Armstrong Flooring, Inc.
Q4 2020 Earnings Call Transcript

Published: 17 Feb 2021

[Operator:]

Greetings and welcome to Armstrong Flooring Fourth Quarter 2020 Earnings Call. As a reminder this conference is being recorded. I will now turn the conference over to your host, Amy Trojanowski. You may begin.

[Amy Trojanowski:]

Thank you for joining us today for Armstrong Flooring’s fourth quarter and full year 2020 earnings conference call. I am joined by our President and CEO, Michel Vermette. In addition to the earnings press release issued today, a copy of the slide presentation to accompany this call is available on the Investors section of our website at www.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 detail 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 security 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.

[Michel Vermette:]

Thank you, Amy. And good morning to everyone on the line. I will begin with a brief overview of our business highlights, then Amy will discuss our financials in more detail before I close with a review of our business transformation progress and our outlook for 2021. 2020 was a transformative year for Armstrong Flooring, and I could not be prouder of our team for their resiliency and dedication to staying safe in delivering exceptional service to our customers. In March 2020, we announced our multi-year plan to transform and modernize our business. Since that time, we have pursued projects grouped under three critical objectives. One, expanding customer reach; two, simplifying our portfolio and organization; and three, strengthening our capabilities. Shortly after introducing our plan, the COVID-19 pandemic created an unprecedented environment for the global economy as many governments, communities and companies implement strict controls to minimize the spread of the virus. During that time, we shifted our immediate focus to prioritizing safety, financial flexibility and operational efficiencies. With our debt recapitalization in place by mid-year, we then have the financing and the financial flexibility to progress further with our planned business investments. Against that backdrop, macro trends have further supported our strategic initiatives, and we see that continuing in 2021. Residential housing construction remains positive for our customers. With this end market continues to grow an importance. Across the industry seasonally adjusted single-family housing starts are up 28% as of December. Other indices, such as the Harvard's Leading Indicator of Remodeling Activity, are predicting a 3.8% increase in 2021, similar to trends in the fourth quarter of 2020. While the commercial end market remains murky for 2021, we anticipate that the worst may be behind us. The Architectural Billing Index, ABI, while still below 50, has been improving after bottoming in April 2020, providing a better indicator for the commercial end market as we look forward. In the short period of time, since we announced the transformation, we have made significant progress in overhauling our product portfolio, re-engaging with customers, introducing innovative products and rebalancing our residential and commercial footprint. In short, we have done exactly what we said we were going to do, despite the pandemic impacts on our business throughout the year.

[Amy Trojanowski:]

Thank you, Michel. And good morning to everyone on the line. I am honored to be a part of the Armstrong Flooring team and excited to see our company enter 2021 on much stronger footing in our goals to achieve greater success. I will now provide a review of our fourth quarter and full year financial performance. Turning to our fourth quarter results on Slide 5, we were pleased to produce fourth quarter results that were in line with our expectations. On a year-on-year basis, revenues increased 1.8% to $143.9 million compared to $141.3 million in the prior year quarter. Increased activity at home centers and other residential channels helped to partially offset COVID-19-related business disruptions. mainly the postponement of certain commercial projects and slower activity at many of our independent customer retail locations.

[Michel Vermette:]

Thank you, Amy. I will now provide some additional details on our transformation progress. These collective strategic initiatives should translate to improve earnings, cash flows and overall returns. We'll start with expanding our customer reach on Slide 10. In the fourth quarter, we continue to directly service the National Flooring Alliance where we have nearly doubled our sales of displays since Q1. Other key national accounts in home centers remain a significant area of long-term focus for us. Prudent investments in sales and marketing are crucial to the long-term success of our customer centric operating model. And in the second half of the year, we added resources to our sales team to expand our reach in both existing and untapped verticals. The pandemic initially delayed our ramp up on the go-to-market side by several months, most particularly as it relates to access to our customers. However, our team was able to get creative to offset that impact and we’re able to make significant stride as the year progress. On the product side, we believe we will continue to outperform in LVT, because of the actions we are taking to improve product mix, realize Quick Ship and capture additional share in areas where we have not participated in the past such as hospitality. In the fourth quarter, we hired our head of hospitality who has wrapped up quickly to target that segment proactively for the first time in our history. We are organizing and augmenting our supply chain resources to reduce costs and increase efficiencies also allowed us to enhance our customer reach in 2020.

[Operator:]

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from Keith Hughes with Truist Securities. Please proceed with your question.

[Keith Hughes:]

Thank you. Have a couple of questions. Number one, you've highlighted a lot of change going on in the business, costs coming out and investment coming back in. Without the assist of volume gains are in 2021, what costs weren't due to this negative six EBITDA that you just reported? Would it improve on that or are you going to need volume to make that move up?

[Michel Vermette:]

Keith, well, thank you for joining us. So one, we do expect volume to be better first and foremost, right? So just with the efforts maturing both on the residential side that we have done so into your point costs, we just stop manufacturing in the South Gate facility recently. So that base of costs will be coming out at the end of March. So that is not there. So, the staffing will be eliminated. So that will be definitely a reduction in our cost base that will be helpful across the platform. So those initiatives will be paying off also. So, we're continuing working through it. And also, the headquarters as I mentioned in the second half will be significantly reduced. That expense will benefit us going forward. There'll be other costs that we will be spending to participate in other verticals. There'll be some give and take, but we definitely expect both top line and adjusted EBITDA to continue improving as we go forward.

[Keith Hughes:]

Okay. You had talked about growth and you talked about that in the slide with residential strength. Where are you now in commercial in terms of the sequential pace of business? Is there been any signs of life any of the end user markets have pick up in the last three, four months?

[Michel Vermette:]

Well, it's been better. There's been a consistent improvement quarter-to-quarter. So, we are hopeful that we – as the year improves next year that we eventually get to positive also. We are not positive yet, but it's getting closer to that in the fourth quarter. So, I'm definitely bullish on what the team's doing. We're also got a lot of self-help with our Quick Ship program. It's an area we were not participating on the transactional side. So, there's definitely some parts and pieces that we're not playing in. And they also – you think of hospitality, we just had no presence at all. So, it's a combination of market getting better, and a lot of self-help in that area. And also, we've done a lot of work on our product portfolio. We introduced some really good products such as MedinPure and some revamp NCD-10, LVT, and improve our LVT offering in the middle of the year, last year. And as you know, commercial takes a little bit of time to specify and get the business out there. So as those things mature and we get the benefit of the work of the sales team in those specifications. We expect definitely that to benefit ourselves so as those efforts mature in 2021.

[Keith Hughes:]

And your LVT growth kind of you're anticipating in 2021, are you at the point – are you growing in excess of the market, particularly given your commercial exposure? Are you growing in excess of the market at this point?

[Michel Vermette:]

Well, I haven't seen any exact market data so far, so I don't know. But we – our trend is improving. So, we were – our LVT growth is positive. So – and we expect to continue improving on it so.

[Keith Hughes:]

Okay. And final question, what is your outlook for your sheet vinyl markets in 2021 both heterogeneous and homogeneous?

[Michel Vermette:]

Hopefully, as the healthcare market stabilizes, we expect the – new construction has been pretty good, but renovation has been put on hold. So, we expect that to come back somewhat. A lot of people have been holding up on projects, but hopefully this vaccine will kick in and as things improve second half, it will be better. So, I expect a little bit more robust.

[Keith Hughes:]

Okay. All right. Thank you very much.

[Michel Vermette:]

All right. Thank you, Keith.

[Operator:]

Our next question comes from Julio Romero with Sidoti & Company. Please proceed with your question.

[Julio Romero:]

Hey, good morning, Michel and Amy.

[Michel Vermette:]

Good morning.

[Julio Romero:]

You talked about your business transformation and your customer centric initiatives. What are you hearing from your customers in terms of evolving residential needs as focused to be purpose homes for a work-from-home, school-from-home, et cetera? And how does that impact against Armstrong?

[Michel Vermette:]

Well, I think, everybody is definitely bullish on residential for 2021 and I think everybody is seeing, I would say, in the last six months the change. And I would say not only in the home for innovation everybody is seeing, I mentioned a little bit in our opening comments people are moving outside of some of the larger cities into larger spaces and everybody wants more room. And looking at their lifestyle, everybody – companies are much more open to remote work and that’s benefitting many companies, and entrepreneurs and retailers, as people reinvent their homes to match their lifestyle. There's still a lot of remote learning, a lot of remote work. Myself and Amy are definitely in that boat, personally, how we work through it. And I think it's created a lot of different projects for everyone. And I think the trend will continue for some time. I think a lot of people are reassessing their life and what's important to them. And I think we'll see that trend benefit for at least another two or three years. And as that comes about, and I think, it creates a lot of good opportunities for our customers, both on the builder side, I’d say in new construction. And I would say on the remodel side, for very much the retailers out there. So definitely that will be a robust market for years to come, I think.

[Julio Romero:]

Got it. And can you talk to your goal to penetrate new commercial verticals such as corporate office, government and how you see those potentially offsetting the headwinds you expect in retail?

[Michel Vermette:]

Well, I think, to your point, I think, there has been a series of verticals where we have not participated, such as hospitalities, and corporate has been very moderate for us. And I think in even some other verticals, we may not have been as equipped as we needed to. To compete, we're adding some commercial sales rep to first specifications in certain segments also. So, I think there's a lot of opportunities where we can do more. Our brand is very well respected and opens a lot of doors in in many areas. We've also added a national account team, that we have high expectations with and they are off to a great start, open up some key national accounts. And the good thing is many major businesses want cleaner areas, easier to maintain and so they can show how it is safe to come into their business. And our national account teams are really making – open up some new doors that maybe weren't there before. So, we're really lucky that they are having some nice momentum with commercial national accounts, where people can be seen resilient maybe where there was carpet before, and now they are willing to put resilient. And that's a big win for us. So have high expectation there. We're more and more engaged with our customers now. And I think that goes a long, long way. So, I'm bullish what the commercial team will accomplish, very bullish what the residential team can do. And getting this company back on track starts with growing sales again, that's first and foremost.

[Julio Romero:]

Got it. I guess the last one for me is if you can talk to kind of cash flow outlook and are you still aiming to get back to free cash flow positive in 2022?

[Michel Vermette:]

I think definitely with this pandemic, we're looking at everything, it's definitely top of mind. That's where we need to get to. The one thing we are looking in everything that we're doing to make sure we're doing it, we're looking to monetize assets, we're looking at our inventories. And I want to also give the benefit of Amy being here. She just got here and looking at this and penciling this out for us. So, I think we're going to make the most of 2021 and then we're going to assess 2022. But definitely sooner we get there, the better, right. So, I think that's definitely top of mind for all of us. So, we're definitely focused on it.

[Julio Romero:]

Great. Thanks for taking the questions. And best of luck in .

[Michel Vermette:]

Thank you. I appreciate it.

[Operator:]

We have reached the end of the question-and-answer session. I would now like to turn the call back over to Michel Vermette, CEO for closing comments.

[Michel Vermette:]

Well, thank you everyone for joining us today. We appreciate your interest in Armstrong Flooring, and we look forward to updating you on future calls. Thank you.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.