Armstrong World Industries Inc (AWI) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to third quarter Armstrong World Industries, Inc. earnings conference call. (Operator Instructions)

As a reminder -- I would now like to turn the conference over to your host, Tom Waters, Vice President of Corporate Finance. You may begin, sir.

Thank you, Nicole. 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've 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 statement 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'll turn the call over to Vic.

Thanks, Tom, and good morning, everyone. It's good to be with you today to review our quarterly results and our outlook for the remainder of 2018.

Third quarter was a busy quarter with strong results. Our top line expanding 11% in the quarter was the best performance in 7 years. Adjusted EBITDA grew double digits. Free cash flow grew 20%. Our team earned enough like-for-like pricing to cover inflation. We closed another acquisition in Architectural Specialties, and we received the entire $330 million in cash from the sale of our international operations.

The third quarter results were strong in both sales and EBITDA, both up double digits. Total company sales growth of 11% continues the positive trend that began in 2017. We have broken out of the multi-year pattern of low single-digit growth and have delivered high single-digit growth for the second year in a row. With the acquisition of Steel Ceilings in the quarter, our second this year, and together with an improving acquisition pipeline, our confidence is growing that we can continue strong sales growth.

Sales in our Mineral Fiber business were up 7%, driven by strong like-for-like pricing and mix gains, which, together, drove higher average unit values or AUV.

Price realization in the quarter was sequentially stronger than the first 2 quarters of the year. In both the quarter and year-to-date periods, we have earned price increases ahead of the inflationary headwinds. Our sales and distribution partner teams have done a fantastic job on pricing in these inflationary times. Also supporting our higher AUV was the improvements in mix, driven by stronger sales in our high-end products. The Total Acoustics and Sustain families both grew significantly faster than the overall Mineral Fiber category.

Mineral Fiber volume overall was fractionally down in the quarter. A modest improvement in the education sector was offset by softness in the home center and independent retail channel. Now as a reminder, the retail channels, that is, Home Depot, Lowe's, Menards, et cetera, can be quite lumpy quarter-to-quarter due to swings in their inventory levels and resulting order patterns. As an example of that, even though we had a softer third quarter in this channel, our month-to-date October shipments in this channel are up double digits. The Mineral Fiber segment adjusted EBITDA was up 7% in the quarter. Price and manufacturing improvements drove expanded gross margins.

The Architectural Specialties segment continued its strong performance with revenue of $48 million up 37% in the quarter. Organic sales were up 26%. Our organic growth is significantly outpacing the underlying market, and this performance reflects our team's increasing ability to win large projects and grow share through our industry-leading specification and service levels. This team is also improving its execution and operational efficiencies, and as a result, adjusted EBITDA is up over 40% from last year, expanding margins 170 basis points to 25% in the quarter. This team is doing a great job, and I'm very proud of the business they are building.

During the quarter, we completed the acquisition of Steel Ceilings, adding additional capability and capacity to our Architectural Specialties portfolio. Based near Columbus, Ohio, Steel Ceilings is a manufacturer of both standard and custom metal ceilings and walls, including architectural, radiant and security ceiling systems. Now radiant and security solutions are new additions to our product portfolio. I know the team's excited to add them to our industry-leading portfolio to drive further growth.

Under our ownership, we expect Steel Ceilings and Plasterform to thrive as Tectum has. The combination of Armstrong's sales and distribution platform, our operational expertise and a modest amount of capital has proven to be a powerful mix. Year-to-date, Tectum sales are up 17% after a long history of low single-digit growth, and EBITDA margins have expanded over 600 basis points to 26% in less than 2 years.

And with regard to the sale of our EMEA and Pacific Rim businesses, and while the transaction isn't closed yet, we have received total gross purchase price of $330 million from Knauf. We've returned $150 million of those proceeds back to our shareholders through an accelerated share repurchase program, which concluded on October 8. Delivering on our commitment to return the majority of the cash realized from this transaction to our shareholders was important to do, and we're very pleased to have executed on this commitment.

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

Thanks, Vic. Good morning to everyone on the call. Today, I'll be reviewing our third quarter and year-to-date 2018 results. But before we go into the financials, as a friendly reminder, I'll be referring to the slides available on our website.

Slide 3 details our basis of presentation. In addition to our customary adjustments and consistent with our basis of presentation principles, in the quarter and year-to-date, we adjusted just under $3 million of costs associated with the Rockfon litigation matter, as these costs are discrete, unusual and not reflective of our true operating results.

Turning now to Slide 4 for our third quarter results. Sales of $260 million were up 11% for the third quarter -- from the third quarter 2017 and adjusted EBITDA increased 10%. Gross margins expanded driven by like-for-like pricing, mix and productivity, including the restructuring benefits previously announced. EBITDA margins did contract slightly due to the impact of recent acquisitions that contribute to sales growth but was not a meaningful contributor to EBITDA. Adjusted diluted earnings per share were up 23%, aided by our share repurchase program.

Year-to-date, including the accelerated share repurchase program which closed in October, we have repurchased just under 4 million shares for $256 million. Since the inception of our repurchase program in the third quarter of 2016, we have bought back over 6.9 million shares for $300 million at an average price of just under $55 per share.

Adjusted free cash flow improved by $12 million or 20% over the prior year quarter. Net debt decreased by $241 million driven by the receipt of the gross purchase price of the sale of our international businesses.

Turning now to Slide 5. Adjusted EBITDA increased $9 million, as the strong AUV gains, Vic mentioned, fell to the bottom line. In the quarter, like-for-like pricing realization expanded from earlier quarters and exceeded inflation again. The input cost increase is being driven by higher freight and raw material costs.

Energy costs are relatively flat year-on-year. SG&A was impacted by $4 million when compared to the base period, where, as you will remember, we had a year-to-date true-up of cost allocations to our WAVE JV. SG&A is also impacted by higher incentive plan accruals in 2018 driven by our strong free cash flow performance above plan. WAVE benefits by $3 million due to the true-up in comparison to the base period. WAVE continues to realize price increases greater than steel cost headwinds they are facing.

Slide 6 shows our change in adjusted free cash flow, which grew $13 million compared to the prior year quarter. Cash earnings were down $15 million, working capital improved by $7 million and capital expenditures were lower. The other category improved due to the timing of tax payments.

Slide 7 begins our segment reporting. In the quarter, Mineral Fiber sales grew 7%. Strong like-for-like pricing and solid mix gains more than offset a slight volume decline driven by home centers and the independent retail customers. Adjusted EBITDA was up $5 million. Price realization was the biggest driver to improve EBITDA and offset inflation. The SG&A and WAVE, drivers I explained for the entire company, all appear in the Mineral Fiber segment.

Moving to our Architectural Specialties segment on Slide 8. Quarterly sales increased 37% as Armstrong's strong share gains continue and the Plasterform and Steel Ceilings acquisitions contributed. I really can't say enough about the growth the team is driving and the excitement we are creating internally and with our customers in this segment. We are in the early innings of the specialty ceiling and wall opportunity, and we are accelerating our leadership in this space.

Adjusted EBITDA in Architectural Specialties was up 47%. Margins expanded over 270 basis points to 25% as we continue to drive not just sales growth but operational improvements in this segment. As we integrate the Plasterform and Steel Ceilings acquisitions, I'm confident we will continue to see EBITDA margin expansion on an annual basis.

Slide 9 recaps our year-to-date results. Sales of $736 million were up 8% from the first 3 quarters of 2017. Adjusted EBITDA increased 9% and margins expanded. Adjusted diluted earnings per share were up 14%. Adjusted free cash flow has increased over 80% from last year, driven by working capital gains, as the 2017 base period was a use of working capital, and 2018 benefited from $26 million in environmental settlement realized in late 2017 but collected in early 2018.

Slide 10 is our total company EBITDA bridge for the first 3 quarters of the year. Volume, price and mix all contributed to improve profitability. Input costs, including freight and raw materials, were headwinds. Productivity in our plants is running $4 million ahead of last year even as we ramp up new products, capabilities and consolidate production. SG&A and WAVE are impacted by the timing and one-off items I discussed in the quarter. And finally, we add back stranded international costs of $4 million. Our manufacturing and G&A restructuring actions remain on track to deliver $10 million of benefit in the year.

Slide 11 shows year-to-date free cash flow. Lower cash earnings are more than offset by the improvements in working capital I mentioned. Capital expenditures are lower as we've returned to a more normalized level of capital investment, and the timing of tax payments all contribute to drive the $79 million improvement.

Slide 12 updates our 2018 guidance. As a result of the strong organic sales growth in Architectural Specialties, AUV gains in Mineral Fiber and our recent acquisitions, we are raising our revenue guidance range to 8% to 9% growth versus prior year from our previous range of 5% to 7%. Our adjusted EBITDA range has been tightened, but the midpoint is unchanged. We continue to expect double-digit EBITDA growth. We've increased the midpoint of our adjusted EPS range by $0.01 to $3.72 and tightened the range. Our adjusted free cash flow midpoint has been increased $33 million.

In October, WAVE paid both Worthington and Armstrong a special dividend of $25 million. Periodically, the WAVE board examines the efficiency of WAVE's balance sheet, and after multiple years of earnings growth, determined that additional leverage was appropriate and prudent. Post this dividend, WAVE's leverage is 1.6x EBITDA. Free cash flow is also benefiting from a lower expected cash tax rate and a slightly reduced capital expenditure outlook.

To close, I'm pleased that we're able to increase our free cash flow forecast for the year. Even excluding this WAVE special dividend, our business is yielding a 20% free cash flow margin and providing us with ample cash to invest, acquire and return cash to shareholders. As an Americas-only business, our line of sight to future cash flow is clear. As we continue to generate cash in the future, we will remain prudent about deploying it in a balanced fashion into the highest value-creation vehicles, and we will continue to maintain a flexible and efficient balance sheet.

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

Thanks, Brian. Before we open it up for questions, a few additional summary comments.

2018 remains on pace to be a record year. As an Americas-focused ceilings and specialty wall company, we've been investing in innovation, manufacturing and selling capabilities to extend our leadership position. These investments are now bearing fruit, delivering both top and bottom line growth.

The revitalization of our Mineral Fiber business is well underway. We are achieving unprecedented adoption rates with Total Acoustics and Sustain products. DESIGNFlex, our newest, most innovative product line, has now launched into the market, and we have already received our first specifications.

The Architectural Specialty business continues to outpace the market. We are driving impressive organic sales growth, expanding margins as we go and adding new capabilities via M&A. And we remain focused on a balanced and disciplined approach to capital deployment to enhance shareholder value.

In 2016, when we separated flooring business, we said we would first look to invest in our business. And we've done that. We've invested $100 million to reinvigorate the Mineral Fiber category with the innovations like Sustain, Total Acoustics, and now, DESIGNFlex. We also said that we would execute a bolt-on acquisition strategy in this Architectural Specialties space, and we have been successful in this endeavor as well, as we've now completed 3 acquisitions in this attractive category. We said we would address the poor returns in our international business, which we have now done through the sale to Knauf. And finally, we said we would return cash to shareholders. As a high-margin, high free cash flow business, we've been able to deliver on this commitment, too. In the past 2 years, we have returned nearly $380 million through our ongoing share repurchase program.

For as much as that has been accomplished, thus far, there's still a lot more to do. So I'm looking forward to seeing many of you here in Lancaster next week at our Investor Day to share with you what's next for AWI. We have an exciting future to share with you as an Americas-focused, industry-leading building products company.

So thank you for your attention. And with that, I'll open it up for questions.

(Operator Instructions) And our first question comes from Nishu Sood from Deutsche Bank.

And for my first question, just wanted to take a step back view here. Obviously, a very strong and encouraging sales performance. You're taking up your sales guidance on the higher AUV realization as well as Architectural Specialties and a little bit from the acquisition as well. EBITDA is coming up less. If we kind of take a step back view, is that mainly driven by the increasing costs? And as we kind of look ahead, you've obviously had strong price realization. So how does that -- if we kind of play the tape forward, how -- what does that imply for -- as we look ahead in terms of margins and EBITDA gains?

Yes, Nishu, this is Vic. And then Brian can add on some color, too, on some of the incrementals. But we're very pleased with the top line, as you've noted. It's good AUV, of course, and it's much needed in inflationary times like this. And we're, again, covering inflation with like-for-like pricing. The mix shouldn't be overlooked here as well. We had very strong growth in the Mineral Fiber segment at the high end of our product portfolio, which drove half of the AUV gains. So I want to call attention to that. That's really helpful also and continue to drive the top line in the Mineral Fiber segment. And then as you noted, the Architectural Specialties team is doing a great job. And when I think about and look at the Architectural Specialty business, every material group in the architectural specialty space is driving double-digit growth. That speaks to the broad-based nature of the activity in that space and how present our team has become in this space across the country. And I'll add to that, that several jobs, over $1 million in size, we were serving in the quarter. So again, very broad-based and multiple-sized projects, not just very large projects. As that -- that business has been lumpy over time, but I'm very encouraged by the broad-based nature of the business, both in size as well as across the categories. So that's going to continue, and we expect good things to continue from that business to add to the top line. The shortfall in EBITDA on the quarter came down to really 3 things. We had slower growth in our WAVE business, okay, which adds to that EBITDA line, and that was basically primarily due to timing of purchases late in the second quarter ahead of price increases. And we anticipated that we would have some lumpiness in the grid volume from WAVE. The second was we had some accrual true-ups on -- around management incentives due to the strong performance on cash flow. I think Brian hit that very well in terms of how well this team is driving cash flow improvements. And so there were some true-up costs in the quarter that were specifically linked to those. And then finally, we had some start-up issues with the West Coast DC in connection to the closure of our St. Helens plant. We talked about some of those in the second quarter. We had some of those that fell off or fell over into the third quarter, and of course, we got those behind us as we finished the third quarter. But those are the 3 things, really. It wasn't higher inflation costs really driving some of that shortfall. It's some of these onetimers, I would say, in the quarter.

Got it, great. And that's very helpful. Second question, on Architectural Specialties, the power that we're seeing now of product innovation and the acquisitions and channeling it through your industry-leading distribution network, you're gaining share. I think that's fair to say or clear to say. Is there some way that you can help us understand the pace of your market share gains? Clearly, it seems to have accelerated as the power of the business model has come through. Can you just help us to kind of bracket that and -- in what pace that market share gains are going?

Yes, the best I can on that, Nishu. I mean, it's really difficult to pinpoint a number, but let me just again frame the Architectural Specialty business as business that's tied to new construction more, so we've got a bias, more to new construction versus renovation. So when you look at new construction, as we've talked about, in terms of the market trends, the new construction is the strongest part of the demand out there in the marketplace today. So we do believe there's somewhere in that mid- to high single-digit growth of new construction activity available out there. So I think that's probably as close to a benchmark as you could say that the Architectural Specialties segment is growing is somewhere in that mid- to high single-digit growth. So there you go. You bench the delta between our growth rate versus that is probably the best proxy I could give you.

And our next question comes from John Lovallo from Bank of America Merrill Lynch.

Mineral Fiber volume in the quarter was down slightly, call it, 1%-ish off of a negative 5 comp in the third quarter of '17. It looks like the fourth quarter comp is, I think, positive 1. And recognizing that there was some lumpiness in the retail channel, it seems like you would need something like in the order of 150 basis points of year-over-year EBITDA margin improvement to -- off of potentially for kind of flattish volume to hit the low end of your outlook. I was just curious if we're missing something here or if that math sounds about right?

Brian, you want to take that?

Sure. So John, thanks for the question. Couple things there. One, as you look at the calendar, we do pick up an extra shipping day in the fourth quarter versus year ago. So as you think about the volume piece, specifically on Mineral Fiber volume, as Vic mentioned, we had some timing of inventory with our Big Box channel, and we're seeing nice double-digit growth in October already for that timing. And then the third piece is, as you drive that down to the bottom line, we've mentioned that we'll see about $9 million of restructuring cost benefit in the back half. We saw probably about $4 million of that or we did see $4 million of that in Q3, so we're expecting $5 million more to flow through in Q4. So that should help bridge as you look at the elements of AUV drivers, some inflation and then the restructuring benefits.

Okay. And then it looks like accounts payable spiked pretty meaningfully in the third quarter. I'm not sure if you've hit on this already, but could you just remind us what drove this and if you expect that to reverse in the fourth quarter?

Yes. So we -- a, it spiked because we saw some sales rate towards the end of the quarter, especially around AS, and then we expect that reverse in Q4. Overall, our cash conversion cycle is one of the best. It's like 17, 18 days in total.

And our next question comes from Stephen Kim from Evercore ISI.

It's Steve Kim from Evercore ISI. I guess, I just wanted to ask in terms of looking forward in the Mineral Fiber business, do you see any -- anticipate any changes in the competitive dynamic at all with the change in ownership of USG that's being bought by Knauf?

Yes, Stephen. Again, we get this question a lot. I guess, people are thinking about that, and we're watching for it, obviously, any meaningful change in the marketplace. I can tell you there's been no meaningful change in the competitive landscape. And we'll have to wait and see, under new ownership, what our competitors do. But at the end of the day, what we focus on is really what our customers are trying to go and what they're trying to solve for. And as long as we stay ahead of whoever is our competition and meeting those customer needs, we continue to drive, I think, these kinds of results. So -- but really, no meaningful change to report on that.

Okay, that's fine. And then I guess, as a follow-up, you -- I just want to clarify your answer to John's question about 4Q. I think you mentioned that there is an extra shipping day. You also talked about the fact that the home center lumpiness looks like it's recovering here in October, and that's great. But just was hoping, maybe you could frame what you think the impact on 4Q -- for the entirety of 4Q may be as a result of the recovery of this lumpiness or the offset to the lumpiness being a headwind in 3Q, just because we don't know exactly what the seasonality looks like as you trend from October, November, December in terms of the size, the overall sales pool and that sort of thing. So if you can just give us a sense of what you think that effect -- that benefit may be in 4Q?

Yes, Stephen, I think you're referring specifically to that -- the seasonality in that retail channel.

Correct.

And I'll be honest with you. There's not a ton of seasonality in that channel. The lumpiness comes from the inventory management in the channel, and of course, then we get large chunks of orders corresponding to those swings in inventory. So it's more of that dynamic than actual seasonality. But what we see in the retail channel, given what we're experiencing in October -- and again, go back and compare this over several quarters, if you remember, actually, last year third quarter, we had a pretty strong buy by the retail channel, by one of our channel partners in particular, that drove a pretty big buy-in. So we were comping a tough base to start off with, again, back to that lumpiness. But when we look at the full year and even the full -- the second half, this kind of evens out based on what we're seeing in October. So we're going to be -- as a Mineral Fiber business, we're going to be right in that range of 0 to 2% that we've been out looking all year. We feel confident that what we're seeing in October is going to make sure that we enable landing in that zone. So we're -- we like what we see in October. And again, I think it's going to even itself out and put us exactly where we expected to be.

Stephen, I would add to that. Yes, as you think about that point that Victor has made, that's really around the question on the Mineral Fiber volume, right, so you pick up an extra day plus this lumpiness. But then as you think about the EBITDA target we've got to hit in order to hit midpoint, in Q4, real strong AUV in Q3, right, we show in our bridge there roughly $12 million of benefit from AUV on the Mineral Fiber segment. Obviously, given seasonality, Q4 won't be as high as that dollar value, but the percents will hang pretty close to it, obviously, AS sales growth and then the restructuring of $5 million benefit that we should see in Q4 to bring us to a total of $10 million for the year.

And our next question comes from Phil Ng from Jefferies.

This is actually Maggie on for Phil. I was wondering if you could provide some color on how to think about margin and seasonality of the Plasterform and Steel Ceilings businesses? And what's a good base for how to think about that going into 4Q? I know Steel Ceilings closed sometime in the middle of 3Q.

Yes, Maggie. This is Vic. The seasonality of Steel Ceilings and Plasterform, I think, will follow very much like the Architectural Specialty business and like our Mineral Fiber business as well. We tend to have a lot more activity in the second and third quarters than we do the first and the fourth quarters. So those 2 businesses should follow very similar patterns as the rest of our business, frankly. Specific to the earnings progression of those 2 companies, as I reported, those 2 companies were relatively new acquisitions to us, of course, in the third quarter, and brought very little EBITDA contribution. While it added almost 2 points to our overall top line, it didn't bring a lot of EBITDA contribution. And again, that's not too dissimilar to what we experienced with Tectum when we first bought Tectum. And what we expect to do with Steel Ceilings and with Plasterform is bring the efficiencies and the scale of the Armstrong go-to-market capabilities to make those businesses more efficient and scalable so that we can drive earnings growth. So I think we'll be driving a disproportionate growth level in those 2 businesses as we catch up to where those businesses should be performing under the Armstrong system. So again, that may be a little out of phase with the overall seasonality that your question was referencing. So hopefully, that answered that, yes.

Got it, yes. Just on the margin side, what's kind of the expected time line to bring those margins up to the overall company level?

Well, we're working at it right away. So we're after it right now. We've already started that process. I think a good proxy for how we'll ramp those is what we've done at Tectum, and it's been an 18- to 24-month period of some capital, but also some of the process improvements to get to the high EBITDA margins that we have in Tectum. So it's -- I think a good 1- to 2-year time frame is a good proxy.

Got it. And then just one follow-up. It sounds like the accelerated repurchase program closed at the beginning of 4Q. Is there any more share repurchases baked into the full year EPS guidance? Or does -- is that just share repurchases to date?

Maggie, it's Brian. So our share repurchase program still has plenty of authorization left in it. We'll continue to look at open market and other form vehicles for our share repurchases in November, December. But the ASR itself is completed.

And our next question comes from Mike Wood from Nomura Instinet.

This is Mason Marion on for Mike. So you caught up the $12 million of AUV achieved during the quarter. Can you give us a sense of what you're seeing in incremental freight input cost inflation currently, and how this will impact your 4Q results, given that your price attempts are largely behind you now?

Mason, this is Brian. So freight in and of itself is a smaller piece of our total cost of goods sold, and obviously, raw materials are much higher. We did see, in the quarter, a deceleration of that inflation. So July was much higher than August and September. And if you recall, last year, the freight inflation really started in Q4 a year ago, 2017. So we're starting to wrap that. So as we look out at the inflation headwinds, we think we've got ample AUV strength to offset that.

Okay. And then just higher level, what gave you the confidence to increase your Architectural guidance to greater than 20% from double digits previously? Like what changed from before?

Yes, in the Architectural Specialty business -- this is Vic, Mason, we have a little more visibility because of the project nature of that business. And so we have a good idea what's going to shift the rest of the year already, given, again, the visibility of those projects. So I think -- and 3 strong quarters already behind us in terms of top line performance of that business, that gave us the confidence to go ahead and raise the guidance on AS.

And our next question comes from Keith Hughes from SunTrust.

A question shifting back a little bit to Mineral Fiber for a minute -- or I guess, maybe include Architectural Specialties. Is the pace of order activity change at all during the quarter and to October either in the new construction or renovation piece of your business?

No. I'd say -- Keith, this is Vic. I think the order pattern was pretty consistent. You take out those months where you have a lot of education activity in the summer months, early part of third quarter. But when you look at -- across the months in both Mineral Fiber and Architectural Specialties, it was pretty consistent.

Okay. And from a cost...

I think the retail segment -- I'm sorry, Keith, to cut you, but the retail segment was the one outlier where we saw some softness, and then we picked it up in October. So a little bit of shifting there.

Okay. And on the cost side, will the cost inflation in the fourth quarter will it be similar to what we saw in the third from where you're standing right now?

Yes. I think the overall cost curve seems to be flattening out a bit in the third quarter -- later in the third quarter. And again, as Brian referenced, we're starting to lap where we saw some meaningful increases in the fourth quarter last year. So again, I feel like we're -- they're not -- the freight expense in particular, we're not finished with those. I think those are going to continue to move higher even into next years. Those are structural issues in that segment that are going to drive costs higher, but raw materials seem to be leveling out here, and I think we've got a enough pricing to cover those increases.

Okay. And then finally, I know -- and you had talked and you're describing some of the adjustments, the costs in litigation with Rockwool, can you give us any kind of update where that litigation stands right now?

Well, as you know, we can't comment too much about the litigation activity. It's in a -- it's in its process. And we continue to -- as we get through phases of that litigation, we continue to be confident that there's not a lot of basis to the claims here and that we're going to prevail in that lawsuit. But it's kind of in its own litigation process and cooking along. It is on an accelerated rate versus what we expected it to be, but it's continuing and will continue on into the fourth quarter at least. And again, I think there's nothing in this case that's come out that would give us any pause for confidence that we're going to prevail there.

And our next question comes from Ken Zener from KeyBanc.

I'm looking forward to next week, so I've assumed some of these things you'll be addressing. But your volume, your guidance is 0 to 2% for this year. It looks like it will be at the lower end of that, some range. Last year, Mineral, wall, kind of down, but your pricing is so strong. In this quarter, price and mix just was, I think, almost -- perhaps a record from a percentage basis. Longer term, do you feel you guys actually need volume growth as you report it? Or is -- perhaps, just the industry changing, given all -- Architectural Specialties, pricing, the mix, as we saw this quarter, do you feel like you even need volume necessarily in your industry at this point given how much the mix shift is changing? And that's it.

Thanks, Ken. Look forward to seeing you next week, by the way. Hey, listen, we're working hard to create demand for Mineral Fiber ceiling solutions. We've got several initiatives that are driving demand for Mineral Fiber solutions. This whole DESIGNFlex platform we're going to talk to the group about next week in more detail is the most innovate and exciting innovation to come to the Mineral Fiber category in a long time, if not ever. And it is all around renewing the interest to specify these types of solutions in the ceiling space. So we are focusing on not only creating value for our customers through services and products that earn higher prices and higher AUVs, but we are also incentivizing and working hard to drive innovation that wants them -- or that drives them to want to specify more Mineral Fiber ceilings. So we're working hard on all of those fronts: price, volume and mix. And we're going to share some of that with you next week, when you're in Lancaster.

And our last question comes from Kathryn Thompson from Thompson Research.

This is Brian Biros on for Kathryn Thompson. I wanted to start with the Architectural Specialties segment. Growth, 37% in the quarter. It looks like acquisitions was 11% of that. So can you kind of just talk about the remaining 26% broken out between the 2 categories you called out, I think, new construction and market penetration?

Yes, Brian. I think, on the Architectural Specialty space, again, it's more biased to new construction or major renovation activity. So I would just kind of put all of Architectural Specialties in that bucket versus the renovation. I think there is large renovation projects that certainly capture Architectural Specialty business, but I bias it more towards the new construction work. And as I mentioned earlier in my comments, Architectural Specialties, across all of its material groups, were up double digits in the quarter. So very broad-based activity. And I also highlighted the size of the job. So from small to larger size, there was a nice balance in the shipments in third quarter as well. So again, I think that really speaks to the broad-based participation that Armstrong has now in this category.

Got you. And I think I was also talking about new construction versus market penetration, not renovation, sorry. If there's any difference between those 2 or if it's still just lumped kind of in just new construction in general.

Well, I'll go back to my earlier comments around the rate of new construction. It's still in that mid- to upper single digits. So I mean, you can almost assume the rest of that then is penetration. I think that's the best proxy to think about it that way.

All right, understood. And again, if you just could dig into the new construction a little more, I think you kind of mentioned large and small projects were about even, but are there any other types of projects or geographies that are doing well or worse than others? If you could dig into any of that, would be appreciated.

Okay, Brian, yes. On the new construction side, it is pretty broad-based across the country still. So all the major metropolitan areas are seeing positive construction, new construction growth. The one segment I'll call out is office, which has been and continues to be kind of the more robust vertical in the new construction category, although we're seeing some renewed activity in health care and education on the new construction side as well. So -- but office has really been, I think, the more robust vertical in the new construction activity.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Vic Grizzle, CEO, for any further remarks.

Yes. I just want to thank everybody for your participation today, and again, we're looking forward to our Investor Day next week. And for all those that are going to be there, we look forward to hosting you here on our campus. So until then, thank you very much.

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