Armstrong World Industries Q3 2025: Contradictions Emerge on Architectural Specialties Strategy, Inflation, and Medical Costs

Date of Call: October 28, 2025

Financials Results

• Revenue: Net sales up 10% YOY (record-setting quarterly net sales)
• EPS: Adjusted diluted net earnings per share up 13% YOY

Guidance:

• Raised full-year guidance across key metrics; expect double-digit growth in net sales, adjusted EBITDA, adjusted diluted EPS and adjusted free cash flow.
• Mineral Fiber volume expected flat to down 1% (improved from prior view); AUV growth of ~6% expected for full year.
• Architectural Specialties sales growth ~29% for full year with organic AS adjusted EBITDA margin ~20% (reported ~19%).
• Mineral Fiber adjusted EBITDA margin ~43% for full year.
• Adjusted free cash flow expected $342M–$352M (15%–18% growth); $21M one-time cash tax benefit excluded from adjusted FCF.

Business Commentary:

• Record-Setting Financial Performance:
• Armstrong World Industries reported record net sales and earnings for Q3 2025, with a 10% increase in sales and a 13% increase in adjusted net earnings per share.

• The growth was driven by strong Mineral Fiber average unit value (AUV) and double-digit net sales growth in the Architectural Specialties segment, supported by operational and commercial execution improvements.

• Mineral Fiber Segment Performance:

• The Mineral Fiber segment saw 6% growth in net sales, with a 6% increase in average unit value and a 6% rise in adjusted EBITDA.

• This was due to favorable like-for-like pricing and a modest contribution from product mix, supported by strong commercial execution and growth initiatives.

• Architectural Specialties Segment Growth:

• The Architectural Specialties segment achieved 18% net sales growth, driven by contributions from 2024 acquisitions and a 6% increase in organic sales.

• Growth was attributed to acquisitions performing better than expected and solid organic growth across specialty product categories, enhanced by digital initiatives like Project Works and Canopy.

• Product Innovation and Digital Initiatives:

• Armstrong's digital initiatives, such as Project Works and Canopy, recorded record sales and EBITDA in the quarter, contributing positively to both segments.
• This success is due to the platforms providing improved customer productivity and efficiency, leading to increased project win rates and enhanced market penetration.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly called Q3 "record-setting third quarter net sales and earnings," highlighted raising full-year guidance across key metrics, announced a 10% dividend increase, described double-digit top- and bottom-line growth and said digital initiatives (Project Works, Canopy) set sales and EBITDA records, supporting a positive tone.

Q&A:

• Question from Susan Maklari (Goldman Sachs): Can you talk about the benefit from new products and how that's affecting mix/AUV and quoting/bidding activity?
  Response: Innovation is driving high-end Mineral Fiber AUV growth and stronger mix, while new AS products boost quoting, orders and backlog—innovation materially improving win rates and mix.

• Question from Susan Maklari (Goldman Sachs): Architectural Specialties is approaching a 20% margin target—how should we think about its forward trajectory amid acquisitions and a challenging environment?
  Response: Organically AS is at the ~20% target; acquisitions are initially dilutive but will scale to drive operating leverage—priority is growth plus maintaining ~20%+ margins, not margin optimization at expense of share gains.

• Question from Tomohiko Sano (JPMorgan): Can you elaborate on the timing-related cost headwinds (higher incentive compensation and medical costs) and how you expect these to trend into Q4 and 2026?
  Response: Q3 included ~$6M of discrete costs ($5M in Mineral Fiber) from atypical medical claims and higher incentive compensation tied to strong year-to-date performance; these are timing-related and not expected to represent ongoing run-rate.

• Question from Tomohiko Sano (JPMorgan): How are end markets like education, health care and data centers trending into Q4 and 2026?
  Response: Education and healthcare are stable (healthcare slightly positive); data centers remain robust with new product launches; transportation strong; office shows early green shoots but not yet a major volume driver.

• Question from Keith Hughes (Truist Securities): Will the SG&A and medical-driven costs likely come down to a more normal run-rate over the next quarter or two?
  Response: Yes—both incentive comp and the atypical medical claim impacts are expected to normalize and are not considered the new run-rate.

• Question from Adam Baumgarten (Vertical Research): On AUV and home-center mix drag in Q3, will that headwind abate in Q4 and does the August price increase drive YoY AUV improvement?
  Response: Home-center mix dragged AUV in Q3 but is not expected to persist into Q4; company still expects a strong Q4 AUV and ~6% AUV growth for the full year.

• Question from Adam Baumgarten (Vertical Research): Given strong AS orders and backlog, should we expect AS growth in 2026 and what end markets excite you?
  Response: Yes—backlog and order trends imply continued AS growth into 2026 driven by penetration/market share gains; large project visibility supports continued momentum across several end markets.

• Question from Rafe Jadrosich (BofA Securities): If office recovers, are there ASP or margin tailwinds regionally or in Class A that you'd expect, and are you seeing meaningful green shoots in specific cities?
  Response: Data shows recovery broadening across ~18 regions beyond Sunbelt; early tenant-improvement activity is appearing (including NY and other metros), which could drive renovation demand over time but is still early-stage.

• Question from John Lovallo (UBS): Mineral Fiber volumes were up slightly—how did that compare to the underlying market and what drove distribution strength (+9% YoY)?
  Response: Markets remain flattish; slight volume upside was driven by growth initiatives and strong commercial execution, particularly distribution performance reflecting effective sales execution.

• Question from Philip Ng (Jefferies): How are you thinking about input inflation and ongoing productivity for the back half and into 2026?
  Response: Expect low single-digit raw-material inflation, energy higher (low double-digit) and flat freight vs prior year; productivity programs remain a key offset and management expects continued steady productivity gains going forward.

• Question from Aatish Shah (Evercore ISI): Can you expand on the impact and evolution of digital initiatives like Project Works and Canopy?
  Response: Project Works automates design and produces accurate bills of materials, raising win rates and contractor efficiency; Canopy reaches smaller customers and delivered record sales and EBITDA—both are scaling and contributing profitable growth.

Contradiction Point 1

Architectural Specialties Margin Target and Strategy

It involves a shift in strategic focus from pushing margins to prioritizing market penetration, which is critical for understanding the company's growth strategy.

What is the forward trajectory for the Architectural Specialties margin target given ongoing acquisitions? - Susan Maklari (Goldman Sachs Group, Inc., Research Division)

2025Q3: For our business strategy, we prefer growth over pushing margins. For the future, we expect robust growth, so we want to prioritize market penetration over maximizing margins. - Victor Grizzle(President, CEO & Director)

What initiatives are driving Architectural Specialties' organic growth, and how should we view back-half performance? - Susan Marie Maklari (Goldman Sachs)

2025Q2: When you get the new acquisitions in, obviously, we're going to have some integration costs. We're going to have some dilution potentially, but we want to grow that over time. That's what we want to do is we want to grow the earnings. - Victor D. Grizzle(President, CEO & Director)

Contradiction Point 2

Inflation and Cost Management

It involves the company's strategies to manage inflation and input costs, which directly impact financial performance and investor expectations.

What is the manufacturing cost outlook for upcoming periods? Is inflation impacting inputs? - Keith Hughes (Truist Securities, Inc., Research Division)

2025Q3: Inflation is present, but productivity remains a key driver. Expect continued cost control and productivity gains. - Christopher Calzaretta(CFO)

Can you update inflation expectations for energy, freight, and raw materials? - Rafe Jadrosich (Bank of America)

2025Q1: We expect mid-single-digit input cost inflation for the year, driven primarily by energy, with freight flat and raw materials slightly impacted by tariffs. We are offsetting this with strong pricing actions, productivity gains, and cost management. - Chris Calzaretta(CFO)

Contradiction Point 3

Volume Growth Expectations for Mineral Fiber

It involves differing expectations for volume growth in the Mineral Fiber segment, which directly impacts revenue expectations for the company.

What's the outlook for manufacturing costs in the next few periods? Is inflation affecting input costs? - Susan Maklari(Goldman Sachs Group, Inc., Research Division)

2025Q3: Our growth initiatives are expected to yield about one point of growth, offsetting softer market conditions, and we still expect to realize that 1 point of growth. - Victor Grizzle(President, CEO & Director)

How should we model the 2025 quarterly cadence considering market variability? - Garik Shmois(Loop Capital)

2024Q4: We expect flattish mineral fiber volume with softer conditions in the first half and improvement in the second half due to new construction starts. - Chris Calzaretta(Senior VP & CFO)

Contradiction Point 4

Inflation and Cost Pressure

It involves differing perspectives on the impact and extent of inflation and cost pressures on the company's operations, affecting financial forecasts.

What is the manufacturing cost outlook for upcoming periods? Is inflation starting to impact input costs? - Keith Hughes(Truist Securities, Inc., Research Division)

2025Q3: Inflation is present, but productivity remains a key driver. Expect continued cost control and productivity gains. - Christopher Calzaretta(Senior VP & CFO)

What factors are driving cost pressure in Mineral Fiber, and what is the 2025 outlook? - Aatish Shah(Evercore ISI)

2024Q4: Low single-digit input cost inflation is expected, with energy and freight being the largest contributors, driven by natural gas pricing. - Christopher Calzaretta(Senior VP & CFO)

Contradiction Point 5

Medical Costs and Incentive Compensation

It involves the explanation of unusual costs, specifically medical costs, and their implications for future financial performance.

How will timing-related cost headwinds, particularly higher incentive compensation and medical costs, trend in 4Q and into 2026? - Tomohiko Sano (JPMorgan Chase & Co, Research Division)

2025Q3: Incentive compensation is primarily due to year-to-date financial performance and updated full-year outlook. Not indicative of future run rate. Medical costs were above normal due to high-cost claims. This is atypical and unlikely to be repeated. - Christopher Calzaretta(CFO)

Will SG&A expenses decline in the next one or two quarters to more historical levels? - Keith Hughes (Truist Securities)

2025Q1: Both incentive compensation and medical costs are expected to return to normal levels. Not expected to repeat the outsized costs seen this quarter. - Christopher Calzaretta(CFO)