Soft demand environment
Jeff Ubben’s hedge fund ValueAct Capital disclosed in a 13D filing in August that it had acquired 9,200,000 shares, or a 16.8% stake, in Armstrong World Industries Inc. (AWI). The company also saw a new passive stake acquired by Eton Park Capital.
As discussed in the previous part of this series, AWI said that consolidated net sales increased slightly in 2Q14 despite lower volumes across all businesses in the Americas and Europe.
The company’s revenue growth appears to be the lowest among its peers in the building products space. Its peers include USG Corp. (USG), Mohawk Industries Inc. (MHK), Interface Inc. (TILE), and Masco Corp. (or MAS).
Armstrong sees softness in commercial and residential markets for Americas
Net sales in the company’s Americas market declined 0.7% to $509.2 million in the second quarter. It was essentially flat for the first half of 2014. This was due to lower volumes. Revenues for the first six months for all its businesses in the Americas were negatively impacted by severe weather conditions during 1Q14.
The building products company noted softness in commercial markets, particularly healthcare and, to a lesser extent, education. It also saw regional variability in the office market and a strength in retail. These trends impacted Building Products. They also impacted the Resilient Flooring businesses.
The main portion of its commercial sales in Resilient Flooring originate from the education and healthcare markets. AWI said residential markets softened as builder activity weakened. Renovation activity was constrained and impacted the Wood and Resilient Flooring businesses.
Lower volumes in EMEA offset by favorable impact of foreign exchange
For Europe, Middle East, and Africa (or EMEA), the company said the majority of its sales are to commercial markets in sectors dependent on public spending. Continued softness in commercial sectors such as office, education, and healthcare, contributed to mixed results across EMEA. These trends impacted AWI’s Building Products and Resilient Flooring businesses. It resulted in lower volumes.
Management said on the earnings call that “EMEA sales were impacted by continuing weakness in Central Europe, but sales in the Middle East more than doubled in the period.” Net sales in the EMEA markets increased 3.7% to $141 million during the second quarter and first half of 2014. They were driven primarily by the favorable impact of foreign exchange of $6 million and $8 million, respectively.
Russia accounted for 3% of the AWI’s total net sales in 2013. The company is currently building a new mineral fiber ceilings plant in Russia. Second quarter sales in Russia, where AWI said it had a significant share position, were up driven by a 10% price increase in April. The price increase was to offset the ruble devaluation, but volumes were relatively flat.
The company said that plant construction and product shipments continue “unimpeded.” The company had forecasted that the Russian market will be down high-single to low-double digits given the current political environment.
Pacific Rim sales driven by China and India
Net sales in the Pacific Rim increased 3.3% to $59.5 million during the second quarter and first half of 2014. Net sales were driven primarily by higher volumes despite the unfavorable foreign exchange impact of ~$2 million and $6 million, respectively. AWI said commercial markets in India saw growth. The markets in China and Australia were mixed.
Management added on the earnings call that “Pacific Rim sales benefited from a more than 50% increase in China and very strong growth in India partially offset by continued weakness in Australia and a down quarter in the volatile Southeast Asia markets.”
The company is constructing a new mineral fiber ceiling plant and two resilient flooring plants in China. Management said on the earnings call that China is the second largest suspended ceiling market in the world. Its penetration in the commercial office base of ceilings is ~10%–15% compared to a fully developed market where the penetration is ~85%. They added that the macro opportunities in China are attractive for ceiling and flooring.
Management saw a solid revenue and volume growth in China and India as a result of investments in the new plants. AWI said its China investment also gives it a stronger platform to gain an entry into southeast Asia. Also, it’s bullish about its investments in the region.
Industry forecasts for Asia and Europe appear positive
According to AECOM’s Asia Construction Outlook survey, construction spending in Asia accounted for 44% of total global construction spending in 2013. It was up 4% from 2012.
In terms of construction spending for individual countries, China was the largest market followed by Japan, India, Indonesia, and Korea. AECOM added that construction spending in China was almost $1.8 trillion in 2013, “making it the largest market in the world and more than $1 trillion larger than the markets in both the United States and Japan.”
A report on the European construction market from EuroConstruct estimated that investments would grow on average by 1.8% a year in 2014–2016. This is an upward revision of 0.2% from the previous forecast in November, 2013. The report said that aggregated construction output for European Union (or EU) countries declined by 2.7% in 2013 to the lowest level in 20 years—when measured at constant prices.
AWI competes with Compagnie de Saint-Gobain (or CODYY), Lafarge SA (or LFGEF), and Forbo Holdings AG (or FBOHY) among others companies in Europe. The S&P SPDR Homebuilder ETF (XHB) includes AWI in its holdings.