Armstrong World Industries, Inc. (AWI) Earnings Call Transcript & Summary

Welcome you to the 2022 Armstrong World Industries Investor Day. My name is Theresa Womble. Most of you in the room probably know me. I'm the Director of Investor Relations here. I'd also like to introduce Dan Haldeman, who's our Manager of Investor Relations in the back of the room. At any time during the day, if you have questions on logistics, just find one of us -- either of us and we will help you out or anybody with a Armstrong name tag can also help. We'll have Q&A at the end of the presentation. But before we get started, I'll do the typical housekeeping of our safe harbor statement. We'll be using forward-looking statements today, and we will make no obligation to update those, standard procedure there. If we go next to the basis of presentation, explains the way we'll be talking about various metrics in the presentation. Looking at our agenda, we're excited to have not only Vic and Brian speak about our strategy and our financials, but we will be also having Mark Hershey, Nick Taraborelli and Jill Crager to talk about our segments, our value drivers, and our growth initiatives of innovation, healthy spaces and digital. We'll have a break about halfway through. And then, as I said, we'll start the Q&A session at the end, and we'll follow that with demonstrations of our initiatives. With that, I'll turn it over to Vic.

Thank you, Theresa. Good morning, everyone. Well, welcome to our campus here. We're delighted to have you here live and in person. And for those of you who are joining us virtually, we're also delighted for you to have joined us as well. I thought before I start this morning, it was fair to acknowledge that maybe this isn't the most important thing going on in the world right now, given the events of the Ukraine. We have a lot of ex-colleagues in that part of the world. We have a lot of friends, and maybe you do as well. So as acknowledgment of what's going on in the world, I thought it was fair to put this into perspective. But with that said, and that acknowledgment, we're happy that you're here. It's exciting times at Armstrong. And we're excited to share with you what we've been working on. We were just talking with some of you, it's been almost 3 years ago -- well, it's been 3 years ago. 2018, the last time we had an Investor Day, we had you together on campus. We were 2 years into our separation from the flooring division as a stand-alone pure-play ceilings and specialty walls company. We were in an agreement to sell our international division to Knauf. And we were excited about the prospects of becoming a more focused, a more capable and a more valuable company in the Americas market here. We've been busy since 2018, and we're excited you're here. We're excited to share with you what we've been working on and what that means for us on where we go next. I'm really excited for everybody to get to meet more of my team as well. I'm very fortunate to have a talented and experienced leadership team. And everybody on this executive leadership team has been with me, except for one, has been with me through the whole journey, so I feel very, very fortunate. And again, I'm thrilled that you get to hear from them today. You're going to hear from Mark Hershey, who is leading both of our P&Ls, our segments, Middle Fiber and Architectural Specialties. He's relatively new to role, but he's not new to the company. He's been with us for 11 years. You're going to hear from Jill Crager, who is -- been responsible for building the digital initiatives that you're going to hear about from her today. And again, relatively new to position, but not new to the company. Jill has been with us for over 23 years. And you're going to hear from Nick Taraborelli, who is responsible for the Healthy Spaces platform and has been building out this platform and an exciting platform. You're going to hear more about that today. Again, Nick relatively new to position, but not new to the company. He's been with the company for 20 years now. Now I know when you look at Nick, you're going to say, there is no way he could be with the company. He started just out of junior high school, okay? So -- but I'm really pleased with this leadership team. And I think you're going to find at the end of this morning session, why I have so much confidence in this leadership team and why this is the next -- the right leadership team to take us to the next level. Again, we've been very busy, really focusing on this Americas market, and we are poised and positioned to accelerate once again our value creation. And what you're going to hear today from this team is we've created a uniquely focused Building Products company built on what is arguably the strongest set of fundamentals in the Building Products space. And with that focus since over the last few years, we've taken a strong position, and we've made it stronger. And our ability to win in the market and compete in the market is even stronger today than it was just a few years ago. And with this enhanced ability to compete, we've not only strengthened the value drivers that you've come accustomed to with Armstrong, but it's going to sustain these value drivers into the future. And we're really confident about that and we're happy to share with you how we're doing that. And then finally, what you're going to hear today, we have secular tailwinds in the market -- from the marketplace, in addition to these growth initiatives that we've been investing in over the last couple of years, that's going to add this new dimension of growth for us, and that's our Mineral Fiber volume. Let's just level set where we are as an Americas-based company and focused company. We are the undisputed leader in the ceilings and specialty wall category. With over 2,800 employees in the Americas market, we have 15 plants around the country. We have an unparalleled footprint to service this customer base. As we reported last week, we just crossed over $1.1 billion in sales, with over $372 million of EBITDA. This is one of the highest EBITDA margins in all of Building Products. We're very proud of that. These sales makeup -- are made up of 2 segments: our Mineral Fiber segment, which is the bulk of the ceilings category. And as you know, we've had a large share in this market. We've had over a 50% share for 30-plus years now, and that's a 40% EBITDA segment for us. Our second segment is our Architectural Specialties segment. It's the fastest-growing part of our business. And in fact, we've done 8 acquisitions in that segment over the last 5-plus years. And we've taken it from $100 million to nearly $300 million over that period of time. We're really excited about the combination of both a very successful industry-leading Mineral Fiber business, complemented by a Specialties business that makes our competitive advantage even greater. As you all know, we are 160-year-old plus. We're one of the oldest American companies that remains. And you get to be one of the oldest companies because you're adaptable as a culture and as a company, but also because the work that you do is relevant. It's relevant to the world. And that really gets at our purpose, our why as we call it, on why we are relevant in what we do in the marketplace. And that is we make a positive difference in the spaces where we live, work, learn, heal and play. And ceilings matter when it comes to that positive difference. And so it matters a lot to our customers -- and therefore, it matters a lot to us. And at the heart of this really is the growing need for sustainable solutions. Sustainability is really at the heart of what we do. You think about, sustainability is about making a positive difference, broadly for all of our stakeholders. And so it fits very nicely and very naturally for what Armstrong is about in the marketplace and what we're doing. And it's very easily integrated into our business strategy. Our approach is we've taken the sustainability platform and divided into 3 pillars. We have pillar leaders and we have pillar teams now around product, planet -- people, planet and product. And we've now set goals, and we've set targets for 2030 that are good business. It's good for our customers. It's going to be good for our shareholders. And again, it's going to be good for our business. At the end of this trail here to 2030, what we're going to find is that Armstrong is a more resilient company as a result of these sustainability goals. I think it's important to call out the category in which we play is very attractive. Even relative to other building products categories, this is an attractive category. It's highly consolidated with really 3 main players in this, and the same 3 players for decades. It has a large installed base because there hasn't been a disruptive technology, in particular, to Mineral Fiber for many years. And so the installed base is a very consistent installed base that drives an annuity of renovation activity. It makes us a very stable, steady category. It's a highly specified product. And I'd like to differentiate specifications here because there's generic specifications that you often find in building products, and then there's very specific specifications because architects really care about what goes in the ceiling because it has a large impact on the functionality of the space. Because they care, they specify specifically manufacture and product number. And that really helps us through the value chain all the way to installation. And then with the growing need around indoor healthy spaces, this category of ceilings, because they matter in the creation of healthy indoor spaces, is becoming even more relevant. Now why are we uniquely positioned to win? And I get this question a lot. Why are you able to hold the margins that you hold in this space and have for so many years? It's because of the winning formula that we have and we've ingrained over the years. When you are the leader for over 3 decades in this space and you do it really, really well, you develop a lot of credibility. And that shows up in the brand strength that we have. It's one of the most trusted brands in Building Products, and it's certainly the most trusted brand in the ceilings category. Now with our Architectural Specialty category building out, we have the broadest, most innovative product offering to our customer base. It makes us more relevant to the specification community, and it's the easiest to do business with in the contractor community. As we -- as they like to say, they have 1 throat to choke. And then winning the specification is a really important part of our core competency. We think that they are very important to drive innovation and new solutions into the marketplace, so we cater to them, we innovate to them. But winning the specifications there is key to holding prices through the value chain and holding your position all the way through. It's one of the things we do really, really well. And it's -- again, it's a key success factor for us to holding our margins. And then at the end of the day, if you don't have operational excellence, you can't hold your specification. They'll flip the spec or they will find a way around it. So having the best quality and the best service is really important to the winning formula. And there is -- we are unmatched in the marketplace with our service and our quality. Again, we've been busy over the last 5 years really driving a more focused, more capable organization. And again, back to 2016, when we separated from our flooring business, became a pure-play focused ceilings and specialty wall company. And then in 2017, we entered our agreement to sell and divest of our international business to Knauf so that we could create this laser-like focus on the Americas market. We closed on that deal in 2019 and if you'll remember, we gave the majority of those proceeds back to our -- back to our investors through an ASR. And then in 2020, we made a very important decision in the depth of the pandemic. We said we have been rightsizing our organization for an Americas-only company. We had gotten our SG&A in line with that focus. And in 2020, we said we weren't going to furlough our people. We were going to maintain the strength and the capacity of the organization and that we were going to continue the investments we had begun in these growth initiatives, again, in 2020 and throughout '21. And we're very proud of the progress that we're making. You're going to hear more about that progress from Mark, Jill and Nick in just a few minutes. But I want to take you back to where the last time that we were together in 2018. And again, what we had acknowledged in 2018, for those that were here, you'll remember this, is that we had the highest margins in the Building Product space. We were generating more cash flow per revenue dollar than any Building Products company at the time. And we had an opportunity to focus on this Americas market where we had the strongest market position and the highest return on investment. But the missing piece for a company, the gem of a company that we had was profitable top line growth. And we set out to say, listen, that's the one missing piece we want to add over the next few years. And we laid out these 4 strategic imperatives, be it to lay the groundwork for us to be able to change the trajectory of our top line growth. We said we had to revitalize our Mineral Fiber category through innovation. And you've heard us talk about this in our investor calls over the last 3-plus years. We launched Total Acoustics. We launched Sustain, DESIGNFlex, ACOUSTIBuilt and now most recently, AirAssure for the healthy spaces. And we drove our product vitality index from 28% to 40%. 40% of our sales today are coming from products that we introduced in the last 5 years. We have accomplished the revitalization of the Mineral Fiber category that we set out to do there. And by the way, that is the driver behind the AUV increase on the mix side of the equation that we've been talking about. We said we wanted to accelerate Architectural Specialties, and we do that both organically and inorganically. And since 2018, we've added 5 acquisitions, and we've nearly added $100 million worth of growth in that part of the business. We were just embarking on our digital transformation, and we were excited about that and we were telling you about that. From the plant floor all the way to the customer's office, we saw opportunities to transform our business through digital technology. We're really happy with the Kanopi platform. We launched it a little over a year ago. Jill is going to tell you about the traction that we're getting there, and around Projectworks. The way we're automating the design process to drive more efficiencies with the architects. For what reason? To further strengthen our ability to win the specification game. And then again, we said we wanted to continue the strong cash generation that this business has been accustomed to through a balanced capital allocation. We've averaged over 20% free cash flow margin. Again, that's one of the best in the Building Products and we're very proud of that, and we're committed to that. We've also spent $250 million on our second priority after investing back in the business on acquisitions. And we've had enough cash to return $650 million back to our shareholders. Again, very proud of that. So a lot of checks here. We really did what we said we wanted to do back in 2018 over the last 3 years. But ultimately, what our objective was, was the changing the trajectory of the top line growth. After a decade of 2% growth up until separation from flooring, we changed the trajectory to 6%, and that's absorbing the pandemic and the recession that was caused by the pandemic. And now we're ready to do it again. Against the backdrop of favorable tailwinds from the marketplace, and the growth initiatives that we're excited to share with you more about today, we have an opportunity to do it again. Let me start with the positive backdrop that we're seeing now for the next few years. And it really starts with an economic recovery from the pandemic recession. We've said from the beginning that this recovery was not going to be a V shape. In the commercial construction area, this was going to be much more like a swoosh. And what you've heard me report over the last year or so, even that swoosh part has gotten really choppy as we've worked through supply chain issues and labor issues on the job sites that have really slowed down parts of the recovery. But the market is recovering. The bidding activity that I've been reporting on for the last 9 months are clear indications, and they're at double-digit levels, are clear indications that the work is out there, that there's pent-up demand for renovation activity. And so when you think about getting back to 2019 levels, and I look at that bidding activity level, I have confidence we're not only going to get back to 2019 levels; we're going to blow by 2019 levels. So just to put that in perspective, from where we are, we finished in '21 to get back to 2019 levels, that's a $100 million sales tailwind for the company. In addition to that, this focus on safety and indoor environmental quality is here to stay. You're going to hear more from Nick on this, but it's here to stay. It's changing the conversation around how buildings or interior spaces are designed and the materials that are going into those spaces. It's a real catalyst for renovation activity. And again, we're excited about that impact or the impact on that in terms of Mineral Fiber volume growth. Now connected to the money being spent on indoor healthy spaces and education is the social equality that was -- that came to the forefront and really stepped up the funding that's going into education. As many of you will have recall, what we've talked about for the last 8 to 10 years around why hasn't the commercial recovery been stronger? One of the reasons that you've heard me say again and again is that the funding for health care and education hasn't been there. Although office has been recovering since 2014 and 2015, health care and education has lagged, and that has really muted the overall recovery. Well, the spending in education right now, which is $190 billion over the next 3 years, is a step change in funding for the education sector. Again, that's a very nice catalyst again for the company around Mineral Fiber volume. And then finally, the growing demand in ESG around the need for more sustainable solutions, companies are setting goals they're going to have to meet on embodied carbon. Cities are setting goals around emissions for their buildings. New York City has the most aggressive with an 80% reduction in emissions, really targeting the buildings, which generate 40% of carbon emissions in the country. So we're just getting started with the need for more sustainable solutions. And to meet these goals, companies are going to have to do something different in their spaces to achieve these goals. Another catalyst for Mineral Fiber volume growth. So against that backdrop, which is very positive and frankly, very different than what we've been talking about, what we experienced in the last 5 years, are these industry-leading growth initiatives that we're excited to share more about again today, that we've been investing in since 2019. And you're going to hear Mark and Nick and Jill talk about these, but the innovation is the great enabler to these initiatives. You'll hear Mark talk about that, the Healthy Spaces and then the digital platforms on their impact on Mineral Fiber volume growth in particular. I hope what you hear when we talk about these initiatives is the additive nature of these initiatives into all what we're already doing around AUV and Architectural Specialty growth. But it -- but the Mineral Fiber volume part of this is really what's new, and you'll be listening for that, I'm sure. So together with the positive tailwinds from the market and these growth initiatives, we're ready to do it again. After a decade of 2% growth to the separation from our flooring business, accelerate to 6% over the last 5 years, now we're ready to do it again to 12% over the next 5 years. So let's pause there, and let's get into some of the initiatives and the building blocks that are behind this change in trajectory. And I'm going to turn it over to Mark Hershey.

Thanks, Vic. Good morning, everybody. I'm Mark Hershey and I'm proud and excited to have this opportunity to speak with you about our 2 operating segments: Mineral Fiber and Architectural Specialties. Proud to represent the dedicated and talented employees in these businesses. Excited to share with you the opportunities we have ahead of us. These are 2 strong businesses. They are truly complementary. And frankly, they're powerful together. My remarks today will focus on 3 themes: first, that together, these segments offer a total value proposition that, as Vic said, is unmatched in the industry. When we say total value proposition, what we mean is the breadth of our product portfolio, the range of our design capabilities, the strength of our customer service offerings, the scale and the reach of our channels, including distribution and the power and the reputation of our brand. You'll hear that these segments, these powerful segments are now supported by, as Vic previewed, investments in initiatives and enablers that support how we win. When we think about how we win at Armstrong, it's definitely specifications, but it's not just being specified. It's becoming the basis of design to architects and designers. In addition, accelerating the rate of renovation, actually stimulating the market to create renovation events and you'll hear about these 3 initiatives today. You'll hear also that these initiatives improve not just each of our segments, but the entire AWI enterprise for growth and driving and supporting the value creation drivers that Vic mentioned, AUV performance, profitable, AS growth and Mineral Fiber volume growth. So let me start with an overview of our 2 segments, starting with Mineral Fiber. Mineral Fiber represents roughly 75% of our total revenues at these very attractive EBITDA margins. While it is a lower-growth business, it is a steady and strong cash generator. And that steady performance comes from the hallmarks of this business, AUV performance and manufacturing productivity, and I'll touch on that in a minute. Mineral Fiber sales are split relatively evenly, balanced among new major renovation and repair project types. This is important. It makes it less impacted by economic cyclicality. Turning to AS. AS now represents roughly 25% of our total sales. While its margins are lower than Mineral Fiber, this is a high-growth business. This is a growth story, multidimensional growth story. Sales in AS are split relatively evenly between new and major renovation. It has virtually no repair, replacement or flow business. Stepping back and looking at both segments now by verticals. Both segments serve a diverse range of vertical markets. This is also important. We're often viewed as heavily weighted toward the office environment when in fact, education, health care and transportation are very important to us. Because both businesses serve -- both heavily serve, new and major renovation business, project types, this means the architect and the designer is essential. And this is really where the power of the combination of the 2 segments comes together, focusing on what the architecture and design community is looking for today and in the future. And both segments have their own key hallmarks or attributes. I mentioned AUV performance. On the Mineral Fiber side, it's certainly manufacturing productivity. Year in and year out, our plants, our operations teams, deliver this productivity by driving lean and operational improvements, reducing waste, reducing cost, reducing scrap directly to the bottom line. On the AS side, design is and has become the hallmark of this business, designed through different categories, segments, if you will, inside of AS, substrates, styles, shapes, colors, whatever the ambition or aspiration of a designer. And we're only getting started here, frankly, in this very fragmented space of the market. Vic mentioned the winning formula. And for those of you who have followed us for some time, we've -- you probably heard this from us before. It's important. It is what differentiates us from competition, and it is a unique value proposition for us. If there's one thing that stands out between us and our competition, it is this formula. At the center of it is what we call the total customer experience. It took me a long time to learn this one. It's the total customer experience. We don't have 1 customer. We've got multiple customers. It certainly starts with the architect and the designer, and they're looking for design and specification optionality, flexibility. It continues into our channels. Distributors are looking for ordering and fulfillment flexibility and ease and reliability. It continues to the contractors, especially these days who are looking for labor savings, ease of installation, time savings. It certainly impacts the building owner, the facility manager, who is looking for value, a return on their investment, getting people back to the office. And last but not least, it certainly impacts the end-user occupant customer. That's all of us in the spaces we live, work, learn, heal and play in. How does the space feel to you? How does it look? How does it sound? And these days more than ever, what's the air quality, how well is it lit? So it's very important for us at both segment levels to embrace all of these customer stakeholders. And nobody is better positioned to address all of their needs, frankly, exceed their needs than Armstrong. And the segments do this by working together, it is the power of the broadest portfolio that leads to specification leadership, relying on the foundational strengths of our company in operations, in channels and our brand. So here's an example of our winning formula at work and the power of the complementary nature of our segments. We sell more products into more spaces by doing one thing really well, which is solving for complexity. Put simply, ceilings are complicated and they're getting more complicated. We solve for that complexity by complementary offerings, by complementary strengths. And here's an example. The reflective ceiling plan on the left side of this page is an example of the complexity inside a ceilings project. It's what architects, designers, contractors face into when they're building. And we embrace that complexity, quite frankly. The ceiling, the way we think about it, it's the capstone of a space. It's where it all comes together. It's where your walls meet. It's where your lighting is integrated. It's where your HVAC is integrated. These days sensors and security, all in one plan, and we embrace that complexity. Just as we did in this project for a school in Memphis, Tennessee. It's a school, you're looking at 2 pictures of a library here. The bid specification was for a high-performance Mineral Fiber solution, but also specialty products. We won the project with our woodworks offering. We won the project with a high-performance Mineral Fiber solution, and we won the project with the best grid in the industry, which comes from our WAVE joint venture, a bundled, integrated offering that allows us to preserve, actually grow our AUV for the project. So here's another example and another benefit of the winning formula and the power of the combination. Repeat opportunities, customer loyalty, yes, this is the same school. Yes, it's the same architect, 4 new spaces. In this case, you're looking at a cafeteria, a fitness center and 2 hallways. Again, a specification for a range of options. Again, high-performance Mineral Fiber, which we bid our Lyra product. Our Lyra product is a plant-based sustained portfolio Mineral Fiber product that brought over 4x the average unit value for our Mineral Fiber products in general. The fitness center, you see is an open plenum space. We don't fear the open plenum. There is complexity in the open plenum. You can't see them very well, but our INVISACOUSTICS MINERAL fiber solution is in this fitness center because open plenum has an acoustics problem. That's where the complexity arises. Again, the power of the total portfolio, solutions from Architectural Specialties, high-performance Mineral Fiber, all supported by suspension and grid from WAVE. 2 different projects: 1 school customer, 1 architect, 5 spaces, 1 supplier, Armstrong. So our segments, they share the winning formula, and that winning formula has delivered the financial results that Vic described to you earlier over the last several years. We're now going to take it to another level. We're going to strengthen that winning formula, reinforce it and invest in it. So you'll hear about our innovation, healthy spaces and digital initiatives today. I'll start with innovation, Nick will cover healthy spaces and Jill will cover digital. In all of these cases, with all of these investments, they've been designed to achieve the outcomes you see on the right side of this page, the value creation drivers for our company. So let me start with innovation. Innovation is not a department, it's not a function, it's not a singular team. For us, it is a mindset inside our company, and a growing one across the enterprise. I'll focus on an example of innovation today that's focused on products, R&D, new product development, to address emerging market needs, market trends as they're coming and frankly, anticipating where they're going to be in the future. With Healthy Spaces, given the role of the ceiling, given our leadership in the ceiling space, we know we have a role to play in bringing indoor environmental quality to all spaces. And digital, serving latent demand with channels and tools, frankly, technology that doesn't exist in the industry, and we don't believe is contemplated by any of our competition. In all cases, these initiatives have in common, their ability to drive and secure specifications and AUV. Okay. Starting with innovation as one example, R&D. Research and development, new product development, multigenerational product planning has been a core competency since Thomas Armstrong founded this company over 160 years ago, quite frankly. We do this by leveraging some of the best, if not the best talent, in the industry. So our organization and our competencies and where we focused are the key. Today, more than 10% of our salaried workforce is directly focused on innovation in product and product development innovation. In many cases, our leaders are actually the industry-recognized experts for codes, testing protocols and standards. And we're going to continue on this journey. Moz, Arktura and Turf in 2020 were a great example of us taking a different approach to innovation, a few minutes on what I call the plus factor that originated out of these acquisitions. In each of these cases, the strategic rationale for buying these companies was about more than their great products. They make beautiful products, and they've got great production capabilities, but it was more than that. It was about how they think. Frankly, these were the first acquisitions we've done where we were not buying the company from a retiring or legacy or a passive owner or investor. We were buying innovation leadership, different ways of thinking, different ways of creating, challenging the norms. What's the next great substrate going to be? Where should we go? What do architects really want or the architect's architect? In these 3 acquisitions alone, we acquired more than 3x the total number of architects and interior designers we had in the whole of AWI at the time in these 3 small acquisitions, complementing the great talent and great design leadership we already have in industrial design, in industrial engineering, a very powerful combination. And it's already showing itself. We're building new ways of thinking. We're collaborating differently, and we're creating new structures, new structures like innovation labs, the [ excel ] it, agile and fast sprints and a Venture Studio, our first foray into corporate venture capital we've never had before. Really excited about where this is going. Really excited about the opportunity to share. I'm confident we're going to be talking to you about the outcomes and the innovation from these structures in the future. Vic mentioned our Product Vitality Index. It's one of the metrics we look at as we invest in innovation. He mentioned nearly 40%, last year, of our product sales in Mineral Fiber came from product launches in the last 5 years. In the pandemic years alone, these last 2 years, we -- we launched more than 2x the number of product families and solutions as at any time in our history. Importantly, all of this innovation, all of the focus is on what the customer needs, what the customer wants, where is the customer going? That's market-driven innovation. That's what gives us confidence that we will succeed. It's done in an agile way, fast, fail fast, succeed fast, and it's always focused on specification outcomes, highly specified outcomes from our innovation. Again, not just getting specified. We're very fortunate to get specified very frequently. But when can we raise our specification strength? And we rate and grade every specification we get on a scale to monitor how our specification strength is improving over time. With specification strength comes confidence that we can hold, grow our average unit value like we've done. For us, it's fairly axiomatic. If we consistently invest in our innovation, if we consistently invest in our new product development, we will consistently grow our AUV performance as we've shown. So here are some examples, and Vic mentioned a couple of these. Innovation does differentiate us. And here are some -- here are 4 examples of innovation journeys that we've embarked on just in the last several years, building on our history of strength and competencies like aesthetics, fire and acoustics. Starting with Total Acoustics in 2015. We were focused on the acoustical performance of our products and spaces, certainly on the sound absorption in these spaces, the NRC, noise reduction coefficient. But at the time, the voice of the customer, the market was looking for more. They wanted speech clarity within a space, that's the NRC. But in this day and age, they wanted more. They wanted speech privacy between spaces, that's CAC, that's Ceiling Attenuation Class. So we launched Total Acoustics, blending the best of both, literally allowing an architect to dial in the acoustical performance in a room, in a room side-by-side. Nobody has a portfolio of broader high NRC and high CAC solutions than we do at up to 2x our average Mineral Fiber AUV. Same model, same kind of journey for Sustain, ACOUSTIBuilt and DESIGNFlex. Just to say it, Sustain was the industry's first portfolio of Mineral Fiber solutions that consisted of entirely red list free products and inputs, no chemicals of concern in our Sustain portfolio, up to 4x our average Mineral Fiber AUV. ACOUSTIBuilt is the monolithic, seamless, looks like drywall solution, but it carries our total acoustics properties at up to 6x our average Mineral Fiber AUV. And DESIGNFlex was the industry's first portfolio, first platform of offerings -- Mineral Fiber offerings in shapes, sizes and colors at up to 7x. These journeys, this historical performance is what gives us confidence for the future, innovating for the future. We will go on similar journeys just like these, focusing on putting the power of our focus on new areas, certainly healthy spaces, certainly sustainability. Installation efficiencies is enormous, particularly in the grid space and certainly always design trends. What's the market looking for? And this is across our portfolio. So certainly in our way of joint venture, inside all of the categories within AS and Mineral Fiber. Our initiatives are designed to drive and continue -- consistently deliver this AUV performance, but as Vic said, we're also focused on Mineral Fiber volume growth. As we look at the leading indicators for new construction, major renovation repair, we believe they provide a favorable outlook, a favorable backdrop for Mineral Fiber volume growth. But we're not resting on the market, and we're taking matters into our own hands. And these initiatives have been designed, they are squarely focused on the prize on the left, and that prize is the 38 billion square feet of latent demand. The orange and the red slices at the bottom of this pie are not a mistake, they represent the annual market for new and major renovation. And to put the prize in perspective, if we're able to influence, activate 1% of this pie to us, with our leadership position, it represents $250 million of top line opportunity. Turning to AS. This is a, as I said, a multidimensional growth story. We are both building this business, but we're also scaling this business. nearly $300 million of sales last year, and that's an impressive story. To put it into perspective, AS was born inside of Armstrong roughly 20 years ago by a few leaders who were focused squarely on the ceilings business and the ceilings industry, who knew and they were right that we could differentiate ourselves by offering a broader portfolio of solutions -- strengthening our specifications. So by 2002, they had started Architectural Specialties focused on sourcing metal tiles, standard metal tiles from Europe, and their business reached about $2 million. 15 years later, the AS became an operating segment for AWI, and we surpassed $100 million in sales. An additional 3 years later, they surpassed $200 million of sales. And now 2 years later, $300 million. And the journey will continue. We will continue to penetrate these categories. You see them sliced here, metal, wood, felt, gypsum or whatever comes next, whatever the A&D community is looking for, leveraging the winning formula, our channels, our brands and our operational strength driving EBITDA margins north of 20% by next year. And here is a great example of the synergies from acquisitions, building and scaling a business. This is our metal category. It's an example of our vision for all of the categories inside of AS. This category has now surpassed $100 million of sales alone by itself. It is the product of 5 complementary acquisitions dating back to 2011. In 2011, we bought a small metal fabricator in Montreal. It did roughly $10 million of business. Now in our hands, in our portfolio, complementing Mineral Fiber, it does well north of $30 million of business, and this segment continues to grow. We're adding capabilities. We're adding products. We're scaling. We're optimizing new footprints. We're growing at north of 20%, with margins north of 20%. It's a terrific story. The metal finishing you see on the side here represents -- finishes from our Moz acquisition in 2020, again, growing the product category, bringing finishing a competency, a capability to the rest of our metal portfolio. So our business development team will continue to look to add these kinds of capabilities and solutions to this category and all the categories. As Vic mentioned in the earnings call last week, we're open for business and M&A. Our pipeline grows, our database of opportunity grows. But we're looking for more than M&A. And somewhat of a shift for us, we're also looking for partnerships, alliances and ventures with a very open mindset, open architecture approach to scaling these businesses with speed and agility in a very less capital-intensive way. but always focused on what the voice of the customer is saying, what are the market trends, what are the market needs. For business development, perhaps no market need has more of our attention today than Healthy Spaces. We believe in our hands, the role of the ceiling, we've got a big role to play and a big opportunity. Nick Taraborelli leads that for us, and I'll turn it over to Nick to tell you more about it. Thank you.

Thanks, Mark. All right. So my name is Nick Taraborelli. I manage our Healthy Spaces initiative here at Armstrong. I'm going to go through reasons to believe today, reasons to believe why Healthy Spaces can be a step-change growth opportunity for Armstrong. This is what we'll go through. I'll take you through the trends, so the Healthy Spaces trends we're seeing in the market. This is a trend that's here to stay. It's not a new trend. I'm going to show you how it's accelerating. We're going to go through the contribution, how ceilings contribute to a healthier space and in particular, indoor environmental quality, and then we'll get into the financials. So just some trend data here we'll start off with. So you can see the trend, the dotted green line towards Healthy Spaces. Owners have been requesting Healthy Spaces prior to COVID hitting in the market. You can see the solid green line there, healthy building trend actually accelerated the slope of the green line, actually when COVID hit. So that 2-year period, you saw the acceleration there. Something like 90% of owners now are desiring a Healthy Space. On the right here, we talk about the macro trends. So this one really shows the acceleration. So if you're familiar with the WELL Building Institute, the WELL Building Institute, they certify -- they've been in existence for 12 years. And in the first 10 years, they certified 1 billion square feet of healthy spaces. Over the last 2 years, they certified another 2 billion square feet. So a total of 3 billion square feet. That's a significant acceleration in the number of WELL healthy certified buildings out there. Work from home is a big trend. I'll show you some more data that I have on that, but it looks like it's moving to this hybrid model, where people are going to work from home part of the time and they're going to work in the office part of the time. And then the square feet per worker, 25% increase in the square feet per worker. So that's spreading people out. If you had been in this room 3 years ago, there would have been a ton of chairs and everybody would have been packed in. And look where we're at now. Everybody is spread out. There is at least 6-foot of social distancing out there, and that's going to be the norm. It's not going to just be the norm in a presentation room like this, but it's going to be the norm in open-plan office, and that's a trend that helps our business. And then the federal stimulus that Vic mentioned, $190 billion that's going to be spent through 2024 on the education segment. So some tailwinds that we have at our back here are some trends that are really going to help our business and help us accelerate the replacement rate for ceilings. So Healthy Spaces is really needed in all spaces, but I'll just focus on health care office and education here. So what's happening in the health care market? Well, health care is looking for more flexible spaces. When you look at 3 different epidemics or 3 different parts of this COVID variant that came about and you had 3 different variants here, there was almost 3 different surges that happened and they need more flexible spaces in health care. And that could be something like converting a storage area into a different acuity level. So if there is a surge, we can move people into other parts of the hospital. The way you move people in other parts of the hospital, they have to be healthy spaces. They might have to be a pressurized space, a space that controls pathogens and our ceilings help you do that in health care. In the office environment, so right now, all of these employers are trying to get people back to work. One way to get people back to work is offering a more healthier environment for them to work in, something that has more amenity spaces, something that has more collaboration spaces and then in education. In education, everything I'm hearing from the education segment is they don't want to go virtual again. And I don't want my kids to go virtual again. We don't need them at home. They're better off in school. So when you think about what a healthy school looks like, a healthy school has clean air, and we have a number of Healthy Space solutions for the education segment. So all wins for us, the whole changing design environment is a great trend for Armstrong in accelerating [ receiling ] replacement. So I get asked this question a lot here, what's going to happen to the installed base of office if everybody works from home? Now I don't believe everybody is going to be working from home in the future. But what's going to happen? So here's how I see this playing out. In 2019, about 5% of the office workforce worked from home, and there was about 200 square feet per worker. And you can see as you move up that blue line, if you go out to 2024 with the yellow dot here, you can see of 25% of the workforce is working from home. So it goes from 5% all the way up to 25%. As long as the square feet per worker increases, which we believe it will, we believe it will increase 25% from 200 to 250 square feet, you actually maintain the installed base. But what we actually believe what will happen, and if you look at the chart on the right here, this is a standard new office -- healthy office design, 315 square feet per worker. So look at this chart. If you go out to 300 square feet, the installed base for office actually increases. So there is a net gain in office square footage by increasing the square feet per worker. So that's a positive, a very positive impact on our business and the amount of Healthy Space ceilings that we would sell into the office environment. Next, I'm just going to go into why the ceilings? You might be thinking to yourself, well, what's the ceiling have to do with a healthy space. So we went out and we tried to understand the market. So we went out there and we talked to organizations like the World Health Organization. We talked to Harvard. We looked at what the WELL Building Institute was saying. We actually hired a strategic adviser, Joe Allen. He's the Director of Harvard's Healthy Buildings Program. He founded 9 foundations, which are the 9 foundations of a healthy building. So we went out and we took all this criteria, we learned everything we could about the market. And then we came up, we defined what a healthy space is, what a healthy space would look like and the contribution of the ceiling on indoor environmental quality. So things like light and sound and air and temperature. These are all elements of a healthy space where the ceiling can really contribute. If you think about light and sound, we've been playing in those areas. Lighting integration is all about the ceiling. Sound, we've been selling acoustics for many years. Air and temperature are somewhat new to us, and that's where we need to invest our innovation dollars. So let me give you an example here of investing in innovation dollars to get air quality out of a ceiling. So one of the big competitors out here to our new ceiling-based VidaShield air cleaning units are floor cleaning units, okay? So if you can imagine a floor cleaning unit that's gone into a number of classrooms, there's a floor cleaning unit, and it's sitting right up here on the floor. This floor air cleaning unit is pulling all the air in this room to the spot right here. So if somebody is sick in the back of the room, the air is getting pulled there. It's getting pulled across everybody in this room. You don't want your son or daughter sitting right here at this desk because all the air is getting pulled right there to them, potentially contaminated air. What you want is a ceiling-based unit, all the air is getting pulled up. So if you look at this graphic here, all the air in the ceiling-based unit gets pulled up and away from everybody. So we work with JB&B, a Manhattan mechanical engineering firm, to do an analysis on this whole situation. How does a ceiling-based unit compare to a floor-based unit? And they found that there's actually a 14% less exposure of risk to a virus or a pathogen when it's a ceiling-based unit. And when you just take our -- take some VidaShield units, take 2 VidaShield units, you put them in a classroom, there's a 22% less exposure risk. So you're healthier and safer with these units in your spaces. So just an example here, one example of how Armstrong solutions deliver a healthier space. So now I'll get into some recent wins to really show you how these products are being used today out in healthier spaces. First project here, Florida Charter Schools. Florida Charter Schools, Southern Florida, they have over 40 school buildings. They bought VidaShield for every single school building. They're in every -- almost every classroom, 2 units per classroom. Here's a quote from a facility manager there. It's all about knowing -- not only knowing the air is being cleaned, but able to see something in the works. The parents feel a lot more comfortable when they walk into a classroom, if you look at that picture there, and they can see the unit in the ceiling that's actually doing something. There's a lot more comfort in that. So you have the education segment where we're selling our solutions. I'll give you an example of the office environment here, CMD office. This is a lobby in CMD office in Irvine, California. They wanted better air quality, they needed better acoustics and they needed better lighting. Our ceiling solution met all of those needs in this space. Think about this space. This is a space that the lobby -- people are in and out of this space all day. They're worried about the air quality. Our units are in there cleaning the air. Encompass Medical, another one, it's in the health care environment. This is an interesting one. This space was designed for pressurization. Health care spaces are designed for pressurization because they're worried about pathogens going in and out of the room. So there might be a slight positive pressure or a negative pressure. In this case, it was positive pressure. Space was designed at positive pressure and the pressure alarms kept going off. So this facility had to make a choice. They could have made a very expensive HVAC investment or they could install our AirAssure ceiling. The only thing they did in the space was change out the ceiling. They put in our AirAssure ceiling, the pressure alarm stopped going off. The AirAssure ceiling is a sealed ceiling plane. There's gaskets on the sides of the panels. Sealed ceiling plane, alarms stopped going off. Think about accelerating the replacement rate. Think about what Mark talked about, 38 billion square feet of ceilings out in the world, okay? This was a perfectly good ceiling in this health care facility. Perfectly good, absorbing sound. They replaced it with an AirAssure ceiling. They took out the old ceilings, they put in the new ceilings. That's what accelerating renovation is. It's a big opportunity for us. Next, we'll just talk about the financials here. So Healthy Spaces benefits us in 2 ways. So when you think about accelerating renovation, that typical reno rate goes up anywhere from 50 to 75 basis points. It's anywhere from $200 million to $350 million opportunity there just moving to Healthy Spaces and looking for some of those solutions that I talked about. So there's a volume play here, but there's also an AUV play. So that health zone AirAssure ceiling sells for 2x what a typical ceiling stands for. So if we can get the market to take out the old ceiling and put in the new ceiling, we're selling that new ceiling for 2x. Then if they add the AirAssure air cleaning units to that space, it's 4x AUV. So all these classrooms, all these health care, all these environments that we're working on today, they're pulling out old ceilings. They're putting in our new AirAssure ceiling at 2x, then they put in 2 AirAssure units or VidaShield units, 4x AUV. So big opportunity here. And this just shows where we're going with this. The key is ceilings, Armstrong ceilings become a critical part of indoor environmental quality. And that's how we're going to get there. So just to sum up here, the trend is real. There's a renovation renaissance going on right now towards healthier spaces. Ceilings are a critical piece of a healthy space, things I talked about like air quality, acoustics and lighting. And then when you think about Armstrong's brand, our experience in the market, our financial strength, we have the right to win in this space. and we're going to win. And then real quick here, I'm going to be doing tours later on of our living lab space. We have 3 different tours going on after the question-and-answer session. You can ask me questions about the space, and I'm going to just talk about all the different design elements that were put in place there with a number of different partners. So thank you.

We'll take a 10-minute break. So we'll be back at 10:10 to finish the rest of the formal presentations. Exit's to the rear. Thank you very much. [Break]

[Audio Gap] our presentation now with our Senior Vice President of Sales Operations, Jill Crager.

So good morning. I'm Jill Crager, and I'm really excited this morning to talk to you about our digital initiatives. We think about our digital initiatives as strategic enablers, supporting winning the specification in more markets and accelerating the renovation rate, driving both top and bottom line growth. What I'm going to -- what I'm going to talk with you this morning about is how we're reaching those underserved and under-tapped markets and accelerating the renovation rate, driving growth. I'm going to talk you [ with ] about how we're winning the specification and driving average unit value. And also I'm going to talk with you mixed in is just how we're using our digital initiatives for speed and productivity, helping us to scale as we grow. We think about our portfolio as balanced, looking across optimization opportunities, step-change initiatives and our goal for an industry disruptor. When we think about these optimization opportunities, they're focused both externally on our customer and internally on our foundation. When we think about the customers focus on cost to serve and speed in the eyes of our customer. So these are the initiatives that we're working on at any one time, really furthering and tangling us with our customer and also offering our second to none customer experience. Our 3 step-changes are our digital initiatives that are driving our growth strategy. And today, that's what I'm going to focus on with you. I'm going to talk about Kanopi. I'm going to talk about our lead optimization engine, and I'm going to talk about Projectworks. These are all 3 digital initiatives that we believe are going to drive meaningful growth for AWI. Here we provide a great overview of how these step-change initiatives are driving growth for us. The first 2 I'll discuss help us to get to the parts of the market that we don't traditionally influence, either the opportunity is too small. It's in an underserved geography where it's just unknown. Kanopi is our digital platform that's focused on the small business owner and their need for that one-stop shopping, our seamless approach from decisioning to purchase to fulfillment and installation. We're reaching those small business owners and facility managers that really need that direct purchase option. They want acoustic solutions. They do want clean undamaged ceiling tiles. They want a healthy space, and they just want a way to help them solution for the right tile. We're seeing a significant ramp in our chats. Customers want to talk to somebody for that final confirmation before they swipe their credit card. We're offering an easy platform that previously did not exist for these small business owners. These personas are examples of some of the verticals that we're reaching. We had a recent win with an engineering firm, our social media campaign landed in front of them. They realized they needed an acoustic solution. They did some shopping on Kanopi. They ended up on a chat which turned into actually a live call with our inside support team. Once they were confirmed, they felt they had the right solution for their ceiling. They swiped their card, they purchased the ceiling and our installation service. We truly are offering this one-stop solution from decisioning to purchasing, consulting, in this case, fulfillment and installation. Kanopi is making it easy for these small business owners and facility managers to purchase their ceiling solutions. Looking more closely at our lead optimization engine. With this engine, we're driving the highest quality leads to our sales team. we're using machine learning to ingest multiple data sources. We're building out and qualifying and scoring sales leads and then passing them off to the sales team. These high-quality leads are served up to our sales team, and it's eliminating the need for them to go search for their next opportunity, allowing them more time to spend on solutioning and selling, closing more jobs. Additionally, our optimization engine is adding capacity by eliminating the need to manual qualification. Our inside sales team is now able to focus on that 60% of the untracked market, that small repair and remodel opportunities, where we were not previously influencing. We are now able to address all opportunities, not just top opportunities. In 2021, we saw an increase of 50% in the number of leads that our inside sales team were able to process. They're able to close using the optimization engine with these high score leads. We're able to scale the business without adding additional salespeople. Focusing on the highest score leads also generates an increase in average unit value. We saw 20% for the leads that have flowed through our optimization engine in 2021. Our lead optimization engine is helping us reach that 60% of the untracked market efficiently. We're getting in earlier. We're reaching more customers, and we're closing more work. So ceilings are getting more complex, and we're solving for complexity with Projectworks, our third initiative. Projectworks is our design service, giving our customers one source for all their design needs, from design through preconstruction. We're providing fast, accurate, comprehensive design packages to our customers, enabling them to better estimate and also understand the scope of work. The service is really important as our ceilings are complex and some of our more complex solutions require some design services. Our build materials provides a comprehensive list of exactly what components are needed and exactly how many are required for a successful installation. Our optimization ensures no overestimating, which means accurate bidding and no waste. This service integrates our sealing solutions into one package, eliminating complexity. We're no longer taking multiple quotes for different types of ceilings in the space. We're combining them all together into one nice [Audio Gap] techs and designers to our awareness campaign. Our strong design automation tools supporting Projectworks allows us to be more productive, providing this service at a speed none of our competitors have today. And you're going to get to see a demo of this later this morning as part of your rotation through the tours this morning as well. With our design automation tool, we're able to service a larger number of projects and significantly less time. So in closing, our step-changes are supporting our growth strategy by unlocking access to these previously untouched markets for repair and renovation. We're driving productivity, allowing us to influence that 60% of the untracked market that we weren't able to get to before. We're providing a design service that offers speed and accuracy for all our products in both design and preconstruction, we're enabling us to win the specification and drive average unit value. Our power of focus means we are uniquely positioned to tackle the inefficiencies in our markets with our digital tools. We're well ahead of our peers in this area, and this further differentiates us. We're using digital to enable our strategy, bringing meaningful tools to the market to support our growth. I'm really excited about our ramp, our success so far, the progress that we're making and our road map for future support of the strategy for growth. Thank you. And with that, I'm going to turn it over to Brian MacNeal.

All right. Good morning. Still morning, right? First, I want to thank everybody, both on the call , who are watching live and who may watch the replay of this and then especially the folks in the room. It's great to see everybody live again, especially here in the room. And a quick thank you to some of the folks behind the scenes that have made this happen. Theresa Womble; Dan, you've [ meant ]; [ Hanna ], who some of you met at the lobby; and then [ Meredith ], who runs all of our facilities, you'll probably get a chance to meet her but she -- the execution has been awesome. We're not quite done yet. And I'm sure many of you who are going on the plant tour will have a great tour. The team over there is very excited. And so as I step back now and get close to the end, what are the financial implications of what you've heard today? And what you're going to hear from me -- too far. All right. Chris, let's go back one. [indiscernible] . Here we go. Excellent. Vic teed it up in the very beginning, one of our biggest value creators is AUV, and we're not going to take our eye off of that. We've, in fact, strengthened it with some of the initiatives you've heard about. On the AS side, we're going to continue to find those complementary acquisitions that add capabilities and strength in that AS business and the Mineral Fiber business, which will help solidify that leadership in that AS space as we continue to penetrate that market. And then third, around capital allocation, a very consistent, clear capital allocation set of priorities, and that's not changing going forward. So AUV, our biggest value creator, you've seen this chart now a couple of different times. On that left-hand side, AUV stands for average unit value. And in the simplest terms, it's taking the selling price divided by the square feet, it's the combination of getting like-for-like pricing ahead of inflation, and then also mixing up our portfolio. Mark touched on the innovation, the history of innovation, our 40 -- almost 40% now product vitality, that helps reinforce that mix-up opportunity to continue to grow at this level, if not higher. Same thing for like-for-like pricing. It's not just about inflation. You heard about the winning formula and all the components of that, not just innovation, but broadening the portfolio, the quality and more so, even more important now, the service piece. Some of you have heard me tell the story, how do you justify price with service? Well, especially in this day and age with labor tight, getting the right product at the right place at the right time is super critical. And actually, Jill runs the customer service team, their team is unbelievable at this. We're the only manufacturer that will allow contractors to change what's on a truck within 24 hours of shipping. Now we tell them 24, but they may call 12 or 10, even sometimes less, and we'll make the change. That way they can manage their working capital and get the right product at the right place at the right time. That's a service, especially right now that's very valuable and substantiates our pricing activities. And that strong AUV on that left-hand side has driven and yielded with the other value creators, a nice strong progression in EBITDA and EBITDA margin. And we're not done there yet. You'll see in the upcoming slides how we're going to continue to drive that price and mix, productivity and drive that acceleration in the EBITDA growth. That EBITDA growth has led to a very stable and steady and increasing free cash flow. And you can see what we've done here on the left is also benchmarked ourselves against our Building Product peer groups, clearly outperforming them on that left-hand side. Strong free cash flow. Our free cash flow margin is just under 20% this past year. And you'll see in our guidance and our kind of value creation model that we're going to accelerate that free cash flow margin. There's very few companies generating almost 20, if not more percent of sales, and converting that into cash. And what that allows us to do then is to turn around and have a very balanced capital allocation priorities, where we can allocate capital to all of those priorities, and it's not going to change. You've seen the history on the left-hand side, a nice balance between investing back in the business, buying companies through acquisitions and then returning cash to shareholders, a very balanced approach. And you'll see here very shortly for those who haven't read ahead, we're upgrading our outlook on free cash flow generation to grow at 15% to 20% to continue to fund all those priorities. So real quick, just to state it again, they're not changing. As you look at that first priority of investing back in this business, both in CapEx and in SG&A., we've got a business with an ROIC just under 20%, that's now going to grow above 20%. And so those -- that investment back in this business with the high margins, the high ROIC, is our first priority. And you've heard a little bit about those investments from Mark, Nick, Jill, we've been investing over the last few years. And then in the CapEx side, we've invested in return-seeking type of investments that drive the productivity in our business at roughly a very consistent 3% year-over-year. So investing back in the business, number one. Number two, and you'll see a slight change here, Mark alluded to it also, acquiring companies, mostly in AS. They tend to be small mom-and-pops, but they help drive capabilities and differentiation in the marketplace. But we've expanded that definition slightly to more of a business development definition. So it's not just acquisitions, it's partnerships, like 9 Foundation, that Nick referenced, and other partnerships that can help accelerate our digital and Healthy Space initiatives. And then third, we'll return excess cash to shareholders, both in the form of a dividend and a share repurchase program. So given the great cash generation this business has, we can do all 3 of these things. You've heard about the investments. And we've always had very consistent value creators around that AUV. I mentioned productivity, AS double-digit growth as it penetrates that market. One of those missing pieces has been Mineral Fiber volume growth. And based on the initiatives you heard today, and you're going to see and experience some of that later on the tour, as we look forward, we see a nice market tailwind that 1 to 2 points of Mineral Fiber volume benefit and then the initiatives driving another 1 to 2 points to get us to a 2% to 4% volume growth outlook. Now some will look at that and say, "Well, that's pretty low. But when you've been flat to negative, slightly negative for the last 10 years, that's a pretty big step-change for us. And from a value creation standpoint, that volume falls through at 60% variable margin. And I'll talk a little bit more here in a second about some of the investments there and the timing of those after I go into AS. In Architectural Specialties, I want to call your attention to the bottom left-hand corner, that box. One of our primary screens, and you've heard, again, Mark talked about this some and Vic and I over the years, one of the screens is how does it complement and strengthen that Mineral Fiber business. It's not a usual screen that people use for acquisitions, but we're very diligent to make sure we understand the strategic rationale for that acquisition and how it can actually help Mineral Fiber. Now it also tends to help AS, too, but it's one of those screens. And you didn't see the other screen -- the other screens we use. We're very diligent, I'd say, and rigorous in our process. We did not complete an acquisition last year. We did 3 of them at the height of the pandemic or the start of the pandemic in 2020, and we've done 8 over the last 5 years. So as you switch to the upper right, you'll see some of the economic returns we're experiencing from those acquisitions. At a time of acquisition, right around 9x is the purchase price. As we look out 18 to 24 months, the post-synergy multiple is right around 7. So we're getting some nice multiple arbitrage, if you will, from the acquisitions versus how Armstrong is being valued overall. And then on the bottom right-hand corner is a picture of AS, and how those acquisitions have helped accelerate that growth in AS. As we sit here today, the EBITDA margin sitting at 14%, we're not happy with it. I know Mark's not happy with it, and the team's not happy with it. And so over the next 2 years, 2023, so next year now, we'll get back to that 20%. And as we look out further, based on that organic growth of double digits or higher, we should see a $500 million business with over 20% EBITDA margin. As I look back at the investments and SG&A, you can see the blue -- the purple bars on the left-hand side. This is the absolute dollar spend in SG&A. And as we've mentioned, we have been investing there. So as you see that increase from 2016 to '21, some of that is digesting and integrating the acquisitions we've done, and then some of that is the investments we made behind healthy spaces, innovation and digital. We're going to continue to drive higher spend there behind those, but the inflection point is here. In 2023, we'll start to see the benefits of those investments outstrip the investments we've made and start generating return. And so as many of you looked at our '22 guidance that we released a couple of weeks ago, there's an implied Mineral Fiber slight margin -- EBITDA margin contraction. That's temporary. That's another year of investing behind digital and healthy as they ramp up and then they start returns in '23. And you can see that baked into our guidance coming up here on the right-hand side. We expect to accelerate net sales from 6% growth to 10% to 13% growth. And I don't -- man, it always happens to me. On the EBITDA side, accelerating from 5% growth to 12% to 15% growth, quite a step change in both the top and bottom line as those investments start to now hit those returns. So that brings me to our value creation model. As we look out over the next 5 years, we see sales growing 10% to 13%, I just touched on, and you can see some of the underlying assumptions. Mineral Fiber volume, 2% to 4%. Strengthening AUV, growing at 5% to 8%. You heard some of the great opportunities we have to mix up this business through innovation, through project work specifically. Acquisitions will be incremental to this growth. And as you move to the fall through there, we'll continue to get manufacturing productivity, 60% incremental fall-through from the Mineral Fiber volume growth. SG&A as percent of sales will come down below 20%, as we start to get that return. 20%-plus EBITDA margins in AS and Mineral Fiber, at 40% plus. WAVE will continue to grow double digits, very consistent with Mineral Fiber. So we translate that EBITDA growth into free cash flow, 15% to 20% growth in free cash flow. Very stable level of CapEx. Yes, we've moved it up some, but we're seeing some great opportunities to generate returns in our capital spend. And again, that ROIC is sitting at just under 20%, and so it's a good investment to do so, investing back in that CapEx, and that ROIC is going to grow to over 25%. So I appreciate your time today. And with that, I'm going to pass it back to Vic to wrap up.

Thank you, Brian. Brian always gets choked up when he's talking about the numbers, especially -- did you notice where he got choked up most on the SG&A page as any good CFO. But let me just put a wrap on this quickly so we can get to Q&A. Again, I know what you heard, I hope that you heard that we have a strong management team, and I'm very proud of this management team. I'm very proud of the organization and how they continue to execute day in and day out. So again, I hope that you experienced that this morning. Again, the other thing I hope you heard is that this business has always been a strong business, but with the power of focus, it's getting a lot stronger. The value drivers that have -- that are foundational basically for this business are getting stronger, and it really is the platform for us now to grow from here. You heard from our [indiscernible] innovation that we're the innovation leader today, and we're being very purposeful about it. We're going to be the innovation leader going forward. It's a big enabler for us on those value creation drivers but also for driving Mineral Fiber volume growth next. You heard from Nick that the healthy spaces, the change is already made. The way we think about our spaces is never going back to the way it was before, and it's a tremendous catalyst for renovation activity, a reason for people to renovate their spaces. And you heard from Jill on the digital front. The digital front is got a lot of benefits for us. She talked about productivity. The efficiency that digital tools bring, and you guys know this in your own lives, the deficiencies that digital tools bring will allow us to scale the business and grow efficiently, continue to get good operating leverage on our growth. We're excited about that. And she talked about how cost effectively we can reach out to new customers who are underserved today and who are inactive. They're not doing renovation, but now they can -- we can stimulate demand by reaching out, touching them in a very cost-effective way. It's an exciting platform for us going forward. And again, we have secular tailwinds like we haven't had in the decade, and that feels really good, and we're innovating into that to make sure that we capture our fair share of that tailwind. Again, the building blocks are in place. We've been investing in these initiatives for the last couple of years. This feels like a really good time to be talking about because we're getting the traction and the confidence behind what they can deliver for us going forward. So they're in place for us to once again accelerate the growth of this company. And with that, we're going to move into a Q&A session, and I'll turn it over to Theresa.

Yes. So we're going to pause for a few minutes to prepare for Q&A. We'll let the management team get situated on the stage. Those of you joining virtually, we have a chat box to submit your questions. We will be going intermittently between.

This is Phil Ng from Jefferies. I appreciate the presentation, very informative. I guess, Vic, big macro picture. Certainly, there's a lot of uncertainty in the world these days, a lot of inflation and rates going up. But I guess what's the biggest risk to your longer-term targets? I mean you're assuming a pretty sharp acceleration of EBITDA growth in top line? That's my first question. And my second question is, on the AUV, you're assuming a pretty noticeable step-up. Can you kind of help parse out what's price versus mix? And with that acceleration in AUV, could we see a step-up in that 60% incremental margin target you guys kind of laid out in the past?

Yes. Phil, thanks for the question. On the macros, clearly, we're watching what's going on, right? And the inflationary environment really was strong in '21 and hyperinflation actually on the steel and the aluminum side of the business, right? Again, as you know, we were very successful in staying ahead of that inflation, but we're paying attention to it, on the supply chain side as well, making sure those are not disruptions. Our teams are building contingency plans around that. The one thing about the inflationary environment, the macro environment that you're referencing there in terms of inflation, it's likely we could stay at higher inflationary levels for a while. But again, this company has got a proven track record on being able to price ahead of inflation, and it's the value creation that we have with our customers that allow us to earn this place. And again, we're going to stay ahead of the inflationary curve, whatever that is to make sure that we're getting enough price over inflation so that we can continue to expand our gross margins. On the AUV side, again, longer term, so stretch it out, this balance of 50-50 is about right, I think, for you to think about this price. About half of the AUV improvement and mix the other half of the improvement. In the short term, in this higher inflationary environment that we're in right now, we can expect a little bit more price than mix because of the inflationary environment. And that's very typical of what we see -- that's what we saw in '21 in particular, and I think in '22 and maybe even '23, you might see a little bit more price in that AUV growth and mix. But over time, it should balance out as it has historically into that 50-50 mix. I'm sorry, about margins?

[indiscernible]

Yes. Yes. As we get on the leverage side of the SG&A investments, we should be continuing to expand our EBITDA margins. Again, if you watch what we've been able to do on the gross margin line, we've been able to stay ahead of inflation to the point where we're expanding gross margins, which is really impressive when you think about the amount of inflation the team has faced and the ability to stay ahead of it on price. There hasn't even been a lag on price over inflation. So again, an excellent performance. The team has got a great ability to do that. So I think at the gross margin level, it's proven we're going to continue that. But as Brian, I think, spoke to, we're going to invest again in SG&A behind these initiatives you heard about this morning. And so -- but as in '23, we start to catch up with our sales growth behind these initiatives, that will catch up to the SG&A, and we'll start to get good operating leverage. We expect to expand EBITDA margins going forward.

Ray Jadrosich from Bank of America. I wanted to first ask on the AS segment. Can you talk about where your market share is today? And then where your assumptions get you to in 2026? And then also, in terms of the margins in AS, you have really healthy expansion. I think 600 basis points in the next 2 years that you're baking in. Can you just give us more color on how you get there?

Yes. I'll let Mark address that second part, but the AS segment, we've kind of sized approximately because it's a very fragmented segment. We've sized it about $1 billion in the Americas part of the business. So you can see, we're in that 20% to 30% share range. It's kind of how we gauge it for now. I say it kind of loosely like that because the more we peel this back, the more opportunities that we see within this Architectural Specialties space, that gets us excited. So that TAM could be moving around on us a little bit, but the point of it is, and I think your point of your question is, we're in a relatively low share position in Architectural Specialties, which gives us a long runway still for us to penetrate this market faster and ahead of where the market is growing. And then on the margins, I'll let Mark speak to that.

Sure. It's really about doing what we do best inside these new businesses. So it could be pricing, it could be operational excellence, but it's bringing that discipline and those practices to these new businesses in our hands for the first time and also realizing the scale of having multiple locations and network of operations that haven't felt the power of that operational strength in the past.

It's Keith Hughes from Truist. Your 5-year guidance is a real step change in terms of the revenue expectations. The EBITDA didn't move up as much as I thought it would given that revenue expectation, and there's just not as much margin gain. Given that you talked about margins moving up in AS and then the SG&A leverage you discussed, is there something else cost-wise going on here that would present faster EBITDA?

Brian, do you want to take that?

Yes, I'll take it. So as you can imagine, we start -- you saw on the chart we had, as we continue to scale that digital investment in healthy spaces, we'll continue to put some additional SG&A dollars in there, but there's still a nice fall through to see margin accretion at the EBITDA line. So there's still a little investment in SG&A continuing.

And just to extend that one in on AS, getting to $500-plus million, this looks like an organic growth rate in the low teens, kind of what you said in the slide. Are you making no assumptions, I assume, for acquisitions. And our acquisition is just not going to be a big priority in this space moving forward?

Okay. I'll take that.

Well, go ahead. Brian wants to answer that one.

No, we're not taking our foot off the gas [indiscernible] for business on the acquisition side. And so you're right, we've not assumed any acquisitions in that look, and we'll continue to find them. We'll be pretty disappointed if we don't do at least 1 deal in 2022, but our intent is still the same. 1 to 3 deals, spend roughly $50 million. They're smaller privately owned mom-and-pop shops, kind of $10 million of sales to $50 million range is the sweet spot. And so the pipeline is strong, and we've got the team looking at it and building and fostering relationships. That timing of when the deal closes isn't always up to us. It's usually about where they are in their succession planning when they're looking at retiring and being ready to sell. We don't see a lot of competition for the targets we're talking to. Most of the time, the targets know us, and there's a predisposition to want to talk to us about something and getting something done.

Garik Shmois, Loop Capital. Two questions. First on Architectural Specialties. If you hit your targets, you'll be a 20% margin by next year. So just curious, in the slide deck, expecting to be over 20%. Any way to calibrate the potential upside in Architectural over the '23 to '26 time horizon? And then secondly, in Mineral Fiber, as you expect to see an acceleration in volume, what does that mean for inventories and working capital, both within your production as well as at distribution?

Brian, why don't you take the second half of this.

Yes.

So let me address the Architectural Specialties question because the 20% is kind of a minimum threshold for us that we think and we understand from what we bring to this platform that we should be at 20%. There's lots of points of leverage with our Mineral Fiber business. That gives us a unique capability to make money in this segment versus a lot of other smaller places. You just don't have the scale to make money in this business. So 20% is kind of a minimum threshold that we put out there for ourselves. And by the way, which is -- when you benchmark with other building products companies, we put this in kind of the top ranks of building products companies and that would make us feel really good about, again, leveraging -- those points of leverage on our Mineral Fiber business. With that said, we're not looking to maximize margins here in the short term. We want to get to 20%, but we think it's a healthy place for us to be. We expect to get better at this business so that we could have incremental improvement in margins, but this is our growth engine. We think there's a long runway ahead of us here, and we want -- we don't want to sacrifice topline growth to try to maximize margins too early in our growth phase. So that's how we think about it. Let's get to the 20% and then incrementally through productivity and getting better at this, we'll march it higher. But that's not our intent to drive it up into the 30% range or something like that. That's not our objective in the next 5 years. Brian, on the working capital.

Yes. So first, let me get some stats out there. So our net working capital is roughly 24 days. I mean it's pretty darn good to begin with. We run at just under 10% of sales for total working capital as we see Mineral Fiber volume growing. We are and AS growing. We are going to see working capital natural move up. So it becomes a little bit of a headwind on free cash flow, but at the same rate we've experienced in the past. So we'll keep that working capital somewhere between 9% and 10% of sales as those sales grow.

We now have a question from the online audience.

Yes. This question is from Kathryn Thompson. What end markets is healthy spaces currently focused on? And are there any end markets that would fit well, but currently are not being heavily targeted?

Yes, one second. Yes. I think, like I said, we're -- all spaces should be healthy spaces. Where we're focused today, given the government stimulus money, $190 billion, we're focusing first on education, health care and office as our main focus areas.

We have another online question related to healthy spaces. I'll feed through here from John Lovallo. Has penetration of your healthy spaces offerings been as rapid as initially expected? And if not, what has held it back? And what do you foresee as a catalyst aside from the approximately $190 billion in federal education stimulus?

Let me take that. I think the answer to that -- and it's a good question from John. The answer to that is that it's not been the snap in poll or demand as we would have initially expected. Sitting in 2020 in the height of the pandemic and the emotion of the pandemic, I think the back-to-office has taken a lot longer than we all expected. I think the complexity of government spending in the education we're also finding is a much longer decision cycle than we anticipated. So we're no less excited about it, but I think it's a fair question that it's not happened as fast as, I think, any of us would have expected, given the conditions and the complexity in the marketplace.

Thank you. Next question?

Susan Maklari from Goldman Sachs. The first question is, the digital initiatives sound like they're very focused on smaller businesses out there, the ability to sort of tap into that market that you haven't been as deep in. But is there any risk of cannibalization as you think about some of your bigger customers perhaps taking advantage of some of those opportunities that are out there? And what could that mean for the business? And then second question is the 20% margin in Architectural Specialties, does that incorporate the impact of any incremental M&A that happens in there? What could be the sort of path if you do ramp up those deals?

Yes. Mark, why don't you hold the AS question first, and then, Jill, do you want to answer the size of customers and maybe the potential conflicts of that?

Yes. So Susan, you're right, we're very focused on that underserved market with Kanopi because -- and it's a convenience buy, right? So we've set it up so that it's a convenience buy. If we do get big opportunities, we're passing those right through our distributors and letting them service it. We're hopeful that we're driving demand with our social media campaigns and some of the advertising we're doing. Regardless of where it goes for those underserved markets, its growth and that's a great thing.

And then on the AS side, that excludes any acquisitions, any future acquisitions. So we'll get back to 20%-plus EBITDA margins. The assumption, there's no acquisitions in that number.

[indiscernible]

It is possible but as you look back at 2020 acquisitions, their margin is actually higher than the AS segment margin. So we'll see which deals come forward. It's possible. It's possible.

Adam Baumgarten, Zelman. Just on those potential partnerships in AS, would that include additional applications outside of ceilings and walls potentially?

Yes, let me take -- so we'll talk about partnerships for a second, but we are really focused on ceilings and specialty walls right now. I think we laid out -- we have a tremendous opportunity to grow our business, staying focused on that. So from a business standpoint, that's where our focus is. The partners in which we partner with to help us with healthy spaces in particular is really where our big focus on partnerships is. Although we're partner all the time with third-party suppliers, for example, in AS that we don't want to own or acquire, we want to partner with them. But the partnerships in the healthy spaces are certainly outside of our business, if you will, ceilings and walls. They're in HVAC, they are in diffusers -- they're in other areas that by partnering, we can have a stronger product offering to suit ourselves. Does that clarify what you're asking there? Yes. But we're -- again, I think we don't need to go outside of ceilings and specialty walls for us to find growth as we presented today.

This is Miles Petrie from BBH. We didn't get a chance to talk too much about WAVE within that new value creation model guidance. You mentioned a guide to double-digit equity earnings growth from the JV. Can you talk a little bit about the volume drivers of that business over the next 5 years? How that compares to Mineral Fiber? And what the drivers are for growth if the bottom line being faster than the top line?

Brian, do you and Jill want to take that?

No, I'll take it. Jill mentioned some of this in her digital side, but the digital initiative is also helping WAVE on the grid side. And she can go deeper into that with you a little bit, but if I break down WAVE for a second, some volume growth, right? Clearly, as it's sold as a complete unit, when you look at ceiling tiles and grid. So we see that economic stimulus help them pick that up. And then they continue -- they always have to get price over inflation and grow margins through that. But on the digital side, how does that help WAVE?

Yes. We're including WAVE and all of our digital initiatives are part of what we do, but very specifically, Projectworks focuses on the specialty grid side and really, again, takes those complex solutions and make them easy. So we're driving that service as well.

And one thing I'll add there is, those products going through -- there's all WAVE products, but some of those specialties are at higher margins. And so they help mix up WAVE also.

Next question in the room? Any questions online? Okay. Okay. Great.

They're trying to help you finish on time. Aren't they? That's great.

We're on time. Okay. This [ slide ] concludes the formal part of the day. Those of you who are joining virtually will be able to see a sample of the demonstrations we are about to do on campus with a video, and we appreciate you joining our event today.