Armstrong World Industries, Inc. (NYSE:AWI) Q2 2025 Earnings Call Transcript

Armstrong World Industries, Inc. (NYSE:AWI) Q2 2025 Earnings Call Transcript July 29, 2025

Armstrong World Industries, Inc. beats earnings expectations. Reported EPS is $2.01, expectations were $1.75.

Operator: Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2025 Armstrong World Industries Inc. Earnings Call. [Operator Instructions] It is now my pleasure to turn the call over to Theresa Womble Vice President of Investor Relations and Corporate Communications. You may begin.

Theresa L. Womble: Thank you, Tina, and welcome, everyone, to our call this morning. Today, we have Vic Grizzle, our CEO; and Chris Calzaretta, our CFO, to discuss Armstrong World Industries second quarter results and rest of year outlook. We have provided a presentation to accompany these results that is available on the Investors section of the Armstrong World Industries website. Our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the earnings press release and in the appendix of the presentation issued this morning. Both of these are available on the 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 29, 2025. These statements involve risks and uncertainties that may differ materially from those expected or implied. We provide a detailed discussion of the 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. Now I’ll turn the call over to Vic.

Victor D. Grizzle: Thank you, Theresa. And good morning, and thank you for joining our call today to discuss our second quarter 2025 results and our expectations for the remainder of the year. We delivered another quarter of record sales and earnings as we continue to execute at a high level and to demonstrate the resilience of our business model in these unique and uncertain market conditions. In the second quarter, on a consolidated basis, we increased net sales by 16% and adjusted EBITDA by 23%. And with efficient execution, we expanded adjusted EBITDA margin by 200 basis points over the prior year to 36%. Adjusted diluted earnings per share rose 29% year-over-year, marking the company’s highest quarterly EPS growth rate since separating from the flooring business in 2016.

Similarly, we generated strong adjusted free cash flow, both in the quarter and on a year-to-date basis, allowing for the continuation of funding of all of our capital allocation priorities despite uncertain market conditions. In these times of market uncertainty, it is even more critical to employ an even higher level of focus within an organization, and that’s what our organization did in the second quarter. Our team stayed focused on what we can control, our costs, our initiatives and our service to customers, and I’m pleased with how we have focused and executed in each of these areas. Our plant teams continue to exemplify our safety culture with improvement on all of our safety metrics and delivered strong productivity results in the quarter, and our commercial teams worked even closer with our customers to deliver industry-leading service and support.

I want to take this opportunity to thank our teams for their outstanding work and their dedication to consistent execution and delivery of results for our customers and our shareholders. Turning now to highlight our segment performance. In our Mineral Fiber segment, our second quarter net sales grew 7% with strong AUV growth of 5% and a modest contribution from volume, both of which were supported by our innovation efforts and our digital initiatives that continues to propel growth at the high end of our product portfolio. Adjusted EBITDA in the Mineral Fiber segment grew 16% and adjusted EBITDA margin expanded by 350 basis points, driven by contributions from WAVE, along with good SG&A cost control and manufacturing productivity gains. This margin level was the best second quarter result since our separation from flooring in 2016.

Turning next to our Architectural Specialties segment, where our net sales grew 37% in the quarter. Both organic and inorganic sales grew double digits. Both our new acquisitions, 3form and Zahner exceeded expectations in the quarter, but especially impressive was the organic growth of 15%, well above market activity levels. Both organic and inorganic growth performance reflects strong penetration into the specialties market with our expanding portfolio of products and capabilities. As we have noted before, our expansion of Architectural Specialties and new materials and capabilities allows us to sell more products into more spaces of a building. With this expanded product portfolio, we can continue to penetrate further into the same commercial buildings where we sell Mineral Fiber today.

These additional spaces include solutions beyond the core ceiling plane, extending into specialty walls, other interior finishes like column covers, grills and partitions and now exterior facades and rain screens. And with our confidence in our cash flow growth, we continue to build our pipeline for future bolt-on acquisitions to further expand our portfolio. This collective organic and inorganic growth has been a successful strategy for the company, delivering nearly a 20% CAGR since our separation from flooring. This breadth of the portfolio, coupled with our digital initiatives is best illustrated with the recent project win of a 4-story health center building in Virginia. Project Works was used for each of the 7 phases of the project, providing significant productivity and speed for the customer.

In total, 32 unique Armstrong solutions were specified and used on the project including a range of products and services that no other single manufacturer could provide. This breadth of portfolio, along with the automated design services provided by project works are a unique competitive advantage for Armstrong. In addition to our impressive sales growth in Architectural Specialties, I’m particularly pleased with the profitability performance in this segment. We continue to make strides in improving our operational efficiency and gaining operating leverage which drove adjusted EBITDA growth of 61% and an adjusted EBITDA margin of approximately 22% in the quarter. This was the highest quarterly adjusted EBITDA margin of any quarter since 3Q of 2020.

We expect that 2025 will mark the third consecutive year of improved organic adjusted EBITDA margin growth and we remain confident in our ability to deliver greater than 20% EBITDA margins in the Architectural Specialty segment. Overall, in the second quarter, we increased our efforts to improve efficiency throughout the business in anticipation of softer economic conditions ahead. The early results of these efforts contributed to the margin expansion we delivered in the quarter. In the sales organization, we saw strong performance with our commercial initiatives, which are improving our coverage and penetration in our core markets. Earlier this year, we implemented a sales and marketing optimization program to better position the commercial team with our customers, driving greater efficiency and selling capacity to better serve both our A&D customers and our distribution partners.

These changes, together with our innovation and our various growth initiatives are making a difference in delivering above market level performance. So again, very pleased with the level of focus and execution demonstrated by our teams and the results so far this year. Let me pause here and turn it over to Chris for more details on the financials. Chris?

Christopher P. Calzaretta: Thanks, Vic, and good morning to everyone on the call. As a reminder, throughout my remarks, I’ll be referring to the slides available on our website, and Slide 3, which details our basis of presentation. Beginning on Slide 6, we summarize our second quarter Mineral Fiber segment results. Mineral Fiber net sales were up 7% in the quarter, primarily driven by favorable AUV of 5% and a modest increase in volumes, both of which were primarily driven by strong commercial execution and benefits from growth initiatives. Specifically, the growth in AUV versus the prior year was driven by both favorable like-for-like pricing and mix. Mineral Fiber segment adjusted EBITDA grew by 16% and adjusted EBITDA margin expanded by 350 basis points to approximately 45% on strong execution by the business in the quarter.

Notably, this marks the 10th consecutive quarter of year-over-year adjusted EBITDA margin expansion in the Mineral Fiber segment. Q2 Mineral Fiber EBITDA growth was primarily driven by AUV growth. contribution from the WAVE joint venture and lower SG&A expenses, which included the benefit from our disciplined focus on cost control as well as the positive impact of higher sales volumes in the quarter. Higher input costs, driven primarily by inflation in both raw materials and energy were partially offset by a decrease in manufacturing costs. On Slide 7, we discuss our Architectural Specialties or AS segment results. where we highlight net sales growth of 37%. This growth was driven primarily by contributions from our 2024 acquisitions, 3form and Zahner, both of which continued to perform better than expected.

On an organic basis, I’m very pleased to report that we delivered second quarter sales growth of 15%, driven by strengthening broad-based penetration throughout our specialty product categories. AS segment adjusted EBITDA grew 61% with an adjusted EBITDA margin of approximately 22%, marking the best Q2 margin performance since 2019. Adjusted EBITDA margin expanded 310 basis points as higher acquisition-related operating costs were more than offset by strong sales growth from our 2024 acquisitions. Additionally, the improvement in adjusted EBITDA margin reflected continued improvement in operational leverage on our cost base in the segment. We are pleased to have achieved 20% or greater adjusted EBITDA margins for both the organic and inorganic side of the AS business in the quarter.

The integration work on our 2024 acquisitions is on track, and these businesses are performing better than expected. We remain committed to achieving our goal of a greater than 20% adjusted EBITDA margin on a full year basis in this segment. Slide 8 highlights our second quarter consolidated company metrics. We delivered 16% net sales growth and 23% adjusted EBITDA growth with 200 basis points of adjusted EBITDA margin expansion, along with 29% growth in adjusted diluted net earnings per share. Incremental volume for both segments, strong AUV performance and healthy equity earnings from WAVE drove our adjusted EBITDA growth in the second quarter versus the prior year period. These benefits more than offset an increase in SG&A, which was driven by our 2024 acquisitions of 3form and Zahner.

Excluding the impact of these acquisitions, we delivered an organic total company adjusted EBITDA margin of approximately 38%, which represents 300 basis points of margin expansion as compared to the second quarter of 2024. Turning to Page 9. We highlight our first half consolidated company metrics, which reflect double-digit net sales and adjusted EBITDA growth with margin expansion. Through the first 6 months of the year, with sales up 17% and adjusted EBITDA up 20%, margins expanded 100 basis points versus the prior year period. Adjusted diluted net earnings per share increased 25% and adjusted free cash flow increased 29%. The drivers of year-to-date adjusted EBITDA growth are similar to the previously mentioned second quarter drivers. Slide 10 shows our year-to-date adjusted free cash flow performance versus the prior year.

The 29% increase was driven primarily by higher cash earnings and dividends from our WAVE joint venture. These results demonstrate our ability to consistently achieve adjusted free cash flow growth despite challenging market conditions, allowing us to deploy our cash generation for investments back into the company as well as to provide returns for our shareholders. In the second quarter, we paid $14 million in dividends and repurchased $30 million of shares. As of June 30, 2025, we have $610 million remaining under the existing share repurchase authorization. Given our healthy balance sheet and our proven ability to consistently generate strong cash flow, we remain well positioned to execute and advance our strategy. Slide 11 shows our updated full year 2025 guidance.

We are raising our full year guidance due to our first half performance and our expectations for continued execution for the remainder of the year. The change in our guidance versus our prior guide provided in April is primarily driven by stronger first half performance as well as stronger performance in AS, both organically and from our 2024 acquisitions. We still expect softening market conditions in the back half of the year as compared to the first half. We now expect total company net sales growth of 11% to 13% for the full year, up from our prior expectations of 9% to 11%. And total company adjusted EBITDA growth in the 12% to 15% range, up from the previous range of 8% to 12%. Additionally, we are increasing our guidance both for adjusted diluted net earnings per share and adjusted free cash flow.

As was the case in April, our updated guidance continues to reflect the impacts of currently implemented and announced tariffs. While tariffs as they stand today, are a modest headwind, they did not have a material direct impact on our second quarter results, and we do not anticipate that they will have a significant direct impact on our second half results due to our planned mitigation actions and our predominantly local supply chain. The tariffs as currently implemented and announced represent a direct impact to our total cost of goods sold of approximately 1%, which is lower than our prior outlook. For WAVE, the tariffs as currently implemented and announced have about a 5% direct impact on the JV’s total cost of goods sold and is consistent with our prior outlook.

We are successfully mitigating the impacts of these tariffs and our updated guidance is reflective of those actions. I’d like to turn your attention briefly to the recently finalized tax bill. While this legislation is complex and we are still evaluating its full impact on our business, we currently estimate that it will result in a cash tax benefit in 2025. And as such, we expect a normalized full year cash tax rate of approximately 22%. As Vic noted, we are pleased with our first half financial performance and the margin expansion that we have achieved in both segments. As we look to the back half of the year, we remain committed to driving profitability, expanding margins, continuing to deploy cash to generate growth and creating value for our shareholders.

And now I’ll turn it back to Vic for further comments before we take your questions.

Victor D. Grizzle: Thanks, Chris. Previously, we have communicated how critically important innovation is to our competitive advantage and our overall strength of our market position. and its importance for AUV growth. I’d like to take a few minutes now to update you on the progress of TEMPLOK, our latest innovation for energy-saving ceilings. As many of you know, we fully launched the TEMPLOK product line in early 2024 and have been working to increase the awareness and the understanding of the energy-saving value proposition TEMPLOK offers, building owners and operators. This is the industry’s first ceiling tile that can help regulate temperatures within buildings and reduce the cost and energy usage required for heating and cooling.

With a proprietary phase change material formulation, TEMPLOK products can help reduce energy used to heat and cool buildings by up to 15%. As such, these products address the increasing demand for both energy efficiency and decarbonization while also reducing energy usage at peak times, thereby lessening the strain on the grid systems in the U.S., and this becomes increasingly important as data center growth accelerates. We also mentioned in our last call that phase change material gained explicit inclusion as a qualifying thermal energy storage technology for tax credits under the inflation Reduction Act. We are happy to report that those credits remain in the final tax law that Congress passed earlier in July. Customers of TEMPLOK may be eligible for tax credits of 40% to 50% through 2033.

Dramatically improving the return on their investment. This means that TEMPLOK with its unique application of face change material can provide an accelerated return for building owners and operators through lower material and labor costs. We see this as an enabler to accelerate the rate of renovation of this large installed base in North America. I’m also pleased to share that now TEMPLOK products are part of the energy modeling software platform offered by Integrated Environmental Solutions, or IES. IES is the global leader in energy modeling for the built environment. IES software is used by tens of thousands of architects, designers and engineers to analyze and optimize building performance on metrics like carbon emissions and energy consumption.

The inclusion of TEMPLOK into the IES software now opens up the ceiling plane as a new source of energy savings to building energy modelers, and we expect this will further accelerate the awareness and adoption of TEMPLOK. So with more certainty around the potential tax credit in place, and now the ability for customers to model the energy savings from TEMPLOK with the IES software and together with growing customer awareness of TEMPLOK, we have even greater excitement about the opportunity to accelerate the rate of renovation. Now before we get to your questions, a few comments about the market. Overall, in the first half, we have experienced about what we had expected and overall kind of flattish sideways moving market albeit with some chop against the backdrop of uncertainty.

Our outlook remains for a slightly softer back half compared to what we saw in the first half due to forecasted lower levels of overall economic activity, again, largely driven by uncertainty, uncertainty on tariffs, inflation, labor and interest rates. This persistent level of uncertainty is expected to slow commercial construction activity with the greatest impact likely on more discretionary type renovation projects. This outlook is largely in line with leading economic forecasts as well as more commercial specific leading indicators. In our updated guidance, you can see that despite softer market conditions, we will continue to outperform the market through consistent AUV growth, productivity gains and margin expansion. Our 2025 guidance reflects the benefits of the diversity of our end markets, contributions from our growth initiatives and momentum in the Architectural Specialties segment, along with our proven ability to prudently control costs.

We have demonstrated this above- market performance for the past several years. This gives us confidence in our ability to continue our efficient execution in these uncertain market conditions and to deliver our third year in a row of double-digit bottom line growth with margin expansion. With consistent strong adjusted free cash flow growth and the ability to execute on all of our capital allocation priorities, we remain focused on advancing our growth strategy and creating value for our shareholders throughout all parts of the cycle. And with that, we’ll be happy to take your questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Susan Maklari with Goldman Sachs.

Susan Marie Maklari: My first question is focusing on the Architectural Specialties segment. The organic growth that you saw this quarter was impressive, especially given the operating backdrop. Can you give us a bit more color on how these initiatives are coming together to drive that level of growth that you saw? And then any thoughts on how we should be thinking of the back half performance as the comps there start to get a bit tougher on a relative basis?

Victor D. Grizzle: Yes. I’ll take that first part, Susan, and then Chris, I’ll turn over to the back half cost. The Architectural Specialty growth, the organic growth, as you mentioned, is it was impressive. It was a continuation, I think, of the momentum on how we’re executing and penetrating the market. We certainly know the market is not growing at this level. So it really is demonstrating the success of our commercial teams in penetrating and getting access to more spaces in these buildings. The one highlight to your point about our growth initiatives, the PROJECTWORKS software platform is proving to be an extremely important productivity tool for architects to do more complex designs and take some of the complexity out of the design when it gets to the contractors.

And that is enabling, I think, more and more Architectural Specialties to be specified in spaces and even more complex solutions to be specified in these statement spaces. So it really is the breadth of the portfolio and the commercial execution to take that to market into more architect’s offices, coupled with our digital tools to make it easier to specify Armstrong solutions and really hire more complex solutions from Armstrong that makes them more unique in the marketplace. I think that’s gaining traction, and that’s really helping us drive the organic part of the growth in AS. I just — you know, since you brought up, AS Susan, the — what’s also very impressive is the 2 new acquisitions, right? The 3form and Zahner, the integration with those 2 organizations is going extremely well.

And when you look at — they did exceed our expectations, at least in the second quarter with their performance. And it’s really attributed to the management teams there. They’re really professional, highly skilled management teams and they have the right attitude to integrate with Armstrong. And I think that’s allowed the integration to go much better than we could have imagined from the beginning. So very pleased with both the inorganic and the organic growth in Architectural Specialties.

Christopher P. Calzaretta: Yes. And maybe, Susan, to comment on the top line growth in the back half of the year. You’re right, lapping a stronger second half top line performance on the organic side in 2024. And so when you account for that, still a healthy level of organic top line growth with margin expansion expected in the back half of the year organically. And just to highlight again, net sales for the total AS segment, expecting greater than 25% top line growth this year with about a 19% adjusted EBITDA margin. So to Vic’s point, really, really pleased with both the organic and inorganic contributions on the AS side of the business.

Susan Marie Maklari: Yes. Okay. That’s helpful color. And then maybe building on that, can you talk a bit about what you’re seeing in terms of the bidding activity either regionally or in terms of various end markets and segments in there? And how that compares to your comment that you expect to outperform the market in the second half even with all the macro uncertainty that continues?

Victor D. Grizzle: Yes. The overall market that we saw in the first half and the bidding activity will connect to this is has really been an overall, I would say, stable market condition, flattish sideways moving as we talked about, there’s really been no uptick in project delays or project cancellations in the first half. And — but when you look at the first-time bidding activity that Dodge reports on, it remains soft again in the second quarter. It wasn’t as soft as we saw in the first quarter. But it certainly reflects the level of uncertainty that’s in the market in terms of the first-time bidding activity. And it’s very logical when you think about first-time bidding activity is for projects that haven’t started. They haven’t broke ground.

They haven’t started the rental work. So it really is at the very beginning. And if there’s some uncertainty there, folks that could wait are probably choosing to wait. And that’s showing up in that the first time bidding activity numbers. I’ll comment though on the ground level bidding activity, which is, I think, more aligned with what we’re experiencing in terms of a stable, flattish sideways moving market condition. The bidding activity remains steady and active on the ground with our contractors and our distribution partners. That level has not seen a change either up or down. and remains fairly steady. So we’re paying attention to both of these. Again, because we think these are both kind of the triangulation of what is the actual environment that we’re going to experience in the back half.

Operator: Our next question comes from the line of Garik Shmois with Loop Capital.

Zack Lee Pacheco: This is actually Zack Pacheco on for Garik this morning. Maybe to follow up on the Architectural Specialties guidance. Any more detail specifically on the cost side, kind of how long do you think you can keep manufacturing cost down in the segment despite the volume growth? Maybe just any more details you can offer.

Victor D. Grizzle: Yes. Zack, you had to look at the drivers to the improved operating margins is really the volume is contributing to operating leverage. So as long as we continue to grow and drive the efficiencies in our manufacturing operations, I think we can continue to maintain these higher levels of margins and the operating leverage we’re getting from there. Our teams are really executing though, on both sides of the equation in terms of being good purchasers of raw materials and being very efficient in manufacturing, but also when it gets to the marketplace and making sure that we’re specking higher-value products and more unique products. And that really shows up also in the profitability mix. So I think broadly, the way we’re executing across the buy, make, sell component of that business, I think as long as we keep executing that way, we can maintain the lower margins.

That gives us the confidence that we can continue to get to our stated goal of greater than 20% margins in this segment.

Zack Lee Pacheco: Understood. And then breaking down the wave of contributions, if you could speak to maybe just how much of it was getting ahead of tariffs versus just the stronger market?

Victor D. Grizzle: Yes, I wouldn’t point to a stronger market here in the second quarter. As I outlined, I think it’s pretty much a kind of flattish sideways moving market as we expected. We did have some additional volume in the quarter. Again, I think our growth initiatives are making a difference relative to what we’re seeing in the actual market and driving above-market growth rates. The other piece of this is as we get quarter-to-quarter some noise in the retail channel, we got a little bit more volume rebalancing in the retail channel. If you remember, in our first quarter, we talked about some weather-impacted softness in the retail channel. Some of that got rebalanced in the second quarter, and that contributed both for the WAVE business as well as the tile business.

But I think the main point around what WAVE is continuing to do is they’re managing their price over inflation or price over cost really well. And that’s showing up, I think, in the numbers in addition to some of the volume contribution.

Operator: Our next question comes from the line of Tomohiko Sano with JPMorgan.

Tomohiko Sano: So I’d like to follow up on especially Mineral Fiber side on AAV, and Vic you talked about the TEMPLOK how is it actually attractive in getting attractions from customers. Could you talk about how you see the TEMPLOK in terms of more in financial numbers that actually contributing to both sales and AUV side? And any opportunities for like having more like a sales acceleration on Mineral Fiber business, please?

Victor D. Grizzle: Yes. Happy to talk about that. The TEMPLOK building blocks, if you will, the market development building blocks that we’re building out to support a brand-new attribute like energy savings in ceiling tiles. It’s the first of its kind, first in the industry. And so there’s a large market development body of work that has to happen for the industry to embrace this. We’re very encouraged by the interest level and the customer enthusiasm around this. And as I noted in my prepared remarks around the building blocks around getting it into the IES software. So people designing right upfront can see Armstrong Ceiling Solutions as an option to drive energy savings. And of course, now it’s part of the tax bill there’s an accelerator here for returns for our customers.

So we’re encouraged and I’m excited about the building blocks that are coming and going into place. The sales impact since we’re in the early days of this market development effort is really minimal. And so we’ll keep you posted on how we continue to gain traction there and drive sales growth. But I think it’s still an opportunity in front of us versus driving the second quarter results.

Tomohiko Sano: Thank you, Vic. And follow up on Kanopi, your e-commerce platform there have been gained tractions with a small commercial contractors. How do you see its role involving within the Mineral Fiber business? And are there plans to expand the offering to more specialty or AS product side as well, please?

Victor D. Grizzle: Yes, it’s a good question. We continue to be encouraged by Kanopi’s ability to reach a customer that’s not being served today through our existing channels to market. They tend to be smaller customers, they order smaller quantities. And so they kind of fall through the cracks of some of our larger channels, larger customers. So we’re really encouraged with this cost-effective digital initiative to reach those customers. And we’re going to continue to expand the product offering on that so we can, again, offer what those unique customers are looking for to update their spaces. One of the things that, Tom, I would like to highlight in the quarter, I’m very pleased with the Kanopi platform is it’s increasing profitability and its contribution to EBITDA growth for the Mineral Fiber segment business.

So we’re — again, I think we have a very cost-effective digital channel to reach a customer base that we’re not serving today, and we’re going to continue to expand the portfolio on there so we can continue to grow that platform and do it profitably, which we’re demonstrating here even in the second quarter.

Operator: Our next question comes from the line of Brian Biros with Thompson Research Group.

Brian Biros: On the outlook in the raised guidance, it seems like most of the raise is from Q2’s performance. And I guess, just general Armstrong specific initiatives rather than any kind of big change in market conditions in the back half. Is that the right way to think about it? Or is there maybe a little bit more nuance to that?

Christopher P. Calzaretta: No. I think you got to characterize right here or there, Brian.

Brian Biros: Okay. I just wanted to make sure that was clear. And then I guess the Mineral Fiber margins were particularly strong this quarter. You talked about it in the prepared remarks. Can you help unpack that margin number? Maybe a bit more and you provided some of the drivers, but maybe provide some magnitude of which drivers were maybe more or less beneficial. And I guess is that kind of sustainability going forward?

Christopher P. Calzaretta: Sure. Yes, to unpack the second quarter a bit in Mineral Fiber, as I shared and Vic shared in our prepared remarks. A little bit more contribution from Mineral Fiber volume. I’d say, overall, really driven by it’s a strong execution across the business. Disciplined focus on cost control impacted our SG&A drove some favorability there. Our initiatives, as we commented in terms of the overall contribution to the top line in terms of the WAVE joint venture and the contributions from equity earnings there that we saw in the quarter really drove strong equity earnings contribution from the JV. And again, that’s coupled with the execution, the top line growth. And then as we commented, continued benefits from price cost benefits and discipline there.

So overall, I mean, I’d say those were the drivers really in Mineral Fiber in the second quarter. When you look to the back half of the year, again, looking for a step down in volumes for the year, we’re out looking the same kind of volume outlook we had back in April. Which is volumes flat to down low single digits, but still expect that AUV to be growing at a greater than 6% rate for the year. So hopefully, that gives you a little more color around the back half in Mineral Fiber.

Operator: Your next question comes from the line of Keith Hughes with Truist.

Keith Brian Hughes: Thank you. There was a transaction with one of your large customers that was announced several weeks ago. I guess if you could just talk to the audience here about your relationship with the customers, exclusivity, things like that? And does this really change how you go to market at all to the contract community?

Victor D. Grizzle: Yes. Keith, your question is around the consolidation and the distribution — our distribution network, right? And it’s continuing, right? This has been consolidation — this consolidation has been going on for a decade now. And so this is, again, Home Depot acquiring or potentially acquiring one of our large distributors is a continuation of that consolidation. I’ve had the opportunity personally to talk to both Home Depot and SRS leadership teams. I like what I hear so far. I think they’re really focused on a lot of things that we want to get focused on in terms of growing the business. I’m particularly pleased with the continuity of management that they have committed to. So John Turner is staying and several of his leadership team is staying in place and we’re excited about that because the GMS team knows the ceilings category very well and they know how we’re successful in the ceilings category.

So we’re really pleased with those relationships are really staying in place and that continuity, I think, is really going to be good. So we’ve been a net, I’d say, beneficiary of consolidation over the last 10 years looking back. And we’re going to continue to look for that opportunity in this next WAVE of consolidation.

Keith Brian Hughes: And one other question on — you talked a little bit on this call about TEMPLOK is given what you’re seeing in the interest level around the product, in ’26, would you have enough orders that would be meaningful in revenue? Or do we have to think longer term about and that could be a real needle mover for result?

Victor D. Grizzle: Well, no, I think we’re going to grow our sales this year. We’ll grow them again next year. I think we — this is a very long-term opportunity, though, because when you think about the large installed base here, of nearly 40 billion square feet. And all of it can get renovated to an energy savings, a cost-saving ceiling tile. So we’re excited about renovating the entire installed base over time. So this is a very long-tailed opportunity for us, but we expect traction in the volumes, and they’re going to get more and more meaningful year after year. So we’re going to build on ’25 success. And now these building blocks are in place. We should see some acceleration into ’26 and ’27. So I won’t outlook too much about how big they’ll be in ’26 and ’27, but we plan to get some meaningful traction again in ’26 and ’27, just like we are — that we have in ’24 and ’25.

Keith Brian Hughes: Okay. And one other question on that is, is TEMPLOK accretive to AUV as you sell those units?

Victor D. Grizzle: Absolutely. Absolutely. Very nicely so.

Operator: Your next question comes from the line of Rafe Jadrosich with Bank of America.

Rafe Jason Jadrosich: If we look at the EBITDA guidance for Mineral Fiber for the year, the 43% that brings you back to 2019 levels or almost there on much lower volumes. I think that’s basically the highest you’ve had historically. Can you talk about from this current level, what the sort of opportunity is now that you’ve gotten back to 43% and sort of what the algorithm would be for further growth?

Victor D. Grizzle: Yes, Rafe, it’s a good question. Let me — because we get this question a lot, as you can imagine, when are you going to get back to 2019 levels, right? And so we’ve been talking about this with all of you for a while. The answer is really a lot of the same because the building blocks and the drivers of margin expansion in that business are the same. You have to get good AUV growth. And that means really strong innovation pipeline into the marketplace to feed what is a natural dynamic to mix up and to make sure that you’re covering inflation with your pricing initiatives. So AUV has been a big driver of how we get back there even on lower volume. Driving productivity every year is becoming a hallmark of the company, even when volumes have been softer, we’re able — and our plant teams do a terrific job at identifying where opportunities are to drive productivity gains, greater than 3% a year.

for many years now. So that’s going to continue. We have a commitment to that, and we invest in that 2 or 3 years in advance. So doing all of that and managing and feathering in the right level of SG&A to support your growth. It’s really — those are the building blocks. That’s how we’ve kind of gotten back to hear from the 2019 levels, to your point, the historical level. And it should propel us higher from here as we go forward, executing on those 3 building blocks.

Rafe Jason Jadrosich: And then just following up on the price piece of it. Your largest competitor on the Mineral Fiber side, USG, you announced price that was modestly higher than what you did in August. And I think historically, if you go back and look, you’re the one that tends to lead on price. Is this sort of a surprise to you? And does this create more opportunity for you to raise price going into next year? Or does that just increase the — either the realization or likelihood that, that second half ’25 price sticks?

Victor D. Grizzle: Really, Rafe. There’s not much to comment on that in particular. We run our business and we look at our costs and our expectations of inflation, yes. So — and we talk to our customers. And so we run our play. And if our competitors are going to do something different, then that’s really their play to run. We’re just staying focused on the play that we’re running with our distribution partners and our customers and we’ve been doing that. We’re going to continue to do that, and that works well for us.

Operator: Your next question comes from the line of John Lovallo with UBS. Please go ahead.

John Lovallo: The first question is on Mineral Fiber. There was some modest input cost inflation in the second quarter. Can you maybe just expand upon what drove that and what your expectations are into the second half?

Christopher P. Calzaretta: Yes, sure. So maybe to answer the second part first. In terms of overall input cost inflation for the year, expecting low single-digit inflation. And if you recall, about 35% of our inputs are raw materials related. We expect raws to kind of be down in that low single- digit range for inflation. And then energy is about 10%. We expect about mid-teens inflation there in terms of energy. And then freight, it’s about 10%, and that’s effectively flat. So when I think about the second quarter, in terms of overall input costs, it was, call it, nat gas pressure on the energy side and then raw material inflation there in that low single-digit range there in Q2.

John Lovallo: Got you. Okay. That’s helpful. And then you guys repurchased about $30 million of stock in the second quarter. Is there an opportunity to step this up in the second half as you guys generated a little bit more cash.

Christopher P. Calzaretta: Yes, I’d say our capital allocation priorities remain unchanged. As you know, we’ve got a very high ROIC business and our first priority is to invest back into the business where we see those high returns. Our second priority is to deploy capital where we see opportunities to grow inorganically. And our third priority is to kind of flex with share repurchases as part of returning cash to shareholders, and that will continue to be our flex option here as we progress through the rest of the year, given our cash flow generation and opportunities within the other 2 categories there.

Operator: Our next question comes from the line of Stephen Kim with Evercore ISI.

Stephen Kim: I just want to clean up a couple of things. You talked about the home centers, the weather-related inventory destocking early in the year, you recovered that in 2Q. I just want to make sure, you fully recovered that? Or do you still have some left in 3Q? And is returning to a more normal home center mix of sales going to be a factor behind anticipated AUV, stronger AUV growth for Mineral Fiber in the back half?

Victor D. Grizzle: Yes. To answer, Stephen, your — the last part of your question is, we don’t think it’s a factor in the back half. As you know, you’ve been close to this for a long time. You know that their inventories can move around a little bit. So it feels like we didn’t get all of it back from the first quarter into the second quarter. I’m not sure if that was really expected. But it felt like there was some rebalancing, and the inventory levels seem to be at a more balanced level, at least for the economic environment we’re in now. So we haven’t factored any more, if you will, rebalancing or correcting in the back half, that would have a negative impact on AUV, if I understand your question.

Stephen Kim: That’s helpful. All right. And then let’s just jumping here to TEMPLOK. My sense is your competition is kind of pretty far behind you on this phase change ceiling tile thing. I was curious if you could talk about the competition and what they’re offering in terms of this kind of phase change solution?

Victor D. Grizzle: Well, for competition, I think this is a brand-new attribute for the ceiling tile itself. I think I understand your question, our direct competition, other ceiling tile manufacturers, really what we’re selling with and maybe in some cases and against is other solutions for capturing energy savings, right? So that’s really, I think, more of what we see as the competitive landscape versus our competitors we haven’t seen a response for on this, but I think we’re really thinking about customers’ options for energy saving solutions. And that’s why being in this IES platform is so important for us because, we’re the only ceiling tile manufacturer in that platform now, but they have access to all kinds of other building energy-saving solutions in that platform.

So it’s really a good way for us to kind of rack stack this savings opportunity versus what they can get in other building or energy-saving solutions. So that’s a little bit of kind of a long-winded answer, but we kind of view our competition more around other energy-saving solutions versus direct tile manufacturers.

Stephen Kim: Yes. No, that’s helpful. Really interesting. Next question I had related to your quarterly cadence. I guess to pick on AS first, I think that you’re generally — sorry, you had, I think, answered earlier when Susan had a question about that. I think you had said that you felt better about your ability to comp positively in the back half over tougher comps. And I just wanted to make sure that I was hearing that, that you think you can comp positively in both 3Q and 4Q?

Christopher P. Calzaretta: Yes. We don’t — as you know, we don’t guide to quarters, but the expectation is, yes, the back half would be positive, and there would be positive top line contribution organically in both quarters.

Operator: And our final question comes from the line of Phil Ng with Jefferies.

Philip H. Ng: Congrats on another strong quarter. So Vic, if I heard you correctly, underground bidding activity sounds pretty stable for Mineral Fiber. So just kind of remind us how far out do you bid for jobs for MF from an on-the-ground basis? And then any color on what you’re seeing on some of the major end markets? I’m particularly interested in seeing what you’re seeing on the education side. There’s obviously been some noise around that front. And any more color on how office and retail is performing.

Victor D. Grizzle: Yes. Yes, happy to do that, Phil. Yes, on the — again, on the ground level bidding activity kind of remains steady and I think, supportive of a flattish market that we’ve described. We don’t have a lot of visibility on the discretionary part of the Mineral Fiber business. So like in AS, we can bid projects a year in advance or even farther in advance and, of course, a lot shorter than that. It depends on the size and the complexity of the project. But I think what’s the more sensitive or elastic to uncertainty is that discretionary part of the market that kind of just shows up through distribution for the most part. So that’s what we think is potentially that can — it can be turned on and turned off very quickly because of its discretionary nature.

And that’s what we’re out looking where we see the potential softness in the back half. So let me just — for a bidding activity, let’s leave it at that for a second. And the verticals that you’re asking about, data centers, transportation and health care continue to be quite active, some of the obvious — for obvious reasons. And education is hanging in there. I think we’re off to a decent start for the team and education from what we can see in the month of June, which is where we typically get some visibility to the year we’re going to have there. So it’s not fallen off like I think a lot of folks maybe thought it could fall off with the ester funds expiring at the end of the year — of the prior year. The office sector, I would just describe it this way, it just continues to kind of stabilize and create a bottom here with signs of stability overall in the leasing activity.

Leasing volume was pretty flattish and steady in the first — in the second quarter. Office occupancy also was pretty steady in the second quarter. There is some green shoots of life, if you will, in the office sector, what we’re hearing in the marketplace with more talk around tenant improvement bidding activity from the field. That’s potentially a positive that, again, reflects maybe a bottoming here. And then this whole flight to quality in the office segment is something that’s really continuing that we talked about it right from Class B to Class A from Class A to Class A plus type quality buildings. That eventually, as the occupancy rate is really high at the high end of the quality office market. It’s eventually going to pull the building Class B buildings into the renovation cycle.

So we’re encouraged by that green shoot. We’ll see how that manifests itself over the next quarter or 2. I think the 1 other thing I would call out is in New York City. Obviously a big market, big office market. It’s a big market for the building products industry. Leasing activity in the first half was the strongest first half in a decade. And I think that bodes well for, again, a bottoming and potentially some green shoots for the office market going forward. So that’s a little bit of an overview I walked around the verticals and what we’re seeing in the market.

Philip H. Ng: That’s super helpful, Vic. And then on the M&A side, you guys have been pretty busy and you’ve done some larger deals on the 3form, Zahner side of things. Curious what you’re seeing on that front? Are sellers in the market? Sometimes when you have uncertainty like that, people kind of retrenched, but love to hear what you’re seeing out there and just the size of these deals any chunkier stuff in the pipeline?

Victor D. Grizzle: Yes. We continue to work this hard, right? We’ve been successful. We have a good successful track record in bolting these on and really scaling them creating value for our shareholders. So we want to do more of these. We’ve got a team that gets up every day and this is all they do. As you know, they fill a lot of these companies that we’re acquiring are not for sale. So we’re working that process with them. That relationship building — so when they’re ready to sell that this is the place they come. So we’re going to continue to work the pipeline. It’s active and I like what I see in our pipeline. We should see some more activity in the near term, in our pipeline. So more to come there. But yes, we’re open for business there and driving it.

Philip H. Ng: Great. I want to sneak one in. Chris, on the margin, AS was awesome. You’re seeing good margin expansion there. Obviously, it’s been a big SG&A investment cycle. M&A aside, if nothing really big and chunky happens, could we see that SG&A continue to taper? Like what’s a good way to think about SG&A spend on a more normalized basis as we kind of look forward?

Christopher P. Calzaretta: Yes. Specific to AS, I think you’re right. We — with some of the acquisitions that we’ve done, we see opportunities to continue to leverage, drive operational efficiency and get that operating leverage in some of the businesses that we’ve acquired us, that SG&A line has been an area for us. So I’d say, initially, like we saw with the 3form and Zahner acquisition, a bit of a step-up. But I think over time, as we continue to get that operating leverage, drive that efficiency that will come down. But at the end of the day, I mean, we’re pleased with the level of penetration that we’re getting in the AS segment overall and really kind of investing back into that business to drive that to get that SG&A leverage something that we’ll continue to do. We’ve been very successful at doing it and are pleased with the algorithm that we have in place there.

Operator: With no further questions in queue. I will turn the call back over to Vic Grizzle for closing remarks.

Victor D. Grizzle: Thank you all for joining our call today. I’m really proud of the first half performance by our team. The execution is really solid. And as a result of that, we’re well positioned going into a back half that might see a little softer environment, but our confidence is very high. My confidence, personally, in our team to execute with agility in these kind of market conditions is going to lead to another record year for the company. So thank you again for joining and safe and — have a safe and fun summer.

Operator: Thank you again for joining us today. This does conclude your presentation. You may now disconnect.