- and late '22 is we invested in some additional resources to create multifunctional teams to go after some of these larger complex projects. And that's an important flex that we were able to take so that we could better position ourselves for winning some of these large airport projects. If we see opportunities to do that, we're going to continue to do the right thing in the short term, for our business over the long term. But we're in striking distance, and we're pushing to get there. I really like the path that we're on.
Christopher P. Calzaretta
And Susan, maybe just to call out too and build on that a little bit is -- in the appendix, we have the adjusted EBITDA margin assumptions for both Mineral Fiber and AS. And we're out looking about 19% EBITDA margin for AS and about 40% for Mineral Fiber.
Operator
Our next question comes from the line of Keith Hughes with Truist.
Keith Brian Hughes
On the guide for Architectural Specialties, what's in the revenue guide. What's the breakout between organic and acquisition?
Victor D. Grizzle
Yes. Really, I'd say within the AS segment, we're guiding 6% to 9% on the top line with I'd say really minor contribution from inorganic on that. It's really the market and continued market penetration that's driving our growth and expected growth in '24.
Keith Brian Hughes
Okay. And one other question. You talked about there was an inventory adjustment amount in the fourth quarter. How much was that? What segment did that show up in?
Victor D. Grizzle
On the -- you're referring to inventory valves?
Keith Brian Hughes
Yes.
Victor D. Grizzle
Yes. It was small. It was small. If you remember back in 2023, we had in the first quarter, a pretty sizable valve impact and in the fourth quarter, it was a much smaller amount. About half of the input cost line on the bridge was valve related in Q4.
Operator
Our next question comes from the line of Rafe Jadrosich with Bank of America.
Rafe Jason Jadrosich
It's Ray, I just wanted to ask on the Mineral Fiber revenue guidance. What are you assuming for share gains, reperformance relative to the market in '24 and then it sounds like there was a mix headwind in '23. And Vic, you just mentioned to an earlier question that there's some expectation of retail destocking in '24. Do you expect the mix sort of headwinds to reverse in '24? Is there anything that's changed in your overall mix going forward?
Victor D. Grizzle
Yes. No, I think mix is going to be a positive contributor in '24 for a lot of the same reasons why it was a headwind in '23, which is this channel imbalance between the retail channel and some of our higher AUV channels. So yes, I think we expect some of that inventory to come out of the retail channel, which, again, brings it more back into the balance of our higher AUV, which allows then the product mix, which is ultimately the driver of our mix as a company is the product mix is able to shine through and contribute when the channels are better in balance.
And hopefully, that makes sense. But that's one of the drivers of this business is 70% of our business is renovation work. And when architects and designers and building owners renovate, they don't put the old stuff back in, they put new stuff back in. So it naturally wants to mix up to higher value, higher performing products that's happened for over a decade, and we would expect that to happen for the next decade that this natural industry dynamic is going to continue. And that's what will begin to shine through in '24 again once these channels to come back into their proportional balance.
Rafe Jason Jadrosich
And then just on the share gain assumption for '24?
Victor D. Grizzle
Yes, we're not assuming any share gain in our assumption. Again, we're driving category expansion with our initiatives, and we're getting our share -- proportional share of that expansion. So the growth dynamics for us really around what the market is doing, offset by our positive contribution from growth initiatives.
Rafe Jason Jadrosich
Okay. And then just on the Mineral Fiber margin assumptions. Can you just -- because natural gas prices have moved so margins have come down so much. Can you talk about the assumptions embedded in your guidance? What is sort of the tailwind from energy in '24? And then can you talk about the strategy around hedging going forward? Like what's rolling off there? And where are you resetting?
Victor D. Grizzle
Chris, will you take that?
Christopher P. Calzaretta
Yes. So sure, remember, about 30% of our Mineral Fiber inputs are tied to raw materials, 10% freight, 10% energy. So as I shared earlier, raw materials were expecting inflation in the low single-digit range. Freight again, to be slightly inflationary, low single digits and then really a tailwind on deflation, largely driven by nat gas. And as we model that, we look at a bunch of different inputs to that, obviously, the NYMEX forward curve kind of shapes and influences that.
But again, looking back at recent history with nat gas, it's really hard to call and hard to peg, but we do have nat gas as a deflationary item in '24, and that's really driving that inventory -- that energy category. I'd say from a hedge position perspective, we have a little bit carried over into 2024, really immaterial when I think about it and to a much lesser extent than we had in terms of price locks in '23. Kind of that said, going forward, don't expect as much of a volatile nat gas environment as we saw in '22 and '23. So not looking to really hedge or do any price locking longer term.
Operator
Our next question comes from the line of Stephen Kim with Evercore ISI.
Stephen Kim
Appreciate all the color so far. Wanted to just talk a little bit about the inventory drawdown at the home centers. It's been discussed a bit already. But it looks like you didn't see it show up last year, you're expecting it again in 2024. I was just wondering if you could give us a sense for why it didn't show up as you expected over the last couple of quarters. And are you expecting this to materialize in the first quarter or some other time later in 2024 in your planning?
Victor D. Grizzle
No. I think this is really hard, as you know, Steve, for us to control or let alone and predict it for sure, let alone control it. But what we expect is -- we've just kind of sprinkle this in throughout the year that they'll come to some normalization around their inventories why these home centers is a good question.
It's a different answer for different home centers, but there's timing in which they are remerchandising their shelves around ceilings, for example. So that can drive a different behavior around inventory build across their stores. And again, we see that on the other side, too, when they draw them down in anticipation of a merchandising change. So it's kind of in line with what we see periodically with these home centers.
Sometimes they're out of phase with one another, and it's a little quieter and sometimes they're in phase with one another and we feel -- and we have to talk about it a little bit more. But it's really timing related and they do come to some normalization over time in their inventory channels with our good service and they're able to do that. So again, we've kind of -- we're not loading it into the first quarter. We don't expect that -- we expect that probably to just normalize over the transition from quarter-to-quarter throughout the year.
Stephen Kim
Okay. That's helpful. Appreciate that. And then, Vic, you earlier talked about your investment in multifunctional teams that are required to really go after the more complex, longer -- larger projects in a better way, and you've attributed the success of that or those investments and the subsequent success to some of the great things that we've been seeing in our expect.
But you then -- I think, to Ray's question, you said that you did not think that you sort of gain share. You're not like gaining share. And I just wanted to make sure that I'm understanding was that a remark around Mineral Fiber, just because maybe you can help us understand if you didn't take share, these sales that products that went -- that go into these more complex projects. They obviously previously were coming from somewhere, right? How are these multifunctional teams that you put together actually changed the way those projects are serviced, which has to your benefit. If you could just help us understand that a little bit better.
Victor D. Grizzle
Yes, Stephen, to be clear, Ray's question was around Mineral Fiber assumption around share gain in our Mineral Fiber build. So just to be clear, my answer to Ray's question was around we're not baking any share gain in our Mineral Fiber volume assumptions like we'll never do. We -- that's not how we build our Mineral Fiber volume plan.
So just to be clear, that my answer was around Mineral Fiber volume. To your point, it's very different in Architectural Specialties. We are penetrating this segment. We are taking share in this segment. We have been for a number of years now. At these multifunctional teams that are just allowing us to leverage the entire portfolio that Armstrong brings to these projects.
There is no other company in the ceilings category that can offer the breadth of portfolio and now with our ProjectWorks design platform, there's lots of things that we can bring, and it really requires a multifunctional team to bring all of those attributes to bear on these large complex projects. So it's part of our competitive advantage that we're creating, but it's also the point of leverage for the unique attributes Armstrong can bring to these large projects. So we're really -- we're pleased with the traction these teams are getting and the effect it's having on our win rates in airport projects, large projects overall.
Operator
Our next question comes from the line of Kathryn Thompson with Thompson Research Group.
Kathryn Ingram Thompson
Just a clarification on volumes. You'd gave some color on quoting activity, but could you do the same in terms of cancellations? Are you seeing any change in an uptick or stasis as you've seen in the -- from the previous quarter?
Victor D. Grizzle
Yes, Kathryn. I think on the volume side in Mineral Fiber, we've been watching the cancellations, and these projects have been delayed or put on hold. But we've not seen a lot of cancellations. And I would say that has continued throughout 2023. And in fact, in Q4, when we look at -- we thought the market would soften a bit in Q4.
What we really saw was some of these projects that were on hold or in that discretionary bucket filled in some of the gaps in Q4 that kept the market kind of at a very stable level from Q3 to Q4. So I think to that point of not a lot of canceled projects keeps them in the wings when they're on hold so that they can be pulled forward or pulled into the system as there's capacity and a willingness to do so.
Kathryn Ingram Thompson
And also just as a clarification. Did Q4 see any benefit from the timing from Big Box that had been a factor in for certain quarters early in 2024?
Victor D. Grizzle
Well, there was a little strength in the retail channel that drove some of that mix that we talked about earlier. Again, that relative strength is relative to the other channels. So I wouldn't say -- I wouldn't put a lot of activity in the channel, but relatively, it was stronger than some of the other higher AUV channels that drove that mix. So not a lot of additional inventory build, if you will, in the quarter for us to point to, to say that, that was a big driver of the overall improvement.
Kathryn Ingram Thompson
Okay. And then finally on WAVE, could you outline some of the factors driving your projections for 2024 with WAVE? And how much of that is driven by core market growth versus just other fundamental changes or growth initiatives in WAVE?
Victor D. Grizzle
Yes, Kathryn, I think the way to think about the WAVE business and the way we're modeling the WAVE business is very similar to the overall market conditions that our Mineral Fiber business sees, right? We do sell grid and ceiling tiles as a package through our distribution. So the overall market backdrop and market assumption is virtually the same for our grid business. So I think you can factor the volume side of that.
What could be a little bit different in that business is the pricing ahead of steel inflation is something that our team does really well to watch what's happening with steel commodities. And so that can move their sales and, of course, their margins based on how well they do. And they have a really strong track record of doing a great job of staying ahead of steel inflation to protect their margins. That's kind of how we've modeled it going forward is that they're going to continue to stay ahead of inflation with their price initiatives and the volumes they'll experience are very similar to what we're expecting on the Mineral Fiber volumes side.
Operator
Our final question comes from the line of Adam Baumgarten with Zelman.
Adam Michael Baumgarten
Just a question on Mineral Fiber volumes. If we look at the back half of '23, how do you think your volumes performed versus the broader market? And then also, were there any notable market share shifts within any channels last year?
Victor D. Grizzle
Well, I think our growth initiatives really contributed in the back half as we talked about, Adam, I think the market was down low single digits which was better than what we -- less worse, if you will, than we expected right in the back half. And I think we certainly offset a good portion of that market softness with our growth initiatives. And so I think that's what we expect to continue going into 2024.
Adam Michael Baumgarten
Okay. Got it. And then just on the AUV guidance. Does that assume the typical 2 price increases throughout the year in Mineral Fiber?
Victor D. Grizzle
Yes. We're getting back to our normal cadence of twice a year price increases. And again, remember, AUV is both price, like-for-like pricing that comes from these 2 price increases you're referencing, but also the mix component of that. So -- which we talked about earlier on the call that we expect mix to be a positive contributor to AUV this year.
Operator
I would now like to turn the call over to Vic Grizzle for closing remarks.
Victor D. Grizzle
Thank you, and thank you all for joining, and thank you for your questions today. We're very proud of the team's results this quarter, obviously, and we look forward to updating you again in April on our progress. Thank you, and have a nice day.
Operator
This concludes today's call. You may now disconnect.
