Good day, ladies and gentlemen, and welcome to the Second Quarter twenty sixteen Armstrong World Industries Inc. Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference is being recorded.
I would like to introduce your host for today's conference, Ms. Christie Olsen, Director of Investor Relations. Ma'am, you may begin.
Thanks, Terrence. 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 armstrongfeelings.com. With me today are Vic Rizzo, 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, Christy, and good morning, everyone. An exciting quarter for us. And before I get into our second quarter results, I would like to make a few comments about the share repurchase program we announced earlier this morning. Earlier this year, we communicated that it was a priority for us to work with our new Board of Directors to develop and implement a balanced capital allocation plan that would enhance and create value for our shareholders. I'm pleased that today, our Board of Directors has approved $150,000,000 share repurchase program with the authorization of the program extending until July of twenty eighteen.
The amount of the authorization is meaningful. It equates to just under 7% of our outstanding flow and it demonstrates our confidence in the strength of our business and our prospects for growth. In particular, with our standout leadership position in the highly attractive ceilings industry and the unique strengths and abilities that this business has to generate margins that are among the highest of any publicly traded building products company. This program reflects our commitment to creating value for shareholders and is an important component of a balanced capital allocation plan. Now turning to our results, I'll begin with an overview of our quarterly and year to date results and then provide some perspective on our market conditions and our resulting outlook for the remainder of the year.
I'll then turn the call over to Brian McNeil, our CFO, who will walk you through a more detailed discussion of the financials and our guidance. So for the second quarter, consolidated reported sales of $314,000,000 were up $8,000,000 or 2.7% from the prior year. On a comparable foreign exchange basis, sales were up almost 4%, driven by the second quarter in a row of broad based volume growth in The Americas and continued improvement in our average unit value or AUV. The Americas business delivered a solid quarter on all fronts. In addition to solid volume growth, like for like pricing was up and we saw another quarter of strong double digit growth at the high end of our portfolio, which contributed positively to mix.
Consolidated adjusted EBITDA of $82,000,000 was up $14,000,000 or 19% from the prior year, driven by the margin benefit of stronger volume in The Americas and continued improvement in AUV. Our Wave joint venture also delivered a record earnings quarter on the back of lower steel prices and solid volume growth, contributing to higher margins. Lower SG and A costs, in particular in our international businesses, also contributed to the higher margins in the quarter. I'm pleased that our international cost actions have more than offset market related weakness to enhance margins. And in total, adjusted EBITDA margins expanded three forty basis points in the second quarter.
On a year to date basis, consolidated reported sales of six zero two million dollars were up $4,000,000 or just over 0.5% versus the first half of twenty fifteen. On a comparable foreign exchange basis, sales were up over 2.5%. Consolidated adjusted EBITDA for the first six months of twenty sixteen of January was up $23,000,000 or 19% from the prior
year. Now as many of
you have seen in our release this morning, we've redefined our reporting segments and will now report results on a geographic basis under The Americas, EMEA and the Pacific Rim segments. We believe that this additional level of transparency will allow investors to better understand our business. So I'll now take a few moments to discuss second quarter results for our new reporting segments. And beginning with our largest and most profitable business, sales were up 6.3 in The Americas on a comparable foreign exchange basis. The sales improvement was driven by mid single digit volume growth and AUV improvement as our customers continue to trade up to higher margin products.
In addition, like for like pricing was positive. Similar to the first quarter, the volume growth was broad based across the majority of our geographic regions and broadly across the portfolio. I'm particularly pleased that our growth initiatives contributed significantly to our results in the quarter as our new products and design capabilities fueled double digit growth at the premium end of the product portfolio in both our quartile products as well as our architectural specialty products. The strong growth in the architectural specialty products was driven by our increasing participation in custom sealing solutions. The market is clearly gaining a greater appreciation for Armstrong's expertise in design.
We're also experiencing growth in cloud and canopy solutions that are used for open plenum designs. Now although open plenum design is growing at a very small rate on a total square foot basis, it is becoming a profitable niche market for us and that we capture with higher value and higher margin solutions. In addition, we saw a continuation of the sales strength at the low end of the product portfolio in the first quarter carrying into the second quarter indicating that R and R activity continues to improve. As we discussed in the first quarter, strength in the R and R is great for the business since the margin benefit of volume leverage far outweighs the dampening impact of our overall AUV improvement from lower selling prices of replacement products. In The Americas, we delivered strong earnings growth, expanding adjusted EBITDA margins by two forty basis points.
Margins expanded with the benefits of stronger volume, a record earnings quarter from Wave and continued improvement in AUV. Our Americas business is in really good shape and with sales accelerating and solid execution operationally leading to expanded margins. Now turning to our EMEA business. On a comparable foreign exchange basis, sales were down 2%. The year on year decline continued to be driven by a weaker Middle East market as low oil prices and ongoing political instability in that region continued to negatively impact project funding.
These conditions are likely to remain challenging in the near term, and so we are continuing to take cost reduction actions to right size the cost structure supporting these markets. Positively in the quarter, we saw improving sales in Russia and in Continental Europe. Adjusted EBITDA in the EMEA business improved as we benefited from the cost reduction actions. Lower SG and A expenses offset market softness, expanding margins by 130 basis points. I'm encouraged with our progress, but we clearly have more to do here to improve our margins and our returns to expected levels.
And finally, in the Pacific Rim, sales came in as expected and improved sequentially from the first quarter. On a comparable foreign exchange basis, sales in the quarter were up over 1% with the improvement driven by a rebound in India after a slow start to the year. Adjusted EBITDA improved nicely, driven by an overall improvement in AUV and lower SG and A expenses as a result of cost reduction actions. Adjusted EBITDA margins in the PACCARIM expanded by seven ten basis points. Now turning to our market outlook and guidance.
In the first quarter, we discussed that our international businesses got off to a slow start and that we expected them to rebound in the second half of the year. While we did see sequential improvement in the second quarter in these businesses, we believe the uncertainty created by the recent decision of The UK to leave the EU will impact business investment and delay project funding. We've already experienced some project delays in the region. And while we continue to expect improvement in the second half, it's more likely to be less than what we had previously expected. As a result, we believe it is prudent to lower our revenue guidance for the full year to reflect these conditions.
We now expect full year constant currency sales to be in the $1,230,000,000 to $1,280,000,000 range. Now in spite of this adjustment, we are maintaining our adjusted EBITDA guidance range of $310,000,000 to $330,000,000 as we expect our cost reduction actions and solid performance in The Americas to offset the sales weakness in our international markets. For the balance of the year in The Americas, we expect to continue to see the sequential improvement in volumes from new construction start activity, carrying into the second half of the year. As we discussed in the first quarter, we believe the year on year volume growth will moderate as we progress throughout the year due to the improvement in volumes we experienced in the back half of last year. The broad based nature of the demand we've experienced this year is very encouraging.
The increase in state and local spending is being felt as we're seeing more activity in education than we've seen in some time. We like the trend. We like what we've seen in the activity so far this year. I will remind everybody the visibility into our R and R demand remains limited. But as we look at the activity in July, we can see consistency and carryover from what we've seen in the first half.
And this further supports the increase in The U. S. Volume underpinning our revised guidance. So with that, I'll turn the call over to Brian for a detailed review of our financials and guidance.
Thanks, Vic. Good morning to everyone on the call. In reviewing our second quarter results, I'll be referring to the slides available on our website. I'll now quickly review Slide three, which details our basis of presentation used throughout this discussion. As you know, on 04/01/2016, we completed the separation of AFI.
Accordingly, AFI's historical financial results have been reflected in AWI's consolidated financial statements as a discontinued operation for all periods presented. As a reminder, effective 01/01/2016, in anticipation of the separation, the majority of our historical corporate support functions and costs were incorporated into the three new operating segments. Slide 16 in the appendix summarizes the consolidated corporate cost push down, which equaled $60,000,000 for Q2 and was held constant in the prior years for comparability purposes. Slides thirteen and fourteen detail the pro form a adjustment made to prior year for comparability purposes by our new reporting segments. Starting with Slide four, consolidated sales for the quarter of $315,000,000 were up almost 4% versus 2015 on a comparable foreign exchange basis.
Adjusted operating income increased over 24%, which translated to three twenty basis points of improvement. Adjusted EBITDA improved by 19%. Global margins expanded by three forty basis points versus the prior year quarter. The primary difference to our reported results are expenses related to separation, the non cash impact of our U. S.
Pension plan and a push down of standalone corporate costs into the reporting segment. Net debt was down $49,000,000 driven by refinancing and debt repayments over the last twelve months. In the chart at the bottom of Slide four, you will note the sales and adjusted EBITDA changed by segment versus the prior year period. On a comparable foreign exchange basis, sales in The Americas were up 6%, driven by broad based volume growth across the product range and higher AUV behind positive like for like pricing and mix. EMEA sales decreased 2% compared to Q2 of twenty fifteen, largely driven by The Middle East.
Our Pacific Rim segment sales were up one versus the prior year quarter where growth in India and Australia offset a decline in China. Adjusted EBITDA for The Americas increased by $9,000,000 or 14 percent, much of this due to mid single digit volume growth and a record earnings quarter from our Wave joint venture. Equity earnings from WAVE were up $4,000,000 or 25% behind double digit sales growth and lower steel costs. Internationally, adjusted EBITDA grew by $1,000,000 and $3,000,000 versus the prior year period for EMEA and The PacRIN, respectively, behind strong cost controls. It's important to note that we improved adjusted EBITDA for all of our reporting segments in this quarter.
Turning now to Slide five, you will see our consolidated Q2 adjusted EBITDA bridge versus the prior year quarter. The increase in adjusted EBITDA of $14,000,000 is up 19%. Just about all lines of the P and L contributed. The key drivers of our consolidated EBITDA growth are volume growth in The Americas, volume growth at Wave, which in turn helped Wave achieve a record earnings quarter, which flows through our equity P and L line item and cost containment in SG and A. As mentioned earlier, we had positive AUV in The Americas, driven by higher sales at the premium end of our product range and positive like for like pricing.
Our input costs benefited from lower energy costs that offset inflation in our direct materials. Our gross profit margins expanded by 100 basis points. Turning to our segments in further detail. On Slide six, the Americas absorbed nearly all the stand alone corporate cost push down. The $16,000,000 includes $2,700,000 of depreciation expense.
These costs were held constant in 2015 to facilitate comparability between periods. Approximately 70% of the costs were expensed to SG and A in the current year and allocated on a pro form a basis to SG and A in the prior year with the remainder impacting cost of goods sold. The Americas business, which includes Canada, had an impressive quarter. On a comparable foreign exchange basis, sales were up over 6%. Sales growth was driven by mid single digit broad based volume growth and higher AUV.
Our strategic growth initiatives contribute to this volume growth as well. Premium products in our core tile business grew by double digits as we continue to listen to the demands of our customers and provide products that meet their design and acoustical needs. Architectural Specialties grew over 25% within the quarter, driven by our specification strength and design and product capabilities. We continue to be the choice of architects and designers as they continually turn to Armstrong to provide innovative and unique creative solutions in statements basis. On a comparable cost basis, you can see the drivers of profitability on the bottom of the slide.
I'm happy to see volume growth for the second straight quarter. In the quarter, we continued to make modest SG and A investments to enhance our selling capacity and capabilities. Adjusted EBITDA margins expanded by two forty basis points. Moving to our EMEA segment on Slide seven. Please remember the EMEA segment includes Russia and The Middle East.
Quarterly sales were down almost 2% on a comparable foreign exchange basis, driven primarily by weakness in The Middle East, which was down over 40%. However, like Vic already mentioned, we are encouraged by the results in Russia for the quarter where sales were up over 15%. The drivers of profitability are listed on the bottom of the slide. The negative impact of lower volume was more than offset by the prior cost actions we have taken and continue to take in this region, which includes rightsizing the Middle East organization and reductions in back office support. The segment drove adjusted EBITDA margin expansion of 130 basis points.
Moving to our Pacific Rim segment on Slide eight. Please remember this segment is comprised mainly of China, India and Australia. Quarterly sales increased by 1% on a comparable foreign exchange basis driven by improvement in AUV. AUV was driven by both positive like for like pricing and mix. Similar to the EMEA segment, prior cost actions we have taken and continue to take improved both manufacturing and SG and A costs.
Adjusted EBITDA margins expanded seven ten basis points. We will continue to be focused on improving the returns of both international segments. Our first half results start on Slide nine and the drivers are very consistent with those for the second quarter. Consolidated sales of $6.00 $7,000,000 were up almost 3% versus 2015 on a comparable foreign exchange basis, as 6% growth in Americas was offset by weakness in the international market. Adjusted operating income increased by over 24%, which equates to a three twenty basis points of improvement.
Adjusted EBITDA improved by nearly 19%. Globally, adjusted EBITDA margins expanded by three forty basis points versus the prior year period. The primary difference to our reported results is driven by separation related expenses and the non cash impact of our U. S. Pension plan and a push down of our corporate costs into the reporting segments.
Slide 10 details our first half consolidated adjusted EBITDA bridge versus the prior year period. The increase in adjusted EBITDA of $23,000,000 is up almost 19%. The key drivers of our EBITDA growth are volume growth in The Americas, WAVE equity earnings, also driven by volume and steel costs, SG and A cost containment and energy deflation which offset direct material inflation. The first half AUV performance was driven by the Q1 AUV items we discussed during the Q1 earnings call. As we saw in Q2, we do not expect the negative trend in the first half to continue into the second half.
Manufacturing costs increased due to the strategic investments in our manufacturing capabilities in The Americas to support growth in the high end of the product range. Slide 11 outlines our revised 2016 guidance. We now expect to deliver revenue growth of 1% to 5% versus prior year. Adjusted EBITDA guidance remains unchanged and is expected to range from $310,000,000 to $330,000,000 Adjusted free cash flow remains unchanged at $80,000,000 to $100,000,000 excluding the cash impact of separation. The cash impact of separation is expected to range from $50,000,000 to $60,000,000 assuming normal accruals and payables at the end of twenty sixteen.
The remaining separation activity relates mostly to IT actions needed to complete the physical separation of our SAP system and is expected to be completed in Q4. As a reminder, this guidance is presented on a stand alone basis. The financial performance of AFI prior to separation is included in discontinued operations and 2015 has been adjusted on a pro form a basis for comparability purposes. The top line guidance reduction is driven by the continued softness in our international markets. Specifically, sales in The Middle East have been negatively impacted by lower oil prices and continued geopolitical uncertainty in the region, which has driven many projects to be delayed.
Furthermore, the Brexit referendum in The UK has increased the likelihood that the second half in our EMEA segment will not improve as much as we originally outlook in Q1. We are reaffirming our EBITDA guidance based on the strength of our Americas volume growth and the cost reduction actions in our international business that offset the reduced sales in international. We expect our AUV achievement to improve in the second half versus the first half driven by continued mix improvement behind the volume growth in our premium offerings, the benefit of our August '1 '5 percent price increase in The Americas on our Mineral Fiber products and abatement of one time items impacting AUV in the first quarter. We continue to focus on identifying additional actions to improve the EBITDA performance in our international markets. We continue to expect approximately $42,000,000 of stand alone corporate costs, excluding the non cash impact of our U.
S. Pension, depreciation and a 1% to 2% cost savings over inflation. We will continue to invest modestly in sales and marketing to accelerate our architectural specialty share gains, total selling solution capabilities and new product initiatives. On a stand alone basis, we anticipate SG and A will be in the range of 18% to 19% of sales. We expect interest expense to be around $45,000,000 excluding the $11,000,000 charge that we recorded in the first quarter related to the settlement of interest rate swaps incurred with the refinancing of our new $1,000,000,000 credit facility as we separated AFI.
This $11,000,000 charge is a key driver to our revised EPS. Finally, I wanted to comment briefly on our share repurchase program announced this morning and that Vic referenced. Our Board approved a two year one hundred and fifty million dollars share repurchase program based on the confidence in our outlook, cash generation and our guided net debt leverage range of two to three times EBITDA. We expect to make repurchases in the open market and under trading programs in accordance with regulatory requirements. We expect to hold the repurchase shares as treasury stock.
This share repurchase program gives us flexibility in the near term as we work towards a balanced capital allocation plan. To wrap up, I understand that there's still a lot of moving pieces this quarter. And we are happy to, for the first time, report segments based on geographies: Americas, EMEA and The Pacific Rim. As you work to analyze these new changes in our reporting, Christy and I will be available for follow-up questions after the call. With that, I'll turn it back over to Vic.
Thanks, Brian. I'd like to add that earlier this year, we highlighted our strategic imperatives to drive volume growth in The Americas and to improve the returns in our international businesses. We've made progress on both fronts with our Americas business delivering mid single digit volume growth throughout the first half of the year and our international businesses delivered modest improvement in profitability. We clearly have more to do here, but I'm pleased with our progress. In closing, I'm pleased with the quarter and our first half results.
Adjusted EBITDA margins improved in every segment. The broad based improvement in The U. S. Commercial markets through the first half of this year are very encouraging. We continue to execute well in achieving positive like for like pricing and driving mix toward the higher margin premium products.
And while we're still in the early days, I'm pleased with the traction we're seeing around our key growth initiatives. And our share repurchase program is a strong vote of confidence from our Board of Directors and our management team in our future growth prospects and reflects our commitment to drive value creation for our shareholders. And with that, we'll be happy to take your questions.
Thank And our first question comes from Nishu Sood from Deutsche Bank. Your line is open.
Thanks. This is Rob Hanson on for Nishu. So the first question I had was just on the volumes, mid single digits, that's pretty good. What is the difference between new construction and remodeling and
then in or renovation? And then in
the renovation, have you seen the return of these batch and match smaller type projects or are there some sort of like larger remodeling project that you got during the quarter that helped boost volumes?
Yes, Rob. This is Vic. Yes, the volume mid single digit growth is really terrific volume in our Americas, especially after what we've seen in terms of, I I would say, an elusive market recovery over the last several years. So we're very encouraged by the level of volume growth that we saw. As I mentioned, it continues to be broad based as well.
As you remember, in the second half of last year, we were starting to see new construction activity start to come into the volume curve. And so we saw volume growth toward the latter half of last year. And we've seen the new construction activity continue to be a major contributor into the first half of this year. What that's been coupled with to get to this level of this mid single digit level of volume growth has been R and R activity. And to your question around the patch and match, for sure, we're seeing a lot more patch and match type activity that is enabling again and supporting the high volume portion of our R and R segment.
So it's broad based in terms of the geographic segments also, which is also very encouraging versus just major cities, if you were to compare it against that. But it's also broad in terms of the portfolio, which reflects up and down the portfolio. It's not only the new, but it's the patch and match as well as the repair and remodel larger repair and remodel projects. So again, I'd say the most encouraging thing about the mid single digit volume growth in The Americas is how broad based it is. And that gives us a lot of encouragement.
Interesting. That's very helpful. And I just wanted to also ask about the share convergence program. Just wanted to get some clarity. I think you mentioned in the script that it was going to be these are going to be systematic purchases, but I just wanted to double check and see if that or if it may be opportunistic as well.
And the other thing is, should we expect you to complete the entire authorization by the time it expires in 2018?
So Rob, this is Brian. Yes, it will be very systematic. And as I pointed out,
the share repurchase program gives us great flexibility.
And so depending on where markets are and our progression around a balanced capital redeployment will drive whether or not we completely spend all that over the two year program.
Okay. Thanks guys.
Thanks, Scott. And our next question comes from Gerrit Schmois from Longbow Research. Your line is open.
Hi. Thank you. Just have a question on the volume outlook in North America. Certainly very good performance in the first half of the year. Notice that the guidance is still for about 1% to 4% growth.
So it does imply some deceleration in North America, if I read that correctly. Just wondering if you could just walk us through some of the maybe additional color on the puts and takes on what you're seeing on the volume side. I know you've identified a little bit of a split where you're seeing on new construction R and R, but maybe dive in a little bit on the different end markets.
Yes, Derek. This is Vic.
We did raise the upper end of our range on volume growth in The Americas to reflect which has been a pretty strong first half on volume. The deceleration you're referencing, as I was saying earlier on the earlier question that we started to see volume growth in the second half of last year from the new construction segment activity. So we're expecting to have more difficult comps, if you will, than we did the first half on similar activity. So we're not expecting a deceleration in the market. But again, compared to the comps that we're expecting in the second half, I think that's what you're feeling there.
And to your segment question or the end market segments, again, it's broad based. We have been talking mostly about strength in the office segment, the new construction office segment. We started to see some of the R and R in the office segment. But in the first half of this year, with state and local spending on education, we've seen it in healthcare. The hospitality segment also has been nice, especially for our architectural specialty business.
So again, the encouraging thing about this volume growth is that it's broad based across all the segments really. So again, that's very, very encouraging for us.
Okay. Thank you. And the follow-up questions on Wave, certainly very good performance.
And our next question comes from Ken Zener from KeyBanc. Your line is open.
Good morning, everybody.
Hey, Jeff.
So the strength quarter in the first half is good. You're highlighting slower growth because of tougher comps last year. And as you cited the limited visibility, I think you're properly being cautious given the strength that you've seen. Looking at some publicly available distributor data through February, they said that their sales had been up 6%, which is pretty much what you guys are seeing in North America. Since you cited state spending, Vic, and education, my recollection is that a lot of that some of the education occurs during the summer period, it's more seasonal time when the students are gone.
What would you expect to see in that vertical if the momentum was going to continue to perhaps accelerate? And why do you think that's occurring there? Is the tax situation better? Have they finally just said we got to get students better ceilings?
Yes. So Ken, the first part of your question, I'll just go back to what we've been seeing prior to this year in Education has been flattish to slightly negative persistently in
the Education
segment. So I think with a good Education segment here in the summer, which it looks like we're off to a good one, would be in the low single digit growth. So it's a pretty meaningful swing. But I would say a low single digit growth Education segment would be a very positive outcome.
So
what was the second part of your question, Ken, if you're still on?
Oh, I am still on. Just kind of I think you answered it in terms of what you're looking for, but also why do you think it's happening now? I mean, my view is that a lot of these states have been stretched by pension payments, obligations to big boomers
and it's curtailed their investments in the physical assets.
But is there any reason
or something that you can
point to that points to the strength now? And I'll just answer my second question, which is steel cost wave, how do you expect that to flow in the
back half of the year? Thank you very much. Yes.
Why it's happening now, I think there's a couple of things here. Actually, the data that I'm looking I understand the pension pressure, which has recently been highlighted, and that's real. But when you look at the investment data for the state and local spending on structural investments or structural spend, which is a breakout of the total spend, you can see that that's picked up, which is very favorable for R and R activity. So I think there is a little more spending going to the structural side of the business, which helps us. The other part of this, and we can't forget this, is that through the years as we've been watching education remains soft, the demand for damaged tiles and ceilings that need to be replaced has not gone away.
It's been sitting there. And there does become a point where it's no longer discretionary. They really just have to repair these ceilings and make the repairs. So I think there's a combination of those things going on that are providing an uplift in the education segment right now. As far as the outlook for the Wave business and steel, as you all know, steel prices are going up.
We announced a price increase earlier in the second quarter, and we've been implementing that, and we feel very good about the realization of that. And all the other players in the space have also announced similar increases and are implementing that. So we feel good that as the steel prices increase, that we'll be covering those increases with this current price increase that's on the street now.
Thank you.
Thank you.
And our next question comes from Catherine Thompson from Thompson Research Group. Your line is open.
Hi. Thank you for taking my questions today for question today. It really centers on pricing and having a better idea of what mix how much the geography mix or pricing actions impact AUV in the quarter, particularly in The Americas? And along with that, I know you touched on previously regarding the wave impact to rising steel costs. But if you could just clarify for listeners, there's greater increases in certain categories such as steel studs and why is that not necessarily the case for your wave op?
Thank you.
Sure. So on pricing, again, Catherine, we saw like for like pricing move up and be positive in the second quarter. Consistent with what we saw in the first quarter, we did see deflation in the quarter. So our price, real price, like for like pricing, overall inflation was positive and really helped drive the two forty basis points of margin improvements that we saw in The Americas 3 40 basis of margin increase across the globe. Your question around how does geographic mix impact that pricing.
And as we've talked about in the past, there are regional differences in some of the pricing and also the product mix in which they use in those regions. And so geographic mix can have an influence on the overall AUV and the overall mix affecting AUV. What I said, however, earlier is that the volume growth we're seeing is very broad based and across over 70% of our territories that we measure against. So I think there's very little geographic mix in the AUV numbers. It's really driven and we've had strong mix in first half, it's really driven by the growth at the high end of the portfolio.
And it's been supported by a lot of the new products that we're driving, namely around the total acoustics and the adoption rates and the architectural community around that type of solution has been very encouraging for us. So our innovation and industry leading innovation, I'll add, at that part of the product portfolio was really helping drive the mix. And that's what you're seeing in the AUV. Your second part of that question, Catherine, was around steel prices and why maybe other steel manufacturers or components are driving higher steel prices. I think one of the things that we do to manage this business, as you know with pricing, is we do a very good job in holding prices throughout the cycle, frankly.
And so we've become less cyclical in terms of our margins. And in fact, if you go back historically, as I think you've probably done, Kevin, is looked at our margins over the steel price fluctuations and you'll see that our margins have improved through those cyclical periods of steel prices. And that's a reflection of how we manage our price. And our price is matched not like a commodity, but it's really matched according to the innovation and services that we're bringing that allow us to offset those cyclical troughs and peaks with steel prices. So it's a little different than I think you're comparing it to and we're going to continue to manage price in the marketplace that way.
And that's why we feel confident that we'll continue to protect and grow margins in the face of higher steel costs.
Thank you very much.
You're welcome.
And our next question comes from Bob Windhall for RBC Capital Markets. Your line is open.
I just was wanted to touch base on Europe and I know you guys are taking down the revenue outlook, but you didn't really mention Brexit. And I'm trying to understand a little bit better how much of this is really FX related versus expectations for weaker demand. I know you had touched on increased uncertainty. How should we be thinking about EMEA in that context?
Yes. So indirectly, I did mention Brexit, but let me comment on it because it's worth commenting that it's not so much foreign exchange. We're anticipating that the volume uptick that we were expecting in the second half of the year will be moderated because of the uncertainty, both in The UK and Continental Europe, as they try to figure out what's going to happen in terms of tariffs and other influences on investment. In fact, in The UK, we've already seen several projects that were in the development stage be postponed until there's some more clarity around this. So I think in the short term, we're going to see some projects that are more discretionary get delayed.
I think they'll finish the projects they've already started. And then we'll start to see potential of the new investments in 2017 and 2018. We start to see the impact of those decisions now in 2017 and 2018. So a dampening effect short term of our expectations and then longer term more uncertainty on new investment.
And Vic, one piece I'd add, Bob, just from a cost side is, we're the only ceiling tile manufacturer in The UK and we ship product from there into the continent and then also from the continent into The UK. And interestingly enough, those volumes are just about equal. So there's a little bit of a natural hedge from some FX movements on the cost side.
And our next question comes from Scott Rittner from Zelman and Associates. Your line is open.
Hi, good morning. Wanted to ask a question on the guidance. It kind of has two parts, but I think it relates. So you took down international growth. North American growth didn't change modestly, but the EBITDA bridge is similar.
So when you think about the updated EBITDA guidance in The Americas, is that just wave or is there a better contribution margin than you thought coming into the year? Hopefully, you could clarify that, Vic. And then Brian, just quickly on the drop through to EPS, why the change in interest and share count versus your prior guidance? Thank you.
Let's go ahead. So Scott, the first question on we are seeing an improvement in The Americas and that's how we've got it. We moved that top end from the high 3% volume growth to 4%, so another point there. As we mentioned, we are making some investments, modest investments in our SG and A around selling specifically, and then also in our manufacturing cost line to support growth in the higher end of the product range. So there's some puts and takes on that Americas piece.
On the question you have on EPS, we have revised some of our share counts down. It's not reflected of the share repurchase program. It's just getting greater visibility to the impact of some of our equity plans as we spun the company and separated floors AFI from the ceilings business. And then on the real impact, as I mentioned on my comments, EPS was largely driven by an $11,000,000 charge for interest rate swaps, which was part of the refinancing activity coinciding with the separation of the company. And so that's taken a hit on the EPS line.
So Brian, that's not adjusted out of 1Q, the $11,000,000
Yes, that's correct.
Okay. Thank you.
Our next question comes from James Armstrong from Vertical Research Partners. Your line is open.
Good morning. You had a really good quarter in The Americas. Obviously, you talked about margin pass through and that you saw pricing and cost go opposite directions. Do you think that going into the back half, do you think that you'll get pricing above costs or do you think costs will start to catch up just a little bit into the margin guidance, especially in The Americas going into the back half?
Yes. We've had a consistent track record of managing our price over inflation and we're expecting to continue that in the second half.
Okay. That helps. So bottom line, do you expect to keep that above the 30 looked at similar margins to what you had in the second quarter will flow through to the back half of the year, would that be fair?
Yes, I think that's fair.
Okay. Thank you.
You're welcome.
And our next question comes from Mike Wood from Macquarie. Your line is open.
My question was just on international. Can you give us a sense of what that dollar value was, the delayed EMEA projects and what you're hearing from clients in terms of what the decision for them is to proceed or not? And also if you could just comment on the China story, just what's the issue with the lack of growth? I know that's been a penetration story longer term. Thank you.
Yes. With regards to the EMEA projects, the impact in the short term, like in the current quarter, has been minimal, okay? I think the story there has really been our cost reduction actions have driven and more than offset the softness in sales, driven by the market conditions there. Again, The Middle East is the biggest driver of our softness in the European region with better strength in Continental Europe, better strength in Russia. So in the short term, again, I think the overall Brexit impact has been minimal.
Our outlook for the second half though is a little bit more guarded because of potential impact on these delayed projects that we've already experienced and how that could impact our rebound in the second half. Again, that's what made us feel like the prudent thing to do was to reduce our expectations on top line growth or volume growth in that region. And I'm sorry, the second part of the question in terms of the China story. Yes. Let me comment on China because China continues to be a market full of potential, but not today.
It's one that's very concentrated in the office segment. And with the restrictions on investment, both from the government side, which has been the biggest driver, now on the private side, we've really felt the impact of that. And so the market continues to contract in the office part of the market. So while that market continues to have very good long term potential, in the short term here, we're seeing a correction and a contraction there, which is why again, we talked about in the last couple of quarters the actions we're taking to take out SG and A. We've had a significant reduction in SG and A in China.
We're also in the process of idling one of our plants in China to reflect the lower market demand there to take some period expense out to really drive the profitability. So you saw some progress to that in the second quarter. We're pleased with that and we've got more to do. But again, China continues to be a very challenging market for us. I'll mention that India continues to be a good place for us.
I love the traction I'm seeing in Australia and even in Southeast Asia. So China right now is where we're having most of the market related issues.
Thanks for the color.
I hope that helps. And
our next question comes from Will Randell from Citigroup. Your line is open.
Hey, good morning and thanks for taking my question. On the upcoming August 1 price increase, if I remember correctly last year, it underperformed your traditional hit rate. Do you think there's opportunity this year given the comp is a bit easier to actually outperform? Or how are you thinking about the take rate on that 5% price increase?
Yes, we feel good about
the 5% price increase. We've had lots of conversations with our partners in the market, our distribution, our contractor partners, I think the environment is good and supportive of the price increase. So we're going into the price increases. We always do with full commitment to it. And but we're feeling good about the environment and the receptivity to the price increase at this time.
So consistent with historical take rates then?
I think so. I think we should expect that.
Thanks guys.
And our next question comes from Jason Marcus from JPMorgan. Your line is open.
Good morning. My question is on the seasonality of the margin. I know historically you've typically seen a nice uptick in 3Q and I think a lot of that was probably driven by The Americas. Whereas I think the seasonality in EMEA and Pacific Rim has been a little bit more muted as you go to 3Q and then 4Q. So I just wanted to get a sense of now that we have the profitability by region, how we should think about kind of the trend of 3Q to 4Q and how would you think about the margin expansion and contraction into 4Q?
Well, I think you're right. Americas the third quarter tends to be the strongest quarter because of the construction activity this summer. In the international markets, both Europe and Asia, they tend to be latter half of the third quarter and into the fourth quarter. So you get a little bit more weighting in the fourth quarter in those markets. So I think that's the right way to think about how you would expect overall strength in both the sales and the earnings from those regions.
Okay. And then just if I could add one more question on Architectural Specialties. I just wanted to see if you could break out where you're seeing the most growth from a geographic perspective? And then following the spin off, your thoughts on M and A within that segment? I know it's something you've maybe talked about in the past, but we haven't seen a whole lot of it at this point.
Yes, we've had in Architectural Specialties, that segment, we're seeing growth in really all the regions. The one exception and it's been particularly strong in The U. S, which obviously is very good for us. But the one region that impacts the overall growth rate has been our reduction in The Middle East. And again, that market is very challenged right now in terms of project funding and delays, and that has impacted the architectural specialty markets in the European region.
But in Asia, very strong, in The Americas, very strong and a little bit lighter, although positive, in Europe, based on the headwind that we see in The Middle East. So it's very encouraging, great traction there, love what I see in that segment and what our teams are doing to penetrate that marketplace.
Okay. Thanks.
You're welcome. And our next question comes from Keith Hughes from SunTrust. Your line is open.
Thank you. I guess as you look at your Americas comps in the prior year, what kind of volume growth did you see in the third quarter of 'fifteen, fourth quarter 'fifteen? The Q gives a 2.5% revenue growth in the third quarter in The Americas and the old Armstrong. How much of that volume and what we would in the fourth quarter look like?
Yes. I'm not exactly sure I have that off the top of my head. I don't know Brian, do you have that number?
No. I think, Keith, we'll follow-up with you and show you that flow in the back half of last year.
Okay. And just sneak one other one in. You're talking about the swap settlement. Was that swap settlement in the first quarter
or the second? Yes. The swap expense hit in Q1, the cash got paid out in Q2, but it was right at the end of Q1 as we refinanced and separated the company.
So that's just come into your EPS guidance view in the second quarter, is that right? That was not part of what you gave in the first quarter?
No, you're correct. And we thought we'd have some other, I'd say, puts and takes on the EPS, but that $11,000,000 swap was significant enough to really impact the outlook on the EPS.
Okay. So we'll be included from now on. Did you ever think of excluding that, I guess? You're excluding a lot of other one time stuff?
Right. And that's when we're including.
All right. Thank you.
And our next question comes from Jim Barrett from C. L. King and Associates. Your line is open.
Good morning, everyone. Good morning, Jim. Could you talk a little bit about Russia? I was surprised to see growth there. Is that sustainable?
And what's underpinning that?
Yes. That's the right question. I mean, I think the Russia market has been very volatile the last couple of years based on not only oil prices, but also just political activity. So the way I would characterize it, it's going to be choppy. And so we're not forecasting that there's an inflection point in Russia because we had a strong second quarter, which it was a strong second quarter.
We did have a weak first half last year, so a little bit of comp helped there. But I expect it to be as long as oil prices stabilize and there's some stability in the region, in the rate at which we're taking share in that market as we expand into Russia, I think it's going to be choppy, but directionally better from where we've been.
Well, thank you very much. You bet.
And our next question comes from Sam Eisen from Goldman Sachs. Your line is open.
Yes. Good morning, everyone.
Good morning, Sam.
So just on the pricing gains, can you perhaps give some color as to the mix versus like for like pricing gains if you maybe break out in the second quarter, that $3,000,000 And then in addition, when I look at your gross margins on a year over year basis, both the three months end of June and the six months end of June, gross margins are down year on year. So can you maybe just give a little bit color? I know you touched on a bit of the movement between SG and A and cost of goods, but just a little bit more information there would be great. Thanks.
Yes, Sam, this is Brian.
So historically, our AUV split between price and mix has been fifty-fifty. Again, our frame that we continue to use is price over inflation. And so while we continue to see deflation, especially as we think about the energy impact, that mix changes slightly in the year to date and in the Q2. But we generally don't go much deeper than that guidance on the components of that AUV. And then I'm not sure I quite follow the margin question yet.
And I know we've got a call later today to follow-up, so we can address it there if that's all right with you.
Well, I guess if I just look at your six months reported numbers in the eight K that you filed today, you did 29.2% gross margins this year, 30.2% last year, so 100 basis point decline in gross margins. Can you maybe discuss what the drivers of that are on a year to date basis?
Yes. So in the earnings call deck, we in the last page, we mentioned that we do have costs moving up into cost of goods sold for those stand alone costs now. And so about 30% of the overall costs have moved up in there, which includes depreciation, obviously,
on that reported basis.
So we can we'll walk you through that bridge
on our call later today.
And we have a follow-up question from Bob Whittinghall from RBC Capital Markets. Your line is open.
Hey, thanks for taking another question. I'm just trying to think out loud and get your views. You sound a little pessimistic on the outlook for European demand in Asia. I know you're been very disciplined on managing SG and A spend levels, and that was shown with what you did in Asia last quarter. Do you have additional opportunity if you don't see a recovery in volumes?
You're obviously seeing some headwinds or just general softness in international markets. Is there room to improve the cost structure if you're not seeing a uptick in volume as you go through the back half of the year? And while we're on SG and A, do you see additional room in The U. S. To tighten the belt now that you've separated from foreign products?
Thank you.
Yes. Thanks for the additional question, Bob, because we're not pessimistic on the international markets. We're being, I think, prudent on what we're seeing in the level of uncertainty to make sure that our outlook reflects what we expect to see there. Again, there's some positives going on in the region. It is a mixed bag with some of the markets like The Middle East, kind of overshadowing some of the other things that are positive going on in the region, China similarly in the Asia region.
So we're being, I'd say, prudent and transparent on what we think is realistic to achieve in the twenty sixteen year. With that said, we're very aggressive aggressively attacking the cost structure. We've got a long ways to go to get these businesses to the return on capital that we expect and that's really our business objective. So we've been out in front already of the softer markets with our cost reduction actions, which has yielded some good results in the second quarter. But we've got a long ways to go and we're working that hard.
So we're going to stay out in front of certainly the guidance that we put in terms of what we think these markets are going to do with our cost reduction actions to continue to make improvements in our bottom line, irrespective of what we see on the top line. So that's what we're running to and we're feeling good about those plans. In terms of The U. S, there's parts of the SG and A structure that we do believe there's opportunity and we're working those. Now that we've got all of the stand alone costs embedded in our business, there's clearly opportunities that we're going to be working.
On the other side of it though, this is an opportunity and we see opportunities to be investing in. As you saw in some of the bridges, we've invested in some commercial capacity. We're investing in our innovation right here in North America because this is where we believe there's a great return opportunity for. So it's a little bit of a mixed bag on SG and A here in North America. So hopefully that addressed your question there, Bob.
Thanks for the question.
And at this time, I'm showing no further questions. I would like to turn the call back to Mr. Vic Grizzle, CEO, for any closing remarks.
Great. I just want to thank everybody again for joining today. The questions were great. We're very pleased with the quarter and our first half results. This is the first quarter really for this management team as a stand alone industry leading ceilings company.
And again, we've made good progress and I really like the progress we're making on our growth initiatives. So we plan to keep everybody posted on our progress there. So thanks everybody and have a good afternoon.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.