Ladies and gentleman thank you, for standing by. Welcome to Armstrong World Industries Third Quarter 2007 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder this conference is being recorded. I would now like to turn the conference over to our host Ms. Beth Riley, Director of Investor Relations, please go ahead.

Thank you. Good morning and welcome. Please note that members of the media have been invited to listen to this call and the call is being broadcast live on our website at armstrong.com. With me this morning are Mike Lockhart, our Chairman and CEO and Nick Grasberger, our Senior VP and CFO. We hope that you have seen our results in this morning's press release, and both the release and the presentation Nick will reference during the call are posted on our website in the Investor Relations section. In keeping with SEC requirements I advise that during this call we will be making forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those expected or implied. For more detailed discussion of the risks and uncertainties that may affect Armstrong, please review our SEC filings including the 10-Q filed this morning. In addition our discussion of operating performance will include 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 press release and in the appendix of the presentation both are available on our website. With that I would like to turn the call over to Mike.

Thanks Beth. Let me begin by saying that we still have nothing to offer you about our review of strategic alternatives. Beyond the statement that we remain actively involved in the process, we still don't know where the process will lead and when a conclusion has reached we will make a timely disclosure. We can talk about what were encouraging results in the third quarter. The third quarter results modestly exceeded our expectations. Both sales and operating income grew despite the challenge of the weak U.S. housing markets. We generated in excess of $100 million of cash in the quarter. In addition, $180 million tax refund was received in the beginning of October. This refund will be reflected in our fourth quarter financial statements. We continue to improve the factors that are within our control and thus mitigate the residential market related volume declines. For the quarter and year-to-date we have improved product mix and price realization while reducing manufacturing expenses. Building products or ceilings business continues to perform well. We saw improved product mix and increased price realization. Encouragingly we also saw process improvement increasing manufacturing efficiency which contributed the profit growth in this segment. Resilient flooring more than doubled the operating income despite flat sales. North American resilient sales declined 2% in the third quarter. Our volumes for residential products were down mid single digits in markets that were much weaker. Continuing the trend of the first half, higher sales from commercial products and improved product mix in both residential and commercial products largely offset the residential volume pressure. For both the quarter and year-to-date significantly reduced manufacturing cost, lower SG&A spending, and raw material depletion contributed significantly to the profit growth. In constant European resilient sales increased about 3% for both the quarter and year-to-date. The operating…

Well thank you, Mike. So as Beth noted my comments will refer to the slide posted to our website. I'll start with the first chart which is numbered page three. This chart reconciles the operating income for the quarter from what we reported in the 10-Q and in the press release to the adjusted number that we will use for analysis. The components of the bricks here are consistent with those in previous quarters and you may recall back in the spring, we had a very detailed reconciliation of the adjustments for fresh-start accounting. In this quarter they provided a benefit of about $6 million which was a net of the write-off of certain unrecognized losses and then some incremental depreciation related to the write-off of assets. So the adjusted number for the quarter is $83 million. The next chart shows the key metrics for the quarter compared to the same metrics for last year. Sales were down 70 basis points, unit volume was down about 5%, pricing mix each contributed about 2 percentage points of growth. If you consider the... the volume decline of 5% that was almost all due to the North American residential businesses both in flooring and cabinets. The gross profit margin improved to 110 basis points to 24.4%, that's driven largely by higher pricing and manufacturing efficiencies more than offsetting the impact of inflation. SG&A expenses were up 3.6%, $251 million. There are two items really that led to that increase excluding those items SG&A would have been down. The first item is we took a rather large at least for us $3 million reserve on accounts receivables for we are a distributor on the East Coast that's experiencing some credit problems. We also have this year the amortization and recognition of the expense related…

Thank you. [Operator Instructions]. Our next question comes from John Baugh of Stifel Nicolaus. John Baugh - Stifel Nicolaus & Company: Couple of things, first of all the net debt guidance for the end of the year in light of the tax refund does that imply really note a free cash generation in the fourth quarter help me there?

No, I still think if you do the math we would expect $60 million to $75 million of free cash flow in the fourth quarter from operations. John Baugh - Stifel Nicolaus & Company: Okay, does that not get to you being below $50 million number, you get 180 you said from the tax refund, what was your net debt position?

250. John Baugh - Stifel Nicolaus & Company: Okay.

Plus or minus. John Baugh - Stifel Nicolaus & Company: Okay, very good. Did you go up to the zero debt, but, probably that's a conservative assumption or estimate?

Yes. John Baugh - Stifel Nicolaus & Company: Okay. Just curious, I mean whether you can make any additional comment... you are spending on a strategic review, we are up fairly significantly in the third quarter. What do I read into that and the fact that we still don't hear anything?

I don't think you read into anything more than we said at the start which is that we still are very actively involved in a process and that we have nothing that we can comment on public. John Baugh - Stifel Nicolaus & Company: Are you in a position where your balance sheet is strictly going debt free here within a month or two. That's probably not the capital structure long-term. Do you just wait and see what the strategic review comes out or do you make a step in the interim?

I think we'll wait and see. John Baugh - Stifel Nicolaus & Company: Thank you.

Our next question comes from Matt Sherwood of ZS Fund.

Hi, great quarter guys. Just to build on John's question before, I was just wondering in your post-Emergence presentation you'd said that an appropriate level of that is two to three times EBITDA. I recognize that this is not anywhere close to that based on strategic review but have you adjusted your view as to appropriate levels of leverage or not?

No I would say that over the long-term, that would be a targeted leverage structure for the company.

Alright, thank you.

We have a question now from Andrew Simon of Ideon Capital [ph].

Thanks. I just want to talk for a minute about Emergence pay and how you guys are getting paid. And my question is the Senior Management of the company, do they have a choice of taking their pay right now and stock or in cash and if so what rates are they making?

Andy they only tell you how we are paid and then we can... the answer to your question is we don't have the choice but, when we emerged we had what is of course generally seems typical Emergence equity grant which kind of was at the mid point of the range of what people see coming out of bankruptcy 1.5% or something like that which gets spread across 250 some odd people and so that's... it represented for most people two or three years worth of what we think it was a long-term incentive. And so those people didn't receive... most of those people didn't receive a grant and long-term incentive grant in 2007. Most of them will receive a grant again in 2008. This stock vests over 4 years beginning at year two... beginning at the end of year or two and that represents our long-term incentive and we have the normal base and bonus structure that you would expect us to have which is retained right in the 50th to 60th percentile of the thing in their bonus. Today it has been based on performance against budgeted income and that over the last several years our average... our average performance against debt has been around 95% as we've achieved about... it has been about 4% to 5% below budget. This year we are substantially over budget.

That is a very good answer and I thank you for that. I... what I am just trying to get at is, I think your stock is remarkably inexpensive and so I am trying to see whether the management and Board shares my opinion and the way that I would see that is if they are to the extent they are able trying to get paid in shares as suppose to the cash right now. So, that's what I was looking for, but, I guess you said nobody has a choice?

Nobody has a choice. The Board does get, the Board just received its annual grant on the share. So that it is paid in shares, so we all have a substantial portion of our income that's related to the stock price.

Thanks for that. I have one other question, and that's in regard to deferred taxes. For some reasons during this quarter, the deferred tax asset dropped from $200 million to above $112 million as a deferred tax liability one from 56 to 160. So those are big changes that haven't occurred in previous quarters and I was just wondering if you could explain to me, what happened?

Well the principal driver of that change is... a change in our election of the carry back with the NOL. We had been assuming that we would make a two year carry back election and as we disclosed we've elected a ten year carry back election. And that utilized effectively more of the losses in that carry back than we had assumed in the previous deferred tax account.

Excellent, thank you.

[Operator Instructions]. We have a follow up question now from Matt Sherwood of ZS Fund.

Hi, just had a quick question on the Wood Flooring side. I know there have been several significant transactions with the Shaw Industry and Mohawk, Columbia, does that mean you have changed the competitive landscape at all for you or not really?

No we don't think so. Obviously both of those companies were heavy suppliers to the companies that bought them and so we don't think it changes the competitive landscape and this is seen are obviously good scenario where we have seen good growth, we got a strong market position, we are seeing where we think is market share increase of this year, and it's an area where we have interest in acquisition if the right opportunity comes along. So we don't see that as a big deal in terms of our competitive position in wood and we don't think that's the last wood acquisition that's going to be done this year.

Thank you.

We now have a question from John Baugh, Stifel Nicolaus. John Baugh - Stifel Nicolaus & Company: Yes, what was the fourth quarter year ago adjusted EBIT number?

One second. The adjusted operating income figure last year was about $50 million. John Baugh - Stifel Nicolaus & Company: So you would anticipate being slightly below that in this fourth quarter, I am curious where... whether it will be all wood flooring, is Resilient weakening in the U.S. as well, Cabinet as well, we've obviously got a housing depression going on here?

Well, one item that's... well there are two things really. The first one is within the Wood Flooring business. We are making some marketing investments related to a program with Home Depot, the benefits of which we will see in 2008 and beyond, okay. So, we are making some investments in marketing, we also have, if you look at some of the other businesses how they have been spending throughout the year, there has been some lagged SG&A expenses that they will anticipate to make in the fourth quarter. John Baugh - Stifel Nicolaus & Company: Could you make a comment on sort of the commercial side of the world both flooring and particularly ceiling tiles, a lot in the press about credit tightening in effecting build... commercial building spend next year. Have you seen anything in your order book on the commercial side of the world both domestically and in Europe that concerns you?

Well, we said we haven't seen anything in Europe that would be concerning us and obviously when we... we have two things rather; one is, everybody who talks about commercial you guys talk about which elements were commercially important to you. When you look at ceilings the biggest driver of demand for ceilings is in the office and given that is generally heavily influenced by our growth in office employment which still is pretty good. On the other hand you have seen a flattening vacancy rate. We never thought that we would see lots of growth in that park next year. We had it initially as flat, but as we look out today we probably think its down 1% from next year. On the Resilient side, our customers are more institutional, lot of education, lot of medical stuff which we think will continue to be pretty good. We also sell some into retail which is going to be slower for couple of reasons; one, because there is a slow down residential and two, because of the change in the way they have their design concept and floor. So, increasingly the large guys are going to polish concrete instead of having the floor covering. So what we would say is we probably would see a one point softening of our outlook in '08 for the Commercial business as it relates to ceilings and we should... we think we'll able be okay to see a modest growth in Commercial and Resilient business. And the business in Europe has been pretty good. It moves around but the UK is terribly important to us in the ceiling business and orders in the U.K. are up over last year in ceilings, hence we feel pretty good about that. John Baugh - Stifel Nicolaus & Company: Okay. And then the last question was on CapEx and D&A for both '07 and '08 if you have it and then is there another dividend coming out of WAVE this year or any guess on next year?

Well, okay. Regarding WAVE the extraordinary dividends are behind us. We have a plan to take out probably three quarters of the cash earnings for the quarter in the fourth quarter. So yes, we will likely receive another dividend in the fourth quarter. With respect to the D&A and CapEx; CapEx for the year I think is now expected to be in the $100 million to $110 million range and depreciation is $130 million to $140 million something like that. John Baugh - Stifel Nicolaus & Company: Any thoughts on next year Nick?

Not yet John. John Baugh - Stifel Nicolaus & Company: Okay, thanks and congratulations.

Sure.

We have a question now from Constantine Mamakos, Quaker Capital Management.

Hi, thanks for the... thanks for taking my question. I have one quick one, what's the net debt at WAVE?

With WAVE... WAVE had an outstanding debt of about $100 million now and they have a modest amount of cash.

Okay and then as I look at your cash flow from operations guidance of $433 million to $444 million for the year?

That's right, that's not from operations that's after capital spending, right Beth.

He is talking about from the direct bodies [ph]...

All right, go ahead.

Okay, some of the one... what are the one time items within that, is there the $230 million tax refund, is that all that's anticipated from refunds in that number?

Right, we just received $180 million refund from a ten-year carry back and then earlier in the year we had received a refund of about $50 million for taxes paid in 2006.

Okay.

There are a couple of offsets to that, partial offset about $30 million in Interest Chapter 11 [ph] cost and we made $20 million payment to AHI in this settlement which also ramped the cash from operations.

Is that... I am sorry is that within the $25 million to $29 million payment there, the payment to AHI?

Yes, that was the settlement with AHI.

Okay. And then going forward to WAVE business, do you expect to take dividends out roughly equal to their beyond equity earnings in that business?

Yes, probably a little bit less 75% to 80% I would say.

Okay and last question, if you had $3.5 million in sales for the year and the low end of your EBIT guidance in '06 something like in 11.8% EBITDA margin?

Correct.

And I think, your long-term goals are 12% to 14% and I was wondering what specific initiatives will be required to get towards the high end of that range?

Well, certainly the recovery in the North American residential business would be a big boost to that. Beyond that as we look at our global manufacturing structure, we continue to believe that we have opportunities as we have realized over the past three or four years to improve manufacturing cost. And if you look at the Commercial business, we continue to see improvement in the selling mix we would expect that to continue.

Okay. That's all. Thanks.

Our next question is from David MacGregor with Longbow Research.

Yes, good morning. Wonder if you could talk a little bit about your lumber cost outlook. I realized obviously its determined in large part by what's happening in residential construction but more specifically with respect to risk management programs you may have or hedging programs, can you give us some outlook of how your lumber price are going to play out over the next two, three, four quarters?

Lumber... our lumber situation is very different than what you normally hear when people talk about lumber because we are buying hardwood not softwood and we buy from 1800 suppliers... 1850 different suppliers and really we buy virtually all of it on the spot market. We have never found a cost effective mechanism to the hedge it beyond buying trees. Years ago we bid on trees, but we don't think trees are a good investment and so we have really found of a good way to insulate ourselves from swings in the market. The market itself is also hot because when you cut a tree you get a mix of quality of lumber out of the tree. The highest grades of the lumber go to the furniture industry. And so the decline of furniture industry in the United States has caused decline for the highest grades of lumber to decline, that reduces the revenue that people can expect when they cut a tree, which leads to fewer trees cut, which means we have to pay more, in order to get the amount of lumber we need for our product. It's a very counter intuitive, we have studied the heck of it and we think its right, and so we... that's why we have this unusual anomaly of following demand for a product and yet from a higher raw material cost.

Thanks, that was a pretty good answer, I appreciate that. What percentage of your lumber source of those 1850 suppliers are domestic versus foreign?

95% of the wood we make is, we sell is from the United States.

It's domestic, okay. Thank you, the next couple of questions just on the Commercial business, can you give us an update on what Commercial represents as a percentage of your total sales in the Resilient markets?

It's a sort of 45% to 48% of the sale that's roughly where it is.

Approximately 45% and how much forward visibility do you have in your North American Ceiling and Resilient Flooring businesses?

Excuse me?

How much forward visibility do you have in your North American Ceilings and Resilient Flooring businesses?

We don't have in terms of orders not much, what we use for visibility is Dodge [ph], sort of the same thing everybody uses, Dodge Information.

Right.

And our Ceilings business sells pretty aggressively to architects and we do try to maintain a sense of how busy the architects are as an indicator of what's going to happen. That's why I mentioned all the architects we see coming through here are very busy right now. So we... that's why we're not quite as pessimistic about our markets as Dodge is in the overall situation.

Would it be fair to say there might be three months of this forward visibility in terms of orders?

No, it's not that long.

It's not that long, okay, very good. Thank you for your help.

Our next question comes from Larry Rivera [ph] SAC Capital.

Hey, just a question I guess as you enter the nine month, the ninth month of the review, management really has been pretty handicapped by not being able to talk to more sell-side analyst, buy-side analyst, go onto your road shows in New York and Boston. Is there a specific law that prevents you from talking to investors as you go through the strategic review? Is there something that your lawyers are looking and not letting you do that?

I don't think I know the answer.

No, there is not. It's a matter of prudence as opposed to something else.

So I mean, so you think it's prudent to not go and talk to investors?

Well I think, obviously, that question, that is not a question... we're not going to answer what we think it is. It is prudent given being in the midst of a strategic review, a strategic option to not be aggressively marketing the stock. That's what we think, is a prudent thing. The answer is that it is prudent not to talk to investors and obviously that question was phrased as an answer as opposed to a question.

Okay and then you made a comment earlier, you said you were looking at making acquisitions in the wood industry. Did I hear that correctly?

What we said was that the wood was an area where we think there maybe acquisition opportunities that we would find attractive.

And that would be I guess considered separately from the strategic review?

No that's, that's routine. I rather think of that as a routine thing. There is nothing... we are big enough that we couldn't do anything that would be... we are big enough in the wood business we would be prohibited from doing anything that's really large and they would change the nature of the company very much. There are a lot of different wood manufacturers, a lot of them are suffering mildly from this downturn and there are some good guys out there that are going to find themselves in trouble and we would like to help them if we can.

And then lastly on the capital structure, I guess also you commented that you would wait until the conclusion of the process, be able to right size your capital structure. Why is that, I mean I would consider that something as routine as making a small wood acquisition?

I think it's, I am not sure that everybody would agree with you on that. It wouldn't make a sense to borrow a lot of money today which is what we really have to do and then get involved in a strategic... in some sort of strategic disposition of all other part of the company and it doesn't make a... and then we are going to have to repay the debt. So we were going to continue to have relatively low levels of net debt until we figure out what structure the companies will look like.

Okay, thank you.

Our next question from Alex Mitchell, Focus Asset Management.

Hi, good morning. I just have couple of questions just about the, the drag from the European, how long does that continue as well as the negative synergies that you talked about?

I didn't hear the second part of that.

As well as the negative synergies that you talked about. How much of a drag is that?

When we bought the DLW in 1998 it comprised a Resilient business and a textile business. When we disposed the textile business if you look at the structure of the industry in Europe... and I think at this point all if not all virtually all Resilient manufacturers who've divested textile assets when we looked at the structure the textile business were relatively large player in one of 400 people and we felt that substantial investment was going to be needed. And while the business we have got, we would improve the business always making money with our substantial further investment it was going to take was going to be needed to make it competitive and moving stuff to Eastern Europe, blah, blah, blah and that we had an opportunity to sell it to private equity which we did beginning of the year. With that we had a combined sales force and a combined SG&A... really a combined SG&A structure. When we took out we are essentially half of the sales, and we couldn't take out a portion immediately, couldn't take out a proportional amount of the cost and so that's what led us to the problems we had. There were two problems, we have excess cost that we have and two, we lost in markets where the textile business was the larger market. We lost a great percentage of the sales force that we had selling our products. So we are restoring the sales force in the markets where we will need to and we're trying to go through the process improvements either to take the people out and restructure. So that's why it is taking us a little time to work through it. Now in terms of Europe, the problem Europe has is that while we have based on…

Alex you were also asking about the ERP system that's the Cabinets business?

Mr. Mitchell, your line is still open.

Alright, lets take the next question.

Our next question comes from John Ken [ph] of Alpine.

Hi, I had a quick question about your pricing initiatives and obviously that offset a lot of the overall margin declines for the quarter and for the year. And I expect a lot of that came from the building product segment. Could you talk a little bit about whether that fixed rate or rate of increases year-to-date has been in line with competitors estimate and then given sort of the lag in pricing increases in Europe, related to manage the margin declines and offsetting that. What are your anticipations for pricing increases within those various segments of your business in the next quarter let's say?

Is that price increases...

Price increases for the next quarter and...

In other words you obviously have to plan right now to anticipate any, to offset any anticipated weaknesses in various businesses, I am just wondering as a forecasting tool what divisions you are looking at and how you are approaching that strategy?

Well, we tend to adjust prices in ceilings a couple of times a year assuming that we have cost pressures that we need to deal with. Now when you look at the price realization half of our improved price realization is mix. And they have been selling higher value products and that's been a beneficial thing in virtually every element of our business in the third quarter. The only place is where we didn't see mixed improvement was in European ceilings and Asian floors. So mix has been a big deal for us. In the Building Products business we have been able to get higher prices but we've also had a lot of raw material cost pressure that caused us to meet our prices. The cost pressures come from the fact that there is lot of wave streams and there is an increase in demand from China for those wave streams and that's driving the raw material cost. But, I don't think we have any price increases actually in the fourth quarter where we amounts to make in the fourth quarter. So we do it a couple of times a year and it varies depending on where and what we think we need to do competitively but sort of in... so it varies during the year. We did have a couple of price increases both in Ceilings and in the Floor business in the third quarter.

Okay, thank you.

We now have a follow up from David MacGregor of Longbow Research.

Yes, you talked about the Home Depot initiative in your Wood Flooring business, can you just give us a general sense of how your advertising and promotion expense might be up or down year-over-year, year-to-date?

In the Floor business its up about $3 million, I mean with the media cost we're spending about $14 million, last year we were about $10 million or $11 million that really comes from the addition of television to the mix in response to competition. We tend to... we have always tended to be the... to spend more money in advertising than other flooring manufacturers and we continue to do that. The... what we are doing with the Home Depot, what Nick referred to is the program that we... the special order program where wood and Home Depot which were in the middle of the implementing displays to make that work.

Now Wood you have got a good, better, best brand positioning strategy and you talked in response to the question from the last caller about the fact that mix drove half the price increases in the third quarter. Presumably that was the case in Wood Flooring, can you just a talk a little bit further about what you did see within mix in Wood Flooring?

Well mix in that flooring, I don't only if you give me... it will take one second because I don't think that is true that the mix in Wood Flooring was up... was 50% of the total because in Wood Flooring clearly as we got into... as we had a disproportionate demand in Wood Flooring through the big box customers or an entry level product and in Wood Flooring we didn't get the same lift from the mix that we did in other products. We did have a beneficial mix but it wasn't of the same magnitude...

Okay.

And so it is the sales of... kind of a low end product and an entry level product.

And was that channel sales associated with this Home Depot initiative was that just... was that channel sale associated with the Home Depot initiative or was that --

No, that was some just basic demand. And one of things with Wood its we can't loose sight of it but for... but low end of wood is considered an upgrade in a house ...

Right.

And so as we see people trying to move houses one of things they are doing is upgrading from vinyl to wood flooring and so we have seen demand at the low end of wood as people go on adding that as an incentive to sell houses.

Thank you. And then last question just can you remind us what percentage of your sales are through big box retailers right now?

20%.

About 20% David.

20% to big box, okay. Thank you, very much

And we now have a follow-up from Alex Mitchell of Focus Asset Management

Hi, I am sorry, I don't know what happened I couldn't follow-up before. Just on the initiatives that you are making, do you have a target and how much cost you are able to take out, I mean you talked about by the end of '08 you will be through many of those initiatives?

We wouldn't have targets per se. We are in the midst of our budget process for 2008 and I suspect we can talk in more detail about that in the New Year when we update you on our outlook for 2008.

And then yes, I did want to ask about the European how much of the drag that was and how long will that continue?

We believe that the drag if you will around the European implementation of Cabinets was isolated in the third quarter. We believe that there should be some incremental sales in Q4 spilling over from Q3 due to that but we believe again those issues to be behind us.

Okay, due to dollar amount that took out?

A few million dollars of earnings I would say.

Okay, thank you.

At this time we have no further questions on the phone lines. I would like to turn the conference back over to Ms. Riley for any closing or final remarks.

All right. Thank you again everyone for joining us. I will be available for calls at 717-396-6354. Have a good day.

That does conclude today's conference. We thank you for your participation. Please have a good day.