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

Hello, and thank you for standing by. My name is Marina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Armstrong World Industries Third Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Theresa Womble, Vice President, Investor Relations and Corporate Communications. Please go ahead.

Thank you, and welcome, everyone, to our call this morning. On today's call, Mark Hershey, our CEO; and Chris Calzaretta, our CFO, will discuss Armstrong World Industries Third Quarter 2026 results and rest of year outlook. We have provided a presentation to accompany these results that is available on the Investors section of the Armstrong World Industries website. Our discussion of operating and financial performance includes 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 we 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 and our expectations as of today's date, October 27, 2026. These statements involve risks and uncertainties that may differ materially from those expected or implied. We provide a detailed discussion of these risks and uncertainties in our SEC filings, including those related to market conditions, inflationary pastures and tariffs. We undertake no obligation to update any forward-looking statement beyond what is required by applicable securities law. Now I will turn the call over to Mark.

Thank you, Theresa. Good morning, everyone, and thank you for joining us. We delivered another solid quarter at Armstrong, demonstrating the resilience of our businesses and continued progress in our growth platforms. I was particularly impressed by how our people across a broad range of roles and responsibilities united to respond to a rapidly changing cost environment while continuing to serve our customers and advance our growth initiatives. . In the quarter, we delivered record third quarter sales and double-digit growth in both adjusted EBITDA and adjusted diluted EPS. Net sales increased 12%. Adjusted EBITDA increased 11% and adjusted diluted EPS increased 10%. This is strong revenue growth against a largely flat overall market. And importantly, both of our operating segments contributed to that performance and expanded adjusted EBITDA margins year-over-year. I believe these results demonstrate 2 things clearly. Our growth strategy is working and the underlying value creation model that has distinguished Armstrong for many years, remains firmly intact. Mineral Fiber delivered solid AUV and positive volume growth, while Architectural Specialties produced exceptional organic growth across a broad range of offerings and product categories. At the same time, input costs accelerated rapidly during the quarter, particularly freight and raw materials. We also saw timing-related mix pressure in mineral fiber, as can occur from time to time in some of our lower AUV channels. Together, those factors dampened the margin expansion we would otherwise have expected from this level of revenue growth. Accordingly, we responded to the recent cost headwinds with the same discipline that has served Armstrong well through previous inflationary cycles, enhanced productivity, swift strolls, optimized transportation and market-based pricing. Some of those benefits take time to flow through, particularly in our custom project-based Architectural Specialties businesses. We expect the impact of these dynamics to moderate as timing-related mix pressure normalizes and are mitigating actions take full or effect. Our updated guidance now reflects these impacts. Taken together of our businesses, underlying strength of demand and the continued traction of our strategic growth initiatives as we enter the final quarter of the year. Turning first to Mineral Fiber. Net sales increased 7%. And AUV was the primary contributor to growth, driven principally by price, together with a positive volume contribution. Notably, this was our third consecutive quarter of mineral fiber volume growth and the fifth of the past 6 quarters. While demand for our higher-value SWAT products remained healthy and again outpaced other product categories, volume was particularly strong in several of our lower AUV channels, most notably in Canada, where customers accelerated purchases ahead of anticipated tariff actions affecting grid pricing. Because we sell a complete ceiling system, that grid activity in Canada also pulled through additional mineral fiber volume. Wave benefited from that timing-related grid activity in the quarter as well as from strong data center growth to deliver a solid earnings performance. While at the same time, responding appropriately to continued steel and tariff cost headwinds. Overall, we view the lower AUV channel strength in the quarter as a timing-related mix dynamic that reduced the margin benefit we would normally expect from this level of sales growth. That said, even with the unusual mix dynamic and the swift rise in freight and raw material costs Mineral Fiber delivered 8% adjusted EBITDA growth and expanded adjusted EBITDA margin by 40 basis points to 44%. I want to emphasize that point. In the face of the highest input cost inflation we've experienced since 2022, Mineral Fiber delivered a 44% adjusted EBITDA margin and expanded margin year-over-year. That is strong evidence of the durability of this business and the ability of our teams to respond to escalating inflation through productivity, cost controls and other near-term mitigation actions. Our mineral fiber manufacturing teams were part of that effort and continued to execute well this quarter, setting an all-time record in plant reliability for the network and topping their record Q2 performance while also keeping our perfect order fulfillment measure at high levels. Plant reliability, product quality and dependable customer service are key enablers of our commercial performance and meaningful differentiators for Armstrong in the market as we strive to support our loyal distributor and contractor customers with exceptional quality and service. Turning to Architectural Specialties. Net sales increased 22% and including impressive organic growth of 16%, the highest quarterly organic growth rate in the segment's history. Growth was broad-based across the AS portfolio, supported by multiple consecutive quarters of healthy demand and strong project activity in transportation, health care, education and other commercial applications. I continue to be encouraged by our quoting and order intake rates. And by the ability of our commercial teams to drive penetration broadly across the Architectural Specialties categories. Order intake in the quarter again increased at a double-digit rate reflecting recent strong bidding activity and providing a healthy foundation as we finish 2026 and move into 2027. Adjusted EBITDA in this segment increased 25% and adjusted EBITDA margin expanded 60 basis points to 19.4%. That's a strong result given the rapid acceleration of freight costs during the quarter, together with heightened aluminum and steel inflation, and tariffs affecting portions of the AS portfolio. As a reminder, particularly with respect to our custom Architectural Specialties work, project pricing remains in place until quotes expire or price escalators take effect. This can create a mitigation lag when inflation and input cost pressures accelerate rapidly. Across the AS portfolio, as we have done across the enterprise. Disciplined mitigation measures are in place to reflect the new cost environment, including pricing and cost control actions initiated earlier this year. These efforts helped to support the record organic growth and margin expansion achieved this quarter. And this performance gives us even greater confidence in the segment's earnings potential as our actions become more fully reflected in the economics of recently quoted and future projects. Recent acquisitions also contributed to revenue growth in the quarter. We remain focused on accelerating commercial adoption, realizing integration benefits and using the Armstrong platform to help these businesses scale. The strategic rationale remains compelling. Each portfolio addition expands the range of materials and capabilities we can bring to a project. increases the number of specifications we can pursue and allows us to capture more value by solving a broader set of customer needs. And we continue to see a clear path toward our 20% Architectural Specialties adjusted EBITDA margin target as we further integrate and scale these recent acquisitions. The performance of Architectural Specialties this quarter also illustrates the broader evolution underway at Armstrong. We are increasingly bringing Mineral Fiber, metal, wood, felt, structural systems and design capabilities together to help architect designers and contractors execute more complex projects. That breadth matters. It allows us to engage earlier, compete for more specifications and offer customers a more integrated solution from design through installation, especially in a market where complexity, schedule certainty and execution matter. Our combination of portfolio breadth, technical expertise, project management and service is increasingly differentiated within our industry. Our recently completed work at Seattle-Tacoma International Airport Terminal C showcases our expanding ability to bring complex, high design spaces to life. Working hand-in-hand with the architects over several years our design team helped realize a striking timber-clad Kanopi and column structure inspired by Pacific Northwest forests, anchoring a 4-story marketplace and grand staircase. The tree at Terminal C which is pictured on the cover page of our earnings presentation today, combines 4 distinct wood products with metal ceiling and mineral fiber solutions and demonstrates how our broad portfolio and collaborative design expertise uniquely position Armstrong to deliver on ambitious architectural visions. This is exactly the kind of opportunity our expanded portfolio is creating. We are not simply participating in more categories. We're helping customers solve more of the ceiling and wall scope through 1 trusted partner. With that, I will turn the call over to Chris for a closer look at our financial results and updated full year outlook.

Thanks, Mark, and good morning to everyone on the call. As a reminder, throughout my remarks, I'll be referring to the slides available on our website, and please note that Slide 3 details our basis of presentation. We begin on Slide 6 with our Mineral Fiber segment results for the third quarter. Mineral Fiber net sales increased 7% in the quarter, driven by AUV growth of 6% and an increase in volumes. The increase in AUV was primarily driven by favorable like-for-like pricing, along with a positive contribution from mix. The increase in volumes was driven by timing-related demand from our Canadian customers, as Mark discussed, as well as benefits from our growth initiatives. Mineral Fiber segment adjusted EBITDA grew by 8% in the quarter with adjusted EBITDA margin expanding 40 basis points to 44%. Adjusted EBITDA growth was primarily driven by the fall-through of AUV although at a lower rate than expected due to the mix impact of higher sales volumes to lower AUV channels. Additional items contributing to Mineral Fiber adjusted EBITDA growth in the quarter included a solid contribution from our WAVE joint venture, as well as lower mineral fiber SG&A expenses primarily driven by higher incentive compensation expense in the prior year quarter. These benefits were partially offset by higher input costs, reflecting a sequential acceleration in freight and raw material inflation. While our pricing actions are designed to offset inflation over time, periods of rapid inflation can create timing lags between higher input costs and our full price realization, and this dynamic was a factor during the quarter. Despite elevated input cost inflation, the Mineral Fiber adjusted EBITDA margin of 44% represents the strongest third quarter adjusted EBITDA margin result in the segment since 2019. This level of financial performance, even in a challenging environment, underscores our mineral fiber value creation drivers, including AUV growth, annual productivity gains and positive contributions from our WAVE joint venture, along with our disciplined focus on cost control. On Slide 7, we discuss our Architectural Specialties or AS segment results, where we highlight net sales growth of 22%. This increase was driven by broad-based organic growth across most of our specialty product categories, along with contributions from the February acquisition of Eventscape and the 2025 acquisitions of parallel and geometric. We are pleased with an organic growth rate of 16% in the quarter, which represents the highest quarterly organic growth rate on record. AS segment adjusted EBITDA increased 25% versus the prior year with adjusted EBITDA margin expanding 60 basis points to 19.4%, which includes the dilutive impact of our recent acquisitions. On an organic basis, we achieved a greater than 20% adjusted EBITDA margin despite the negative impact of lower project margins related to elevated metal costs and freight. The improvement in adjusted EBITDA was primarily driven by a $12 million benefit from higher net sales, of which $3 million was inorganic. This benefit was partially offset by a $2 million increase in manufacturing costs due primarily to our recent acquisitions and a $3 million increase in SG&A expenses, of which approximately half was from our recent acquisitions. We are particularly pleased with the segment's $12 million sales benefit to adjusted EBITDA in the quarter despite the impact of elevated metal costs. On Slide 8, we highlight our third quarter consolidated company metrics. Net sales grew 12% and adjusted EBITDA increased 11%. Additionally, adjusted diluted net earnings per share grew 10%. Incremental volume from both segments, solid AUV performance and positive equity earnings from WAVE drove adjusted EBITDA growth in the quarter. These benefits were partially offset by higher input costs, primarily driven by freight and raw material inflation in addition to higher manufacturing costs, which were largely driven by our recent acquisitions. SG&A expenses were essentially flat in the quarter as increased organic selling investments and an inorganic increase from our recent acquisitions were offset by higher incentive compensation expense in the prior year quarter. Excluding the impact of our recent acquisitions, total company organic adjusted EBITDA margin was 35.1%, representing 40 basis points of organic adjusted EBITDA margin expansion. Slide 9 summarizes our year-to-date consolidated company results, which reflect 10% net sales growth and 7% adjusted EBITDA growth. Adjusted EBITDA growth in the first 9 months of 2026 was driven by both incremental volume and the fall-through impact of solid Mineral Fiber AUV as well as positive WAVE equity earnings. Higher manufacturing costs were largely driven by our recent acquisitions and first quarter costs in the AS organic business. The increase in input costs was driven primarily by freight and raw material inflation. SG&A increased primarily due to continued investments to support growth, including higher people costs, and the inorganic impact from recent acquisitions, partially offset by higher incentive compensation costs in the prior year period. Adjusted diluted net earnings per share grew 9% and driven primarily by higher net earnings and partially due to a lower share count resulting from increased share repurchases. On Slide 10, we present our year-to-date adjusted free cash flow performance versus the prior year. The 2% decrease was driven primarily by unfavorable timing-related working capital flows driven by accounts receivable. Higher income tax payments in the current quarter primarily due to the favorable timing of a portion of our third quarter federal tax payment in the prior year period and higher capital expenditures. Partially offsetting these headwinds was a year-to-date increase in dividends from our WAVE joint venture. We remain confident in our ability to deliver solid double-digit adjusted free cash flow growth in 2026 to support all of our capital allocation priorities. Turning to capital deployment. Our year-to-date activity reflects continued execution on our capital allocation priorities, which are investing back into the business through CapEx pursuing strategic acquisitions like the first quarter acquisition of Eventscape and returning value to our shareholders through our dividend and share repurchases. Last week, we announced a 10% increase to our quarterly dividend marking the eighth consecutive annual increase since the inception of our dividend program in 2018. This increase reflects our Board of Directors' continued confidence growth strategy and ability to generate. Additionally, in the third quarter, we paid $15 million of dividends to our shareholders and repurchased $75 million of shares, bringing our year-to-date dividends paid to $45 million our year-to-date share repurchases to $210 million. As of September 30, 2026, we have over $1 billion remaining under the existing share repurchase authorization. Our balance sheet is healthy with low leverage and ample available liquidity, we remain well positioned to execute on our strategy. Turning to Slide 11. We present our updated 2026 guidance metrics. We now expect total company net sales growth of 10% to 11%, up slightly from the previous range of 9% to 11%. This increase is driven by the continued robust performance of our AS organic business. where we now expect net sales growth in the low teens range, up from our previous assumption of growth in the high single digits. Partially offsetting this increase are lower-than-expected contributions from our recent acquisitions as we continue to scale these businesses onto the Armstrong platform. This brings our full year net sales outlook for the AS segment, up to 18% to 19% growth an increase from our previous outlook of 15% to 17% growth. For the Mineral Fiber segment, we have slightly lowered our full year net sales growth assumption to approximately 6.5%. With about 1 point of volume growth and AUV growth of approximately 5.5%. We now expect more price due to higher inflation and softer mix versus our prior expectations. Additionally, we are modestly lowering the midpoint of our total company adjusted EBITDA guidance and now expect growth of 8% to 10% for the full year, down from our prior guide of 9% to 12%. This adjustment incorporates elevated input cost inflation and the ongoing impact of tariffs and reflects the timing of our mitigation actions across the business as well as lower-than-expected contributions from our recent acquisitions in AS. In the Mineral Fiber segment, we now expect the full year adjusted EBITDA margin result to be approximately flat to the prior year, largely reflecting the impact of mix headwinds. Recall that in Mineral Fiber, the 2025 adjusted EBITDA margin result of 43.5% was a record full year result, surpassing the previous high watermark of 2019. Within the AS segment, we continue to expect full year adjusted EBITDA margin expansion with an adjusted EBITDA margin of approximately 19%. And on an organic basis, we continue to expect a full year adjusted EBITDA margin of approximately 20%. We have also slightly lowered the midpoints of both our total company adjusted diluted net earnings per share and adjusted free cash flow guidance, given the decrease in our total company adjusted EBITDA guidance. We now expect total adjusted diluted net earnings per share growth in the range of 12% to 13%, down from our prior guide of 12% to 15% and now expect adjusted free cash flow growth of 10% to 13% compared to our prior guide of 10% to 14%. Please note that additional assumptions are available in the appendix of this presentation. Our updated full year guidance reflects our current view of the business. and we remain well positioned to deliver another year of profitable top line growth. And now I'll turn it over to Mark for further commentary.

Thanks, Chris. The outlook Chris just summarized reflects the market conditions and on the ground sentiment we are seeing today. Broadly, underlying market conditions remain generally muted, consistent with what we described last quarter and have experienced more or less throughout 2026. As a reminder, we benefit from a broad mix of end markets and balanced exposure across new construction, renovation and repair and replacement activity. providing resilience across changing market conditions, such as those we are seeing today. We continue to see steady activity across a diverse range of verticals with strength in areas such as transportation, health care and data centers. And within those verticals, we are encouraged by the trend we are seeing toward high-value experiential infrastructure for airports, stadiums, arenas and other hospitality environments. Ongoing modernization, capacity investments and a greater emphasis on the passenger and experience are driving more architecturally differentiated premium spaces. This plays well across both Mineral Fiber and Architectural Specialties. Importantly, that can be not just more square footage, but greater design intensity per square foot with more emphasis on acoustics, aesthetics and differentiated solutions. At the same time, we are closely monitoring elevated inflation, geopolitical uncertainty and signs of more cautious sentiment across the industry. While on the ground, sentiment and bidding activity remains stable, we are working closely with our customers, particularly our commercial distribution partners to monitor for signs of project delays and capture opportunities as they emerge. In this type of environment, our strong relationships with distribution partners, architects and contractors together with continued investment in our growth platforms remain critical to expanding our addressable market and driving growth ahead of the market. Within our growth initiatives, our e-commerce platform, Canopy continues to demonstrate solid growth with double-digit revenue and mineral fiber volume growth year-to-date and meaningful EBITDA improvement while increasingly extending its digital capabilities beyond mineral fiber into grid and Architectural Specialties. Similarly, Project Works, our automated design platform also continues to grow adding incremental mineral fiber volume growth while also assisting designers and contractors in the design and preconstruction project phases, helping save time and money with complete, accurate and dependable solutions drawings and builds of the material. In data centers, we are applying Armstrong's established strength in specification, systems, technical support and installation efficiency to an attractive growing vertical. As we shared last quarter, our broader solution set has positioned us to serve demand from hyperscalers, co-locators and enterprise customers more effectively. Our complete set of structural grid, containment and integrated mineral fiber solutions can improve building efficiency and installation speed, and we're seeing encouraging signs of progress. Through the third quarter, both our ceiling and DynaMax structural grid data center sales have exceeded our full year revenue plans. We are also seeing increased applications for these solutions in mission-critical advanced manufacturing environments. A recent win at an advanced manufacturing research facility shows how our expanding go-to-market approach and our technical expertise are improving our access and win rate. By engaging earlier in the design and bid process, our close collaboration directly with the owner helped realign project requirements to use our recently introduced SKYLO walkable ceiling system. By validating performance with an on-site demonstration return to specification gap into a confirmed order for our solution. That project spans almost 500,000 square feet and represents a multimillion dollar order demonstrating our ability to win large, complex projects with our tailored solutions and approach. We will use this and other recent wins to strengthen Armstrong's position as a trusted, experienced partner and build references for similar customers. This is a highly competitive market, and our presence continues to expand. With the combination of strong market growth across this vertical a broader portfolio and growing customer engagement gives us confidence the data centers and other mission-critical buildings can become a consistent growth platform for us over time. We are also encouraged by the progress we are making with TEMPLOK energy saving ceilings, particularly in specification activity. Building on the pipeline growth we discussed last quarter, our specification teams and established sales relationships are helping us introduce TEMPLOK earlier in the design process and earn consideration on a growing range of projects. That's an important step in building demand for a new solution whose value proposition includes energy performance, occupant comfort and building economics. Specification activity is an encouraging measure of progress. It reinforces our confidence that Armstrong's long-standing strengths with architects, designers and contractors can help us build this new market. By expanding the pipeline of projects in which TEMPLOK can be evaluated, selected and ultimately converted into commercial demand. We're also seeing compelling real-world validations of our TEMPLOK technology. A recent case study at a pediatric therapy facility in Charlotte demonstrates how TEMPLOK ceilings are creating a quieter, cooler environment for the children and families the facility serves. This is exactly what excites us about TEMPLOK. We're taking a familiar building surface and giving it an entirely new performance capability, creating tangible value for building owners and occupants. Overall, we remain encouraged by our growth initiatives. They are further differentiating Armstrong with customers, expanding the markets we can serve and contributing tangible growth today, including up to 150 basis points of above-market mineral fiber volume growth for the full year. In closing, this was a quarter that demonstrated the durability of the Armstrong value creation model and the progress we are making against our growth strategy. We delivered record third quarter sales and margin expansion in both segments, even as input costs accelerated rapidly. We responded with urgency and discipline and we are confident in the actions underway to address those pressures. At the same time, we are strengthening our established businesses, expanding the Armstrong portfolio and building growth platforms that increase the value we can deliver for customers. None of that happens without the commitment and hard work of our people. I want to thank our teams across Armstrong for the way they continue to serve our customers and respond to changing conditions. We move forward into the fourth quarter and look ahead to 2027 with confidence, focused on delivering profitable growth and creating long-term value for our shareholders. With that, operator, we are ready to take your questions.

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

My first question is building on the last comments that you gave us on some of the projects and the initiatives that you have in there. I think it's encouraging to hear that the order intake in AS was up double digits the macro pressures that we've seen. Can you talk about how you are communicating with your customers, the architect designer community, making sure that they really understand the initiatives that you've put through in the last couple of years, the value proposition of the product. And maybe with that, just how are you monitoring the channel in demand and any potential changes from the macro? .

Great. Susan, thank you very much. Yes, we're really pleased with the intake and also the consistency of the intake. We are compounding and stacking multiple quarters of double-digit intake and I think that's a testament to our teams and good commercial execution but also to what you're talking about, which is awareness of the broader portfolio and the value proposition that comes with it. Last quarter, we talked about the NeoCon event in June. And frankly, that event and how we presented ourselves to the market, was what we're trying to do with all of our customers, the architect design community for sure. And we've also optimized our selling organization around that very purpose. So we are going to market and equipping our commercial organization with the full range of that portfolio. And that puts them in a position with design experts and design professionals to have a conversation, to have a partnership and a relationship where we can share the complete breadth of the portfolio and help them achieve their design intent. And that's really what the breadth of the portfolio is all about is giving the market options to meet their design objectives regardless of what material or substrate or objective they're trying to accomplish. It could be aesthetics, it could be performative. It could be acoustics. It could be energy with TEMPLOK. So we're really giving them that voice and that platform, that pallet, I said we talk about it, to be able to make their design choices. And then we're promoting it. Frankly, you heard me mention in my remarks the incredible project at [indiscernible] this quarter. We will market those projects. We will keep them in front of the design community and we'll stay very close to that design community. Your point on kind of monitoring what's going on in the market, that happens with our commercial organization with our A&D customers. It happens with our distribution partners. It happens with our contractor customers. And that's where we glean all of our kind of market insights around bidding activity and on the ground activity. So we're sharing projects. We're monitoring their activities, and we're supporting them in the process.

Okay. That's great color. And then maybe shifting to some of the channel dynamics that you mentioned in the quarter. Can you just talk to when you expect that to normalize? How we should think about the -- any potential ramifications into the end of this year and maybe even into early 2027? .

Yes. Thanks for the question. So on mix, generally, this is one of those episodes that we -- that does happen from time to time. We just saw relatively stronger volume performance in Mineral Fiber and concentration in our lower AUV channels. We've had this in the past, occasionally, we've talked about this before. When we get -- we refer to it sometimes is lumpier demand in some of those channels and we saw that this quarter. What was really unusual this quarter and it happened in this quarter was this was a Canadian dynamic, as I mentioned in my remarks. And the triggering event for that dynamic was really tariffs. This was brought on and really manifested itself in late summer when the 338 tariffs went into effect and then Canada sort of retaliated in response, that put additional heightened tariffs on to grid flowing into Canada that triggered additional buying activity to get ahead of potential tariffs and surcharges and you had the pull-through of additional volume. So a very interesting dynamic there in Canada. And so we had outsized, if you will, concentrated volume growth in that lower AUV channel. We view this as really very much a timing dynamic that will flow through, and we expect to moderate by the end of the year.

Your next question comes from the line of Tom icono with JPMorgan. .

Mark, you've noted intake has remained consistently strong. Faster high level, are higher rates and higher costs impacting customer investment behavior, like are you seeing more project defers or spec changes? And where is that like showing up in your orders and volumes by end market, please? .

Yes. I think that's always a consideration, Tomo. We're not seeing outsized or material changes affecting our intake this quarter. It's something we watch very closely. But no, we think the project values continue to be high. And I think one of the kind of big picture demand environment points that is worth calling out, which we continue to see, while project counts and new start counts are somewhat muted other than maybe data centers. The value of new starts and the value of the bidding activity we're seeing continues to remain high. We still think there is high demand for a premium solution set, which really plays well to our strengths. So it's always a competitive environment, and we're competing on our innovation and our service and quality, but that has not dampened our intake. And I think that makes the intake even more impressive is the consistency of it and the double-digit nature of it.

And just one follow-up, rather than the timing of price cost, I want to ask better price [ sickness ]. How have reacted to recent pricing actions and surcharges. Like where are you seeing any pushback by channels or products and that's the competitive environment raise any concern about holding? .

Yes. Thank you, Tomo. So we take a very disciplined approach as we have for frankly, decades. We've got a very strong pricing center of excellence, an incredible team that manages our pricing activity. We talk about market-based pricing. We talk about pricing that's proportionate to the inflation and correlated to the inflation that we see in the backdrop. So on its face, some of the pricing numbers may seem dramatic, but they do correlate to what we're seeing in the market. And it's that discipline that responsible pricing that we're committed to maintain. So I think, look, the analysis that we do, the data gathering that we do, the calibration to the rapid rise of inflation. And frankly, just to put it in perspective, this quarter, was the most significant inflationary period that we've experienced since mid-'22. The rate and pace of that inflation, and it is evident in the data was simply dramatic through the period and especially so in areas like freight, which we talked about in our prepared remarks. So we prepare our pricing. We put pricing on the street, we believe is responsible and correlated and that's where our credibility comes from is kind of that foundation.

Your next question comes from the line of Adam Baumgarten with Vertical Research Partners.

Just sticking on mineral fiber AUV, it seems like you're implying a similar about 6% AUV in 4Q as you saw in 3Q. I guess -- and I think you sort of touched on this earlier, but are you assuming those mix pressures continue to some degree into 4Q that you saw in 3Q and then maybe as you exit the year, you get it through it? That's my first question.

Yes. Adam. Yes. So just to unpack AUV kind of progression, if you will, outlooking a full year of 5.5% and what we're seeing there is a little bit stronger price than we previously expected due to the pressures that impacted us here in the third quarter and the continued pressure into the fourth quarter, but a little bit softer mix on the mix dynamics that we outlooked in our prepared remarks. So 5.5% for the full year, still expecting positive mix but a little bit stronger pricing, again, in response to the ongoing inflationary pressures.

I'll just say on top of that, we got good price realization in the quarter. We're expecting good price realization again next quarter. So there's no change in our confidence there around our ability to realize price. We've got this somewhat timing-related mix dynamic, and that's really what you're seeing play through. .

Okay. Got it. And then just maybe thinking about if you look into next year, just given all the inflation you've seen in your typical pricing cadence and sort of the 1Q and 3Q. Should we think that price realization that part of the story that you have more control on could be higher next year given all the inflation you're facing?

Yes. We're still in the sort of design and construction phase, the modeling phase right now, Adam, for our 2027 budget. So we're not going to begin to try to guide our 2027 outlook. But I think it's fair to say that we are setting ourselves up to be in a strong position to continue to realize strong pricing in 2027 with the actions we've taken. Each of our businesses has had additional price increases in 2026 that are beyond our normal cadence. So beyond our normal February, August cadence. Fiber business just announced another price increase that's effective in November. The AS business had a price increase off cycle in June as well as November. The WAVE business had additional price increase in June as well as November. And when we make those kinds of decisions, they are, as I said before, correlated to what we're seeing in terms of input cost inflation and market dynamics but they are -- we are considering the outlook and the inflationary environment we expect over the near and medium term.

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

We've talked a lot about cost pressure. I assume that's going to get a little worse in the fourth quarter in Mineral Fiber. Is that correct? And would you expect maybe more sequential increases to come in the first quarter of '27.

Yes. Keith. So sequentially heading into the fourth quarter, for sure, we believe that the inflationary pressure is still elevated, especially on the freight side. Fuel continues to pressure this area with diesel pricing above $6 a gallon. So certainly on the mineral fiber side there on freight. And then on the AS side, continued pressure on the freight front as well as continued pressure on metal costs heading into the fourth quarter. That being said, the pricing algorithm and our ability to continue to realize price hasn't changed for the business. Sometimes, we get caught up in a bit of a lag effect and are able to catch up in subsequent quarters as our pricing is fully realized. So again, it's a temporary impact that we saw here certainly in the third quarter as it pertained to the impact on the margin in both segments. But no change in our algorithm and the value creation driver of AUV and pricing for the company.

Okay. And just switching to AS real quick again on costs. It doesn't seem like it's facing as much cost pressure. Is that correct? Or is that something you hadn't in the numbers?

Yes. It's still -- we're still facing the cost pressures there again on the metal cost and freight front and then, again, responding to those accordingly through our actions and the pricing cadence that Mark mentioned previously. So still a pressure point for us there in that segment.

Maybe one thing to add there, too, Keith, is -- and I agree, Chris, is the pricing for AS is different. And I think that lag effect that Chris is talking about, it's important to point out. In AS, we price largely the bulk of the portfolio on a project basis. So that lag effect is very natural because we're putting quotes out on the street that have a duration to them that is longer than, let's say, a Mineral Fiber sale -- a standard SKU basis, right? So there is a lag effect there. It's why we use escalators, it's why we use quote expirations, but that lag effect for custom projects, for example, is sort of inherent to the nature of that project business and it moves through. But the actions we've taken, and they go beyond pricing, but the actions we've taken across the enterprise and particularly in AS, give us that confidence to see improvements. And we're outlooking margin improvement in the fourth quarter, both year-on-year and sequentially in AS as a result of those actions. So we're confident in where that's headed.

Your next question comes from the line of Garik Shmois with D.A. Davidson.

I was wondering if you could quantify at all the pull-forward effect from the shipments in Canada and what you're assuming for, I guess, the expected destocking in the fourth quarter.

Yes. So Garik, it's a bit of a timing-related dynamic. I can tell you that as we're continuing to look forward to our overall volume for the year in Mineral Fiber, we're still out looking at one point of volume growth for the year with continued volume growth in the fourth quarter. Just remember that we're comping a bit of a soft volume quarter in Q4 of last year. But again, there is a timing dynamic here but haven't certainly sized precisely what that is.

Okay. That's fair. Follow-up question is just on SG&A and Mineral Fiber. You had, I guess, lower incentive comp and drove a lower SG&A in the quarter. I was just wondering if you could help us think through what underlying SG&A inflation is in that segment and any additional levers that you have to keep controlling costs.

Yes. No, thanks for the question. So on performance in the quarter, SG&A performance in the quarter, at the total company level, we were essentially flat versus the prior year. Let me unpack kind of both segments, Garik, here to provide a little bit more color on each. Mineral Fiber was favorable by $3 million, and that was precisely what you had noted there, the higher compensation expense in Q3 of last year and it's at a more normalized level here in the current year quarter. On the AS side of the business, we had higher SG&A of about $3 million, where half of that increase was organic, where we continue to invest for growth and the other half was inorganically related primarily on the acquisition of Eventscape. We're taking a very disciplined approach to SG&A costs in light of the broader cost pressure on the business, and we've been focusing on discretionary cost controls in response to answer your question. I'd say overall, I'm pleased with our SG&A margin of approximately 19% in the quarter and are really driving for that, I've mentioned this before, sub-20% SG&A as a percentage of sales for the full year. as we finish 2026. Again, what remains important to us is the rate and pace of spend, and that continues to be a focus given the inflationary backdrop that we've been talking about this morning.