Good day, ladies and gentlemen, and welcome to Third Quarter Armstrong World Industries Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will follow at that time.
As a reminder, I would now like to turn the conference over to your host, Tom Waters, Vice President, Corporate Finance. You may begin, sir.
Thank you, Nicole. Good morning and welcome. Please note that members of the media have been invited to listen to this call and the call is being broadcast live on our website at armstrongceilings.com. With me today are Vic Grizzle, our CEO and Brian McNeal, our CFO. Hopefully, you have seen our press release this morning and both the release and the presentation Brian McNeal will reference during this call are posted on our website in the Investor Relations section.
I advise you that during this call, we will be making forward looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong World Industries, please review our SEC filings, including the 10 Q filed earlier this morning. Forward looking statements speak only as of the date they are made. We undertake no obligation to update any forward looking statement beyond what is required by applicable securities law.
In addition, our discussion of operating performance will include non GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation. Both are available on our website. With that, I'll turn the call over to Vic.
Thanks, Tom, and good morning, everyone. It's good to be with you today to review our quarterly results and our outlook for the remainder of 2018. Third quarter was a busy quarter with strong results. Our top line expanding 11% in the quarter was the best performance in seven years. Adjusted EBITDA grew double digits.
Free cash flow grew 20%. Our team earned enough like for like pricing to cover inflation. We closed another acquisition in Architectural Specialties. And we received the entire $330,000,000 in cash from the sale of our international operations. The third quarter results were strong in both sales and EBITDA, both up double digits.
Total company sales growth of 11% continues the positive trend that began in 2017. We have broken out of the multi year pattern of low single digit growth and have delivered high single digit growth for the second year in a row. With the acquisition of Steel Ceilings in the quarter, our second this year, and together with an improving acquisition pipeline, our confidence is growing that we can continue strong sales growth. Sales in our Mineral Fiber business were up 7%, driven by strong like for like pricing and mix gains, which together drove higher average unit values or AUV. Price realization in the quarter was sequentially stronger than the first two quarters of the year.
In both the quarter and year to date periods, we have earned price increases ahead of the inflationary headwinds. Our sales and distribution partner teams have done a fantastic job on pricing in these inflationary times. Also supporting our higher AUV was the improvements in mix driven by stronger sales in our high end products. The Total Acoustics and Sustain families both grew significantly faster than the overall Mineral Fiber category. Mineral Fiber volume overall was fractionally down in the quarter.
A modest improvement in the education sector was offset by softness in the home center and independent retail channel. Now as a reminder, the retail channels, that is Home Depot, Lowe's, Menards, etcetera, can be quite lumpy quarter to quarter due to swings in their inventory levels and resulting order patterns. As an example of that, even though we had a softer third quarter in this channel, our month to date October shipments in this channel are up double digits. The Mineral Fiber segment adjusted EBITDA was up 7% in the quarter. Price and manufacturing improvements drove expanded gross margins.
The Architectural Specialties segment continued its strong performance with revenue of $48,000,000 up 37% in the quarter. Organic sales were up 26%. Our organic growth is significantly outpacing the underlying market. And this performance reflects our team's increasing ability to win large projects and grow share through our industry leading specification and service levels. This team is also improving its execution and operational efficiencies.
And as a result, adjusted EBITDA is up over 40% from last year, expanding margins 170 basis points to 25% in the quarter. This team is doing a great job and I'm very proud of the business they are building. During the quarter, we completed the acquisition of Steel Ceilings, adding additional capability and capacity to our Architectural Specialties portfolio. Based near Columbus, Ohio, Steel Ceilings is a manufacturer of both standard and custom metal ceilings and walls, including architectural, radiant and security ceiling systems. Now, radiant and security solutions are new additions to our product portfolio.
I know the team is excited to add them to our industry leading portfolio to drive further growth. Under our ownership, we expect Steel Ceilings and Plasterform to thrive as Tecum has. The combination of Armstrong's sales and distribution platform, our operational expertise and a modest amount of capital has proven to be a powerful mix. Year to date Tecnam sales are up 17% after a long history of low single digit growth and EBITDA margins have expanded over 600 basis points to 26% in less than two years. And with regard to the sale of our EMEA and Pacific Rim businesses, and while the transaction isn't closed yet, we have received the total gross purchase price of $330,000,000 from Knopf.
We returned $150,000,000 of those proceeds back to our shareholders through an accelerated share repurchase program, which concluded on October 8. Delivering on our commitment to return the majority of the cash realized from this transaction to our shareholders was important to do, and we're very pleased to have executed on this commitment. And with that, I'll turn it over to Brian for a deeper dive into our financial results.
Thanks, Vic. Good morning to everyone on the call. Today, I'll be reviewing our third quarter and year to date 2018 results. But before we go into the financials, as a friendly reminder, I'll be referring to the slides available on our website. Slide three details our basis of presentation.
In addition to our customary adjustments and consistent with our basis of presentation principles, in the quarter and year to date, we adjusted just under $3,000,000 of costs associated with the Rockfond litigation matter as these costs are discrete, unusual and not reflective of our true operating results. Turning now to Slide four for our third quarter results. Sales of $260,000,000 were up 11% from the third quarter twenty seventeen and adjusted EBITDA increased 10%. Gross margins expanded driven by like for like pricing, mix and productivity, including the restructuring benefits previously announced. EBITDA margins did contract slightly due to the impact of recent acquisitions that contributed to sales growth, but was not a meaningful contributor to EBITDA.
Adjusted diluted earnings per share were up 23% aided by our share repurchase program. Year to date, including the accelerated share repurchase program, which closed in October, we have repurchased just under 4,000,000 shares for $256,000,000 Since the inception of our repurchase program in the third quarter of twenty sixteen, we have bought back over 6,900,000.0 shares for $300,000,000 at an average price of just under $55 per share. Adjusted free cash flow improved by $12,000,000 or 20% over the prior year quarter. Net debt decreased by $241,000,000 driven by the receipt of the gross purchase price of the sale of our international businesses. Turning now to Slide five, adjusted EBITDA increased $9,000,000 as the strong AUV gains Vic mentioned fell to the bottom line.
In the quarter, like for like pricing realization expanded from earlier quarters and exceeded inflation again. The input cost increase is being driven by higher freight and raw material costs. Energy costs are relatively flat year on year. SG and A was impacted by $4,000,000 when compared to the base period, where as you will remember, we had a year to date true up of cost allocations to our WAVE JV. SG and A is also impacted by higher incentive plan accruals in 2018, driven by our strong free cash flow performance above plan.
WAVE benefits by $3,000,000 due to the true up in comparison to the base period. WAVE continues to realize price increases greater than steel cost headwinds they are facing. Slide six shows our change in adjusted free cash flow, which grew $13,000,000 compared to the prior year quarter. Cash earnings were down $15,000,000 working capital improved by $7,000,000 and capital expenditures were lower. The other category improved due to the timing of tax payments.
Slide seven begins our segment reporting. In the quarter, Mineral Fiber sales grew 7%. Strong like for like pricing and solid mix gains more than offset a slight volume decline driven by home centers and the independent retail customers. Adjusted EBITDA was up $5,000,000 Price realization was the biggest driver to improved EBITDA and offset inflation. The SG and A and wave drivers I explained for the entire company all appear in the Mineral Fiber segment.
Moving to our Architectural Specialty segment on Slide eight, quarterly sales increased 37% as Armstrong's strong share gains continued and the Plasterform and Steel Ceilings acquisitions contributed. I really can't say enough about the growth the team is driving and the excitement we are creating internally and with our customers in this segment. We are in the early innings of the specialty ceiling and wall opportunity, and we are accelerating our leadership in this space. Adjusted EBITDA in Architectural Specialties was up 47%. Margins expanded over two seventy basis points to 25% as we continue to drive not just sales growth, but operational improvements in this segment.
As we integrate the Plasterform and Steel Ceilings acquisitions, I'm confident we will continue to see EBITDA margin expansion on an annual basis. Slide nine recaps our year to date results. Sales of $736,000,000 were up 8% from the first three quarters of twenty seventeen. Adjusted EBITDA increased 9% and margins expanded. Adjusted diluted earnings per share were up 14%.
Adjusted free cash flow has increased over 80% from last year, driven by working capital gains as the 2017 base period was a use of working capital and 2018 benefited from $26,000,000 in environmental settlement realized in late twenty seventeen but collected in early twenty eighteen. Slide 10 is our total company EBITDA bridge for the first three quarters of the year. Volume, price and mix all contributed to improved profitability. Input costs, including freight and raw materials were headwinds. Productivity in our plants is running $4,000,000 ahead of last year, even as we ramp up new products, capabilities and consolidate production.
SG and A and WAVE are impacted by the timing and one off items I discussed in the quarter. And finally, we add back stranded international costs of $4,000,000 Our manufacturing and G and A restructuring actions remain on track to deliver $10,000,000 of benefit in the year. Slide 11 shows year to date free cash flow. Lower cash earnings are more than offset by the improvements in working capital I mentioned. Capital expenditures are lower as we have returned to a more normalized level of capital investment and the timing of tax payments all contribute to drive the $79,000,000 improvement.
Slide 12 updates our 2018 guidance. As a result of the strong organic sales growth in Architectural Specialties, AUV gains in Mineral Fiber and our recent acquisitions, we are raising our revenue guidance range to 8% to 9% growth versus prior year from our previous range of 5% to 7%. Our adjusted EBITDA range has been tightened, but the midpoint is unchanged. We continue to expect double digit EBITDA growth. We've increased the midpoint of our adjusted EPS range by $0.01 to $3.72 and tightened the range.
Our adjusted free cash flow midpoint has been increased $33,000,000 In October, WAVE paid both Worthington and Armstrong a special dividend of $25,000,000 Periodically, the WAVE Board examines the efficiency of WAVE's balance sheet and after multiple years of earnings growth determined that additional leverage was appropriate and prudent. Post this dividend, WAVE's leverage is 1.6 times EBITDA. Free cash flow is also benefiting from a lower expected cash tax rate and a slightly reduced capital expenditure outlook. To close, I'm pleased that we're able to increase our free cash flow forecast for the year. Even excluding the WAVE special dividend, our business is yielding a 20% free cash flow margin and providing us with ample cash to invest, acquire and return cash to shareholders.
As an Americas only business, our line of sight to future cash flow is clear. As we continue to generate cash in the future, we will remain prudent about deploying it in a balanced fashion into the highest value creation vehicles. And we will continue to maintain a flexible and efficient balance sheet. With that, I'll turn it back over to Vic.
Thanks, Brian. Before we open it up for questions, a few additional summary comments. 2018 remains on pace to be a record year. As an America's focused ceilings and specialty wall company, we've been investing in innovation, manufacturing and selling capabilities to extend our leadership position. These investments are now bearing fruit, delivering both top and bottom line growth.
The revitalization of our Mineral Fiber business is well underway. We are achieving unprecedented adoption rates with total acoustics and sustained products. DesignFlex, our newest, most innovative product line, has now launched into the market and we have already received our first specifications. The Architectural Specialty business continues to outpace the market. We are driving impressive organic sales growth, expanding margins as we go and adding new capabilities via M and A.
And we remain focused on a balanced and disciplined approach to capital deployment to enhance shareholder value. In 2016, when we separated flooring business, we said we would first look to invest in our business, and we've done that. We've invested $100,000,000 to reinvigorate the Mineral Fiber category with innovations like Sustain, Total Acoustics and now DesignFlex. We also said that we would execute a bolt on acquisition strategy in this architectural specialty space, and we have been successful in this endeavor as well as we've now completed three acquisitions in this attractive category. We said we would address the poor returns in our international business, which we have now done through the sale to Knopf.
And finally, we said we would return cash to shareholders. At the high margin, high free cash flow business, we've been able to deliver on this commitment to. In the past two years, we have returned nearly $380,000,000 through our ongoing share repurchase program. For as much as that has been accomplished thus far, there's still a lot more to do. So, I'm looking forward to seeing many of you here in Lancaster next week at our Investor Day to share with you what's next for AWI.
We have an exciting future to share with you as an America's focused industry leading building products company. So thank you for your attention. And with that, I'll open it up for
questions. Thank you. And our first question comes from Nishu Sood from Deutsche Bank. Your line is now open.
Thank you. And first question, just wanted to take a step back for you here. Obviously, a very strong and encouraging sales performance. You're taking up your sales guidance on the higher AUV realization as well as architectural specialties and a little bit from the acquisition as well. EBITDA is coming up less.
If we kind of take a step back to you, is that mainly driven by the increasing costs? And as we kind of look ahead, you've obviously had strong price realization. So how does that if we kind of play the tape forward, what does that imply for as we look ahead in terms of margins and EBITDA gains?
Yes. Nishu, this is Vik. And Brian can add some color too on some of the incrementals. But we're very pleased with the top line as you've noted. It's good AUV, of course, and it's much needed in inflationary times like this.
And we're again covering inflation with like pricing. The mix shouldn't be overlooked here as well. We had very strong growth in the Mineral Fiber segment at the high end of our product portfolio, which drove half of the AUV gains. So I want to call attention to that. That's really helpful also and continue to drive the top line in the Mineral Fiber segment.
And then as you noted, the Architectural Specialties team is doing a great job. And when I think about and look at the Architectural Specialty business, every material group in the Architectural Specialty space is driving double digit growth. That speaks to the broad based nature of the activity in that space and how present our team has become in this space across the country. And I'll add to that, that several jobs over $1,000,000 in size we were serving in the quarter. So again, very broad based and multiple sized projects, not just very large projects.
As that business has been lumpy over time. But I'm very encouraged by the broad based nature of the business, both in size as well as across the categories. So that's going to continue and we expect good things to continue from that business to add to the top line. The shortfall in EBITDA in the quarter came down to really three things. We had slower growth in our Wave business, okay, which adds to that EBITDA line And that was basically primarily due to timing of purchases late in the second quarter ahead of price increases.
And we anticipated that we would have some lumpiness in the grid volume from Wave. The second was we had some accrual true ups around management incentives due to the strong performance on cash flow. I think Brian hit that very well in terms of how well this team is driving cash flow improvements. And so there were some true up costs in the quarter that were specifically linked to those. And then finally, we had some startup issues with the West Coast DC in connection to the closure of our St.
Helens plant. We talked about some of those in the second quarter. We had some of those that fell off or fell over into the third quarter. And of course, we got those behind us as we finished the third quarter. But those are the three things really.
It wasn't a higher inflation costs really driving some of that shortfall. It's some of these one timers, I would say, in the quarter.
Got it. Great. And that's very helpful. Second question, on Architectural Specialties, the power that we're seeing now of product innovation and the acquisitions and channeling it through your industry leading distribution network, You're gaining share, I think that's fair to say or clear to say. Is there some way that you can help us understand the pace of your market share gains?
Clearly, it seems to have accelerated as the power of the business model has come through. Can you just help us to kind of bracket that and at what pace that market share gains are going?
Yes, the best I can on that issue. I mean, it's really difficult to pinpoint the number. But let me just again frame the Architectural Specialty business as business that's tied to new construction more, so you've got a bias more to new construction versus renovation. So when you look at new construction, as we've talked about in terms of the market trends, the new construction is the strongest part of the demand out there in the marketplace today. So we do believe there's somewhere in that mid to high single digit growth of new construction activity available out there.
So I think that's probably as close to a benchmark as you could say that the Architectural Specialties segment is growing. It's somewhere in that mid to high single digit growth. So there you go. You bench the delta between our growth rate versus that is probably the best proxy I could give you.
Okay. Thank you.
You're welcome.
Thank you. And our next question comes from John Lovallo from Bank of America Merrill Lynch. Your line is now open.
Hey guys, thank you for taking my question. Mineral Fiber volume in the quarter was down slightly, call it, 1% -ish off of a negative 5% comp in the third quarter of twenty seventeen. And it looks like the fourth quarter comp is, I think, positive 1%. And recognizing that there was some lumpiness in the retail channel, it seems like you would need something like in the order of 150 basis points of year over year EBITDA margin improvement to off of potentially kind of flattish volume to hit the low end of your outlook. I'm just curious if we're missing something here or if that math sounds about right?
Brian, you want to take that?
Sure. So John, thanks for the question. A couple of things there. One, as you look at the calendar, we do pick up an extra shipping day in the fourth quarter versus a year ago. So as you think about the volume piece, specifically on Mineral Fiber volume, as Vic mentioned, we had some timing of inventory with our big box channel, and we're seeing nice double digit growth in October already for that timing.
And then the third piece is, as you drive that down to the bottom line, we mentioned that we'll see about $9,000,000 of restructuring cost benefit in the back half. We saw probably about $4,000,000 of that, and we did see $4,000,000 of that in Q3, so we're expecting five more to flow through in Q4. So that should help bridge as you look at the elements of AUV drivers, some inflation and then the restructuring benefits.
Okay, thanks. And then it looks like accounts payable spiked pretty meaningfully in the third quarter. I'm not sure if you hit on this already, but can you just remind us what drove this and if you expect that to reverse in the fourth quarter?
Yes. We, A, it's spike because we saw some sales rate toward the end of the quarter, especially around AS, and then we expect that to reverse in Q4. Overall, our cash conversion cycle is one of the best. It's like seventeen, eighteen days in total. Okay.
Thanks guys.
Thanks, John.
Thank you. And our next question comes from Stephen Kim from Evercore ISI. Your line is now open.
Hi, it's Steve Kim from Evercore SI. Good job in the quarter. I guess I just wanted to ask, in terms of looking forward in the Mineral Fiber business, do you see any anticipate any changes in the competitive dynamic at all with the change in ownership of USG being bought by Connaught?
Yes, Steven. Again, we get this question a lot. Again, people are thinking about that. We're watching for it, obviously, any meaningful change in the marketplace. I can tell you there's been no meaningful change in the competitive landscape.
And we'll have to wait and see under new ownership what our competitors do. But at the end of the day, what we focus on is really what our customers are trying to go and what they're trying to solve for. And as long as we stay ahead of whoever is our competition and meeting those customer needs, we continue to drive, I think, these kinds of results. So, but really no meaningful change to report on that.
Okay, that's fine. And then I guess as a follow-up, I just want to clarify your answer to John's question about 4Q. I think you mentioned that there's an extra shipping day. You also talked about about the home center lumpiness, it looks like it's recovering here in October and that's great. But just was hoping maybe you could frame what you think the impact on 4Q for the entirety of 4Q may be as a result of the recovery of this lumpiness or the offset to the lumpiness being a headwind in 3Q?
Just because we don't know what exactly what the seasonality looks like as you trend from October, November, December in terms of the size of the overall sales pool and that sort of thing. So if you can just give us a sense of what you think that effect that benefit may be in 4Q?
Yes, Stephen, I think you're referring specifically to the seasonality of that net retail channel.
Correct.
I'll be honest with you, there's not a ton of seasonality in that channel. The lumpiness comes from the inventory management in the channel. And of course then we get large chunks of orders corresponding to those swings in inventory. So it's more of that dynamic than actual seasonality. But what we see in the retail channel given what we're experiencing in October and again, in October, and again, you can go back and compare this over several quarters.
If you remember, actually, last year third quarter, we had a pretty strong buy by the retail channel, by one of our, channel partners in particular that drove a pretty big buy in. So we were comping a tough base to start off with. Again, back to that lumpiness. But when we look at the full year and even the second half, this kind of evens out based on what we're seeing in October. So we're going to be as a Mineral Fiber business, we're going to be right in that range of zero to two that we've been out looking all year.
We feel confident that what we're seeing in October is going to make sure that we enable landing in that zone. So we like what we see in October, and again, I think it's going to even itself out and put us exactly where we expect it to be.
That's great.
No, that's encouraging.
Steven, I would add
to that.
Yeah, as you think about that point that Vic just made, that's really around the question on the mineral fiber volume, right, so you pick up an extra day plus just lumpiness. But then as you think about the EBITDA target we've got to hit in order to hit midpoint in Q4, real strong AUV in Q3, right? We show on our bridge there roughly $12,000,000 of benefit from AUV in the Mineral Fiber segment. Obviously, given seasonality, Q4 won't be as high as that dollar value, but the percents will hang pretty close to it. Obviously, AS sales growth, and then the restructuring of $5,000,000 benefit that we should see in Q4 to bring us to a total of $10,000,000 for the year.
Great. Thanks very much guys. Great. Thanks, Heath.
Thank you. And our next question comes from Phil Ng from Jefferies. Your line is now open.
Good morning, guys. This is actually Maggie on for Phil. I was wondering if you could provide some color on how to think about margin and seasonality of the plaster form and steel sealings businesses? And what's a good base for how to think about that going into 4Q? I know steel ceilings closed sometime in the middle of 3Q.
Thanks.
Yes. Hi, Maggie. This is Vic. The seasonality of steel ceilings and plaster form, I think will follow very much like the architectural specialty business and like our Mineral Fiber business as well. We tend to have a lot more activity in the second and third quarters than we do the first and the fourth quarters.
So those two businesses should follow very similar patterns as the rest of our business, frankly. Specific to the earnings progression of those two companies, as I reported, those two companies were relatively new acquisitions to us, of course, in the third quarter and brought very little EBITDA contribution. While it added almost two points to our overall top line, it didn't bring a lot of EBITDA contribution. And again, that's not too dissimilar to what we experienced with Technum when we first bought Technum. And what we expect to do with steel ceilings and with Placerform is bring the efficiencies and the scale of the Armstrong go to market capabilities to make those businesses more efficient and scalable so that we can drive earnings growth.
So I think we'll be driving a disproportionate growth level in those two businesses as we catch up to where those businesses should be performing under the Armstrong system. So again, that may be a little out of phase with the overall seasonality that your question was referencing. So hopefully that's okay.
Got it. Yes. Just on the margin side, what's kind of the expected timeline to bring those margins up to the overall company level?
Well, we're working at it right away. So we're after it right now, but we've already started that process. I think a good proxy for how we'll ramp those is what we've done at Tecnam. And it's been an eighteen to twenty four month period of some capital, but also some of the process improvements to get to the high EBITDA margins that we have in Technum. So it's I think a good one to two year timeframe is a good proxy.
Got it. And then just one follow-up. It sounds like the accelerated repurchase program closed at the beginning of 4Q. Is there any more share repurchases baked into the full year EPS guidance? Or is that just share repurchases to date?
Hi Maggie, it's Brian. So our share repurchase program still has plenty of authorization left in it. We'll continue to look at open market and other foreign vehicles for share repurchases in November, December, but the ASR itself is completed.
Got it. Okay. Thanks guys.
Thanks Meghan.
Thank you. And our next question comes from Mike Wood from Nomura Instinet. Your line is now open.
Hi, this is Mason Marion on for Mike. So you called out the $12,000,000 of AUV achieved during the quarter. Can you give us a sense of what you're seeing in incremental freight and input cost inflation currently? And how does it impact your 4Q results given that your price attempts are largely behind you now?
Hey, Nathan, this is Brian. So freight in and of itself is a smaller piece of our total cost of goods sold. Obviously raw materials are much higher. We did see in the quarter a deceleration of that inflation, so July was much higher than August and September. And if you recall, last year, the freight inflation really started in Q4 a year ago, 2017, so we're starting to wrap that.
So as we look out at the inflation headwinds, we think we've got ample AUV strength to offset that.
Okay. Thank you. And then just higher level, what gave you the confidence to increase your architectural guidance to greater than 20% from double digits previously? Like what changed from before?
Yes, in the Architectural Specialty business, this is Nick, Nathan. We have a little more visibility because of the project nature of that business. And so we have a good idea of what's going to shift the rest of the year already, given, again, the visibility of those projects. So I think and three strong quarters already behind us in terms of top line performance of that business. That gave us the confidence to go ahead and raise the guidance on AS.
Thank you.
Thank you.
Thank you. And our next question comes from Keith Hodges from SunTrust. Your line is now open.
Thank you. Question shifting back a little bit to Mineral Fiber for a minute. I guess maybe include Architectural Specialties. Is the pace of order activity changed at all during the quarter into October either in the new construction or renovation piece of your business?
No, I'd say Keith, this is Vic. I think the order pattern was pretty consistent. You take out those months where you have a lot of education activity in the summer months, early part of third quarter. But when you look at across the months in both Mineral Fiber and Architectural Specialties, it was pretty consistent.
Okay. And from a cost
The retail segment, I'm sorry Keith, I cut you off. The retail segment was the one outlier where we saw some softness and then we picked it up in October. So a little bit of shifting there.
Okay. And on the cost side, will the cost inflation
in
the fourth quarter will be similar to what we saw in the third and where you stand right now?
Yes. I think the overall cost curve seems to be flattening out a bit in the third quarter, later in the third quarter. And again, as Brian referenced, we're starting to lap where we saw some meaningful increases in the fourth quarter last year. So again, I feel like we're they're not the freight expense in particular, we're not finished with those. I think those are going to continue to move higher even into next year's.
Those are structural issues in that segment that are going to drive costs higher. But raw materials seem to be leveling out here, and I think we've got enough pricing to cover those increases.
Okay. And then finally, I know you had talked and you were describing some of the adjustments, the cost on litigation with Rockwell. Can you give us any kind of update where that litigation stands right now?
Well, as you know, we can't comment too much about the litigation activity. It's in its process. And we continue to as we get through phases of that litigation, we continue to be confident that there's not a lot of basis to the claims here and that we're going to prevail in that lawsuit. But it is kind of in its own litigation process and cooking along. It is on an accelerated rate versus what we expected it to be, but it's continuing and will continue on into the fourth quarter at least.
And again, I think there's nothing in this case that's come out that would give us any pause for confidence that we're going to prevail.
Okay.
Thank you.
Yes. Thank you.
Thanks, Keith.
Thank you. And our next question comes from Ken Zener from KeyBanc. Your line is now open.
Good morning, gentlemen.
Good morning.
I'm looking forward to next week. So I assume some of these things you'll be addressing. But your volume, your guidance is zero to two for this year. It looks like it will be at the lower end of that some range. Last year, mineral wool kind of down, but your pricing is so strong.
In this quarter, price and mix just was, I think, almost perhaps a record from a percentage basis. Longer term, do you feel you guys actually need volume growth as you report it? Or is perhaps just the industry changing given all architectural specialties, pricing, the mix as we saw this quarter. Do you feel like you even need volume necessarily in your industry at this point given how much the mix shift is changing? And that's it.
Thank you very much.
Thanks, Ken. Look forward to seeing you next week, by the way. Hey, listen, we're working hard to create demand for mineral fiber sealing solutions. We've got several initiatives that are driving demand for mineral fiber solutions. This whole DesignFlex platform we're going to talk to the group about next week in more detail is the most innovative exciting innovation to come to the Mineral Fiber category in a long time, if not ever.
And it is all around renewing the interest to specify these types of solutions in the ceiling space. So we are focusing on not only creating value for our customers through services and products that earn higher prices and higher AUVs, but we are also incentivizing and working hard to drive innovation that drives them to want to specify more Mineral Fiber ceilings. So we're working hard on all of those fronts, price, volume and mix. And we're going to share some of that with you next week when you're in Lancaster.
Looking forward to it. Thank you.
Great. Thanks, Mike.
Thank you. And our last question comes from Catherine Thompson from Thompson Research. Your line is now open.
Hey, good morning. This is Brian Barros on for Catherine Thompson. You for taking my questions today. I wanted to start with the Architectural Specialties segment. Growth 37% in the quarter, looks like acquisitions was 11% of that.
So can you kind of just talk about the remaining 26% broken up between the two categories you called out? I think new construction and market penetration? Thank you.
Yes, Brian, I think on the Architectural Specialty space, again, it's more biased to new construction or major renovation activity. So I would just kind of put all of Architectural Specialties in that bucket versus the renovation. I think there is large renovation projects that certainly capture Architectural Specialty business, but I'd bias it more toward the new construction work. And as I mentioned earlier in my comments, Architectural Specialties across all of its material groups were up double digits in the quarter, so very broad based activity. And I also highlighted the size of the job.
So from small to larger size, there was nice balance in the shipments in third quarter as well. So again, I think that really speaks to the broad based participation that Armstrong has now in this category.
Got you. Thank you. I think I was also talking about new construction versus market penetration, not renovation, sorry. If there's any difference between those two or if it's still just lumped kind of in just new construction in general?
Well, I'll go back to my earlier comments around the rate of new construction is still in that mid to upper single digits. So I mean, you could almost assume the rest of that then is penetration. I think that's the best proxy to think about it that way.
All right. Understood. And if you could just dig into the new construction a little more, I think you kind of mentioned large and small projects were about even, but are there any other types of projects or geographies that are doing well or worse than others? If you could dig into any of that, would be appreciated. Thank you.
Okay, Brian. Yes. On the new construction side, it is pretty broad based across the country still. So all the major metropolitan areas are seeing positive construction new construction growth. The one segment I'll call out is office, which has been and continues to be kind of the more robust vertical in the new construction category.
Although we're seeing some renewed activity in healthcare and education on the new construction side as well. So but office has really been, I think, the more robust vertical in the new construction activity.
Got it. Thank you.
Yes. Thank you.
Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Vic Grieselan, CEO, for any further remarks.
Yes. I just want to thank everybody for your participation today. And again, we're looking forward to our Investor Day next week. And for all those that are going to be there, we look forward to hosting you here on our campus. So until then, thank you very much.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.