Armstrong Flooring, Inc. (AFI) on Q1 2021 Results - Earnings Call Transcript
Operator: Greetings. Welcome to the Armstrong Flooring First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the call over to your host, CFO, Amy Trojanowski. Please go ahead.
Amy Trojanowski: Thank you for joining us today for Armstrong Flooring’s first quarter 2021 earnings conference call. I am joined this morning by our President and CEO, Michel Vermette. We trust that you have seen our press release this morning on the Investors section of our website at www.armstrongflooring.com. 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 detail discussion of the risks and uncertainties that may affect Armstrong Flooring, please review our SEC filings.
Michel Vermette: Thank you, Amy, and good morning to everyone on the line. I will start by providing a Q1 business update, as well as some color on our transformation progress. Then Amy will share additional details on our financial results. Overall, the positive momentum in our business continued into the first quarter and I’m pleased with the ongoing transformation of Armstrong Flooring. 12 months ago, we introduced our strategic roadmap to transform and modernize our business, and soon thereafter, the world entered the early stages of global COVID-19 pandemic. On last quarter’s earnings call, we discuss how our team’s -- team members overcame the challenges brought on by the pandemic to achieve significant progress against the various facets of our plan during 2020. I am pleased to report today that we can team to make significant progress against our goals during the first quarter of 2021. In the first quarter, we delivered 7% topline growth, which reflected contribution from each region where we operate. In North America, our results reflect growth in residential remodel and new construction. While commercial sales were flat and sales to residential national accounts were down due to prior year program launches that did not repeat in 2021. Internationally, our markets are recovering at a faster pace, led by strong performance in China and Australia. Operationally, our improvements resulting from maintenance and reliability initiatives are providing us with overall increased uptime and throughput at our plants. That said, these improvements were tempered during the quarter by the impact of winter storm Uri, which closed three of our plants in the Midwest and South for approximately three weeks in February and early March, along with disruptions in the supply of key raw materials. Amy will discuss this in greater detail in the call. Overall on the residential side, demand has been supported by impressive single-family housing starts growth of 41% year-over-year in March, which came in well ahead of initial industry expectations. On the commercial end, the ABI Index closed out at 55.6 in March, reflecting continued sequential improvement.
Amy Trojanowski: Thank you, Michelle. I’ll begin with a brief review of our financial performance on slide 12. First quarter net sales improved 7.4% versus 2020 and 5.1% versus 2019. In 2020, as you remember, we had strong performance in North America at the beginning of the quarter and in 2021 we saw more improvement towards the back half of the quarter. This momentum at the end of the quarter along with our open customer orders, points toward a continued recovery across our footprint. In China, sales improved substantially versus the prior year period, with improvement driven by recovery from the pandemic. We believe a portion of this increase is related to timing, with some sales being pulled forward in advance of our recent price increases in our Chinese market. North American sales were essentially stable, with sales of LVT in all channels improving versus the prior year. Sales in our residential national accounts were lower year-over-year due to initial product rollouts in the prior year quarter that did not occur in the first quarter of this year, due to the size of our business volatility in residential national accounts sales will happen quarter-to-quarter based on the timing of these new rollouts. Globally, our revenue from commercial channels was up double digits versus the prior year, while residential channels were essentially flat. As Michelle mentioned previously, the impacts of winter storm Uri closed several of our manufacturing facilities for approximately three weeks in the first quarter and disrupted the supply of key raw material throughout our supply chain. Into the second quarter availability of raw materials continues to improve. However, we continue to experience headwinds from higher raw material and shipping costs compared to the prior year. Global marine shipping remains very volatile due to port congestion in the Suez Canal ever given an incident. We announced sales price actions in the first quarter and additional increases have been announced for the second quarter. These increases will cover a broad range of our products that we expect to help mitigate higher inflation and realize raw material pricing.
Michel Vermette: Thank you, Amy. I’d like to thank the Armstrong Flooring team for their strong performance and dedication to our plan during the first quarter. I am pleased with our progress and I’m remained optimistic about our future. Our transformation is underway and we’re continuing to deliver on the commitments we made to you just over a year ago. Commitments that we’ve worked on steadily through the midst of the global pandemic and commitments to build a strong foundation for our business to expand, simplify and strengthen our core capabilities. I have full confidence in our team members to continue to safely serve our customers in this rapidly evolving market, while continuing to make incremental progress in our long-term value creation initiatives. Thank you again for joining us today. Operator, please open the lines for question.
Operator: Thank you. Our first question comes from Ken Zener with KeyBanc Capital Markets. Please go ahead.
Ken Zener: Good morning, everybody.
Michel Vermette: Good morning. Thank you for joining us.
Ken Zener: No problem. I wonder if you could just kind of update us on the pricing announcements that you have in place and how that might vary, obviously, let’s say, the U.S. residential versus international, and how that’s related to the cost inputs that you’re seeing in terms of how the cadence of that should unfold through the year? That’s my first question.
Michel Vermette: Okay. Well, we announced a price increase in December and it’s starting to phase in, in the middle of the first quarter. But with the winter storm, we had indefinitely impacted our raw materials across North America and also globally, that the combination of the recovery from the pandemic and basically the limited availability of the raw materials and definitely some producers taking some -- losing some capacity for extended weeks has created an inflationary situation. So we announced a second price increase at the end of the quarter and that will phase in, in the second. But we expect the first one to be pretty much be completed in the second quarter and the second one to be evolving through the second and eventually be fully implemented the third. As you know, some of these price increases take some time to go through to the contracts and definitely in commercial bids, there’s a certain period of time to phase those in due to those commitments. But, unfortunately, luckily, the industry has been dealing with this for many years and has had a lot of practice. So it’s more question of when and dealing with it, and our customers are also understand that the reality, so that’s working through. And then the international one was announced at the same time, the second one, and we should see the benefit of that, partially in the second and then start getting better in the third and the fourth.
Ken Zener: Appreciate those details. Realizing COVID affected kind of your business transformation everybody’s life actually in the last year...
Michel Vermette: Yeah.
Ken Zener: Could you guys just talk about how your planned SG&A investments specifically and how those might be unfolding this year. I know you guys broadly have talked about it, but now that, I want to say things are normalizing, probably, if you could just kind of update us on your tactical choices that you’re making? Thank you very much.
Michel Vermette: Yeah. Very good question. So, as you know, we were hopeful last year about this time to be investing in adding sales representation, engaging in independent retailers for with more product launches and displays. But naturally in the second quarter, basically no one wants anybody in their stores. And to your point, we’re trying to figure out what this -- how lengthy and how complex and what was the impact COVID. So we definitely had to take a pause in our go-to-market strategy, reset it pretty much in the third quarter and we started basically as we had a little more clarity in the marketplace and now to your point, things are definitely getting better. So we started hiring back in the fourth -- hiring the go-to-market additions in the fourth and representation to call on independent retailers, on builders and also making some additions also in key segments were gaps such as hospitality. We’ve made a significant increase in independent retailers in the first quarter to keep building upon that and we also launched a series of new displays both in Sheet and Alterna in the first quarter, did some of that in the fourth quarter, also some new LVT displays with key bank groups such as NFA and others. So we -- some of the things we’re hoping to do really late summer last year or early summer last year, where we started do in the fourth quarter and first quarter, and we’re phasing through that process as we speak. So naturally the SG&A investment isn’t commensurate with that -- those investments going through and that’s what Amy was covering. Those will be reflected in the coming quarters. But naturally the sales should follow naturally as the program matures and people become more productive in the field.
Ken Zener: Thank you very much.
Michel Vermette: Thank you.
Operator: Next question Keith Hughes with Truist Securities. Please go ahead.
Judy Merrick: Thank you. Actually, this is Judy Merrick in for Keith Hughes. And if I could just follow up a little bit on the first question, on slide 13, you talked about the EBITDA impacts and the $4.9 million of higher raw material and other higher costs. You answer kind about your thoughts about the price increases coming through the year? Do you think that $4.9 million is that kind of run rate for the year, anyway that we got the price increases coming? Do you think maybe by the end of the year, the pricing will offset those or is anything else you can kind of add about those increased costs?
Amy Trojanowski: Sure. The raw material cost and the increases are, frankly, coming extremely fast and in some cases faster than we can implement pricing. As Michelle talked earlier, a number of our contracts have set pricing for a period of time and we’re limited in the window in which we can do those increases. That said, we’re managing the raw materials very, very carefully. There’s been huge disruption across all of the supply chains for these materials. And as we look at it, based on our information, we expect there to be continued increases in each quarter in raw materials this year based on the visibility that we have at this point, obviously, that could change it. March was much steeper than February and we’ve seen continued increases here in April. So we’re trying to balance all of that and make sure that we have the right recovery. Freight has also been a headwind for us this year, both on ocean freight and the cost there for some of our imported materials. But then also onground transportation, availability, lanes, timing and pricing, have all been some headwinds that the teams have been managing through.
Judy Merrick: Okay. That’s helpful. And if I could -- one more question, you talked about on commercial. I think in global it sounds like that was doing better. But some of that was pulled forward price increases and but also in the U.S. more so. Have you seen an increase in quotation activity in commercial or is this, like, project delays that are kind of resuming or anything else you could add there would help?
Michel Vermette: So, to your point, we’re seeing more activity, for sure, in commercial. You saw the ABI’s or, I guess, the architects are seeing some same things happening. We’re seeing actually more transactional work also helping our commercial results. We augment in our business with a new Quick Ship program and that has helped to take advantage of opportunities that -- things to your point that got pushed back or got deferred in prior periods. So some property owners are addressing that and refurbishing some of their properties. So the commercial business is definitely an improvement versus the fourth quarter and I expect continued improvement in the second quarter and third quarter. So definitely the -- you can just see the activity, the conversation with the customers. There’s still some sluggishness in commercial. But this seems to be the there’s definitely more and more conversations, project discussions. And to your point, some of the projects that have been on the sideline from an extended period of time are starting to come off, which we’re excited to see.
Judy Merrick: Okay. Great. Thanks. Thank you very much.
Michel Vermette: Thank you.
Operator: Next question Chris White with Thompson Research Group. Please go ahead.
Chris White: Good morning, Michel and Amy. Thanks for taking my questions. I wanted to continue on the commercial and market questioning. You said Q1 commercial was flat. You cited ABI strength. I’m wondering if you think you could actually see growth in the commercial market for Q2 and if so, how strong do you think the growth could be, given some comps that were off pretty dramatically in 2020?
Michel Vermette: Well, to your point, I mean, the comps are making it. We should definitely see growth, for sure. Definitely, with the comps that we had in Q2 and I was expect that would be the case across the industry. So definitely, and also, in our case, with some of the things we’re doing are go-to-market and some of our programs we put in place, I expect those to help us through not only the market is getting better, but I think some our initiatives are maturing that will help us in Q2 and Q3. I won’t quote a specific number or range, but I definitely expect commercial to be a positive in the second quarter and third quarter that can help us in continue growing the business and which is our, first and foremost, goal in re-establishing the brand where it needs to be. And so -- and we’re connecting with customers. We have more reach now than we significantly had last year. And as that comes through, as you know, the commercial takes businesses that one that has a longer sales cycle than the residential one. But I’m very positive with what the team’s doing and how they’re engaging with customers and I am confident will bear fruit in the coming quarters.
Chris White: Thank you. And just digging down on that a little bit more, breaking commercial down by segment, I know that education and healthcare had been lagging recently. Are those the two sectors that you are seeing kind of a momentum coming back or is that -- is it other sectors that are -- that you’re kind of seeing the Street?
Michel Vermette: We’re definitely seeing more activity and more discussion on projects both on education and healthcare, for sure. There’s definitely some activity as we’re getting engaged in hospitality now. As we mentioned in our remarks, you can tell that even the hospitality owners, the ones that have the funding to do it, are really looking at refurbishing their properties, make sure they’re as competitive as can be as the consumer comes back and the travel industry to get a leg up on their competition. So you’re seeing some of those discussions, for sure. And also, I think, there’s definitely some corporate work, a lot of people are resetting what they’re doing, it’s moderate. But the -- you can tell there’s more discussions of what the office of future should look like in the reality we’re dealing with and knowing that there could be other versions of what we’ve dealt with in this past year of COVID or related issues. So how do we change the way we work and operate. So there’s definitely some conversations happening is, how high everybody is resetting their corporate footprint. So -- and the good thing is hard surface is a great product that can help you stay, keep your property clean, organize. You see if there’s -- if it’s in good condition or not. So it’s definitely been a positive all around.
Chris White: Thank you. That’s helpful. And then flipping over to the residential side, you had spoken that -- spoken about the residential national accounts that were down due to the product launch last year that provided tough comps. Can you help us better understand that national accounts loss last year and then why would be down this year despite a stronger residential market?
Michel Vermette: Well, it was tied to a load-in. So, as you know, when you have major residential national account and you do the inventory load-in when you load-in multiple days of products, right, so in a very short timeframe. So you get a one-time benefit across your business. And that’s really what we’re referring to was the initial inventory load-in last year, so we didn’t have a comparable inventory load-in this year versus last year. It’s not necessarily the program itself. It was more of the, what we displace, we display someone else and we benefited from launching to thousands of stores around the country and that was all happening within that one quarter. So those -- and company our size, those will make our sales trend lumpy in residential national accounts from time to time. So that’s what we were saying there. We’re very bullish on residential national accounts. It’s just the timing some of the rollout from time to time, depending on their size and this was a large one so, which was good. We’re happy. We want more of those going forward.
Chris White: Yeah. Got it. Thank you. That’s helpful. Last one for me. You mentioned the success of the Quick Ship program. Can you talk a little bit about how kind of scaled up this program is? Are we still in the early stages or do you think you’ve kind of taken as much market share as you can with this? Thank you very much.
Michel Vermette: Appreciate the question. It’s very much in the early stages. This is something we launched in August and September of last year. Our distributors have been very good partners to get the product out. We have some geographies. They’re doing a tremendous job, getting the word out and you can tell it’s gaining momentum. So by the time the product gets specified or use or get program in TI projects or TI facilities or different groups, that should only keep maturing. So it’s off to a very good start. We’re seven months in, eight months in, in that process now. So we definitely expect significant improvement and continue improvement for our Quick Ship and we’ll also augment that over time. So I think this was -- we’re happy with the early returns and we will continue adjusting and investing in so.
Chris White: Great. Thanks again.
Michel Vermette: Thank you.
Operator: I will now hand it back to Michel for closing remarks.
Michel Vermette: All right. Well, thank you, everyone for joining us today. We appreciate your interest in Armstrong Flooring and we look forward to updating you on future calls. Thank you all.
Operator: This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.
