AFI - Earnings call transcript Q3 2018 | Armstrong Flooring, Inc.

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Operator

Greetings, and welcome to the Armstrong Flooring, Inc.

Third Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. to Vice conference Investor President like host, to Relations. now Bingham, Doug of would turn over the your I Treasury and

Doug Bingham

Quarter We Executive morning. Officer, Thank Armstrong Maier; release and Today's us this joining Officer, Don have is XXXX Ron seen Financial Third press Ford. call Chief you Call. you Earnings by today hosted Chief Conference trust for Flooring's for our

materially to our accompany Investor Additionally, those at or this call, is that forward-looking slide a involve and making from copy you the of of during statements be available of and risks refer expected Relations I uncertainties. presentation section X that website differ the www.armstrongflooring.com. on implied. this Slide outcomes advise Actual will that call to we presentation you may

discussion For filings. our review the a Flooring, uncertainties risks SEC Armstrong affect that detailed of more may please and

statements undertake by and Forward-looking to update statements are they speak forward-looking made, what date only of obligation no securities the laws. beyond is we as any applicable required

our in in addition, this will directly within will G. With include Regulation SEC these operating discussion release press turn is reconciliation now performance of call measures of of meaning measures included GAAP to Don. A the the the comparable measures the non-GAAP most I appendix to the and financial of presentation. In that, over

Don Maier

will open key which our I then your discuss to you to on thank offer highlights closing you Page will some our Thank comments. details financial will X, XXXX results highlights our activity. questions. and and call. Good to and for participating remarks, our ask on answer you, After I Today, call updates. outlook we turn prepared the everyone, additional provides morning, Like to before Doug. third quarter and cover earnings Ron operating business

with Luxury am Third our Resilient second segment year-to-date. in more making I consistent largely X.X%. Vinyl across X% business, sales Resilient XX.X% to we that in the our and with sales LVT, improvement the growth margin for ongoing focus improved basis to performance in innovation progress EBITDA XX.X XXX lower the segment, or unrelenting Tile, EBITDA adjusted straight Adjusted are in offsetting quarter grew pleased the portfolio. volume driven our by with growth quarter, million, than Wood generating point net significant on

cost along actions. We price pricing with priorities, productivity across are a through product reflecting achieving strategic gains, categories, SG&A and higher savings selling our of most number reductions XXXX

company steps we intense entire Taken together, the taking evident across right these combined are the mitigated actions effectively to pressures avenues. We industry. value inflationary build in have believe the flooring our all through

We our are committed evident XXXX. return now solid LTM business margins on in to where investments The on strategic on to X. Page has move improved priorities our in returns. Resilient I'll our generate to have steadily been most since investing

Our enhancing profitability leadership, five revitalization of categories. priorities and include strategic innovation, Wood of LVT share wallet with legacy distributors, our

new segment share working We as product competitive now with are gains. introductions our In you. have growth improve actively driving to I sustained demonstrated position expanded transformative will are updates and Resilient double-digit in our some drive capabilities LVT, and supply volume our year-to-date. we

continue believe we opportunities developments. portfolio, where meaningful produced following expand existing are recent domestically We to especially there LVT, tariff our

Vivero in in our Technology. XX featuring we domestically We including produced products Oklahoma Illinois. produce interest made American seen as Pennsylvania, new and renewed Personalities design-leading our In Creations and Natural have in LVT offering, produced such Alterna, Diamond

durability our categories, to LVT, our central and have design we the invest our products, innovations and compelling continue strategy. of we In all is of generation broad in these to next plan in to portfolio and pipeline Beyond high-demand exciting flooring an in of products.

a our of our VCT, most generating which which recent on collectively we Our of announced lower XX or our of represent launch to the leading of enhanced is key X In be resistance, and continue lower in total revitalize proprietary Technology stain XX% excited results been offers Diamond cost strong and Tile, distributors scratch award-winning innovation Diamond over ownership. potential and market Vinyl categories, to May, the this To costs about installation Technology to XX Composition category. response sales. date, has the

with have additional We industry are value. on partners further should key growth positioned share to support best with aligning test to our completed of focused strategy. which distribution, installations commercial wallet the are gaining evidence In its provide we in customers of ourselves who

marketing we in accounts, As the commercial national better spend we we previously announced, our quarter, and third our leverage believe more can where to of allocate to began scale.

entirely is of customers In more to Resilient, to continue distributor the have with segment. lower we the is margin. higher to transition sales at we work more directly and to pronounced almost market our residential turn, residential The be there residential, local and serve in our In merchandising we pleased segment, by in shift shift support XXXX. is been products, underway Our have commercial be that our products expansion still our margins, of on our so to merchandise that a that with of recognize benefits distributors expect year-end completed do. exposure to Wood the empowered full in working will better cost and partners but

imposed last the call on our down around the the imports. of Chinese rollout have tariffs program uncertainty We discussed on slowed given licensing

However, domestic will been wood the low-value engineered we have have where favorable expect imports on position us our overall also and category, tariffs that well. problematic operations the impact a

we product our productivity markets. driving revitalizing all addition, more legacy actively capacity work compete effectively our creating our to in In we're categories, improving to utilization more to on-trend plants our and In portfolio, make manufacturing at our of continue efficient and offerings. new

helping Flooring to continue hard position our in efforts, goals. strengthen to will poised selling We to productive and more product its as medium-term pursue a closer flooring. move margin to Armstrong innovation is which us surface leader is

and products, channels operations. driving improvements are We across our

turn sales over call to providing financial our to drive of by products. of to an ever of even I'll the lineup than Ron the competitive situated details walk better are more We now performance. through winning

Ron Ford

with I'll to in prices X. year-over-year. strong mix. a LVT begin with review quarter due Total and good $XXX.X had Thank to to in the in financial sales good million. and This sales many growth LVT, to Resilient a stronger double-digit today. generated Page better was to our a In you, increasing on we categories across Don, were growth revenues primarily net on X% pressure. resulting response call of positive morning impact inflationary results volume those

albeit pressure recently from a EBITDA category. To margins partially pricing. pressure the net to from of engineered me low a business Additionally, reflect wood, on down to our will flooring. with to industry our point, that competition remain volume through accretive take continued occur at This on licensing reported by tariffs laminate more for laminate as our implemented similar of both licensing alleviate end a anticipate segment sales sales generated lower at thoughts the margin the attractive discuss first of that in moment Challenges some in on XXXX. impact in recent planned, will the similar potential Wood quarters. We of import and of migration challenged sales, solid and XXXX, this let portion the the engineered XXXX. remainder higher half offset updated that tariffs transition model to

adjusted increases, imported prices model coming trade heavily peers most January amount with China. product source from believe with the on tariffs we wood and further us to response X, sales in which offset to raised in natural announced productivity inflationary was The domestic prior of announced buying have that the up that by costs, the to XX.X% to a gains, continued stronger from percent we where of This EBITDA with We tariff than we And primarily increases to This behavior or product by provide pricing, may XX%. combined consecutive impact the XXXX administration mix round We've SG&A of larger for insulation manufacturing by intense largest adjusted as compared expectation driven across as lower and overall proactively import fourth $X.X LVT we'll increase are are better our October XX% X Total product. provides a effective XX% produce. pressures. engineered quarter, manufacturer the updates, as will a million market. effective year double-digit first monitor trade quarter. increase EBITDA and increased million the disputes. customer more and in we the We some from from developments. categories appropriate, meaningful $XX.X on

significantly off operating third increases in higher of begun to and to October. cost to X% implemented additional products quarter, increases we still expect into in Resilient Lumber many XXXX. price to they're continue transportation, in costs, materials although X% level energy, continue on which effective have year. the We than We've last raw costs experience rising

overcoming Our team anticipating job has great inflation. in done and challenges a the

other impact with will savings, the pressures. inflationary to pricing QX, in additional gains these of expect and We cost actions combined productivity offset help continuing

to flow liquidity free Turning X. our on cash Slide and

receivables we quarter-end. of of depreciation, timing with gives spend levels $X XXXX run $XX nine ongoing planned $XX opportunities. sheet, This with We in timing free the inventory of invest of a of us first Based has significant During the a flexibility to invest anticipate build in recent which approximately million. value-enhancing annual million distributors of initiatives rate of we with debt. primarily quarter outflow at working an to in of below This is in line the approximately flow experienced balance achieved inventory be opportunities will as years. investments, growth consisting related months cash. the combined CapEx pursue net XXXX, on cash million higher capital remains ended additional strong range and to

challenges encouraged in has our to which results on million we range in With we to $XX turning the XXXX. now into for Resilient, outlook to Slide outlook helped adjusted $XX offset EBITDA, stronger year-end, expect our visibility full are be We're for year-to-date, narrowing our particularly of our million in year by Wood. increased X. which the Now

at unchanged, is imported outlook in the quarter inventory the although buy increase for anticipation based January. sales and of in expect higher-than-normal the the ahead some distributors potential of tariff in levels Our we on products volatility

For we sales growth expect year XXXX, driven by primarily the to Resilient. low-single in growth in the continue full digits,

of expect low a $XX X.X% the prior range or balance paybacks productivity projects sales, we We approximate expect of our where X% million the end projects is spending to of innovation capital be year, with should of $XX million consisting high-return for of budgeted strong expenditures approximately with the CapEx investments at which the million. Maintenance return. $XX to short for to

comments. result our On cash zero effective that as taxes closing be anticipate change years. from hand expect our P&L, line for to in I'll federal the the that tax flow remembering will a free quarter-to-quarter, cash back recent worth We positive year now with we significantly but of it's could that, XXXX to NOLs. of call be full rate another year With Don

Don Maier

Thanks, Ron.

Turning for to I proud especially and year-to-date, inflation during X. tariffs. very the of team Slide and cost results face delivering improved am quarter in the rising line Flooring the Armstrong of third bottom

We We shareholder our XX Technology are are Diamond a we exciting leadership to Operator, returns actions take upon footing clear today by XXXX we operating us strong drive market and Investments success. goals. to partnerships, and path now strengthened along and XXXX. on other for additional provide margin with believe questions. a with catalyst achieve our strong build XX% to EBITDA LVT, to with cost brand a excited distributor to profitable enter and are operation ready realize efficiencies innovations, reduction in more and product very

Operator

Instructions]. [Operator

comes with question Wood, Mike proceed first Instinet. question. Our from Nomura your Please

Mike Wood

whether wanted gains you the thoughts that increases. mentioned measuring impact? about share the How LVT flooring in you flows how And demand categories? impact price in I demand that to any from about LVT of other against thinking First, -- terms ask are

Don Maier

Mike, thanks for your question.

reasonable some drive we as So very came as of the did and there do the surge only a January you all, fourth We that in said but end with we've products. that, not similar added the that, product end announced to tariffs anticipate sort to the of at the the that the on behavior largely, is growth, Having believe, XX% the some be QX, included of pleased towards increase driven continue X, of introductions buying we're on to LVT, quarter. the portfolio, innovation also would that tariffs announced out progress we expansive of with that the so our the in quarter. to know, it believe by first see proprietary

be same we're We XX% implemented that, that January on we've and thing said having announced side. the made So consistent the tariffs should with the going have progress pleased gross and the implemented we're the do with increases X. we've the to tariff, announced

Mike Wood

China Can countries you to supply in Whether was up you inventories prebuy maybe And tariff of the how chain give us a you in large stocked effectively Asia not hearing sense to in anticipation? are LVT? well the moving other of impact? or adjusting in avoid to order LVT

Don Maier

not of products. the sensitive And prefer any reasons. months the quantification been been demand orders because additional for I We've before inventory provide announced our bringing So to those new obviously, competitive, in months had and tariffs. for placed

distributors the further So that we advantage quantify our the of could XX% that not you. for buy took appropriately tariff, to would but believe do they want ahead fact that of

leveraging of to on in tariffs. focused the things broaden to on options associated and suppliers in improved well increases of our base LVT we other the of three capabilities China actions China it products, here pricing it. external the as Resilient tariff those two impact their really supply the which appropriate chain, to of execution our and have their addition other price have and our is As of the alleviate facilities taking U.S., plans the are all a that in been there and yes, relates We've others of beyond the the to products the number given has relative to out China announced value manufacturing with domestic

sheet full produced LVT a of here and place to all our are have the susceptible and products tariffs. not we our blitz beyond So offering domestically on taking that all tile

Mike Wood

you of hold of any see out the maybe before finally, impacted by on that off making LVT? demand how do in the is for to Just And progress some the decision? tariffs capacity terms wood decision swapping

Don Maier

the the coming for that produced the our of out imports are XX% is Yes. we opportunity impact of the given China. by here We're Asian see wood, continued us obviously of engineered on watching products XX% U.S. tariff an in be engineered largely And which to about pressured

to So could capacity large And we opportunities XX%, a that we us. of increase have think amount certainly, dynamic as some here. for the tariffs create

Operator

comes Hughes, Keith next Our question Robinson from Humphrey. SunTrust

Keith Hughes

is versus how Can are those you And produced domestically coming your from? how LVT, on us LVT imported? where tell much are much is imports now

Don Maier

of domestically. so sales upon ourselves. we about what are there disclosed we XXXX, what our about Yes, things. is total we XX% disclosed In produced sourced we've parties -- them more LVT, heavily our X Keith, -- that X/X purchase certainly On of X/X And depend we've produce supply were suppliers. from and

Keith Hughes

sourced, are the that is X/X And is from -- primarily China? the

Don Maier

It China, yes, primarily but includes -- China. is

Keith Hughes

you any now company? that can dollar a rough Resilient And something us like the or give LVT sense as percentage for figure for how big or of

Doug Bingham

Yes, Keith, Resilient represented our We've LVT. in XXXX, XX% continued past we've for of said strong in to growth LVT that the see segment.

conclusion probably provided can to an haven't but and We make some you own your updated assumptions get on that. number,

Keith Hughes

Okay.

one? the were think the was at you volume? any general, VCT, look If quarter, specifically and Resilient of in only Or categories categories LVT in in but up other within I the the of

Don Maier

growth years, growth been category, categories, the again but the has consistent all we out for being the where has saw on -- LVT, We of Keith, past significant in most growth, once the structures. largely in really several as driven rigid-type Yes. significant saw all double-digit come that almost

Although still nice growth LVT traditional on well. seeing the as flexible

growth market I'd of and growth, on ranking the growth LVTs of other categories. then kind Core very our flexible rates consistent Rigid So impressive order, the explosive say products in on

Keith Hughes

as effectively negative Okay. flat, The for Resilient volume was reported year-over-year. X.XX%

LVT got So number. to be has to up, is that if to get down something

Don Maier

Keith, No. was up X%. Resilient,

Keith Hughes

the on volume. Just

Don Maier

Just volume, got on you. -- the just

Okay.

Keith Hughes

volume right struggling categories volume, okay of volume on like I is up now? are sounds too, was terms big that. in LVT in really So What pricing assume

Don Maier

Doug I'm to... to looking

Doug Bingham

sheet. one, Keith, main has red The been

Keith Hughes

sheet. Red

Doug Bingham

smaller continues it be the to still of to but piece decline. business, getting a It's

Keith Hughes

here switching And easily or XX% quickly. do? then get easy would quite sources engineered hardwood do not If are Wood to the of we other large Flooring supplement tariff, it that to there is that as Chinese supply

Don Maier

additional the to crewing. So capability there we have capacity, our is certainly add plant within

So the well. the within our North as we a there is domestic significant engineered on and to supply demand see satisfy ability on side chain side America an

Southeast expanding the China chain In a addition, into beyond supply have of seen continuation we Asia.

Operator

Instructions]. [Operator

next comes Gabelli Our from Alvaro & Company. question Lacayo,

Alvaro Lacayo

One, transition in timing of the to that get the tariffs that for when with over decide to number magnitude? the licensing so remind on, you're to bit projected -- All that? I looking secondly, quick you to of then to are can the is plans update what magnitude change of questions. engineered that And the losses do right, you in comment amount the X can licensing does me on that an in losses, Maybe wood. wanted that terms business, come if just you of the business math little a the or

Don Maier

Yes.

So do what And frankly, the before question, side I were could we on what we going economics as license we a a need swing to while far and to domestically to understand there. significant implications your distributors think, first our that's other slowdown licensing are is to have our what planning out of down in the be tariffs get January rolling products retailers significant program. with and as slowed a program, with it the rather the Frankly, benefit the tariff. XX% given of produced

So be dust let I settle and think we'll in where out we're QX understand realistically, -- we're the to at. going

we around not the haven't the that. given environment any playing to provided on it the And given have with change the this, my in any probably be comment impact valid the here macro longer of the prior guidance size would or licensing have tariffs. it plans, what field We we is need to done, to everything And relates as just here the agreement, tariffs. is going be no, understand

Alvaro Lacayo

with tariffs up make assuming talk consolidated on across the on then And the tariffs, -- about, realization, do move basis. a January, in portfolio to what's the and up then of costs or maybe a what price maybe in of the from year-to-date Or if dollar that XX% price go kind XX%? the And comments what's to impact thinking terms about? of increases to magnitude your -- tariffs amount, dollar assuming you'd you're amount

Don Maier

of Well, particularly proud this team. is area I'm our that an

As you And the margin strength significant declines seen of back sure actions didn't know, nice we ramping we've we quite that support to of at decisive able we most as same along been and seen have with see face candidly only that of, testament actions for first the their through took coming Resilient pricing differentiation as input X% the to the testament the of well much X% our a distribution saw that's a pricing level end not inflation through well. enjoy the coming driving to up. it's the mix quarter we've on to continued in make have think said of end take nice frankly, and improvement and a and cost to have efforts freight with that, Having inflation, the notwithstanding strength of of inflation but also recently not we innovation And but price increase go then to portfolio, the inflation been network summer here and the we've at QX. that that. realization, now the the as as the volume tariff I and the in

it's our our the portfolio. an sales retailers with all-out So differentiation as a as partners been well product combination, team their here and team effort with our in I distribution and think

Alvaro Lacayo

what's incremental number's go your the have if the from sort that the So realization toolbox? perspective, cost of you the a to via tools pricing tariffs that year-to-date? you'd And XX% in to have what's offset been

Ron Ford

inflation able for We went than say let's we actions that specific anticipating saw take I'll within Well, our still Don we've in our guidance number, without after described. a the -- that, Doug taken we've Ron. year. disclosing been the one. the inflation we've stay is to This that that guidance more year that having into that some -- been taken just

ability mentioned, year. top on and to get this so to -- And inflation anticipate for get with Don pleased our of as incremental the we're

of across-the-board, to year. expect relative say my it's inflation during extent year relative of supply I'll of and that year, also course, next Of to sense and chain all -- that absorbs course lesser the tariff the the this some a this entire piece next I year. to that

we've remains to those so but those it if stay as do, if seen be recover in costs. And place, announced, we they to will intend tariffs

Operator

Our next from question Stifel. comes Dillard Watt,

Dillard Watt

be the we've you could as next incremental sort incremental might margins talk I little down fair in how shakeout other do wood through assumption if significant we is on of been maybe margin which, if engineered a a last the years, that would expectations about the side, guidance year, there the flat if of year? your bit But couple where or in pickup Wondering for gone bit is get due is slightly embedded of particularly, a goes there change volume some your to that all that in think, next volume imports. the way,

DonMaier

expansion's part important that. actions the lying margin behind of plan have an we and Well, that our overall strategic

over third adjusted points disappointed in very While going quarter basis expansion quarter in EBITDA XX% we Wood we EBITDA nice the margin. up improvement XXX were in and revenue, had the with

So us and all make entire the that actions transition are but we've and the the portfolio. taken of mix category allowing the only that to the of not other improvements there, to on innovation progress introductions, side wood continuing product it's equation

Dillard Watt

And macro environment? that's a hearing in indicating we moving seeing ask Are pause may the to then question. towards maybe one I'll to closer or you macro be anything be growth the the

Don Maier

right So is robust saw We now. and new really change and nothing answer in radar starts the no housing fairly on remodeling. short growth

the residential been. pretty that side, looks good, where consistent So with on we've

we On slightly tick saw actually up commercial better. that side, the

of the nothing So our other commercial on than little a equation. of on bit horizon forward-looking side the maybe encouragement

Operator

have like remarks. and turn I back would to session. question-and-answer of end Maier for the call the gentlemen, the closing Don Ladies reached we to

Don Maier

us thank Well, joining you, great, today. for everyone,

progress. forward day. interest continue to on your our we Flooring, and calls in a appreciate look We Have Armstrong you updating Thanks. future to great on

Operator

This concludes conference. today's

participation. for this at lines your disconnect time. your Thank may you You

Armstrong Flooring (AFIIQ) 10 Nov 182018 Q3 Earnings call transcript