Armstrong Flooring, Inc.
Q2 2020 Earnings Call Transcript

Published: 22 Jul 2020

[Operator:]

Hello and welcome to the Armstrong Flooring Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instruction] A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the floor over to Armstrong's Interim CFO, Gregory Waina. Mr. Waina, please go ahead.

[Gregory Waina:]

Thank you for joining us today for Armstrong Flooring's second quarter 2020 earnings conference call. I am joined by our President and CEO, Michel Vermette. We trust you've seen our press release this morning on the Investors section of our website at armstrongflooring.com. During this call, we will be making 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 SEC filings. 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 securities law. 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. I'll now turn the call over to Michel.

[Michel Vermette:]

Thank you, Greg, and good morning to everyone on the line. Before I begin the discussion on our operating highlights and business activity, I first want to take a moment to formally introduce Greg Waina, our recently announced Interim CFO. Greg comes to Armstrong Flooring with extensive interim CFO experience. He has served as a valued advisor to many public companies C-suite leadership team. We're excited to have Greg on Board and I'm confident that he will provide great insight and perspective on our finance, strategy and execution of our business transformation, as we work to identify and appoint a permanent CFO. With that, I will now dive into our operating highlights for the second quarter. Overall, I'm pleased with our second quarter performance, which reflects the focus execution of our strategic plan during these challenging times. At the beginning of the COVID-19 pandemic, we saw an unprecedented environment as strict shelter-in-place orders and other various actions to minimize the spread of the virus were implemented across the globe. During this time, we had shifted our near-term focus to prioritizing safety, financial flexibility and operational efficiency to prepare our business so that we could overcome the unpredictable market dynamics at hand. We entered this quarter with the expectation of multiple depressed demand scenarios. We were happy to report that our top line performance improved month-over-month throughout the quarter, leading to second quarter performance that exceeded our initial expectation. This is in part due to recovery in demand for critical flooring products, as the economy reopened in shelter-in-place orders were lifted across many markets. In addition, we are beginning to see the initial benefits from some of the actions we introduced as part of our strategic long-term roadmap back in March, which I will detail further shortly. Importantly, I would like to reiterate that we remain focused on the health and wellbeing of all of our employees and stakeholders. As we mentioned last quarter, most of our customers operate in the central industries and we are fortunate that we have been able to continue serving and throughout the pandemic. During the second quarter, business performed better than expected in every segment. While we clearly experienced a significant impact to our top line from a year-over-year perspective, mainly due to lower North American volumes, particularly in April, we were encouraged to record positive EBITDA for the quarter. We achieved this while under pricing pressure across the category. Fortunately, our initial efforts to simplify our processes through enhanced productivity and cost control helped us to achieve favorable results with all circumstances considered. Looking at our markets, in North America, we witnessed several encouraging trends as the quarters progressed in economies reopened across the country. On the residential side and most particularly in new construction, we saw outperformance across the board. This resulted primarily from homebuilders as well as from some of our internal customers engaging, engagement efforts from earlier in the year, they continue to gain momentum. On the repair and remodel side. On the center business, where we continue to serve our branded and private label products have largely operated unscathed throughout the pandemic. These businesses have remained open and available to homeowners who perhaps now have some additional motivation to remodel given they are spending much more time at home. On the contrary, opportunities on smaller independent retailers and large commercial contractors have bit more limited, in these end-markets, our experience of more prolonged recovery from our perspective. In many cases, our smaller independent retailers have not yet been able to fully resume normal activities as quickly as we would have hoped. Looking at the commercial side, healthcare and education are bright spots, but in other industries, we believe the slow recovery is primarily due to many delayed projects across the country. Furthermore, it is important to note that market conditions are continuing to evolve and some parts of the country are seeing ebbs and flow of activity. So while we have been encouraged by promising new residential construction trends and optimistic discussion with some of our customers, we're mindful that conditions are subject to change. With this in mind, we will continue to focus on the factors that are in our control, such as the execution of various projects in our long-term strategic roadmap. Asia, which represents a small portion of our footprint, business has recovered relatively quickly. However, there are still some challenges we are working through, although fortunately we have yet to see a material impact to our supply chain from the COVID-related impact. Just prior to the COVID-19 pandemic, we introduced a strategic roadmap to transform and modernize our operations to become a leaner, faster growing and more profitable company. As a reminder, this is a multiyear plan with the three critical objectives to expand, simplify and strengthen our business. As part of this plan, we're transforming our product portfolio, reengaging with customers, reintroducing innovative products and rebalancing our residential and commercial footprint. To every extent possible, we have been enacted exactly what we said, we were going to do since the inception of this plan, with a near term emphasis on less capital intensive initiatives. Now with our recently amended credit facility, a new term-loan, we have the right financing and the financial flexibility to make more significant progress on these goals. In regards to expanding our customer reach, the response from the launch of our new non-PVC MedinPure sheet product have been encouraging; Armstrong Flooring is becoming a better service provider in rebuilding our relationship and reputation with our customers. Our new customer centric operating model has been well received. We have been able to engage with customers differently and more effectively and the shift to virtual interaction has not slowed us down. We have adapted quickly in the way we train, in the way we engage. I'm confident in our ability to outperform our markets from a service perspective. We have connected with thousands of decision makers in the commercial industry leveraging technology. As planned, we start servicing the national flooring association directly. We also have well obtained virtual forms with our local distributors for retail sales associates to remain on top of mind and help them up-sell when customers return. Establishing and building relationship with customers is a critical part of our strategy that we expect to contribute more substantially and strengthen our results over the long term. On the simplification side, during the quarter, we announced the relocation of our corporate headquarters to Greenfield, a premier mixed-use corporate park also located in Lancaster, Pennsylvania. We're excited to move our offices to the vibrant space, which is much better fitted for the size of our company, will ultimately provide us with the benefits of a lower cost structure. In fact, this move is expected to help us achieve approximately 60% savings from our current headquarter lease in Lancaster. It is on track to occur in the summer of 2021. As we discussed last quarter, prior to the onset of pandemic, we began assessing the monetization noncore assets, such as our South Gate facility plant portfolio in California. We have made further progress on transitioning production out of that plant and into our production facilities as necessary. The market value that we estimate for that sole property in California continues to provide us with comfort in the strength of our total noncore asset moderation potential, and we expect to provide additional update on this assessment in the coming quarter. These are several examples of our progress during this unprecedented global pandemic, most of which represent permanent enhancements to our business. We're proud of our team's ability to adapt to the work-from-home environment, while continuing the strong engagement efforts with our customers. Our teams are staying creative in finding ways to be increasingly relevant to key influencers in the flooring space. We will continue to provide you updates on the progress we make on our strategic roadmap. With that, I will now turn the call to Greg to provide additional updates on our financial performance and liquidity.

[Gregory Waina:]

Thank you, Michel. I’ll begin with a brief review of our second quarter financial results. As Michel mentioned, considering the precedent circumstances of the quarter, our revenue and adjusted EBITDA performance were ahead of plan and reflection of proactive company-driven efforts in many areas. Global sales were $145.6 million compared to a $177.7 million in the prior year quarter, with the $32 million decrease primarily attributed to lower volumes due to COVID 19 pandemic and shelter-in-place related business disruptions. This included impacts from temporary closings of many independent customer retail locations, and the postponement of certain commercial projects. Adjusted EBITDA was $6.9 million in the second quarter of 2020. The top line impacts from lower volumes reduced EBITDA by approximately $16 million. Price mix headwind amounted to $2 million, largely reflective of the lower price in response to the abatement of tariffs. We also had approximately 2 million of headwinds in SG&A, resulting from management transition expenses as well as some planned growth investments to support our strategic roadmap. Partially offsetting these headwinds were positive impacts from reduced input costs, which contributed about $2 million to the upside, primarily due to the previously mentioned lower tariffs. Additionally, we experienced a $5 million benefits from productivity and strict cost controls. I'd like to remind you that we entered 2020 with SG&A headwinds totaling around $20 million, as a result of benefits incurred in 2019 with approximately 8 million of that in the second quarter of 2019. These prior year benefits were primarily related to our transition service agreements with the buyer of our wood flooring business. These SG&A headwinds will impact the third and fourth quarters of 2020 by about $4 million each. Looking at our cash flow during the second quarter of 2020, CapEx was reduced to 3.4 million with spending mainly limited to maintenance and safety. Operating cash flow was $10.2 million, which was in excess of adjusted EBITDA. The main driver of operating cash flow was reduction in working capital as we drove down a significant working capital bills in the first quarter. As we mentioned last quarter, we don't expect the remainder of the year to follow normal cash flow patterns, and we have implemented numerous measures to reserve cash as necessary. Our recent actions to improve our liquidity profile have provided us with ample financial resources to execute additional objective related to our strategic plan. In June 2020, we amended our senior secured asset based revolving credit facility, modifying the facility size to $90 million with a maturity date in December of 2023. This amendment provides us with further flexibility on our covenants with terms that are more appropriate in the current environment. Additionally, in June, we entered into a $70 million term loan facility, which has further strengthened our capital resources. Capital from this facility is available to us for business transformation and growth initiatives working capital needs and general corporate purposes. At June 30, 2020, we had total liquidity of approximately $120 million, including cash of $34 million plus availability under our credit facility. Our term loan does not mature until 2025. In anticipation of evolving marketing conditions, we will continue to evaluate additional actions to enhance our liquidity and cash as necessary. I will now turn the call back to Michel for closing remarks.

[Michel Vermette:]

Thank you, Greg. As we move into the second half of the year, we remain focus on expanding our reach within our addressable markets, simplifying our processes, and strengthening our competitive position while being mindful that extending shelter-in-place orders may have an evolving impact on the near-term demand for critical flooring products. That said, I am confident in our entire team and their ability to move forward with our multifaceted strategic plan, which will ultimately create positive long-term outcomes for our business. With positive receptions from our customers, innovative new products within pipeline and our recently improved liquidity position, we now have the foundation to execute our business transformation. Operator, please open the lines for questions.

[Michel Vermette:]

I want to thank you all for joining us today and look forward to talk to you next quarter. Thank you.

[Operator:]

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.