Armstrong Flooring, Inc. (AFI) on Q2 2021 Results - Earnings Call Transcript
Operator: Greetings. And welcome to the Armstrong Flooring’s Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Head of Investor Relations, Matt McColgan. Thank you. You may begin.
Matt McColgan: Good morning. Thank you for joining us today for Armstrong Flooring second quarter 2021 earnings conference call. I’m joined this morning by our President and Chief Executive Officer, Michel Vermette; and our Chief Financial Officer, Amy Trojanowski. In addition to the earnings press release issued today, a copy of the slide presentation to accompany this call is available on the Investor section of our website, www.armstrongflooring.com.
Michel Vermette: Thank you, Matt, and good morning, everyone. I will start by providing a second quarter business update and share my perspectives on our progress against our multiyear transformation plan. Then I will ask Amy to share details on our second quarter financial results. On last quarter’s earnings call, we discussed the positive momentum and continued progress against our transformation goals. As we move into the second quarter, gradually from COVID-19 related restrictions and recoveries in residential and commercial demand help drive 15.5% topline growth year-over-year and nearly 13% growth sequentially from the first quarter of this year with increases noted in both our North America and international markets. While demand remains strong in the quarter, volatility in global supply chains and the continued inflationary environment significantly impacted our business in our second quarter results. We’re diligently working to mitigate these headwinds and I’ll provide more details on the initiatives Armstrong Flooring has taken. Overall, the resilient flooring market continues to rebound as the greater economy emerges from the COVID-19 pandemic. This is reflected in the healthy demand we’re seeing in both our commercial and residential business. We, like many companies, we’re able to return to the workplace in a limited capacity in the second quarter. In the field, our new build up sales force was able to increase the number of face-to-face meeting to near historical levels. In North America, pent-up demand drove sales increases across our LVT, VCT and vinyl sheet products, while the continued recovery from the pandemic grow sales increases in both China and Australia versus the same quarter of the prior year.
Amy Trojanowski: Thank you, Michel, and good morning, everyone. I’ll refer you to slide 13, which provides the summary of our financial results for the quarter. Second quarter net sales were $168.1 million, a 15.5% increase versus the second quarter of 2020 and a 12.9% increase sequentially from the first quarter of 2021. Our year-over-year sales performance benefited from relieved COVID-19 business disruptions, a healthier product mix and our previously communicated transformation initiatives, along with strong demand in both commercial and residential end markets. This resulted in sales increases versus the second quarter 2020 in all regions in which we operate. Throughout the quarter, demand remained strong, though, as Michel mentioned, disruptions in the global supply chain hampered our sales throughout the quarter. Despite this, we entered the third quarter with a healthy order book and significant deliveries of key inventory products coming in July and August. In North America, our commercial business benefited from recovering demand and the outlook continues to build momentum as the ABI Index registered one of the highest points in its history. Sales grew in both our commercial VCT and LVT products, benefiting from a healthy mix and improved pricing from our efforts to mitigate inflation. We saw considerable traction in our Quick Ship Program particularly in the latter half of the quarter, as customers began to take advantage of quick lead times for our American made products amidst the ongoing supply chain shortages affecting internationally sourced products.
Michel Vermette: Thank you, Amy. I would like to close by thanking the Armstrong Flooring team for their continued diligence in managing our business in the context of our long-term goal, by also staying proactive and agile in the current environment. We will implement our price increases and drive efficiency to offset inflation, while making our supply chain more resilient, all the while, balancing these near-term actions with investment initiatives necessary to transform the organization for the long-term. 15 months into our transformation journey we’re continuing to expand our customer reach, simplifying our operation, and strengthening our processes and infrastructure, putting Armstrong Flooring on the path to be more resilient and more profitable. The resilient flooring market continues to be a growing industry. Our products are in demand and are receiving positive recognition, and we continue to see many improvements across our business from our transformation plan. Overall, we at Armstrong Flooring, continue to stay committed to putting the customer, our employees and our shareholders in the best position to deliver value. Thank you for joining us today. Operator, please open the lines for questions.
Operator: Thank you. Our first questions come from the line of Julio Romero with Sidoti & Company. Please proceed with your question.
Julio Romero: Yes. Hey. Good morning, Michel and Amy.
Michel Vermette: Good morning.
Amy Trojanowski: Good morning.
Julio Romero: My first question is just on the Rest & Refuge product line. I know you talked about some incremental sales there for the first time in the second quarter and you’re newly established hospitality sales team. Can you maybe just speak to how much you’ve put into that effort from a strategy and maybe a headcount perspective, and how that product line has been received by the customer?
Michel Vermette: Yeah. Very well so far. We have five dedicated hospitality reps that have been onboard in recently. The product has been presented and we’re presenting our full offering also, but Rest & Refuge was designed with hospitality in mind first and foremost, and we have received their first few orders in -- and fulfilled them in the second quarter. We are talking to all the major brands about being a larger presence for them and in their different platforms. So we’re progressing very well on open up those doors and getting specified. And as you know, when it comes to hospitality, you have to be selected for critical brands and we’re working through that with each major operator. So we’re very optimistic that this is a good start. We opened the door and now we expect to gain momentum, a little bit similar to our Quick Ship, as I mentioned earlier on the call. That’s been a nice initiative for us and we’ll gain momentum in the coming quarters with hospitality.
Julio Romero: Got it. And can you maybe speak then in new products in the pipeline for that Rest & Refuge line and more broadly the product launch cycle targeting the hospitality channel in general?
Michel Vermette: Yes. We have in our pipeline for next couple months. We have another SPC product targeted for the category and also another wood slate product target for the category and these are all tied to the conversation we’re getting from our customers. So there’ll be -- within the next 12 months, there’ll be two editions, and also we will have a representation in key markets as we open up the door, so we can have connections with the owners of the properties after we get specified from the brands. So we can complete that execution.
Julio Romero: Great. And maybe just switching gears a little bit on your supply chain, you touched on some of the actions you’re taking to mitigate some of the impacts in the near-term, increasing your safety stock, exploring some alternative shipping. Can you maybe speak to some of the actions you’ve taken for the longer term in making your supply chain a little more resilient maybe beyond the next 12 months?
Michel Vermette: Yes. What we’ve done is expand our supplier base from one and also country of origin. So if there’s an issue in one part of the world, it doesn’t impact our whole supply chain. So, we’ve added supply from Vietnam, from Malaysia to our Chinese and Korean supply. So there is more versatility there and flexibility. We also augmented our U.S. manufacturing, as I mentioned in our remarks. So we are working to be more resilient there. And we’ve added suppliers also in North America to be -- to make the right raw materials and expansion. It’s been a very volatile environment and we’re working through that diligently. We’re in constant contact with our freight borders for the international sourced goods and even added fuel providers to that so we can bring goods there. But we keep adjusting. We keep understand what’s happening with each group and I expect this to get better in the third quarter and fourth quarter, as we have these extra bits and the safety stock is fully put in place.
Julio Romero: Yeah. That dovetails right into my last one here which was how do you expect the action you’ve taken in terms of the safety stock and alternative shipping routes to maybe even some of the impacts in the third quarter and fourth quarter, but I guess you mentioned, it’ll be less than you experience…
Michel Vermette: Yeah.
Julio Romero: … in the second quarter?
Michel Vermette: Yeah. And I think the big thing is safety stock is coming in, those orders were placed in the first quarter and second quarter but they were delayed getting here because of transportation. So we -- you’ll see improved service. Our customers will see improved service in the third quarter and fourth quarter as we have higher availability. So and we’ll keep adjusting accordingly. A lot of it is communication with our customers right now. They’re dealing with this in every commodity and every process. So we’re in close connection with them and to make sure we meet their needs.
Julio Romero: Understood. Thanks for taking the questions and best of luck in the back half of the year.
Michel Vermette: Thank you. Thank you for joining.
Operator: Thank you. Our next question comes from the line of Kathryn Thompson with Thompson Research Group. Please proceed with your question.
Kathryn Thompson: Hi. Thank you for taking my questions today. In your outlook, you noted that Armstrong is better positioned in geographic markets and product categories and I want to pull the string on that. Is this relative to Armstrong’s historical position or relative to other competitors?
Michel Vermette: Well, first and foremost, historical to our position. As you know, Kathryn, we -- everything pretty much in our business in North America went through distribution by a year and a half ago in what other than home centers. And what we’ve done is and we were missing opportunities with some of the largest retailers, some of the largest builders and commercial contractors. And we have been reengaging with these folks and then in particular on the builder side with the launch of the program. Now we have direct relationship with little over 60 of the top 300 contractors and builders in the country with what our build program that we just put in place in May. So those are different conversation. When you’re close to the customers, you have bigger opportunities. Just the number of customers and conversations we have has been very encouraging with what we have put in place. So we’re really participating or engaged in opportunities that the company has not been historically engaged with and I think that bodes very well for the future. We just had to get close with the customers and same thing in hospitality earlier. We just didn’t call on hospitality until this year. So a lot of work is being done to open up more verticals and create a brighter future for Armstrong. Some other competitors have some of those relationships, we just we’re not at the table until recently and we’ll continue to meet those and make sure we’re successful with those opportunities.
Kathryn Thompson: Okay. And just to summarize really this reflects not even being at the table but being at the table for certain key markets -- end markets and geographic markets. Is that a correct way to think about it?
Michel Vermette: Yeah. That is the correct way to think about it. Definitely. There are some verticals that we just did not participate in and within some larger opportunities until we had direct sales force. It seems impossible to be successful with some of these larger multi-geographic markets…
Kathryn Thompson: Okay.
Michel Vermette: …multi-state.
Kathryn Thompson: And then I understand that AFI is a leader in certain products like sheet vinyl. How does this apply specifically to LVT and maybe just remind us just on your LVT strategy?
Michel Vermette: Well, it’s a bit of balance between source and manufacturer. We have purposely augmented our offering of U.S. manufactured products such as Quick Ship, some of the launches I mentioned in our prepared remarks. So we believe we have opportunities to use our assets better here and we’re doing that and that’s been some nice momentum on the demand. We are having some targeted relationship with some vendors to bring some new innovation on sourced side. So it’s got a combination of being made in America and also sourced products that complement our offering. It will be -- it’s a larger part of our product portfolio than it was a year ago and will continue to be going forward. So there’s definitely a significant demand and to be successful in the verticals that we talked earlier, we need to augment that presence in LVT and we will do that both from the U.S. manufacturing end and a sourced end.
Kathryn Thompson: Okay. And following up on inflation and inflation is not a new subject. You and the industry have passed on multiple price increases, which will see benefits. But as we look -- conceptually look for beyond 2021 into 2022, is it safe to say that there will continued need to be pricing actions as we go into 2022 and most of the pricing developments in 2021 will be realized in 2022 and any other thoughts just on -- just a bigger picture on inflation versus just what’s right in front of us?
Amy Trojanowski: Yeah. Kathryn, thank you for the question. The inflation is real and it continues to increase. I think just for perspective, last quarter when we reported on the first quarter and we’re preparing, I think at that point we had announced already our May 1st price increase, that was really based on an anticipated annual inflation number that was in the $30 million to $35 million range across the categories that covered our source materials, our raw materials, our freight inflation and all of those things that we were we were seeing. As we sit here today and look at the remainder of the year, we think for the full year, we could have as much as $60 million to $65 million based off of inflation in the current year based on what we say and it’s a dynamic environment. Some days, we get some nice surprises and some costs that are slightly lower than our expectation. But many days is continuing increases. And as Michel commented earlier, some of these supply chain disruptions, I mean, the fires, the winter storms and all of those disruptions in the global supply of some of our key raw materials have really increased the price and it put us on force -- we’ve been on force majeure with some of our suppliers and that has a trickle-down impact to the cost in our manufacturing facilities because the plants can’t necessarily operate with a full supply and so we’re slowing down production based on the materials that we have, based on what the suppliers can provide. So I think that it’s a whole circle. And I think the last six months have demonstrated, in some cases, the strength of the supply chains, in other cases, the fragile nature of it and how connected it is globally. As we look forward, we do see a significant amount of that inflation impacting us in the second half of the year based on some of the inventory turns, some of our inventories are at low levels because we’re trying to get the supply and I think both we will recognize through sales some of this higher cost inventory as we sell it in the second half. Our teams as they look forward and a lot of the indices that we follow, it doesn’t look like there’s going to be substantial softness or recovery for some of these inflationary impact into well into 2022. So I’m not sure that it’s going to go away very quickly. Certainly, not as quickly as it has come on. I think the velocity of the increases has taken everybody by surprise and has been greater than we’ve seen in decades.
Michel Vermette: So I do expect to have some further increases as we go through. These relatively changed week-to-week and month-to-month and as they come to impacting the different products, we will have to adjust and we will adjust. I think that’s the reality that we’re faced in and everybody in our industry is facing. So I think it’s the nature of the environment we’re dealing right now.
Kathryn Thompson: Okay. And along the line with inflation with some materials, how has it been on the labor front for AFI and getting and retaining labor in the current market?
Michel Vermette: I think our HR team has done a great job of recruiting and retaining labor. As you know, we’re probably a little higher in the geography we operate in, our wages were definitely in the frontline, employees are a little better than maybe some local competitors that we operate in, so we’ve been very fortunate to retain a high level of employees. There is some scarcity from certain skills areas such as electronic -- electricians, mechanics, that operate some of the specialized areas. But so far, I think, we managed decently our labor component and we’re very lucky having the loyalty and the engagement of our employees. That’s what we’re trying to achieve.
Kathryn Thompson: Okay. Perfect. And the final question for the day, once again, this is a little bit more not just in 2021, but looking into really the next few years, but with the lens that we’re looking at in the near-term. We’ve received -- one of the big pieces of feedback we’ve received sequentially is that lighter commercial construction which had lain for a while is showing signs of strength. What are you seeing and I know you talked about specific end markets, but when you look at the lighter type construction, so in other words, not a distribution center or data centers, what have you seen sequentially and what does this mean for your business beyond 2021?
Michel Vermette: Well, as you’ve seen our Quick Ship results, they’ve been very strong. A lot of that would be tapping into exactly that light commercial having improvement demand, small -- multiple small jobs that are happening every day and we’re seeing a lot of that activity in that nature. To your point, longer projects that require design and more complexity, more specialized labor are definitely being talked about, but they’re not as prevalent right now to go through. They’re coming though. You could see in the ABI. You can see in the conversation we’re having with our customers there. But I think what we’ve done to augment our Quick Ship, we’ll have some additions to it, is bodes well to where we are operating right now. And I think that will help us gain momentum in 2020 -- the rest of 2021 and 2022, and I think, as we become more nimble and more reliable that area, I think, we’ll have some very nice success.
Kathryn Thompson: Okay. Thank you for taking my questions today.
Michel Vermette: Thank you, Kathryn.
Operator: Thank you. Our next question comes from the line of Keith Hughes with Truist. Please proceed with your question.
Keith Hughes: Hi. Thank you. Most of my questions have been answered. But just looking at the raw material inflation you discussed in the slides, the big increase in container cost coming from Asia. Would that be reported as an input rise in that bar graph, is that how it comes into the numbers?
Amy Trojanowski: Yeah. It does.
Keith Hughes: Okay. And are you seeing sequentially any lightening of these, huge increases in those costs?
Amy Trojanowski: No. Not right now.
Michel Vermette: Not yet. Actually…
Keith Hughes: Oh! Yeah.
Michel Vermette: …Keith, we’re seeing weekly, we’re seeing records just about every week on Sundays. Because there’s just not enough supply of containers.
Keith Hughes: Right. Okay. Thank you very much.
Michel Vermette: Thank you.
Operator: Thank you. There are no further questions at this time. I would like to turn the call back over to Michel Vermette for any closing remarks.
Michel Vermette: I appreciate everyone joining today and we are focused on transforming our business and navigating this challenging environment and I appreciate everybody’s interest. Thank you for joining us today.
Operator: Thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines at this time. Have a great day.
