Armstrong World Industries - Earnings Call - Q1 2025

Executive Summary

• Record-setting Q1 2025: net sales $382.7M (+17% YoY), GAAP diluted EPS $1.58 (+16% YoY), adjusted EBITDA $129M (+16% YoY); both segments expanded margins on strong Mineral Fiber AUV and acquisitions contribution.
• Results beat Street: revenue and EPS above S&P Global consensus; GAAP EPS $1.58 vs $1.53*, revenue $382.7M vs $370.6M*; adjusted diluted EPS $1.66 also outperformed.
• Guidance reaffirmed for FY 2025 (net sales $1.57–$1.61B, adjusted EBITDA $525–$545M, adjusted diluted EPS $6.85–$7.15, adjusted FCF $315–$335M) with updated assumptions reflecting softer 2H on tariff uncertainty and MF volume flat to down LSD offset by >6% AUV growth.
• Call catalysts: continued AUV price/mix strength, manufacturing productivity, AS backlog/order intake, IRA tax credits for TEMPLOK thermal storage (40–50% credit potential) supporting energy-efficiency product adoption into specs.

What Went Well and What Went Wrong

What Went Well

• Strong net sales and earnings growth; MF AUV was a key driver and AS benefited from 3form/Zahner with organic growth; CEO: “solid start to 2025… strong Mineral Fiber AUV performance… and sizable contributions from our 2024 acquisitions”.
• Segment margin expansion: MF adjusted EBITDA margin up 180 bps to 43.0%; AS adjusted EBITDA margin up 310 bps to 17.1% in Q1.
• Operational excellence: manufacturing productivity contributed despite softer volumes; CFO highlighted organic adjusted EBITDA margin expansion to 35.6% excluding acquisitions.

What Went Wrong

• MF volume decline (home center softness, one fewer shipping day); MF net sales up only 2.3% with volumes −$10M offset by +$16M AUV.
• Slight total-company margin compression: adjusted EBITDA margin 33.6% (−30 bps YoY) due to acquisition-related SG&A and manufacturing costs in AS.
• Management expects softer 2H 2025 market conditions tied to tariff uncertainty (discretionary renovation pause risk) and updated MF volume outlook to flat to down low single digits.

Transcript

Operator (participant)

Thank you for standing by. My name is Amy, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Q1 2025 Armstrong World Industries earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star and the number one on your keypad. If you would like to withdraw your question again, press star and the number one. It is now my pleasure to turn the call over to Theresa Womble, VP of Investor Relations and Corporate Communications. You may begin.

Theresa Womble (VP of Investor Relations and Corporate Communications)

Thank you, Amy, and good morning, everyone. On today's call, Vic Grizzle, our CEO, and Chris Calzaretta, our CFO, will discuss Armstrong World Industries' Q1 2025 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 measure is included in the earnings press release and in the appendix of the presentation, both of which were issued this morning. 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 29, 2025. These statements involve risks and uncertainties that may differ materially from those implied or expected.

We provide a detailed discussion of the risks and uncertainties in our SEC filings, including the 10-K filed earlier this year. We undertake no obligation to update any forward-looking statement beyond what is required by applicable securities law. Now, I will turn the call to Vic.

Victor Grizzle (CEO)

Thank you, Theresa, and good morning, everyone. Thank you for joining our call today to discuss our Q1 2025 results and our expectations for the rest of the year. Our Q1 was another quarter of record-setting sales and adjusted EBITDA for Armstrong as we continue to execute our growth strategy well and improve our productivity and expand our capabilities into new market opportunities. In the Q1, total company net sales increased 17%, and adjusted EBITDA increased 16%, with meaningful margin expansion in both of our segments. In fact, it was the best Q1 margin performance in both segments since 2020. These results were a clear demonstration of the strength of our business model, the diversity of our end markets, as well as the strong execution culture we have here at Armstrong.

Delivering these financial results in an environment of elevated uncertainty requires focus and agility to adjust to changing operating conditions and customer needs. Doing this while continuing to deliver industry-leading quality and service levels our customers have come to expect. Again, the agility and commitment to execution by our teams was on full display in the quarter. As many of you have come to know, this is a hallmark of the organization we have here at Armstrong. I want to take this opportunity and thank all of our employees for their tremendous efforts and their commitment to execution. Now, taking a closer look at the Q1 results in our Mineral Fiber segment, net sales increased 2% while EBITDA increased 7%.

Sales growth for the segment was driven by a 7% increase in average unit value, or AUV, versus the prior year, which included favorability in both like-for-like pricing and product mix. This increase in AUV more than offset lower sales volumes, primarily driven by weather and lower foot traffic in our home center channel, and predominantly in the Southeast, where winter weather was particularly severe. In the Mineral Fiber segment, I'm pleased with the EBITDA margin performance, which expanded 180 basis points to 43%. This was the strongest Q1 margin performance since 2020 and our ninth consecutive quarter of year-over-year margin expansion. Again, AUV was a key driver of EBITDA growth and margin expansion in the quarter. Also, notably in the quarter, and a contributor to margin expansion was our manufacturing productivity, despite the softer volumes.

This outcome reflects the multi-year, long-term approach to investing in productivity that we practice here at Armstrong. This not only helps with our direct productivity, but it also enhances our consistency of our service and quality levels that distinguish us in the marketplace. One of the key indicators we track internally is what we call our perfect order measure that you have heard me mention in the past. This measure includes five areas of service and quality that represent a perfect order from order entry to customer receipt, and again, representing what a perfect order looks like in the eyes of our customer. This quarter, the measure was solidly ahead of our target and near historic highs.

This has been a passion of ours, and in times like these with high levels of uncertainty and risk for supply chain disruption, this is and will continue to be a critical differentiator for Armstrong. Overall, I'm pleased with the performance of the Mineral Fiber segment in the quarter, despite softer volume, delivering EBITDA growth, margin expansion, AUV growth, and manufacturing productivity, all while maintaining our high levels of quality and customer service. Now turning to the Architectural Specialties segment, where our results in the quarter were particularly strong and broad-based in both the organic and the inorganic sides of the business. This is clearly a demonstration of the advantage of having the broadest portfolio of solutions, where we continue to leverage our scale and specification strength to sell more products into more spaces and drive profitable top-line growth.

For a decade now, we have averaged 20% top-line growth in this segment. With our strong start to the year, we expect to continue this pace of growth in 2025. Organically, the Q1 Architectural Specialties sales grew 11% from prior year's results. Our 2024 acquisitions, 3form and Zahner, contributed another 47 percentage points of sales growth. Additionally, our order intake grew in the Q1. Notably, both our sales and order intake spanned a wide range of product types and broad-based set of market verticals. In addition to the transportation vertical, we saw good project activity in office, retail, and education. Because of our industry-leading product portfolio, strong service levels, and mostly U.S. manufacturing footprint, we believe we are well-positioned to continue to win.

Along with strong top-line growth in the quarter, I am particularly pleased with the strong adjusted EBITDA growth and margin expansion performance in this segment as well. Architectural Specialties adjusted EBITDA increased 94%, including organic EBITDA growth of 34%. As important, the EBITDA margin for the segment expanded at both the organic and total segment level as we continue to improve our operating leverage. In fact, this was the strongest Q1 Architectural Specialties adjusted EBITDA margin performance since 2020 and marks continued progress toward our goal of 20% EBITDA margin for this segment. It is also worth noting in the quarter the solid performance of our 2024 acquisitions. We are very pleased with how both 3form and Zahner are performing and the mutual benefits we are seeing developing as we increase our collaboration and knowledge sharing.

Frankly, I'm not surprised at how well this is going, given that both these companies come with highly professional and skilled management teams who have the right mindset to collaborate and innovate with Armstrong to accelerate their growth. With 3form, the collaboration across our sales teams has uncovered many opportunities to sell more products into more spaces, given 3form's unique ability to create translucent solutions that use light and texture to enhance design opportunities for architects. In addition, we have worked together with their teams to increase 3form's operational efficiency and are already seeing benefits from these efforts. At Zahner, as we noted last quarter, we significantly expanded our exterior metal design and fabrication capabilities and further deepened our presence in an attractive adjacency that complements our existing interior metal business.

The strong market reputation of Zahner gives us early access to large, complex projects, and we expect this will enhance our visibility to more selling opportunities for the interior spaces of these large projects, in addition to the new business opportunities on the exterior. As we have stated, we estimate that this exterior metal adjacency will add another $1 billion to the addressable market for our Architectural Specialties segment, bringing its total addressable market to more than $2.5 billion. We are excited to expand our presence in this adjacency and to continue our above-market growth rate for years to come. Now, before turning the call over to Chris, let me take a moment to share how we are thinking about the market in light of the current and evolving tariff landscape.

As we all know, this is a very fluid and uncertain set of dynamics that we will all have to navigate. First, it's worth repeating that our production and supply chain is predominantly U.S.-based, and the majority of our products sold into Canada and Mexico are covered under the USMCA trade agreement. In the limited areas where we see a direct impact on our costs, we expect to mitigate those impacts through negotiations, price actions, and through supply chain adjustments within our U.S. footprint. For direct impacts of tariffs here at Armstrong, the impact is both minor and manageable. Beyond these minor impacts, we do believe the indirect benefit effects from high levels of uncertainty around these tariffs have the potential to dampen end market activity. This, of course, is much more difficult to call given the varying impacts throughout the value chain.

For Armstrong, the market impact is likely to come in the form of holding back and pausing on discretionary renovation work until there is more clarity on the way forward, much like we have seen in prior periods of market disruption and uncertainty. There may also be some disruptions in the construction supply chain that could impact project timelines. That said, in total, we do not see a meaningful impact from disruption in new construction activity in 2025, given the lag time on new construction projects. The ground-level bidding activity in the market remains supportive at this time, as do the order rates through April. The sentiment from our customer survey work remains positive, but understandably cautious given the uncertainty. Of course, we will remain vigilant as further disruptions from policy changes could create more project delays than we are seeing at the moment.

Given what we know and its expected impacts, and with our controllables, namely pricing, productivity, and good cost management, we remain confident in our ability to navigate these conditions, and therefore, we are reaffirming our full-year guidance for 2025. With that, let me pause and turn it over to Chris for more on our financials.

Chris Calzaretta (Senior VP and 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 three, which details our basis of presentation. Beginning on slide six, we summarize our Q1 Mineral Fiber segment results. Mineral Fiber sales were up 2% in the quarter, driven by favorable AUV of 7%, partially offset by lower sales volumes. The strong AUV result was fairly balanced between like-for-like price and favorable mix. Lower sales volumes were driven primarily by softer demand from our home center customers who experienced lower store traffic due to a number of factors, including negative weather-related impacts in certain markets. We also had one less shipping day compared to the prior year quarter, which represents about a point of volume in the quarter.

Overall, the market we experienced was consistent with the choppy conditions that we expected heading into 2025. Mineral Fiber segment adjusted EBITDA grew 7% despite softer volumes, with adjusted EBITDA margin expanding 180 basis points to 43%. Adjusted EBITDA margin expansion was primarily driven by the benefit of AUV growth and manufacturing productivity gains despite lower volumes. In addition, the segment margin benefited from lower SG&A expenses and favorability in input costs as compared to the prior year quarter. The decrease in SG&A was primarily driven by deferred compensation plan gains. Input cost inflation was more than offset by favorable inventory valuation timing impacts. Similar to Mineral Fiber, we saw softer grid volume in our WAVE joint venture, driving weaker equity earnings in the quarter. Recall that we are also lapping a strong Q1 of 2024, which was the highest equity earnings quarter of 2024.

As Vic mentioned, Mineral Fiber's adjusted EBITDA margin of 43% in the quarter was the best Q1 margin performance for this segment since 2020 and was a strong demonstration of our value creation drivers, including consistent AUV growth and manufacturing productivity gains despite uneven market conditions. On slide seven, we discuss our Architectural Specialties, or AS segment results, where we highlight robust sales growth of 59%. This growth was driven primarily by contributions from our recent acquisitions, 3form and Zahner, both of which performed in line with expectations. On an organic basis, I'm also pleased to report that we have delivered double-digit Q1 sales growth of 11% with strength in many product categories. AS adjusted EBITDA grew 94% with a 17.1% adjusted EBITDA margin. This represents margin expansion of 310 basis points as higher acquisition-related operating costs were more than offset by inorganic sales growth.

In addition, we benefited from better operational leverage on our cost base. We are encouraged to see this adjusted EBITDA margin improvement and remain focused on delivering our goal of greater than 20% adjusted EBITDA margins for the segment. We continue to closely monitor project timelines, particularly against the backdrop of elevated macro uncertainty. Slide eight highlights our Q1 consolidated company metrics. We delivered double-digit growth for both sales and earnings with adjusted EBITDA margins that compressed slightly versus the prior year. Notably, adjusted diluted earnings per share grew 20%. Our total company adjusted EBITDA margin of 33.6% marks a solid start to the year. Incremental volume from recent acquisitions and our growth initiatives, coupled with consistent AUV performance, drove our adjusted EBITDA growth in the Q1.

These benefits more than offset an increase in SG&A, which, as noted earlier, was driven by our recent acquisitions of 3form and Zahner. Excluding the impact of these acquisitions, we generated an organic adjusted EBITDA margin of 35.6%, which represents 170 basis points of margin expansion as compared to the Q1 of 2024. Slide nine shows our year-to-date adjusted free cash flow performance versus the prior year. The 10% increase in adjusted free cash flow was driven by higher cash earnings and dividends from our WAVE joint venture, which was partially offset by higher capital expenditures. We remain confident in our ability to deliver strong adjusted free cash flow growth in 2025 to support all of our capital allocation priorities, despite elevated macro uncertainty. In the Q1, we repurchased $22 million of shares and paid $13 million of dividends.

As of March 31, 2025, we have $640 million remaining under the existing share repurchase authorization. With a healthy balance sheet that includes low leverage and ample available liquidity, we are well-positioned to execute and advance our strategy. As we move to slide 10, you'll see our full-year guidance for 2025, which is unchanged for the four key metrics of total company net sales, adjusted EBITDA, adjusted diluted earnings per share, and adjusted free cash flow. We have made some modest adjustments to some of our assumptions given the current macroeconomic headwinds, and this guidance now reflects the impacts of currently known tariffs. This guidance now reflects softer market conditions in the second half of the year due to elevated uncertainty stemming from tariffs.

As such, we are decreasing our Mineral Fiber sales volume expectations to flat to down in the low single-digit range, but we expect that this headwind to our net sales growth will be largely offset by greater than 6% Mineral Fiber AUV growth, as well as a slightly better outlook for total AS sales growth. It's important to note that while there will be a headwind, we do not believe tariffs, as they stand today, will have an outsized direct impact on our results. The tariffs as currently announced represent a manageable level of less than 3% impact to our total cost of goods sold. For WAVE, the tariffs, as announced, have about a 5% impact on the joint venture's total cost of goods sold. We believe we are well-positioned to mitigate most of the impacts from these tariffs, and our guidance is reflective of those actions.

Additionally, we have relatively limited exposure to foreign currency fluctuations, which positions us well to weather volatile market environments. We remain confident in our outlook and in our team's ability to drive manufacturing productivity and demonstrate rigorous cost management and drive overall efficiencies while balancing investing for growth. We are well-positioned to deliver solid results for the remainder of the year as we continue to demonstrate the resilience of our business model despite challenging market conditions. We remain committed to driving margin expansion and continuing to deploy cash to generate growth and create value for our shareholders. Now I'll turn it back to Vic before we take your questions.

Victor Grizzle (CEO)

Thanks, Chris. One thing that we have been consistent with here at Armstrong is staying with the investments in our growth initiatives, even in times of uncertainty. The reason for this is our high level of conviction in our strategy and the confirmation from the traction we are realizing from our growth initiatives. We kept our investments going in 2020 during the pandemic and again during the disruption that occurred in 2022. We will again continue our investments in our growth initiatives in this current period of uncertainty. The strength of our business model and our balance sheet allows us to do so. We continue to be pleased with the reach and the contributions of Canopy, our online selling platform. We've shared how it's helping to drive incremental sales volume for Mineral Fiber and grid products.

We have also been adding many more of our Architectural Specialties products to the platform, including solutions from our recently acquired 3form business. Our ProjectWorks platform, our advanced automated design service, had strong results this quarter and added incremental sales volumes. Using ProjectWorks meaningfully increases the productivity of designers, architects, and contractors with designing and executing complex projects and achieving more efficient use of materials, resulting in less waste on the job site. We continue to expand the capabilities of ProjectWorks, both in terms of products and design optimization. More and more customers are using this service to enhance their own productivity in the pursuit of their own cost and quality goals. Our innovation, in particular around energy-saving ceiling tiles, is gaining traction in the market and confirming that companies are indeed looking for energy savings for both cost savings benefits and for achieving internal decarbonization goals.

Our phase change material innovation, coupled with our acoustical performance, is changing how architects and designers, as well as building owners, view the ceiling with energy-saving attributes that bring enhanced functionality and reduced energy consumption in buildings. Energy and how we conserve it is a key macro trend that will impact construction and industrial markets for years to come. It is driven by the increasing need for resiliency and energy efficiency in buildings, the drive towards clean technology, and the growth of artificial intelligence, along with the pressure this puts on our nation's electrical grid systems. These challenges are critical for all industries to address, but particularly important for the construction of buildings, as buildings consume nearly 40% of global energy. In the U.S., the built environment consumes nearly 75% of all electricity used. About half of that energy usage is to heat and cool buildings.

Just this month, the leading standard for healthy and sustainable buildings, the LEED certification standards, recognized a heightened need to deepen its focus on decarbonization and energy efficiency and have increased LEED credits for energy savings in the latest version released. We believe that our products can play an important role enabling the industry to address this challenge. Innovative products like our Templok energy-saving ceilings respond to the urgent need for energy efficiency and decarbonization with their ability to achieve up to 15% energy cost savings from heating and cooling buildings. These products can make a meaningful impact for both reducing the cost of operating commercial buildings and increasing decarbonization within these buildings. In addition, Templok can reduce energy usage at peak times of the day, thereby helping to lessen the strain on the U.S. electrical grid system.

Now, with the explicit inclusion of phase change material as qualifying thermal storage technology for tax credits under the Inflation Reduction Act, Templok can be even more of a win-win for building owners and operators through lower installation costs and lower energy operating costs. Customers of Templok may be eligible for tax credits of 40%-50%, dramatically improving the return on their investment. With this tax credit, Templok is gaining recognition as a viable energy-saving solution, and we're seeing increased interest for winning specifications and are currently ramping up production. These are exciting developments for us, and we are continuing our innovation around the Templok platform with our multi-generational approach to product development. We look forward to providing more updates on our progress in the coming quarters.

As important, beyond our organic growth initiatives, with our high confidence in our cash flow generation and the strength of our balance sheet, we remain active in our pursuit of inorganic growth opportunities as well to sustain the strong and consistent growth of our Architectural Specialties business. As we navigate these uncertain market conditions and plan for a softer back half of the year, mainly due to pausing of discretionary renovation work, our agility and commitment to execution with the help of a local supply chain structure, as well as the diversity of our end markets, will serve us well. The dependable ability to deliver AUV growth, productivity gains, and above-market growth rates in our Architectural Specialties business will allow Armstrong to outperform in conditions such as these.

Because of our resilient business model, we are well-positioned to be both prudent where appropriate and assertive where opportunities present themselves to optimize the value creation outcome for our shareholders. With that, we'll pause now and take your questions.

Operator (participant)

Thank you. The floor is now open for questions. Just as a reminder, if you have dialed in and would like to ask a question, please press star, followed by the number one on your telephone keypad to enter the queue. If you would like to withdraw your question, also press star and the number one. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when answering the questions. We do request for today's session that you please limit to one question and one follow-up. Again, star and the number one to enter the queue. Your first question comes from the line of Susan Maklari with Goldman Sachs. Your line is now open.

Charles Perron (Analyst)

Good morning, everyone. This is Charles Perron in for Susan. Thanks for taking my question and congrats on a strong quarter.

Victor Grizzle (CEO)

Thank you. Good morning, Charles.

Charles Perron (Analyst)

Good morning. Just maybe first, I want to talk about your expectations for volume deceleration in the back half of this year. It sounds from your commentary that orders and activity are holding strong through April. Against that, is the deceleration more signs of conservatism or any other sign to slow down you're hearing when speaking with customers? How do you expect those to flow through across your two segments over the course of the year?

Victor Grizzle (CEO)

Yeah, it's a good question because we're kind of in the middle of this, right? Thirty days outside of the announcement of much broader and larger tariffs. We're kind of in the middle of this now. It's a good question. The sentiment from the customers and the reason why I mentioned the on-the-ground bidding activity does remain to be kind of intact and steady and not reflective of what we think the downstream impact of this uncertainty could have in the back half. I think in the current moment and what we're experiencing today is about what we would have expected before, I think, again, the announcement of the size and the breadth of the tariffs that has maybe changed the sentiment. Our basis of this outlook for the back half of the year is really experiential.

In prior periods where we have event-based disruption in the marketplace, the first thing that goes to the sidelines is that discretionary work. Projects that aren't critical and that can wait and customers or owners behind those projects move them to the sidelines and wait for a little bit more visibility and clarity. That's what we've experienced, and that's kind of what we're modeling in here. Even though we're not seeing it and feeling it today, we do expect that based on prior experiences, when we have this level of uncertainty for this length of time, the first thing that's going to show up is a softening in the discretionary project work. Again, we've modeled our outlook for the back half based on that experience.

Charles Perron (Analyst)

Okay, that's super helpful, Vic. Maybe second, talking about the mix impact in Mineral Fiber, when you consider the price actions that you look to put in place or you have put in place, the benefit from recent product introduction like Templok, Healthy Spaces against the risks of a slowdown, are you seeing any signs of trade down in mix moving away from those new products? Maybe also it would be helpful if you could provide some context about what you see historically in mix, what happened during prior downturns.

Victor Grizzle (CEO)

Yeah, again, a good question because under these conditions, you would expect maybe some of that trade down to happen. We have not seen that. As you can see in our results in the Q1, we had a positive product mix, which means that customers continue to trade up to our highest technology products, our highest aesthetic product. That has continued into the Q1. Actually, this is a dynamic that transcends downturns. We have seen this for well over a decade now, this natural dynamic to mix up. I do not see that changing in the back half of this year, even with the downturn. We did not see that in the great financial crisis. We did not see that during the pandemic. Those were much deeper downturns, of course. We do not expect an AUV mix impact from that dynamic that you are referencing.

Let me just add, though, when you look at the new technology that we're talking about with our Templok product, for example, and some of the other technologies around low embodied carbon, these products come at a higher AUV into the marketplace. We believe as those transition and become more of a volume multiplier in our portfolio, that there's upward lift on our AUV performance over time. We believe this has been a trend that's been continuing for a number of years, well over a decade, frankly. We think that this is a trend that can continue as we innovate into that dynamic that the industry wants to mix up in all parts of the cycle. Again, good question. Thank you.

Charles Perron (Analyst)

Thank you. Good luck.

Victor Grizzle (CEO)

Thank you.

Operator (participant)

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

Zack Pacheco (Equity Research Associate)

Good morning. This is actually Zach Pacheco on for Garik. Thanks for taking my question.

Victor Grizzle (CEO)

Hey, good morning.

Zack Pacheco (Equity Research Associate)

Maybe to hone in on the Mineral Fiber AUV again. I'm just curious how much of the implied guidance rate includes maybe a second price increase later this year versus kind of just what you're currently seeing and what you've already secured. Thanks.

Chris Calzaretta (Senior VP and CFO)

Sure. Hey, good morning. Yeah. Yes, our guidance does incorporate kind of, as we've stated in the past, getting back to our normal cadence of two price increases a year. Yes, it is reflective of that. Just to maybe break it down a little bit further, the guide in terms of the AUV does include positive mix and positive like-for-like pricing. Kind of given the backdrop of tariffs and higher costs accordingly, that AUV incorporates positive mix and is a little bit tipped to a little more price than mix. Overall, expect, again, a good solid AUV performance in the year. For modeling purposes, a little bit heavier in the back half than the front half, getting back to your question on price increase and pricing.

Zack Pacheco (Equity Research Associate)

Understood. That makes sense. Maybe just any more color on current bidding environments across your verticals, any change to the office end market or what you're expecting to see? Thanks.

Victor Grizzle (CEO)

Sure. Let me add a little bit more than usual on the bidding activity. I think it's something, obviously, since we're right in the middle of the uncertainty getting underway here, I've talked in the past about bidding activity in terms of the Dodge first-time tracker on bidding activity. It's really the earliest phase of project launching. It's something we watch quarter to quarter. That particular measure softened in Q1 as uncertainty was building. Really no surprise, that's exactly what you would expect. First-time bids, things that are in the early stages like that could take a pause and a wait-and-see mode. We did see that in Q1. It softened in both the new and the large renovation.

Again, just as a reminder, this Dodge first-time bidding activity has somewhere between a 12-24 month, and sometimes even greater than that, out before ceilings are needed. This is something that we look at as a kind of high-level, across-the-horizon type of indicator of activity that's out there. In summary, this is kind of what we've been seeing over the last seven or eight quarters leading up to this quarter: this choppy kind of quarter-to-quarter sideways movement in this particular bidding activity metric. What I mentioned in my prepared remarks is another bidding activity altitude, if you will. It's really the ground-level, on-the-ground, sub-level project bidding type activity. What this bidding activity really reflects is more down to ceiling projects and the interior projects bidding level. In Q1, this remained active and steady.

What we saw was good activity across many verticals like data centers, transportation, schools, hospitals, even office TI. We saw good activity in the quarter. I think this is to your question. What we're seeing today is really kind of a consistent sideways motion on our bidding activity at the ground level. We're going to continue to keep an eye on the flow or the discretionary portion of that ground-level business because we think that's what we're going to see as the first signal that the markets are softening up based on this uncertainty. We'll continue to track that closely and report out on that.

Operator (participant)

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

Keith Hughes (Managing Director)

Thank you. The questions have gone WAVE with the steel tariffs coming in. You talked about the impact, what you're having to do on pricing there.

Victor Grizzle (CEO)

I'm sorry, Keith, would you say that last part again?

Keith Hughes (Managing Director)

Yeah. The question is on WAVE. Could you talk about the impact there with steel tariffs and what they're having to do on pricing?

Victor Grizzle (CEO)

Yes. Yeah. In the WAVE business, we obviously use steel and aluminum for the structure, the grid structure of our ceiling systems. As a reminder, most of what we source in terms of steel and aluminum comes from the U.S. and is locally sourced. We do bring a small percentage from external markets for, I will say, strategic reasons. We do that. We can shift that volume as we need to local sourcing here. What we have seen in the first round of tariffs that we saw back in 2018 with steel imports is that the local steel companies began to raise their prices. We are seeing actually kind of an indirect, if you will, or ripple effect impact from the steel tariffs on local steel prices. We are having to raise prices in the marketplace to help pass that on.

We have two price increases already in the Q1 on the street to try to help us stay in front of that steel inflation. A little bit less of a direct impact on tariffs in our WAVE business and a little more of an indirect because of the market pricing coming up.

Keith Hughes (Managing Director)

Historically, when WAVE raises prices, is there a margin drag until they catch up with the input with what's happened on the inputs?

Victor Grizzle (CEO)

Yeah. In 2018, that happened because the steel tariffs went in. If you remember during the first administration, that happened very quickly, and it took us a quarter or two to catch up. In 2022, that did not happen. We stayed ahead of the prices or the inflation, and we did not see the drag on our margins. Our plan here is we are staying ahead of the inflation with our prices and trying to stay ahead of those steel tariff price increases. I expect that we will continue to expand margins in that business throughout the year.

Chris Calzaretta (Senior VP and CFO)

Keith, maybe just one additional point on WAVE is that we still expect equity earnings to grow mid-single digits for the year.

Keith Hughes (Managing Director)

Final question on the specialty business. How much did price play a role in the reported numbers, and what are you expecting on that for the rest of the year?

Victor Grizzle (CEO)

Yeah, I'd say minimal. That's really the number of projects that we're winning and the size of the projects. I think it's more on the volume side than a meaningful price. We are raising price in various substrates to stay ahead of any impact from tariffs. For the most part, the goodness and the strong performance of that business has really been projects and win rates and projects driving that business.

Operator (participant)

All right. Thank you. The next call comes from the line of Phil Ng with Jefferies. Your line is now open.

Philip Ng (Managing Director)

Hey, guys. Congrats on another strong quarter. Quick question on the home center side of things. You called out weather impacting the Q1. Have you started seeing that normalize out? I think weather's cleared out a bit in March and April. Just curious to see what you're seeing on the home center side of things and then how they've kind of managed inventory. I mean, it's lumpy from time to time.

Chris Calzaretta (Senior VP and CFO)

Yeah, that could be lumpy, as you acknowledged. Yes, we have seen orders normalize, especially in those locations that were hardest hit by the severe weather. Yeah, that's getting back to its normal run rate.

Philip Ng (Managing Director)

Okay. So we should expect the drag you saw in Q1 from the home center to kind of flush out, kind of a non-event for Q2.

Chris Calzaretta (Senior VP and CFO)

Yeah. I think for the rest of the year, I would not call it 2Q just because they can flex their inventories over a quarter, as we reported on numerous times. I would say for the year, we do not expect this to be anything different than what we see in the rest of the marketplace for the year. This timing-related impact should work its way through.

Philip Ng (Managing Director)

Okay. That's helpful. Vic, I think you kind of pointed out, if I heard you correctly, maybe it was AS or maybe it was a broader comment for new construction. I think based on the backlog you have right now, it sounds like you're pretty confident it could carry through 2025. Appreciating that AS business, new construction, there's a longer lag. Do you have enough line of sight to give us some color on what you're seeing on 2026, if you've seen bidding activity, quoting activity for that channel, AS particularly going out to 2026? What's the early look right now?

Chris Calzaretta (Senior VP and CFO)

Yeah. The new construction side of the business and the equation is from the back half of 2023 and 2024, positive new construction starts, right? When you lag those out for when a ceiling is required for those new construction jobs, we think that that is really going to hold for 2025. If you spent all of that money on those projects, by the time you get the ceilings, you are likely to finish that work. That is kind of our assumptions going into that. We do not see a big disruption on new construction coming through as we lag it into 2025. We have better line of sight.

To your question around project and the project nature business of the Architectural Specialties, I can tell you that we're closing good work for the back half of this year in 2025 and, of course, into 2025 or 2026 and even into 2027. Some of these projects are larger and longer term. We're starting to close work out into those. It'd be really premature for me to talk about the magnitude of that and what that could mean for us for 2026. Again, I would just point you back to the momentum this business has created, started in the back half of 2024, continued into the Q1 of 2025. That team is doing really well and closing work. I think we're closing more work. I expect that momentum to continue.

Operator (participant)

Thank you. Your next question comes from the line of Adam Baumgarten with Zelman. Your line is now open.

Adam Baumgarten (Managing Director and Equity Research Analyst)

Hey, good morning, guys. Just on the incremental price increase, I know it's typically been in February and August each year. Is that kind of the way to think about it this year as well? Perhaps maybe a higher price increase than maybe what you put through in February or kind of similar? Just curious how to think about that.

Chris Calzaretta (Senior VP and CFO)

Yeah. I would say at this point, on our normal twice-a-year pricing cadence, I think the amount and the extent of that will really be dependent upon kind of how the overall tariff and cost landscape unfolds. We are going to continue to keep an eye on that as always. For purposes of at this point in time and what we have somewhat of a line of sight to, that is how we are thinking about it. Again, as I commented on AUV and our AUV growth for the year, again, tipped more towards price with positive mix. That is largely on us continuing to stay close and monitoring the cost side of our business and then adjusting the price side accordingly.

Adam Baumgarten (Managing Director and Equity Research Analyst)

Okay. Got it. Thanks. Maybe on the education market, not sure if you guys touched on that, but curious what you're seeing there. I know the ESSER funding kind of rolled off to some degree. Are you seeing any change in the trends you've been seeing over the last year or two?

Chris Calzaretta (Senior VP and CFO)

Yeah, not materially. We've been watching that very closely as well. There was a lot of bonds that were approved for education at the state level in November. We were hopeful that that might fill in some of the gap from the ESSER funds. What I can tell you, what we saw in the Q1 is still good activity in the education sector. We will see how the summer season plays out. That's really where you see the bulk of the education K-12 action anyway. We will be very watchful of that. So far, we've not seen a falloff in education activity.

Operator (participant)

All right. Thank you. The next question comes from the line of Rafe Jadrosich with Bank of America. Your line is now open.

Rafe Jadrosich (Managing Director)

Hi, good morning. Thanks for taking my questions. I think last quarter, you said you were expecting, I think, inflation, a cost inflation for the year in the low single-digit range. Can you just give an update of what you're expecting now and then the difference between energy and freight and raw materials?

Chris Calzaretta (Senior VP and CFO)

Sure. Sure. Good morning, Rafe. Yeah. Just to size our inflation assumptions for the year, we expect freight to be relatively flat for the year. Raw materials expect to be inflationary in that mid-single-digit percentage range versus prior year. Energy between 10%-15% inflationary. That is really kind of driven by volatility in the natural gas market. What that puts you at is, from a total input cost perspective, in that mid-single-digit range of inflation for full year versus prior year. Again, just a reminder within that energy bucket, it is about pretty evenly split between electricity and natural gas. From a raw material perspective, this does kind of dial in a little bit of an uptick in some of our raws that will be slightly impacted by tariff impacts. Mid-single-digit inflation for the year as percentage versus prior year.

Rafe Jadrosich (Managing Director)

Got it. That's helpful. The higher price realization, your guide is what's offsetting that?

Chris Calzaretta (Senior VP and CFO)

Yeah. I mean, we think about this more broadly than just the pricing component, which certainly is, as Vic mentioned in his prepared remarks, a mitigation and way to continue to offset. We also are focused on continuing to drive productivity. We've had a really strong track record of being able to demonstrate manufacturing productivity on our plants. We expect that to continue, as well as the focus on ongoing disciplined and rigorous cost control and cost management. I think all three of those components coupled together is really what gives us the levers, if you will, to continue to grow and expand margins here. That is how we're thinking about operating the business given these dynamic times.

Rafe Jadrosich (Managing Director)

Okay. That's helpful. Just on the AS side, the organic growth, obviously, we had M&A contribution, but the organic growth is really strong in the Q1 here. How do you think about sort of what the implied organic growth is for the remainder of the year? How does that compare to the market? What's the market share that you're seeing or your growth relative to the market that you're anticipating?

Victor Grizzle (CEO)

Yeah. So for kind of implied in the guide for the year on the organic side of AS, it's a softer back half than the front half of the year. Really, what's at play there is lapping a really strong back half of 2024. As Vic mentioned and I mentioned in our remarks about keeping a watchful eye on overall projects, project delays, etc., that could certainly be at play. Again, we have a little bit of a timing dynamic given just the strength of the back half last year relative to the expected strength in the back half of this year. I'd say we're continuing to do well and win in the AS business and are very pleased with the double-digit top-line growth that we saw organically here in the quarter. Really pleased with that business and its performance.

Operator (participant)

Thank you. Again, if you would like to ask a question, please press star and the number one to enter the queue. Your next question comes from the line of John Lovallo. Your line is now open.

John Lovallo (Analyst)

Good morning, guys. Thanks for taking my questions. The first one is on Mineral Fiber AUV incrementals. Percent, which it's consistent with last quarter, but it's below historical levels. I was under the impression that this may have been driven by a little bit more mix versus price in AUV, but that doesn't seem like it's the case. Curious what's driving that, and would you expect this to kind of normalize higher as we move through the year?

Chris Calzaretta (Senior VP and CFO)

Yep. Yep. So yeah, that's largely you're talking about the impact, the EBITDA impact on AUV in the quarter. It's really timing and nature. You can see this from time to time and can get some quarterly noise, if you will, around how projects ship, which can influence the overall basket of products and how that falls to the bottom line. When I take a look at our overall expectation for the year, we do believe that our incremental there on EBITDA will return to and kind of be in line with our historical fall-through rate there. From time to time, you get a little bit of quarterly noise, and that's what we saw here in Q1.

John Lovallo (Analyst)

Okay. Gotcha. Then manufacturing costs have been a headwind to AS adjusted EBITDA for a few quarters now. Curious what's kind of driving that headwind, and do you expect that to subside as we move through the year?

Chris Calzaretta (Senior VP and CFO)

Yeah. I'd say largely when you look at the AS segment, again, with the inorganic growth that we've seen, the manufacturing costs are stepped up in connection with the acquisition of two businesses that we saw in 2024. That's largely the, call it the manufacturing cost increase that we've seen in that segment.

John Lovallo (Analyst)

Okay. Thank you, guys.

Chris Calzaretta (Senior VP and CFO)

Thanks.

Operator (participant)

Your next question comes from the line of Brian Biros with Thompson Research Group. Your line is now open.

Brian Biros (Senior Analyst)

Hey, good morning. Thank you for taking my questions. I guess on the sales guidance for Architectural Specialties, looks like it's a slight raise there. I guess kind of goes against the general uncertainty in the market. I know you talked about a few trends there throughout the call, but just curious if you could expand on what is behind the raise there for the guidance, if it's project timing or better acquisition cross-selling or something else, just what's driving that?

Chris Calzaretta (Senior VP and CFO)

Yeah. I'd say there's a little bit of what Vic had mentioned earlier around project, the overall visibility to projects there in that side of the business, more clear line of sight due to our backlogs. You also have a bit of that project, call it timeline, which is once a project kind of gets started, it's from the time of breaking ground to ceiling ship, and it can be in that 12-24 month range. We feel that that line of sight gives us confidence around our ability to call that top-line growth increase, slight increase in AS. Tempered with that too is a little bit of the uncertainty and cloudiness around what potential project delays could look like.

Overall, it's the backlog and the line of sight that we have that gives us confidence in the uptick in the top-line growth expectation for AS, albeit balanced with that potential uncertainty that's out there.

Victor Grizzle (CEO)

Brian, let me add, what Chris has said is exactly right. If you do not mind, I will just add that the other component that is a little different in Architectural Specialties is the market penetration growth dimension of that business. Remember, this is doing much better than the overall market is doing. That is something that we can continue to do even if the market softens in the back half. That is the other, I think, growth dimension that we have here, growth driver that we have here that is different than, say, in our Mineral Fiber business.

Brian Biros (Senior Analyst)

Understood.

I guess on the updated Mineral Fiber volume guidance, are there any specific verticals that you would expect to see maybe a quicker or more severe pullback based on your historical reference, or is that more of a broad-based view that everything would discretionary-type spend would pull back kind of in line with everything? Thank you.

Victor Grizzle (CEO)

Yeah. Yeah. I understand the question. Going back to an answer I gave earlier around the discretionary portion of the renovation work is where we're going to see the softness in the back half. Our experience here has been it's really vertical agnostic. If it's a discretionary project, whether it's in education, healthcare, or office, it is subject to a wait and see when there's a high degree of uncertainty. I wouldn't say one particular vertical is going to stand out over the other. I think we're going to see across the verticals, the discretionary work, again, I think that's where we're going to see the softness in the back half.

Operator (participant)

Thank you. Our final question comes from the line of Stephen Kim with Evercore ISI. Your line is now open.

Stephen Kim (Senior Managing Director)

Yeah. Thanks a lot. Vic, I just wanted to follow up on that last point there. Discretionary projects, do we see any kind of would we expect to see any kind of AUV or margin impact if you do see a decline in discretionary first? I am also kind of wondering whether or not you might see or anticipate you might see maybe smaller customers having more of a sort of a disproportionate impact from the sentiment impacts you were referring to earlier. Similarly, could that have an AUV or margin impact worth calling out?

Victor Grizzle (CEO)

Yeah. This discretionary business, flow business, as we refer to it, Stephen, as you know, is where we have the least amount of visibility. It is concentrated more with the installed base and kind of mirrors more of the installed base, which still is a lot of older, more, I would say, lower AUV-type products. If there's any AUV impact, it would be a lift on AUV or a help to AUV because of the mix improvement by not having some of the lower AUV in it. Whether it's material or not, I think that's another question. Directionally, to get at your question, I think if there is an AUV impact from that discretionary spend or the lack of the discretionary spend, I think it might show up there. I think these are smaller projects, not smaller customers.

I would think about it that way because even larger customers might forego or put on hold smaller projects. I would say it's the same dynamic. I think, if anything, there might be less lower AUV products in the mix and would be an upward help to the overall mix. Does that help?

Stephen Kim (Senior Managing Director)

Yep. Absolutely. That was exactly my question. Appreciate that. Yeah. Second question relates to the, again, staying on AUV impacts, the home center softness. I'm wondering, does that also have some sort of an AUV effect? In other words, was AUV maybe a little benefited by the home center softness this quarter as well?

Victor Grizzle (CEO)

Yeah. Yes, definitely. As we've talked about, that's our lower AUV channel. We have a very low or a small group of products that we sell through that channel, and they tend to be at the lower AUV. Yes, there was a little bit of a help in the quarter on the mix side from the lack of volume in that retail channel.

Stephen Kim (Senior Managing Director)

Okay. Great. Thanks very much.

Victor Grizzle (CEO)

You bet.

Operator (participant)

There are no further questions at this time, so I would like to turn the call back over to Mr. Vic Grizzle.

Victor Grizzle (CEO)

Thank you all for joining our call today and for your questions. I think as you can hear in our discussion today, we have a resilient business model, and we have a proven ability to execute on our controllables, that give us confidence to navigate these choppy and uncertain market conditions. We are ready to and poised to execute even in softer market conditions that we are forecasting for the back half of this year. Thank you again for joining our call today.

Operator (participant)

This concludes today's conference call. You may now disconnect.