Armstrong World Industries Inc Q2 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the Second Quarter 2023 Armstrong World Industries Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Theresa Womble, VP of Investor Relations and Corporate Communications. Please go ahead.

Thank you and welcome everyone to our call this morning. Today, we have Vic Grizzle, our CEO; and Chris Calzaretta, our CFO to discuss Armstrong World Industries second quarter 2023 results and rest of year 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 the SEC Reg G. A reconciliation of these measures with the most appropriate comparable GAAP measure is included in the earnings press release and in the appendix of the presentation issued this morning. Both of these are available on our Investor Relations website. During the call, we will be making forward-looking statements that represent our view of our financial and operational performance as of today's date, July 25th, 2023. These statements involve risks and uncertainties that may differ materially from those implied or expected. We provide a detailed discussion of the risks and uncertainties in our SEC filings, including the 10-Q filed earlier this morning. We undertake no obligation to update any forward-looking statement beyond what is required by applicable securities law. Now I will turn the call over to Vic.

Thank you, Theresa, and good morning, everyone, and welcome to our earnings call. We have lots of exciting things going on at the company, including a strong quarter of execution and the acquisition of BOK Modern, which we announced yesterday. So let's jump right in. On a total company basis, we generated 10% year-over-year adjusted EBITDA growth on 1% net sales growth in the quarter, despite soft market conditions and continued economic uncertainty. These results helped increase our year-to-date adjusted free cash flow to $103 million, a 60% increase from 2022 results. Both the Mineral Fiber and Architectural Specialty segments contributed to the strong earnings and free cash flow growth, and both segments delivered meaningful EBITDA margin expansion. These are solid results, and I'm pleased with how our team is executing thus far in 2023, managing softer market conditions while increasing profitability and continuing to deliver on our growth initiatives. In our Mineral Fiber segment, sales ended the quarter essentially flat to 2022 levels. Strong AUV performance of 7% offset a decline in sales volumes. As mentioned on our first quarter call, we expected market demand to be softer versus prior year, and we had highlighted first quarter restocking activity in the home centers that would begin reversing out in the second quarter. Also, you may remember, the second quarter last year was impacted by the unusual timing of our July 1st price increase versus our typical August timing. Overall, we believe that sequentially underlying market demand was modestly softer than the first quarter. Relevant indicators for our primary sectors were mixed overall in the quarter. Dodge bidding activity softened, ABI declined but remained in positive territory, office vacancies continue to rise but at a slower pace and commercial leasing activity improved in the quarter for the first time in four quarters. And now that we've begun the second half, on-the-ground sentiment has slightly improved with verticals like transportation, health care and education remaining active, partially offsetting soft replacement activity and tenant improvement work in the office vertical. The fact that we sell into a variety of verticals is important for us. The office vertical, which has been the most challenged area, represents about 30% of our sales, similar to the education vertical, followed by health care, retail and transportation. They rarely move up or down at the same rate. And this has helped cushion our business from cyclical swings, and we believe that it positions us well in this current environment. Another highlight of the quarter was our Mineral Fiber AUV performance of 7%. This result was driven primarily by like-for-like pricing. As we have often noted, our ability to consistently achieve price is an important part of our value creation model. We've captured our normal price realization for the increase that we announced earlier in 2023, and it has helped offset the inflation on raw materials we're experiencing. Our industry-leading value proposition enabled by the work of our sales team staying close to our customers and the efforts by our plants and customer service teams to maintain our best-in-class service levels and our new product innovation have all contributed to our consistent ability to earn our prices in the marketplace. I'd also like to highlight that our healthy spaces and digital growth initiatives were a positive contributor to Mineral Fiber sales in the quarter. Sales growth in our Health zone product line continued at elevated levels and our sales through our online marketplace, Canopy, doubled from 2022 levels. Both of these helped offset some of the negative impacts from the overall lower market activity. Another highlight for the Mineral Fiber segment is that our plants did very well with delivering productivity gains despite lower volumes in the quarter. The great work by our plant teams demonstrates another of the core value creators for Armstrong, which is operational excellence in all parts of the cycle. Our ability to consistently generate manufacturing productivity while maintaining best-in-class quality and service throughout our network contributed to Mineral Fiber margin expansion this quarter and has been a hallmark of our company's success. These efforts, along with our continued growth in AUV, helped push Mineral Fiber quarterly adjusted EBITDA margin above 40% for the first time since 2021. Now moving onto Architectural Specialties. Sales for this segment accelerated from first quarter results and were up 6% from a strong 2022 level. We continue to see good activity in verticals like transportation, health care and education. Our order intake for the quarter in Architectural Specialties reached a historical high in the quarter. Importantly, we're also driving EBITDA growth and margin expansion in this important growth segment. We're now seeing the benefits from the investments that we've made in the businesses we have acquired and are achieving the expected operating leverage on increased sales volumes. Last, before I turn it over to Chris, I would like to briefly illustrate how our investments across the segments work together to deliver value for our customers and grow our business through a successful project involving a hospital that we recently completed in Colorado. This was a sizable project with typical complexities that required many different solution types to achieve the design intent of the architect. The project began with the architect employing the use of project works, our preconstruction and design service platform. The architect was able to input the project requirements and develop a layout in project works that enabled the multiple iterations to optimize the design intent and costs quickly and efficiently. This project ultimately required a mix of 28 different Armstrong products across both our segments. This included sustained smooth wide acoustical tile, including our Health zone products, as well as a variety of grid and Architectural Specialty products, including our METALWORKS Blades. The project ended up being a very strong specification for AWI since no other single manufacturer could offer the complete suite of products digitally enabled by our proprietary design platform. This is a great example of how valuable the breadth of our portfolio of products and our innovative services can be for our customers, making it easier for architects to specify more Armstrong products in more spaces, leading to stronger specifications and greater AUV growth. Now I'll pause and turn it over to Chris for some more details on our financials.

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 three, which details the basis of the presentation. On slide six, we discuss our quarterly Mineral Fiber segment results. Mineral Fiber sales were essentially unchanged from the prior year as AUV growth of 7% was offset by lower volumes. AUV performance this quarter was driven by like-for-like pricing, while mix was essentially flat, with positive product mix being offset by timing-related channel mix headwinds. Our Q2 Mineral Fiber AUV result gives us confidence that we are on track to deliver above-average historical performance for the full year. The decrease in volume during the quarter was driven primarily by softer market demand and to a lesser extent, the timing of year-over-year announced price increases and the resulting impact on sales that Vic mentioned earlier, in addition to the expected weaker home center sales from inventory build that we noted in our April call. Mineral Fiber segment adjusted EBITDA grew by $6 million or 7% and adjusted EBITDA margin expanded by 260 basis points as compared to the prior year. AUV fall-through was above historic levels and a key driver in expanding EBITDA margin. WAVE equity earnings were also favorable as compared to the prior year, driven by price over inflation. Our Mineral Fiber plants continued to execute well in the quarter and delivered meaningful productivity gains ahead of their targets. Partially offsetting these gains were headwinds from lower volumes and higher input costs. While we experienced energy and freight cost deflation versus the prior year, raw materials remain inflationary. SG&A in the quarter was essentially unchanged versus the prior year as modest increases in selling expense in support of our digital initiatives were partially offset by the benefits from our previously announced cost savings initiatives. On slide seven, we discuss our Architectural Specialties, or AS, segment results. With sales growth across most product categories, the rate of growth in the quarter improved sequentially from Q1 and is a better reflection of the growth we expect to see for the full year. We continue to see strong transportation bidding activity and are keeping a close eye on order intake and backlog. We're particularly pleased with the order intake and backlog levels for our metal products, which are both up more than 20% versus the same time last year. This activity supports our excitement and investment in this growing category through our recently announced acquisition of BOK Modern for initial cash consideration of about $14 million. Vic will share some additional thoughts on this acquisition in a few minutes. AS adjusted EBITDA margin took a step up in Q2, both sequentially and versus the prior year period, expanding 360 basis points versus the prior year through operating leverage on increased sales. We continue to leverage SG&A as we grow and expand EBITDA margins in this segment. Slide eight shows our second quarter consolidated company metrics, where benefits from improved AUV, WAVE equity earnings and lower manufacturing costs more than offset headwinds from lower volumes, increases in input costs and higher SG&A expenses. Consolidated adjusted EBITDA margin expanded 260 basis points with adjusted EBITDA up 10%. Adjusted diluted net earnings per share increased 7% versus the prior year, and adjusted free cash flow increased $28 million or 64% versus the prior year. Slide nine highlights our consolidated company metrics through the first six months of the year, where we grew adjusted EBITDA by 10% and expanded margins 130 basis points. These strong results reflect the execution, operational efficiency and cost control discipline of the entire AWI team, despite market headwinds. Adjusted diluted net earnings per share increased 9% versus the prior year period, and adjusted free cash flow increased about $40 million or 60% versus the prior year. Slide 10 shows our year-to-date adjusted free cash flow performance versus the prior year. The increase was driven by working capital improvement, primarily in inventory and receivables and an increase in WAVE dividends. This was partially offset by higher CapEx and higher cash interest. We are proud of this year-over-year improvement through the first half of the year and remain focused on driving full year free cash flow growth to fund all of our capital allocation priorities. Recall that our first capital allocation priority is to invest in our business where we see the highest returns. Next, we target strategic acquisitions such as BOK Modern that offer unique specifiable attributes and capabilities that leverage the strengths of our business. Last, we seek to return excess cash to shareholders. In the second quarter, we repurchased $30 million of shares. And since the inception of the share repurchase program in 2016, we have repurchased a total of 13.2 million shares for about $908 million. We ended the second quarter with $292 million remaining under the existing authorization. Last week, we announced an increase in our existing share repurchase program, adding an additional $500 million to the authorization and extending the program through 2026. This decision reflects confidence in our ability to generate adjusted free cash flow and our commitment to fund all of our capital allocation priorities to create long-term shareholder value. Slide 11 shows our full year guidance. Improved visibility for the second half of the year has removed the worst-case market downturn scenario from our expectations. And as such, we are modestly updating our full year 2023 guidance for sales, adjusted EBITDA and adjusted diluted EPS. And as I just mentioned, with the expectation of continued strong cash flow generation, we are raising the midpoint of our adjusted free cash flow guidance with an updated range of $240 million to $250 million, with a midpoint free cash flow margin of about 19%. Looking ahead, recall that in the second half of 2023, we will be lapping a period of lower SG&A incentive compensation in the prior year as well as continuing investments to support our digital initiatives in the current year. Additional assumptions are available in the appendix to this presentation. And now I'll turn it back to Vic for some additional thoughts before we take your questions.

Thank you, Chris. At the halfway point in the year, I'm pleased with where we are, and I believe we are well positioned to deliver on our outlook for 2023. The resiliency of our AUV growth, our productivity gains and now the meaningful contributions from our digital and healthy spaces initiatives when we need them the most in a weaker market environment are clearly shining through. Our digital initiatives are on track to be EBITDA positive for the second half of the year. And as of yesterday, sales through Canopy have already surpassed total 2022 sales results. Our healthy spaces' products are also gaining traction with sales up over 20% on a year-to-date basis, and we're pleased with the regulatory support they are gaining. Many of you may have read about the two new bills lawmakers are bringing forward in New York City that would require the city to create standards to measure, monitor and report and enforce air quality inside schools and municipal buildings. These are bills that have been in the works since the pandemic. But due to the Canadian wildfires and the impact on air quality inside buildings, these bills have been accelerated. These proposals follow recently updated guidance on ventilation and buildings from the Center for Disease Control and Prevention and adopted by ASHRAE that the air and spaces be changed five times per hour to help reduce the number of pathogens in the air. These are all positive trends that support our healthy spaces growth initiative and the role ceilings can play in creating healthy spaces. Overall, I attribute our year-to-date results to two things. Number one, our team's strong execution being demonstrated through the ups and the downs, and number two, the resiliency of our business's core attributes, namely our strong market position in this uniquely attractive ceiling and wall category, our best-in-class exclusive distribution partners. Our ability to deliver consistent AUV growth and our proven ability to achieve consistent annual manufacturing productivity gains, all contributed to the extraordinary resilience of our company and our ability to expand margins and deliver free cash flow growth in all parts of a normal cycle. This resilience and the resulting free cash flow growth allows for the deployment of free cash flow for both direct return to our shareholders as well as on the growth initiatives and complementary acquisitions that deliver profitable growth. Just last week, as Chris mentioned, our Board of Directors approved a $500 million increase to the share repurchase authorization, a shared confidence in our ability to sustain strong free cash flow into the future. And our acquisitions continue to help us build the broadest portfolio of specialty architectural solutions in the industry and importantly get Armstrong solutions into more projects and into more spaces. And our latest acquisition, BOK Modern we announced yesterday does exactly that. Focus is a growing and profitable business focused on the design and engineering of architectural metal solutions for a wide variety of applications that are a natural extension of what we're doing in Architectural Specialties. Their solutions have patented designs that deliver project efficiency benefits by reducing material usage and installation. The work they do will help us respond to the desire among architects and designers to have a seamless flow between the interior and exterior look of a building. Additionally, their facades and rain screens not only add aesthetic interest, but they also reduce the energy load of the building by deflecting solar heat. This will be an increasingly desired design attribute as the embodied carbon and emissions of buildings becomes more and more in focus. We're pleased to welcome them to the AWI family, and we have every confidence that we will be able to leverage our platform to accelerate their growth and increase their profitability. We're excited about the momentum overall in Architectural Specialties. Our expanding portfolio truly distinguishes us from our peers in terms of being a single-source provider for complex projects, such as those in the transportation vertical, and we continue to see increasing bidding activity for airport projects. This increase in demand has been fueled by the recent Infrastructure Bill, which includes $5 billion in spending specifically for airports. We've previously discussed our significant win at the Pittsburgh airport. But recently, we've also been awarded jobs at the Seattle-Tacoma airport and the airport in El Paso. And to date, we're tracking at least 200 more airport projects, ranging from new terminals at JFK in New York and Chicago's O'Hare to work in Nashville, Orlando and Jacksonville just to name a few. These opportunities are growing and often involve a wide range of materials from mineral fiber, wood, metal and more of Armstrong's complete portfolio. Given the scale and complexity of these projects and now Armstrong's size and capabilities, we expect a tailwind from transportation to last beyond 2026. I think it's fair to say that five years ago, we wouldn't have been able to compete for these types of projects. We wouldn't have had the right portfolio or the capability to do it. With the capabilities that we've added now with our unmatched scale, we are well positioned to capture the opportunity in front of us. With that, we'll be happy to take your questions.

Thank you. At this time, we will conduct the question-and-answer session. Our first question comes from the line of Keith Hughes with Truist Securities. Your line is open. Keith, please make sure your line is unmuted.

There we go. Sorry about that. Question on input costs. The lowest number, negative, but the lowest number we've seen since '21 on Mineral Fiber. Could you talk about what you're expecting in the second half of the year and what costs are moving in the right direction and what are still in the wrong?

Sure. Chris, do you want to take that?

Yes. Okay. So on the input cost side, we saw effectively, we were flat on total input costs in the second quarter. What we're seeing is continued inflation on the raw material side with some offsetting benefits from energy and freight. I think in the back half, we'll continue to see that inflationary pressure on the raw side and some continued moderation in deflation on the energy and freight side. So all up, all in, we're looking at for the year, call it, high single-digit inflation on raw materials and on total input costs in the low single-digit inflation range for the year. So continued back half pressure on raw materials with continued deflationary benefits in energy.

Okay. And just a question on demand. You've highlighted some of the trends in the prepared comments. In terms of the guidance for volume in Mineral Fiber, low to mid-single-digit declines, do you expect office to get worse in the second half of the year or what's kind of baked into that number?

Yes. What we've highlighted, as you noted, Keith, there's some good activity still out there in some of the other verticals. Office, we're still expecting to be softer in the back half than we saw in the first half. This is based on a couple of things. Remember in the back half of last year, we were tracking bidding activity, in particular in this segment, and it turned negative in the third quarter and fourth quarter last year. So that's informing a little bit of the pipeline of activity that's going to come mature in the back half of this year. And the expectation that economic activity overall continues to weaken in the back half. Now it's less bad if you want to say it that way than what we initially expected. But vacancy rates continue to increase in office, although at a slower rate and supports, I think, a softer office segment in the back half.

Okay. Great. Thank you.

One moment for our next question. Our next question comes from the line of Garik Shmois with Loop Capital Markets. Your line is open.

I wanted to follow up on the previous question regarding the office sector and some of the verticals you mentioned. Can you clarify if there is currently a weakening in office demand, or has it stabilized? Additionally, you mentioned strong performance in airports and the projects you're bidding on and currently servicing. Should we assume that the volume from airport and transportation bidding will primarily benefit Architectural Specialties? I just wanted to confirm that.

Yes. I want to add to the previous comments regarding the office sector. The aspects I mentioned earlier are tied to key indicators such as projects, significant renovations, and new constructions. We have solid visibility from these leading indicators. However, the discretionary market for smaller renovation work, which we often refer to as our flow business through distribution centers, remains less predictable and dependent on discretion. Given the uncertainty around interest rates and the economic downturn we anticipate, we expect a continued slowdown in discretionary projects. We have been seeing this trend and expect it to persist in the latter half of the year. While it appears we may have already faced the worst of the current situation, our guidance reflects the possibility of further declines before improvement occurs. Regarding transportation, your question is relevant; most of the extensive square footage involved in large airport projects comes from Architectural Specialties, which is where we see significant benefits. Additionally, a considerable amount of Mineral Fiber is also used in these spaces, allowing us to leverage our entire portfolio effectively during the specification process. Overall, the main advantage is indeed for the Architectural Specialty segment.

Great. Thanks for the color. I wanted to follow up on pricing. And if you have any thoughts on your ability to get pricing moving forward, given some of the choppiness in the end markets? And any color around your plans here in the second half of the year.

Yes. I would point you to the second quarter just to start off with that because it's a pretty choppy quarter, a lot of ins and outs, base period noise and so forth, market did get softer. And as we alluded to, the majority of our AUV growth was like-for-like pricing. So I think that's a good signal of confidence that even in these kind of conditions, we're going to continue to price ahead of inflation. And as Chris outlined, going into the back half, we still expect some raw material inflation and we'll be pricing into that to make sure that we continue to expand margins.

Understood. Thank you very much.

Thank you. One moment for our next question. Our next question comes from the line of Kathryn Thompson with Thompson Research Group. Your line is open.

Hi. Thank you for taking my questions today. I wanted just to clarify on your guidance today. So with AUV up 7% quarter implied that volumes down as much versus expected down with single digit. And when you flow that into the implied guidance, it appears that Mineral Fiber volumes could be down low single digits to mid-single digits versus more solid mid-single digits. You bought just through your sales rep in terms of expectations for Mineral Fiber volumes as we head into the back half of the year based on what's in your pipeline? And any type of expectation you may have beyond that?

Do you want to take that?

Yes, Kathryn. So in terms of the back half of the year relative to Mineral Fiber volume, we're looking at volume down in the, call it, high mid-single-digit range in the second half of the year. And as Vic mentioned, the backdrop and the overall uncertainty tied to the macroeconomic still exists. So cautious as we approach the back half of the year, really monitoring the market. As we noted in our guidance, that improvement in volume was really due to the fact that we removed our worst-case market scenario and took that off the table. But that being said, still a lot of uncertainty as we head into the back half here. And I'd just say on AUV, continue to point to the above-average Mineral Fiber AUV growth and continued focus on expanding margins in Mineral Fiber. And you can see with our updated assumptions there, we took our Mineral Fiber EBITDA margin up with that revision.

Yes. I wanted to know if there are any significant differences between your Mineral Fiber volume trends and your WAVE volumes. Additionally, while you have benefited from lower steel costs, how do you see steel prices affecting WAVE earnings for the rest of the year?

Yes. We sell WAVE as a package, so WAVE volume and Mineral Fiber volume are closely connected. There has been some variability due to the pandemic, but generally, these volumes tend to follow and track each other closely.

Okay. Great. Thanks very much.

You bet. Thank you.

One moment for our next question. Our next question comes from the line of Philip Ng with Jefferies. Your line is open.

Vic, you mentioned how your bidding activity has influenced your perspective on the demand outlook this year. I'm curious about how that is progressing so far this year. Do you have enough clarity to assess whether the second half of this year will see a decline in Mineral Fiber volumes, or could we anticipate an additional decrease in 2024?

Yes. The bidding activity I mentioned refers to the Dodge bidding activity that we monitor quarterly, particularly from the latter half of last year. If you recall, after the negative trends observed in the third and fourth quarters, the first quarter surprisingly showed a slight positive change, which I found noteworthy but didn't want to place too much emphasis on, as quarter-to-quarter fluctuations can occur. In the second quarter, however, the Dodge bidding activity turned negative again. Interestingly, when I compared the trends of this activity, the latter half showed more negativity than the first half. To phrase it differently, the negativity during the first half of this year decelerated, indicating an improvement in the rate and pace of softness. I’m not entirely sure what this signifies regarding a potential trough for economic activity. It's difficult to predict the timing and severity of the downturn overall, so I won't make any forecasts. However, we expect the second half to be a bit softer compared to the first half, which aligns with some of the leading indicators we've noted. We'll need to wait and see how things develop as we move into the third and fourth quarters.

Okay. That's helpful. And then given a soft demand backdrop, I mean, the ability to grow EBITDA is quite impressive, Vic. The team has done a great job on the AUV side. I was quite impressed by the SG&A in the manufacturing line, especially from the Mineral Fiber side. Can you expand on what's driving some of that upside there? Is that level contribution sustainable as we look out into the back half of this year? And is there more to do, I guess, perhaps in 2024?

Do you want to take this, Chris?

Yes, Phil. So yes, on the manufacturing side, we expect to see probably continued productivity in the back half. We had a really strong productivity performance in the fourth quarter. So we're going to be lapping that in Q4 on the manufacturing side. So we expect a strong Q3, a little bit of flattishness in Q4. On the overall, call it, SG&A, just remember, we had some timing items in the back half of the year. As I noted in my script, we were lapping some adjustments that were made in the back half of 2022. So expect to see us to continue to invest in our initiatives as we finish out the year, but we'll be very mindful of the rate and pace of our discretionary spend and investments given the overall play out of the economy and the volume. Hope it helps.

Yes, Chris, is there more you guys could do potentially in 2024 on the productivity side if demand remains weak?

Yes, I'll stop short of commenting on 2024, but we look at productivity every year and continue to try and drive productivity improvement year in and year out, and that's part of what we've talked about in terms of our overall productivity goal of 3% improvement on adjusted COGS in Mineral Fiber.

And specifically to the back half, yes, there's more to go here. Our teams are really focused on have really good line of sight projects that they're working on. So we're not done. I think really good progress in the first half of this year, but the team is not finished. We've got some more to do in the back half.

Okay. Appreciate all the color. Thank you.

You bet.

One moment for our next question. Our next question comes from the line of Susan Maklari with Goldman Sachs. Your line is open.

Thank you. Good morning, everyone.

Good morning.

Good morning.

My first question is, Vic, you mentioned that you're seeing an overall improvement in the projects that are coming through for Architectural Specialties, just the mix there that's moving higher for you. Can you talk about the sustainability of that trend? And what that will mean for the cadence at which you can continue to see an improved margin in that segment as you target that 20% or low 20 plus percent range?

Yes, we are on a path to enhance the EBITDA margin in that business to over 20%, which is considered world-class. We reached that level before the pandemic and are focused on returning to it while integrating our recent acquisitions. Last year, we saw a 200 basis points improvement in the EBITDA margin, and we are on track for another 200-plus basis points this year, thanks to strong performance in the second quarter. We are confident about reaching that 20% level next year. The progress is driven by effective operating leverage from our investments, which had initially created some challenges as we grew into them. We expect continued benefits from larger projects and improved specifications, allowing us to capture more market share. There are still growth opportunities ahead, contributing to our operating leverage. Overall, the team is committed, and we are successfully aligning our pricing strategies with this new operational model. We believe we will continue to advance towards our goals this year and into the next.

Okay. And then following up on that a bit. It was good to see you back in the M&A market in July with BOK closing in there. As you think about capital allocation, what are you seeing in terms of the M&A pipeline? And I know that you also increased your repurchase authorization. So how are you thinking about the balance between the different uses and how that could come together?

We are very satisfied with the BOK Modern acquisition. It aligns well with our business, and having the current leaders remain with us is a significant advantage as they are exceptionally skilled designers. This acquisition will enhance our business significantly. I want to clarify that we have not stepped back from pursuing acquisitions or business development; this is our first move in a while, and I understand the perception. We remain actively engaged and see this as an excellent opportunity to utilize our cash to deepen our presence in the specialty segment, particularly at a 20% EBITDA level with higher returns on invested capital. This acquisition ranks as our second priority, right after, as Chris mentioned, our primary focus of reinvesting our free cash into our high-return business. Our second priority involves acquisitions that will bolster our capabilities, making us more competitive and valuable to our customers. Lastly, with our increased authorization, we have more flexibility to continue repurchasing shares and support our growth dividend. Overall, there is no change in our cash flow priorities. Following our July meeting with the Board, where we reviewed our three-year strategic plan, we emerged with strong confidence in our strategy and the anticipated cash flows. This positions us well to pursue all three capital allocation priorities and highlights our strong capacity for free cash flow.

Yeah, okay. Thanks for the color, Vic, and good luck with everything.

Yeah, thank you.

One moment for our next question. Our next question comes from the line of Adam Baumgarten with Zelman & Associates. Your line is open.

Hey, good morning, everyone. I think earlier in the year, you guys talked about a return to a more normal price increase cadence of usually February and August. Is there an August Mineral Fiber price increase out there in the market?

Yes, there is.

Okay. Got it. And the magnitude, if you could share that?

Sure, it's 7%. We successfully implemented the February price increase and are now in the market with the August price increase. We aim to return to our usual schedule with our distribution partners. Last year's price increases were significantly larger, and we want to return to normal while adjusting price increases based on current inflation levels to ensure we cover inflation and expand our margins. The August increase has been communicated.

Got it. And then if I just look at the revenue growth guidance, you maintained the midpoint, but you did tick up our Mineral Fiber volumes modestly and you do have over five months of the BOK acquisition. Is there maybe a modest offset for those tailwinds?

Yes. No, I mean I think as I outlined earlier, the range was contemplated in assessing multiple potential scenarios. So as we look towards the back half of the year, I just continue to point to the uncertainty associated with the broader macroeconomic environment and continue to drive AUV performance for the year and looking to expand margins in connection with that. So that's kind of how we're looking at the second half and the implied volume down high mid-single digits in the second half.

Okay, great. Best of luck.

Thank you.

One moment for our next question. Our next question comes from the line of Stephen Kim with Evercore. Your line is open.

Thank you very much. I wanted to follow up on Arc Spec, specifically regarding the acquisition pipeline. When you look at BOK Modern, it appears they focus significantly on building exteriors. I'm interested in whether you believe there’s an opportunity to grow more in exterior compared to interior opportunities. Additionally, could you provide some insight into the Architectural Specialties segment overall? Has the proportion of products you manufacture versus those you source changed over time, and do you anticipate that it will?

Yes. So Stephen, let me take the BOK question in particular, and the fit. I think it's important to take a step back and recognize what we've been doing in Architectural Specialties over the last 10 years is, when we acquire these companies, we're acquiring capabilities that allow us to participate in more spaces in a commercial building. For example, when we way back, and you'll remember this when we bought Tectum, that moved us to the wall space with a very unique product. And so it really gave us a platform to expand our wall business beyond the ceiling plane. Similarly, when we bought ACGI, ACGI had terrific products for the walls. They had microperforations that allowed these products to go on the walls. So our capabilities have been through these acquisitions have allowed us to extend our business to new spaces. And when I think about the BOK deal, it's very similar. They have very unique metal design capabilities that are not structural in nature, that extend us into a new space on the building, which is in the exterior building, primarily for driving sustainability solutions. So it's a real natural fit with our metal business overall in terms of capabilities. And with their design expertise and their creative problem-solving on the exteriors, it extends our reach into that exterior space, if you will, an additional space in a commercial building. So I'd say we're going to continue to pursue these spaces just like we have from ceilings to walls, we're going to continue to pursue these as we have success in demonstrating our ability to win in those spaces, leveraging these capabilities. Overall, as a mix, you're getting to our supply chain, and as you know, we have a hybrid, make-sell, buy-sell model. We don't make everything that we sell and have specified in the marketplace. That mix has evolved over time around that 50% in and out type of level and proportionality. And again, as we buy companies, it kind of moves, and then we continue to flex in our third-party network. With this BOK acquisition, we're going to continue to leverage their third-party network as well as opportunities to move some of this new business into some of our existing factories to optimize the supply chain around the capacity inside being able to flex with this high growth into our third-party network. So we're committed to that. Stephen, it's kind of a long-winded answer, but we're committed to that hybrid, make-sell, buy-sell model. It's evolved over time, but it's not far from the 50-50 in any given period.

Can you quantify the broader opportunity or the size of the market for decorative exterior products compared to the interior opportunities that ArchSpec has historically focused on? Additionally, could you clarify how the lower incentive compensation from last year will impact our performance in the coming quarters?

Yes, Stephen, this is Chris. I'll take that last question first. So yes, we saw the benefit in 2022. So my point in looking at and kind of modeling out SG&A is that we're going to be lapping that tailwind in the back half of '23. So as you think about SG&A progression, that was just one thing to kind of remind everyone about.

So regarding the sizing of the opportunity, we're currently focusing on the incremental nature of this new space following our acquisition. Over time, this will likely become clearer for everyone. It's important to note that we can project various figures, but I prefer not to delve into specific numbers at this time. However, this opportunity is a valuable addition to our existing business, and we're enthusiastic about it.

Okay. That's fair enough. Thanks a lot, guys.

Okay. Thank you.

Thank you.

One moment for our next question. Our next question comes from the line of John Lovallo with UBS. Your line is open.

Good morning, guys. Thank you for taking my questions as well. The first one here is how are you thinking about Mineral Fiber mix in the second half? I mean, it seems like it may have been a bit below expectations in the first half. So just curious if this is timing and do you expect improvement as we move into the second half?

Yes, let me start, and I'll let Chris add some detail. Our product mix has been a crucial element of our overall average unit volume growth for many years. The industry tends to update its offerings during renovations, introducing new products. As we innovate along that design curve, we incorporate the latest products that enhance our product mix. This mix has remained positive even during the downturn. We often discuss the mix between channels, which can be influenced by timing since each channel's patterns may vary based on inventory levels. It can be challenging to forecast these shifts, especially since customer decisions to build inventory can significantly impact a specific channel in any given quarter, particularly if it is a channel with lower average unit volume. This variability could be what you are referencing. With that context, let me have Chris add to this.

Yes, additionally add just a little more color on the timing element of it. You saw kind of the timing in the first quarter and then again in the second quarter. So it just speaks to the variability and the challenge in forecasting that element of AUV. But again, just highlighting our AUV guide for the year at being above-average Mineral Fiber AUV growth is really what we've incorporated here in terms of our full year revised guidance.

Okay. That makes sense. I guess what I'm trying to kind of wrap my head around here is that if you look at the full year Mineral Fiber adjusted EBITDA margin outlook of 37.5%, it's about, call it, 300 basis points below the second quarter result of 40.4%. It just seems like that's unusually wide looking historically. So just trying to figure out what's sort of driving that?

I believe the uncertainty in the latter half of the year is significant. We're maintaining some broad ranges where we find it necessary due to the lack of visibility in certain areas. However, we're focused on growing our Average Unit Volume and ensuring that translates into expanded margins in the Mineral Fiber sector. That's the current situation and what you can anticipate for the second half.

Okay. Thank you, guys.

You bet.

Thank you. One moment for our next question. Our next question comes from the line of Rafe Jadrosich with Bank of America. Your line is open.

Hi. Good morning. Thanks for taking my question. Just a follow-up on the Mineral Fiber AUV. Just what does the guidance imply for realization on that August price hike? And then what's sort of been the acceptance of the channel and the installers on pricing, just kind of given the softer environment that's out there?

Yes, I'd say, Rafe, this is Chris. The expected realization is really in line with our historical price realization. So no change there and nothing really to speak about in terms of standard receptivity with our channel partners.

Got it. Okay. And then as we think of the Mineral Fiber volume guidance for the second half of the year, obviously, you kind of raised the high end of the target now down low to mid-single digits to mid-single digits. Like what's the kind of specific thing that changed that kind of gave you comps? Like where are you getting more visibility that's giving you the confidence to sort of increase that? And then can you just talk about the cadence between 3Q and 4Q on a year-over-year basis, like you have a much easier comp in the fourth quarter, but I think that the outlook has kind of softened through the year. Just how should we think about that in the back half?

Yes, I'm going to stop short of giving quarterly, call it, volume guidance. But I mean, I talked earlier about what we'd expect in the back half. And really just keep in mind the seasonality associated with the business with Q2 and Q3 typically the strongest quarters from a seasonality perspective. But again, a lot of uncertainty associated with, again, the back half. So I'd just point to the second half volume comments that I made of being down high mid-single digits in the second half of this year. Vic, did you want to talk more about that?

Yes. And Rafe on the confidence or what we're seeing, we're now into the third quarter. I would say the biggest change really for us versus where we were at the beginning of the year on the back half is the on-the-ground sentiment and conversations with our customers and the activity they see some of their backlogs that are building, so they have better visibility to their backlogs, not great, but better than what we had at the beginning of the year. And that's given us some confidence that kind of the worst-case scenario that we had in the downside of our guidance wasn't likely to happen given what our customers are seeing now in terms of their activity. So I would say we're looking at all the indicators. We really triangulate a lot of different things to try to get a read on the pipeline of activity coming into the market. I would say that's probably the biggest change is what we're hearing from our customers that's been encouraging.

Okay. Thank you.

Thanks.

That concludes today's question-and-answer session. At this time, I would like to turn it back to Vic Grizzle, President and CEO, for closing remarks.

Yes. Again, I want to thank everybody for joining our call today. Again, I think we're in a really good position for us to finish the year out and deliver on our guidance ranges. And I'm really pleased with how our teams are executing and how the resiliency of our model is coming to light and shining through. And again, we look forward to talking to you in a quarter now on a continuation of good execution and the resilience of our business model. Thank you all, and have a good week.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.