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Digital Initiatives Aid Armstrong World (AWI) Amid High Costs

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Armstrong World Industries, Inc. (AWI - Free Report) has been witnessing solid sales growth in the Health Zone product line through its online marketplace.  Also, its focus on digital initiatives, investment in new products and inorganic moves bodes well. However, higher raw material costs and Fed’s consistent rate hikes are concerns.

Driving Factors

The company is continuously investing in healthy spaces and digital initiatives and is optimistic about its contribution to its growth. During second-quarter 2023, AWI's healthy spaces and digital growth strategies positively contributed to Mineral Fiber sales. Strong sales growth in the Health Zone product line through its online marketplace helped the company mitigate some of the adverse effects of the overall decline in market activity. Notably, sales through its digital initiative, Canopy have surpassed the total sales for 2022.

Armstrong World has been strategically investing in new products, sales and support services and advanced manufacturing capabilities. The company’s Architectural Specialties segment has been leveraging the new product platforms it has acquired in the past several years. This has helped the company further penetrate the specialty ceiling and wall category, participating in more spaces and commercial buildings and, importantly, larger, more complex jobs.

The company's systematic inorganic strategy enhanced its portfolio over the past few years. During second-quarter 2023, Armstrong World secured contracts at the Seattle-Tacoma airport and the airport in El Paso. The company is tracking over 200 airport projects, including new terminals at JFK in New York and Chicago's O'Hare, projects in Nashville, Orlando, Jacksonville and others.

In July 2023, Armstrong acquired BOK Modern, LLC, to further enhance its portfolio. The company intends to leverage BOK's third-party network and potentially integrate some operations into existing factories for a more efficient supply chain and improved capacity to support rapid expansion.

Headwinds

AWI is highly dependent on housing market demand. The company, which shares space with RPM International Inc. (RPM - Free Report) , Owens Corning (OC - Free Report) , Masco Corporation (MAS - Free Report) have been experiencing lower demand due to prevailing market conditions. The cyclical housing industry makes it vulnerable to changes in consumer confidence and economic conditions. As the Fed tightens monetary policy to curb inflation, higher mortgage rates may lead to reduced consumer spending on construction and renovation projects. This, in turn, could dampen demand for the company's ceiling systems, particularly in the U.S. market, where the effects of rising interest rates are already noticeable.

This apart, it has been investing regularly in healthy spaces and digitization, which is ultimately increasing selling, general and administrative or SG&A expenses. The company's SG&A expenses in the first half of 2023 were $124.6 million, up 5.1% compared with $118.6 million in the year-ago period. The increase in SG&A expenses can be attributed to an $8 million increase in selling expenses, primarily related to digital initiatives and higher costs in the Architectural Specialties segment.

Higher raw material, energy and freight costs and manufacturing costs hurt the company's bottom line. Although the company has been working to recover higher commodity costs through price increases, we expect this ongoing volatility in material costs to continue in the near term.

A Brief Review of the Other Players

RPM International: The company is benefiting from its businesses, providing engineered solutions targeting infrastructure and reshoring projects. In fourth-quarter fiscal 2023, the Performance Coatings Group segment sales increased 8.8% year over year to $358.4 million. Also, implementation of MAP 2025 operational improvement initiative, increased infrastructure spending, strategic buyouts and divestitures added to growth.

Owens Corning: The company is benefiting from solid Roofing segment performance. In second quarter 2023, the segment’s sales increased 10% year over year to $1.1 billion. The upside was driven by higher volumes related to storm activity and positive price realization. Also, its focus on pricing initiatives and product innovation bodes well.

Masco: The company is benefiting from Strong pricing actions and operational efficiency. Also, solid liquidity level, cost-saving efforts and accretive acquisitions are encouraging. In second quarter 2023, adjusted gross margin improved 320 bps from the prior-year level to 36.2%.

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