2019 Armstrong Flooring Inc Earnings Call
LANCASTER May 8, 2019 (Thomson StreetEvents) --
Edited Transcript of Armstrong Flooring Inc earnings conference
call or presentation Tuesday, May 7, 2019 at 2:00:00pm GMT
TEXT version of Transcript
Dominic C. Rice
Armstrong Flooring, Inc. - Chief Product Officer
& Senior VP of Global Operations
Douglas B. Bingham
Armstrong Flooring, Inc. - Senior VP, CFO &
Larry S. McWilliams
Armstrong Flooring, Inc. - Chairman & Interim
Conference Call Participants
G. Research, LLC - Research Analyst
Stifel, Nicolaus & Company, Incorporated,
Research Division - Associate
Justin A. Speer
Zelman & Associates LLC - MD of Research
Mason Irwin Marion
Instinet, LLC, Research Division - Research Analyst
Greetings, and welcome to the Armstrong Flooring,
Inc. First Quarter 2019 Earnings Call. (Operator Instructions) As a
reminder, this conference is being recorded.
I would now like to turn the conference over to
your host, Doug Bingham, Senior Vice President, Chief Financial
Officer. Please go ahead.
Douglas B. Bingham, Armstrong Flooring, Inc. -
Senior VP, CFO & Treasurer 
Thank you for joining us today for Armstrong
Flooring's First Quarter 2019 Earnings Conference Call. I am joined
by our Chairman and Interim CEO, Larry McWilliams; and our Chief
Product Officer and Senior Vice President of Global Operations,
We trust you've seen our press release on Friday.
Additionally, a copy of the slide presentation to accompany this
call is available on the Investors section of our website at
I refer you to Slide 2 of that presentation and
advise you that during this call, we will make certain
forward-looking statements that involve risks and uncertainties.
Actual outcomes may differ materially from those expected or
implied. For a more detailed discussion of the risks and
uncertainties that may affect Armstrong Flooring, please review our
Forward-looking statements speak only as of the
date they are made, and we undertake no obligation to update any
forward-looking statement beyond what is required by applicable
In addition, our discussion of operating
performance will include non-GAAP financial measures within the
meaning of SEC regulation G. A reconciliation of these measures to
the most directly comparable GAAP measures is included in the press
release and in the appendix of this presentation.
With that, I will now turn the call over to Larry.
Larry S. McWilliams, Armstrong Flooring, Inc. -
Chairman & Interim CEO 
Thank you, Doug. Good morning, everyone, and
thank you for participating in our first quarter 2019 earnings
call. On the call today, I will be discussing our operating
highlights and business activity. Doug will then cover additional
details regarding our financial results before I offer some closing
remarks and open the call for questions.
I first want to discuss the recent announcement
of our leadership transition. On Friday, we announced that Don
Maier has stepped down as CEO and from his position on the Board. I
want to thank Don for his many years of service and dedication to
our company. We wish him the very best.
I have served as Chairman of Armstrong Flooring
since 2016, working closely with Doug and the entire management
team since that time. As interim CEO, I view my mandate is focusing
on the company's strategic priorities and our valued consumers,
driving profitable growth and innovation in every facet of our
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
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
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
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
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
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
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.
Douglas B. Bingham, Armstrong Flooring, Inc. -
Senior VP, CFO & Treasurer 
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
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
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.