Title

Presentation

Armstrong World Industries, Inc. misses on earnings expectations. Reported EPS is $1.69 EPS, expectations were $1.82.

Operator: Hello, and thank you for standing by. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Armstrong World Industries First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Theresa Womble, Vice President, Investor Relations and Corporate Communications. Please go ahead.

Theresa Womble: Thank you, Sarah, and welcome to everyone joining our call today. On today’s call, we have Mark Hershey, our CEO; Chris Calzaretta, our CFO, and they will be discussing Armstrong World Industries First Quarter 2026 results [indiscernible] outlook. We have provided a presentation to accompany these results that are available on the Investors section of the Armstrong website. Our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of SEC regulations. A reconciliation of these measures with the most directly comparable GAAP measures is included in the earnings press release and in the appendix of our presentation issued this morning. Again, both are available on the Investor Relations website.

Now 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, April 28, 2026. These statements involve risks and uncertainties that may differ materially from those expected or implied. We provided a detailed discussion of risks and uncertainties in our SEC filings, including the 10-Q we filed early this morning. We undertake no obligation to update any forward-looking statement beyond what is required to applicable securities law. And now I will turn the call to Mark.

Mark Hershey: Good morning, everyone, and thank you for joining us. As many of you know, this is my first earnings call as CEO of Armstrong. I step into this role with deep respect for the remarkable legacy of our company and culture that has defined it for well over a century, one built on integrity, innovation and enduring relationships across the building ecosystem. For generations, our success has been rooted in our people and the long-standing relationships we have built in our industry. their loyalty, work ethic and dedication to our values have been crucial to sustaining growth and our unwavering commitment to our customers to consistently deliver the highest quality, most innovative products and best-in-class service levels that earn their trust and enable their success.

This commitment to our distribution partners, the A&D community, the contractor community and to building owners and operators, and the strength of those relationships are a meaningful competitive advantage for Armstrong, and they must remain at the center of how we work. As I shared in February, our strategy will remain consistent. Building on our strong and proven foundation, I envision an even more innovative and productive Armstrong and an enterprise that is squarely focused on driving AWI’s earnings power through consistent mineral fiber growth based on both AUV and volume as well as healthy margins in our Architectural Specialties or AS segment. Through our growth initiatives, we strive to grow volumes ahead of market rates supported by our advantaged market position, strong channel partnerships and importantly, market-driven innovation that expands the value we deliver.

In addition to our digital growth initiatives, Kanopi and PROJECTWORKS, our TEMPLOK energy saving ceilings products and our recently launched data center solutions are great examples of this innovation. This industry-leading innovation differentiates Armstrong, creates new demand vectors and positions us at the center of key macro trends that support AUV and volume growth in the coming years. I’m confident that we are over the right targets with these initiatives. and we’ll share more on our progress later in the call. Expanding and scaling our AS segment is another part of our strategy. With acquisitions and organic investments over the last decade, we have enhanced our ability to win more on every commercial construction project, leveraging our commercial reach and thereby efficiently expanding our wallet share.

And because of the complementary nature of our segments and the brand equity, relationships and influencer access, we have earned over time, we’ve consistently proven that when both AS and Mineral Fiber Solutions are specified on a project, our win rate meaningfully increases. Our goal with AS continues to be outsized organic growth, coupled with sustainable attractive margins. driven by our portfolio and capability breadth and scaling new companies on the platform. Acquisitions will continue to be a key enabler of that strategy. With M&A, we look for opportunities that reinforce a differentiated market position in commercial construction, expand our capabilities and enhance our ability to support customers across all stages of the project life cycle.

As we’ve expanded our portfolio, we are now able to serve more complex design-driven projects while reinforcing the value of Armstrong as a total solutions partner. That advantage is evident in our acquisition of [ Zener ] and more recently, [ eventscape ], through which we’ve significantly enhanced our design and engineering expertise. Both companies enable us to collaborate with a broader network of architects, designers, engineers and contractors, allowing Armstrong to engage earlier especially when design concepts and technical requirements are still being shaped. As a result, we’re not only increasing our project participation, but also connecting with a wider array of key stakeholders, enhancing the visibility and the influence of the Armstrong brand and platform.

The strategic imperatives I’ve outlined are designed to further solidify the resilience of our business, and further support our attractive cash generation profile. With profitable growth and strong cash generation, we can invest in each of our capital allocation priorities, which remain unchanged. While I’ve already discussed M&A, our first capital allocation priority is reinvesting back into our business where we see the strongest returns. These investments focus on both productivity enhancement, and capacity expansion for growth areas of our portfolio that generate higher AUV, including TEMPLOK and our [ Smooth White acoustical tile or SWAT ] mineral fiber products. And finally, we’ll continue returning value to shareholders through dividends and share buyback, which Chris will detail in his comments shortly.

Turning to the quarter. While we faced a few discrete headwinds, the foundational building block of value creation that we’ve historically demonstrated are fully intact and remain strong, as is our confidence in our outlook. Total company sales in the first quarter increased by 7% with top line growth in both segments remaining solid. In the Middle Fiber segment, sales increased 5% with solid AUV growth and a modest increase in sales volumes. Notably, we’ve grown mineral fiber sales volumes 3 of the last 4 quarters on a year-over-year basis. As expected, we saw some recovery in sales to federal government customers along with strong commercial execution and continued benefits from our growth initiatives. Also, as expected, market conditions remained flattish, similar to how we exited 2025.

Our Mineral Fiber segment continued to demonstrate strong profitability with an adjusted EBITDA margin greater than 42%. This result was driven by strong AUV along with productivity gains in our plants, and equity earnings contributions from our [ WAVE ] joint venture. Turning to AS. Sales increased 11%, driven by 7% organic growth and contributions from our 2025 and 2026 acquisitions, adding another 4 points to prior year results. We are pleased to see broad-based demand across most of our product portfolio with organic growth improving sequentially, which has also continued steadily into April. Adjusted EBITDA for this segment declined in the quarter primarily due to a onetime tariff adjustment relating to duties on aluminum as well as targeted investments for growth in connection with growing demand.

Looking forward in the AS segment, [ quoting ] activity has remained strong, and our order intake levels have increased in the low double-digit range, both in the quarter and over the last 12 months. supporting our full year outlook and giving us some visibility early into 2027 as well. With an improvement in sales and lower cost headwinds, we expect AS segment adjusted EBITDA margin to significantly improve in the second quarter and that we will continue to make meaningful progress and expand margin toward our goal of 20% or greater EBITDA margin on a full year basis. In support of that growth, our team continues to actively bid and win the transportation and airport projects at a high rate. Year-to-date, we have already surpassed our entire 2025 order intake total for transportation projects.

These large complex projects often feature both high design and standard elements with multiple AS product categories as well as mineral fiber solutions. With our industry-leading portfolio, we are uniquely positioned to serve them. In addition to project wins at [ JFK and LAX ] mentioned on our last call, we have also won new projects at the San Antonio San Francisco and Dallas-Fort Worth airports. Before turning the call to Chris, I want to highlight 2 operational items within our plant network across both segments. First, on a total company basis. we had a strong safety quarter with our total recordable incident rate well below 1 and well below industry average. This is a testament to the strong safety culture we have built across the enterprise, including our acquired companies.

Among our greatest responsibilities is to protect the health and well-being of our employees throughout their Workday. I’d also like to thank and congratulate our mineral fiber plants for successfully navigating a series of winter storms while maintaining strong quality and service levels for our customers. In fact, our perfect order measure for the first quarter exceeded our targets, and reached a record for the month of February. As we have shared, this measure captures the full customer experience by assessing whether orders are shipped completely, delivered on time, priced and billed accurately and received without damage. By holding ourselves a [indiscernible] across every step of the order life cycle, the perfect order measure reinforces our ability our focus on reliability, operational discipline and customer trust, ensuring what we do, what we say we will do every time.

Success with this metric is among the key factors contributing to our ability to win in our markets and supports our consistent AUV performance. Now I will turn the call to Chris for a more detailed review of the financials.

Christopher Calzaretta: Thanks, Mark, 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 please note that Slide 3 details our basis of presentation. We begin on Slide 6 with our Mineral Fiber segment results for the first quarter. Mineral Fiber net sales increased 5% in the quarter, driven primarily by favorable AUV of 4% and a modest increase in volumes. AUV growth was primarily due to favorable like-for-like pricing, while volume growth was driven by solid commercial execution and growth initiatives with overall flattish market conditions in the quarter. Mineral Fiber segment adjusted EBITDA grew 4% with an adjusted EBITDA margin of 42.4%.

Mineral Fiber adjusted EBITDA growth was primarily driven by the fall-through of AUV, positive contributions from our WAVE joint venture and slightly higher mineral fiber volume versus the prior year. These benefits were partially offset by higher input costs, driven primarily by raw materials and energy inflation as well as unfavorable inventory valuation impacts and an increase in SG&A expenses, primarily due to higher gains in the prior year from deferred compensation. Achieving a consistently strong adjusted EBITDA margin reflects the continued resilience of the Mineral Fiber business, fueled by our value creation drivers of AUV growth, annual productivity gains and contributions from our WAVE joint venture. As we look ahead to the second quarter, recall that last year’s Mineral Fiber adjusted EBITDA margin performance of greater than 45% was a record high for the segment.

We still expect strong performance next quarter even as we invest in our growth initiatives. On Slide 7, we discuss our Architectural Specialties or AS segment results. Net sales increased 11% in the quarter driven by solid organic growth, along with contributions from our recent acquisition of [ Avenscape ] and the 2025 acquisitions of parallel and Geometric. AS segment adjusted EBITDA decreased approximately $3 million or 12% versus the prior year. This decrease was primarily driven by higher manufacturing costs, which included a $2 million nonrecurring tariff adjustment and incremental $2 million of costs of recent acquisitions and approximately $1 million related to plant investments to support growth. The SG&A increase was primarily driven by $2 million of selling investments in support of top-line growth and $1 million of incremental expense from our recent acquisitions.

I want to take the opportunity to further discuss the performance of the AS segment in the quarter on both an organic and inorganic basis. For reference, the organic adjusted EBITDA reconciliation for this segment is included in the appendix of this presentation. On an organic basis, net sales grew 7%, driven primarily by broad-based growth led by our metal and wood categories. Organic AS adjusted EBITDA declined by 9% year-over-year. primarily driven by — by the nonrecurring $2 million tariff-related adjustment previously noted, along with a total of $3 million of both higher selling expenses and manufacturing investments to support growth. all of which pressured segment operating leverage. On an inorganic basis, our recent acquisitions delivered $5 million of net sales in the quarter and were slightly dilutive to adjusted EBITDA.

This anticipated short-term dilution was largely driven by the integration ramp that we experienced from time to time with some acquisitions as we incorporate and scale these businesses onto the Armstrong platform. At the segment level, I’d like to note here that we expect the adjusted EBITDA margin for Architectural Specialties to significantly improve sequentially in Q2 and resume year-over-year adjusted EBITDA growth in the back half of 2026. I’ll speak more on the second half outlook for both segments shortly. On Slide 8, we highlight our first quarter consolidated company metrics. Net sales grew 7% and adjusted EBITDA increased 1%. Our consistent building blocks of solid AUV performance, incremental volume from both segments and positive wave contributions were largely offset by higher manufacturing and input costs and higher SG&A expenses.

Adjusted diluted net earnings per share increased 2%, primarily due to a lower share count in the quarter, reflecting an increase in the pace of share repurchases. Slide 9 summarizes our first quarter adjusted free cash flow performance versus the prior year. The 1% decrease was primarily driven by timing-related working capital and cash taxes, partially offset by higher dividends from our WAVE joint venture. We remain confident in our ability to deliver strong adjusted free cash flow growth in 2026 to support all of our capital allocation priorities. During the first quarter, we continued to create value for shareholders through disciplined capital deployment. We paid $15 million of dividends to our shareholders and repurchased $60 million of shares representing an accelerated pace of repurchases as compared to recent quarters.

As of March 31, 2026, we have $473 million remaining under the existing share repurchase authorization. In addition to shareholder returns, we continue to deploy capital in support of our growth strategy in the first quarter, including the February [ Evenscape ] acquisition as well as continued capital expenditures to support manufacturing productivity, innovation and future growth initiatives across the business. With a healthy balance sheet that includes low leverage and ample liquidity, we remain well positioned to execute and advance our strategy. Turning to Slide 10. We are reaffirming our full year guidance for net sales, adjusted EBITDA and adjusted free cash flow. Given the accelerated pace of share repurchases in the first quarter, we are modestly raising our adjusted diluted EPS guidance to a range of 10% to 14% growth versus the prior year.

We have also slightly revised our adjusted EBITDA margin assumptions, primarily driven by our first quarter results. We continue to expect margin expansion in both segments for the full year, with Mineral Fiber adjusted EBITDA margin of approximately 44% and AS adjusted EBITDA margin of approximately 19%. On an organic basis, we expect AS adjusted EBITDA margin to be between 19% and 20%. Please note that additional assumptions are available in the appendix of this presentation. We continue to monitor geopolitical developments and their potential impacts on our business, including rising carrier fuel costs that have picked up in recent weeks, we have responded accordingly by implementing a fuel surcharge that took effect in late March. This is an example of our strong track record of mitigating inflationary headwinds as they arise.

Before turning it back to Mark, I’d like to comment on our expectations for the second half of the year. We expect improved net sales and adjusted EBITDA growth in the second half of the year as compared to the first half in both segments as well as improved adjusted EBITDA margin performance. In Mineral Fiber, we anticipate an acceleration in AUV growth, productivity gains and wave contributions in the back half to support full year adjusted EBITDA margin expansion in this segment. In AS, we expect organic net sales growth to accelerate in the second half of the year, supported by strong order intake and healthy backlogs. We also expect higher inorganic contributions from our recent acquisitions. We remain confident in our outlook for 2026 and are well positioned to deliver strong results for the remainder of the year as we demonstrate the resilience of our business model.

We remain committed to driving profitable top line growth, margin expansion in both segments and strong adjusted free cash flow to further our strategy and create value for our shareholders. And now I’ll turn it over to Mark for further commentary.

Mark Hershey: Thanks, Chris. As Chris outlined in his remarks, our view of the market remains consistent with how we began 2026 as we expect modest improvement for the year overall even with the current uptick in uncertainty related to the geopolitical climate. This view reflects our current consideration of multiple macro, industry, economic and on-the-ground inputs. Verticals like data centers, transportation and health care are performing well. From a bidding perspective, we remain encouraged by the recent and consistent increase in overall project values as reported in Dodge data for both new construction and major renovation projects. With our robust portfolio, we are well positioned to serve that market environment. While we are also pleased to see some early signs of better discretionary demand, given elevated levels of uncertainty, it remains too early to shift our views on underlying market trends in construction.

We will remain focused on driving our growth initiatives to gain traction and contribute incremental sales, giving us confidence in our ability to generate up to 1.5 percentage points of volume growth ahead of market-driven demand in 2026. These initiatives include PROJECTWORKS and Kanopi along with our energy efficiency and data center specific solutions. First, looking at PROJECTWORKS and Kanopi. Both are designed to improve sales volumes and AUV over time and further differentiate Armstrong with our customers. PROJECTWORKS continues to scale as we add more products from our portfolio to the platform. including most recently from our 2024 acquisition, [indiscernible]. The number of project design completions with the PROJECTWORKS service continues to grow, along with the speed, design accuracy and cost predictability when using this tool.

And importantly, our specification win rate increases almost 20% and when projects go through this complementary automated design service. Kanopi also continues to reach new customers and improve from a revenue and profitability standpoint, more than tripling its EBITDA contribution in the first quarter. We are also pleased to see continued return customer growth along with healthy AUVs nicely above our average AUV level for Mineral Fiber. Our newer product introductions that I mentioned earlier in the call are also gaining momentum. As we shared last quarter, our next-generation TEMPLOK energy-saving sealing products are now part of our sustained portfolio and meet the highest industry standards for sustainability. This makes TEMPLOK even more attractive for building owners, seeking standards that can increase their lead 5 credits and differentiate their buildings from an energy efficiency standpoint.

This innovation with growing awareness of eligibility for tax credit incentives and validation by more real-world case studies is driving growing interest, specifications and adoption. Our TEMPLOK pipeline continues to grow through heightened awareness, marketing and commercial execution. These projects encompass a diverse set of verticals and project types. In February, we mentioned a couple of financial institutions in New York that are installing TEMPLOK in new office construction projects. More recently, we’ve won projects that include a new health care facility in the Southwest, a Pennsylvania school district and a small business office renovation in Pittsburgh for an owner seeking the benefits of both the energy saving and the available tax credits for the product, the grid and the installation.

These, among others, are important points of validation for what we believe will be a meaningful driver for Mineral Fiber volume and AUV growth in the future. Our confidence in this outlook is bolstered by the urgent need for energy efficiency and grid stability as demands from AI, cloud computing and data centers, pressure grid systems. In addition, local and state regulations introduced over the last several years present real challenges for building compliance with carbon and energy reduction mandates. With few new solutions coming to market to tackle these challenges, TEMPLOK is appealing for building owners facing these new regulations and even utilities looking for ways to protect the grid during peak usage hours. We believe this is a multiyear macro-driven opportunity for Armstrong, and are pleased with the market development progress we’re making so far this year.

Data centers also represent a multiyear macro-driven opportunity, supported by many of the same long-term trends tied to AI and the growing need for energy efficient and resilient digital infrastructure. Over the past year, we’ve increased our capabilities and our market presence with expanded design-for-purpose offerings. The Armstrong portfolio anchored by systems such as [ Dynamex, Dynamex LT ] structural grid, data zone ceiling panels and containment build on the core strengths of both Armstrong and our WAVE joint venture in manufacturing, specification-driven selling and systems-based solutions for complex environments. Looking ahead to 2026. We see sustained activity across hyperscale, colocation and enterprise data centers with customers increasingly focused on airflow management, support for higher power densities and improved energy efficiency.

We view data centers as a vertical market that [indiscernible] well with our capabilities and our disciplined approach to growth. Year-to-date, our pipeline for projects expected to ship in 2026 is more than 50% ahead of 2025 levels. These indicators of traction demonstrate we are well positioned to capitalize on both current and emerging market opportunities. We fully expect these efforts to not only contribute to our 2026 results but also lay the foundation for future growth. With our dedicated employees serving our customers, our growth initiatives and continued contributions from our core value creation drivers we remain confident in achieving our 2026 outlook and in our ability to generate above-market growth, robust returns and enduring value for our stakeholders as we move forward.

With that, we’ll be pleased to take your questions.

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Operator: [Operator Instructions] Our first question comes from Susan Maklari with Goldman Sachs.

Susan Maklari: My first question is, can you talk a bit about just the bidding activity that you’re seeing out there, given the macro and obviously, the start of the conflict in the Middle East during the quarter, has that had any impact on the level of activity that you’re seeing? And I guess within that as well, can you talk about the new products and platforms and how that’s perhaps driving some relative elasticity for you relative to the broader market?

Mark Hershey: Thank you for the question, Susan. First, on bidding activity, I think the best characterization of that would be that it’s fairly stable overall. We have not seen a dramatic impact from the geopolitical backdrop. Both in the Dodge data that we use on bidding activity and from an on-the-ground standpoint, we feel pretty good about the bidding activity. we’ve talked previously about bidding activity with project counts being down but project values being up. That continues. We continue to see that. That’s a good thing for us. We continue to believe that, that plays [indiscernible] well to our strengths, these larger, higher-value products, and by the way, values that are up well above inflation for that matter. So bidding contains — continues to hang in there.

And we made some in our prepared remarks, some comments on our pipeline and our intakes continue to be very strong, double-digit intakes and good project visibility out into ’26 and beyond for that matter. On the new products, we mentioned in the prepared remarks, we continue to feel like we are absolutely over the right target on both energy savings and on data centers. As I mentioned, pipelines continue to build dramatically. We’re seeing very good commercial execution from our sales teams on those projects. And it’s giving us confidence in reiterating [indiscernible] basis points of [indiscernible] volume growth ahead of market growth in the period. So we’re — in both cases, with data centers and energy savings. We’re developing the market.

We are, as Chris mentioned, adding selling resources, we’re investing into these initiatives for growth. We’re having more conversations, reaching more influencers and feel really good about the traction of both of those initiatives.

Susan Maklari: Okay. That’s very helpful color. And then appreciating that you outlined a lot of your initiatives and areas of focus as you step into the CEO role, given the world that we’re in today, can you talk about some of the things that you’re focused on in the near term? And how we should think about them coming through in the next several quarters relative to some of the longer-term initiatives and things we should be watching for over time?

Mark Hershey: Yes, I’d say consistency there. What you’ve seen from us over the last several years, we call it our winning formula, our building blocks for growth — so first and foremost, execution around our building prop blocks for growth. So certainly, AUV, certainly, our product development focus on the innovation side and bringing new products to the market. certainly, across the enterprise, and I mentioned this in my opening remarks, productivity. Productivity from operations has been a hallmark of our Mineral Fiber business for a very long time, extending that productivity mindset I think it extends certainly into the acquisitions we acquire and just gaining operating leverage on the platform that we’ve built in Architectural Specialties over time.

We know we’ll go through cycles where we’re adding on acquisitions. If you think about the last 6 months, we acquired 3 companies, a couple of smaller companies. There’s a necessary ramp with those companies, but integrating them well, getting them up and running on our platform and then getting the scale and the momentum behind those new additions is really important. You’ll see that in the near term. and we’ll continue to be active on M&A and continue to build an active M&A pipeline because that’s also part of our strategy moving ahead.

Susan Maklari: Okay. Great. Good luck with the quarter. .

Operator: Our next question comes from Tomohiko Sano with JPMorgan.

Tomohiko Sano: On a Mineral Fiber volumes turn modestly positive, but in a flat market environment, you highlighted commercial execution to push up 100 basis points. Has your view on volume trends for the second quarter and the full year changed compared to 3 months ago? We would appreciate any updated perspective on the drivers behind your outlook?

Mark Hershey: Yes. Thanks for the question. So overall, our view hasn’t changed in terms of our Mineral Fiber volume outlook. We continue to be confident in that outlook. Just a couple of comments on Mineral Fiber volume in the quarter. I mentioned in my remarks, we did see the federal government volume come through. We also saw, in addition to the commercial execution I mentioned, we saw some flow business in the quarter, and that flow or discretionary business that we get from [indiscernible] volume is an important signal for us. It comes through our distribution partners and that also contributed in the quarter. So across the board. We continue to grow AUV, but that flow business does tend to carry a lower AUV. But the higher end of our portfolio performed very well in Mineral Fiber volume as well. That’s swat part of the category, and so we’re pleased with that. And that helped with our initiatives, gives us confidence in that outlook, Tomo.

Christopher Calzaretta: And maybe, Tom, just to add on the volume, still expecting a modest step-up in volume in the back half of the year and continued strong like-for-like performance and positive mix as part of that AUV of about 6% for the year.

Tomohiko Sano: And Chris just follow up on margins in 2Q you talked about the significant improvement in 2Q. But could you please elaborate on the expected magnitude or level of this improvement? Any additional color on how you define significant? And what we should anticipate in terms of margin recovery would be appreciated.

Mark Hershey: Thanks, Toma. Chris, I’ll take a shot at that, and then you can add on. I think the way we’re thinking about it is that the headwinds that we’re seeing in the first quarter are largely short term in nature, and we don’t expect them to continue throughout the rest of the year. So I think a fairly consistent margin performance through the rest of the year is how we’re thinking about it without pinning it on a number. Obviously, you can see our guide and our outlook for margins overall for the year. And I think we’re looking for a more consistent performance across all 3 of those quarters. Chris?

Christopher Calzaretta: Nothing to add. Again, pointing to still expect margin expansion for the full year in AS segment level.

Mark Hershey: Yes. I’ll get on to that, Chris. If you think about it, we are out looking margin expansion organically. Our confidence stems in part from what we’re seeing in our pipeline and the headwinds kind of stepping away. But also, we’ve expanded margins in AS organically for 4 consecutive years. And we believe we got the building blocks in place to continue to do that and that this will be our fifth year of organic margin expansion for AS.

Operator: Our next question comes from Keith Hughes with Truist.

Keith Hughes: I wanted to ask about this tariff issue more. Can you give us a little more detail of what this is about? And is this going to be a continuing cost in quarters in ’26?

Mark Hershey: Thank you, Keith. The short answer is no. We do not expect it to be a continuing cost and happy to provide some color on it. Look, the tariffs that I think we’ve all seen a rapidly kind of evolving area. There’s been a lot of fluidity around the guidance, the application, frankly, the calculation of duties. And I want to applaud our team this year for constantly reevaluating that guidance and staying current on that. So we proactively this quarter in our reevaluation decide to make a reconciliation, if you will, of our duty rates on — I mentioned in my remarks, aluminum, these are finished goods that contain aluminum that are imports into the U.S. And so we made that reconciliation. It’s a onetime event. And with it, we also deployed a series of mitigation measures so that we don’t have this as a go-forward run rate.

And I think over the years, we’ve proven our ability to do so to mitigate those headwinds through a series of actions that could include supply chain changes, manufacturing changes, pricing if needed, so that we can mitigate that headwind. So we don’t expect it to continue throughout the rest of the year.

Keith Hughes: Okay. And one other question on AS. You talked about the manufacturing cost impact in the quarter. Was that primarily on the last acquisition you did? And is it just required some extra investment as you get in to expand that or exactly where does that come from?

Christopher Calzaretta: Yes. Keith, it’s a little bit of both. It’s the costs associated with the manufacturing related to our recent acquisitions. as well as some investments back into the organic side of the AS business within our plants.

Operator: Our next question comes from Rafe Jadrosich with Bank of America.

Rafe Jadrosich: First, I just wanted to start with — can you just update us on the inflation outlook for the year? I think coming into the year, you’re expecting mid-single digit with energy up low doubles and then low single digit on raws. Like where is that tracking today?

Christopher Calzaretta: Yes. Thanks, [indiscernible]. So just to reground on COGS inflation, raws are about 35% or COGS energy is about 10% with a fairly even split between electricity and nat gas and then freight is about 10%. So for total input cost inflation for the year, no change to our mid-single-digit outlook that I shared in February, but a slight [indiscernible] components. So let me walk through them here quickly. On the raw side, we expect mid-single-digit inflation versus prior year. freight, given the uptick — a little bit of uptick in the pricing of fuel, we’re in that mid-single-digit inflationary range on energy in that 10% range for the full year. So all in, no change to the total input cost inflation assumption of mid-single digits, but a little bit of shifting kind of between the categories.

Rafe Jadrosich: Great. That’s really helpful. And then just the AUV acceleration in the second half of the year, I think, 4% in the first quarter and then 6% for the full year. Was there any mix headwind in the first quarter that will reverse later in the year? Just can you just talk about the components of like what’s going to actually drive that acceleration as we get later in the year?

Mark Hershey: Sure. Happy to take that. We probably saw a little bit of product mix and that does product mix, as you know, quarter-to-quarter based on the kind of basket of products we’re selling in our channels in a given quarter. There’s probably a little bit of that in the quarter, and we expect that to even out the rest of the year. Our initiatives our ability to continue to mix up will continue throughout the rest of the year. So we don’t view that as a headwind going forward. And just stepping back, if 5% overall sales top line growth for Mineral Fiber, we feel really good about. From an AUV perspective, we’ve got good pricing traction in the period. We got very good AUV fall-through in the quarter well over our expected run rate there. So in terms of from an AUV perspective, overall, we’re confident in that roughly 6% for the year.

Operator: Our next question comes from Brian Biro with TRG.

Brian Biros: On the Mineral Fiber EBITDA margin outlook, even though Q1 was down a little bit year-over-year, it had some pressures, still very good performance. It looks like you raised the full year to 4% instead of 43.5%. So clearly, a good sense of being able to overcome kind of whatever happened in Q1, even though it was still very good. and perform even better in the rest of the year than, I guess, you had thought 3 months ago. So I guess, what is driving that increased confidence in margin for the rest of the year? It sounds like it’s even better AUV traction, but more clarification on that would be great.

Christopher Calzaretta: Yes. So thanks for the question, Brian. No, I mean, overall, the margin expectation for the full year in Mineral Fiber is largely unchanged. We’re at about 44% we were out looking a little bit north of 43.5%. So really no change there overall. And as you stated, really expect a modest uptick in the volume in the back half of the year and then kind of an increase in AUV in the back half of the year based on Mark’s comments associated with product mix. still strong AUV fall-through still strong productivity and again, really good contribution from our WAVE joint venture gives us confidence in that margin and our ability to expand margins at the segment level on a full year basis.

Brian Biros: Got it. And then on the raising the EPS guidance, I guess, from higher share repurchases. I was curious if you’re more on the thought behind that and kind of when you guys decided that was the right approach, kind of was it looking at the stock pressure itself and looking at the demand outlook for the year, and just kind of seeing that disconnect, but just be curious more about kind of what figured the decision to execute more on the buyback or execute on quicker?

Christopher Calzaretta: Yes. in Mark’s prepared comments, no change to our capital allocation priorities. We have a high-return business and we seek to invest back there first. Secondly, we seek to grow inorganically, and you can see kind of our track record there and share repurchases has kind of been our flex option. We take into account and we look at a multitude of different things in contemplation of that. And the uptick in EPS or the raise in the guide was really based on our share repurchases in the first quarter, took advantage of some opportunistic buying there. But now the full year guide is reflective of that kind of that step-up that we saw in the first quarter in terms of repo. It continues to be our flex option again as we go forward as well. But it’s, again, an examination and a look at a whole host of different factors as part of our capital allocation.

Mark Hershey: And I’ll just add, we’ll continue to be opportunistic. I think that’s the right word for this. I think implicit in that is a confidence in our free cash flow outlook as well as what Chris described there.

Operator: Our next question comes from Garik Shmois with Loop Capital Markets.

Garik Shmois: On the improvement that you talked about in the flow, I guess, the discretionary part of the business. I’m just hoping you can talk a little bit more on that, what verticals are seeing improvement and any sense as to how sustainable the growth is there?

Mark Hershey: Sure. So that’s the one part of the portfolio. We’ve got a little less visibility to. By its nature, discretionary. It shows up through our distribution partners. So it’s a nice stable volume flow. Our ability to trace it back to specific verticals is limited. But I wouldn’t say it would be vertical specific. It would be more broad-based just based on what we’re seeing overall in the markets as well as projects, and the same would be true for geographic. So it’s still an uncertain environment, and I think that’s what weighs on the ability for that to be a more consistent part of our mineral fiber volume flow, if you will, or volume outlook, but it’s a good sign. And it’s one of the signs that we look at very closely every quarter as an indicator of future activity. So I’d say the flow business we saw this quarter coupled with the pipeline, that’s what gives us confidence in our outlook overall.

Garik Shmois: And just a follow-up on Mineral Fiber margins. You talked to the 44% for the full year, but you also did mention the second quarter, you I guess, a difficult comparison. Just wondering if you could frame 2Q EBITDA margins in Mineral Fiber, a little bit more. Do you — would you expect margins to be up in the second quarter? Any additional color would be great.

Christopher Calzaretta: Yes. Thanks for the question, Garik. I stop short of guiding to the quarter there. But again, we are lapping a strong base period it’s probably going to be close there. But again, I think thinking about just the overall building blocks that have been a true testament to that business will still be on display in the second quarter. So again, really strong AUV contribution, strong pricing within that productivity and again, a disciplined approach to cost control kind of balanced with opportunistically investing back into the business for growth.

Operator: Our next question comes from John Lovallo with UBS.

John Lovallo: On the Architectural Specialties side, organic sales, I think, were up about 5%. And year-over-year in the fourth quarter, up about 7% in the first quarter. How are you sort of thinking about the cadence of organic growth into the second half? And then — can you also give us an update on — I think there were 4 or 5 big projects that got pushed out last quarter. Any update there would be helpful.

Mark Hershey: So thanks, John, for the questions. I think we continue to be confident in that high single-digit range of organic growth for AS pleased with 7% in the first quarter, and I’d expect more of the same throughout the rest of the year, the high single digits throughout the rest of the year. We did follow through on all 5 of those projects. One of those projects that we were talking about last quarter actually shipped and closed in the quarter. And the other remaining projects we expect in the first half of Q2. So — that’s consistent with what we were expecting is that they flow through in the first half of the year. And so we were on track for those.

John Lovallo: Got it. Okay. That’s helpful. And then you guys slightly outperformed a flat market in the first quarter for Mineral Fiber with volume up about 1%. And I mean, is there any particular vertical that you could point to where that may have been the driver? Or was it sort of broad-based?

Mark Hershey: It was broad-based. But when we say that, look, in terms of vertical by vertical, transportation continues to be strong for us. Health care continues to be positive. We’ve talked a lot about data centers contributing and office in spots contributed although uneven. So the verticals overall, it’s one of the reasons why we’re fortunate to be, have a strong presence in a diverse mix of verticals. So overall, it kind of balances out. when some are up and some are down, and that was the case here in this quarter, but not overly concentrated in one particular vertical.

Christopher Calzaretta: And John, sorry, as you model the organic top line in AS, just be thinking about a pretty sizable step up in the back half of the year compared to the front half top line.

Operator: [Operator Instructions] Our next question comes from Stephen Kim with Evercore ISI.

Stephen Kim: Yes. Appreciate all the color so far. I guess my question, I wanted to focus on the data center vertical for a second. I guess I’m curious, first of all, what you think the — what are the features that really matter the most within the data centers? I understand that the [indiscernible] I get you need it, obviously, in a very robust grid system. But I’m curious about the — in addition to the tiles. Am I right in thinking that perhaps maybe gasketed products might be more important in order to really minimize the air flow. I’m curious if there’s something else? And do some of these products have a quicker replacement cycle that you can anticipate? That’s my first question.

Mark Hershey: Okay, Stephen, thank you. Happy to talk data centers a little bit. I think you’re over the right target there. Arlo management is part of the value proposition. But before you even get down to a specific kind of product attributes like gaskets or airflow management, I think what’s winning is speed and labor efficiency and labor savings. So trust, relationships, the ability to support lead times and a complete system that is capable of being installed on time. quickly with minimal labor or rework. That seems to be a priority value proposition right now. And so that’s what we’ve done with our system is kind of a complete connected holistically designed system. So not just the [indiscernible] not just the suspension.

We talked about walkable platforms before we talk about containment. That’s really what we’re aiming for. And then to bring the Armstrong power of go-to-market and service and distribution to that equation to really give contractors and the other inventors who are really prevalent in the data center space that confidence. So it’s repeatable, it’s reliable and they can get data center up and running as fast as possible. So that’s our priority.

Stephen Kim: Yes. No, that’s very helpful. And actually, it’s a good segue to the other question that I had about the data centers, which is as we know, the data center, the starts around any announcements around construction of data centers was obviously very robust. but that may be starting to slow a little bit in light of the practical realities of actually getting these things out of the ground. And so my question is, do you anticipate perhaps that completions of data centers, which I’d assume matters most for you might actually have a little bit of a hiccup sometime in ’26 ’27 after the initial surge. Is that realistic? Is that something that you believe? And then longer term, — what percent of sales do you think data centers could ultimately represent either if we’re talking like in 2 to 3 years or maybe even longer than that.

Mark Hershey: On your first point, point well taken, it’s very tough to crystal ball what that will look like in the future. there’s been public opposition to data centers in different communities as well, and we’ve been monitoring that. So we’ve got our eye on that. We haven’t seen kind of the demand wane. I mentioned the number of wins we’ve had — so I think the opportunity in the near term is real. And frankly, just on that point, we think with some of our solutions, energy efficiency, in particular, acoustical solutions exterior solutions that we’ve got a value proposition for data center construction that is kind of commute friendly, so to speak, and we’re focused on that. But could we see that kind of wane in the long term?

We’ll see — we’ll see it probably too early to call. Your second question was on sizing of this. Still difficult for us to do. We haven’t obviously set this out as a separate discrete vertical. It doesn’t rise in our view, to the level of, let’s say, our transportation or our retail vertical. But to my point earlier about having a diverse set of verticals, it’s a good thing. And there’s a strong tailwind in it, and we’re going to take advantage of it and pursue our — we believe to be our fair share of that work while it’s here. and we reflect that positivity inside our office vertical as we presented. So it’s a positive factor overall in our vertical mix.

Stephen Kim: That’s great, Mark. Just to clarify though, could you comment on the replacement cycle on some of the products that go in particularly the tiles, would there be any reason to think that the replacement cycle might be quicker?

Mark Hershey: Not that we’ve seen yet. And maybe it’s too early to tell on that as well because retrofitting, we’re starting a lot of new demand right now, obviously, with data centers and not a lot of major retrofit demand at this moment. So as that time comes, we’ll have a better sense for the cycle and if there’s a comparable to, I’d say, tenant improvement, is there a data center tenant improvement comparable. We just don’t know that yet and haven’t seen that yet.

Operator: Our next question comes from Phil Ng with Jefferies.

Philip Ng: Question for you, Mark. Some of these growth factors you’ve called out, whether it’s transportation, I think, particularly in AS data centers and TEMPLOK would be a little different approach, more smaller customer base. How should we think about pricing, margins and mix broadly?

Mark Hershey: So we’ll start with pricing. So pricing and AUV generally is favorable to our standard, that’s how you should think about it for [indiscernible] for our data zone, tiles and data centers that’s certainly true. And as we mix up the portfolio, generally, we’re trying to drive the high end of our portfolio. As we ramp these solutions, and we’re still in ramp mode, we’re still in ramp mode for TEMPLOK for sure, and we’re still in ramp-up to a degree for data centers. will build and gain leverage over time. And I think it’s fair to say that for this year, we’re still in that ramp mode for TEMPLOK as we generate momentum and create the demand overall.

Philip Ng: What about transportation?

Mark Hershey: Transportation is sorry about that. So transportation is very favorable because of the mix and because of the broad solution set that we see there. So if you take the typical airport job like I was describing in my remarks, we see projects that are a blend of high AUV mineral fiber, very high AUV architectural solutions and the power of our portfolio really comes into play there, and our margins reflect that as well on transportation projects. So we do really well with that portfolio effect.

Philip Ng: Okay. That’s great. And to kind of tie it all together, you guys are winning here, right, Mark. So when you who do you compete with? Is it your typical competitors on mineral fiber to have more of a commodity product, AS is probably a little more nuanced. But just give us a sense for some of these larger complex projects, who are you competing with? It does feel like you have an advantage here and even on the TEMPLOK side as well?

Mark Hershey: Yes. I appreciate the question. For that reason, 2 years ago, we organized a specific transportation vertical-focused team, a very cross-functional team from multiple parts of our business. These projects are complex. They’re multi-year. The wins that we announced this quarter, we’ve been working — our sales team has been on these for several years to try to win them. You’re dealing with different influencers. There’s a regulatory dimension to this. There are different authorities involved. So it is a complex, sophisticated long-term sale. And I think 1 of the most compelling value propositions we bring relative to competition is the breadth. — because these airports have a wide array of needs. There’s a wide array of spaces in them from lounges to con courses to the exterior facade for that matter.

And I think this is really where you see the power of our portfolio and the brand coming to play, and it can be served through our distribution partners very reliably. So that’s a powerful combination when you put it all together.

Philip Ng: Okay. And then one last one for me for Chris. EBITDA for was a little weaker than we would have expected for 1Q. It sounds like you’re expecting that to improve nicely into 2Q. — you called a few things that were temporary in nature, the $2 million tariffs. Were the investments in the business and M&A lumpier nature in 1Q that will kind of say, — just kind of help us think through why things get better perhaps in 2Q? And do you have enough levers there for EBITDA will be up year-over-year in 2Q?

Christopher Calzaretta: Yes. Thanks for the question. So yes, a little bit of lumpiness. The way I would think about it in terms of the overall confidence is that we absolutely believe that we’re going to be able to not only expect to grow but not only that but expand margins on a full year basis. And so I’d be thinking about some of the nonrecurring impacts that we saw in Q1 on the tariff front is largely the impact that will carry through for the full year. Other than that, we really feel good about the order intake, our backlogs, as we mentioned, and are very confident in our ability to deliver the outlook that we have here for the year.

Operator: This concludes the question-and-answer session. I’ll turn the call to Mark Hershey for closing remarks.

Mark Hershey: I want to thank everybody for joining the call today. Thank you for your interest in Armstrong and we look forward to speaking with you soon. Have a great day.

Operator: And this will conclude our call today. Thank you for joining. You may now disconnect.

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