Armstrong World Industries Inc

NYSE:AWI

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2024 Armstrong World Industries, Inc. Earnings Call. [Operator Instructions] I would now like to turn the call over to Theresa Womble, Vice President of Investor Relations and Corporate Communications. You may begin.

[Theresa Womble, executive]

Thank you, Bailey, and welcome, everyone, to our call this morning. On today's call, we have Vic Grizzle, our CEO; and Chris Calzaretta, our CFO, to discuss Armstrong World Industries' third quarter results and rest of year outlook. We have provided a presentation to accompany these results that is available on the Investors section of our company website. Our discussion of operating and financial 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 earnings press release and in the appendix of the presentation issued this morning. Both are available on our Investor Relations website.

During this call, we will be making forward-looking statements that represent the view we have of our financial and operational performance as of today's date, October 29, 2024. These statements involve risks and uncertainties that may differ materially from those expected or implied. We do provide a detailed discussion of the risks and uncertainties in our SEC filings, including the 10-Q filed earlier this morning. We take no obligation to update any forward-looking statements beyond what is required by applicable securities law. With that housekeeping done, I will now turn the call over to Vic.

[Victor Grizzle, executive]

Thank you, Theresa, and good morning, everyone, and thank you for joining our call. As we reported today, Armstrong delivered another quarter of strong results with record-setting third quarter sales and strong earnings growth, enabling us to once again raise our earnings guidance for full year of 2024. Similar to last quarter, our teams executed well on all fronts while still facing muted market conditions as well as managing through 2 impactful hurricanes.

Now to our customers and the communities impacted by Hurricane Saline and Milton, we extend our sincerest hope for a quick recovery from the physical and economic damage from these storms. And to our teams at our Pensacola, Florida and Georgia facilities and our entire supply chain group, thanks to you for successfully managing through these storms with minimal interruption to our operations and to our customers.

This is a clear example of our agility and dedication to customer service and operational excellence, and I'm proud of this effort and the work of our 3,500 employees who exemplify his commitment to our -- to serving our customers every day. Now taking a closer look at our third quarter results, total company sales and adjusted EBITDA were at record-setting levels each increased 11% from prior year results while adjusted diluted earnings per share increased 13%. These strong results were driven by contributions from our recent architectural specialty acquisitions, a 3 form and BOK Modern, both of which are performing very well, along with solid AUV performance and specifically like-for-like price realization in our Mineral Fiber segment, strong manufacturing productivity gains and solid contributions from our WAVE joint venture also contributed nicely in the quarter. This collective performance was also modestly better than we had expected and contributed to the increase and our full year 2024 outlook, which Chris will talk more about here shortly.

Our Mineral Fiber segment continued to perform well this quarter, even as market conditions remain mixed across our key verticals. Mineral Fiber net sales increased 3% on solid AUV performance, more than offsetting a modest decline in sales volumes. Our commercial teams executed well in the quarter, achieving strong like-for-like price along with some share gain in our retail channel.

Together with this strong execution and contributions from our digital growth initiatives, Canopy and PROJECTWORKS, we were able to largely offset overall market softness. Mineral Fiber adjusted EBITDA rose 8% in the quarter, and adjusted EBITDA margin reached almost 44%, marking the seventh consecutive quarter of year-over-year adjusted EBITDA margin expansion. And this result also is the strongest third quarter margin performance reported since 2019.

These results reflect our ongoing ability to deliver strong AUV performance driven by consistent like-for-like pricing and productivity gains in our mineral fiber plants while remaining focused on quality and service. In the quarter, our plants delivered service levels ahead of our targets. Measures like our perfect order measure and fill rates were at elevated performance levels.

And as you've heard me discuss before, these KPIs measure performance in areas that are key to our industry-leading value proposition to our customers. Consistently providing our customers with high-quality products and best-in-class service levels help strengthen our market position and earn our pricing in the marketplace.

The contribution from our plants goes hand in hand with the work our commercial teams do to differentiate Armstrong and continues to be foundational to our competitive advantage. Our Architectural Specialties segment also reported a strong quarter with net sales up 32%, accelerated by the inclusion of form that we acquired in April of this year, along with contributions from both Modern, which we acquired in the second half of 2023.

On an organic basis, the segment generated net sales growth of 7% and as expected, this was a step-up from our organic sales performance in the first half of the year and was driven by solid performance across our broad portfolio, and specifically, activity in the transportation vertical to the large airport projects I've mentioned previously.

As we've discussed, these transportation projects are often large and multi-phased I'm pleased to report our teams are doing a great job managing the complexity with supply chain coordination, construction and service quality. Being able to provide the level of service and coordination required to efficiently execute on these larger projects has become a differentiated advantage for Armstrong.

Importantly, we are seeing more bidding activity turn into orders as projects begin to move forward. We mentioned being awarded a couple of Florida projects, airport projects on our last call. This quarter, we were awarded 6 additional airport projects in various parts of the country. We continue to expect the federal funding for these projects to provide a multiyear opportunity for Armstrong.

I'm particularly pleased with the earnings performance of our Architectural Specialties segment, with adjusted EBITDA increasing 27% and adjusted EBITDA margins above 20%, including with the impact of 34. It's worth noting that the AS organic EBITDA margins have expanded every quarter in 2024, demonstrating we are executing the right actions in our pursuit of our stated goal of at least 20% adjusted EBITDA margin for this segment on an annual basis.

Now overall market conditions are continuing to further stabilize Activity continues to be positive in education, health care and transportation, along with data centers, while office activity appears to have stabilized with tenant improvement work slowly returning in parts of the country. Although a level of uncertainty remains, we are encouraged by what we are seeing across our verticals.

As we have navigated these somewhat choppy and inconsistent demand conditions post COVID, the positive impact of our diverse set of end markets, the resilience of our business model and the consistent dependable execution of our organization has allowed us to deliver net sales and adjusted EBITDA growth every year since 2020. And now let me pause here and allow Chris to provide some additional details on our financial results.

[Christopher Calzaretta, executive]

Thanks, Vic, and good morning to everyone on the call. As a reminder, throughout my remarks, I'll be referring to the slides available on our website, in Slide 3, which details our basis of presentation. Beginning on Slide 6, we discuss our third quarter Mineral Fiber segment results. Mineral Fiber sales were up 3% in the quarter, driven by favorable AUV of 4%, partially offset by modestly lower sales volumes.

The increase in AUV was driven by strong like-for-like pricing with flat mix on a very strong prior year comparison. Market conditions continued to stabilize in the quarter, and our initiatives, along with higher volumes in our retail channel partially offset market softness.

Mineral Fiber segment adjusted EBITDA grew by 8% with adjusted EBITDA margin expanding 200 basis points to 44% despite modestly softer volumes. Adjusted EBITDA margin expansion was primarily driven by the fall-through of AUV, gains from improved manufacturing productivity and higher equity earnings from our WAVE joint venture.

Manufacturing productivity in the quarter was ahead of our target and WAVE equity earnings were driven by favorable price cost, partially offset by lower volumes. These benefits more than offset an increase in SG&A, which was driven primarily by higher incentive compensation. I'm pleased with how our team executed in the quarter and their commitment to drive profitable mineral fiber growth, with a focus on consistent margin expansion despite muted market conditions.

On Slide 7, we discuss our Architectural Specialties, or AS, segment results. Robust sales growth of 32% in the quarter was driven primarily by an increase from our recent acquisitions of Freeform and Boat Modern as well as organic sales growth primarily driven by some larger transportation projects, including the acquisitions of Freeform and BOK, third quarter total AS adjusted EBITDA margin was 20%. And as we noted on our last call, we expected to see the top line growth of the organic AS business accelerate and continue to expand margins in the back half of the year.

We're encouraged that our third quarter results reflect that and expect sequential top line improvement in the fourth quarter. We are on track to deliver the approximately 18% adjusted EBITDA margin for the full year 2024 that we had outlooked for the total AS segment in April and July.

We're also pleased with the performance of our recent 3form acquisition. The integration plan is on track as we continue to leverage and scale the business on the Armstrong platform, while delivering innovative solutions and best-in-class service levels to our customers. As Vic noted, we're also encouraged by the positive momentum on bidding activity and order intake as we close out 2024 and as we continued positive activity in the transportation vertical.

Slide 8 highlights our third quarter consolidated company metrics in which we delivered double-digit growth for sales and earnings with adjusted EBITDA margins fairly consistent with the prior year. Notably, adjusted diluted net earnings per share grew 13%. The drivers of third quarter adjusted EBITDA growth are consistent with the first 9 months of the year.

And as we turn to Page 9, we present our year-to-date consolidated company metrics, which reflect double-digit sales and earnings growth, with total company adjusted EBITDA margin expansion of 100 basis points. 2024 year-to-date performance was driven by our core value drivers, which are foundational to the profitability of our company.

Incremental volume from acquisitions and growth initiatives consistent strong AUV performance and healthy equity earnings contribution from WAVE drove our adjusted EBITDA growth for the year-to-date period. These benefits more than offset the increase in SG&A a significant portion of which was driven by recent acquisitions.

Slide 10 shows our year-to-date adjusted free cash flow performance versus the prior year. The 9% increase was driven by higher cash earnings and lower capital expenditures, partially offset by unfavorable working capital changes.

As we expected and as noted on our last call, adjusted free cash flow generation accelerated in the third quarter, with 17% growth versus the prior year. We saw continued strong cash earnings and positive contributions from working capital in the third quarter. We remain confident in delivering double-digit adjusted free cash flow growth for the full year.

Our demonstrated ability to consistently deliver strong adjusted free cash flow allows us to support all of our capital allocation priorities. Recall that our capital allocation priorities are: first, to reinvest back into the business where we see the highest returns; second, to execute strategic acquisitions and partnerships to create shareholder value; and third, to return cash to shareholders through dividends and share repurchases.

Just last week, we announced a 10% increase to our quarterly dividend, marking the sixth consecutive annual increase since the inception of our dividend program in 2018. This increase reflects our Board of Directors' continued confidence in our long-term growth strategy and evidences our ability to continue to return cash to shareholders.

In the third quarter, we repurchased $15 million of shares and paid $12 million of dividends. As of September 30, 2024, we have $677 million remaining under the existing share repurchase authorization. With a healthy balance sheet and ample available liquidity, our ability and intent to complete additional acquisitions remains unchanged, and we remain committed to advancing all of our capital allocation priorities.

Slide 11 shows our updated full year 2024 guidance. With strong profitability in the third quarter and our improved profitability outlook for the remainder of the year, we are increasing our guidance for adjusted EBITDA and adjusted diluted net earnings per share as well as modestly increasing our guidance for adjusted free cash flow.

We have also tightened the range on our full year sales outlook. As market conditions stabilize, we continue to expect full year Mineral Fiber volume to be down about 1%. We also continue to expect full year Mineral Fiber AUV to be above our historic average. Our sales outlook for the full year is in the range of 10% to 11% growth.

Given solid third quarter performance and improved full year profitability expectations, we now expect total company adjusted EBITDA growth for the full year in the 12% to 14% range. an increase from our prior expectations of 10% to 13% growth. There are no material changes to our AS segment assumptions from our July outlook.

For the full year, we expect adjusted free cash flow to grow 10% to 14% and expect adjusted diluted net earnings per share to now grow at 16% to 17%, and with about half of the increase in the EPS outlook driven by a lower effective tax rate compared to the prior year.

Please note that additional assumptions are available in the appendix of this presentation. Our focus on driving profitable growth in light of a challenging market environment remains unchanged, and we expect 2024 will be our fourth consecutive year of net sales and earnings growth.

The strong results we've delivered thus far and our robust growth outlook for the full year gives us confidence that we will finish 2024 strong and enter 2025 with positive momentum. And now I'll turn it back to Vic before we take your questions.

[Victor Grizzle, executive]

Thanks, Chris. As Chris summarized, we are well positioned for another record year of double-digit top and bottom line growth in 2024. We have momentum that we expect to carry forward into 2025, and I'm extremely proud of the accomplishments so far this year.

Our product innovation remains focused on important attributes and solutions that are responding to current and future market needs. Products like our Temp lock energy-saving sealing products and our low and body carbon ceilings. With these products, we are directly addressing large macro trends that we believe will be important in driving our business for many years to come.

In our recent updates, we have discussed the significant role buildings play in both energy use and carbon emission with buildings contributing about 40% of all carbon emissions generated annually in the U.S. Within this, about 40% of energy consumed by commercial buildings is related to heating and cooling.

I'd like to take a moment to elaborate on these trends that are driving the need for greater energy efficiency within these buildings. One driver is the rapid expansion of data centers and the increasing adoption of AI technologies, both of which are pressuring the U.S. electrical grid.

According to the Electric Power Research Institute, data centers are projected to consume nearly 9% of the nation's electricity by 2030. That's up from 4% in '22. As AI is becoming more integrated into everyday technology, energy consumption is and will continue to increase considerably. For example, you may have seen the stat that a simple ChatGPT query uses 10x the energy of a typical Internet search.

Meanwhile, building owners aiming to decarbonize to achieve both energy and emission savings are adding to the strain on the electrical grid as they look to shift from natural gas to electric heating systems. The aging electrical power grid will struggle to keep up with this unprecedented increase in energy demand, raising serious concerns about the reliability and sustainability of electricity supply.

So addressing the energy demands of buildings is a critical area of focus in order to lower the strain on the grid while redirecting energy to support newer applications like data centers and AI. We believe Armstrong has an important role to play here.

Our Temp lock Energy savings sealing products provide up to 15% reduction in energy usage for heating and cooling of buildings, which is a significant cost savings for building operators. These products contribute to lowering the building's carbon emissions while maintaining thermal comfort for occupants and they are the first ceilings on the market that pay for themselves over time.

Taking this one step further, heating and cooling of buildings is also a main driver of peak electricity demand that has forced utility providers to build expensive grid capacity to handle these these spikes in usage. Temp lock thermal storage can be leveraged during these peak hours, moderating demand and providing relief to electrical infrastructure when it's needed most.

As utilities and grid operators seek solutions for grid stability, this kind of demand flexibility is becoming more critical for a more resilient energy system. Also in support of building energy savings is a regulatory driver for increased energy efficiency through new building codes and standards.

One example is currently gaining momentum across the country, our enhanced building performance standards that are being introduced by state and local governments. That mandate-specific building level energy use and emission reductions. 13 cities in the U.S. have implemented laws on these standards as of 2024, including New York City, Boston, St. Louis, and Seattle, to name a few.

There are another 30 cities planning on launching similar laws by 2026. Now over time, we believe these standards will contribute to an acceleration of retrofitting older buildings, particularly Class B and Class C buildings in order to comply, but also to become more competitive. This is because new tenants know that buildings meeting these standards will be more economical to operate.

The energy saving products we have launched are well positioned to help building owners reach these standards and will contribute to a renovation tailwind for years to come. Now before turning to your questions, I would like to go back to a point I made earlier. So far in 2024, Armstrong has continued to demonstrate resilience in a challenging environment and is delivering consistent profitable growth. While it's too early to provide a detailed outlook for 2025, we do expect the foundational components of our growth algorithm to persist, and these include steady, consistent mineral fiber AUV growth supported by like-for-like pricing and market-driven product innovation, growth initiatives to drive Mineral Fiber sales volume above market level growth rates, growth from our Architectural Specialties through market penetration and acquisitions that are scaled on the Armstrong platform, manufacturing productivity improvements that offset inflation and expand margins.

As we continue to successfully execute our growth strategy, we are confident in our ability to generate strong and consistent free cash flow to fund future growth and provide an attractive return to shareholders through our dividend and share repurchase program. These are the hallmarks of Armstrong's business model that continue to drive consistent results through all parts of the economic cycle.

With this proven framework, again, we are confident in our ability to navigate a dynamic market backdrop, capitalize on the opportunities we see and deliver strong growth and profitability for years to come. With that, we'll be happy to take your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Susan Maklari with Goldman Sachs.

[Susan Maklari, analyst]

My first question is thinking about mineral fiber volume growth given the backdrop that you outlined and some of these stabilizing factors or some of the green shoots that you're starting to see across the end markets and the different verticals. How are you thinking about the potential to get back to that longer-term volume outlook in mineral fiber? Any thoughts on the trajectory there? And maybe how that could to come through over the next several quarters?

[Victor Grizzle, executive]

Yes, sure. The market that you're referencing really -- and we've talked about this, right, in the last 3 or 4 quarters. We've really had a market that is stabilizing. And it's kind of moving sideways, even the bidding activity that we monitor on a quarter-to-quarter basis has been moving in a tight range over the last several quarters. And so we do feel like we've kind of stabilized and created a new base here, if you will, to go forward. To your point, Susan, on the outlook. When I look at the outlook fundamentals and the building blocks for that outlook, that was in that 2% to 4% volume range. The building blocks are there. Now that we've stabilized and when you look at the distance from where we are to those pre-pandemic levels of volume, we have a tailwind of getting back to that from a market recovery. It's a big building block of that 2% to 4%. We do believe that, that's still intact. And it might be initially led by new construction with renovation to follow, which is an interesting dynamic in this particular cycle. But the other is the growth initiatives, and we've been demonstrating our ability to generate somewhere around 1% and in some cases, slightly north of 1% volume gain to help us offset some of the market weaknesses that we've been experiencing in the last 4 or 5, 6 quarters. That building block is still there. And so when you -- and when you add energy savings, sealing tiles, which were in the very early stages of that has another leg of growth to our initiatives that we're very excited about. So I believe that building block is still intact and that gets you to that back into that 2% to 4% range. So we feel good about the outlook for the midterm. I think the question that you're alluding to here, Susan, is the rate and pace to we get back to that. So I'm confident in the building blocks there. I think the rate and pace. We still have to wait and see how some of this uncertainty kind of clears up for us so that the discretionary work can get back in the market as well.

[Susan Maklari, analyst]

Yes. Okay. You're right on that. But I appreciate the color and that commentary in there. And then maybe turning to margins. You saw some really nice tailwinds from the productivity initiatives that you've been pursuing in the last couple I guess as you look out, can you talk to the opportunity that's still out there? And any thoughts on how some of that may come through over time?

[Victor Grizzle, executive]

Yes. We've actually established a multiyear history now, right, providing greater than 3% productivity. And it's really the approach that our teams are taking on the fundamentals of a lean methodology. And we take a multiyear look at driving a pipeline of productivity programs so that each and every year, almost irrespective of what volume is doing, we're able to implement programs around scrap reduction and uptime on our equipment and so forth. We have a pipeline. So when I think about going forward, that pipeline is intact. It's still very healthy. And therefore, our confidence, along with our expectation of continued greater than 3% productivity gains is intact, and we expect that to be part of the business model going forward.

[Operator]

Your next question comes from the line of Keith Hughes with Truist Securities.

[Keith Hughes, analyst]

Input costs have been a tailwind for the whole year. pretty small here in the third quarter. Can you talk about what you're looking at for the fourth quarter and early next year, again, to Mineral Fiber.

[Christopher Calzaretta, executive]

Yes. Keith, it's Chris. Yes. So yes, exactly. For the fourth quarter, just to break down the components of our inputs, about 10% of our inputs are energy, pretty even split between electricity and gas. About 10% is freight and 35% is raw material related. So in the quarter, in the third quarter, we were seeing input costs in the low single-digit deflation level with, call it, mid-single-digit deflation on freight, double-digit deflation on energy and low single-digit inflation on raws. So I think for the fourth quarter, we're largely going to see a continuation of that as we finish out at the end of the year.

When I look forward to 2025, just to take a step back and think about our raw material inputs, for example, about 2/3 of our spend is on contracted raws -- and some of those span multiple years and have some inflation tied to them. So I expect in '25, a modest level of inflation heading into the new year. But again, we don't see a lot of variability and volatility on our raw material inputs. The freight and energy components of our inputs can fluctuate from time to time. too early to call yet what 2025 holds. That's some of the work we'll do as we finish the year and start modeling out 2025. So I believe that helps give you a little bit of context for the end of the year and looking into next year. That's very thorough. One other question, we had some nice growth here tie growth on Architectural Specialties, you called out transportation. Is it particularly large as a part of AS sales or was it this period of time that the end user market is doing particularly well.

[Victor Grizzle, executive]

Keith, it's a contributor for sure, right? Some of these projects are quite large. We've mentioned some of the large projects that are supporting that. But I wouldn't want to overemphasize the organic growth being tied specifically or only to airport projects. And I think, again, they're a meaningful contributor. But we're seeing some broad-based activity across our portfolio of businesses that are supporting this organic growth. From some of the smaller locations in which we've added in recent years all the way up to the main metal and wood parts of our business. So I'm encouraged by the fact that it's -- the step-up is really broad-based. But certainly, these large airport projects are having a nice contribution. And really, when I think about our backlog, they're contributing to a nice healthy backlog that gives us confidence going forward in the next couple of years as well.

[Operator]

Your next question comes from the line of Adam Baumgarten with Zelman & Associates.

[Adam Baumgarten, analyst]

On the topic of AUV -- One topic on AUV, just given the August price increase, which seemingly has gone pretty well. Do you expect AUV maybe to accelerate a bit on a year-over-year basis in 4Q to get to that -- to the guidance you've given?

[Victor Grizzle, executive]

Yes. We've had some nice realization really both in our February and our August price increases throughout the year. As you remember, we got back to some normalization with our price increases and the size of our price increases -- and the realization, again, has been really good. Teams have done a nice job on that. What we didn't have in the third quarter was a strong positive mix component of AUV. In fact it was flat, as Chris mentioned, -- so what we expect in the fourth quarter is more contribution from the mix side as the channel mix kind of normalizes out -- and to your point, should be a bit of an acceleration on AAV in the fourth quarter versus our third quarter performance. Similar like-for-like pricing, but a little bit more contribution on the mix side.

[Adam Baumgarten, analyst]

Okay. Great. And then just on SG&A in Mineral Fiber, it's been a year-over-year headwind for the past couple of years. It seems to maybe be moderating a little bit. How should we expect that to trend into the fourth quarter year and then maybe into 2025 at this point?

[Victor Grizzle, executive]

I'm sorry, what was the first part of that, Adam?

[Adam Baumgarten, analyst]

Just Mineral Fiber SG&A has been a year-over-year headwind ,

For the last couple of years or so. Is that moderated, you seem to down a little bit in the third quarter. How to think about that in 4Q and then into next year?

[Christopher Calzaretta, executive]

Yes, Adam. So on the -- in the fourth quarter, I'd say a little bit of moderation versus Q3. When I take a step back and think about SG&A and looking forward to 2025, obviously, we've established a relatively foundational level for our growth investments. And the incremental on that has been relatively small. When I normalize for some of the items that we've talked about over the past couple of quarters, incentive comp being 1 of them and look forward to 2025, we'll continue to -- and we're looking to get our SG&A as a percentage of sales down below that 20% level and continue to focus on leveraging our investments and getting that operating leverage. So Fourth quarter, I think, will be relatively similar to Q3, maybe a little bit better, but it's something that as we look forward to the new year to obviously continue to get that leverage from our investment base and continue to drive profitable growth.

[Operator]

Your next question comes from the line of Rafe Jadrosich with Bank of America.

[Rafe Jadrosich, analyst]

For the fourth quarter, I think you said that for AS segment, you would have quarter-over-quarter revenue growth, which does imply like a pretty big acceleration -- so the first question on this like is what's driving that? And then what does that imply for mineral fiber volume? And what are kind of the puts and takes there? .

[Stephen Kim, analyst]

Yes. .

[Christopher Calzaretta, executive]

It's Chris. So let me start with the second part first. So with mineral fiber volume kind of expecting a flattish fourth quarter on that particular side of the business, just to help help frame that. Again, Vic outlined the AUV component. So AUV, a bit of a step-up from Q3, but with flattish volumes -- on the AS side, speaking specifically, I think you're referring to the organic component of the business and the top line growth that we're referring to there. So we do expect to see top line acceleration sequentially in the fourth quarter on the organic side of the business. And again, continued EBITDA margin expansion as we finish out the year organically. So hopefully, that helps frame that a bit for you. .

[Rafe Jadrosich, analyst]

That's helpful on the components. And then just following up on an earlier question just on the SG&A cycle. If I go back 4 or 5 years, like the SG&A as a percent of sales is up quite a bit. You've made really significant investments in like Canopy and PROJECTWORKS. Can you talk about like the return you've seen on those investments where you are in those like the investment cycle for those? And then how do we think about that going forward?

[Victor Grizzle, executive]

Yes. Rafe, let me take that. The investments that we we started really back in 2019 on these growth initiatives, the 2 of which you mentioned, and we continued through the pandemic, right? And that's the SG&A step-up that you've been -- you're referencing there. Those were some foundational investments because these were some real white space in which we are investing in. As we have talked about, we're kind of past the foundational. We are past the foundational investment levels for those initiatives and we're seeking the operational leverage, which we started in '23 to get, and we've continued in '24 to get good operating leverage on those initiatives. In fact, I've been reporting that we've been EBITDA positive from those initiatives. That's going to continue. I don't think those investments, the way we look at those particular platforms of initiatives going forward as meeting the foundational level of investments going forward. So we're confident that we can continue to generate the operating leverage and get higher and higher returns on those initiatives. So we feel good about where we are with those. And again, I feel like now looking back, I'm glad that we continue those investments through the pandemic instead of cutting them or pairing them back because they're really materializing and helping us offset this continued weakness that's lingered on in the commercial markets. And so yes, I think going forward, we should continue to generate greater and greater operating leverage on those initiatives.

[Operator]

Your next question comes from the line of Stephen Kim with Evercore.

[Unknown Analyst]

This is Latish on for Steve. You touched on this a little bit in the script. For Mineral Fiber in the quarter, can you talk about which markets performed underperformed? And then kind of looking forward, do you see any kind of shift in this than anything you're seeing right now?

[Victor Grizzle, executive]

Yes. So on the Mineral Fiber side, the third quarter was very consistent than what we've been talking about the last couple of quarters in terms of the verticals, right? I think leading with office office continues to be stabilized, but at a lower level and so softer conditions, whereas health care and education. Certainly, the Transportation segment was -- were all positive contributors with data center is also contributing. But again, transportation and data centers are relatively small verticals in the overall scheme of things. So consistent education, positivity, health care positivity, offset by continued softness in the overall office market, although we've seen continued signs of stabilization in that office market, which are really encouraging.

[Operator]

Your next question comes from the line of Garik Shmois with Loop Capital.

[Garik Shmois, analyst]

Just on the mix impact in 3Q on EUV. Just to be clear, it's mostly a function of the growth we saw in retail. And I guess just to drill in on the retail strength that you commented on. Was it primarily a load-in? Or are you see point-of-sale accelerate as well?

[Victor Grizzle, executive]

Yes, Garik, on the mix impact, if it was nearly all on the channel mix and driven by retail. One of the things that I want to make sure I highlight is the underlying product mix of the business, which is driven by sales growing faster at the higher end of our portfolio, driven by our specification work. That continues to be a real positive and positive contributor like it has for years, frankly. That's still -- moving forward, this quarter-to-quarter noise we can get sometimes on the retail channel is what we experienced in the third quarter that pushed the mix to flat overall. But what I mentioned in my prepared remarks, we were awarded some additional stores at 1 of our big box customers. We had earned that business based on really good service and the way that we're handling these accounts. So we're happy to be awarded these accounts and these new stores, which require you to populate the shelves and to load in these new stores. And so that's what we experienced in the third quarter. And again, that is the overwhelming cause of the mix being dampened down in the third quarter.

[Christopher Calzaretta, executive]

And maybe, Garik, just a reminder also in terms of full year AUV. So through 9 months, we've seen really strong pricing and positive mix results on our year-to-date AUV performance despite the Q3 impact that Vic mentioned.

[Garik Shmois, analyst]

Okay. That make sense. And then I wanted to follow up just on the comment you made around manufacturing productivity coming in ahead of your targets. I was wondering if you could maybe expand on that a little bit more? Is it related to some of those longer-term initiatives you called out with respect to cycle times and scrappage? Or is there anything maybe a little bit more besides those longer-term items that are driving some of the productivity improvements that you saw in the third quarter?

[Victor Grizzle, executive]

Yes. One of the things I didn't mention that is very fundamental to your productivity is just running the plants really well, right, and not having a lot of downtime and just be very effective in the runs that we need to make. That was really a big foundational component of our productivity gains in the quarter as the plants were running very well. We had some record plant reliability numbers in some of our plants. So it really starts with that. Fundamentally, you've got to run the plants really well. And then on top of that, with your initiatives around scrap reduction overall quality, first pass yield on quality. Some of the things that can drive costs up in the plant being really good on those fronts was the driver, and it's been consistent actually throughout the year, how well our plants have run.

[Operator]

Your next question comes from the line of Katherine Thompson with TRG.

[Kathryn Thompson, analyst]

Just following up on a recent Wave acquisition in the data center space, give a little bit more color on this acquisition? And also when you think about M&A and growing the Armstrong portfolio, more color in terms of how much you're focused on the data center space versus other areas for growth?

[Victor Grizzle, executive]

Yes, Kathryn, thanks for the question. Yes, data centers, we believe, is a terrific kind of new and emerging, if you will, vertical. We're very focused on it. There's a lot of opportunity for design and design trends to make them even more efficient, more energy efficient. So we're really excited about that space and what we can bring to it. One of the fundamental things about data center design is the grid system because more and more is being suspended from the grid system, from cable trays to containment for heating and cooling separation. There's a lot of things that hinge on the design of that grid system in the ceiling. And that's really 1 of our strengths as a company. So we have a real right to play here that stems from really efficient design of that skeleton, if you will, in the ceiling. So this acquisition you're referring to is an extension of what we can bring into the ceiling and the ceiling grid system. It's really highly structural but it's componentry that's going to hang off of the grid system to provide more of the heating and cooling solution set that data centers are looking for. So it's an exciting area. It's a really small acquisition to get us started in this space to build off of our success in the grid system. And again, most of these data centers that we're working on most of them, the vast majority of them have ceilings in them. And this is how they control the environment for heating and cooling. So it's a nice upward opportunity for us and our WAVE joint venture, this acquisition was in that joint venture because they are at the point of the spear in terms of how we want to support given the importance of the structural grid system that goes in these data centers. So it's an exciting one. And it's an area of focus for us as a company, but certainly the WAVE joint venture.

[Kathryn Thompson, analyst]

How you go after business for data center, it's going to be different than some more of what I call traditional end markets, be it hospitality or office. How do you approach the strategy towards gaining growth and been gaining sales and gaining mind share specifically in data centers throughout the U.S.

[Victor Grizzle, executive]

Well, the good news here, a lot of it is specification-driven, right? Architects are designing data centers and they're specifying what materials go in those data centers. They're employing contractors to do [indiscernible] The model is actually quite similar. There are different sets of architects and in some cases, different sets of contractors. But the overall strength of how you win a specification plays right to Armstrong's to Armstrong's strength. So yes, that's how we plan to approach it. One of the things that we've done in our sealing business around project works and being able to automate the design we've been able to incorporate these structural grid components now in project works. And so we're using the PROJECTWORKS tool also to drive automation and productivity for the architects and the contractors for these complex grid systems.

[Kathryn Thompson, analyst]

Yes. We're just finding in some of our work at the decision-making processes for data centers has been a big departure from other types of projects. And so that was really the driver for that question.

[Operator]

Next question comes from the line of Fiona Chan with Jefferies.

[Unknown Analyst]

This is Fiona for Game. Congrats on the good quarter. You mentioned the market conditions continue to stabilize. So just curious about your thoughts in terms of the recoveries as we're going into 2020? Are we being maintaining some more growth in the second half of 2020 following the recut?

[Victor Grizzle, executive]

Yes. When you peel the part -- the market apart for a second in terms of new and renovation, I think what's really visible is the new construction activity throughout 2024. It's been positive. New construction starts on a square footage basis, has consistently outperformed the rental activity in 2024. So when I think about that pipeline of new construction activity in 2024, and I lag at 18 to 24 months out, that does say there could be in the second half of 2025 a tailwind of activity from new construction starts in 2024. So we'll be looking for that. On the other part of the business, which is the larger part of our business, as you know, 70% of our demand profile comes from renovation activity of the installed base. That is going to be a little bit more dependent on some of the other factors interest rates being one of them, of course, I think, is going to drive. But some of the uncertainty around what's going to happen to the economy and in the economy that will drive confidence for people to go ahead and release some of this discretionary renovation activity that we've been talking about, it's on the sidelines today. That's really kind of, I think, one of the things we'll have to -- as we get further into the year and our planning process for next year to assess how much of that discretionary renovation activity will come back in and at what rate and pace to influence the overall demand profile for 2025. I would just say, I think in total, when I look across, there's more potential for tailwind opportunities going into 2025, then there are headwind opportunities to the business. So we'll have to see as we get closer to February, and we give our full year outlook. But that's kind of how we're thinking about it today.

[Unknown Analyst]

Perfect. That's helpful. And then just a quick follow-up. Margin expansion for mineral fiber this quarter was pretty good. So how should we think about the cadence for this segment going into 2025? Any color on margins or revenue will be helpful.

[Victor Grizzle, executive]

Chris, do you want to take this?

[Christopher Calzaretta, executive]

Yes, sure. So yes, healthy margins in Mineral Fiber. And again, you can see the performance relative to our best quarterly performance since 2019 for the third quarter. The way we think about margins in Mineral Fiber is just kind of going back to the building blocks and core value drivers that Vic outlined earlier, continued pricing execution. And again, we look at all of the inputs and components in order to determine our pricing for the year. and really at a minimum to offset inflation. It's the continued ability to drive manufacturing productivity in our plants, again, to drive that margin expansion. And then again, all of the pull together of all of the execution in terms of controlling our costs, making disciplined investment decisions to get those returns should yield future and ongoing margin expansion. So that's how we look at the algorithm. That's how we look at the fundamentals of the business, and that's how we run the business is to continue to drive profitable growth with ongoing margin expansion.

[Operator]

Your next question comes from the line of John Lovallo with UBS.

[John Lovallo, analyst]

The first one is just on, I think, Vic, you characterized the Mineral Fiber volumes sort of stabilizing, moving sideways. In the context of the slight decline in volume from mineral fiber that you guys posted in the quarter, where did the market -- or how did the market perform? And how much would you say are you outperforming? And as we move into next year, how do you see that kind of spread between the market and Armstrong's ability to outperform.

[Victor Grizzle, executive]

John, the market overall seemed to be fairly consistent in the third quarter with what we've seen in the last 2 or 3 quarters to characterize it down low single-digit level. And I think our initiatives we've sized in that 1%, maybe slightly north of 1 percentage in terms of incremental volume contribution. So not quite offsetting all of the market softness, but a good part of it. And that's been pretty consistent all year from the initiatives that we've talked about. As I think about that going forward next year, I expect that we'll continue to -- from our growth initiatives, especially as we add new growth initiatives like the energy-saving ceiling tiles and our low and body carbon products, I think we have some confidence that our growth initiatives can continue to be in that one, slightly, again, greater than 1% contribution to the business, whatever the market gives us. And again, we're we're kind of moving into sideways here until some of this uncertainty clears up. But I would think that the delta between our market reality to our growth initiatives should still be in that 1-plus percent range.

[John Lovallo, analyst]

Okay. Make sense. And then at the beginning of the call, you guys mentioned the hurricane impact. And it's always a little bit uncomfortable to talk about the rebuild effort and what your role could be in that. But is there any opportunity for onshoring to participate in the rebuild that will occur there ultimately?

[Victor Grizzle, executive]

Yes, it's really to tell, John, on that with this kind of a storm, it usually is later in the cycle versus early in the cycle. So I think to be determined. I think like in similar storms, there's been a little bit, but it's not a big needle mover and material to the overall profile of the business. That's kind of how we're thinking about this one at this point, but it's kind of early to tell.

[Operator]

There are no further questions at this time. I will turn it back over to Vic Grizzle, President and CEO, for closing remarks.

[Victor Grizzle, executive]

Thank you all for joining our call today. Again, we're well positioned to finish the year strong, as Chris mentioned, and well positioned for whatever the market conditions happen to be in '25. And we're very pleased with the demonstration of really strong execution and the overall resilience of the business model, and we think that's going to continue as we go forward into 2025. So look forward to talking to you later. Again, thank you for joining.

[Operator]

This does conclude today's conference. You may now disconnect.