Armstrong World Industries Inc (AWI) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Armstrong World Industries Earnings Conference Call. (Operator Instructions)

As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Mr. Tom Waters. Sir, you may begin.

Thanks, Skyler. Good morning, and welcome. Please note that members of the media have been invited to listen to this call, and the call is being broadcast live on our website at armstrongceilings.com.

With me today are Vic Grizzle, our CEO; and Brian MacNeal, our CFO. Hopefully, you have seen our press release this morning, and both the release and the presentation Brian MacNeal will reference during this call are posted on our website in the Investor Relations section.

I advise you that during this call, we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong World Industries, please review our SEC filings, including the 10-Q filed earlier this morning. Forward-looking statements speak only as of the date they are made. We undertake no obligation to update any forward-looking statements beyond what is required by applicable securities law.

In addition, our discussion of operating performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation. Both are available on our website.

With that, I will turn the call over to Vic.

Thanks, Tom, and good morning, everyone. It's good to be with you today to review the start of 2018 and update you on our outlook for the year.

Overall, first quarter financial results were largely in line with our expectations with some moving parts within the segments, primarily due to the impact of weather. First quarter revenue of $227 million was up 3% versus a strong first quarter in 2017, which benefited from a Big Box load-in and an extra shipping day.

Revenues were also impacted by severe weather, as those of you on the East Coast can surely appreciate. Notwithstanding the weather, underlying market conditions are improving as expected, and our sales guidance for the year is unchanged.

In the Architectural Specialties segment, sales and earnings are off to a great start, with revenue up 22%. It's our second consecutive quarter of more than 20% organic growth, and margins expanded almost 700 basis points.

The strategic investments we've been making over the last several years to expand our portfolio and build our capability in design services is paying off. We are increasingly involved earlier in the design process and are more capable to deliver the most innovative solutions to architects, designers and building owners. Our portfolio, our reputation and our ability to service complex projects is driving meaningful share gains in this segment.

Our distribution partners are also investing in this growth initiative with us, extending our coverage and service capabilities. All of this has us in a position with the strongest pipeline to date.

In addition, margin expansion from sales growth and SG&A leverage has been significant and will continue. This is going to be a strong year for the Architectural Specialties business.

Now turning to the Mineral Fiber segment. Sales were up slightly year-over-year. Favorable average unit value, or AUV, resulted in over $10 million of sales growth, with both mix and like-for-like pricing improving. Sales of our higher-end products, including the newer Total Acoustics and Sustain families, continue to outpace more standard products and drove improved mix.

Volumes were impacted by the 3 factors I mentioned earlier: the Big Box base period load-in that did not repeat; 1 less shipping day; and the adverse weather conditions, which combined, led to a $10 million headwind in the quarter. However, we've seen sales and volumes accelerate in April, which has been aided by the delayed weather-related volume from the first quarter. And as of today, year-to-date, Mineral Fiber volume is positive for the year, right where we expect it to be. Given where we are year-to-date and the underlying improving market conditions, we remain confident in our outlook for Mineral Fiber sales for the year.

Now of note, in the quarter we experienced strong growth in Latin America, which had been declining for several quarters. And sales into Puerto Rico were particularly strong.

Adjusted EBITDA in the quarter of $79 million was up 5% from Q1 2017, and margins expanded despite inflationary pressures. Architectural specialty sales, along with AUV gains, manufacturing performance and solid SG&A management, more than offset the volume declines in Mineral Fiber and inflation, especially in steel. The WAVE business is responding to higher steel costs and has acknowledged 3 price increases already this year. These pricing actions are all well supported in the market and have gained traction throughout the quarter. We expect wage results to further reflect these increases in the second quarter, and we remain confident that WAVE will deliver a price greater than inflation for the full year.

Now on our last call, I mentioned that I was looking forward to talking more about improved manufacturing performance in 2018, and our plans did not disappoint in the first quarter. Despite challenges and expenses associated with cold weather, they executed on all of our key manufacturing metrics. I'm pleased with their progress to date, and I expect this performance to continue.

The first quarter also saw the ramp-up of our automated flexible design line in Marietta, and their performance is on plan. This is truly going to be an exciting capability around specifiable features for the ceilings and walls market.

We continue to make progress in closing our St. Helens, Oregon, facility, where production is scheduled to stop in late May. The total facility will be shut in the third quarter when our new distribution center in Phoenix is up and running.

As we mentioned on our last call, that this plant closure, combined with our plan to rightsize our G&A profile to reflect an Americas-only business, would yield cost savings in the range of $15 million to $20 million by the end of 2019. Since then, we've identified and initiated actions -- additional actions, and we are now confident that we'll achieve the high end of the savings range.

The sale of our EMEA and Pacific Rim businesses remain on schedule, and I'm pleased to report that these businesses are performing very well. We expect the necessary regulatory approvals will be granted in the third quarter, and we continue to expect to realize $215 million net after cash -- after tax cash in connection with the transaction and to return a majority of this cash to shareholders.

Now with that, I'll turn it over to Brian for more details on our financial results. Brian?

Thanks, Vic. Good morning to everyone on the call. Today, I'll be reviewing our first quarter 2018 results before we go into the financials. As a friendly reminder, I'll be referring to the slides available on our website.

Slide 3 details our basis of presentation. You will note on Slide 3 that we will no longer be presenting currency-adjusted sales, as movements in the Canadian dollar should not be material to our results.

Turning to Slide 4 for our first quarter results. Sales of $227 million were up 3% from first quarter 2017. Adjusted EBITDA increased 5%, and margins expanded. Adjusted diluted earnings per share were up 6% due to higher earnings and a lower share count. In the first quarter of 2018, we repurchased 1.2 million shares for $70 million. Since inception of our repurchase program in the third quarter of 2016, we have bought back 4.1 million shares for $194 million.

Adjusted free cash flow improved by $27 million over the prior year quarter, due primarily to the receipt of cash from the insurance settlement we reached in the second half of 2017. Net debt increased by $35 million.

Turning now to Slide 5. Adjusted EBITDA increased $4 million, as improved AUV, SG&A leverage and manufacturing productivity more than offset headwinds from Mineral Fiber volume declines, inflation and lower earnings from WAVE. WAVE equity earnings were lower this quarter due to higher steel costs as well as the revised support cost arrangement we announced in the third quarter of 2017. Depreciation was higher in the quarter as a result of our recent capital investments.

Slide 6 shows our change in adjusted free cash flow, which grew $27 million compared to the prior year quarter. The main factor impacting cash flow in the quarter is the receipt of $26 million of net insurance settlement proceeds, which impacted working capital. Capital expenditures were lower as we've returned to a more normalized level of capital investment.

Slide 7 begins our segment reporting. In the quarter, Mineral Fiber sales grew 0.5%, as 5% AUV gains more than offset volume declines, driven by the 3 factors Vic mentioned: weather, the shipping day calendar and the Big Box load-in in the prior year. EBITDA was flat as AUV gains and SG&A savings offset the volume declines and softer results at WAVE.

WAVE has announced 3 price increases already this year. We've seen price over inflation accelerate through the quarter and expect price to be greater than inflation for the full year.

Moving to our Architectural Specialties segment on Slide 8. Quarterly sales increased 22%. As you remember, we closed on the Tectum acquisition in January 12, 2017, so this growth is almost entirely organic in nature. We had strong sales performance across all substrates with all product forms up in the 20% range, including metal, wood and Tectum products.

Armstrong's broad specialty ceilings and walls portfolio, coupled with our superior service and support capabilities, is allowing us to increase penetration in this market.

Adjusted EBITDA in AS was up 70%, and margins expanded 680 basis points in what is historically our lightest sales quarter. This quarter again demonstrates not only the top line potential of the Architectural Specialties business with ability to meaningfully help us grow the bottom line and expand segment margins to 24%.

Slide 9 updates our 2018 guidance. As Vic mentioned, our revenue guidance is unchanged from our initial guidance. Our adjusted EBITDA guidance is also unchanged, as is cash flow, which is up 20% to 30% versus 2017. We are taking the bottom and top of our adjusted EPS ranges up $0.07, as our share repurchase activity is driving a lower expected share count for the year. We now anticipate EPS growth of 19% to 27%. Note that 2017 adjusted EBITDA has been increased to $319 million from the previously reported $317 million with year-end results for consistency -- consistent comparability. This change is a result of an accounting standards change, which was effective January 1, 2018, requiring all component of our supplemental pension and postretirement benefit plans, excluding service costs, to be recorded below operating income. This change only impacts the Mineral Fiber segment and has no other impact on 2017 results.

To close, our net leverage as of quarter end remained near the low end of our targeted range of 2 to 3x adjusted EBITDA, and we have plenty of liquidity to support our capital allocation priorities, including innovation, share repurchase and M&A.

With that, I'll turn it back to Vic.

Thanks, Brian. All in all, a good start to 2018, a year in which we are transitioning to an Americas-focused ceilings and wall company. As anticipated, we're seeing solid underlying market activity, and we had another quarter where we expanded our EBITDA margins even in the face of inflationary pressures.

Our focus has continued on introducing more and more innovative and value-added products for our customers. This allows us to continue a positive product mix of higher-priced products that help drive growth and margins.

As we move forward, we will continue to execute on our multipronged plan to grow sales and profits. We are revitalizing the Mineral Fiber category with Total Acoustics, Sustain and now our enhanced flexible design range of products to continue to drive improved AUVs.

The Architectural Specialties business is hitting on all cylinders to drive volume growth and expand margins. Our manufacturing team has pivoted from a capital investment focus over the past several years and is now laser-focused on driving productivity. We are taking steps to rightsize the G&A cost structure and drive savings. And WAVE is taking the actions necessary to expand margins in this inflationary environment.

I want to directly address inflation, which is an obvious concern in the market. We are certainly seeing it in our businesses, particularly in steel and freight. However, we are committed to recapturing these costs through price increases, and I'll remind you that we have done this every year for the past decade. This pricing discipline, improving Mineral Fiber volumes and a terrific growth platform in Architectural Specialties gives us confidence that we will deliver a strong 2018.

So thank you for your attention, and with that, I will open it up for questions.

(Operator Instructions) Our first question comes from Nishu Sood with Deutsche Bank.

I first wanted to start on the Mineral Fiber volumes. So Vic, you mentioned that April has been strong enough such that the year-to-date volumes in Mineral Fibers are positive year-over-year. That sounds like -- and again, seasonality probably plays a role here, but it looks like your volumes were down kind of mid-single digits in 1Q overall. So that sounds like a pretty significant surge. Can you just walk us through that? Obviously, there's oftentimes lumpiness in Mineral Fiber volumes depending on projects. Maybe January and February, such low volume months that's not as impressive as it sounds. But if you could just kind of walk us through the mechanics on the volumes there, please.

Yes. As you know, in most weather-related impacts, they're delayed -- it's delayed demand, right? It's not lost demand. And certainly, in the areas where we saw the weather impact, mainly in the month of March, Nishu, we saw those replenishment orders come back in April in those same areas. So we can link it pretty well to the weather-related impact. And the volume is up again well beyond seasonalities. And even when you adjust April for the 2 extra shipping days that we're seeing in April, the volume is up in a meaningful way. Obviously, it offsets the shortfall in the first quarter in the month of April alone. So again, I think we're exactly where we expected to be in terms of volume. It's right within the guidance that we've laid out for the whole year. And again, that's against the backdrop that was a pretty strong first quarter. So we feel -- again, we still feel very confident where we are year-to-date and again getting on the other side of the weather impact.

Got it. And with the weather effects, since it sounds like it was obviously pretty noticeable, wouldn't it have affected your unit mix in the first quarter? In other words, would it have driven AUV up by depressing more kind of patch-and-match business? Or would it have depressed it because it delayed kind of more new construction projects?

No. We didn't notice a difference across the categories. It was -- when you can't ship, you can't ship, whether it's a commodity or standard-type product versus a custom product. You just can't ship. So it's -- it was across all the categories where we felt the weather impact. But the mix was very strong, as you noticed in the first quarter. We continue to win at the high end of the markets. And with Total Acoustics and our Sustain products getting them specified and flowing in the market, we had really strong growth at the high end of our product portfolio.

Got it. And one just one real quick clarification. On the WAVE price catching up -- or I'm sorry, price exceeding steel cost increases by the end of the year, does that mean you expect that for 4Q by itself when we -- as we get to the end of the year? Or will the price gains be strong enough that the entire year will see price exceeding steel -- cost increases for WAVE for '18 versus '17?

Yes, good question. We're already seeing the price catch up to inflation. Actually, throughout the first quarter, as I mentioned, WAVE has announced 3 price increases. Two are already implemented. And we started to see traction already through the first quarter. In fact, in the month of March, we covered inflation with pricing. So I like the trend line we're on. We should see better and better price with the additional price increase coming in May to make sure that we're covering inflation for the rest of the year. And yes, I do expect that total price realization should exceed total steel inflation for the year.

Our next question comes from Stephen Kim with ISI. Our next question comes from John Lovallo with Bank of America.

Guys, it's actually Pete Galbo on for John. Brian, I guess the first question, is there any further depreciation step-up expected for the St. Helens plant that we should think about in the second quarter? Or is that now kind of fully accelerated at this point?

Yes, we'll continue to see some accelerated depreciation, roughly $4 million there. We took some accelerated depreciation in Q4 and then the $7.7 million we called out for Q1, and then there'll be about another 4 in Q2.

Should that dissipate in Q3 and 4 then or continue a little bit into Q3?

That will dissipate.

Okay. And I guess, just thinking about the Architectural Specialties business. Obviously, very strong volume there on an organic basis. Just trying to think about how we should think about the cadence of growth over the rest of the year, just given you're going to go up against much tougher comps in the back half.

Yes, I think the way to think about -- the way we look at this, we track a new business pipeline, given that the Architectural Specialties business is quite a project-intensive type business with a very little of the flow portion to the business. So we have pretty good visibility in the pipeline, and our pipeline is up meaningfully and supports a really strong second half of the year as well as the first half of the year. So I expect us to continue to drive solid double-digit top line growth for the remainder of the year and deliver on the outlook that we have for Architectural Specialties. Again, I'm really pleased with the margin expansion, along with the top line growth in that business as we just fundamentally get better at serving this market.

Your next question comes from Michael Wood with Nomura Instinet.

You cited the year to date volumes in Mineral Fiber. It sounds like right in the middle of your guidance despite the tougher comps in the quarter. That's good to hear. In the past, you have often got off to a strong start, and then it faded. Curious what you're hearing from customers with feedback on that Mineral Fiber outlook, particularly remodeling, whether or not the strength is sustainable here.

Yes. So the short answer, Mike, is that we believe it's sustainable, and we're going to have a solid year in Mineral Fiber. I spent a lot of time personally out in the marketplace in the first quarter seeing architects and contractors. And it's a noticeable tone in the marketplace right now with their backlogs and their level of activity. And it seems to be broad -- the base seems to be broadening out in terms of the verticals as well, which I think gives us a good feeling about the remodel part of the business. Again, the new construction part of that business is pretty visible, and we're tracking it very closely. But I would just say, again, the sentiment in the marketplace and the activity in the marketplace is stronger than it was last year, and it's as we expected it to be at this time of the year.

Okay, great. And then with the retail load-in, I recall you had a relatively easy mix comp this quarter. I'm curious just overall where the price/mix and the incrementals are tracking versus your expectations year-to-date since you gave us the volume color. And is that 5% year-over-year price/mix, should that step back a little bit in 2Q as that retail load-in effect fades?

Brian, you want to take that?

Sure. Mike, I think we were happy with what we saw in the AUV performance, plus 5%. The retail piece of that isn't much of a headwind, quite frankly. And so we'll continue to see AUVs in the remaining quarters consistent with our expectations.

Our next question is from Stephen Kim with ISI.

I wanted to follow up, if I could, on the acquisition pipeline that you see out there in the marketplace. In particular, we have been -- we have heard that smaller companies really benefit from being aligned with your distribution network, in part because of the backing that you can provide with being such a large company with a long reputation in the market. And so I was curious as to whether or not you are seeing the ability to apply those benefits more broadly into adjacent areas and if that's come through in some of your M&A conversations.

The answer to that -- the short answer is yes. And again, that's one of the premises, I think, to this particular part of our strategy is that these smaller-scale companies do benefit from being attached to the go-to-market reach and capability that we have, not only geographically, but into the architectural offices. And our distribution partners have been very helpful in covering the smaller projects as well as the big projects, but the smaller projects in addition and to provide a service profile that really is top-notch. So I think it's the combination of those things that really take a business like Tectum, which is our only public example at this point, to show how we can leverage and drive revenue synergies as well as bottom line productivity synergies, which we're seeing in that business. So that is the premise of it. And I think we've got one to demonstrate that for. Relative to the pipeline, I will tell you that I continue to be encouraged by the development of our pipeline. Some of the things that we've been working on for the last 6 months have moved up in the process, and we're adding new companies and targets to the pipeline. So I continue to be optimistic about the progress that, I think, we're going to make on the M&A front throughout 2018.

That's great. And regarding Tectum, I believe when we had chatted previously, you had talked about the walls category as being one that could be addressed by Armstrong as well. And I think, correct me if I'm wrong, but I believe, Tectum, those are demountable walls. And was curious as to whether you had a preference for demountable versus nondemountable, if there's any important distinctions to draw within that category.

Well, you're right, Stephen, around one point that Tectum does bring a wall substrate and a wall business as part of that overall acquisition. And we've learned a ton by being inside the tent with Tectum on walls, and we're learning a lot more. It's not a demountable wall in -- per se, but it is a very nice wall substrate that provides the acoustics and some of the abuse-resistant properties that are required in those type of wall applications. So again, we continue to learn more about this. And in our conversations with the architects, there is more and more of an opportunity for acoustics and other design aesthetics to move to the wall. And it just plays very nicely to Armstrong's strength. So more to come there. I think we're learning a lot, and the Tectum acquisition gives us a nice platform to build off of.

Great. And just one housekeeping item. Productivity, I think, was $2 million in the quarter. Just want to confirm that. And are you still looking for about $10 million a year?

Yes, Stephen, this is Brian. So yes, that's $2 million of productivity. But I would mention what we called out as some headwinds in costs associated with weather. As you can imagine, throughout the quarter, it was really cold here in the Northeast, and so some of our plants ran into some additional costs associated with that. So the productivity number was slightly ahead of that, that offset those costs, and we fully expect it to deliver at least $10 million for the year.

Our next question comes from Keith Hughes with SunTrust.

We've talked a lot about steel inflation on the call. Just wanted to get back to the traditional tiles. What kind of inflation are you seeing there? And how do you expect that to run the next several quarters?

Keith, this is Brian. So we'd ranged 2.5% to 3%. We're hitting that range in the first quarter and expect -- don't see anything that's going to give us concern that we won't stay within that range for the full year.

And that's independent of the steel situation at WAVE. Is that correct?

That's correct. So as you know, WAVE comes to our -- we account for that through equity earnings. So it's not in our cost of goods sold. But yes, WAVE is having a higher steel inflation for that, and as Vic mentioned, we've got a path to exceed that steel cost through our pricing actions.

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And I was a little unclear on the answer to one other question. Do you think, on a price cost, will WAVE be back on the positive side in the second? Or is it going to come more in the second half?

Well, we're not breaking it out by quarters, Keith. But again, as I said in my answer was that we saw in March the progression of the realization of price to cover the amount of steel inflation we saw in March. And I can see -- I expect that to continue. So that the full year, that we should be back on the positive side of price realization for inflation.

Okay. Final question, the buyer of your ceiling business in Europe's been embroiled in a hostile bid here. Is there any indication that this has changed the sale of the Euro business?

Our project to sell our EMEA and Pacific Rim businesses is on track. Regulatory applications have all been filed, and we're making progress there. So no change around that project.

Our next question comes from Michael Rehaut with JPMorgan.

First question I just had was just trying to think a little bit big picture on the Architectural Specialties. And obviously, continues to be an interesting part of the story, exciting part of the story. And I apologize if this is something that you've kind of spoken to in the past, but if you think out like 2 or 3 or 4 years, pick a number, do you guys have any kind of goalpost or targets that you want to see that business achieve, either from a sales size type of perspective or also for -- in terms of margins? And on the margins itself, obviously, you saw -- we saw great improvement there this quarter, given the sales volume growth. So kind of part of the question here is to the extent that you have a size in your sites over the next 2 or 3 years, what could that mean from a margin standpoint as well?

Yes, Michael, it is an exciting part of our business. There's no question about it. It's got a lot of facets to it, and we continue to explore more and more of those as we get into this. I mean, I'll tell you, I think that we have highlighted this before, Michael, but our level of penetration into this segment is quite different than the Mineral Fiber segment. Relative share positions for Armstrong in this category are relatively low. So there's lots of penetration and growth opportunity consolidating the industry as we move forward. And so there's a long runway of that moving forward. And so we're not putting a stake in the ground out into the future other than we should be growing double-digit growth in this segment for many years to come to get to a higher level of concentration in this segment, irrespective of what the market is doing. And that's kind of the, I think, the guidelines we put out there, and for the last several years, we're demonstrating nice, solid double-digit growth in that segment. I expect that to continue over the next several years.

I appreciate that. And I guess, in thinking about the cadence for the year, it appears that you reiterated -- obviously, you reiterated your full year sales guidance. And as part of that, the 10% plus on the Architectural Specialties. I think, obviously, as the comps get a bit tougher in the back half, is it implicit in that guidance that we should be expecting the back half of the year to show, perhaps, a sub-10% organic growth just as things even out? Or could there just be, at the end of the day, some upside to that guidance?

Well, we're sticking to the guidance, Michael. And I think that what I did mention earlier is still appropriate to repeat here, and that is that our pipeline and our visibility in this segment is pretty good. The pipeline is up nicely, and we expect that it will support the double-digit growth that we've outlooked in the second half of the year. I will say, as we've seen in the past, based on timing of projects and this being a very project-intensive segment, you can see some quarter-to-quarter volatility. But on the year, again, we're sticking to the guidance, we expect a really strong year in Architectural Specialties this year.

Okay. And then just one last one, if I could. On the -- for Mineral Fiber and the margins being able to offset freight and material cost inflation with productivity, I just want to make sure if I heard that right that it was about a $3 million gain in productivity that offset a similar amount of inflation and that you reiterated your $10 million goal for the year. Is that right? Or I apologize if I don't have those numbers exactly.

Hey, Michael, it's Brian. So we've reported out $2 million of productivity in our bridge, and I mentioned that there's some headwinds there from costs. So we're on track to deliver our 10 or more of productivity for the year.

Our next question comes from Ken Zener with KeyBanc.

As I was looking through the Q, I wonder, this is the first time -- and I just looked at the K, and I don't think I missed it, but were you breaking out what's called major customer group within each segment? Is there anything that we could or should look to, to read into your business since you've broken out the business by distribution, U.S. home centers? Or conversely, is there something we shouldn't be reading into now that we can see, like, those different channels by quarter?

Hey, Ken, it's Brian. No, that's new disclosure now required as part of that new revrec. I wouldn't look into it from any other different angle than what we've been talking about before. So no real change there. It's -- you can see the composition of both AS and Mineral Fiber by the various distribution points.

Interesting. And then I guess, related to -- looking at data, is there any callouts? So obviously, we hadn't load-in part in the home centers. You talked about weather this quarter. But when we look at 2 and 3Q, is there anything -- I know, school didn't come through -- education didn't come through last year as much as you thought, for example. Is there anything that you would call out for 2Q or 3Q that just so we don't get -- realizing your guidance is there, but drilling into your different verticals a little bit, is there anything that we should be sensitive to?

Thanks, Ken. No, there's nothing out of the ordinary. And consistent with what I talked about earlier, which is the segment activity is as we expected, and it's broader based. 4 out of the 5 verticals are in the positive territory first quarter versus first quarter last year, which is supportive of the environment that we're out looking to. And we don't expect -- and we don't guide to, but we don't expect any unusuals in the second or third quarter relative to that outlook.

Our next question comes from Garik Shmois with Longbow Research.

I'm just wondering about just the pace of the SG&A savings. You're taking up the guidance to the upper end of the prior $15 million to $20 million range. Just how should we think about that layering in 2018 and 2019?

Hey, Garik, this is Brian. So we communicated $15 million to $20 million over the 2 years, and we're going to commit at the higher end of that. And half of that will now occur in 2018. Obviously, it's more back half loaded in Q3 and Q4, so we'll see a departure from our normal splits of EBITDA percent of year first half, second half, given that pick up of, call it, roughly $10 million in the second half.

Okay. And then just on the Architectural Specialties margin improvements. Recognizing that the comp was fairly easy from a year ago. But the incremental margin plus the consolidated EBITDA margin in the segment was a step-up year-on-year. Just how should we think about that moving forward, both on incrementals and on margins? Is kind of a mid-20s margin on EBITDA a good way to think about that? And again, on incrementals, any guide posts would be helpful.

Yes, I'll take it. And then Brian, you could add some color, if you like. But Garik, I think the way to think about this is, with the sales volume that we had, we really got good leverage on the infrastructure costs that we have in the business, namely SG&A. So as long as we continue to get these kinds of organic growth rates, we should see similar levels of SG&A leverage. And the other underlying part of this is we're just getting more efficient to how we run this part of the business and how we serve customers. And our teams, the scale level, is just elevating with every quarter that goes by. So I expect our margins to continue to expand. And again, you're going to have quarter-to-quarter noise, I think, based on what's going on in the quarter relative to some of those projects. But I expect the performance of this business to continue to improve by the margin level. So I hope that answers your question, Garik.

Our next question comes from Phil Ng with Jefferies.

I appreciate you raising your EPS guidance in a tough backdrop. A big part of that's buyback. Just want to make sure, is that a function of the buybacks you've done already? Or are you accounting for some incremental buybacks over the course of the year? And as you look to return some cash back to shareholders via your proceeds from the divestiture, will that be more gradual potentially or you could look at an ASR?

So Phil, this is Brian. I'd call it this way. We continue to be confident in our ability to generate 20% to 30% improvement in free cash flow year-over-year. And in the quarter, as we called out, we had a net benefit from insurance proceeds of roughly $26 million, and we chose to return that to shareholders through our existing share repurchase program. As we look out over the year, we don't provide guidance on share repurchase. What we will reflect in our EPS guide is what we've actually done, and we've repurchased a pretty significant amount there in Q1.

Got it. And I guess, just for Q1, volumes were a little lighter in Mineral Fiber. You guys called out a few things that makes a lot of sense. But I did notice that your price increase was a little earlier than your competitors by a month or so. I don't know if you holding the line on pricing had any impact on volumes and if that's kind of normalized if there's any moving on share shifting or anything of that nature.

No, we don't believe so, Phil. It was really, again, the 3 things that we outlined that impacted volume.

Our next question comes from Kathryn Thompson with Thompson Research.

First, on Architectural Specialties. How much of the segment growth was carried over from large projects from the prior quarter? If you could you give more color on size of project bids, because what we are seeing in our primary search is more projects that are of the $1 billion type size than we've seen in the past. And it may be too early for you to see this type of project bid, but curious if you are seeing that -- seeing larger projects in your pipeline.

Kathryn, nearly everything that we ship to in the first quarter is something that we were working on in 2017. Some of it could have been from the fourth quarter that we were working on and shipping to. But certainly, all of 2017, we were building that pipeline that materialized in the first quarter. As far as the size goes, actually, we have been shipping very large projects. The Grand Central station, we've been very public about, that are $1 million-plus projects. And the pipeline is building out with some midsized projects now, which is very encouraging and, I think, speaks to the broader-based activity in the marketplace. So we're all over the big projects, of course, Kathryn, you could imagine. But one of the things that I did notice that's a little bit contrary to your question is, we're noticing a lot more midsized projects filling up in the pipeline as well, which is, again, very encouraging for us.

Hey, Kathryn, this is Brian. The other point I'd add and reemphasize is we sold that over 20% growth across all material substrates. So metal, wood, Tectum itself, so a very nice broad-based pick up in our Architectural Specialties business.

Okay, great. With the wall systems, which we've discussed over the past couple of quarters, with bringing home the Tectum, how have your conversations been with the A&D community? And how open are they to the wall systems versus traditional gypsum, particularly given an environment of rising cost? Just really mainly to understand, are you seeing a different type of conversation today, say, versus 2 years ago?

Well, I'm not going to get into too much detail about the conversations we're having, specifically with our customers on this. But certainly, the Tectum acquisition gives us a platform of products and applications in which those parts go into, to move our conversation in different directions relative to walls, in addition to the ceiling applications that they traditionally go into. So we're always looking for opportunities to expand our service and our support of the architectural community. They know we're committed as a part of our business strategy to servicing them. And again, I spent personally a considerable amount of my time in the first quarter out talking to architects and contractors. And we talked about a lot of things, you can imagine. So I'll leave it there, but again, the Tectum acquisition has been a terrific acquisition, and it's expanding the range of the conversation that we can have with the A&D community.

Okay. And final question, just on walls. I know that we've talked about the wall itself. Any interest in getting into the software side or kind of the planning side of that business?

Yes, Kathryn. I'm not going to comment on that. I mean, again, we're looking to expand our platform in Tectum as appropriate.

And our next question comes from Scott Rednor with Zelman Associates.

Brian, are there additional recoveries from the environmental insurance litigation for the balance of the year?

Scott, we continue to talk to our carriers on that topic. One thing I'd call out is that we've probably got another $9 million to $10 million of P&L benefit available to us. Anything above and beyond that would show up on the balance sheet. But nothing at this time to call out.

Just to clarify, from a cash flow perspective, is the 26 everything from last year? Or is there additional influence we should expect for the balance of the year?

No, the 26 is a net number. You'll see in our Q that we call out 28.7 in total gross recoveries, but then that's offset by about 2.7 of expense. So net it down to 26.

Okay. And when you think about the cash flow conversion of the business, if you took out the $26 million that you're getting this year from those actions last year, seems like the conversion is probably a little bit below the 50% plus or minus conversion from adjusted EBITDA to free cash flow. When you think about getting back to those levels in '19 and beyond, what are the additional levers to get there?

So first, I'd say, when we guide our midpoint to $183 million, which is up 20% to 30% year-over-year, that excludes the environmental pieces. So that's just cash from normal operations. The cash from the insurance proceeds was an additional benefit that, like I mentioned, we used to fund our share repurchase in the first quarter. So we'll continue to see nice growth in cash. We are normalizing on our capital CapEx spending. We continue to be very diligent in our working capital, and obviously, cash taxes has been a nice benefit, too.

And then just lastly, have you guys discussed how large freight is as a percentage of COGS and just realizing that, that's been an inflationary area across Building Products?

Yes, it's roughly 10% of our cost of goods sold.

At this time, I'm showing no further questions. I'd like to turn the call back over to Vic for closing remarks.

Great. Thanks, everyone. Yes, I hope you -- aside from the weather impact, we're right on track to deliver what's going to be a strong year for AWI, 5% to 7% top line, greater than 10% EBITDA and over 20% cash growth. I do want to mention, on a closing note, that I'm pleased to announce that we will be hosting an Investor Day here in Lancaster on Wednesday, November 7. We're excited to show you the flexible design line at the Marietta plant, our revitalized range of Mineral Fiber ceiling systems and the breath of our Architectural Specialties portfolio on that day. And we'll also be sharing where we're going next. So I look forward to seeing all of you there. Again, thanks for your attention, and have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.