Earnings Call Transcript - AWI Q2 2025

Operator, Operator

Thank you for being here. My name is Tina, and I will be your conference operator today. I would like to welcome everyone to the second quarter 2025 Armstrong World Industries Inc. Earnings Call. It is now my pleasure to turn the call over to Theresa Womble, Vice President of Investor Relations and Corporate Communications. You may begin.

Theresa L. Womble, Vice President of Investor Relations and Corporate Communications

Thank you, Tina, 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 results and rest of year outlook. We have provided a presentation to accompany these results 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 SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the earnings press release and in the appendix of the presentation issued this morning. Both of these are available on the 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 29, 2025. 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 filed earlier 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.

Victor D. Grizzle, CEO

Thank you, Theresa, and good morning, and thank you for joining our call today to discuss our second quarter 2025 results and our expectations for the remainder of the year. We delivered another quarter of record sales and earnings as we continue to execute at a high level and to demonstrate the resilience of our business model in these unique and uncertain market conditions. In the second quarter, on a consolidated basis, we increased net sales by 16% and adjusted EBITDA by 23%. With efficient execution, we expanded adjusted EBITDA margin by 200 basis points over the prior year to 36%. Adjusted diluted earnings per share rose 29% year-over-year, marking the company's highest quarterly EPS growth rate since separating from the flooring business in 2016. Similarly, we generated strong adjusted free cash flow, both in the quarter and on a year-to-date basis, allowing for the continuation of funding of all of our capital allocation priorities despite uncertain market conditions. In these times of market uncertainty, it is even more critical to employ an even higher level of focus within an organization, and that's what our organization did in the second quarter. Our team stayed focused on what we can control: our costs, our initiatives and our service to customers, and I'm pleased with how we have focused and executed in each of these areas. Our plant teams continue to exemplify our safety culture with improvement on all of our safety metrics and delivered strong productivity results in the quarter. Our commercial teams worked even closer with our customers to deliver industry-leading service and support. I want to take this opportunity to thank our teams for their outstanding work and their dedication to consistent execution and delivery of results for our customers and our shareholders. Turning now to highlight our segment performance. In our Mineral Fiber segment, our second quarter net sales grew 7% with strong AUV growth of 5% and a modest contribution from volume, both of which were supported by our innovation efforts and our digital initiatives that continue to propel growth at the high end of our product portfolio. Adjusted EBITDA in the Mineral Fiber segment grew 16%, and adjusted EBITDA margin expanded by 350 basis points, driven by contributions from WAVE, along with good SG&A cost control and manufacturing productivity gains. This margin level was the best second quarter result since our separation from flooring in 2016. Turning next to our Architectural Specialties segment, where our net sales grew 37% in the quarter. Both organic and inorganic sales grew double digits. Both our new acquisitions, 3form and Zahner exceeded expectations in the quarter, but especially impressive was the organic growth of 15%, well above market activity levels. Both organic and inorganic growth performance reflects strong penetration into the specialties market with our expanding portfolio of products and capabilities. As we have noted before, our expansion of Architectural Specialties and new materials and capabilities allows us to sell more products into more spaces of a building. With this expanded product portfolio, we can continue to penetrate further into the same commercial buildings where we sell Mineral Fiber today. These additional spaces include solutions beyond the core ceiling plane, extending into specialty walls, other interior finishes like column covers, grills and partitions and now exterior facades and rain screens. With our confidence in our cash flow growth, we continue to build our pipeline for future bolt-on acquisitions to further expand our portfolio. This collective organic and inorganic growth has been a successful strategy for the company, delivering nearly a 20% CAGR since our separation from flooring. This breadth of the portfolio, coupled with our digital initiatives is best illustrated with the recent project win of a 4-story health center building in Virginia. Project Works was used for each of the 7 phases of the project, providing significant productivity and speed for the customer. In total, 32 unique Armstrong solutions were specified and used on the project, including a range of products and services that no other single manufacturer could provide. This breadth of portfolio, along with the automated design services provided by project works is a unique competitive advantage for Armstrong. In addition to our impressive sales growth in Architectural Specialties, I'm particularly pleased with the profitability performance in this segment. We continue to make strides in improving our operational efficiency and gaining operating leverage, which drove adjusted EBITDA growth of 61% and an adjusted EBITDA margin of approximately 22% in the quarter. This was the highest quarterly adjusted EBITDA margin of any quarter since Q3 of 2020. We expect that 2025 will mark the third consecutive year of improved organic adjusted EBITDA margin growth, and we remain confident in our ability to deliver greater than 20% EBITDA margins in the Architectural Specialty segment. Overall, in the second quarter, we increased our efforts to improve efficiency throughout the business in anticipation of softer economic conditions ahead. The early results of these efforts contributed to the margin expansion we delivered in the quarter. In the sales organization, we saw strong performance with our commercial initiatives, which are improving our coverage and penetration in our core markets. Earlier this year, we implemented a sales and marketing optimization program to better position the commercial team with our customers, driving greater efficiency and selling capacity to better serve both our A&D customers and our distribution partners. These changes, together with our innovation and our various growth initiatives are making a difference in delivering above-market level performance. So again, very pleased with the level of focus and execution demonstrated by our teams and the results so far this year. Let me pause here and turn it over to Chris for more details on the financials. Chris?

Christopher P. 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, which details our basis of presentation. Beginning on Slide 6, we summarize our second quarter Mineral Fiber segment results. Mineral Fiber net sales were up 7% in the quarter, primarily driven by favorable AUV of 5% and a modest increase in volumes, both of which were primarily driven by strong commercial execution and benefits from growth initiatives. Specifically, the growth in AUV versus the prior year was driven by both favorable like-for-like pricing and mix. Mineral Fiber segment adjusted EBITDA grew by 16%, and adjusted EBITDA margin expanded by 350 basis points to approximately 45% on strong execution by the business in the quarter. Notably, this marks the 10th consecutive quarter of year-over-year adjusted EBITDA margin expansion in the Mineral Fiber segment. Q2 Mineral Fiber EBITDA growth was primarily driven by AUV growth, contributions from the WAVE joint venture and lower SG&A expenses, which included the benefit from our disciplined focus on cost control as well as the positive impact of higher sales volumes in the quarter. Higher input costs, driven primarily by inflation in both raw materials and energy, were partially offset by a decrease in manufacturing costs. On Slide 7, we discuss our Architectural Specialties or AS segment results, where we highlight net sales growth of 37%. This growth was driven primarily by contributions from our 2024 acquisitions, 3form and Zahner, both of which continued to perform better than expected. On an organic basis, I'm very pleased to report that we delivered second quarter sales growth of 15%, driven by strengthening broad-based penetration throughout our specialty product categories. AS segment adjusted EBITDA grew 61% with an adjusted EBITDA margin of approximately 22%, marking the best Q2 margin performance since 2019. Adjusted EBITDA margin expanded 310 basis points as higher acquisition-related operating costs were more than offset by strong sales growth from our 2024 acquisitions. Additionally, the improvement in adjusted EBITDA margin reflected continued improvement in operational leverage on our cost base in the segment. We are pleased to have achieved 20% or greater adjusted EBITDA margins for both the organic and inorganic side of the AS business in the quarter. The integration work on our 2024 acquisitions is on track, and these businesses are performing better than expected. We remain committed to achieving our goal of a greater than 20% adjusted EBITDA margin on a full-year basis in this segment. Slide 8 highlights our second quarter consolidated company metrics. We delivered 16% net sales growth and 23% adjusted EBITDA growth with 200 basis points of adjusted EBITDA margin expansion, along with 29% growth in adjusted diluted net earnings per share. Incremental volume for both segments, strong AUV performance and healthy equity earnings from WAVE drove our adjusted EBITDA growth in the second quarter versus the prior year period. These benefits more than offset an increase in SG&A, which was driven by our 2024 acquisitions of 3form and Zahner. Excluding the impact of these acquisitions, we delivered an organic total company adjusted EBITDA margin of approximately 38%, which represents 300 basis points of margin expansion as compared to the second quarter of 2024. Turning to Page 9. We highlight our first half consolidated company metrics, which reflect double-digit net sales and adjusted EBITDA growth with margin expansion. Through the first 6 months of the year, with sales up 17% and adjusted EBITDA up 20%, margins expanded 100 basis points versus the prior year period. Adjusted diluted net earnings per share increased 25%, and adjusted free cash flow increased 29%. The drivers of year-to-date adjusted EBITDA growth are similar to the previously mentioned second quarter drivers. Slide 10 shows our year-to-date adjusted free cash flow performance versus the prior year. The 29% increase was driven primarily by higher cash earnings and dividends from our WAVE joint venture. These results demonstrate our ability to consistently achieve adjusted free cash flow growth despite challenging market conditions, allowing us to deploy our cash generation for investments back into the company as well as to provide returns for our shareholders. In the second quarter, we paid $14 million in dividends and repurchased $30 million of shares. As of June 30, 2025, we have $610 million remaining under the existing share repurchase authorization. Given our healthy balance sheet and our proven ability to consistently generate strong cash flow, we remain well positioned to execute and advance our strategy. Slide 11 shows our updated full year 2025 guidance. We are raising our full-year guidance due to our first-half performance and our expectations for continued execution for the remainder of the year. The change in our guidance versus our prior guide provided in April is primarily driven by stronger first-half performance as well as stronger performance in AS, both organically and from our 2024 acquisitions. We still expect softening market conditions in the back half of the year compared to the first half. We now expect total company net sales growth of 11% to 13% for the full year, up from our prior expectations of 9% to 11%. Total company adjusted EBITDA growth is in the 12% to 15% range, up from the previous range of 8% to 12%. Additionally, we are increasing our guidance both for adjusted diluted net earnings per share and adjusted free cash flow. As was the case in April, our updated guidance continues to reflect the impacts of currently implemented and announced tariffs. While tariffs, as they stand today, are a modest headwind, they did not have a material direct impact on our second-quarter results, and we do not anticipate that they will have a significant direct impact on our second-half results due to our planned mitigation actions and our predominantly local supply chain. The tariffs, as currently implemented and announced, represent a direct impact on our total cost of goods sold of approximately 1%, which is lower than our prior outlook. For WAVE, the tariffs as currently implemented and announced have about a 5% direct impact on the JV's total cost of goods sold and is consistent with our prior outlook. We are successfully mitigating the impacts of these tariffs, and our updated guidance reflects those actions. I'd like to turn your attention briefly to the recently finalized tax bill. While this legislation is complex and we are still evaluating its full impact on our business, we currently estimate that it will result in a cash tax benefit in 2025. As such, we expect a normalized full-year cash tax rate of approximately 22%. As Vic noted, we are pleased with our first-half financial performance and the margin expansion that we have achieved in both segments. As we look to the back half of the year, we remain committed to driving profitability, expanding margins, continuing to deploy cash to generate growth, and creating value for our shareholders. And now I'll turn it back to Vic for further comments before we take your questions.

Victor D. Grizzle, CEO

Thanks, Chris. Previously, we have communicated how critically important innovation is to our competitive advantage and our overall strength of our market position, and its importance for AUV growth. I'd like to take a few minutes now to update you on the progress of TEMPLOK, our latest innovation for energy-saving ceilings. As many of you know, we fully launched the TEMPLOK product line in early 2024 and have been working to increase the awareness and the understanding of the energy-saving value proposition TEMPLOK offers building owners and operators. This is the industry's first ceiling tile that can help regulate temperatures within buildings and reduce the cost and energy usage required for heating and cooling. With a proprietary phase change material formulation, TEMPLOK products can help reduce the energy used to heat and cool buildings by up to 15%. As such, these products address the increasing demand for both energy efficiency and decarbonization while also reducing energy usage at peak times, thereby lessening the strain on the grid systems in the U.S., and this becomes increasingly important as data center growth accelerates. We also mentioned in our last call that phase change material gained explicit inclusion as a qualifying thermal energy storage technology for tax credits under the Inflation Reduction Act. We are happy to report that those credits remain in the final tax law that Congress passed earlier in July. Customers of TEMPLOK may be eligible for tax credits of 40% to 50% through 2033, dramatically improving the return on their investment. This means that TEMPLOK, with its unique application of phase change material, can provide an accelerated return for building owners and operators through lower material and labor costs. We see this as an enabler to accelerate the rate of renovation of this large installed base in North America. I'm also pleased to share that now TEMPLOK products are part of the energy modeling software platform offered by Integrated Environmental Solutions, or IES. IES is the global leader in energy modeling for the built environment. IES software is used by tens of thousands of architects, designers, and engineers to analyze and optimize building performance on metrics like carbon emissions and energy consumption. The inclusion of TEMPLOK into the IES software opens up the ceiling plane as a new source of energy savings to building energy modelers, and we expect this to further accelerate the awareness and adoption of TEMPLOK. So with more certainty around the potential tax credit in place, and now the ability for customers to model the energy savings from TEMPLOK with the IES software and together with growing customer awareness of TEMPLOK, we have even greater excitement about the opportunity to accelerate the rate of renovation. Now before we get to your questions, a few comments about the market. Overall, in the first half, we have experienced about what we had expected and an overall kind of flattish sideways moving market albeit with some chop against the backdrop of uncertainty. Our outlook remains for a slightly softer back half compared to what we saw in the first half due to forecasted lower levels of overall economic activity, again, largely driven by uncertainty, uncertainty on tariffs, inflation, labor, and interest rates. This persistent level of uncertainty is expected to slow commercial construction activity with the greatest impact likely on more discretionary type renovation projects. This outlook is largely in line with leading economic forecasts as well as more commercial specific leading indicators. In our updated guidance, you can see that despite softer market conditions, we will continue to outperform the market through consistent AUV growth, productivity gains, and margin expansion. Our 2025 guidance reflects the benefits of the diversity of our end markets, contributions from our growth initiatives, and momentum in the Architectural Specialties segment, along with our proven ability to prudently control costs. We have demonstrated this above-market performance for the past several years. This gives us confidence in our ability to continue our efficient execution in these uncertain market conditions and to deliver our third year in a row of double-digit bottom line growth with margin expansion. With consistent strong adjusted free cash flow growth and the ability to execute on all of our capital allocation priorities, we remain focused on advancing our growth strategy and creating value for our shareholders throughout all parts of the cycle. And with that, we'll be happy to take your questions.

Operator, Operator

Our first question comes from Susan Maklari at Goldman Sachs.

Susan Marie Maklari, Analyst

My first question is focusing on the Architectural Specialties segment. The organic growth that you saw this quarter was impressive, especially given the operating backdrop. Can you give us a bit more color on how these initiatives are coming together to drive that level of growth that you saw? And then any thoughts on how we should be thinking of the back half performance as the comps there start to get a bit tougher on a relative basis?

Victor D. Grizzle, CEO

I'll address the first part, Susan, and then Chris can discuss the second half costs. The growth in Architectural Specialties and the organic growth you mentioned is indeed impressive. It continues to reflect our momentum in executing and penetrating the market. We recognize that the overall market isn't expanding at this rate. This showcases the success of our commercial teams in reaching and accessing more areas within these buildings. A key point regarding our growth initiatives is the PROJECTWORKS software platform, which has become an essential productivity tool for architects, enabling them to manage more complex designs and simplifying the process when it reaches contractors. This functionality allows for a wider range of Architectural Specialties to be specified in both straightforward and complex environments. Our strong portfolio and effective commercial strategies are helping us make inroads into more architects' offices, alongside our digital tools that simplify specifying Armstrong solutions, particularly more intricate offerings. I'm optimistic about this momentum, which is fueling our organic growth in Architectural Specialties. Additionally, regarding AS, I'm pleased to mention the two new acquisitions, 3form and Zahner. Their integration with our company is progressing exceptionally well. They have exceeded our expectations, especially in terms of their second-quarter performance. This success can be credited to their highly skilled management teams, who possess the right mindset for integration with Armstrong. Overall, I'm very satisfied with our inorganic and organic growth in Architectural Specialties.

Christopher P. Calzaretta, CFO

Yes. And maybe, Susan, to comment on the top line growth in the back half of the year. You're right, lapping a stronger second half top line performance on the organic side in 2024. And so when you account for that, still a healthy level of organic top line growth with margin expansion expected in the back half of the year organically. Just to highlight again, net sales for the total AS segment, we're expecting greater than 25% top line growth this year with about a 19% adjusted EBITDA margin. So to Vic's point, really, really pleased with both the organic and inorganic contributions on the AS side of the business.

Susan Marie Maklari, Analyst

Yes. Okay. That's helpful color. And then maybe building on that, can you talk a bit about what you're seeing in terms of the bidding activity either regionally or in terms of various end markets and segments in there? And how that compares to your comment that you expect to outperform the market in the second half even with all the macro uncertainty that continues?

Victor D. Grizzle, CEO

Yes. The overall market that we saw in the first half and the bidding activity will connect to this is has really been an overall, I would say, stable market condition, flattish sideways moving as we talked about. There's really been no uptick in project delays or project cancellations in the first half. But when you look at the first-time bidding activity that Dodge reports on, it remains soft again in the second quarter. It wasn't as soft as we saw in the first quarter. But it certainly reflects the level of uncertainty that's in the market in terms of the first-time bidding activity. It's very logical when you think about first-time bidding activity is for projects that haven't started. They haven't broken ground. They haven't started the rental work. So it really is at the very beginning. If there's some uncertainty there, folks that could wait are probably choosing to wait. That's showing up in the first-time bidding activity numbers. I'll comment, though, on the ground-level bidding activity, which is, I think, more aligned with what we're experiencing in terms of a stable, flattish sideways moving market condition. The bidding activity remains steady and active on the ground with our contractors and our distribution partners. That level has not seen a change either up or down and remains fairly steady. So we're paying attention to both of these. Again, because we think these are both kind of the triangulation of what is the actual environment that we're going to experience in the back half.

Operator, Operator

Our next question comes from the line of Garik Shmois with Loop Capital.

Zack Lee Pacheco, Analyst

This is actually Zack Pacheco on for Garik this morning. Maybe to follow up on the Architectural Specialties guidance. Any more detail specifically on the cost side, kind of how long do you think you can keep manufacturing costs down in the segment despite the volume growth? Maybe just any more details you can offer.

Victor D. Grizzle, CEO

Yes. Zack, you had to look at the drivers to the improved operating margins is really the volume is contributing to operating leverage. So as long as we continue to grow and drive the efficiencies in our manufacturing operations, I think we can continue to maintain these higher levels of margins and the operating leverage we're getting from there. Our teams are really executing though, on both sides of the equation in terms of being good purchasers of raw materials and being very efficient in manufacturing, but also when it gets to the marketplace and making sure that we're specking higher-value products and more unique products. That really shows up also in the profitability mix. So I think broadly, the way we're executing across the buy, make, sell component of that business, I think as long as we keep executing that way, we can maintain the lower margins. That gives us the confidence that we can continue to get to our stated goal of greater than 20% margins in this segment.

Zack Lee Pacheco, Analyst

Understood. And then breaking down the wave of contributions, if you could speak to maybe just how much of it was getting ahead of tariffs versus just the stronger market?

Victor D. Grizzle, CEO

Yes, I wouldn't point to a stronger market here in the second quarter. As I outlined, I think it's pretty much a kind of flattish, sideways moving market as we expected. We did have some additional volume in the quarter. Again, I think our growth initiatives are making a difference relative to what we're seeing in the actual market and driving above-market growth rates. The other piece of this is as we get quarter-to-quarter some noise in the retail channel, we got a little bit more volume rebalancing in the retail channel. If you remember, in our first quarter, we talked about some weather-impacted softness in the retail channel. Some of that got rebalanced in the second quarter, and that contributed both for the WAVE business as well as the tile business. But I think the main point around what WAVE is continuing to do is they're managing their price over inflation or price over cost really well. That's showing up, I think, in the numbers in addition to some of the volume contribution.

Operator, Operator

Our next question comes from the line of Tomohiko Sano with JPMorgan.

Tomohiko Sano, Analyst

So I'd like to follow up on especially Mineral Fiber side on AAV, and Vic you talked about the TEMPLOK how is it actually attractive in getting attractions from customers. Could you talk about how you see the TEMPLOK in terms of more in financial numbers that actually contributing to both sales and AUV side? And any opportunities for like having more like a sales acceleration on Mineral Fiber business, please?

Victor D. Grizzle, CEO

Yes, happy to talk about that. The TEMPLOK building blocks, if you will, the market development building blocks that we're building out to support a brand-new attribute like energy savings in ceiling tiles. It's the first of its kind, first in the industry. So there's a large market development body of work that has to happen for the industry to embrace this. We're very encouraged by the interest level and customer enthusiasm around this. As I noted in my prepared remarks around the building blocks around getting it into the IES software. So people designing right upfront can see Armstrong Ceiling Solutions as an option to drive energy savings. Of course, now it's part of the tax bill, so there's an accelerator here for returns for our customers. We're encouraged and excited about the building blocks that are coming and going into place. The sales impact since we're in the early days of this market development effort is really minimal. We'll keep you posted on how we continue to gain traction there and drive sales growth, but I think it's still an opportunity in front of us versus driving the second quarter results.

Tomohiko Sano, Analyst

Thank you, Vic. And follow up on Kanopi, your e-commerce platform there have been gained traction with small commercial contractors. How do you see its role involving within the Mineral Fiber business? And are there plans to expand the offering to more specialty or AS product side as well, please?

Victor D. Grizzle, CEO

We are encouraged by Kanopi's ability to connect with customers who are currently underserved by our existing marketing channels. These customers are typically smaller and place smaller orders, which can sometimes get overlooked in our larger channels. This cost-effective digital initiative allows us to better reach them. We plan to enhance our product offerings to address their specific needs for updating their spaces. Additionally, I am pleased to report that the Kanopi platform is contributing positively to profitability and EBITDA growth for the Mineral Fiber segment. We believe we have an effective digital channel to engage a previously untapped customer base and will continue to grow and expand this platform profitably, as evidenced by our performance in the second quarter.

Operator, Operator

Our next question comes from the line of Brian Biros with Thompson Research Group.

Brian Biros, Analyst

On the outlook in the raised guidance, it seems like most of the raise is from Q2's performance. And I guess, just general Armstrong-specific initiatives rather than any kind of big change in market conditions in the back half. Is that the right way to think about it? Or is there maybe a little bit more nuance to that?

Christopher P. Calzaretta, CFO

No. I think you got to characterize right here or there, Brian.

Brian Biros, Analyst

Okay. I just wanted to make sure that was clear. And then I guess the Mineral Fiber margins were particularly strong this quarter. You talked about it in the prepared remarks. Can you help unpack that margin number? Maybe a bit more and you provided some of the drivers, but maybe provide some magnitude of which drivers were maybe more or less beneficial. And I guess is that kind of sustainability going forward?

Christopher P. Calzaretta, CFO

Sure. Yes, to unpack the second quarter a bit in Mineral Fiber, as I shared and Vic shared in our prepared remarks. A little bit more contribution from Mineral Fiber volume. I'd say, overall, really driven by strong execution across the business. Disciplined focus on cost control impacted our SG&A driving some favorability there. Our initiatives, as we commented in terms of the overall contribution to the top line in terms of the WAVE joint venture and the contributions from equity earnings there that we saw in the quarter really drove strong equity earnings contribution from the JV. Again, that's coupled with execution and top line growth. Continued benefits from price cost benefits and discipline there. Overall, I'd say those were the drivers really in Mineral Fiber in the second quarter. When you look to the back half of the year, again, looking for a step down in volumes for the year, we're out looking the same kind of volume outlook we had back in April, which is volumes flat to down low single digits, but still expect that AUV to be growing at a greater than 6% rate for the year. So hopefully, that gives you a little more color around the back half in Mineral Fiber.

Operator, Operator

Your next question comes from the line of Keith Hughes with Truist.

Keith Brian Hughes, Analyst

Thank you. There was a transaction with one of your large customers that was announced several weeks ago. I guess if you could just talk to the audience here about your relationship with the customers, exclusivity, things like that? And does this really change how you go to market at all to the contract community?

Victor D. Grizzle, CEO

Yes, Keith, your question is about the consolidation and our distribution network, correct? This process has been ongoing for the past decade. Home Depot's potential acquisition of one of our major distributors is part of that trend. I have had the chance to speak with both Home Depot and SRS leadership teams, and I find their focus on key growth areas aligns with our objectives. I am particularly encouraged by the commitment to continuity in management, with John Turner and several members of his leadership team remaining in their roles. This is promising because the GMS team has a strong understanding of the ceilings category and knows our success strategies well. We are happy to see these relationships maintain their stability, and I believe that continuity will be beneficial. Overall, we have been advantageous in the ongoing consolidation over the past decade, and we will continue to seek opportunities in this next phase of consolidation.

Keith Brian Hughes, Analyst

You mentioned TEMPLOK during this call. Given the current interest in the product, will you have enough orders in 2026 to generate significant revenue, or should we look at this from a longer-term perspective as a potential game changer for the results?

Victor D. Grizzle, CEO

I believe we will increase our sales this year and continue that growth into next year. This represents a long-term opportunity for us due to the large existing installed base of nearly 40 billion square feet, all of which can be updated with energy-saving, cost-effective ceiling tiles. We are eager to renovate this entire base gradually. While this is a lengthy opportunity, we expect to gain traction in volumes, which will become increasingly significant year after year. We aim to build upon our success in 2025, as the foundational elements are now in place. We anticipate some acceleration in 2026 and 2027. Although I won't speculate too much on the scale of our growth in those years, we do plan to achieve meaningful traction in 2026 and 2027, similar to what we expect in 2024 and 2025.

Keith Brian Hughes, Analyst

Okay. And one other question on that is, is TEMPLOK accretive to AUV as you sell those units?

Victor D. Grizzle, CEO

Absolutely. Absolutely. Very nicely so.

Operator, Operator

Your next question comes from the line of Rafe Jadrosich with Bank of America.

Rafe Jason Jadrosich, Analyst

If we look at the EBITDA guidance for Mineral Fiber for the year, the 43% that brings you back to 2019 levels or almost there on much lower volumes. I think that's basically the highest you've had historically. Can you talk about from this current level what the sort of opportunity is now that you've gotten back to 43% and sort of what the algorithm would be for further growth?

Victor D. Grizzle, CEO

Yes, Rafe, that’s a great question. We often get asked when we will return to 2019 levels. This has been a topic of discussion for some time. The answer remains consistent because the key factors driving margin expansion in that business are unchanged. Achieving good AUV growth is essential, which requires a robust innovation pipeline to stimulate the market and ensure that pricing initiatives address inflation. AUV has been crucial in our return even with lower volumes. Driving productivity has become a hallmark for us over the years, and even with softer volumes, our plant teams excel at identifying opportunities for productivity gains, achieving over 3% annually for many years now. This commitment will continue, and we plan our investments two to three years ahead. Effectively managing SG&A to support growth is also vital. These are the foundational elements that have guided us back to the historical levels from 2019. By executing on these three components, we expect to continue progressing from this point onward.

Rafe Jason Jadrosich, Analyst

And then just following up on the price piece of it. Your largest competitor on the Mineral Fiber side, USG, you announced prices that were modestly higher than what you did in August. Historically, if you go back and look, you're the one that tends to lead on price. Is this sort of a surprise to you? And does this create more opportunity for you to raise prices going into next year? Or does that just increase the realization or likelihood that that second half '25 price sticks?

Victor D. Grizzle, CEO

Really, Rafe. There's not much to comment on that in particular. We run our business and we look at our costs and our expectations of inflation, yes. We talk to our customers. We run our play. If our competitors are going to do something different, then that's really their play to run. We're just staying focused on the play that we're running with our distribution partners and our customers, and we've been doing that. We're going to continue to do that, and that works well for us.

Operator, Operator

Your next question comes from the line of John Lovallo with UBS. Please go ahead.

John Lovallo, Analyst

The first question is on Mineral Fiber. There was some modest input cost inflation in the second quarter. Can you maybe just expand upon what drove that and what your expectations are into the second half?

Christopher P. Calzaretta, CFO

Yes, sure. So maybe to answer the second part first. In terms of overall input cost inflation for the year, expecting low single-digit inflation. If you recall, about 35% of our inputs are raw materials related. We expect raws to kind of be down in that low single-digit range for inflation. Then energy is about 10%. We expect about mid-teens inflation there on energy. Then freight, it's about 10%, and that's effectively flat. In terms of the second quarter, overall input costs, it was nat gas pressure on the energy side and then raw material inflation there in that low single-digit range in Q2.

John Lovallo, Analyst

Got you. Okay. That's helpful. And then you guys repurchased about $30 million of stock in the second quarter. Is there an opportunity to step this up in the second half as you guys generated a little bit more cash?

Christopher P. Calzaretta, CFO

Yes, I'd say our capital allocation priorities remain unchanged. As you know, we've got a very high ROIC business and our first priority is to invest back into the business where we see those high returns. Our second priority is to deploy capital where we see opportunities to grow inorganically. Our third priority is to kind of flex with share repurchases as part of returning cash to shareholders, and that will continue to be our flex option here as we progress through the rest of the year, given our cash flow generation and opportunities within the other two categories.

Operator, Operator

Our next question comes from the line of Stephen Kim with Evercore ISI.

Stephen Kim, Analyst

I just want to clean up a couple of things. You talked about the home centers, the weather-related inventory destocking early in the year, you recovered that in 2Q. I just want to make sure, you fully recovered that? Or do you still have some left in 3Q? And is returning to a more normal home center mix of sales going to be a factor behind anticipated AUV, stronger AUV growth for Mineral Fiber in the back half?

Victor D. Grizzle, CEO

To address your question, Stephen, regarding the last part, we don't believe it's an issue for the latter half of the year. As you're aware, there's been some volatility with inventories. It seems we didn't fully recover from the first quarter into the second. I'm not certain that this was anticipated. It appears there has been some rebalancing, and the inventory levels now seem more appropriate for the current economic conditions. We have not anticipated any further rebalancing or adjustments in the second half that would negatively affect AUV, provided I correctly understood your question.

Stephen Kim, Analyst

That's helpful. All right. And then let's just jumping here to TEMPLOK. My sense is your competition is kind of pretty far behind you on this phase change ceiling tile thing. I was curious if you could talk about the competition and what they're offering in terms of this kind of phase change solution?

Victor D. Grizzle, CEO

For competition, I think this is a brand-new attribute for the ceiling tile itself. I think I understand your question, our direct competition, other ceiling tile manufacturers, really what we're selling with and maybe in some cases and against is other solutions for capturing energy savings, right? So that's really, I think, more of what we see as the competitive landscape versus our competitors we haven't seen a response for on this, but I think we’re really thinking about customers' options for energy saving solutions. That's why being in this IES platform is so important for us because we're the only ceiling tile manufacturer in that platform now, but they have access to all kinds of other building energy-saving solutions in that platform. It's a good way for us to kind of rack stack this savings opportunity versus what they can get in other building or energy-saving solutions. So that's a little bit of kind of a long-winded answer, but we view our competition more around other energy-saving solutions versus direct tile manufacturers.

Stephen Kim, Analyst

Yes, that's helpful and really interesting. My next question pertains to your quarterly rhythm. Focusing on AS first, I believe you mentioned earlier in response to Susan's inquiry that you feel more optimistic about achieving positive comparisons in the latter half of the year despite facing tougher comparisons. I just wanted to confirm that you believe you can achieve positive comparisons in both the third and fourth quarters.

Christopher P. Calzaretta, CFO

Yes, we don't provide guidance for specific quarters, but the expectation is that the second half will be positive, with organic top line contributions in both quarters.

Operator, Operator

And our final question comes from the line of Phil Ng with Jefferies.

Philip H. Ng, Analyst

Congrats on another strong quarter. So Vic, if I heard you correctly, underground bidding activity sounds pretty stable for Mineral Fiber. So just kind of remind us how far out do you bid for jobs for MF from an on-the-ground basis? And then any color on what you're seeing on some of the major end markets? I'm particularly interested in seeing what you're seeing on the education side. There's obviously been some noise around that front. And any more color on how office and retail is performing.

Victor D. Grizzle, CEO

Yes. Bidding activity at the ground level remains steady, which supports the flat market we've mentioned. We have limited visibility on the discretionary side of the Mineral Fiber business. Generally, we can bid on projects a year or longer in advance, depending on the project's size and complexity. The discretionary part of the market is more sensitive to uncertainty, meaning it can quickly shift due to its nature. This aspect may show some weakness in the latter half of the year. The sectors you inquired about, such as data centers, transportation, and healthcare, are still quite active for obvious reasons. Education has also held its ground, and we have a decent outlook based on trends we observed in June, a month when we typically gain insight into that sector's performance. Contrary to some expectations, it hasn’t declined significantly with the expiration of the federal funds at the end of last year. The office sector continues to stabilize and show signs of bottoming out as overall leasing activity remains stable. Leasing volume was consistent in the second quarter, and office occupancy also maintained steadiness during that time. We’re noticing some positive signs in the office sector, especially with increased discussions around tenant improvement bidding activity. This trend might indicate a potential bottoming out. The ongoing shift towards higher-quality office spaces is evident, as we’ve discussed moving from Class B to Class A, and from Class A to Class A plus buildings. With high occupancy rates in premium office spaces, Class B buildings are likely to enter renovation phases. This development is encouraging, and we’ll monitor how it evolves in the upcoming quarters. Additionally, leasing activity in New York City, a major market for our industry, was notably strong in the first half of the year, marking the best first half in ten years. This could signal a bottoming out and possibly some positive movement for the office market going forward. That provides an overview of various sectors and what we’re observing in the market.

Philip H. Ng, Analyst

That's super helpful, Vic. And then on the M&A side, you guys have been pretty busy and you've done some larger deals on the 3form, Zahner side of things. Curious what you're seeing on that front? Are sellers in the market? Sometimes when you have uncertainty like that, people kind of retrenched, but love to hear what you're seeing out there and just the size of these deals any chunkier stuff in the pipeline?

Victor D. Grizzle, CEO

Yes. We continue to work this hard, right? We've been successful. We have a good successful track record in bolting these on and really scaling them to create value for our shareholders. So we want to do more of these. We've got a team that gets up every day and this is what they do. As you know, many of these companies that we're acquiring are not for sale. We're working the process with them, relationship building, so when they're ready to sell, this is the place they come. We continue to work the pipeline. It's active and I like what I see in our pipeline. We should see some more activity in the near term, but we're open for business there and driving it.

Philip H. Ng, Analyst

Great. I want to sneak one in. Chris, on the margin, AS was awesome. You're seeing good margin expansion there. Obviously, it's been a big SG&A investment cycle. M&A aside, if nothing really big and chunky happens, could we see that SG&A continue to taper? Like what's a good way to think about SG&A spend on a more normalized basis as we kind of look forward?

Christopher P. Calzaretta, CFO

Yes. Regarding AS, you're correct. With some of our acquisitions, we see opportunities to enhance operational efficiency and achieve operating leverage in the businesses we've acquired. SG&A has been a focus for us. Initially, like we experienced with the 3form and Zahner acquisition, there was a bit of an increase. However, as we continue to gain operational leverage and enhance efficiency, those costs will decrease. Overall, we are satisfied with the level of penetration we have in the AS segment, and we are reinvesting into that business to enhance SG&A leverage. This is something we will persist in doing. We have been very successful in this area and are pleased with the strategy we have implemented.

Operator, Operator

With no further questions in queue. I will turn the call back over to Vic Grizzle for closing remarks.

Victor D. Grizzle, CEO

Thank you all for joining our call today. I'm really proud of the first half performance by our team. The execution is really solid. As a result of that, we're well positioned going into a back half that might see a little softer environment, but my confidence is very high. My confidence, personally, in our team to execute with agility in these kinds of market conditions is going to lead to another record year for the company. So thank you again for joining, and have a safe and fun summer.

Operator, Operator

Thank you again for joining us today. This concludes your presentation. You may now disconnect.