Earnings Call Transcript - AWI Q2 2024

Operator, Operator

Good morning, ladies and gentlemen. Thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Armstrong World Industries Second Quarter 2024 Earnings Conference Call. Thank you. And I would now like to turn the conference over to Theresa Womble, Vice President of Investor Relations and Corporate Communications. You may begin.

Theresa Womble, Vice President of Investor Relations and Corporate Communications

Thank you, Abby, 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 2024 results and the rest of the year outlook. We have provided a presentation to accompany this call, and it's available on our Investor Relations section of the Armstrong World Industries website. Our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measure is included in the earnings press release and in the appendix of the presentation issued this morning; both are available on the Investor Relations website. During this call, we will be making forward-looking statements that represent the view we have of our financial and operational performance as of today's date, July 30, 2024. These statements involve risks and uncertainties that may differ materially from those expected or implied. We provide a detailed discussion of the risks and uncertainties in our SEC filings, including the 10-Q we filed this morning. We undertake no obligation to update any forward-looking statements beyond what is required by applicable securities law. Now I'll turn the call over to Vic.

Vic Grizzle, CEO

Thank you, Theresa, and good morning, everyone, and thank you for joining our call today. Today, we reported another quarter of strong and record-setting results and an increase in our guidance for the full year 2024. It was a quarter of strong execution on all fronts as we continue to drive consistent growth from our initiatives and operate very efficiently. So let me begin by thanking our nearly 3,500 employees now including our team members of 3form for their continued efforts and commitment to the execution of our strategy through the production of the highest quality products and the best-in-class service levels that differentiate Armstrong in the marketplace every day. Together with their commitment to excellence and winning the right way with integrity and respect, Armstrong will continue to be successful for many years to come. Turning to our financial results this quarter, we generated total company revenue growth of 12% and adjusted EBITDA growth of 13%, with total company margin expansion. This marks five quarters in a row that we have achieved year-over-year adjusted EBITDA margin expansion for the company. Adjusted net earnings per share increased 17%, marking the sixth consecutive quarter of year-over-year adjusted EPS growth, all against a muted market backdrop. Our Mineral Fiber segment delivered net sales growth of 7% year-over-year with strong average unit value or AUV, along with increased sales volumes driven by stabilizing market demand, which I will talk more about shortly and contributions from our growth initiatives. These initiatives include our automated design platform ProjectWorks and Canopy, our online platform and new product innovation efforts. Both innovative digital platforms are advancing in their capabilities and are making an increasing impact on our business. In the quarter, Canopy sales increased over 20% from prior year results and had its largest shipment month ever in June. Canopy also positively contributed to EBITDA in the second quarter. With ProjectWorks, we continue to integrate more of our products into our digital catalog, expanding our coverage and increasing the number of projects where we can improve the design to construction process. More and more architects and contractors are using ProjectWorks. And for the first half of the year, the quoted value of projects moving through this platform has increased a remarkable 52% from the first half of 2023. Further ProjectWorks is strengthening our engagement with architects and contractors positioning us to win more specifications and sell more products into more spaces. The growth of both of these digital initiatives is further differentiating Armstrong in our industry. With these contributions from our growth initiatives and contributions from continued AUV growth, moderating input costs and earnings from our WAVE joint venture, Mineral Fiber EBITDA increased 10% and our EBITDA margin percent improved by 130 basis points, reaching nearly 42% in the quarter. Our plants also continue to operate at a high level, operating efficiently and delivering high-quality products. Again, these results reflect another quarter of strong performance and execution. Now turning to our Architectural Specialties segment. Net sales increased 26% year-over-year, largely due to the inclusion of our 3form acquisition in April as well as contribution from our 2023 acquisition of BOK Modern. In addition to the inorganic contribution, we saw growth in custom project sales across several product categories. Now as previously reported, we've been awarded large airport projects, including Pittsburgh and Seattle International Airports. And now more recently, we have been awarded projects at the Tampa and Fort Myers airports as well as other smaller regional airports across the country. We continue to expect federally funded transportation projects to be a multiyear opportunity for our AS segment. Our quarter-to-quarter sales in this segment are likely to continue to be choppy and uneven due to project timeline variability stemming from a variety of factors, including labor availability, inflation and the speed of project funding. That said, quoting activity remains healthy and our backlog remains strong for the overall segment. Adjusted EBITDA for the AS segment, with the inclusion of 3form increased 25% with a margin of 18.4%. Importantly, adjusted EBITDA margin for the organic AS results continue to improve. We look forward to continuing the integration of 3form onto the Armstrong platform and expect to see margin improvements as we do this. Although it is still early days in the 3form integration, we are pleased with their performance in the second quarter and how the integration is progressing. We continue to be excited by the unique capabilities of 3form using color, texture and light to elevate the design of a space. Our other recent acquisition BOK Modern has also performed in line with our expectations, and we believe their ability to design and develop integrated architectural metal systems for interior and exterior applications positions us well for further growth in this category. Now before I turn the call over to Chris for additional financial details, I'd like to comment on the underlying market conditions we are experiencing. Broadly speaking, market conditions seem to have stabilized and have a sideways movement to them. With this and feedback from our customers, we have modestly improved the outlook for the second half of the year, although a level of uncertainty remains around interest rates, inflation and the overall impact on the economy. While the office sector continues to be challenged, it is stabilizing with pockets of improved regional activity. We're seeing early signs of renewed activity in some of the depressed markets like San Francisco, with the rise in AI demand for office space. We've also seen tech projects that had been paused throughout the Pacific Northwest start up again. Additionally, we're seeing a rebound in project bidding in the Mid-Atlantic and New York Metros. These activities are in the early stages, but are encouraging signs. Other verticals like health care and education are holding steady, transportation continues to be strong, and data centers remain an area of rapid growth providing higher value grid and component sale opportunities. We are currently tracking over 100 data center projects across the country. We're also seeing steady growth in new construction bidding activity, and the latest Dodge forecast for new construction starts in 2024 remains in positive territory. These are good signals for 2025 and into 2026. As we've demonstrated over the past several years, the benefit of our balanced set of end markets is one of the key stabilizing attributes of our business that enables us to deliver consistent, profitable growth. Now I'll pause and turn it over to Chris for some more details on our financials.

Chris Calzaretta, CFO

Thanks, Vic, and good morning to everyone on the call. As a reminder, throughout my remarks, I'll be referring to the slides available on our website, and Slide 3 details our basis of presentation. Beginning on Slide 6, we discuss our second quarter Mineral Fiber segment results. Mineral Fiber sales were up 7% in the quarter, primarily driven by favorable AUV of 6% and 1% from higher volumes. Favorable like-for-like pricing and, to a lesser extent, positive mix drove the strong AUV result versus prior year. Higher volumes were driven by stabilizing demand as well as contributions from our growth initiatives. Mineral Fiber segment adjusted EBITDA grew by 10%, expanding adjusted EBITDA margin by 130 basis points to 41.7%. Adjusted EBITDA margin expansion was driven by the fall-through of AUV and lower input costs. These benefits more than offset an increase in SG&A. Manufacturing productivity in the quarter more than covered inflation and a temporary uptick in plant-related costs. Lower input costs were driven primarily by freight and energy deflation, as well as a benefit from inventory valuation. The increase in SG&A was driven primarily by higher incentive compensation and higher employee costs due to inflation. The strong second quarter adjusted EBITDA margin result for Mineral Fiber marks the sixth consecutive quarter of year-over-year adjusted EBITDA margin expansion for this segment and demonstrates our focused efforts to drive consistent margin expansion despite uncertain market conditions. On Slide 7, we discuss our Architectural Specialties or AS segment results. Sales growth of 26% in the quarter was driven primarily by contributions from our recent acquisitions of 3form and BOK Modern, as well as organic sales growth driven by some of the larger transportation projects that we have previously mentioned. We're happy to report that the 3form business performed as expected in the quarter and that the integration work is on track. Including the acquisitions of 3form and BOK, second quarter total AS adjusted EBITDA margin was 18.4% and compressed by 10 basis points. AS organic sales patterns continue to be impacted by project dynamics and can be lumpy quarter-to-quarter. Despite lower-than-expected organic sales growth, we were pleased to see adjusted EBITDA margin expansion organically. We also expect to see the AS organic portion of the business continue to expand margins over the second half of the year. We remain on track to deliver the approximately 18% adjusted EBITDA margin target we had outlooked for the total AS segment in April. Slide 8 highlights our second quarter consolidated company metrics. We delivered 12% sales growth and 13% adjusted EBITDA growth, with 10 basis points of adjusted EBITDA margin expansion, along with 17% growth in adjusted diluted net earnings per share. The drivers of the second quarter adjusted EBITDA growth are largely similar to the first six months of the year. Turning to Page 9, we present our first half consolidated company metrics, reflecting continued margin expansion. Notably, through the first six months of the year, with sales up 9% and adjusted EBITDA up 14%, margins expanded 160 basis points versus the prior year period. Adjusted diluted net earnings per share increased 20%, due primarily to higher net earnings. Adjusted free cash flow increased 2%, and I'll comment further on that in a moment. Adjusted EBITDA growth for the year-to-date period was driven primarily by AUV fall-through and higher volumes, partially offset by an increase in SG&A costs. The recent acquisitions drove the majority of this volume benefit, as well as a sizable portion of the increase in SG&A. WAVE equity earnings were also a strong driver of growth in the first half, helping to expand Mineral Fiber and total company adjusted EBITDA margins. Slide 10 shows our year-to-date adjusted free cash flow performance versus the prior year. The 2% increase was driven primarily by higher cash earnings and lower capital expenditures. Higher cash earnings were more than offset by unfavorable working capital changes, most notably timing-related changes in accounts receivable and an increase in cash paid for income taxes largely due to higher earnings. This is captured with adjusted operating cash flow on the bridge. The single-digit adjusted free cash flow growth result is lower than we expected through the first half of 2024, and it is timing-related. Accordingly, we expect this working capital impact to reverse in the second half of the year, resulting in double-digit adjusted free cash flow growth for the full year. Our proven ability to consistently deliver strong adjusted free cash flow growth allows us to invest in all of our capital allocation priorities. As we discussed on our April call, in the second quarter, we acquired 3form for a purchase price of $94 million net of cash acquired. Along with this sizable acquisition, we continue to make capital investments back into the business and return value directly to shareholders through our regular quarterly dividend and share repurchases. In the second quarter, we paid $13 million of dividends and repurchased $10 million of shares. As of June 30, 2024, we have $692 million remaining under the existing share repurchase authorization. With a healthy balance sheet and ample available liquidity, our intent to complete additional acquisitions remains unchanged, and we remain committed to advancing all of our capital allocation priorities. Slide 11 shows our updated full year 2024 guidance. We are raising our guidance on all our key metrics to reflect our solid second quarter performance and improved expectations for the second half of the year. While macro uncertainty continues, we believe market conditions have stabilized. Accordingly, we have removed the downside scenario from our outlook. We now expect full year Mineral Fiber volume to be down about 1% based on these better-than-expected market conditions. We also expect full year Mineral Fiber AUV to be above the 5% historic average. We now expect total company net sales growth of 9% to 11% for the full year and expect total company adjusted EBITDA growth in the 10% to 13% range, up from our prior expectations of 8% to 13% growth. The change in our adjusted EBITDA guidance versus our prior guide provided in April is driven by improved Mineral Fiber profitability due to higher volumes, better AUV and lower input costs. There are no material changes to our AS segment guidance. For the full year, we expect adjusted free cash flow to grow at 10% to 14% and expect adjusted diluted net earnings per share to grow at 13% to 16%. Please note that additional assumptions are available in the appendix of this presentation. As we look to the back half of 2024, we remain committed to driving profitability and continuing to deploy cash to generate growth and create value for shareholders regardless of the market environment. Now I'll turn it back to Vic for further comments before we take your questions.

Vic Grizzle, CEO

Thanks, Chris. As we have summarized, our business is performing well in this current environment. We're on track in 2024 to deliver annual revenue and earnings growth as we have in each year since 2020 in a muted commercial construction market, all while we continue to make investments for our future, investments to support the growth of our company through acquisitions like BOK Modern and 3form, as well as through investments in our operations for productivity and in innovation to continue bringing new products to market aligned with next-generation market needs and aligned with longer-term secular trends for the built environment. In the last couple of quarters, we've discussed the rising demand for building solutions that can reduce the energy cost and the environmental impact generated by buildings. We are making great strides with product innovation focused specifically on energy savings and decarbonization. This includes our TEMPLOK energy-saving ceiling products, which are the industry's first ceiling tiles that can help regulate temperatures within buildings and reduce energy costs through a unique application of phase change material coupled with our mineral fiber tiles. This is the first ceiling product that pays for itself over time by generating energy savings of up to 15%. This economic return provides building owners and facility managers a reason to replace existing ceilings. We also recently launched an industry-leading line of Low Embodied Carbon products or LEC that helps tackle the challenge of embodied carbon in commercial buildings. The new Ultima LEC ceiling tiles are the lowest embodied carbon tiles on the market today while maintaining their typical acoustical and aesthetically appealing attributes. Together, these products can make a meaningful impact on the overall carbon footprint of a building and its operation. Although these products are in the early stages of their launch, the feedback from industry groups and the A&D community confirms these products are on trend for where things are going. We expect the demand for these types of solutions to grow given the increased attention to decarbonization and the energy efficiency by industry standard setters, federal initiatives, and increasingly state and local regulators. One example to note is the proposed lead version five standards from the U.S. Green Building Council that seeks to establish ambitious new standards for sustainable building practices with several guiding principles, including decarbonization, resilience, and health. These standards call for additional reductions in operational and embodied carbon. Maintaining these standards will require finding additional sources of energy savings and decarbonization like the benefits provided by both our LEC and energy-saving products. For perspective, there are close to 3 billion square feet of building space currently certified by the U.S. Green Building Council. Armstrong has a long history of supporting customers to achieve their lead project goals and working with the Green Building Council to drive real-world positive change through innovation. We're also pleased that our TEMPLOK product was named one of 17 new technologies that will be tested by a program run by the Department of Energy with the General Services Administration called the Green Proving Ground. This is a multiyear testing and validating program for innovative building technologies using the U.S. government's real estate footprint as testing sites. This program looks for new technology that can drive down operational costs in several buildings and help lead market transformation through the deployment of new technologies. Jetta Wong, GSA's senior adviser recently called the face-change ceiling tile made by Armstrong World Industries a game-changer, because construction companies don't need special training to install the new tiles. We are thrilled to be part of this program and to be the only ceiling-based and phase change material solution included in the program. Again, we're in the early process of educating our customers on the benefits of these new products and building market demand. But interest is growing, and we have already taken orders with our largest order to date placed just last week. These products are important catalysts for the renovation activity that could lead to mineral fiber volume growth in the future. The innovation around new products is a key element, enabling AUV growth. As many of you know, Mineral Fiber AUV is one of the core value drivers for our company and has been for over a decade. With new products like low embodied carbon and TEMPLOK energy-saving ceilings, we are expecting AUV growth to continue. We are demonstrating, again, that ability in 2024. Investing in our AS segment is also a core value driver as we seek to grow revenue through acquisitions and market penetration while increasing the profitability of the businesses we bring onto the platform. In 2016, when we separated from our flooring business, this was just a $100 million business for Armstrong. In 2024, we are on track for this segment to well exceed $400 million in revenue. We are demonstrating success in penetrating the specialties category and doing so profitably. Our investments in digital growth initiatives, Canopy and ProjectWorks, also support the overall business and are contributing to both sales volume and AUV growth. I'd also like to highlight our best-in-class service model and specifically within that, the critical role our distribution partners play in providing that last mile of service. Their partnership and excellent service support growth for our mineral fiber, our grid, and architectural specialty products and is essential for our success. We clearly have the best of the best distribution partners. All in all, our teams are executing well, and 2024 is unfolding better than expected. We remain well positioned to continue delivering consistent profitable growth in these overall muted but stabilized market conditions. With that, now we'd be happy to take your questions.

Operator, Operator

And your first question comes from Susan Maklari with Goldman Sachs. Your line is open.

Susan Maklari, Analyst

Thank you. Good morning, everyone.

Vic Grizzle, CEO

Hi Susan.

Chris Calzaretta, CFO

Good morning.

Susan Maklari, Analyst

Hi. My first question is, you made some comments in your opening remarks about stabilized conditions and getting some feedback from your customers that is supporting this improved view that you have for the back half. Can you give us a bit more commentary on what you're hearing from them? And then you also mentioned that there's some depressed markets that are coming back, which is encouraging. Can you talk a bit about what you're seeing there, what those projects are? And how we should think about what that could mean for mix shift as well as perhaps some of these newer offerings start to gain even more momentum with some of those markets coming back?

Vic Grizzle, CEO

Yes. Susan, as you know, we talked to our customers and with their visibility into their backlogs as a key input to how we think about the market conditions and so forth. Specifically, I think your question relates primarily more to office because that has been the biggest drag overall, with healthcare and education kind of hanging in there, and transportation being strong. Let me address the office segment, in particular, because I was referencing some of those new projects in the Pacific Northwest that were on hold. These were large office buildings for the tech companies that have now come back online as part of the encouraging signs out West, particularly in San Francisco with the artificial intelligence demand for moving into some of that lower-cost office space in downtown San Francisco. But if I look broadly across the market, there are some real signs that support the stabilization view and what we are experiencing in the marketplace. Leasing activity in the office space was up 15% in the quarter. That's the highest quarterly volume since the pandemic. Connected to that, when you look at the sublease vacancy rates, they have declined over the last three quarters, with Q2 having the steepest rate of decline. So that's a really encouraging sign when you think about the availability, especially for some of this Tier 2 and Tier 3 space. I also thought it was interesting that a survey of CFOs showed that 65% expect their office square footage to increase in the next 12 months. A couple of years ago, a similar survey showed the opposite. So that's another positive signal for overall office demand. Together with some of the green shoots we're seeing in distressed markets like San Francisco and some areas in the Mid-Atlantic, I would say there are several indicators supporting the stabilization feel in the marketplace and the conversations we're having with our customers.

Susan Maklari, Analyst

Yes. Okay. That's helpful color. Sorry, go ahead.

Vic Grizzle, CEO

No, I was just going to say that I think the second part of your question was really on how this contributes to the mix shift. Certainly, when markets like San Francisco, New York, and Chicago—some of the larger metros—return, we have some of the richest value products going into those markets. It's always going to be helpful for those markets. When they come back, it will positively impact our overall product mix, which is a positive sign for additional product mix going forward.

Susan Maklari, Analyst

Yes. Okay. Thank you for all that color. That's helpful. And then turning to Architectural Specialties, you've seen those margins holding really nicely in this quarter. Any commentary on how we can think about reaching perhaps 20% next year? And how you are considering the integration of the recent M&A within that target?

Vic Grizzle, CEO

Yes. The approach we are taking on the organic part of our business and improving the margins is clear: we need to drive operational excellence and achieve better throughput and productivity from the investments we've made in those businesses to grow them profitably. This involves continuing to get that operating leverage and maintaining discipline in how we service and win these projects. That's part of what we do, and we're very committed to executing that approach. We saw a benefit from that in the second quarter and expect that to continue as we drive those margins organically toward that 20% target. I think we're on the right track. The 3form acquisition means we are essentially starting from scratch. We need to execute our play to scale this business on the Armstrong platform. I'm pleased with the progress we've made, and we are already focused on the synergies identified in our business case coming into that acquisition. We're just going to stick to our strategy and drive synergies on both the cost and revenue side to improve margins in that business as we move forward, which is a similar play we've been running for the last several years.

Susan Maklari, Analyst

Yes. No, I am familiar with it, and it's coming together well. So thank you for that color and good luck with everything.

Vic Grizzle, CEO

Thank you, Susan.

Operator, Operator

And your next question comes from the line of Keith Hughes with Truist. Your line is open.

Keith Hughes, Analyst

Thank you. In the quarter, could you just talk about— you’ve done some of this, but I just wanted to get a list. In the quarter in Mineral Fiber, what markets were positive and which markets were negative?

Vic Grizzle, CEO

Well, Keith, the markets that we spoke of—health care and education—are performing well. Education is expected to pick up later in the year, typical for them. However, we continue to see strength in health care, especially on the East and West Coast, with significant work linked to universities. So both health care and education are strong. In transportation, the bidding activity has been robust. Meanwhile, retail is showing flat performance overall. That represents the bulk of the verticals for us.

Keith Hughes, Analyst

And the office is still in there. You said some positive things about the future of the office.

Vic Grizzle, CEO

Yes. I left that off, but I've talked a lot about that. So yes, I would say it's moving sideways, but it's still at a lower level overall. That is a drag overall on the other verticals for sure.

Keith Hughes, Analyst

Okay. And if you look at your backlog in office, some of the positives you talked about in this call, would it be next year before something like that could potentially turn in a positive direction?

Vic Grizzle, CEO

I think for the most part, we're seeing stability. The stabilization we're observing now, if these green shoots continue to materialize with the lag on some of these projects, we should see most of the positive impact in '25. That said, it does give us confidence that we don't have the softening we expected in the back half; that's the main driver behind raising our guidance for the back half. There could be some benefit, but significantly, the bulk of it is more likely in '25 and '26.

Keith Hughes, Analyst

Okay. Architectural Specialty has remained positive organically. It tends to have more of a higher construction component to it. How has that been able to continue the growth despite the headwinds in construction?

Vic Grizzle, CEO

Yes. We're capitalizing on positive new construction activity that took place in late 2022, so we're still benefiting from that. However, we must not overlook that large renovation projects are equally critical to our Architectural Specialty business, which is about a 50-50 split between new construction and renovation. We’re currently seeing good activity in the latter, particularly in the transportation and health care sectors, and to a lesser extent, in the education segment.

Keith Hughes, Analyst

Okay, great. Thank you very much.

Vic Grizzle, CEO

Thank you.

Operator, Operator

And your next question comes from the line of Adam Baumgarten with Zelman & Associates. Your line is open.

Adam Baumgarten, Analyst

Hi. Good morning, everyone. Just thinking about AUV, I know you mentioned above 5% AUV growth for the year. It looks like you did about 7% in the first half. Should we expect a similar year-over-year increase in the back half of the year? I know there's a price increase out there that I’m assuming you guys expect realization on, so just some more color on the cadence of AUV as we move through the year.

Chris Calzaretta, CFO

Yes, so the back half of the year looks a little bit softer on AUV compared to the first half of the year. We expect some positive mix and price contributions, but to a lesser extent on price than what we achieved in the first half of the year, especially considering some deflationary dynamics we've been facing. So expect a bit of deceleration on AUV in the back half, but with strong price contribution and positive mix.

Adam Baumgarten, Analyst

Okay, got it. And then just switching to AS, you mentioned the airport projects. You noted four or so, and I’m sure there are others. Can you size the cumulative opportunity from a revenue perspective and maybe provide some insight on timing of when that would actually hit the P&L?

Vic Grizzle, CEO

We're currently shipping in the Pittsburgh Airport project now and Seattle soon. These larger projects are outsized compared to our normal average project size. However, we also have some smaller regional projects that are more typical renovation projects. The Pittsburgh and larger new projects are starting to hit the P&L, with more to come in the back half of the year and extending into '25 and '26. We've encountered strong bidding activity with a number of airport projects we are tracking across the country, which should represent at least a three to four-year tailwind for our Architectural Specialty business.

Chris Calzaretta, CFO

Adam, maybe I can add a bit more context around the phases of these projects as a lot of them are multiphase within these transportation jobs. This can contribute to some choppiness and lumpiness as individual phases are completed and shifted.

Adam Baumgarten, Analyst

Okay, got it. Thanks. Best of luck.

Vic Grizzle, CEO

Thank you.

Chris Calzaretta, CFO

Thank you.

Operator, Operator

And your next question comes from the line of Garik Shmois with Loop Capital. Your line is open.

Garik Shmois, Analyst

Hi, thank you. I think you mentioned in prior quarters that project delays were particularly acute after Q1. I'm just curious if it's fair to say the pace of delays has slowed down. If so, what's bringing some of those projects back?

Vic Grizzle, CEO

I think we're still seeing delays. The reasons behind these delays have changed somewhat. Initially, it was more supply chain-related, but in the last 12 to 18 months, it's shifted more towards labor and funding dynamics, especially for larger projects. That can cause lumpiness in the timing of these projects. So I wouldn’t say the situation is better or worse overall, but delays are still present, and the reasons vary by project type.

Garik Shmois, Analyst

Okay, got it. That's a helpful clarification. And then just on SG&A, the increase in the quarter. I was wondering if you could size directionally how much was due to inflation, how much was from performance comp, and how much was the acquisition impact? So just how should we think of the SG&A piece in the back half of the year?

Chris Calzaretta, CFO

Yes. In the quarter, we experienced higher incentive compensation driven by performance. The increase in SG&A was primarily due to the 3form acquisition. In a more normalized run rate basis, you should consider the impact of 3form's SG&A, which will continue to be a factor moving forward.

Garik Shmois, Analyst

Got it. Okay, thanks for that.

Operator, Operator

Your next question comes from the line of Kathryn Thompson with Thompson Research Group. Your line is open.

Brian Biros, Analyst

Hi, good morning. This is actually Brian Biros on for Kathryn. Thank you for taking my questions. Regarding the improved outlook in the second half, could you break that down between new construction versus renovation? It seems the new side is seeing slightly more improvement based on your comments, if I interpreted that correctly. Could you address how that breaks out?

Vic Grizzle, CEO

It’s really difficult to break them down. However, I would say the pattern we saw in the first half should carry into the back half. The new construction market remains positive, as we are still benefiting from some starts in the latter half of 2022. However, we are seeing softness on the renovation side, particularly in discretionary renovations, as people are waiting for some uncertainty to clarify. There isn't a sizable departure in our outlook between new versus renovation activities in the back half when compared to the first half.

Brian Biros, Analyst

Got it. And then with the better outlook and raised guidance, I assume that means we'll see slightly better throughput on the Mineral Fiber production lines. Given the throughput and business margins, is there any way to quantify those productivity or margin benefits in the second half?

Vic Grizzle, CEO

I think we are on track to deliver our productivity goals. We were slightly ahead in the first half. Based on this modestly improved outlook on volume, we should really be able to meet or exceed our productivity targets for the year. We're confident margins will expand through Q3 and Q4 as we've been tracking.

Chris Calzaretta, CFO

Additionally, our adjusted EBITDA margin within Mineral Fiber is on the rise. If we consider our full-year assumptions for 2024, we're looking at above 40% adjusted EBITDA margin which is now around 41%.

Brian Biros, Analyst

Got it. Helpful. Thank you.

Operator, Operator

Your next question comes from the line of Philip Ng with Jefferies. Your line is open.

Philip Ng, Analyst

Hi, guys. It is pretty encouraging that you're signaling that the market is stabilizing here. I think you teased this a little bit in the last question, that it sounds like new construction is still pretty good because you're lagging some of the strength you saw in the back half of 2022 despite some resiliency. Can you provide more context on how the major renovation has been? It sounds like it's still weaker but is it less bad at this point? Just give us a little more context on how these three buckets are performing?

Vic Grizzle, CEO

Yes. I would say it continues to be stable. The stabilization for me refers to a sideways kind of feel in terms of the number and value of projects on the renovation side. There’s also a fine line between major renovation work and discretionary renovation activity, which I don't want to delineate too sharply. Both segments are stabilizing. On the positive side, we are still benefiting from favorable new construction activity, as you mentioned.

Philip Ng, Analyst

Okay. So that's helpful. You mentioned confidence that things are stabilizing in the back half, but how do you think 2025 will shape up? A lot to unpack, but you noted some green shoots that could benefit next year. However, Dodge’s new construction starts have been declining for the last 1.5 years. With rates coming down, how should we contextualize the recovery into 2025?

Vic Grizzle, CEO

The fact that we're experiencing stabilization here—I believe troughs and recessions are best confirmed in the rearview mirror—so it’s still early to project for '25. Nevertheless, we're encouraged to see a stabilization here and are also observing that Dodge's new construction starts have turned positive this year and are forecasted to remain positive in 2024. I believe those are good signs for '25 and '26.

Philip Ng, Analyst

Okay, thank you.

Operator, Operator

And your next question comes from the line of Rafe Jadrosich with Bank of America. Your line is open.

Rafe Jadrosich, Analyst

Hi. Good morning. Thanks for taking my question. First, with steel prices moving down significantly this year, could you remind us how that impacts your margins and earnings? Additionally, how do volatility in fuel prices relate to that, especially in terms of the WAVE JV?

Vic Grizzle, CEO

Do you want to take the accounting side of this?

Chris Calzaretta, CFO

Yes. So Rafe, WAVE has consistently been able to manage price costs while actively monitoring pricing. We've noted pricing aligns with inflation we've seen in steel. Typically, there's about a quarter lag in terms of steel pricing hitting the P&L. Our team has done a good job managing pricing. We experienced some volatility in steel prices after the auto union negotiations late last year, for which we had to react quickly and raise prices. Steel prices have moderated since then, but our team has effectively managed the situation. And for us, EBITDA margin expansion in WAVE shows as an equity earnings stream on our financials.

Rafe Jadrosich, Analyst

Got it. That's really helpful. I wanted to follow up on the Green Proving Ground program. I know it was just announced, but could you talk about the potential long-term opportunity there? Also, how much of your end markets are tied to government spending or government real estate? Just to give us a sense of the opportunity?

Vic Grizzle, CEO

Yes. This program is quite exciting, as there's a little over $3 billion earmarked for it. It aims to accelerate the adoption of innovation that can drive decarbonization and energy savings. The Federal Government has a substantial real estate footprint, so we see this program bolstering the credibility of our technology. This should serve as an accelerator for market adoption of these technologies. It's still early in the process, but we are the only ceiling company included in this program, and we're thrilled to be part of it. Regarding the institutional footprint in commercial construction, we are present across all the verticals where institutional plays. As such, we are equitably distributed across institutional and non-institutional segments of the market.

Rafe Jadrosich, Analyst

Thank you. That's very helpful.

Operator, Operator

And your next question comes from the line of Stephen Kim with Evercore ISI. Your line is open.

Stephen Kim, Analyst

Yes, thanks very much, guys. Just wanted to clarify a couple of housekeeping items. First, regarding SG&A, you mentioned that the increase is mostly related to incentive compensation with 3form. Should we expect that trend to continue for the next few quarters? Also, could you comment on the SG&A run rate in Mineral Fiber? It was higher than we expected, and will that persist?

Chris Calzaretta, CFO

Sure. Regarding SG&A, the increase was indeed driven by higher incentive compensation, which was related to our current performance. Regarding the Mineral Fiber segment, about $3 million was attributed to higher incentive compensation, and we did see employee costs increase as a result of inflation. However, we do not anticipate that level of increase to persist moving forward. In short, the major contributor to the total SG&A impact was the 3form acquisition.

Stephen Kim, Analyst

Perfect. That's clear. The second question relates to ProjectWorks and Canopy. Vic, you mentioned Canopy sales are up 20%, with ProjectWorks contributing around 52% in projects. Should we view these digital initiatives as discrete drivers of growth or more as a source of continuous improvement? Is there an incremental sales assessment for these initiatives, or is the benefit more of an advantage over competitors?

Vic Grizzle, CEO

Yes, it's a good question. For ProjectWorks, it's about improving our engagement with architects and contractors, making their design processes more efficient. It allows us to help them realize their design ideas more fully and uniquely with Armstrong solutions. I view this as continuous improvement and an additive capability that enhances our ability to drive higher value solutions in the market. Canopy, however, brings a more incremental impact as it targets an underserved portion of the market, particularly smaller business owners who may not have known how to approach renovations. This platform guides them through the process and allows us to transact directly with them. So, in short, each digital initiative contributes differently, with ProjectWorks leaning toward continuous improvement and Canopy providing more direct incremental revenue opportunities. Additionally, our Healthy Spaces products are showing strong traction in the market, and we expect them to significantly contribute to AUV growth.

Stephen Kim, Analyst

Great. That's very helpful. Thanks!

Vic Grizzle, CEO

You bet. Thank you.

Operator, Operator

Your final question comes from the line of John Lovallo with UBS. Your line is open.

Matt Johnson, Analyst

Hi. Good morning, guys. Actually, this is Matt Johnson on for John. I appreciate the time. If we could focus on Mineral Fiber volumes in the quarter— they were up a little over 1%. Could you frame the contributions from market demand versus AWI's outperformance? Additionally, since your outlook seems to imply volumes will be down around 1%, how do you think about the relative impacts from market demand versus AWI performance or shipping base?

Vic Grizzle, CEO

On the first two parts of that, the overall market is down in the low single-digit range. That has remained consistent. Our initiatives and growth strategies have offset about 1% to 2%, so we are experiencing consistent contributions on that front. Thus, the market is stable but down low single digits, and consequently our quarter-to-quarter performance remains consistent. In the back half, we expect to see similar contributions from our growth initiatives of approximately 1% to 2% in volume.

Chris Calzaretta, CFO

Furthermore, we had two extra shipping days compared to the previous year. Recall that higher retail activity influenced our 2023 guidance. We anticipate that this inventory accumulation will offset the extra shipping days in the back half of this year.

Matt Johnson, Analyst

Thanks for that. Based on the midpoint of your EBITDA guidance, it implies around $244 million of EBITDA in the back half, which could be up around $21 million year-over-year. How are you thinking about your EBITDA bridge in the back half considering volume, AUV, input costs, et cetera?

Vic Grizzle, CEO

When we consider the back half of the year, the strong Q1 and Q2 performance suggests a bit of deceleration is to be expected, particularly in regards to AUV. We can still anticipate robust like-for-like pricing, albeit to a lesser extent than in the first half of the year. Importantly, we experienced a noticeable benefit in inventory valuations in the first half of the year, and we don't predict that will happen in the back half. Additionally, our WAVE equity earnings were notably strong in the first half and will decrease in the back half. That being said, we are optimistic about our guidance and the outlook for the full year.

Operator, Operator

And that concludes our question-and-answer session. I will now turn the conference back over to Mr. Vic Grizzle for closing remarks.

Vic Grizzle, CEO

Thank you, and thank you all again for joining. I'm very pleased with the way our teams are executing and performing in this muted market. We're working hard to extract as much value as we can while consistently growing margins. I'm very satisfied with our performance and looking forward to a better outlook for our back half. Thank you for joining us, and we will keep you updated on our next call.

Operator, Operator

Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.