Edited Transcript of AFI earnings conference call or presentation 7-May-19 2:00pm GMT

As Chair of Armstrong Flooring, a role that I will continue to hold and as Chair of Armstrong World Industries, I'm aware of the industry dynamics and the challenges the business and our teams must address. I have every confidence that we can do so. I am focusing on improving our execution and our financial performance. I will also be working with the Board to seek permanent CEO and ultimately helping facilitate that transition.

I look forward to working with the talented teams across our business along with our distributors, customers and suppliers as we enter the next chapter for Armstrong Flooring.

Now on to the results for the quarter. Our team has been focused on executing key growth initiatives during 2019. That said, the first quarter results were challenged by several dynamics. Demand pull forward into 2018 has kept distributor inventory at elevated levels since year-end. This was in part due to the timing of customer purchases in response to the uncertainty in U.S. tariff policy. We expected this dynamic to impact the first quarter performance and it did. Results were further negatively affected by softer end market demand along with wet weather conditions in many parts of the United States.

Our residential categories were affected the most by these adverse impacts. The effect on commercial sales was less severe, partly attributable to the emphasis of our strategy on that end market.

While we are not pleased with our first quarter results, we made encouraging progress on several fronts. During the quarter, we continued to drive innovation and bring new products to the market.

We also realized higher selling prices and productivity gains, which help partly offset input cost increases. While input cost increases are likely to remain higher on a year-on-year basis, we are seeing cost pressures moderate on a sequential basis, and we look -- and we took additional price actions in April.

Following the sale of our Wood business in the fourth quarter, we have achieved a number of planned reductions in overhead to right size our operation as a purely Resilient company. We have worked closely with our customers to maintain strong relationships and exceptional levels of service with transition to a purely Resilient company.

All of these factors support our confidence in a more favorable operating environment as we move into the back half of 2019. We have a strong portfolio of award-winning products and our team is committed to expanding its leadership positions in the Resilient Flooring industry. We are working to improve our growth trajectory and augment our margin profile.

Our actions are primarily focused on LVT leadership, differentiated innovation, strengthened distribution partnerships and leveraging our strong position in commercial channels.

In LVT, we continue to energize our market presence through a steady stream of new products, including a comprehensive set of cutting edge LVT products. We have also refreshed our Alterna, Elements, Rigid Core, Vantage and other product lines. Overall, we remain excited by our growth prospects in this attractive category.

Looking at innovation across our broader set of categories, advances in design, durability, installation, maintenance and material composition remain key to our success. Our proprietary, award-winning Diamond 10 Technology continues to have good traction with customers in all of our key categories.

Our innovation pipelines remain strong, and we plan to continue to invest in our broad portfolio of compelling high-demand products.

In distribution, as I mentioned earlier, we have experienced a seamless transition to a purely resilient relationship. Additionally, our 2018 go-to-market pivot to focus on commercial and national accounts is progressing well and aligned with the weighting of our portfolio towards the commercial end market.

Through all of these efforts, our team is dedicated to improving our operational performance in all categories through innovation and cost efficiencies to more effectively grow our market presence. We have a strong balance sheet to invest in growing our Resilient categories to take advantage of significant opportunities ahead. Combined with our focus on rationalizing costs and streamlining processes, we believe that we are making progress to strengthen our position as a leader in Resilient Flooring.

I'll now turn the call over to Doug to walk through the details of our financial performance.

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Douglas B. Bingham, Armstrong Flooring, Inc. - Senior VP, CFO & Treasurer [4]

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Thank you, Larry. I'll begin with a review of our first quarter results on Slide 5. For the first quarter 2019, net sales were down 13.8% to $142 million as compared to $164 million in the prior year quarter. The decrease in net sales was largely due to unfavorable mix and lower volumes in almost all product categories, including residential LVT.

Our first quarter volumes were affected by distributor destocking and soft end market conditions along with wet weather in many regions of the U.S. These dynamics were particularly acute in our residential categories. This was partially offset by overall higher selling prices in response to inflationary pressure.

Changes in currency exchange rates had an unfavorable impact of 120 basis points year-over-year.

In the distributor channel, which represents 3 quarters of our sales, customers continued to work down inventory levels from unusually high levels at year-end.

As we explained last quarter, many distributor stocked up inventory in the third quarter 2018 ahead of U.S. tariffs on Chinese imports implemented on October 1. The subsequent delay and general uncertainty around further tariffs have created a temporary departure from normal seasonal buying pattern since that time.

While inflation in reported results is likely to continue to be higher year-over-year, we have experienced a moderation in input cost increases on a sequential basis compared to the fourth quarter, which is encouraging.

Our price increases that went into effect on October 1 have allowed us to partly blunt the impact of inflation due to tariffs and other input costs. We've implemented additional price increases of 4% to 6% based on inflation in freight in select commercial and residential products effective on April 1.

Our first quarter 2019 adjusted EBITDA was breakeven as compared to $10.6 million in the first quarter of 2018. The decline in adjusted EBITDA was primarily due to input cost inflation pressure, lower net sales and higher SG&A spend, partly offset by improved productivity. Higher reported SG&A spending was primarily driven by the timing of a benefit of $4.3 million related to customer reimbursements in the prior year quarter, which did not recur in the first quarter of 2019.

During the first quarter, we experienced an operating cash outflow of approximately $63 million compared to an outflow of approximately $5 million in the same period last year. As we mentioned on our last call, in the first quarter of 2019, we rebuilt working capital off year-end lows and also experienced normal seasonality of first quarter cash usage.

For the quarter, we invested $9 million in CapEx, which remained below our run rate depreciation. In our financing activities, we paid down the $25 million of outstanding borrowings on our revolving credit facility. We ended the quarter with a strong balance sheet and net cash position.

We have announced that our current unused share repurchase authorization has been set at $50 million. This is in addition to the $41 million that we have already deployed. This will allow us to return excess capital to shareholders, while still preserving flexibility to invest in initiatives and growth avenues that makes sense for our business.

Our capital allocation objectives remain unchanged with our focus on maintaining the business, funding internal growth initiatives and pursuing M&A opportunities to support our growth strategy.

Moving to our full year outlook. Based on our first quarter performance and a likely challenging remainder of the first half, we are moderating our full year expectations. For the full year 2019, we now anticipate adjusted EBITDA to be in the range of $50 million to $58 million. We expect energy, transportation, raw materials, operating costs and tariffs to be a headwind on our P&L in 2019 despite some moderation in costs on a sequential basis.