Armstrong World Industries, Inc. Q2 2026 Earnings Call

Hello, and thank you for standing by. My name is Paige, and I will be your conference operator today. At this time, I would like to welcome everyone to the Armstrong World Industries second quarter 2026 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. I would now like to turn the conference over to Theresa Womble, Vice President, Investor Relations and Corporate Communications. Please go ahead. Thank you.

Welcome everyone to our call this morning. On today's call, Mark Hershey, our CEO, and Chris Calzaretta, our CFO, will discuss Armstrong World Industries' second quarter 2026 results and the 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 measures is included in the earnings press release and in the appendix of the presentation issued this morning. Both are available on our investor relations website. 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, July 28th, 2026.

These statements involve risks and uncertainties that may differ materially from those expected or implied. We provide a detailed discussion of risks and uncertainties in our SEC filings, including the 10-Q filed earlier this morning. We undertake no obligation to update any forward-looking statements beyond what is required by applicable securities law. With that, I will now turn the call over to Mark.

Good morning. Thank you for joining our call. Today, we reported second quarter results featuring record net sales and adjusted EBITDA, with solid contributions from both our Mineral Fiber and Architectural Specialties segments. On a total company basis, net sales increased 11% and adjusted EBITDA increased 8% versus the prior year, while adjusted diluted earnings per share increased 13%. These results were modestly ahead of our expectations and reflect strong execution despite continued flattish market conditions, which were similar to what we experienced in the first quarter. Our ability to achieve these results in a muted market environment is a testament to the focused execution of our teams and the power of the value creation building blocks at Armstrong.

These building blocks include earning consistent Mineral Fiber Average Unit Value or AUV growth, driving operational productivity in our manufacturing plants, and delivering profitable growth in our expanding Architectural Specialties portfolio. Looking first at Mineral Fiber results, we posted an 8% increase in net sales, driven by AUV growth of 6% and volume growth of 2%. Both price and mix contributed meaningfully to our AUV result this quarter, with mix performance driven by continued increased demand for products at the higher end of our portfolio, namely for our smooth white acoustical tiles, what we call our SWAT products. Our ability to meet evolving customer needs with innovative high-value products that meet a range of functional and design requirements continues to be an Armstrong hallmark.

Turning to Mineral Fiber volume, this quarter marked the fourth quarter out of the last five in which we generated volume growth and represented the highest quarterly growth rate since early 2023. A combination of consistent commercial execution by our selling, marketing, service, and support teams and ongoing incremental benefits from our growth initiatives drove the healthy increase in volume. These sales results highlight the strength of our commercial organization and their long-standing relationships within our markets, relationships with distributors and other channel partners, and importantly, with the architects, designers, and contractors that specify and install our products. Those established relationships are supported directly by our broad market coverage and teams uniquely focused on ceiling solutions. Coupled with our proven track record for product quality and customer service, from seamless ordering to reliable delivery, we are well-positioned to sustain success across variable market conditions.

Mineral Fiber adjusted EBITDA performance was strong this quarter, with 7% year-over-year growth and an adjusted EBITDA margin approaching 45%, even as we continued our SG&A investments for growth and experienced some input cost inflation. Our manufacturing plants supported that performance by running well with the quality and perfect order fulfillment measures we discussed last quarter remaining at very strong levels. Consistent operational execution coupled with focused productivity initiatives at the plant level remain critical enablers of our impressive margin performance in Mineral Fiber. We are well-positioned to achieve our full year 2026 adjusted EBITDA margin guidance of approximately 44%, which would represent a record performance for this segment and the fourth consecutive year of Mineral Fiber margin expansion.

Importantly, our Mineral Fiber results in the quarter were well-supported by our growth initiatives, which remain squarely focused on delivering Mineral Fiber AUV along with volume growth ahead of market through leading innovation and differentiated services. These include our strengthening digital initiatives, namely our Kanopi online selling platform, and ProjectWorks, our automated design service along with our more recent product innovation focused on energy efficiency and data center solutions. Within the digital initiatives, both Kanopi and ProjectWorks continue to gain traction and deliver value for the company. Kanopi has continued to strategically evolve, both in terms of the breadth of products available on the platform and the types of customers it serves. Put simply, the core premise of Kanopi is proving out that latent demand exists for a specific portion of the installed ceilings base, which can be reached by a tailored and efficient path to purchase.

Kanopi offers a digital channel that is highly engaging and easy to use for this underserved part of the market. In addition to supporting small business owners, we are finding that companies with multiple facilities across a wide geography can use Kanopi to provide their locations or branches with a consistent and reliable means of refreshing their space with materials pre-approved by their central design or procurement teams, reliably fulfilled through our trusted distribution network. As we've scaled and optimized Kanopi, we are increasingly pleased with its profitability performance. ProjectWorks also continues to deliver value by strengthening our project specifications and win rates and further differentiating our market position with our customers. Both quoted values and fulfilled projects processed through ProjectWorks continue to grow, supporting our AUV and sales volume.

As we are frequently reminded by architects, designers, and contractors, ceilings are complex, and they are becoming more complicated as the design community pursues a broader range of visuals and integrated solutions. Particularly as demand for skilled installation labor remains constrained and project timelines remain compressed, ProjectWorks directly addresses the efficiency and accuracy needs of our customers. Similarly, our product innovation continues to center on the most immediate mega trends within the built environment, namely the demand for energy-efficient building solutions and the expansion of data center infrastructure. Innovations like our TEMPLOK energy-saving ceiling tiles and our expanded data center product portfolio deliver customer value, driving both AUV and volume growth. With our TEMPLOK offering, we remain focused on raising awareness of its multiple value propositions, from energy savings to thermal comfort for occupants, to eligibility for tax incentives.

To that end, we are expanding and scaling our go-to-market platform and supporting those resources with energy modeling capabilities, project case studies, and testimonials to influence building owners and energy savings companies that drive this decision-making. These efforts are helping to secure specifications and, in the process, build a pipeline with more project opportunities, which more than doubled since the end of the first quarter. These are encouraging and confidence-building signs for this important initiative and our commercial teams, reflecting not only our sales and marketing efforts, but also the market need for more solutions to meet the rapidly expanding demand for energy-efficient buildings as electricity costs continue to rise and the focus on grid reliability increases. Similarly, as we discussed last quarter, the data center market represents another focus area for growth.

While we have served data centers with ceiling products for years, mainly in the front office portion of those facilities, we have expanded into structural grid and containment offerings to capture more share within these projects. With a broader solution set for data centers, we are positioned to more effectively serve demand from hyperscalers, co-locators, and enterprise customers. We're seeing healthy growth in both our project quoting and intake pipelines, with wins year to date in 2026 increasing more than 50% compared to last year. This is a growing vertical that we will continue to serve as it evolves with both our ceiling tile and acoustical grid solutions as we have in the past, as well as with an expanded set of structural and containment solutions from our WAVE joint venture.

For context, as we have noted in the past, it's important to remember that Mineral Fiber ceiling tile and standard grid applications in data centers represent a smaller percentage of project spend compared to typical commercial buildings. This is a growing and addressable vertical for those solutions and for our expanded structural offerings that we expect to serve for years to come. Collectively, we are encouraged with how these initiatives are progressing, further differentiating Armstrong with customers and contributing incremental AUV, as well as up to 150 basis points of above-market Mineral Fiber volume growth for the full year. Turning to Architectural Specialties, we posted strong top-line growth this quarter, driven by healthy organic sales growth of 9%, stemming from broad-based demand across our portfolio. This performance, coupled with contributions from our recent acquisitions, lifted AS net sales 17% above prior year results.

On the bottom line, we are also pleased with the adjusted EBITDA margin performance of the business, coming in above our full-year goal of 20% on both a total segment and an organic basis, and reflecting solid sequential improvement consistent with the expectations we shared last quarter. These results reflect improved SG&A leverage and solid execution in our AS plants, along with price actions and disciplined cost control as we work to address rising costs on certain substrates. Second quarter order intake for the segment was strong and continued at a double-digit rate, supporting our full-year outlook and giving us early visibility to our 2027 backlog. Like last quarter, our strong quoting and ordering activity levels were fueled by projects across a range of verticals, led by transportation and education. Looking specifically at transportation, we continue to serve and win more projects by leveraging our industry-leading portfolio of solutions.

In addition to expanded intake at JFK, SFO, and LAX airports, we had new project wins this quarter at the San Antonio International Airport and with the Ohio Department of Transportation. Our success within the transportation vertical demonstrates the power of our broad portfolio, our deep technical expertise, and our dedicated project management, design assistance, and installation support service offerings. These are all intentionally designed to serve architects, contractors, and airport authorities as they navigate challenging specifications and phased construction schedules by reducing risk and improving project outcomes. With that, I'll turn the call to Chris to discuss our financial results in more detail.

Thanks, Mark, 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 please note that slide three details our basis of presentation. We begin on slide six with our Mineral Fiber segment results for the second quarter. Mineral Fiber net sales increased 8% in the quarter, driven primarily by favorable AUV of 6% and an increase in volumes. AUV growth reflected both favorable like-for-like price and mix, driven by continued demand at the high end of the product portfolio. While higher volumes were driven primarily by strong commercial execution and benefits from our growth initiatives. Mineral Fiber segment adjusted EBITDA grew 7%, with an adjusted EBITDA margin of 44.7%.

Adjusted EBITDA growth was primarily driven by the fall through of AUV, a margin benefit from higher sales volumes, and a positive contribution from our WAVE joint venture. These benefits were partially offset by higher input costs, reflecting freight and raw material inflation, as well as increased SG&A expenses, primarily driven by investments to support growth. We are pleased with the current quarter's Mineral Fiber adjusted EBITDA margin result of 44.7%, which was similar to 2019 levels. The modest margin compression was against a strong prior year comp period with an adjusted EBITDA margin of 45.2%. The segment's core value creation drivers of AUV growth, ongoing productivity gains, and WAVE equity earnings each contributed to another quarter of strong profitability. On slide seven, we discuss our Architectural Specialties, or AS, segment results, where we highlight net sales growth of 17%.

This increase was driven by broad-based organic growth across most of our specialty product categories, along with contributions from the February acquisition of Eventscape and the 2025 acquisitions of Parallel and Geometrik. We are pleased with the organic growth rate of 9% in the quarter, especially as we lap a robust prior year result of 15% organic growth in the segment. The broad-based nature of this growth reflects strong execution across the business and continued market penetration within our expanding specialty product portfolio. AS segment adjusted EBITDA increased 10% versus the prior year with an adjusted EBITDA margin of 20.4%, a meaningful sequential improvement over the first quarter result, as we expected, with strong operating leverage in the business.

The improvement in adjusted EBITDA was primarily driven by a $5 million benefit from higher organic net sales, which includes the impact of higher steel and aluminum costs, and $4 million related to our recent acquisitions. Partially offsetting these benefits was a $4 million increase in SG&A expenses, of which approximately half were driven by our recent acquisitions, as well as a $2 million increase in manufacturing costs, inclusive of a $2 million benefit from IEEPA tariff refunds. On an organic basis, the AS segment achieved an adjusted EBITDA margin of 21.4%, which was essentially flat as compared to the prior year quarter. This organic AS adjusted EBITDA margin result in the second quarter is a meaningful step up sequentially from the first quarter. Turning to our recent acquisitions, our integration efforts are progressing.

As is typical for recent acquisitions, as previously shared, these businesses will be dilutive to total AS segment adjusted EBITDA margin for the full year. We continue to realize the benefits of these acquisitions as we scale them onto the Armstrong platform. Our goal of a 20% or greater adjusted EBITDA margin on a full year basis for the total AS segment remains unchanged. On slide eight, we highlight our second quarter consolidated company metrics. Net sales grew 11% and adjusted EBITDA increased 8%. Incremental volume from both segments, strong AUV performance, and incremental equity earnings from WAVE drove adjusted EBITDA growth in the quarter. These benefits more than offset an increase in input costs driven by freight and raw material inflation, in addition to higher SG&A expenses, which were primarily driven by investments to support growth, as well as an inorganic increase.

Adjusted diluted net earnings per share increased 13%, driven by both higher adjusted net earnings and a lower share count, resulting primarily from an increased pace of share repurchases. Excluding the impact of our recent acquisitions, total company organic adjusted EBITDA margin was 35.9%, representing strong profitability as we continue to invest back into the business for growth. Slide nine summarizes our first half consolidated company metrics, which reflects 9% sales growth and 4% adjusted EBITDA growth. Adjusted EBITDA growth in the first half of 2026 was primarily driven by both incremental volume and the fall-through impact of strong Mineral Fiber AUV, as well as positive Worthington Armstrong Venture equity earnings. Higher manufacturing was largely driven by first quarter costs in the Architectural Specialties segment. The increase in input costs was driven by freight, raw materials, and energy inflation.

SG&A increased primarily due to continued investments to support growth and the inorganic impact from recent acquisitions. Adjusted diluted net earnings per share grew 8%, driven by both higher net earnings and a lower share count resulting from increased share repurchases. On slide 10, we present our year-to-date adjusted free cash flow performance versus the prior year. The 9% increase was driven primarily by higher cash earnings and dividends from our Worthington Armstrong Venture joint venture. We also present our year-to-date capital deployment, where we have demonstrated the execution of and our commitment to our capital allocation priorities, which are investing back into the business, pursuing strategic acquisitions, and returning value to shareholders. As you can see, we are executing on all of these fronts in 2026.

In the second quarter, we paid $15 million of dividends to our shareholders and repurchased $75 million of shares, bringing our year-to-date dividends paid to $30 million and our year-to-date share repurchases to $135 million. Additionally, just last week, our board approved and we announced an increase to our existing share repurchase program, adding an additional $800 million of authorization and extending the program through 2029. This reflects the fundamental strength of and our confidence in our business model and its ability to consistently generate strong adjusted free cash flow. Turning to slide 11, given our solid financial performance, we are raising our full-year guidance midpoints across all key metrics. We now expect total company net sales growth of 9%-11%, up from the previous range of 8%-10%.

We have slightly raised our full-year Mineral Fiber net sales growth assumption to approximately 7%, with about one point of volume growth driven by strong execution and benefits from growth initiatives, along with AUV growth of approximately 6%. In the Architectural Specialties segment, we are slightly raising our full-year net sales growth assumption to 15%-17%. We are also increasing the midpoint of our total company adjusted EBITDA guidance and now expect growth of 9%-12% for the full year, up from our prior guide of 8%-12%. We continue to expect adjusted EBITDA margin expansion in both segments for the full year. In Mineral Fiber, we expect an adjusted EBITDA margin of approximately 44%. In Architectural Specialties, we expect an adjusted EBITDA margin of approximately 19%.

On an organic basis, we now expect an AS adjusted EBITDA margin of approximately 20%, which is a slight increase from our prior assumption. Additionally, we are increasing our guidance for adjusted diluted net earnings per share growth to a range of 12%-15%, up from our prior guide of 10%-14%. We are also increasing our guidance for adjusted free cash flow growth to a range of 10%-14%, up from 9%-14%. Please note that additional assumptions are available in the appendix of this presentation. We are pleased with our performance through the first half of the year, and we remain well-positioned to continue to deliver profitable growth and create value for our shareholders. Now I'll turn it over to Mark for further commentary.

Thanks, Chris. As Chris shared, we are pleased with the results we've delivered so far in 2026. The consistent market conditions we're experiencing and the momentum we're building with our growth initiatives. Looking forward to the second half of the year, we're hearing on-the-ground commentary from our customers regarding bidding activity and demand trends that's consistent with what we heard in the first quarter. While underlying market conditions have improved slightly from 2025, they remain muted, in part due to ongoing macroeconomic uncertainty. That said, within the verticals we serve, there are clear pockets of strength in transportation, data centers, and healthcare. The diversity of our end market verticals and project types, including new construction, major renovation, and repair and replacement, support the resilience of our business, as these areas rarely move all in the same direction at the same time.

Our consistent ability to grow profitably goes beyond the diversity of our end markets, operational execution, and our legacy position within the ceilings category. It is also driven by our proven track record of acquiring companies to strengthen and expand our Architectural Specialties portfolio of products and capabilities. With the Eventscape acquisition earlier this year, we've completed 15 AS acquisitions and expanded our addressable market well beyond the traditional ceiling plane in commercial buildings. To illustrate that point, I would like to call out a recent event that highlights how we are maximizing the power of our portfolio. Each June, architects and designers from around the world gather at the Mart in Chicago for NeoCon, the leading event for the commercial interior design industry. We have participated for several years at this event through some of our AS brands such as Turf and Arktura.

This year, for the first time, we created an Armstrong-branded showroom showcasing the full range of both Mineral Fiber and AS ceilings, specialty wall, and architectural solutions. This space demonstrated how our industry-leading breadth of products supports the increasing complexity of modern design by balancing intricate aesthetics, multifunctional performance, and sustainability attributes. NeoCon provided an energizing platform for us to engage directly with thousands of architects and designers, reinforcing, and in some cases, introducing the Armstrong brand at the forefront of interior architectural solutions. From the beginning of our journey to expand into specialties, we believed our leadership in Mineral Fiber ceilings gave us a strong platform from which to expand and generate consistent, profitable growth. With our leading portfolio and enhanced capabilities, we now compete for more specifications and win more projects in more spaces within every commercial building.

I personally attended NeoCon this year, together with dozens of leaders from across our enterprise to see the range of our offerings prominently on display and to celebrate several Best of NeoCon awards, including Innovation and Business Impact awards for TEMPLOK. In the process, I also saw the power of our people coming together to unite, collaborate, and elevate how we show up for our customers and in the industry. It was an inspiring experience and one that the entire Armstrong organization can and should be proud of. With our talented organization energized, focused, and executing, and with our resilient business model and consistent growth strategy, we are well positioned for a strong second half of 2026 and to continue creating value for our shareholders.

Underscoring that point, as Chris noted in following the review and approval of our strategic plan last week, our board of directors approved an expansion and extension of our share repurchase program, reflecting both the consistency in our capital allocation priorities and continued confidence in our strategic direction. The operator will begin the Q&A session.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Susan Maklari with Goldman Sachs. Your line is open. Please go ahead.

Thank you. Good morning, everyone, and thanks for taking the question.

Good morning, Susan. Good morning.

I want to start with the comment about the strength in the order rates that you're continuing to see coming through the business. Can you give us some more details on that? How you're thinking about it across the various verticals and what that means for the second half of the year and then maybe even just looking further out?

Happy to, Susan. Thanks for the question. My comment was focused specifically on AS, intake where we've got very clear visibility into projects and the pipeline there. The double-digit intake, again this quarter, reinforces what we've seen over the last several quarters, which is now roughly our fourth consecutive quarter of double-digit intake in AS. That's supporting the pipeline, that's supporting our outlook for the second half, and frankly, starting to give us some visibility into 2027 as well. That pipeline is broad-based, and it reflects both new construction projects, it reflects renovation projects, and it's also across both a wide range of verticals. Particularly, we mentioned transportation in our prepared remarks, but also office, also healthcare, also education. Importantly, it's across all of our categories. We talk about AS categories and whether that's metal or felt or wood, it's broad-based there.

We're not over-concentrated, I would say, in any one particular AS category. Recent intake's been very strong. We track that also on a trailing 12-month basis, and we believe it's very supportive of our outlook for the back half.

Okay. That's great. That's very helpful. My follow-up question is, it's great to hear the traction that you saw at NeoCon this year with your Armstrong branded showroom. Can you talk a bit more just about some of the feedback that you got from clients and maybe even other people that toured the showroom and how we should think about that contributing to the business and being a part of this longer-term growth initiative that you have, and what it means not just in terms of AS, but also perhaps for Mineral Fiber and the volume flow there?

Yeah. Thanks for that. It's a really important point, because it was not just a specialty showcase. When we talk about the power of the portfolio, we're talking about the collective enterprise at Armstrong, and we think of our enterprise as one business squarely focused on ceiling and wall solutions. That's really what we were trying to put on display at NeoCon this year. I think the number one consistent theme we heard from the thousands of folks who went through our spaces was impressed by the breadth and the diversity of the offerings and the capabilities. Whether that's in materials or performance, aesthetics, that sort of broad-based solution set. We like to think of it really as a palette for architects and designers to work from. In some ways, that showcase was really our strategy on display, if you think about it.

I mean, AS has been built and developed over the years as a complement to the Mineral Fiber business, and the two of them work well together. We win more jobs and we win more spaces whenever we have Mineral Fiber and AS on a project. That's what was being showcased there. I think what you're seeing in our recent results, what you're seeing in these kind of larger projects, we talk a lot about transportation, is really reflective of that. You bring the portfolio and the power of it through our channels, through our access to market, and that's how the two complement each other.

Yeah. Okay. Thank you for all of that color, and good luck with the quarter.

Thank you, Susan. Your next question comes from the line of Tomo Sano with J.P.

Morgan. Your line is open. Please go ahead. Hi. Good morning, everyone.

Good morning, Tomo. Thank you.

On Mineral Fiber, your fiscal year assumptions implying 1% volumes growth. Given the volumes were out in both first quarter and second quarter, would you expect the volumes to accelerate or decelerate or flattish in second half? If you could give us more color on end market, channel inventories, and market share perspectives in the back half, please. Thank you. Thank you, Tomo.

Yeah, we're outlooking a fairly consistent volume performance. As we talked earlier in the year, we were talking about a positive first half, a positive second half. We think we're well on track for that with the performance the last two quarters. Frankly, four out of the last five quarters, we've demonstrated positive volume growth. That's our outlook for the back half. Consistent volume growth across the portfolio, driven primarily by, I'd say, our commercial distribution channel, which is really where we're showing a lot of traction. I think the portfolio breadth and the product strength, and particularly at the high end, like I mentioned in my remarks, the SWAT portfolio is playing really well, to the verticals that are in play there, and we're serving that demand very effectively.

Consistent volume performance for the year and consistent volume is a priority for us as we've mentioned, and we expect to continue to demonstrate that.

Thank you. Follow-up on recent acquisitions, including Eventscape. What is the strategic power of bringing these businesses into the AWI platform? Commercial pull through or spec in with the architects and designers and channel access. Could you talk about key synergy levers and integration KPI, if you could? Thank you. Yep. You mentioned EventScape, Tomo.

I'm going to expand that a bit and extend it to companies like Zahner as well, who have these unique design capabilities. They have access to projects and they have access at the design assistance stage of a project than is earlier than our traditional access to projects. One of our key KPIs as we integrate them is focusing on the transfer function that can happen between those businesses when they have their early access and the rest of our portfolio, to give insights into project activity, to make connections with designers, to introduce the broader part of the portfolio. Again, sort of as I was commenting about NeoCon, open up the rest of the portfolio as a solution set for that designer at that earlier stage. We're seeing that. I'll give you an example from this past quarter.

We actually highlighted a project with our board where a fairly prominent project, high profile project, and the first awareness we had of that project came from Zahner. They actually had a toehold on an interior metal application. That was ahead of the entire rest of our portfolio. As a result of that toehold, we were able to pull through five other solution sets, including Mineral Fiber, Grid Solutions, and other parts of the AS portfolio. That's an advantage to Zahner having been in early. We see that same advantage in what EventScape does with their design capabilities. We're going to try to harness the power of that access and then transfer it into the rest of the portfolio to win more share.

The only thing I'd add to that, Tomo, too, on the metrics side is we have Robust business case financials that we put together as part of our investing decisions.

We continue to monitor those on a monthly basis and performance opposite those business case financials as part of that metric set that Mark mentioned as well.

Thank you, Mark, Chris. Thank you so much.

Thank you. Your next question comes from the line of Adam Baumgarten with Vertical Research Partners.

Your line is open. Please go ahead.

Hey, guys. Good morning. Just talking about demand, and you highlighted some of the higher end or SWAT products as being strong. Is that consistent across all the end markets where you're seeing strength, that the high end is outperforming?

It is. That's a fair point. We are seeing it consistently across our markets, consistently across our verticals. We think it's on trend, frankly. The aesthetics and the performance in those products is attractive across all of those. That's not isolated from a market point of view or a vertical point of view.

Okay, great. Just in the back half, do you expect any additional IEEPA refunds?

Nothing material, no, we're not.

Okay, great. Thanks. Best of luck.

Thank you. Your next question comes from the line of Keith Hughes with Truist.

Your line is open. Please go ahead.

Thank you. The question really, you talked more about data centers on this call, and we've heard a while with some growing backlogs. Can you talk specifically what products work best in data centers? Is it just grid, or is it mineral fiber? Is there a specific mineral fiber you sell into that occupancy?

Sure, Keith. Happy to take that. It's not just grid, to answer your question directly. The way we think about it is grid and tile have been going into data centers for a long time. We sort of bifurcate the structure of a data center into front of house and back of house. Back of house being the compute side of the data center. Front of house, mineral fiber, and traditional acoustical grid, we'll refer to it that way, has been servicing that need for a long time. We'll continue to see that. That varies by product application. It could be our SWAT products, it could be our mid-tier products on the tile side, supported by a traditional acoustical grid. In the back of house, you get much more variation and much more demand for a more structural solution.

Not the traditional acoustical grid, but some of the heavier duty structural solutions that we've launched just recently out of the WAVE venture. Products like the DYNAMAX branded line of structural grid solutions. You have containment solutions there. When there is a tile application in the back of house, and there can be tile applications, it's often a product that has an acoustical, not so much an acoustical, but an air management attribute to it. A gasketed tile. Again, it could be a variety of our mineral fiber products serving that tile need. It could also be our new DATAZONE tailored product offering, which was created specifically for data center applications and has a slightly higher AUV to it. It's varied, Keith, across, it's really dependent on the specifier, largely the owner in a lot of cases.

Okay. The final question on this. Is there any interest in that occupancy on TEMPLOK, given that cooling those facilities down is a major deal for them?

There is interest in it. In fact, our commercial teams have been doing a really good job of introducing TEMPLOK to data center applications and selling, frankly, everything I just mentioned to you as a solution with TEMPLOK as a key component of it. We do believe there's an application for it there, TEMPLOK carries multiple value propositions, energy savings. There's thermal dynamics to it. There's tax eligibility for incentives. We've got a value proposition that we are pitching there, absolutely.

Okay. Thank you. Thank you, Keith.

Your next question comes from the line of Rafe Jadrosich with Bank of America. Your line is open. Please go ahead.

Hi, good morning. Thanks for taking my question. I was wondering if you could talk a little bit more about the drivers to the revenue guidance increases. How much came in just the second quarter being better versus the second half? If you could just give some specifics on are you seeing better end market trends? Are you gaining more share? What's driving that? Yeah. Thanks for the question.

I'll take that, then I'll hand it over to Chris as well. I think the overarching message is the increase in our guide is largely as a result of the second quarter performance. We're seeing a consistent back half to what we expected. Carrying forward, we're going to expect market conditions to be consistent with what we've seen in the first half. We expect our commercial execution, we expect our growth initiatives to continue to perform and deliver that outcome.

Yeah, maybe just unpack that top line change a little bit more. That $20 million increase in sales at the midpoint, about two-thirds of that is really driven by AS performance and about a third from Mineral Fiber. As Mark mentioned, again, both on second quarter performance versus our expectations.

The fall through on versus the typical margin profile that we see is pressured a little bit due to some ongoing investments in SG&A and the freight inflation that I commented on in my prepared remarks.

Great. That's really helpful. Just following up on the SG&A, what are the drivers there? Is that higher incentive comp just because you're beating internal plans or is that opportunistic investment? Can you just talk about does any of it have to do with that expansion at NeoCon? Just trying to get an understanding of what's changing there.

Maybe I can start with SG&A performance in the quarter. In Mineral Fiber, as I say in my prepared remarks, the increase in SG&A was driven by investments to support growth of both the selling side of the house as well as innovation, and as you mentioned, an increase in incentive comp. In AS, about half of that SG&A increase was driven by our recent acquisitions, while the remainder was driven by investments back into the business and resources on the selling side to support growth as we scale. On a full year basis, Rafe, we expect leverage on the SG&A line, and SG&A margins about 20%, which is in line with our initial expectations at the beginning of the year for the company in total.

As a reminder, we want to be in that sub 20% range at the total company level, but recognize that acquisitions could initially pressure that as we continue to integrate them and deliver against the business cases there. We're going to continue to be mindful of our rate and pace of SG&A for the remainder of the year, just given the overall context of the broader macro.

Rafe, I'll add to that. Just as I think about the SG&A investments, I think of them as squarely tailored to the growth initiatives that we're talking about. You should think about commercial selling support resources in support of the energy savings initiative, data center sales, and some R&D to support both of those initiatives as well.

Thank you. That's very helpful.

Thank you. You bet. Your next question comes from the line of Brian Biros with Thompson Research Group.

Your line is open. Please go ahead.

Hey, good morning. Thank you for taking my question today.

Good morning. Morning. Morning. You talked about the strength of the higher end of your portfolio, I think in your prepared remarks and in some of the call questions earlier.

I think that's a theme you kind of touched on last quarter as well. I think you mentioned kind of the number of projects across the industry was down a little bit, but the value was up, and that that's a trend that plays well for your product set. I guess, do you view that dynamic as short-term, maybe another quarter or two, or is that trend kind of more like a multi-year trend that you can continue to benefit from? How are you thinking about that?

Yeah. Thanks for the question, Brian. That trend certainly continued in the quarter. I didn't mention it in my remarks, last quarter, we talked about 12 consecutive quarters of that dynamic where the high end of our Mineral Fiber portfolio is outperforming the lower end. This past quarter was the 13th consecutive. This has been running for a couple of years now, and we expect it to continue. It is too early to project how far out, I think it's part of the dynamic about the bidding activity that you mentioned and the starts activity that you mentioned that gets consistent with that. We'll continue to see, we saw it again this quarter, the count of projects being down, the value, and this is true across all our verticals for that matter. The value of the project is up.

We think it's consistent with the trend towards quality, the flight to quality, if you will, in commercial spaces, looking to distinguish those spaces. We also think it plays really well to the portfolio breadth theme that we were talking about earlier today, definitely to the high end of the Mineral Fiber product category.

Got it. Follow-up, I guess you talked about data center products you offer. You mentioned your structural grid and containment. Can you just talk a little bit more about the sales process for those products today for you? I guess remind us, do those get specced in? Do you work with the GC or maybe directly with the hyperscaler? I guess just more details on the go-to-market for those would be appreciated. Thank you. You got it.

Thank you. Very appropriate question given it's a dynamic and different go-to-market motion than traditional, let's say, building construction spaces because you've got different influencers, and you listed them. The hyperscalers as owners will set their own specifications. They'll use architects, they'll use GCs, of course, but they will have an outsized or overweight influence on the design of the spaces. Similar dynamic with co-locators, all versus traditional enterprise data center sponsors, which might look more like our traditional architect-led, spec-led motion.

Some of the SG&A that we're talking about in supportive data centers is specifically designed to give us a more diverse approach in our go-to-market so we can go direct to those owners, we can go direct to those co-locators and hyperscalers and give them a tailored, packaged, reliable, and consistent solution, almost bundled solution if you will, for the range of products that we're now offering. It is different. We are leveraging a very strong national accounts program that we've had at the company for a really long time to leverage the relationships we have with many of those companies who are sponsors of these data centers. That's our approach, it's sort of a broad-based approach and requires it given how data centers are designed.

Your next question comes from the line of Stephen Kim with Evercore ISI. Your line is open. Please go ahead.

Yeah. Thanks very much, guys. Appreciate all the color so far. I wanted to lean in on the new products a little bit. In particular, I am curious as to whether or not the success and the focus on the various new product initiatives that you have is increasing your indexing to new construction versus R&R, how you sort of think about that on a go-forward basis. Last time I asked you about the lifespan of some of these newer products, I just want to double-click on that a little bit. Just from a layman's perspective, as I think about gasketed products, where I think of gaskets maybe drying out over time or impeding performance, or I think of phase change materials, there's a certain number of thermal cycles that they're designed around.

I just wanted to sort of follow up on whether or not you think that there's a reason to believe that the replacement cycle for some of these products should be shorter than maybe some of your more generic historical products.

Thanks for the question. First on the indexing, we don't feel that way. We don't believe we're over-indexing to either new or R&R. I think what we're doing, honestly, is continuing to innovate as we've done for decades. This just happens to be the next chapter of innovation around the ceiling platform. There have been step changes in fire, seismic, acoustical performance, structural performance, and we're adding a new dimension to this. We think it plays in both new and renovation applications both. Just like it has. We've had that experience for decades in serving both of those demand sources. I think it's consistent with that. We've not framed any change in lifespan or duration, durability, or even warranty for that matter. We continue to warrant these products consistently with how we've warranted them in the past.

We're certainly not signaling, and we're certainly not expecting the quality or deterioration to be any different. It's a question we get, frankly, around some of our new innovations. We're standing behind those products for the life of the products just like it. Just like the products that we had before. We think that's important because that standard of quality, we are not compromising in our products and with our new innovation.

Okay. Gotcha. Perfect. Okay. Second question relates to Wave. Obviously, we're looking for some strengthening results there. I was wondering if you could provide a little bit more color as to the strength that you're seeing there. Should we be thinking about this as momentum building that is likely to carry over for beyond just this year? Or is there any lumpiness that we're benefiting from here? Maybe just give us a little bit of insight into what's driving the anticipated growth in Wave.

Well, Wave's still on track for our outlook mid-single digits of equity earnings growth. We're pleased with their performance. We think it correlates well with our Mineral Fiber performance overall. At the same time, they're continuing to innovate themselves and are bringing new products to the market along the way. We're pleased with their performance, and we expect it to continue into the second half. Chris, you want to add some color to that?

I was going to say, Stephen, on the steel cost front, the markets continue to face some inflationary headwinds there in the quarter. We saw the impact of higher steel flowing through the P&L, which pressured margins ahead of our announced August pricing actions, along with the ramp-up of some of the data center initiatives there that Mark mentioned. Turning to the back half of the year, we expect a step-up in the equity earnings contribution to the Mineral Fiber segment as those price cost benefits offset the rising steel cost exposure there.

Yep, that makes sense. Perfect. Thanks very much, guys. Thank you.

Thank you. Your next question comes from the line of John Lovallo with UBS.

Your line is open. Please go ahead.

Good morning, guys. Thanks for taking my questions as well. The first one is, within Mineral Fiber, the home center channel was strong again this quarter. I think it was up 9% year-over-year, pretty similar to the first quarter. The question is how much of this was driven by stronger discretionary or flow business like we saw in the first quarter? If so, what was the impact on Mineral Fiber volume and AUV in the quarter?

Yeah. I'll start, Chris, and you can comment. I think our flow business in the quarter, we talked a little bit about this in Q1 and in Q2, fairly consistent. It's the part of the market we don't have as great a visibility to, so we do kind of triangulate that based on home centers, maybe a little bit on what we see in Kanopi, and also what we gather from sort of on-the-ground activity. That flow TI, smaller R&R work, continued to be consistent in the quarter, and I think that bodes well. It's a nice stable source of volume for us in the quarter, and certainly something that we're hoping continues in the near term. It reflects some confidence and a willingness to use that discretionary spend and support our volume.

Yeah. Really, John, nothing to call out there in terms of atypical activity. That channel can be lumpy, and we saw a little bit of lumpiness here in the second quarter.

Got you. Then, considering the $800 million step-up in the share buyback authorization, and I think there's $2.5 billion authorized through December of 2029, just curious if you guys would consider a large share repo, maybe even an ASR. Is that something that's on your radar?

Yeah. Let me put the repurchase program into some context here. First of all, this is the time of year, we just had our board meeting last week. It is our annual strategic planning cycle. We had a robust and rigorous planning cycle and a great review and discussion and approval by our board of a strategic plan. That came first. Then on the heels of that strategic plan approval, the board supported this authorization, which is an authorization. The way we think about it is it's confidence in that strategic plan. It's confidence in our strategic direction. It's confidence in the cash flow generation that comes from that plan. We're not signaling any change in our capital allocation priorities, as Chris talked about in his remarks. We will be opportunistic as we've been.

We were opportunistic in the second quarter, as you saw, and over the life of the program, we'll continue to be opportunistic. That said, it's our third capital allocation priority, and no change there, and we continue to believe we've got a compelling pipeline of both investing back into the business at an attractive ROIC, as we've done, and also a healthy M&A pipeline to run at. It's a balanced approach to capital deployment that's served us well for years. This should not signal any change in approach there.

Okay. Thank you, guys. Thank you.

Thanks. Your next question comes from the line of Phil Ng with Jefferies.

Your line is open. Please go ahead.

Hey, guys. Congrats on a strong quarter. Chris, I guess for a housekeeping question first. Can you give us an update how you're thinking about inflation for your major buckets? If I heard you correctly, you're not expecting IEEPA refunds in the back half, anything to call out as it relates to some of the changes and news around Section 301 and 338?

Thanks, Phil. You're correct. Nothing expected here on the IEEPA refund front for the back half of the year. In my prepared remarks, I mentioned in the quarter higher input cost inflation in the areas of freight and raw materials and Mineral Fiber. Let me just, again, frame up input costs as a percentage of COGS in the Mineral Fiber segment. Just as a reminder, freight's about 10% of COGS, energy is about 10%, and raw material is about 35%. What we experienced in the quarter was higher than expected freight inflation due to pressure on carrier rates. That's largely driven by some of the labor shortages and some industry consolidation there. Raw material inflation came in a little better than we expected, wasn't a real needle mover in the quarter.

We saw strong AUV in the quarter and strong like-for-like pricing, which really contributed to that healthy EBITDA fall-through rate. On a full-year basis, on the input side front, let me just break down the pieces. We expect energy inflation to be in that low single digits range for the year. We're outlooking freight inflation to be in that mid-teens range for the full year. Again, that's driven by the dynamics that I just mentioned on the carrier rate side and in tight capacity there. We expect raws to be in that low single digit percentage range. All up, all in, input costs are expected to be inflationary in that mid-single digit range for the full year.

Okay. Chris, was there any big movement from what you gave us last quarter? I go back to my notes, just wasn't sure if there was any big moving pieces there, what you've got last quarter.

Good question. Thanks. On the total input line, in total, no, but the pieces did shift and most notably on the freight front.

Helpful. A question for you, Mark. A lot of momentum in your two growth factors, whether it's transportation on the data center side. Your broader product offering, investments you're making is having a real impact here. I was curious, if I had to unbundle transportation versus the data center piece, are you winning on some of the product differentiation, which has always been the hallmark for you guys on transportation and data centers? I just wasn't sure if the offering was very different like you have in your rest of portfolio, particularly on the data center side.

Are we winning on transportation for differentiation? No question. Are we scaling on data centers as we raise awareness to the fact that Armstrong can be a player, a meaningful player, and a value-add player on the data center side? That's ramping now. That's what a lot of our commercial investments are about, is raising awareness. I think Armstrong's been recognized as a traditional ceiling player in those spaces for a long time. We've talked about serving those spaces, but now we're driving awareness to say we've got a much broader portfolio, and we can serve the structural, and we can serve the containments, and the broader solution set. We do think we have differentiation in those products, and that's what this awareness driving is all about.

Is your competitive landscape different too? Sorry. Go ahead, Chris. Yeah, I was just going to add a little more color on the freight piece before your follow-up, which is really that the change there is a little more pressure on the back half of the year as I outlook that range for full year.

Okay. Super. Just to your question, where you're going.

Sure. Yeah, the data center competitive set, it is different.

It is different because in that back of house and that compute side of the data center, there is such a diversity of applications and needs and structural solution sets that is much broader and different. You can solve your data center performance needs with structures and solutions on the floor and the ceiling in a variety of different ways. It is a broader, more fragmented, competitive set.

Okay. That's really helpful, guys. Really appreciate it. Thanks. Thank you.

There are no further questions at this time. I will now turn the call back to Mark Hershey for closing remarks.

Thanks everybody for joining the call today, and for the questions, we appreciate it. We're pleased with a solid quarter. It's a good opportunity for me to thank our teams for that performance. As we reflect on the quarter, we're really proud of outperforming the market in a dynamic environment. We've seen inflationary pressures, as we talked about today. There's still uncertainty and not a lot of market stimulant and tailwind behind us. Really good execution, and that's what we'll stay focused on to continue to create value. Thank you for your time today, and we'll talk to you soon.