Participants

Theresa Womble; Investor Relations; Armstrong World Industries Inc

Vic Grizzle; President, Chief Executive Officer, Director; Armstrong World Industries Inc

Chris Calzaretta; Chief Financial Officer, Senior Vice President; Armstrong World Industries Inc

Susan Maklari; Analyst; Goldman Sachs

Garik Shmois; Analyst; Loop Capital

Keith Hughes; Analyst; Truist Securities

Fiona Shang; Analyst; Jefferies

Rafe Jadrosich; Analyst; BofA Global Research

John Lovallo; Analyst; UBS Securities LLC

Brian Biros; Analyst; Thompson Research Group

Presentation

Operator

Good morning. My name is John and I will be your conference operator today. At this time, I would like to welcome everyone to the Armstrong World Industries fourth-quarter and full year 2004 earnings call. (Operator Instructions)
I would now like to turn the call over to Theresa Womble, VP of Investor Relations and Corporate Communications. You may begin your conference.

Theresa Womble

Thank you, John, and welcome, everyone, to our call this morning. On today's call, we have Vic Grizzle, our CEO, and Chris Calzaretta, our CFO, to discuss Armstrong World Industries fourth-quarter and full year 2024 results and our 2025 outlook.
We have provided a presentation to accompany these results that is available on the investors section of the Armstrong World Industries website. Our discussion of operating and financial performance today will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the earnings press release and in the appendix of the presentation issued this morning.
During our call, we will be making forward-looking statements that represent the view we have of our financial and operating performance as of today's date, February 25, 2025. These statements involve risks and uncertainties that may differ materially from those expected or implied. We provide a detailed discussion of the risks and uncertainties in our SEC filings, including the 10-K filed earlier this morning. We undertake no obligation to update any forward-looking statement beyond what is required by applicable Securities law.
Now, I'll turn the call over to Vic.

Vic Grizzle

Thank you, Theresa. Good morning, and thank you all for joining our call. Today, we announced a record-setting fourth-quarter and full year 2024 results as our teams continue to execute our strategic priorities and deliver consistent growth. At the total company level for the full year, our net sales increased nearly 12% from 2023 results, and our adjusted EBITDA grew 13%, with our adjusted EBITDA margin expanded 50 basis points.
Our adjusted free cash flow also rose 13%, and our adjusted diluted earnings per share were up 19%. This marks the fourth consecutive year we have generated net sales and earnings growth in the face of challenging market conditions. This would not have been possible without the dedication and relentless focus on execution by our teams.
I'm extremely proud of our team's commitment to consistent execution, excellence, and innovation, and serving our customers well, all of which enabled these record-setting results. So I want to say thank you to all of our 36,000 Armstrong colleagues and to our distribution and channel partners who we work closely with to deliver for our customers.
Both Mineral Fiber and Architectural Specialties segments positively contribute to these record-setting results. Mineral Fiber, into the year with approximately 6%net sales growth, 11% adjusted EBITDA growth, and adjusted EBITDA margin expansion of more than 200 basis points.
And with the addition of two acquisitions, 3form and Zahner, Architectural Specialties generated year-over-year net sales growth of 27% and adjusted EBITDA growth of 24%. Importantly, on an organic basis, the Architectural Specialties segment also expanded adjusted EBITDA margin by 40 basis points to approximately 19%. This furthers our progress toward our goal of a 20% margin in this segment.
Now turning to our fourth-quarter results. In Mineral Fiber, we achieved 9% average unit value or AUV growth, which was the strongest quarterly growth rate of the year and was driven by both mix and like-for-like pricing. For the full year, AUV grew 7%, nicely above above our historical average.
Similar to our results last quarter, our growth initiatives continue to contribute positively to the Mineral Fiber AUV and volume results, and largely offset softer market conditions. Strong AUV growth, along with solid productivity gains, and impressive performance from our WAVE joint venture drove 10% Mineral Fiber EBITDA growth and 70 basis points of EBITDA margin expansion to 37.5%. This was the best fourth quarter EBITDA margin in the Mineral Fiber segment since 2019.
In fact, we've generated a year-over-year EBITDA margin expansion in this segment in each of the last eight quarters. Delivering this consistent performance requires strong execution across the business, including our sales teams, our manufacturing, and innovation teams. These results demonstrate the resilience of our growth model in all parts of the economic cycle.
Now turning to our fourth-quarter results in Architectural Specialties, sales for this segment increased 41%, with more than half that growth driven by our recent acquisitions of BOK, 3form and Zahner. The organic Architectural Specialties sales also continued to accelerate this quarter, up 15% year over year with solid demand across our portfolio. Order intake also increased on a broad-based strength from across our product portfolio.
As we've noted throughout 2024, we continue to see benefits from large transportation projects. Acquisitions have been and continue to play an important role in expanding our portfolio of diverse materials and unique capabilities, enabling us to sell more into more spaces.
Since 2016, we've completed 12 acquisitions in the specialty space, creating the broadest portfolio of products and design capabilities with a world-class manufacturing network. This has become a clear competitive advantage as we have grown. And has opened new opportunities for growth.
This is particularly evident in the metal category. Over the past decade, Armstrong has successfully developed and acquired world-class metal design and manufacturing capabilities for interior ceilings and specialty walls. As a result of this work, we have established an industry-leading position and interior architectural metals solutions in North America.
Now we are taking this industry leadership position to the exterior of a building. Our most recent acquisition, Zahner, accelerates our ability to grow our position in exterior architectural metal applications with a company that is globally known as the leading expert in the design, engineering, and fabrication of complex, highly crafted, exterior architectural metal projects.
Simply said, for the most iconic exterior architectural metal projects, architects and designers go to Zahner. The addition of Zahner allows us to accelerate our penetrations to the adjacent, highly specifiable market category.
Building on the capabilities of BOK Modern that we acquired in 2023, we believe that metal exterior applications are a natural extension of our interior architectural metal platform within the Architectural Specialties segment with high growth potential. With the addition of this adjacency, we estimate we've added another one $1 billion to the addressable market for our Architectural Specialties segment, bringing its total addressable market to more than $2.5 billion.
We're excited to apply our growth model to this adjacent market and to continue our above market growth rate for years to come. So let me pause there for a second and hand it over to Chris for more details on our financial results.

Chris Calzaretta

Thanks, Vic, and good morning to everyone on the call. As a reminder throughout my remarks, I'll be referring to the slides available on our website and slide 3, which details our basis of presentation.
Beginning on slide 6, we discuss our fourth-quarter Mineral Fiber segment results. Mineral Fiber sales grew 8% in the quarter, driven by strong AUV growth of 9%, partially offset by modestly lower sales volumes. The increase in AUV was roughly balanced between both the favorable mix and positive like-for-like pricing. On volume, one extra shipping day in the quarter, partially offset market conditions that continue to stabilize.
Mineral Fiber segment adjusted EBITDA grew by 10% in the quarter with adjusted EBITDA margin expanding 70 basis points to approximately 38% despite lower volumes. Adjusted EBITDA margin expansion was primarily driven by the fall through of AUV and higher equity earnings from our WAVE joint venture. Wave equity earnings were driven by favorable AUV, higher volumes, and lower steel costs.
These benefits more than offset an increase in Mineral Fiber SG&A, which was driven primarily by higher employee costs and a decrease in company-owned officer life insurance gains related to deferred compensation plans as compared to the prior year period. As Vic mentioned, Mineral Fibers adjusted EBITDA margin of 37.5% in the quarter was the best Q4 margin performance for this segment since 2019.
This level of financial performance highlights our Mineral Fiber value-creation drivers, including consistent AUV growth, annual productivity gains, and earnings from our WAVE joint venture. With this solid fourth-quarter performance, full year Mineral Fiber adjusted EBITDA margin finished above 41%, and was consistent with our previously outlooked expectations.
On slide 7, we discuss our Architectural Specialties or AS segment results. Healthy sales growth of 41% in the quarter was driven primarily by contributions from our recent acquisitions of both 3form and Zahner. Importantly, year-over-year organic AS sales growth continued to accelerate sequentially.
As we noted on our last two calls, we expected to see the continuation of top line organic growth in the AS business, along with continued organic margin expansion in the second half of 2024. And I'm pleased to report that we delivered AS organic sales growth of 15%, with AS organic adjusted EBITDA margin expansion of 70 basis points.
AS segment adjusted EBITDA grew 33% in the quarter and the year over year growth rate accelerated throughout 2024. Higher sales more than offset increased SG&A from our recent acquisitions. Order intake also strengthened over the second half of the year. We also remain encouraged by the positive equity we're seeing in the transportation vertical and are optimistic that our project pipeline will continue to build as we progress throughout the year.
For the full year 2024 adjusted EBITDA margin for the AS segment was approximately 18% and consistent with our previously outlooked expectations, which did not include the December acquisition of Zahner. We are pleased that the AS organic adjusted EBITDA margin expanded 40 basis points to approximately 19% and was able to dampen the dilutive impact of our recent acquisitions on the AS segment's adjusted EBITDA margin for the year. We expect continued progress on increased profitability and margin improvement of these recently acquired businesses.
Slide 8 highlights our fourth-quarter consolidated company metrics in which we delivered strong double-digit growth for both sales and adjusted EBITDA. Adjusted diluted net earnings per share grew 23%, and total company adjusted EBITDA margin compressed 100 basis points, reflecting our recent acquisitions.
Excluding the recent acquisitions, total company adjusted EBITDA margin expanded 40 basis points. Adjusted EBITDA growth in the quarter was driven by the fall through impact of strong AUV performance, increased AS sales, and positive WAVE equity earnings.
These impacts were partially offset by increased SG&A, primarily attributable to our recent acquisitions. These key drivers remain consistent with the full year period as we turn to page 9. As full year sales were up 12% and full year adjusted EBITDA was up 13%, resulting in 50 basis points of margin expansion.
Adjusted diluted net earnings per share were up 19%, driven by higher pretax earnings, a lower effective tax rate, and lower shares outstanding. The lower tax rate in the fourth quarter and full year 2024 was driven primarily by discrete items, a capital loss valuation allowance release related to the sale of real estate, and a tax reserve benefit related to a tax year statute closure. Adjusted free cash flow grew 13% and was at a healthy 21% of net sales and 61% of adjusted EBITDA.
In 2024, our core value drivers delivered profitable growth with incremental volume from recent acquisitions and growth initiatives, consistent strong AUV performance, and healthy equity earnings contribution from WAVE. These benefits more than offset the increase in SG&A, a significant portion of which was driven by our recent acquisitions.
Slide 10 shows our full year adjusted free cash flow performance versus the prior year. The 13% increase was primarily driven by higher cash earnings, which was partially offset by higher cash taxes paid. The strong adjusted cash flow margin profile of our business allows us to execute on all of our capital allocation priorities. As a reminder, these are: first, to reinvest back into the business where we see the highest returns; second, to execute strategic acquisitions and partnerships to create shareholder value; and third, to return cash to shareholders through dividends and share repurchases.
In the fourth quarter of 2024, we acquired the issued and outstanding shares of Zahner for cash consideration of $46 million, reflective of a purchase price of$ 42 million, inclusive of $16 million of cash acquired, subject to customary post-closing adjustments for working capital. Additionally, in the fourth quarter, we repurchased $15 million of shares and paid $14 million of dividends.
As of December 31, 2024, we have $662 million remaining under the existing share repurchase authorization, which runs through the end of 2026. We entered 2025 with a strong balance sheet and ample available liquidity. And with our proven ability to consistently generate strong free cash flow, we remain committed to all of our capital allocation priorities.
Slide 11 presents our guidance for 2025. With overall stabilizing market conditions, we expect choppiness throughout the year and flattish Mineral Fiber volume for the full year. We also expect Mineral Fiber AUV growth above our historical average of about 5%.
Adding to Mineral Fiber growth, we expect AS organic growth to continue as we penetrate a highly fragmented market. Note that results from 3form will be incremental through the first four months of 2025, and results from Zahner will be incremental throughout almost the entire year. We expect these two acquisitions together to drive more than half of the growth in total AS segment sales. This result in total company net sales growth of 9% to 11%.
As you know, our first quarter is typically one of the weaker quarters of our year for Mineral Fiber with our stronger quarters in Q2 and Q3 due to better weather conditions and timing of renovation and new construction activity. While we don't provide quarterly guidance, we do expect a higher degree of variability quarter-to-quarter in 2025, as we navigate choppy market conditions.
Moving to adjusted EBITDA, we expect Mineral Fiber AUV impacts to more than offset low-single digit input cost inflation. With this, growth in the AS segment, the benefits from WAVE, and continued focus on execution throughout the organization, we expect adjusted EBITDA growth of 8% to 12%. We expect adjusted EBITDA margin expansion in both segments for the full year with a total company flat to prior year as we drive the integration of our recent acquisitions.
For the full year, we expect adjusted diluted net EPS and adjusted free cash flow to grow at rates similar to adjusted EBITDA. You'll notice that our capital expenditure assumption is slightly higher as compared to recent years due to planned investments in our energy saving ceilings manufacturing capabilities in support of future growth. Please note that additional assumptions are available in the appendix of this presentation.
We are well-positioned to deliver strong results in 2025 as we continue to demonstrate the resilience of our business model despite a near-term choppy market outlook. Our teams have proven agile and have consistently advanced our strategy while navigating uncertain market conditions in recent years, and I expect that to continue in 2025. And now, I'll turn it back to Vic before we take your questions.

Vic Grizzle

Thanks, Chris. Picking up on the market conditions that Chris just referenced, let me provide additional color there on how we're thinking about the markets in 2025. Overall, we see demand in our key markets continuing to stabilize while we navigate the uncertainty from potential tariffs and new policies.
New construction starts were positive throughout 2024, driven by education, transportation, and data centers. Lagging those starts should be a positive contributor to our markets in 2025. Dodge bidding activity in the fourth quarter remained choppy and a sideways moving pattern, as it has all year, and we are encouraged by the increase in back-to-work mandates and higher leasing activity over recent quarters in the office vertical.
We also continue to benefit from large transportation projects, as I mentioned, as well as major entertainment and sports venues, including convention centers and NFL, and other sports stadiums. Still, there remains a level of uncertainty that is likely to cause some additional choppiness in 2025. With potential tariffs, new policies, and their impact on inflation and interest rates, these factors could create positive potential wait-and-see decisions impacting project timing.
That said, we know how to execute in uncertain market conditions. And with our diverse set of end markets and our resilient business model, we are well-positioned to deliver sales and earnings growth again in 2025.
Underpinning the strength of our business model and a key element of our value-creating building box is our industry-leading innovation. Our innovation is guided by market and customer needs. And one of the strongest most prevalent need is for energy saving solutions.
As we've shared before, buildings consume nearly 40% of global energy. In the US, the built environment consumes nearly 75% of all electricity used, and about half of that energy is used to heat and cool buildings. Give this, there's a strong desire for companies like Armstrong to help reduce commercial building energy usage.
Beyond the economic benefit of energy savings, there's a larger need for reducing the strain on our electrical grid system to support the expansion of AI and a build-out of supporting data centers. This need for energy savings is likely to be a catalyst for innovation and solutions across many industries for many years to come.
This megatrend across industries has led Armstrong to our Templok technology that addresses this challenge. Templok is a unique sealing product that contains phase change materials that works as thermal energy storage, passively absorbing and releasing heat in the building and reducing the cycles for heating and cooling. With this new energy saving attribute, our Templok ceiling tiles can reduce heating and cooling costs and generate meaningful cost savings, while also helping to reduce the strain of the built environment puts on the nation's electrical grid systems.
In January, we, along with our customers receive some positive news is when the U.S. Treasury and IRS issued final regulations under Section 40 80, the higher but the Internal Revenue Code. This section expanded the energy investment tax credits under the inflation reduction Reduction Act.
These final regulations confirm that solid liquid phase change materials is a type of thermal energy storage property that may qualify for the index investment tax credit under Section 40 80 temp block, a phase change materials may qualify for an investment tax credit of up to 50% difference that depending on the project customers installing block in new construction or renovation projects may qualify for an investment tax credit that would allow them to pay less for a ceiling that does more.
In addition, just last week, we also learned that template products are now part of the approved selection of sealing products available for the US government services AnGes agency, which manages a large portfolio of government office buildings. These developments are part of the growing validation of these products in the marketplace and are encouraging milestones for an important and long term initiative driving renovation and its potential impact on Mineral Fiber volume growth.
In closing, I want to thank our employees for their dedication and execution that enable enabled us to deliver record results again in 2020 for this has been another important year for us as we further strengthen our value, creating building blocks.
Along with our overall competitive strength, we continue to the pursuit of our growth initiatives to offset soft market conditions and 2020 for this included industry shaping innovation and technology like our temp block energy saving sealing products that pay for themselves over time. We've made significant strategic acquisitions that expand our addressable market and strengthen our ability to provide unique specified products to more parts of the building and now including exterior.
And finally, we continued the advancement of our digital initiatives to bolster per AUV and volume growth, both by serving markets untouched by our traditional channels with Canopy by Armstrong and further deepening our relationship with architects, designers to contractors with project works. These advancements have further strengthened our business model, made Armstrong even more resilient and position us well for continued growth in 2025 and beyond.
And with that now be happy to take your questions.

Question and Answer Session

Operator

(Operator Instructions) Susan Maklari, Goldman Sachs.

Susan Maklari

Thank you. Good morning, everyone, and congrats on a nice quote. I want to start by talking about the new products because it sounds like you're gaining some really nice momentum there that is starting to truly come through in the results. Can you talk a bit more vague about some of those initiatives that you are seeing out there?
How we should think about the guide for the Mineral Fiber AUV. to come in ahead of the historical range for 25, how much of that is coming from these initiatives relative to like-for-like pricing in there? And just any additional color on them and how those products are coming through in the marketplace?

Vic Grizzle

Sure. Thank you and happy to address that. You know from our initiatives over the last couple of years has contributed both to, as you were saying, AUV growth and volume growth. And we continue to see traction in our canopy platform. For example, that is reaching a very small, um, nichey customer that kind of fall through the cracks.
And we continue to grow double that had double digit growth in 2024 on that platform. Again, we're very encouraged by some distraction that we continue to get there. By the way to your question on the AUV., Canopy has a net contributor to positive AUV growth. Our average unit value on the Canopy platform is nearly two times our average unit value for Mineral Fiber.
And so that project works is another example of where we continue to gain traction. We nearly doubled the amount of projects through project works in 2024. And again, connected BACTEC through project works is five or six times our average unit value of Mineral Fiber volume. So again, a nice growth initiative that's adding to current and future AUV growth.
And then the energy savings, which I think it's the specific of your question, the milestones that we got in the marketplace in terms of the support with tax credits also being adopted by the GSAR. real big milestones for overall market adoption of this new technology and a very new application for for ceiling tiles. And I continue to be very encouraged by the fact that were over the right target having a different level of conversation with customers who are looking to solve this energy savings from the challenges they have.
And again, so we look at the AUA, the of our energy saving ceiling tiles, again, to tie it back to our AUV growth. It's two or three times our average unit value on on dumb mineral fiber products. So when you think about the AUV growth in the consistent AUV growth, that has been a legacy of this business for the past 10 plus years.
And you think about this new technology, the new growth initiatives that we're bringing to market, you can't help be excited and encouraged by the opportunity consistently and continue to grow our AV. in this business. I'm going forward.

Susan Maklari

Yes. Okay. That's great color is very exciting to hear that. And then maybe turning to the discretionary R&R side, I appreciate the commentary you gave on the broader market and how you're thinking about some of those factors coming index.
Can you talk a bit about that discretionary R&R piece, just given where rates have been in any and any additional color on what you're seeing there and how you're thinking about that as we move through 2025?

Vic Grizzle

Yes. You know, when you look at some bidding activity overall, I kind of all of the same pattern. We saw all through 2024 with one one quarter positive and the next quarter, down next quarter, positive next quarter, down following this kind of choppy pattern, but sideways moving that continued in the fourth quarter and dumb felt the bidding pattern and has been really consistent over the past nine quarters in this slide.
And to your question, really, the bidding activity has been strongest on the new construction side, which kind of matches what we've been seeing on the new construction starts, which was positive throughout 2024 versus 2023. So we've the discretionary renovation has been the weakness that I'm sure this is the genesis of your question that renovation activity for discretionary type in particular has been on hold while some of the uncertainty, um, um, you know, plays itself out the level of uncertainty.
The renovation now is around tariffs and policy changes, things like that, that discretionary renovation work continues to be on the sidelines. And so that is that's one we're going to watch very closely and 25 as some of the uncertainty around the overall market and the optimism around the overall market progresses throughout the year to see some of that renovation, discretionary renovation come back into the marketplace.
Again, I think in 2025, new construction is going to be a tailwind as we lap those. Those new construction starts into 25 is going to be a tailwind for us in 2025. And then you look at the office segment in particular, we had a third consecutive quarter of leasing activity that increase in the fourth quarter, and it's at levels post pandemic highs.
Now going in into 2025. And the outlook for 2025 in the office segment is that vacancy rates are forecasted to improve in 2025. So we will call this necessarily on a turning point.
At this point, there are more green shoots and more optimism around one of the softer discretionary renovation vertical sales for us, and that's been the office segment. I hope that provides a little more color there.

Susan Maklari

Yes. No, that is great. Thank you for all of that package to Vanquis everything.

Operator

Garik Shmois, Loop Capital.

Garik Shmois

All right. Thank you. I'm just wondering if you could provide a little bit more color on how we should be modeling the quarterly cadence for the year. You're going to continue to expect to see more variability as you navigate these choppy conditions, but are any additional handholding, whether it's on the on the top line? Right. The margin would agree.

Chris Calzaretta

Hey, Eric, it's Chris here. On the Mineral Fiber Sitel speak specifically to Mineral Fiber volume. You know, we obviously don't go don't guide to quarters. But if I take a step back and figure out really the first half, second half dynamic outlooking flattish volume for the year in Mineral Fiber with a little more of softness in the first half of the year and then turning in a more favorable in the back half.
And that's really around trying to see and navigate how some of the uncertainty that's that's out there in the market kind of shakes out and ones of settling down. So a little bit softer in the in the front half and more favorable in the back half of 25.

Garik Shmois

Okay. That's helpful on wanted to follow up on our AUV. and you're guiding to another year or two above normal, a review. Great reviews speaking, acquire. And we continue to be able to convert previous question with respect to our favorable mix moving forward on it, you start to see some better demand conditions and you're expecting on.
Is it reasonable to think that we might be entering into a period of years normal with AUG. growth, both on where for like and mix? And do you view could be above normal for an extended period of time here?

Chris Calzaretta

Yes, I think come when it when I take a step back and think about the longer kind of the longer-term horizon. Vic mentioned our innovation in some of our new products and the I call it the mental AUV points relative to our existing a UV. I think that provides some potential for additional AV. growth in the future. When I think about 2025, I'd say between the first half of the year and back half of the year, it's it's relatively balanced in terms that AUV growth.
But sure, I mean, it's really a testament to our innovation pipeline, staying close to our customers and really aligning with the needs in the market. And I think our products and solutions aligned to them and creates a lot of opportunity for us to continue to grow the AUV side of our of our equation.

Garik Shmois

Okay. Very good. Thanks, Russell.

Operator

Keith Hughes, Truist Securities.

Keith Hughes

Thank you, Linda Niro in a couple one end-user market office with solid gets a lot of discussion. How the order pattern, particularly in office renovation in the year and what sort of expecting from that in 2025?

Chris Calzaretta

Yes, that office vertical, Keith, on it was consistent with what we have been saying and kind of a sideways kind of stabilizing from pattern in office. Again, this is a third to fourth quarter, the third quarter of consecutive of leasing activity improving the bidding activity also was notable notably positive in the fourth quarter and office.
So I think it was the order pattern was consistent and sideways moving stabilizing versus the soft downward motion that we've been experiencing in the last couple of years in the office for early calling a recovery in the office segment. But certainly it's consistently moving sideways as as we're trying to establish at least a trough here.
That's it. That's what Tom we're modeling going into 25 as well. Not a big recovery in office, but I think to downward pressure is on some of them is behind us on the office segment.

Keith Hughes

Okay. one other question is we end we entered 25. What was new news remarkable as strong as well?

Chris Calzaretta

Well, I think transportation data centers, which is now being broken out from office are real highlights in terms of opportunity growth there, I think come the the health care continues to be positive. And even though the extra funds are expiring in the education segment, it was a really good election season for state municipal bonds that is likely a backfill, the of the extra funds.
So I wouldn't say it's going to be a real positive, but I don't think it's going to be the negative from that some of the anticipated with the extra funds tailing off. So I kind of feed in that order for us case.

Keith Hughes

All right. Thank you very much.

Operator

Philip Ng, Jefferies.

Fiona Shang

Hi, this is Fiona on for Phil. On how do you expect the recent tariff on steel and aluminum to impact your wave earnings in 2025? I'm wondering, do you have the ability to push price higher?

Vic Grizzle

Yes, let me Yum. Let me take them the tariff question here and um, and maybe take a broader approach to your question because I think wave as part of the part of the young to question and part of the the answer also care, and then I'll ask Chris to put a fine point on the impact that that might have for us on a cost from cost basis on with the tariffs that we know at least the potential tariffs that are out there.

Chris Calzaretta

And well-publicized, the short answer for the impact on Armstrong is quite limited. And when you look at on the limited nature, we still have mitigation plans on that limited impact to even further minimize the overall impact of that. So let me maybe break that down very quickly.
We really are a North American supply chain. And really when you boil it down, it's a primarily a U.S. supply chain business in from the China tariffs that are in place. We buy very little from China, mostly MRO MRO or spare part type items that can be sourced locally.
In Mexico, we buy virtually nothing Canada. We do have a Montreal plant for metal ceilings that represents less than 3% sales for the Company. And as you know, we have a large footprint in the United States for metal ceiling manufacturing that we can mitigate by local sourcing some of those projects here in the US.
To your question, though the steel and aluminum tariffs or the other place where on farm, Sean could be impact. And it's really see in the WAVE joint venture we buy of of a small quantity of steel and aluminum from imports in our WAVE joint venture for the production of our our grid systems. And we have local sources that week can move both that import volume to.
And of course, you know our pricing discipline. We were factoring in any cost impact into our pricing plans here in the early part of 2025. So I'll just say, again, we have limited impact from tariffs that we know no, both the ones in place, but the potential ones that we know about.
And we have a strong track record of covering any inflationary impact from these tariffs with our pricing initiatives. And to get very specific Crystal, I'll ask you to comment on the cost into sure of and as Dick mentioned, you know, on the supply chain side and environmental fiber in Architectural Specialties relatively insulated there, Tom, expectedly less than a 1% impact on Armstrong AWI. cost of goods sold in 2025, taking a step back and looking at Wave, as Vic mentioned, from less than 2% of their cost of goods sold on steel and aluminum.
And overall, I think about this from a competitive and broader backdrop in others. There's also similar backdrop of other folks in the market place is facing similar dynamics as it pertains to tariff impact. So in a relatively small, we're insulated Tom and minimal impact as I think about it in terms of supply chain impact on costs.

Fiona Shang

And that's really helpful. And my follow-up questions will be in your 2020 guidance. You mentioned a choppy market outlook for Mineral Fiber, QT sand volumes in that segment probably inflecting 26.

Chris Calzaretta

Yes, I'll pause and stop short of guidance for 2026. You know, again, want to see how 2025 unfolds, as Dick mentioned, at the end of the degree of uncertainty, obviously, that choppiness associated with the markets.
So our best view right now now is flattish volume for Mineral Fiber. And we'll see how we'll see how the year progresses before thinking about 26. But thanks for the question.

Fiona Shang

Thank you. Appreciate the color.

Operator

Stephen Kim, Evercore ISI.

Hi, this is a Fish on for Steve. Thanks for taking the questions. So first and Mineral Fiber, I have mentioned the input costs become a headwind in the quarter.
Could you kind of clarify which inputs? And how does how we should think about the pressure there as we move through 2025?

Vic Grizzle

Yes, sure. So let me let me let me pause and take a step back and just talk about what we've assumed in our guide for 2025. So overall from a total input cost perspective on outlooking low single digit inflation. Just a reminder in our labors, about 10% of our COGS inflation and puts and Mineral Fiber Energy's 10, 10 and raws are about 35%.
So all up in a total input costs in that low single digit inflation range. From a freight perspective, I'm expecting inflow nation on both the rate basis and fuel basis. So in that low single digit range was low single digit inflation for 25 and then about 10% or so inflation on energy. And that's really driven by natural gas.
And if you think about how pricing for natural gas has progressed from 24, 25 and kind of the latest outlook for 25, that will make us make a lot of sense. So just kind of adds a little bit more color around how we're thinking about about this year.

Great. That's super helpful. Tom. And then on our expect upon the vendor acquisition, can you help us kind of contextualize that the total percentage of the Company sales that are indexed areas now?

Chris Calzaretta

Yes. Let me take this personnel, you can add to that, Tom, thanks for the question. Because some we're really excited about the acquisition fees since 16 gets averaged 20% kegger growth since then. And we're outlooking another 20% in 2025.
And of course, that's a combination of organic penetration into this SaaS specialties area, but also on inorganic additions to the business and Zane or is just another step of that. one of the exciting things about the Zinger acquisition debt, coupled with the bulk acquisition, is that it really does establish a design and manufacturing platform for the exterior part of the building.
That opens up another $1 billion worth of total addressable market. That's about the size of the market. And when we started in 2016 on this run of 20% category growth.
So the way we think about one, the reason why we're excited is it obviously opens up another com opportunity pool for us to play in, but it gives us confidence that we can continue to growth of architectural specialties for years to come.
We have now renewed leg of penetration opportunities in addition to future inorganic bolt-on opportunities. So I will mention again that, you know, this is the third consecutive year and 24 was a third consecutive year that we were able to expand margins in this business organically.
So we're driving really strong top line and expanded expanding margins, and we're demonstrating we have the right levers to pull to expand margins in this business. So we're excited about the segment. Overall. Designer acquisition just gives us a whole nother Lake and capability with our bulk acquisitions to continue our growth into the future.
Yes. And just to add on as well to your to your question, you know, we some assumed about 20% top line growth in the U.S. segment for 25. More than half of that is related to inorganic contribution in the year. Some and overall segment and margins for 2025.
And as Eric mentioned, we've this is the play we've run around acquisitions where we can bring these unique to specify what attributes and capabilities into the Company and continue to grow and create value for shareholders by leveraging Armstrong plan form. So really excited about the opportunity to do that in 25. With our recent 24 acquisitions.

Great. Thank you. And Kip.

Operator

Rafe Jadrosich, Bank of America.

Rafe Jadrosich

Hi, good morning, Trey. Thanks for taking my question. Good morning. Starting with our temp block? Or can you talk about how you think about the potential either TAM or or or or market size of 10 block relative to some of the other growth initiatives you've had over the last few years, like a healthy three issues are or can into account how big could tempt Block B on overtime?

Vic Grizzle

Yes. A good question because it's really when you think about this particular technology and the application broadly speaking to drive renovation, it's a much, much bigger opportunity, which is why we're excited about it.
That's why we're innovating around this on this for this phase change material has a lot of different avenues that we can go with it. So when you think about the installed base of mineral fiber at 39 billion square feet and over time getting to the point where why would you ever put another ceiling tile? And it doesn't pay for itself over time.
It doesn't save energy. It's some it's an exciting opportunity. So when upsizing it publicly, but you can get suggests it's a very large opportunity. And we think for many, many years to come as we transition all of the installed base, ceiling tile overtime to energy saving ceiling tiles.
And then two more follow-ups come on block of the cumulative growth initiatives you've had there has been investment and ramp associated with that didn't need to put additional SG&A and from to drive that conversion or for for product innovation on Penn block, our kind of realize our market opportunity for a minute.

Rafe Jadrosich

And the second question is like how do we think about 10 Block AUV. relative to your average check?

Vic Grizzle

Yes, the AUV contribution is somewhere in the neighborhood of two or three times our average Mineral Fiber volume such a nice adder and contributor to positive EV growth over time. The answer to your SG&A question, we are already feathering in SG&A to support the market developments and the market acceptance, if you will, the development of of different customers that make decisions around this.
So we're already doing that, and we'll continue to do that into 2025, and we factored that into our cost outlook. So in addition to that, you didn't ask, but in addition to that, you'll notice a little step up in our CapEx spending and that is to support some additional capacity creation, finishing capacity creation and one of our path plants to to support the energy saving ceiling tile production.

Rafe Jadrosich

Could you wouldn't expect to step up and put beyond 25? Could you would not expect a step-up in SG&A or CapEx plan where you'd already done hub to support to go through the growth?

Chris Calzaretta

Yes, I think there can be obviously, Ralph, at the rate and pace service of sales growth, there could be a little bit of a step-up in SG&A. But, you know, I would do I think about it is today relative to rate and pace on the CapEx side on now, not not at this point in time.
We think with the capacity that we're adding, some you mentioned support our short-term growth outlook on the hopefully and again, we remain excited about the opportunity that 10 block offers. So should that outpace our expectations from given that level of AZ opportunity and Mineral Fiber volume growth, we remain excited about the potential that this product tests.

Rafe Jadrosich

Great. Thank you.

Operator

John Lovallo, UBS.

John Lovallo

Good morning, guys. Thanks for taking my questions as well. On the first one is you're expecting flattish Mineral Fiber volume growth in 2025. Curious first of all, how that sort of compares to the market?
And then I think, you know, last quarter you guys it seems reasonably confident and the ability to return to more normalized kind of 2% to 4% volume growth this year. On-site markets have stabilized a bit, maybe some green shoots. So what's it going to be to get back to those levels of growth?

Vic Grizzle

Yes, the MC. implication for the market is in at plus or minus 1% range. We are still confident that our growth initiatives are going to add up to one point of growth, offsetting some of the softer market condition for adding to a flatter market conditions. I think plus or minus it's 1% is a pretty good proxy for a choppy market going forward.
As far as the 2% to 4% to 4%, middle to long-term outlook was the growth initiatives plus the market recovery back to 2019 levels. So outlook in 2025 to be a market recovery with a flattish market.
So to get back to the to the two to four, we're going to have to have the market contribute to come to that. We get to that two to four range to complement our growth initiatives set pet term. We continue to be very optimistic about.

John Lovallo

Okay, makes sense. And then on architectural specialty, the EBITDA margin forecast 18%, it seems like that's being impacted by some of the more recent acquisitions like the examiner. Just curious, does this change or push out the year, the outlook for kind of consolidated 20% EBITDA margins in that segment?

Vic Grizzle

Well, we're going to continue to make progress, as I mentioned earlier on, this is a third consecutive year that we've expanded the margins organically in that business. So we're on the right path.
As you know, as we add new acquisitions to this segment, they come in at lower EBITDA margins, given the scale of the lack of scale that they have. And the opportunity for us to scale these businesses is the opportunity to drive operating leverage and improve the overall EBITDA margin business were running that play.
I think we're going to continue to do that. But certainly when we bring on new acquisitions like you're noting here that there's work to do for us to get those those businesses up to the 20% EBITDA level. So again, I think come I really feel good about the three consecutive years really demonstrating that we have a right levers that we're focusing on.
We're pulling them in the right way and making really good headway toward the 20%. So we remain confident that we're going to get this business to a 20% EBITDA business over time.

John Lovallo

Got it. Thank you, guys. Divestments.

Operator

Brian Biros, Thompson Research Group.

Brian Biros

Good morning and thanks for taking my questions. On the on the vendor acquisition, I guess it seems like a a larger step into the exterior space in like a strategic decision to go into that category as mentioned, I guess, how do you think about further acquisitions to round out the extra offering? Or is that more of a organic growth initiative from here to attack that? I mean, you mentioned 1 billion in new addressable market.

Vic Grizzle

Yes, Brian, it's a it's an exciting space for us. And, you know, five years ago, this wouldn't have been a space that we could attack. But because of the metal design and fabrication capability that we've been building and developing partly through acquisitions as well, we really have a world-class metal design and fabrication capability that we can use now to take to the exterior side of the building.
And with the expertise and the brand of a company like Zener, it really is an accelerator for us to participate in play organically. Now in this in this space.
But again, when you look at the sales of saner with book and a $1 billion TAM opportunity, that puts us at less than 10% share. And so again, very similar place that we started with Architectural Specialties in over 10 years ago. So there's plenty of penetration opportunity here organically, but also there's going to be additional players from that.
We can bolt on to this business as we go and will be will be open for business in that particular category as we are in the interior side. I'm going to kind of see how that turns out, I guess on the guidance from five.

Brian Biros

I guess what are the puts and takes to get maybe to the high end low end of guidance between volume AVN. and they also kind of drive the arrange? It seems like volume. I think the biggest driver of the range of any more color would be helpful.

Vic Grizzle

Yes, I'd say volume for sure. But if I just take a step back and take a broader look at the overall landscape in the market, you know, it's a little more clarity and in some call Miss supplied to the chart that we have outlook for the year.
So I think a lot of it's going to be just around how the broader macro shakes out, how the market share South, which could provide some potential upside and downside case, albeit at the lower. And so that's really the biggest variable, the dynamic that that we faced here in 2025 and that in a quarter to quarter chopped throughout the market. So from that, that's kind of how we how I would size the that the ranges and the variability on the guide.

Brian Biros

Thank you. You're welcome. Thanks.

Operator

As there are no further questions at this time. I would now like to turn the call back over to Vic Grizzle, President and CEO for closing remarks.

Vic Grizzle

Thank you, and thank you all again for joining and for your questions. Again, you know, as we come, we navigate some turbulent market conditions going forward here. I think our diverse set of end markets plays well for us to keep a very stable label business.
Our consistent ability to drive AUV growth, our ability to continue to drive productivity even in soft market conditions, really allow us the resiliency that we need and market conditions like this, and we remain confident in our 2025 outlook and term look forward to updating you on our next call.

Operator

You very much. This concludes today's conference call. Thank you for participating. You may now disconnect.