Armstrong World Industries' Q3 2025: Contradictions Emerge on Office Market Recovery, Architectural Specialties Growth, and Mineral Fiber Margin Sustainability

Date of Call: October 28, 2025

Financials Results

• Revenue: Consolidated net sales up 10% YOY (record-setting quarterly net sales); Mineral Fiber net sales up 6% YOY; Architectural Specialties net sales up 18% YOY.
• EPS: Adjusted diluted net earnings per share up 13% YOY (amount not provided).

Guidance:

• Raising full-year 2025 guidance; 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%; AUV growth ~6%.
• Architectural Specialties sales growth ~29% (organic high-single-digit); AS adjusted EBITDA margin ~19% (organic ~20%).
• Mineral Fiber adjusted EBITDA margin ~43%.
• Adjusted free cash flow $342M–$352M (15%–18% growth); ~$21M one-time cash tax benefit excluded from adjusted FCF reconciliation.

Business Commentary:

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

• The growth was driven by consistent AUV growth, back-to-back quarters of Mineral Fiber volume growth, and double-digit net sales growth in the Architectural Specialties segment.

• Mineral Fiber Segment Performance:

• Mineral Fiber segment net sales increased by 6%, with a 6% rise in AUV and a 6% increase in volumes compared to 2024.

• This growth was supported by strong commercial execution, growth initiatives, and favorable market conditions, despite some timing-related expenses.

• Architectural Specialties Expansion:

• The Architectural Specialties segment saw a 18% increase in net sales, driven by both acquisitions and organic growth.

• The growth was attributed to contributions from acquisitions like 3form and Zahner, solid organic growth, and strong order and backlog growth.

• Effective Cost Management:

• Despite some timing-related discrete costs, Armstrong maintained a 43.6% adjusted EBITDA margin in the Mineral Fiber segment and a 19% margin in the Architectural Specialties segment.
• The company managed to offset cost pressures through operational efficiency, productivity gains, and strategic cost control measures.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted 'record-setting third quarter net sales' with 'year-over-year top line growth of 10%' and that 'adjusted diluted net earnings per share grew 13%.' They said they are 'raising our full year guidance' with a 'double-digit growth outlook' and expect Mineral Fiber adjusted EBITDA margin of 'approximately 43%,' signaling confidence and momentum.

Q&A:

• Question from Susan Maklari (Goldman Sachs): Can you talk about the benefit you're seeing from the new products, how that's helping the mix component of AUV, and how that's coming through in terms of the strength of quoting and bidding activity?
  Response: Innovation is driving higher‑end mix—near double‑digit growth in premium Mineral Fiber AUV—and is boosting quoting, orders and backlog in Architectural Specialties.

• Question from Susan Maklari (Goldman Sachs): Architectural Specialties is getting close to the 20% margin target; can you talk about the forward trajectory of that and where it can go over the next year if the environment stays challenging?
  Response: Organically AS is at ~20% margin and management expects to sustain ≥20% over time while prioritizing continued growth and penetration over maximizing margins.

• Question from Tomohiko Sano (JPMorgan): Could you elaborate on the timing-related cost headwinds such as higher incentive compensation and medical costs and how you expect these to trend in 4Q and into 2026?
  Response: Q3 margin compression was driven by ~$6M of discrete costs (≈$5M in Mineral Fiber) from atypical high medical claims and higher incentive compensation; these are timing-related and not expected to be the new run rate.

• Question from Tomohiko Sano (JPMorgan): Can you talk about education, health care and data centers into Q4 and your 2026 expectations?
  Response: Education and healthcare are stable (healthcare slightly positive); data centers remain a robust growth opportunity with new product launches and continuing activity.

• Question from Keith Hughes (Truist Securities): Would the SG&A/health-care related expenses most likely come down over the next quarter or two to something more consistent with the past?
  Response: Yes—management expects incentive compensation and the atypical medical claims to revert to more normal run rates and not persist.

• Question from Keith Hughes (Truist Securities): What's the outlook for manufacturing costs in the next few periods; is inflation starting to creep into inputs?
  Response: Input inflation exists but productivity programs and cost-control should offset it; expect a run rate similar to earlier quarters with ongoing productivity gains.

• Question from Keith Hughes (Truist Securities): Has office Class C moving to Class A started to occur in quantities that are moving the numbers or is office still lagging?
  Response: Early tenant-improvement activity is emerging on the ground—office is stabilized with encouraging green shoots but not yet a major volume driver.

• Question from Adam Baumgarten (Vertical Research): On AUV and home‑center mix, do you expect that mix headwind to abate in Q4 and will the August price increase flow through to show YOY AUV improvement in Q4?
  Response: The Big Box/home‑center strength pressured Q3 AUV but management does not expect that mix headwind to continue into Q4 and still expects a strong Q4 AUV supporting ~6% full‑year AUV.

• Question from Adam Baumgarten (Vertical Research): Given strong AS backlog/orders, should we expect growth next year and what end markets excite you for 2026?
  Response: Yes—order and backlog momentum imply continued AS growth in 2026 driven mainly by market penetration and share gains across projects.

• Question from Rafe Jadrosich (BofA Securities): If office comes back, are there ASP or margin tailwinds (e.g., Class A) and are you seeing green shoots in specific regions like SF or NY?
  Response: Recovery is broadening beyond Sunbelt into many regions (≈18) with improving leasing that should support renovation demand; signs are encouraging but early.

• Question from Rafe Jadrosich (BofA Securities): Any directional visibility on cost inflation, AUV, SG&A into next year—specific puts and takes?
  Response: Too early to give 2026 specifics; management is focused on AUV growth, productivity and disciplined SG&A to drive EBITDA and margin expansion.

• Question from Brian Biros (Thompson Research Group): How does the current outlook compare to your expectations three months ago and what drove the shift from uncertain to stable?
  Response: Discretionary renovation demand did not soften as expected and economic revisions plus traction from growth initiatives produced stabilizing market conditions and better volumes than feared.

• Question from Brian Biros (Thompson Research Group): Can you unpack the Mineral Fiber margin strength and how it compares historically given current volume levels?
  Response: Mineral Fiber delivered very strong margins (≈44% Q3; full-year ~43% expected) driven by AUV/pricing, mix, productivity and WAVE equity earnings; excluding discrete costs margins would have expanded versus prior year.

• Question from Zack Pacheco (Loop Capital) on behalf of Garik Shmois: Do you see a natural cap above the pre‑pandemic ~43% Mineral Fiber margin or can it move higher?
  Response: Management believes margins can move higher if pricing, productivity and higher‑AUV product mix continue and will keep investing to capture further efficiency gains.

• Question from Zack Pacheco (Loop Capital) on behalf of Garik Shmois: Update on the Geometrik acquisition and the M&A environment?
  Response: Geometrik expands the wood portfolio and West Coast footprint; management is pursuing bolt‑on M&A and expects additional small strategic acquisitions.

• Question from John Lovallo (UBS): How did Mineral Fiber volume performance this quarter compare to the underlying market?
  Response: Markets are roughly flat; slight volume upside was primarily driven by the company's growth initiatives outperforming a flattish market.

• Question from John Lovallo (UBS): Sales to distribution were up 9% YOY—what drove that relative strength?
  Response: Strong commercial execution and contributions from growth initiatives drove distribution channel outperformance.

• Question from Philip Ng (Jefferies): How are you thinking about inflation for the full year by major inputs and is there steady productivity available for 2026?
  Response: For 2025 management expects low-single-digit raw inflation (~35% of COGS), freight flat (~10%), energy higher (low double‑digits); productivity remains a sustainable value driver and management expects continued gains.

• Question from Philip Ng (Jefferies): Any nuances front half vs back half on those inflation components?
  Response: Inflation is modestly moderating in the back half versus July expectations but not materially.

• Question from Philip Ng (Jefferies): Given AS outperformance, what is a reasonable way to think about organic growth into 2026?
  Response: AS organic growth ran high‑single‑digits this year; management expects continued solid organic growth in 2026 but has not provided a precise figure yet.

• Question from Aatish Shah (Evercore ISI) on behalf of Steve Kim: Could you discuss digital initiatives and how their impact has grown and evolved?
  Response: Project Works increases win rates and delivers precise BOMs for complex projects; Canopy reaches smaller customers and delivered record sales and EBITDA—both are scaling and producing operating leverage.

Contradiction Point 1

Office Market Performance and Recovery

It highlights differing perspectives on the office market's performance and recovery, which are critical for understanding the company's market positioning and growth strategies.

Can you provide an update on your inflation outlook for the full year, including major inputs and the second-half pace? Should we expect consistent productivity improvements through 2026? - Rafe Jadrosich (BofA Securities)

2025Q3: What the data is showing now is how it's broadening out beyond some of the major cities and the Sunbelt. In fact, into 18 regions across the country, we're starting to see some positive activity there, both on the leasing front. - Victor Grizzle(CEO)

What is the bid timing for Mineral Fiber jobs, and can you provide comments on major end markets (e.g., office and education)? - Philip Ng (Jefferies LLC)

2025Q2: Our office occupancy and leasing volumes are stable with no visibility into discretionary projects. However, the market data shows there are fewer distressed properties, reduced leverage for borrowers, and some green shoots of growth. - Victor Grizzle(CEO)

Contradiction Point 2

Architectural Specialties Growth Expectations

It involves differing expectations for the growth of the Architectural Specialties segment, which impacts strategic planning and investor expectations.

Given the strong backlog and order commentary, along with visibility on larger projects, should we expect growth next year? - Adam Baumgarten (Vertical Research Partners)

2025Q3: Yes. Again, our expectations and the way it's building in our backlog, we would expect growth in '26. Almost irrespective of what the market is doing because, as you know, most of our growth there is really through penetration. - Victor Grizzle(CEO)

Can you clarify how Architectural Specialties' organic growth initiatives are impacting performance and how the second half performance is expected with tougher comparisons? - Susan Marie Maklari (Goldman Sachs)

2025Q2: On the organic side, we've been running in the high single digits this year. I would expect the growth for next year organically to continue to be at a really good clip. - Victor Grizzle(CEO)

Contradiction Point 3

Mineral Fiber Margin Sustainability

It highlights differing views on the sustainability of Mineral Fiber margins, which are crucial for financial forecasting and investor confidence.

Is there a natural cap on Mineral Fiber margins exceeding 43% due to industry dynamics or investment levels? - Zack Pacheco (Loop Capital Markets LLC)

2025Q3: We keep pointing back to the building blocks, what the drivers of margin. And really as long as those are present and we continue to invest behind those, which we're committed to do, we continue to look for greater efficiency and greater margins from here. - Victor Grizzle(CEO)

Can you explain the Mineral Fiber margins and their sustainability? - Brian Biros (Thompson Research Group)

2025Q2: Despite a step-down in volumes, AUV growth is expected to continue. - Christopher Calzaretta(CFO)

Contradiction Point 4

Office Market Activity

It involves differing perspectives on the office market, which is a significant revenue source for Armstrong World Industries, impacting expectations for future sales and growth.

Are there ASP or margin tailwinds in a recovery, particularly in Class A or regional segments? - Rafe Jadrosich (BofA Securities)

2025Q3: Office activity has stabilized. We're starting to see some positive activity there, both on the leasing front and the buildout front. - Victor Grizzle(CEO)

What are your expectations for AUV evaluation in the second half of this year, given strong orders and equity through April? Is the deceleration due to conservatism or other slowdown signals from customers? - Unidentified Analyst (Goldman Sachs)

2025Q1: Some of the first things to go to the sidelines in that uncertain environment is discretionary work, especially like the office. - Victor Grizzle(CEO)

Contradiction Point 5

Productivity and Inflation

It involves differing expectations regarding productivity and inflation, which are critical for managing costs and maintaining profitability.

What's the outlook for manufacturing costs and potential inflation impacts on inputs in the next few quarters? - Keith Hughes (Truist Securities)

2025Q3: On the manufacturing side, we have inflation, but our ability to continue to drive productivity in our plants remains one of the value creation drivers and building blocks of the business. - Christopher Calzaretta(CFO)

What factors are currently affecting gross margins, and how might they impact the remainder of the year? - Luke Junk (Stage 6 Advisors)

2025Q1: We expect the productivity gains to cannibalize some of the benefits of inflation for us in 2025. - Christopher Calzaretta(CFO)