Armstrong World Industries Inc (AWI) 2018 Q2 法說會逐字稿

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

I would now like to turn the conference over to your host, Mr. Tom Waters, Investor Relations Officer. Sir, you may begin.

Thanks, Bridget, and good morning, everyone, 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 also 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'll turn the call over to Vic.

Thanks, Tom, and good morning, everyone. It's good to be with you today to review our second quarter results and update you on several recent important developments.

Second quarter results were solid, with both sales and adjusted EBITDA up double digits. We had strong volume growth in both segments. We achieved solid like-for-like price increases to offset inflation and WAVE delivered a record quarter. Overall, our results in the first half of the year were solid and in line with our guidance. And as we enter the busy summer period, we remain confident in our 2018 outlook.

Total company second quarter revenue of $249 million was up 10% versus the second quarter of 2017, and adjusted EBITDA of $95 million was up 12%. Free cash flow was up 140% in the quarter. And year-to-date, free cash flow has tripled to almost $100 million.

The Architectural Specialties segment had another strong sales quarter with revenue of $42 million, up a strong 18% from last year. Adjusted EBITDA in the quarter of $9 million was up 5%, resulting in a 22% EBITDA margin.

Architectural Specialties' sales growth was broad-based, with all major substrates up at least 15%, including metal, wood and the Tectum products. Big projects continue to provide tailwinds to the business as we completed the Salt Lake City Airport renovation in the quarter and our pipeline of large jobs remains strong and includes major transportation projects at LAX, the Royal Caribbean Terminal in Miami and the Grand Central Station, among others.

Architectural Specialty margins compressed in the quarter due to the timing of investments in selling and design capabilities and the mix of products sold in the quarter. Now, you will remember we've discussed that we can see some quarter-to-quarter variance in our results due to the timing of investments and project work.

Overall, this business continues to gain momentum and grow significantly faster than the underlying market. For the full year, we expect sales to be up more than 15%, with adjusted EBITDA margins better than 2017.

During the quarter, we also completed a strategic acquisition within the Architectural Specialties segment, the purchase of Plasterform. And the purchase of Plasterform provides us with the manufacturing and selling capabilities for ultra-expressive custom architectural cast ceilings and walls and other items. Plasterform's unique capabilities and process technology allows for intricate, 3-dimensional design options, a level of detail and dimensionality that is not possible with our current portfolio.

As with the Tectum acquisition, we will bolt these capabilities on to the Armstrong platform and combine them with our sales, distribution and operations expertise to grow even faster and enhance their profitability.

Now, additionally, as you have seen in our press release today, we just reached an agreement on another Architectural Specialties acquisition. We will be purchasing Steel Ceilings, Inc., thereby adding additional capability and capacity to our metal ceilings product line. Steel Ceilings is a manufacturer of standard and custom metal ceilings, including architectural, radiant and security ceiling systems. We look forward to closing this transaction later in the quarter and adding this business on to the Armstrong platform.

Now, turning to the Mineral Fiber segment. Second quarter revenue of $207 million was up 9% from last year. Adjusted EBITDA in the quarter of $86 million was up 13% from 2017 and EBITDA margins expanded 160 basis points to 41.5%.

Mineral Fiber volume was up 5% in the quarter. As we previewed on our last earnings call, we had a strong April as shipments rebounded from weather-related issues in March. Now, without the benefit of the Q1 delay, volumes would have been up about 3%. Sales to Latin America, Canada and the U.S. home centers were particularly strong in the quarter. Overall, a solid volume quarter for Mineral Fiber.

AUV, which, again, is a combination of like-for-like pricing and product mix, was up 4% from prior year as pricing gains accelerated from the first quarter and mix continues to benefit from our new high-end products. Sales of our more recent product innovations that we've been talking about, Total Acoustics and Sustain, grew double digits in the quarter.

Mineral Fiber segment EBITDA benefited from the higher volume and solid realization, offsetting inflation in the quarter. Manufacturing productivity improvements continued, but were tempered by headwinds related to the St. Helens plant closure. Brian will provide more details on this when he discusses our financial results in a moment.

But WAVE had a strong quarter as multiple pricing actions have gotten this business back in line with the significant steel cost inflation, expanding margins very nicely. WAVE equity earnings grew 22% in the quarter.

Now, operationally, in our Mineral Fiber business, we continue to make good progress on our key initiatives. The flexible design line at Marietta is ramping up production and is on schedule. We completed the closure of our St. Helens plant ahead of schedule and have begun decommissioning activities. The St. Helens production was picked up by other manufacturing facilities and customer service was maintained throughout that process. Our new distribution center in Phoenix launched operations and is now providing improved service levels to our customers on the West Coast. And we've largely completed our G&A restructuring, which, along with our other restructuring activities, will provide $9 million of cost tailwinds as we move into the second half of 2018.

In June, we formally launched DESIGNFlex Ceiling Solutions at the American Institute of Architects Expo in New York, the largest architectural show in the U.S., with over 26,000 in attendance. DESIGNFlex gives architects and designers the freedom to reinvent ceilings by mixing and matching shapes, sizes and colors.

Our manufacturing investments, including the flexible design line in Marietta, are providing mass customization solutions at standard lead times. This means minimum orders as small as one carton can be shipped to the job site in just 3 weeks, industry-leading capabilities in both product and service.

The response to our launch at AIA was overwhelmingly positive, from the new shapes, sizes and colors to the innovative technology we used to showcase DESIGNFlex. Post-show, we received recognition as the most innovative commercial product out of more than 800 companies exhibiting. The AIA booth and DESIGNFlex will both be on display at our Investor Day in November.

With regard to the sale of our EMEA and Pacific Rim businesses, you likely noted from the 8-K we filed last week that we've amended the terms of our sale to Knauf. The purchase price of $330 million remains unchanged and the amendment assures our unconditional receipt of the cash in a timely manner. Knauf will now make a full -- fully nonrefundable payment of $250 million to Armstrong on August 1 and $80 million on September 15. With this amendment, we continue to expect net cash realized from the transaction to be $250 million, the same as we estimated when we announced the sale. In light of the ongoing competition clearance process, we now expect closing to occur prior to year-end.

As we've mentioned before, it has been our intention to return a majority of the net cash realized to our shareholders. And I'm pleased to announce that to enable these actions, our board has expanded our share repurchase program by $300 million to a total of $700 million. Management and the board are working on finalizing the vehicles and the timing for executing these repurchases.

And with that, I'll pause and turn it over to Brian for a deeper dive into our financial results. Brian?

Thanks, Vic. Good morning to everyone on the call.

Today, I'll be reviewing our second quarter and year-to-date 2018 results. But before we go into the financials, as a friendly reminder, I'll be referring to the slide available on our website. Slide 3 details our basis of presentation.

Turning to Slide 4 for our second quarter results. Sales of $249 million were up 10% from the second quarter of 2017. Adjusted EBITDA increased 12% and margins expanded 70 basis points. Adjusted diluted earnings per share were up 16%, aided by our share repurchase program. In the second quarter, we repurchased 620,000 shares for $35 million. Since the inception of our repurchase program in the third quarter of 2016, we have bought back over 4.7 million shares for roughly $230 million at an average price of just over $48 per share. Adjusted free cash flow improved by $39 million or 140% over the prior year quarter, due primarily to improved working capital performance in the quarter. Net debt increased by $21 million as cash balances are lower than last year and debt is also lower.

Turning now to Slide 5. Adjusted EBITDA increased $10 million as volume gains in both Mineral Fiber and AS flowed to the bottom line. AUV was positive and offset inflation. Input costs include $2 million of inflation as well as other spending, primarily related to freight costs associated with our changed manufacturing and distribution footprint. SG&A increased due to investments in AS capabilities and legal costs in the Mineral Fiber business. WAVE had an excellent quarter as profitability was up 22%.

Slide 6 shows our change in adjusted free cash flow, which grew $39 million compared to the prior year quarter. Working capital improved by $18 million year-over-year, with onetime items in both the base period and current year impacting the results. Capital expenditures were lower as we returned to a more normalized level of capital investment and WAVE earnings improvement flowed through to cash. The other category improved due to timing of tax payments.

Slide 7 begins our segment reporting. In the quarter, Mineral Fiber sales grew 9% with all 3 drivers, volume, like-for-like pricing and mix, improved versus 2017. Adjusted EBITDA was up $10 million. The volume impact on EBITDA is straightforward, but fall-through of mix was later than usual, driven by channel mix. The strong sales growth we experienced in Latin America and the home centers benefited us on the volume line, but was a slight offset to the mix line as the margins earned in these channels is lower than the overall segment. The manufacturing and input cost line captures ongoing productivity gains at our plants offset by freight and raw material inflation as well as the freight costs associated with reconfiguring of our manufacturing and distribution footprint due to the closure of the St. Helens plant. SG&A was higher in the quarter, largely due to legal expenses, including those associated with M&A and litigation matters. WAVE equity earnings increased $5 million or 22% versus prior year.

Moving to our Architectural Specialties segment on Slide 8. Quarterly sales increased 18% as Armstrong's broadest specialty ceilings and walls portfolio, coupled with our superior service and support capabilities, continues to drive increased penetration in this market. Adjusted EBITDA in AS was up 5%. Margins contracted as we made investments in manufacturing and SG&A to drive and service future growth. Year-to-date, adjusted EBITDA margins of 22.7% are up 170 basis points versus the first half of 2017.

Slide 9 recaps our year-to-date results. Sales of $476 million were up 7% from the first half of 2017 and in line with the high end of our guidance range. Adjusted EBITDA increased 9% and margins expanded 60 basis points. Adjusted diluted earnings per share were up 13%. Adjusted free cash flow has tripled from last year, driven by working capital gains and lower capital expenditures.

Slide 10 is our total company EBITDA bridge for the first half of the year. Volume, price and mix are all contributing to improved profitability. Input costs, including the extra freight activity in the second quarter, are a headwind. Productivity in our plants is running $3 million ahead of last year even as we ramp up new products, capabilities and consolidate production. WAVE earnings are up $3 million. Year-to-date, WAVE has delivered price over inflation. Finally, we add back stranded international costs of $4 million.

Slide 11 shows year-to-date free cash flow. Improvements in working capital, including the 2018 receipt of environmental insurance recoveries and lower capital expenditures, helped drive the $66 million improvement.

Slide 12 updates our 2018 guidance. Our revenue, adjusted EBITDA and adjusted free cash flow guidance are all unchanged from our initial guidance. We've increased our revenue growth expectation in Architectural Specialties by 500 basis points.

We are increasing the adjusted EPS range $0.07 to reflect our share repurchase activity to-date. We now anticipate EPS growth of 19% to 27%. Note that our share count for EPS calculation is our most recent position and does not take into account future share repurchases.

To close, I'm pleased that we were able to execute on the acquisition in the quarter and announce another one here on our earnings call. For modeling purposes, both companies will be purchased for 11 -- for a little over $11 million to $12 million range. Combined, in 2019, we expect them to have just over $20 million in annual sales and will contribute in 2018 about $1 million to our bottom line. Margins for both businesses will ramp up towards the overall AS segment margin, similar to what we've achieved with Tectum.

Our businesses are building momentum and I look forward to a strong third quarter as we're lapping a soft comparable period on the top line and expect strong bottom line performance as well. We are on track to deliver our annual guidance of 5% to 7% top line growth and EBITDA growth of greater than 10%, and I'm confident that we have the plans in place to deliver.

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

Thanks, Brian.

2018 is on pace to be a record year here at AWI. The strategic initiatives and advanced manufacturing investments we've talked about are bearing fruit. As an Americas-focused ceilings and specialty wall company, we have been investing to extend our leadership position in both product solutions and support services.

We're already achieving success with Total Acoustics and Sustain products. And now with the formal launch of DESIGNFlex, we are further extending our leadership into next-generation interior space solutions and reinvigorating the Mineral Fiber ceilings category.

And our innovation pipeline has never been better. The Architectural Specialty business continues to hit on all cylinders. We are driving impressive organic sales growth, expanding margins as we get better at executing in this specialty space and we are winning and delivering iconic projects. Add in 3 strategic acquisitions in the past 18 months and a robust M&A pipeline, and this is not only a great business today, but it has an exciting future as well.

We just completed a review of our 3-year strategic plan with our Board of Directors and I have to say the alignment and the confidence has never been higher. This confidence is clearly demonstrated in the expanded repurchase authorization that I mentioned earlier. The cash generation of this business is unique and we will continue to deploy it to invest in our business, to acquire bolt-on acquisitions and return it to our shareholders.

So thanks again for being with us today. And with that, I'll open it up to questions.

(Operator Instructions) Our first question comes from the line of Stephen Kim with Evercore ISI.

I was curious if you could talk in the Mineral Fiber's business. I think you talked about the 0% to 2% in terms of the volume for the year and -- but we had a little bit of volatility in the first 6 months. You talked about that in terms of the 1Q in April and so forth. And so I was curious if you could talk a little bit about what you saw in July and whether your expectation would be that you could be in that 0% to 2% range in each of 3Q and 4Q as well as for the year.

Yes, Stephen. This is Vic. Going back first to the volatility that we talked about, right, for March to April based on weather. So when you look at the first half, we're in that 0% to 2% range that we're outlooking for the whole year. So that, coupled with the market conditions that we're seeing into the third quarter and what we expect to see the rest of the half -- rest of the second half, which is very consistent with the first half, frankly, we remain confident in that 0% to 2% outlook that we provided for Mineral Fiber.

That's great. Helpful. And then if we could talk a little bit about, in the slide, I think you made reference to LatAm and home centers having an impact in terms of lower mix but also higher volume. Was curious if you think this is going to be an ongoing trend that we should be factoring in, in any way or if it was primarily a 2Q phenomenon.

Yes. Really, it's been predominantly a first half phenomenon. I would say, in the first quarter, we also saw -- and we spoke to this, our LatAm and, in particular in the Puerto Rico area, we've called out based on some of the rebuilding that's going on there. So I expect that to continue. I think the home -- the sales through the home centers is a bit of an indicator on some of the R&R activity that we're seeing broadly in the market. So we would expect that to continue. As you know, with the home centers, you can get some lumpiness quarter-to-quarter based on their inventory adjustments as we've talked about in the past, but the sell-through that we're seeing through those home centers, we expect to continue into the second half.

Our next question comes from the line of Nishu Sood with Deutsche Bank.

So obviously, great sales trends in Architectural Specialties. Continuing acquisition -- the acquisition pace has stepped up here as well. As we kind of look across the initiatives you have going in Architectural Specialties, the 3 you've made over the last 2 years here, plus the flex form, is there kind of a broad strategic overlay that you can guide us to that's kind of guiding these acquisitions? Or should we think about them more as this is opportunistic? There's obviously an incredible array of specialties, ceiling materials and it's more opportunistic as you fill in your product portfolio.

Yes. Good question, Nishu. I think the strategic overlay -- let me separate. The 2 that you mentioned were the DESIGNFlex, which is really a Mineral Fiber initiative to reinvigorate that category from a 2-by-2 white-side-down ceiling tile to shapes, colors and sizes, that can really, I think, reenergize what architects want to design around. So that is separate from the Architectural Specialties. So let me just talk about that for a second because I think this is -- the feedback that we got from the AIA show and the initial launch into the marketplace is very exciting. And it's very encouraging that we're over the right target on what architects want to do with that space going forward. So they want the aesthetic. They want the statement that comes from the ceiling plane, but they also need the acoustics. And this is a great combination of capabilities for architects to design around. So we're very encouraged by that. And again, this -- the strategic overlay for DESIGNFlex is to drive Mineral Fiber sales growth. So that's the -- one of the initiatives that's going to support that.

On Architectural Specialties, these are really adjacent capabilities that we don't have in our portfolio today that we want to augment what we currently take to market to broaden the basket of solution capabilities to help architects with a one-stop-shop approach to solve all of the spaces within the commercial buildings. And it's a very fragmented space, as we've talked about in the past. So the best way for us to bolt-on this capability and to acquire this -- or to get this capability is to acquire this capability as it exists in the marketplace today and then bolt it on to Armstrong's capabilities and specification skill sets to get these products spec-ed.

So again, there's 2 strategic overlays here: Grow the Mineral Fiber business through DESIGNFlex and creating more options around next-generation design requirements from architects, and #2 is to add to the product capability in Architectural Specialties through bolt-on acquisitions to play in more spaces within the commercial buildings. And that's really what's driving our -- we're being very purposeful about adding unique capabilities to the portfolio, not all the capabilities, but the unique capabilities to the portfolio, again, leveraging Armstrong's scale and our ability to go to market.

Yes. Nishu, just real quick to add to that. Vic mentioned that we're being purposeful and we are. As you know, we have a good balance of make versus buy in this business and the AS business drives over a 50% ROIC. So we're very purposeful in our M&A to make sure there are unique capabilities that stand out.

Got it. Got it. And second question, Brian, you called out transportation expenses as a result of the reconfiguration of your distribution network with the shutting of the West Coast facility and the distribution center being opened. Should we take that as one-off expenses related to the plant closure and the transition to the distribution center? Or are these more ongoing as a result of the new layout? And obviously, there's been increasing -- there's been pressure on freight expenses. So how does that play into the picture as well?

Sure. So A, I called out both the freight inflation, which is ongoing, but this -- the onetime nature of the extra transportation and extra costs we experienced in the quarter was really around the closure of St. Helens. As we moved that production into our other plants, and at the same time, demand increasing, we saw some additional overtime related to that and some additional transportation. So they're more onetime in nature. We're all facing that freight inflation as a separate item.

And our next question is from Michael Rehaut with JP Morgan.

This is Elad on the line for Mike. I just had a couple. So first, on Architectural Specialties, how big do you guys see you this segment getting over the next 3 to 5 years? And how much of that is going to be organic versus inorganic? And I presume that the raised guide, greater than 15% versus greater than 10%, is mostly organic, but maybe if you could -- or mostly inorganic, sorry, but if you could just break that down for us a little bit?

Well, in Architectural Specialties, we've experienced in the first half solid double-digit growth. In fact, it's up 20% organically. So we're seeing some very nice market penetration activity there and some good traction in the new project pipeline that we've been executing against. So we expect that to continue. And what we're outlooking in that business and, I think, what you can expect in that business is that we should have double -- solid double-digit organic growth and then, as we add somewhere in the neighborhood of 1 to 3 bolt-on acquisitions in this space a year, to further accelerate on top of the double-digit growth inorganically.

So it's hard to predict what those inorganic opportunities and the timing of those. So it's really tough to answer your question very directly on that. But the plan and the play that we're running around that is continued solid double-digit on organically, winning these projects and servicing those and then, again, opportunistically adding those targeted bolt-on acquisitions that add to the capabilities that we need going forward. And again, for a ranging standpoint, somewhere between -- they're ranging $10 million to $50 million in size as a typical acquisition in this space.

Okay. And just a follow-on on that just to get a little more clarity around margin potential going forward, do you see a lot of potential for the margin in Architectural to expand beyond where they currently are?

Yes. We expect to -- again, a lot of these companies are not as profitable as our base business. And so as we add companies to this, we plan to expand and improve their margins. At the same time, and as we've demonstrated, if you look back over the last couple of years, at the same time, we're getting more efficient and we're getting better at servicing this specialty space and we're improving margins. And I would expect that to continue for us in the next several years.

Our next question comes from the line of John Lovallo with Bank of America.

First question is -- I just want to make sure I'm understanding this correctly. So Mineral Fiber volume in the first quarter, I think, was down 5% year-over-year. And then, I think you guys mentioned last -- on the last call that April was enough to kind of flatten the volume out for the year, so I guess, up 5%. So it seems to imply that all of the 5% volume in the second quarter that you reported today was April. I'm not sure if I'm understanding that correctly. But I guess the question is, were May and June kind of flattish? And then what are you seeing into July?

Yes. I mean, to answer your question very directly, as I said in my prepared remarks, that without the overflow from March into April, which we spoke about that in April, volumes were up in the quarter 3%. So we had positive volume growth throughout the quarter.

Okay. Got you. And then maybe as a follow-up here, the $9 million of SG&A savings in 2018, was that -- maybe I heard this wrong. Was that lowered? Was that $10 million previously? And the target heading into 2019, is that the full $10 million?

Yes, John. So what we said is it's -- for the full year, it's going to be $10 million. $9 million of that's in the back half. It's more than just SG&A. Just for clarity, it's total restructuring savings that hits both manufacturing and SG&A. And next year, we expect another $10 million, which will bring the full program to the high range of $20 million.

Our next question is from the line of Kathryn Thompson with Thompson Research.

This is Brian Biros on for Kathryn Thompson. I wanted to ask about the Steel Ceilings acquisition announced this morning. If you had any idea of the total addressable market for the Steel Ceilings products? And then, specifically for the Steel Ceilings company, where you think that might go in the next 2 to 3 years on growth?

Yes. The Steel Ceilings is an exciting acquisition for us. They bring some additional capability that we don't have in the portfolio today, especially around radiant ceilings and security ceilings for prisons, for example, or other institutions. So there's some really exciting products and capabilities that will be additive to our overall capability. They also bring some of the other basic capacity that we currently have, but it's added capacity for us to serve this market.

We've not broken out exactly how big the specific metal ceilings market is, but it's part of a billion-dollar market opportunity that we're targeting in the specialties market here in North America. So you can look at our sales in this category and know and recognize that we've got a long ways to go to reach more significant market share levels. So lots of room to grow here and we're excited about the acquisition.

Got you. A quick follow-up on that. Did they have a national sales footprint? Or are they more regionally focused in certain parts of the Americas?

Yes, they're a national organization. They use a combination of indirect and direct. And again, this will be a great opportunity to bolt this capability and merge that into Armstrong's national sales organization. So that's our plan to do that to really leverage this capability.

Our next question is from the line of Phil Ng with Jefferies.

This is Maggie on for Phil. Going back to Mineral Fiber volumes, can you quantify the impact from the extra shipping day in the quarter and also if there was any pre-buys in the tile business or the WAVE JV?

I'm sorry, Maggie. I didn't catch the first part of the question.

I'm sorry. Could you quantify the impact from the extra shipping day in the quarter?

You want to take that, Brian?

Sure. Yes, so Maggie, we've said in our prepared remarks, about 1.5 points. We rounded that to 2 for the timing of what shipped in Q1 into Q2. And from a pre-buy standpoint...

Go ahead. Yes.

Yes. I'd say minimal pre-buy, I mean, at all on the Mineral Fiber side, a little bit more on the WAVE side, given the number of price increases we've done, but very minimal on the Mineral Fiber side.

Got it. And just a quick follow-on. I'm curious if you're seeing any signs that trend in shipments for Mineral Fiber is accelerating given the strong economy and maybe any benefits from corporate tax cuts?

Yes. The overall market has improved. There's no question about it. We outlooked an improved market at the beginning of the year and we're experiencing a better market environment than what we had last year. So we are in a more positive market. When you look at some of the stats going around, the value put in place, for example, is positive really in all the segments. Transportation, in particular, has been particularly strong based on start activity in 2017. So there's some, I'd say, solid activity.

I've been in the marketplace in the last 4 months several times, talking to both contractors and distributors, architects. Everybody is very busy and their backlogs are strong and a lot of them are saying it's not been this strong in a long time. So I think there's a lot of good activity out there. We're experiencing, I think, the market that we expected, which is really nice.

Our next question is from the line of Justin Speer with Zelman & Associates.

Just wanted to tease out that 3 to -- the guidance of $345 million to $360 million. What was the incremental acquired EBITDA that will be in that number? Or is that the way -- the right way of thinking about it, the $345 million to $360 million is including the incremental M&A?

Justin, it will be -- as I mentioned in my prepared remarks, just about $1 million will be the impact of the EBITDA for the acquired businesses.

Got it. Perfect. And then -- and thinking about the multiples paid on EBITDA, what were -- what did you pay for those assets on EBITDA, if you can characterize that? Also, just in terms of the competitive landscape on the M&A side, with other entrants maybe getting into the space, can you characterize what you're seeing on that front? What are you looking at in your funnel?

Yes. So we -- I mean, obviously, we look both at pre- and post-synergies, but given the value that we bring to these acquisitions and the capabilities they bring to ours, both of these are in that -- and typically, they are 7 to 8 multiple post-synergies. And so we mentioned roughly $24 million of purchase price. We expect that $20 million of sales next year. And we expect these margins to -- they're currently reported well in their own internal private businesses, but they'll start to expand like we've seen at Tectum and get close to that AS overall margin of 22%.

Excellent. And then on the M&A side, are you seeing any competitive incursions on the M&A side that are changing economics at all in your models of these acquired -- of these candidates?

Yes, sorry, Justin. This is Vic. So on that front, there's not really a significant change on the -- in the competitive aspects of these acquisitions. In fact, several of the acquisitions, there's -- they're not in a process. And so we've had a direct conversation and had a direct process with them.

So -- and with that said, the -- a lot of these companies are growing nicely and they're benefiting from an improved market condition as well. So that's part of the conversation I think, their current state and their future outlook as we negotiate with these companies. But again, I would say, there's nothing material to talk about in terms of a change in the competitive landscape around M&A.

And last question for me. Just these proceeds that are coming from the asset sales, it looks like they're going to be, I guess, your placeholders for buyback. Have you guys considered a special dividend or any other avenue? I know you have M&A obviously in the hopper. You have buybacks, but is there even maybe potential for a dividend on top of that?

Well, right now, we have -- and again, back in November when we closed this -- or signed this agreement with Knauf to sell our international assets, we had indicated at that point, it was our intention that we would return a majority of this to shareholders. And so we're still on that path to do that. And we've had a lot of time to think about all the options.

So I think you've identified the vehicle at least that we plan to move forward with in returning these proceeds. So -- but with that said, longer term, a balanced approach to shareholder return is our goal and we plan to keep that in view.

Our next question is from the line of Ken Zener with KeyBanc.

Big-picture question here. I was just looking at your last deck. Can you give us some reference point where we are in 2018 versus kind of the peak that we had in, I guess, it was '06 or whatever? Like, what's the percentage that we're down in volume for your mineral [wall] business or the industry, however you want to think about it?

Yes. Volumes in the Mineral Fiber ceilings business, and I would probably say across a lot of the building products spaces, are still down in that 25% range in volumes.

And I know last year, I think, you had -- and one of the things I've always asked you guys about is you have the office versus retail versus the education, transportation and other categories, which is more cyclically depressed. But last year, third quarter, we had some issues related to education, given that it's July. My kids are at least going back to school in about 2.5 weeks. Can you comment if there are any comp issues relative -- that we should be kind of prepared for? I know you kind of guided 0% to 2% for the year, but because third quarter's outsized in education, is there any insight you can provide in terms of what you're seeing?

Yes. It's still early, but I would say that it's better than it was last year. And if you remember the story last year, Ken, that a lot of these states made midyear corrections to their budgets and diverted funds away from education, both K through 12 and higher education. So we track that, by the way, and we can tell you that fewer states have made funding adjustments so far than they did last year, and that supports, I think, the better environment that we're seeing right now.

Okay. And then in the Specialty -- the Architectural, was there something that -- I would have thought that going into generally new construction, you'd had pretty good visibility. Was that revenue growth -- I mean, that organic increase? I mean, or was the increase tied to the M&A? I guess, I know the EBIT contribution was $1 million, but -- for the year, but was it that M&A that led you to do that or you're actually just seeing a lot more business coming through? Sorry for the clarification.

Well, when you look at our first half, Ken, we're up 20%. So we've had a stronger first half. The project pipeline is filled up very nicely and the teams are executing against that wonderfully. So it was prudent for us to -- and we do have visibility. When you look at our backlog and our pipeline, we do have pretty good visibility to what's going to happen in the second half. So that gave us confidence to go ahead and raise the top line guidance in that business.

And our next question is from Judy Merrick with SunTrust.

Yes. This is Judy for Keith Hughes. Just one more follow-up on the Architectural Specialties business on the margin. You called out the timing of the selling expenses and some of the investments that you're making. Was there anything else that kind of stands out maybe in the base business? Or was your manufacturing costs in line with what you anticipated?

Yes. There's 2 things really. We talked about the timing of some of those expenses. Again, they can be lumpy as we feather them in. And we've had a history for the last 5 years of doing, I think, a good job overall on a year-to-year basis of feathering in support resources that fall into SG&A, but it's a lot of designers and CAD operators and project managers and we feather those in to support future growth at a rate and pace that allows us to grow with the business and expand margins. So quarter-to-quarter, you can get a little bit of lumpiness on that and that's what we're seeing.

The other thing that we saw in the second quarter is -- and we can see this again quarter-to-quarter is your mix can change a bit based on project activity. And we saw a little bit of a headwind from the mix in the Architectural Specialty business in the second quarter. So a lot of that just kind of works its way out over time throughout the year and -- which gave us the confidence, again, to say top line is going to be better than we thought and we're going to expand margins in that business in 2018.

Yes, Judy, just to add just a little bit more to that. Just, we came in -- at Q1, AS had a margin of 24%. Last year, it was 22%. We made a point on the call to -- that we were going to see some of that lumpiness. I mean, in Q2, we're at 21.5%. We expect the full year to be above that 22% we delivered last year, but we will get some movement in between quarters.

(Operator Instructions) Our next question comes from the line of Garik Shmois with Longbow Research.

This is Jeff Stevenson in for Garik. I just had a quick question on tariffs. And I was just wondering how we should be thinking about inflation over the rest of the year and what actions do you think you'll have to take, if any, with your supply chain?

Yes, Jeff. Yes, this is Vic. So on the tariffs, the major impact for Armstrong's business is around steel. Our grid systems are obviously very dependent on steel supply. We do import some steel internationally. So -- and we've been talking about this quite regularly over the last 6 months. So the actions that you're asking about are the price -- passing along these tariffs and the higher steel costs on to customers through price increases. And we've executed a number of them already this year. So we're kind of -- we're already responding to the tariffs and the inflation. Some of this inflation will continue to linger, we believe, in the second half and we're poised with another price increase in August to make sure that we're staying out in front of that. And again, I'm pleased to report, in the second quarter, the pricing actions that we talked about in the first quarter have materialized and good price over inflation in the quarter. So we're going to continue to run that and stay ahead of inflation as we've done for many years now.

Okay. Great. And then just a quick question on your guidance. How should we be thinking about the mix impact in your AUV guidance for this year?

Yes, Jeff. This is Brian. We've incorporated any potential mix headwind in that guidance of 3 to 4.

And I'm not showing any further questions.

I'll now turn the call back to over to Vic Grizzle, CEO, for closing remarks.

Great. Thanks, everybody, for being with us today.

Again, we're on track to deliver a strong year in 2018. Very encouraged by our board's vote of confidence to authorize an additional $300 million of share repurchases. And again, we're excited about the second half.

And I appreciate everybody's attendance today. We look forward to talking to you next quarter.

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.