Armstrong World Industries, Inc.
Q4 2017 Earnings Call Transcript

Published: 26 Feb 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q4 and Full-Year 2017 Armstrong World Industries Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today’s conference, Mr. Tom Waters with Investor Relations for Armstrong World Industries Incorporated. Mr. Waters, you may begin.

[Thomas Waters:]

Thank you, Daniel. Good morning and welcome. Please note that members of the media have been invited to listen to this call and the call is being broadcast live on our website at armstrongceilings.com. With me today are Vic Grizzle, our CEO; and Brian MacNeal, our CFO. Hopefully, you have seen our press release this morning, and both the release and the presentation Brian MacNeal will reference during this call are posted on our website in the Investor Relations section. I advise you that 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 World Industries, please review our SEC filings, including the 10-K filed earlier this morning. Forward-looking statements speak only as of the date they are made. We undertake no obligation to update any forward-looking statements 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, with the most directly comparable GAAP measures, is included in the press release and in the appendix of the presentation. Both are available on our website. Finally, in discussing our financial results today, I want to remind you that with our announced agreement to see our EMEA and Pacific Rim businesses to Knauf, we will be referring to our North American continuing operations only with the exception of discussions regarding cash flow. With that, I’ll turn the call over to Vic.

[Vic Grizzle:]

Thanks, Tom, and good morning, everyone. It’s good to be with you today to discuss an important and productive year in Armstrong’s continued transformation, a year where we made significant progress on our two strategic imperatives

[Brian MacNeal:]

Thanks, Vic. Good morning to everyone on the call. Today, I’ll be reviewing our fourth quarter and full-year 2017 results. But before we go into the financials as a friendly reminder, I’ll be referring to the slides available on our website. Slide 3 details our basis of presentation used throughout this discussion. The primary differences to our reported results are expenses related to the separation of the flooring business in 2016, the impact of the sale of our international businesses, the exclusion of net environmental insurance settlements in 2017, adjustments made for our U.S. pension plan and costs associated with the restructuring activities we announced in November. With the agreement to sell our EMEA and Pacific Rim businesses, we are unveiling new segment reporting today. We are now reporting three segments

[Vic Grizzle:]

Thanks, Brian. Before we get into 2018, I want to offer a few comments on the leadership transition we recently announced. On Friday, we announced that Americas Senior Vice President, Dave Cookson, has decided to retire effective July 1, after 39 years of service. It’s difficult to list the contributions Dave has made Armstrong during his long and distinguished career. He’s been instrumental in the development and success of the ceilings business and to Armstrong’s market leadership position. Dave has driven a customer-focused approach that has helped build Armstrong’s reputation to what it is today, and his leadership and dedication has created significant shareholder value over the years. He will be missed by me personally and by many others in the organization. I want to take this opportunity to publicly wish Dave and his family great health and happiness in retirement. Now in light of Dave’s retirement and as part of our ongoing succession planning, Senior Vice President, Charlie Chiappone, has accepted the newly created position of Senior Vice President Ceiling and Wall Solutions effective April 1. In this new role, Charlie will lead the Mineral Fiber and Architectural Specialties segments. With Dave’s retirement, it’s the right time to consolidate these businesses under one leader and create a leaner, more nimble, integrated organization. And with Dave’s advanced notice, we’re afforded time to execute a seamless transition. Having successfully led the WAVE and Architectural Specialties businesses over the last six years, Charlie has the knowledge, the key relationships and leadership skills to drive the combined businesses forward. I’m excited for him and for the opportunities that lie ahead for all of us, as we continue to grow our business by selling into more spaces and selling more into every space. Now looking ahead, we anticipate 2018 to be another exciting and productive year for Armstrong. We’re expecting to operate in a more favorable economic environment, which will support more repair and remodel activity. And we expect the continuation of positive new building construction activity as the starts of 2015 through 2017 turn into completions, and 2018 is off to a good start. Year-to-date, volumes are up, well within our guidance range and versus a strong volume quarter in Q1 of 2017. Now however, regardless of market conditions, there are several factors entirely within our control that will allow us to drive sales growth and improve profitability in 2018. As I mentioned, since separating from the flooring business, we have been strategically investing in new products, sales and support services and advanced manufacturing capabilities. In 2017, we gained traction in the new product area. We began to see a return from our sales and support initiatives and we’ve completed our advanced manufacturing investments. In 2018, we will see even greater returns from these strategic actions driving sales gains through both volume and AUV. EBITDA will improve as a result of these sales growth and will be accelerated further by improved efficiencies in our manufacturing operations. After years of elevated capital investments, our manufacturing team will now intensify their focus on productivity and running our plants more efficiently as they have in past years. In fact, I expect to be talking a lot more about the positive performance of our plans in 2018. Our product innovation efforts remain robust and you will see us continue to introduce new products and services further extending our leadership in next-generation interior space solutions. We will continue to deliver double-digit organic growth in the Architectural Specialty sector, and we will supplement this growth through a more focused M&A activity. Our restructuring activities, the $15 million to $20 million of savings around the closing of St. Helens and reducing our G&A costs, are being accelerated and expanded. These actions will provide tailwinds to EBITDA growth in the second-half of the year and keep us on track to deliver $400 million of adjusted EBITDA in 2019. And finally, we look forward to closing the sale of our EMEA and Pacific Rim businesses and returning a majority of the cash to shareholders on top of our ongoing share repurchase program. So thank you for your attention this morning. And with that, I’ll open it up to questions.

[Operator:]

[Operator Instructions] And our first question comes from Keith Hughes with SunTrust. Your line is now open.

[Keith Hughes:]

Thank you. Just two questions. First on the quarter. The flow-through within Mineral Fiber on pricing, it seems a little weak versus what we have thought going in what we kind of heard the market. Can you just talk about pricing on Mineral Fiber for the quarter? How much of the price increase you saw on the top line and if there’s anything inhibiting the flow to the bottom line?

[Vic Grizzle:]

Yes, Keith, this is Vic. For the flow-through rate, it’s primarily been affected by the temporary startup issues I talked about in manufacturing. We had good price realization in the quarter. We had actually excellent AUV improvement overall in the quarter. Again, that flow-through rate was interrupted by the temporary startup costs that I mentioned, especially in our Marietta facility. So I’ll say, in the fourth quarter saw the acceleration that we talked about in the third quarter in terms of pricing, it was the highest realization quarter that we had all year and continue to build the momentum off of the the price increase we announced in the summer. We have announced another price increase in February, and we plan to continue to stay ahead of inflation with our price realization. And I expect the fall-through rate to improve significantly, or I’d say, it would be significant from our fourth quarter fall-through rate, but certainly back to our historical norms as we get our manufacturing productivity back to the levels that it has been in the past.

[Keith Hughes:]

And the plant issues, did they prevent delivery of some higher priced goods, or how does that impact the AUV?

[Vic Grizzle:]

Yes, it was primarily around the startup of new equipment. So there was no delay in terms of servicing those products. Those products are being supplied by their plants at the moment. And once we have this automation equipment online, I’m sorry, it’s online now and it’s up the learning curve. As we get it higher up on the learning curve, we’ll be moving all the products to this automated facility, which will greatly enhance the profitability of those products as well.

[Keith Hughes:]

Okay. Second question, your EBITDA guidance for the year, you had referred to $15 million to $20 million of productivity SG&A savings, how much of that is contemplated in the EBITDA guidance for 2018?

[Vic Grizzle:]

Yes, $15 million to $20 million is a total G&A and manufacturing footprint optimization range. And we said that, back in November, we said that that was going to be over a two-year period. So we would be implementing that in 2018 and also partially in 2019. So by the end of 2019, we should be at that run rate. I also mentioned in my prepared remarks, Keith, that we were expanding this and accelerating. And so pulling some of those cost reductions forward, so that we should see a bigger impact in the second-half. So we’re not breaking out exactly the contribution as some of these may float, but there’s definitely a second-half impact and acceleration in our EBITDA numbers that we guided to.

[Keith Hughes:]

Is it fair to say you’re going to see a higher dollar impact in 2019 than 2018 on this one?

[Vic Grizzle:]

Yes, I think so. I think that’s fair to say.

[Keith Hughes:]

Okay. Thank you.

[Vic Grizzle:]

Thank you, Keith.

[Operator:]

Thank you. And our next question comes from Kathryn Thompson with Thompson Research Group. Your line is now open.

[Kathryn Thompson:]

Hi, thank you for taking my questions today. Just some follow-up on the Oregon plant closure. You gave some color on the impact of the quarter, but if you could just maybe quantify a little bit more specifically the impact in the quarter? And also, clarify how we should think about the costs flow-through as you wrap up those operations for the remainder of fiscal 2018? Thank you.

[Brian MacNeal:]

Hi, Kathryn, this is Brian. So a couple of points there on the St. Helens. One, we mentioned that in our prepared remarks that we had – took a $4 million accelerated depreciation hit in the quarter, so for those that look at EBIT versus EBITDA and we’ll continue to see that in 2018. And as Vic mentioned, we’re now at the completion of $100 million advanced manufacturing investment that we made. So some of the operational headwinds we saw weren’t just at St. Helens, it was across the whole system, and we accelerated the startup of the ramp up curve in our biggest plant, Marietta, for the Flexline. We pulled that forward into December, so we could get out of the gates in 2017 stronger from the performance for 2018 from a performance standpoint.

[Kathryn Thompson:]

Should we see – as that St. Helens plant wraps up in Q1, will there be any other lingering costs specifically related to the plant for the remainder of the year? Just wanted to check okay and make sure that we’re on the same page just in terms of wrapping up that plant impact?

[Brian MacNeal:]

Yes. We will – as we’ve said previously, we’ll wrap up production in that plant. We’ll continue to service the customers out of that plant through until the DC is set up in Phoenix.

[Kathryn Thompson:]

Okay. Shifting focus to future and what to do with your cash flows, we spent some time in the past, the last conference call that since then talking about areas to invest, including walls, could you give an update of where you are speaking strategically in terms of walls, but also clarify the – a little bit more of what you can do to expand the Tectum family of products as they are being integrated into Armstrong? Thank you.

[Vic Grizzle:]

Yes, Kathryn, this is Vic. I may be very careful not to signal where we’re focusing in terms of new product development. But I do want to say that the Tectum platform coupled with our existing specialty wall platform really does give us a lot of latitude for us to innovate and we are innovating in that. We are investing in several new lines of products connected to those two technologies that we’re very excited about and we’ll continue to get the focus of our team. So I’d say in 2018, you’re going to see some new products around those two new platforms that are going to further our penetration to specialty walls. So I’d like to leave it there for now and not to signal too much, but it is an exciting area for us. It’s an exciting adjacency. The Architectural Specialty capabilities that we’ve been working on for the last five or six years, specifically around design capabilities really does give us the platform of capability to move into this adjacency. And again, as you mentioned with Tectum acquisition, it gives us a whole another platform to – as a material platform for us to innovate to. So very exciting and more to come on that.

[Kathryn Thompson:]

Okay, great. And finally, just quickly a question on rising steel costs and how that impacts WAVE. Do you feel like you’ve been able to keep up with rising costs in that – particular for steel? And how should we think about – I assume that you’re going to attack that with multiple price increases, any color on rising steel and WAVE? Thank you.

[Brian MacNeal:]

Yes.

[Vic Grizzle:]

Yes. So the steel inflation really started in the second-half of 2016 and began accelerating; put us into a bit of a behind the curve in 2017. And although we were successful in raising price successfully and gaining in each of the quarters of 2017, we never caught up through the gap that was created in the second-half of 2016. We, as you know, we’ve announced a number of price increases and November was our last one, we’ve got another one in February. And I’m confident that we’re going to catch up to the steel inflation with our price increases and we’re on the right trajectory to do that. So, yes, we will be raising price accordingly to make sure that we’re covering steel inflation in 2018.

[Kathryn Thompson:]

Thank you very much.

[Vic Grizzle:]

Thanks for your questions, Kathryn.

[Operator:]

Thank you. And our next question comes from Stephen Kim with Evercore ISI. Your line is now open.

[Stephen Kim:]

Thanks very much, guys, and thanks for all the color. Wanted to talk a little bit about Architectural Specialties, if I could. I was curious if, going forward, you can give us a sense for what you think the normalized incremental margin we should be using in Arc Spec is? And also are you going to at any point in the foreseeable future start breaking out AUV in Arc Spec?

[Brian MacNeal:]

Hey, Stephen, this is Brian. So on the AUV point more than likely not. It’s very difficult given the customization that occurs in Architectural Specialties to really pinpoint the exact price and mix benefit. So we’ll continue to show on our bridges there that mostly is volume and we’ll continue to invest in some SG&A to help the front-end of the design phase of AS. On the margins going forward, we – 22% EBITDA margins are pretty good proxy at this stage. I mean, obviously, that’s not the gross margin, but like I mentioned, we’ll continue to invest in SG&A. And so using in that 20 to 25 range is a good incremental margin number.

[Stephen Kim:]

Okay, got it. And then that’s helpful, thanks for that. And then, as you think about opportunities outside of just the Mineral Fiber ceiling tiles, I mean, obviously, Arc Spec encompasses a lot of different kinds of things. In general, as you look at adjacencies, are they – are you typically finding opportunities with EBITDA margins in that kind of range of the existing 22% to 25%, or is there your expectation that you’ll boost the top line, but obviously – but the EBITDA will come down a bit?

[Vic Grizzle:]

Yes, I would say, compared to the Mineral Fiber EBITDA margins, it’s tough to find that standard, right? I mean, that’s a pretty high benchmark out there. But here’s how we think about it. We think about these opportunities that are outside the Armstrong system. When they’re brought into the Armstrong system, what is the margin expansion and profitability opportunity that exists? By leveraging something that we’re already doing very, very well, whether it’s gaining specifications or partnering with our – through our distribution channels. So there’s – that’s how we think about those opportunities and the synergies and the leverage we can get with the existing Armstrong model. And that’s how we’re thinking about what we – what else we want to bring into the Armstrong system is that opportunity, and we’ll continue to size up those based on those leverage points.

[Stephen Kim:]

Yes, that make sense.

[Vic Grizzle:]

Yes.

[Stephen Kim:]

Lastly, on productivity, you had mentioned that productivity will be probably in line with inflation in the guidance for 2018. But I just wanted to delve into that a little bit more. Can you give us a sense for what kind of level each might be, I know that you said that might be about the same. But like how much inflation are we thinking about here in terms of dollars for 2018? And it’s – am I correct in assuming that you might see the inflation of cost hit you more in the front-half, or the productivity gains might be more weighted to the back-half, or do you think they actually might be synchronized quarterly?

[Brian MacNeal:]

So, Stephen, this is Brian. The productivity will improve right away.

[Stephen Kim:]

Okay.

[Brian MacNeal:]

We had some headwinds there in 2017 as we tried to prepare for the St. Helens closing and complete that $100 million advanced manufacturing investment. So we expect that productivity to start right out of the gate. From an inflationary standpoint from our guidance, this year we sold just right around 2%. We’ve guided 2% to 3%, so it came in a little bit towards the lower-end and we expected to pick up some here in 2018 from an inflationary standpoint. But net-net, this business historically has delivered over $10 million of productivity, and we didn’t see in 2017 we expect and we’re confident we’ll see in 2018.

[Stephen Kim:]

Got it. Thanks very much, guys.

[Brian MacNeal:]

Thanks, Stephen.

[Operator:]

Thank you. And our next question comes from Nishu Sood with Deutsche Bank. Your line is now open.

[Nishu Sood:]

Thanks. I wanted to ask first about the – plans for the cash generation from the sale of the International Operations. Your diluted share count guidance for this year kind of indicates no share repurchases. So just wondering, because you’ve mentioned the majority of those cash proceeds are going to be returned to shareholders. Is – does that tell us that it will be returned in another way, or is that just a placeholder since the transaction obviously hasn’t been completed yet?

[Brian MacNeal:]

Hi, Nishu, it’s Brian. We’ve just assume that we want to be clear with everybody that we assumed in our EPS guidance of $53 million. I mean, obviously, we’re going to continue to complete and be active against our existing share repurchase. On the use of proceeds from the sale of international, we continue to have a great dialogue with our Board. Obviously, the transaction has not closed, and we intend to return a majority of it to shareholders with a vehicle to be determined.

[Nishu Sood:]

Got it, got it. Great, okay. And the – on the acquisition pipeline, Tactum, obviously, a very successful deal in terms of integration and drive – driving cost savings from there. How does the pipeline look at this stage? And what generally should we be expecting in terms of pacing, obviously recognizing that deal flow comes up when it comes up and when things work out? But how active do you intend to be in terms of that and what generally should folks be expecting in that regard?

[Vic Grizzle:]

Nishu, this is Vic. The pipeline continues to be very encouraging and it’s building. It’s – from a year ago, it’s so much better than what – it’s – from six months ago, it’s improved. So I like what I’m seeing in the pipeline. As you talk about, some of these things are very hit or miss and the timing is dependent on both parties. So there’s a lot of timing elements to this. But the pipeline itself, the opportunities and the way that we’re thinking about the growth opportunities to bolt-on to this very capable go-to-market machine that we have here. We’re very excited about this. And as I mentioned in my prepared remarks, this is a focused effort for us now. We have a team of people, this is what they do every day is mine for opportunities to take advantage of the successful Armstrong business model that we have. So I continue to be encouraged and excited about the pipeline. And you should expect, as we’ve outlooked, one, two, three bolt-on acquisitions a year, and I think we’re building a pipeline to accomplish that.

[Nishu Sood:]

Got it. And the – obviously, the enhancement of cash flow from the lower tax rate. Does that change the capital allocation hierarchy in anyway, or does it just give you more to play with in terms of either obviously investments or acquisitions or cash return?

[Vic Grizzle:]

It doesn’t change our capital allocation strategy at this time, not at all. It – I think, it further enhances what we’re focusing on, but it doesn’t change the prioritization.

[Nishu Sood:]

Okay, great. Thank you.

[Vic Grizzle:]

Thank you.

[Operator:]

Thank you. And our next question comes from John Lovallo with Bank of America. Your line is now open.

[John Lovallo:]

Good morning, guys, and thanks for taking my questions. The first one is, it seems that Mineral Fiber volume was kind of flattish in 2016. It was down, call it, 1% to 1.5% in 2017. What do you think these to happen to the high-end of your 0% to 2%? And how much confidence would you have in a high-end of that range?

[Vic Grizzle:]

Yes, I think the new construction activity continues to be very healthy, especially in the office sector. But when you look at healthcare and education, the new construction side of the business is encouraging for 2018 and potentially beyond. That R&R component is where we’ve seen a little bit of softness. And a quarter here, a quarter there, you’ll get some spikes in activity. But if we haven’t had this consistent R&R activity, I think, what has to happen there is a broader-based economic environment much like what we’re coming into in 2018, where you have more sectors of the economy participating. And that’s why we’re out looking a better R&R environment in 2018. As we come into from the tax reform and the impact on a broader basis, we’re expecting some better activity there. So I think that’s what’s – that is what has to happen, and I think that’s what we’re out looking to happen in 2018.

[John Lovallo:]

Okay, that’s helpful. And then maybe along the same lines, did you see any pickup in the education sector with school being back in session, or is that still a relative soft spot?

[Vic Grizzle:]

Well, we wouldn’t – we didn’t expect to see any uptick in education, because when they’re back in school, the renovation activity really comes to a halt. It’s really those summer months are really important when the kids are out of school for them to be doing the renovation work. So a kind of return to normal as we reported in October, November. So that’s – I think that’s kind of where we are. We’ll have to wait and see as May, June will surround here how the summer is looking for education. But again, with a lot of the bond approvals to allocate more funds toward education that we saw in California and Texas across several states actually, we’re optimistic that we’ll have a better R&R season in education.

[John Lovallo:]

Great. Thank you. One quick one here. In the China, it appears that you have one Mineral Fiber plant in China that you’re keeping post Knauf. What’s the rationale for that, or it’s just a timing issue?

[Vic Grizzle:]

Yes, it’s a timing issue, because we’ve closed that plant and it’s just a matter of what’s the right disposition of that plant at this point.

[John Lovallo:]

Okay. Thanks, guys.

[Vic Grizzle:]

You’re welcome. Thank you.

[Operator:]

Thank you. And our next question comes from Michael Wood with Nomura Instinet. Your line is now open.

[Michael Wood:]

Hi, thanks for taking my question. First, just wanted to walk through fourth quarter Mineral Fiber volumes. It was just about two months ago, I guess, in the year, you’d given the full-year guidance for 7% to 11% Americas sales growth. It looks like you came in just under the bottom-end of that range. Just wondering was there any particular area that was softer versus your expectations?

[Vic Grizzle:]

Yes, the one area that we highlighted in the third quarter was the education repair remodel. That – again, it was as late in the season as June where discretionary budgets were cut. And so we saw really soft education R&R season, which is a very important volume season for us. So that was really the major, I think, change and relative to the overall guidance that we had put at the beginning of the year.

[Michael Wood:]

Okay. When your other competitors came out and saw stronger growth in the fourth quarter? There was some attribution to inventory stocking, also some sales to weather-related storm impacted areas. Just curious why you felt like you didn’t get participation in that activity?

[Vic Grizzle:]

Well, it’s really hard to compare quarter-to-quarter, right? I mean, there’s project – large projects that can influence. There’s channel purchases that can influence a quarter-to-quarter. So I would be very careful with the the assumption that we didn’t participate. We had a very good fourth quarter 9% top line growth, lots of activity and overall, pretty good growth.

[Michael Wood:]

Okay. And then on Sustain, you’d mentioned more than 30% of your sales in Sustain product. Does that roll out continue in 2018? And do you think, we continue to see penetration in that product?

[Vic Grizzle:]

Yes, we expect to see that continuing. Architects want to spec more of these types of products. And as we get more specs rolling through the system, we expect penetration rate to continue to go up absolutely.

[Michael Wood:]

Okay. Thank you.

[Vic Grizzle:]

Thank you.

[Operator:]

Thank you. And our next question comes from Garik Shmois with Longbow Research. Your line is now open.

[Garik Shmois:]

Hi, thank you. First question just on the AUV guidance. Is this assuming just carryover from 2017 price actions plus the February price increase, or are you going to need additional pricing to hit you, at least, 3% AUV increase for 2018?

[Brian MacNeal:]

Hi, Garik, this is Brian. So we price every year, twice a year on the tile side of the business. WAVE is a little bit more dynamic, but generally, it’s twice a year also. We just announced a 5% increase in February and we typically do another one late summer, early fall kind of in that August 1 time frame. So the guidance we provided, it seems that we will do just like history to pricing actions.

[Garik Shmois:]

Okay, that’s helpful. And then I just want to ask on Architectural Specialties. It seems like other competitors are just investing more in this business as well. I’m just curious you’ve – it seems like you’ve had a moat around it for quite sometime. Are you seeing any change in competitive landscape and just speak to your level of confidence in driving double-digit growth in 2018?

[Vic Grizzle:]

Yes, my confidence level is high. And in Architectural Specialties, one of the unique parts of this is, it’s a very project-oriented business. So the visibility of the pipeline is sometimes better than in your Mineral Fiber part of the business because of the project nature of it and a lot of custom type projects. So I like what I see in our pipeline, and we have the pipeline that supports another year of double-digit growth there. And so my confidence level is high here. We’ve got a great team. We’ve been working on capabilities that are very different than the Mineral Fiber business. They’re much more design-oriented. And that team just continues to strengthen its capabilities and the type of projects that we’re participating in just continues to increase. So that’s what gives us confidence that we’ll have another year of double-digit growth there.

[Operator:]

Thank you. And our next question comes from Michael Rehaut with JPMorgan. Your line is now open.

[Michael Rehaut:]

Thanks. Good morning, everyone.

[Vic Grizzle:]

Good morning, Mike.

[Michael Rehaut:]

The first question I had was on average unit value and your outlook in for 2018 for a roughly 3% contribution. I just wanted to do understand if you felt that would be coming more from price versus mix, given the discussions around price increases, and if that would be more weighted in the Mineral Fiber segment?

[Brian MacNeal:]

Hi, Mike, this is Brian. So historically, our AUV contribution is roughly been 50-50 between price and mix. It obviously moves depending on the inflationary backdrop. In 2017, we saw a little bit more on the mix side than history. As we go into an inflationary market, we believe that’ll be more balanced like it has been historically. And so that’s reflected in our guidance.

[Michael Rehaut:]

That’s helpful. Thank you. Also, I think there’s an earlier question about cadence around productivity over inflation. And so the thoughts there were helpful. I think just taking a step back as well, just thinking about first-half and even first quarter versus back-half, you had mentioned that you expect some contribution from the SG&A saves to start hitting in the back-half of the year. When you think about the growth and the margin expansion, EBITDA margin expansion and growth you expect for 2018, should there – should that growth be even throughout the year and that margin expansion even throughout the year, or there are many companies that have kind of guided to a little more 2H weighted and maybe the expansion being a little bit less or even flattish in the first-half or the first quarter and a little bit above the full-year average in the back-half? So any thoughts around that would be very helpful?

[Brian MacNeal:]

Sure, Mike, this is Brian. We have a history of driving EBITDA margin expansion. And so we continue to expect in the first-half kind of a historic performance there. As Vic mentioned and as I’ve talked about too, the restructuring will benefit the second-half, so we’ll see that pick up. And clearly, from the guide that we’ve provided, we’re expecting nice pretty significant margin expansion. Our plant, as we mentioned, did not run as well as we’d hoped and didn’t drive the productivity in 2017. And so as we get focused on delivering $10 million of productivity in 2018, that will be spread across the whole year.

[Michael Rehaut:]

Okay, that’s great. And just lastly, on the pension, which is included – the pension expense, which is included in the table to get to the adjusted EBITDA. Is that pension expense something that in terms of adding it back something that you saw in 2017, is this something that that we should be expecting as a kind of continued expense over the next two, three, four years? I think people sometimes focus on whether or not to add something back and count it within an adjusted if it’s more of a shorter-term expense that that’s not going to recur, or if it’s something that you expect in this type of magnitude for the next several years?

[Brian MacNeal:]

No, Mike. So, a, it was an expense in 2016, it was a credit in 2017, and that’s really – the reason it was a credit was really the reflection of a spend of fours and settling in the composition of our pensioners. We don’t expect to see any huge changes in creditor expense position going forward, they’re really a function of the separation of our floor business.

[Michael Rehaut:]

Okay. And so then that $20 million should be something that we should expect over the next few years, and just to clarify if that’s non-cash versus cash?

[Brian MacNeal:]

Correct. We’re – it’s a 100 – over a 100% fully funded pension. And so this is accounting for the changes in the spend.

[Michael Rehaut:]

Okay. So non-cash then?

[Brian MacNeal:]

Yes, non-cash.

[Michael Rehaut:]

Right. Great. Thank you.

[Brian MacNeal:]

Thank you.

[Operator:]

Thank you. And our next question comes from Ken Zener with KeyBanc. Your line is now open.

[Kenneth Zener:]

Good morning, gentlemen.

[Vic Grizzle:]

Hey, Ken.

[Brian MacNeal:]

Good morning.

[Kenneth Zener:]

So I do appreciate the color on the new segment reporting here. I believe – but you talked about a, as you said, it was 20% organic, that was for the full-year, I believe?

[Brian MacNeal:]

Yes.

[Kenneth Zener:]

Now, is that – just so and I realize you might not talk about FY 2018? Did that have a pretty steady cadence, or is there seasonality in the business that we should be aware of outside of any M&A?

[Vic Grizzle:]

Yes. Ken, on – this is Vic. On the cadence, because it’s a very project-oriented business, it has less of a seasonality influence to it like our Mineral Fiber business. So it can be influenced by the shipment of large projects in a quarter. So it can have some lumpiness to it and it doesn’t really follow the seasonal pattern as much as the Mineral Fiber business. I hope that was your question. I hope that helps.

[Kenneth Zener:]

Yes. And I would just say to that effect like there was load-in in the retail and ceilings in the past if you see any of that volatility coming, that would be useful, I would say, in advance?

[Brian MacNeal:]

That’s not typical in the AA business because of the custom nature of the products, yes.

[Kenneth Zener:]

Good. And then I guess, Brian, just going – you talked about EBITDA. In general, you talked about a little stronger back-half, historically, in mineral well – at least, for the last two years that we now have data on 51% of EBIT came in the first-half. is it – are you implying that it could be like 55% in the back-half, as opposed to just under 50%, or would you say that back-half is something that you would feel comfortable putting a number around, so we could have a little more clarity?

[Vic Grizzle:]

Yes, Ken. I mean, if you look back at history, this business runs either 49 first, 51 back, or 51 front and 49 back.

[Kenneth Zener:]

Yes.

[Vic Grizzle:]

It doesn’t swing drastically and we don’t anticipate that big of a swing, while it will – the second-half will benefit from the restructuring activities.

[Kenneth Zener:]

Thank you.

[Vic Grizzle:]

Okay. Thank you, Ken.

[Operator:]

Thank you. And our next question comes from Philip Ng with Jefferies. Your line is now open.

[Collin Verron:]

This is actually Colin Verron for Phil. Thanks for taking my question. My first question just you and your largest competitor out with price increases for February. Can you talk about the impact that you’re seeing from increased competition with the new supply entering the market?

[Vic Grizzle:]

Yes, this is Vic. I think that the competitive environment continues to be the same as we’ve seen, it’s competitive and you have to earn what you get out there every day. And we continue to focus on serving our customers in a way, which we can earn these price increases with better service, better quality, and are certainly our new product introductions at the high-end of the market continue to help us drive and earn those prices. So it’s – there’s no material difference out there. You just have to work hard every day to get it.

[Collin Verron:]

Okay. And then I believe you said the Architectural Specialty sales are growing at 20% plus organically. And looking out into 2018, you say greater than 10% in your guidance. Is this 20% organic growth rate something that can continue in that business?

[Vic Grizzle:]

Well, hypothetically, it can continue, but what we’ve been delivering is a double-digit growth rate in that 10% to 20% range over the last several years. So we continue to be excited about the pipeline and the opportunities based on our capabilities that we’ve developed over the last several years. So we’re very optimistic about the possibilities to continue a double-digit growth scenario in that business.

[Collin Verron:]

Great. Thanks for taking my questions.

[Vic Grizzle:]

You bet. Thank you.

[Operator:]

Thank you. And our next question comes from Dennis McGill with Zelman & Associates. Your line is now open.

[Dennis McGill:]

Hi, thank you, guys. First question just going back to the guidance for Mineral Fiber for the year the 0% to 2%. And just to clarify, is that your assumption for the market for the year and the variance there is just whether the end channels become stronger now and some of the other end channels kick in relative to 2017, or are there any execution benefits that you’re seeing from a strategic investments that would impact the number versus the market?

[Brian MacNeal:]

Hi, Dennis, this is Brian. So the 0% to 2% is consistent with our expectation in the market. There’s no share gain in there.

[Dennis McGill:]

Okay, perfect. And then just Architectural Specialties. On the organic side, I know in the quarter you said it’s just about 25%. On our numbers, that’s a lot higher than earlier in the year. Can you just clarify what the full-year organic was and then in the fourth quarter specifically?

[Brian MacNeal:]

So we’ve said in our prepared remarks, Q4 was up 50% in totality. We previously called out that AS or our Tectum acquisition benefited for the full-year at roughly $26 million in sales. You can pretty much back into the AS growth.

[Dennis McGill:]

Okay. That’s what I was getting to. So in the fourth quarter, it’s a big step up in organic growth relative to the first three quarters. So is that just project-related? Was there a big project that hit in the fourth quarter?

[Vic Grizzle:]

Yes.

[Brian MacNeal:]

Yes, that’s exactly right. That’s exactly right.

[Dennis McGill:]

Okay. And any carryover from a large project like that again into the first quarter?

[Vic Grizzle:]

Well, we continue to like our pipeline. We should have a good first quarter, and I think a good year in Architectural Specialists in 2018.

[Dennis McGill:]

But nothing as you said here today that would tell you to have an outsized growth in the first quarter for something that you know is going to deliver that’s rather large?

[Vic Grizzle:]

But we’re not going to guide on the quarter. But I think that again, the pipeline supports another double-digit growth year for us and we’re going to get off to a good start in the first-half of this year.

[Dennis McGill:]

Okay. Got it. I think you got it.

[Vic Grizzle:]

Makes sense.

[Operator:]

Thank you. [Operator Instructions] And we do have a follow-up from Keith Hughes with SunTrust. Your line is now open.

[Keith Hughes:]

You had talked at the beginning of this call about volume being related to economic growth and obviously, the tax reform. There’s a questions whether that’s going to accelerate. My question to you is, have you seen anything in the last couple of months from not even just orders, but from quotation activity giving you an indication that the – there’s a Mineral Fiber volume could start picking up?

[Vic Grizzle:]

Well, our project-based backlog, Keith, this is Vic is – has picked up and we like what we see on the new projects side. And you know as well as anybody, that’s a smaller portion of the overall business, the R&R portion is less visible. But there are some good signs in terms of activity out there that are encouraging. And once I talked to the customers and both the distribution and the contractors, they’re all very optimistic about the bid activity that they have going on out in the marketplace. So there are several signals that that give us some hope for a better economic environment.

[Keith Hughes:]

Okay. Thank you.

[Vic Grizzle:]

You’re welcome. Thank you.

[Keith Hughes:]

Thanks, guys.

[Operator:]

Thank you. And I’m not showing any further questions at this time.

[Vic Grizzle:]

Okay. Thank you very much for everybody’s attention this morning and participation. Again, just a couple of closing comments. A productive year, very busy, very productive year. We’re excited about the growth opportunities that are resulting from our thinking as a focus on the Americas and the startup issues that we talked about and we saw in the fourth quarter are behind us, big focus on productivity as we get into 2018. The line of sight on rightsizing cost actions and I talked about expanding those and even accelerating those together with the industry-leading innovation that we’ve launched in the marketplace, we’re well-positioned for a terrific 2018 and beyond and we’re excited about it. And we look forward to updating you after our first quarter results. So thank you, everybody, and have a nice day.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program, and you may all disconnect. Everyone, have a wonderful day.