Armstrong World Industries, Inc. (AWI) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 Armstrong World Industries Inc. Earnings Conference Call. My name is Laura, and I will be your operator for today. [Operator Instructions] And we will conduct a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Tom Waters, Vice President of Treasury and Investor Relations. Please proceed, sir.

Thank you Laura. Good morning, and welcome we appreciate all of your flexibility as we've delayed this call from our normal release time of Monday as we and, more significantly, you have dealt with Hurricane Sandy and the aftermath, and we hope that everyone has come through that safely. Regarding this call, 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 Matt Espe, our President and CEO; Tom Mangas, our CFO; Frank Ready, the CEO Worldwide Floor businesses; and Vic Grizzle, CEO of our Worldwide Ceilings businesses. Hopefully, you have seen our press release issued Monday morning, and both the release and the presentation Tom Mangas will reference during this 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 outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong, please review our SEC filings, including the 10-Q filed Monday. Forward-looking statements speak only as of the date they are made. We undertake no obligation to update any forward-looking statements beyond what is required by applicable securities law. 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 will turn the call over to Matt.

Thanks, Tom. Good morning, everyone. We've got a lot to cover this quarter, so I do appreciate you taking the time to join the call. I'm going to ask you to bear with us as we go through a lot of material. I'll start out by providing a high-level view of the market environment and our results in the quarter and update you on a few recent Armstrong-specific actions. I'll then turn the call over to Tom Mangas, who will give you a detailed review of our financial performance, as well as guidance for the remainder of 2012. And then finally, I'll share our current thinking on 2013 macroeconomic outlook and recap where we stand as a company. Our third quarter adjusted EBITDA margin of 19.3% was the highest achieved by Armstrong since we emerged from bankruptcy in 2006. This achievement is a testament to our cost out and productivity efforts as global end markets remain challenging. Market conditions in the third quarter of 2012 continue to exhibit many of the same trends as the first half of 2012. Commercial sales in the U.S. were down slightly with particular weakness in the health care and education sectors, which of course, rely on public financing. The office sector was slightly down, but performance varied as regions with technology or energy-driven economies have done well, while most other regions lag 2011. New residential construction continues to be a bright spot, and our flooring businesses have seen strong year-on-year gains in the builder channel. However, high unemployment, low consumer confidence and general uncertainty have constrained resi repair and remodel activity as homeowners remain cautious. In Europe, the Eurozone economies continue to struggle, but sales declines have moderated. And there are signs that the region is nearing bottom. Russia, Eastern Europe and the Middle East continued to do well and provided something of an offset to the weak Western European markets, especially for our ceilings business, which actually saw sales and profitability improve year-on-year. In the Pacific Rim, both flooring and ceilings continue to see strong growth in the health care and education verticals in China and India. And Australia, our biggest market in the Pacific Rim, continues to be down from 2011. Our net sales for the third quarter were $695 million, which, after adjusting for disposed businesses, was within, albeit at the low end, of our guidance range. I'll talk more about these divestitures later. Sales in the quarter were marginally as anticipated when we issued guidance with the exception of flooring sales in the home center channel, which were lower than expected. Compared to the third quarter of 2011, sales were down $40 million or 5%. On a comparable foreign exchange basis, sales were down $15 million or 2%. The large majority of the FX impact was driven by the euro. On a total company basis, volume declines in the big box channel and softness in North American and Eurozone commercial activity were only partially offset by price and mix gains. Year-to-date sales of just over $2 billion are down $94 million or 4.5% from 2011. On a comparable foreign exchange basis, sales were down $50 million or 2%. Again, the large majority of the FX impact was driven by the euro. More than all the sales decline was driven by volumes, as again, both businesses are driving favorable price and mix. Adjusted EBITDA for the quarter was $135 million, within our guidance range of $120 million to $140 million, and up over $13 million or 11% from the third quarter of 2011. Manufacturing productivity, SG&A savings and our continued ability to achieve price to cover inflation more than offset lower volumes and drove the adjusted EBITDA improvement. As of the end of the third quarter, we've delivered the $200 million in manufacturing and SG&A savings from our cost out program. And we'll obviously monitor costs closely, going forward, but the structural changes identified in 2010 have been achieved. Despite global volume declines of more than 4% year-to-date, we've been able to increase adjusted EBITDA by more than $6 million or 2% from last year. Our actions to drive manufacturing and SG&A improvements in price over inflation have offset more than $40 million of bottom line impact related to market-driven volume declines. We continue to execute on our strategic priorities and in this quarter, announced the divestiture of 2 noncore businesses: our Cabinets division and our Patriot wood flooring distribution businesses. We've been talking about Cabinets as noncore for some time now, and I'm pleased that we've been able to announce the sale that maximizes cash value for Armstrong's shareholders and provides the business and its employees with more appropriate ownership. This transaction is expected to close later this week. I want to personally thank all of the Cabinets employees for all their hard work over the past several years as they successfully executed a significant and difficult restructuring of their business. Patriot is a small wood flooring distributor in the Northeast that was included within our Wood Flooring segment results. Now by selling Patriot to one of our existing distributors, we better position them to succeed and successfully sell Armstrong-branded wood products in the region. Despite the relatively modest proceeds from these divestitures of just over $40 million, these are, nonetheless, critical steps for Armstrong. We are now more aligned with our preferred business profile. As we've said in the past, we are strategically focused on global businesses; businesses with critical size and scale; leading market positions in categories, where our brand can add value; and businesses, where we can lever our relationship with leading architects and designers to pull product through our distribution partners. While many of our end markets are softer now than a year ago, Armstrong is continuing to execute on the items in our control. Our plant construction projects remain unscheduled, and we look forward to start production at our China homogeneous flooring plant later this quarter. Our cost-cutting program has just hit the $200 million mark, and we successfully divested our noncore businesses. Based on those divestitures and the market conditions I discussed, we are lowering our sales and adjusted EBITDA guidance for 2012. We now anticipate $2.6 billion to $2.65 billion of sales for the year, which translates to the low end of our previous guidance when adjusted for the divested businesses. We now anticipate adjusted EBITDA for the year in the range of $385 million to $415 million. This is up from 2011 adjusted EBITDA of $375 million, but down from our previous guidance range of $400 million to $430 million. Tom Mangas will provide more details on these figures and specifically break out our guidance for the fourth quarter. So with that, I'll turn the call over to Tom to review the financials. Tom?

Thanks, Matt. Good morning to everyone on the call. In reviewing our third quarter and year-to-date results, I'll be referring to the slides available on our website starting with Slide 4, Divested Businesses, as Tom Waters already covered Slide 2, and Slide 3 is simply an explanation regarding our standard basis of presentation. Before we get into the details of our financial results, I want to spend a minute to make sure everyone understands the reporting impact of our recently announced divestitures. As you would've seen in our 10-Q, the Cabinets segment is being treated as a discontinued operation, and my discussion today will relate only to continuing operations, with the exception of cash flow, which includes the Cabinets segment's small use of cash to date. As you can see on Slide 4, Cabinet's prior year and current year performance needs to removed from our historical comparisons and guidance as we included the segment when we last issued guidance in July. For perspective, we anticipated cabinets contributing a total of $135 million to $145 million in sales in 2012 and EBITDA of roughly $5 million on an adjusted basis. The Patriot business, while a smaller business than Cabinets, is a little more complicated for comparison purposes, as historical Patriot sales remain in our Wood Flooring segment results. As a result, the Patriot divestiture impacts both guidance and prior-period comparisons. As you can see, there's a $10 million to $12 million sales impact on the last 4 months of 2012 and approximately $24 million to $27 million sales impact in the first 8 months of 2013. The sales impact from Patriot is the result of their sales of non-Armstrong products to end-retailers and the small distributor margin on Armstrong products. We will continue to sell Wood Flooring products in the Northeast and anticipate neutral to slightly positive growth of Armstrong-branded products in the region as a result of this divestiture. Patriot was only marginally profitable, so there's no meaningful bottom line impact. Turning to Slide 5, as Matt mentioned, adjusted EBITDA margin for the third quarter of 19.3% was a record for Armstrong, an increase of 230 basis points from last year. Adjusted EBITDA was also a record at $135 million and was up 11% from 2011, despite a 2% drop in adjusted net sales. Adjusted operating income rose 15% and adjusted earnings per share results increased by 14%. Third quarter free cash flow was $78 million, up $5 million from the same period in 2011. I will address the drivers of EBITDA and free cash flow in more detail on upcoming slides. We closed the third quarter with net debt of $784 million, down from $878 million at the end of the second quarter, but up from $467 million at the end of the third quarter of 2011 as we increased leverage to pay our $500 million special cash dividend in April. One additional fact I want to highlight is our unadjusted return on invested capital, or ROIC. On a continuing operations basis, reported ROIC achieved 9.5%, an increase of 430 basis points over the prior year and reflects the highest level we've achieved since emergence. We continue to focus on sustained ROIC performance with a goal of delivering at least 15% mid-cycle. Please refer to the Financial Overview section of our May 2012 Investor Day materials on our website to see how we define mid-cycle. Slide 6 details the adjustments we made on EBITDA and presents a reconciliation to our reported net income of $74 million in the quarter. As you can see, there are only a few minor adjustments in this past quarter and in the third quarter of 2011. Interest expense was higher in 2012 than in 2011, as debt increased by about $250 million to finance a portion of the dividend paid in April 2012. Tax expense was significantly lower versus the prior year, primarily due to a decrease in the valuation allowance and favorable impact from our foreign mix of income. The decrease in valuation allowance is based on foreign tax credits and our projected ability to utilize these credits to offset future tax taxable income. Moving to Slide 7, this provides our sales and adjusted EBITDA by segment for the quarter. Excluding the impact of foreign exchange, Resilient Flooring had a sales decline of 5%, driven by declines in the home center channel, continued softness in the education and health care commercial markets in North America and weakness in the Eurozone, where sales declined by 10%. The sales drop was entirely volume driven as price and mix were favorable. Despite the sales decline, Resilient Flooring adjusted EBITDA improved by $12 million or over 54% from the third quarter of 2011 as manufacturing and SG&A savings, as well as pricing mix improvements, more than offset lower volumes. Wood Flooring sales were down 4%, largely due to the Patriot divestiture I mentioned earlier. Excluding Patriot, North America wood volumes were up mid-single digits, but were offset by slight declines in price and mix, resulting in essentially flat sales. The builder channel remains strong with sales up double digits compared to 2011 as new construction activity flows through to our sales. However, sales to the builder channel tend to be lower mix than our retail offering, thus contributing to the drop in mix. As in the second quarter, Wood Flooring sales were down in the home center channel. Adjusted EBITDA in the wood business was down year-over-year primarily due to price mix and higher lumber cost. As a result of this, last week, we announced a price increase on our solid wood products of approximately 6% effective mid-December. Building Products sales were up slightly as global price and mix gains offset volume declines in North America. In the U.S., commercial sales were essentially flat as we saw a continuation of the volume weakness in the business that Matt already discussed. Retail channel was also down. In total, unit volumes were down mid-single digits in North America. Some of the softness in retail can be traced back to a strong third quarter of 2011 when we had a series of storms, including Hurricane Irene, which drove repair -- retail repair activity. Sales in Europe were up 3% including -- pardon me, 3% excluding the impact of foreign exchange as volume gains in Russia and the Middle East offset continued weakness in the Eurozone. Sales in Russia were up 50% in the quarter as we sold ahead of our go local initiative to ensure continuity of service. We expect some of this inventory build will bleed off in the fourth quarter as we bring our new expanded distribution service model online. Price was up in Europe, but mix was down as Russia has a lower mix profile than Western Europe. Pacific Rim sales were up despite continued weakness in Australia, our largest Pacific Rim market. China sales were up 13% despite a tougher commercial construction backdrop. Adjusted EBITDA in Building Products increased $8 million or almost 10%, as the price gains and manufacturing productivity offset the volume declines. Some of the year-over-year manufacturing performance is due to the higher cost we incurred in 2011 to continue operations at our Marietta, Pennsylvania, facility during the lockout. Separately, we also took a 4% price increase in North America ceilings and grid effective October 1, in response to a rising steel, starch and perlite input costs. All indications in the markets suggest others have followed our price increase. The Corporate segment was down due to the expected continued decrease of our noncash pension credit. Core corporate expenses were lower year-on-year. Slide 8 shows the building blocks of adjusted EBITDA from the third quarter of 2011 to our current results. The story of the quarter, similar to earlier quarters this year, was volume declines across our commercially oriented markets, offset by price and cost improvements. Volume was a $12 million drag on quarterly earnings. Mix gains were driven by North America, Resilient Flooring as high-end luxury vinyl tile products continued to gain share. In addition, weakness in the K-12 education segment helped Resilient mix as many of those projects use basic VCT products. Mix was also favorable in North America ceilings as we continue to drive sales of our high-end products such as Ultima and products from our Architectural Specialties initiative faster than the market. Offsetting these favorable mix trends were weaker mix in the builder channel and Wood Flooring and the emerging market growth prior to our new plants opening. Price and input cost contributed modestly. Continued SG&A and manufacturing cost reductions totaling $25 million more than offset volume headwinds and the lower noncash pension credit. Turning now to Slide 9, you can see our free cash flow for the quarter. Cash earnings were higher than the prior year driven by improved operating income. Working capital contributed $8 million more to free cash flow in the quarter than the prior year. Capital expenditures were higher than 2011 as we continue to build out our emerging market plans. Interest expense was higher due to the additional debt from our March refinancing in support of the April $500 million special cash dividend. The restructuring other line was primarily related to several small 2011 items, including prior year asset disposals. Slides 10 to 13 illustrate our year-to-date financial results. Adjusted sales were down 2.4% on a comparable foreign-exchange basis driven by European macroeconomic issues and softness in commercial markets in the U.S. Despite the sales declines, adjusted operating income, adjusted EBITDA and adjusted EPS all improved. Free cash flow was lower primarily due to higher CapEx spending. Slide 11 illustrates our sales and adjusted EBITDA by segment for the first 3 quarters of 2012. The story is similar to the third quarter for the flooring segments, so I won't recap those areas. Building products saw gains in the third quarter of 2012, but year-to-date EBITDA was essentially flat as favorable price and manufacturing productivity gains were not able to offset volume declines, investments in emerging markets and the start-up costs at our new Millwood mineral wool plant. Slide 12 is our year-to-date adjusted EBITDA bridge, and again, the story echoes the quarter. Lower commercial market opportunity across all our core geographies remains a drag on EBITDA. As you can see, by adding the manufacturing cost in SG&A columns, we have achieved the revised $50 million of savings targeted for 2012. This means we have fully delivered the $200 million savings program that began in 2010, as we sought to rightsize our cost structure. Slide 13 is the year-to-date free cash flow bridge. Improved cash earnings benefited from both higher operating income and lower cash taxes. The working capital change was negative, but this was driven entirely by our accounts payable initiative that delivered onetime outsized gains in 2011. Accounts receivable and inventory changes were favorable to the prior year. CapEx is, of course, related to our plant construction projects and interest expense to our March refinancing. WAVE's free cash flow reflects the partnership's ability to operate with minimal cash balances now that they have undrawn capacity on the revolver -- revolving credit facility. Barring this impact, which occurred in the first quarter, WAVE's cash distribution was up marginally. The other column is primarily driven by prior year restructuring payments that have not recurred in 2012. Slide 14 is our last presentation on our cost out program. As I mentioned a minute ago, we have now achieved $200 million in cost out savings since 2010. And while the line items may change in coming quarters, the full amount has been captured and is reflected in our results. Going forward, we will remain diligent about costs and adapt our spending to market conditions and opportunities, but we will no longer report out on cost in this fashion. Slide 15 updates guidance for 2012. As Matt mentioned, we are lowering our sales guidance due to our divestitures and continued market headwinds to $2.6 billion to $2.65 billion in sales. As a result of this sales decline, we are lowering our adjusted EBITDA guidance range from $400 million to $430 million to a new range of $385 million to $415 million. At the midpoint of this guidance, we would realize a 7% improvement versus 2011 despite low single-digit volume declines company-wide. This once again illustrates the power of our cost-reduction initiatives and the operational leverage we are building into the business. The midpoint of our adjusted EPS range is down $0.05 from previous guidance but up $0.27 from 2011. We now expect free cash flow to be in the $50 million to $80 million range, up from our previous guidance driven by improved working capital performance and lower capital expenditures as we continue to fine-tune the timing of our plant spending and find savings in our programs. As you'll recall, our free cash flow guidance for 2012 is below $170 million we delivered in 2011 as we do not anticipate a special dividend from WAVE this year and as capital expenditures have risen related to our plant construction programs. Slide 16 provides more detailed assumptions going into our earnings guidance and includes specifics on the fourth quarter. First, petroleum-related raw material energy costs have moderated, but we still expect to see inflation of $10 million to $20 million versus 2011. We continue to expect to fully offset material inflation with price in 2012. Our recent solid wood price increase announcement is an example of our focus on offsetting cost increases on a realtime basis. Given our cost out efforts, continued focus on improving mix and measured pricing to recover commodity inflation, we continue to expect improved gross margins of 50 to 100 basis points despite lower volumes. Our noncash U.S. pension credit will decline to $12 million. This is also unchanged from July. We continue to expect WAVE's earnings to be flat and cash taxes of roughly $10 million to $20 million. Our estimate for the fourth quarter projects sales, including anticipated FX impact, to be in the range of $585 million to $635 million, which at the midpoint is basically flat with 2011 on a constant FX basis. We expect the fourth quarter of 2012 to produce adjusted EBITDA of $60 million to $90 million compared to $53 million on a comparable basis in 2011. Our top line assumes a continuation of the macro environment we've experienced these past 2 quarters. The adjusted EBITDA estimate benefits from our 2012 cost, price and mix improvements and from 2011 comparisons, where we experienced higher costs associated with the lockout at Marietta. Our capital spending range of $210 million to $230 million is lower than previous guidance as we uncover savings opportunities and the timing of some spending shifts into 2013. As Matt mentioned, our emerging market plants remain on schedule. Lastly, for the full year of 2012, we continue to anticipate $10 million to $15 million in EBITDA adjustments associated with already announced actions. This is unchanged from previous guidance. Clearly, the macro climate is a challenge, but you can remain confident we are doing all we can to manage the areas we can control to deliver strong shareholder value creation over the long term. We have delivered our cost out savings program. And now we are focusing our attention to driving top line growth in the quarters and years ahead as we begin to benefit in 2013 from our investments in emerging markets and developed world innovation program. And with that, I will now turn it back to Matt.

Thanks, Tom. As you'd expect, we're in the midst of building our annual operating plan. As I've talked with many of you at recent investor events, I know that 2013 is on your mind as well. While I'm not yet ready to provide guidance for next year, I'd like to update you on the macro economic climate we're anticipating as we frame our operating plan. Utilizing the September McGraw-Hill data and blue chip consensus estimates, we expect modest GDP growth in the U.S. similar to that of this year. These data sources project that commercial construction starts in the U.S. will be up double digits. But remember, our product lags starts, so we'll be living with 2012 flat starts in 2013. Retail and office should be the best performing subsectors, with education again lagging. Commercial Repair/Remodel activity will be up modestly, with office leading and education lagging. New residential construction will continue to grow as housing starts in the 850,000 to 900,000 range, and modest growth in residential repair and remodeling activity as consumers gain a measure of confidence as the economy slowly improves and house prices stabilize and then rise. Outside of North America GDP, consensus forecast project very tepid growth in Europe, with the Eurozone experiencing essentially no GDP growth and the U.K. doing only slightly better. Now if correct, this translates into lower volume of Armstrong products, especially in segments impacted by the austerity measures, and again speaking about the Eurozone year. The outlook for Russia and the Middle East remains bullish. Consensus forecast indicate that China and India will grow GDP in the mid to high-single-digit range. And we continue to expect that our target sectors of health care and education will grow faster than the overall economy. So in summary, it's a fairly similar story to this year. So to recap, the Armstrong team is delivering on factors within our control and driving earnings growth in a down market. We're increasing our focus on our core businesses and divesting non-core assets. And we're making strategic investments to grow in global markets where construction is strong. Turning to next year, we have a cautious view on the global macroeconomic situation. But as a reminder, we have capacity to achieve up to $4 billion in sales with our current and under construction manufacturing footprint, and given our record adjusted EBITDA margins, the operating leverage to drive significant profitability. So again, thanks for your attention. We covered a lot of ground. And with that, we'll be happy to take any questions.

[Operator Instructions] And your first question comes from line of Ken Zener, KeyBanc Capital Markets.

Given that you've talked about, not specifics in 2013, but that could very well look like '12 in terms of lower volume, but you're getting earnings growth in a downmarket perhaps. Can you talk about the material versus cost inflation that you're seeing right now? So you've announced recent price increases. Is that necessary to hold current operating margins? Or is that going to be net accretive? It sounds like net accretive.

Well, we'll not really comment specifically on the impact of those price increases in 2013. The increases we've announced in our ceilings and grid business this fall and those announced in our Wood Flooring business in December affect us somewhat differently. So the ceilings and grid price increases and their anticipated yields are included in our current thinking and current guidance. The increase in the wood in mid-December really won't be effective, have a big impact at all either way in this year. And again, we'll comment on that as we issue guidance for the next year.

This is Tom. Certainly, part of our business models, we want to make sure we're at least covering commodity inflation. But our history is with volatility we are able to get it a little bit sooner and hold it a little bit longer as it comes down. So I think generally, you should count on price being a driver for our sales growth and potential margin growth for the future.

Okay, good. Because excluding the WAVE, it seems as though your third quarter did very well, and you're still looking at price. And then I guess, if I could switch over, the wood business, obviously, the retailers, how they're handling inventory doesn't change end market demand. But overall, given the shift more to the independent channel, would you still be reiterating your comments that you're holding share in that wood business notwithstanding how the channel is handling inventory changes?

Yes. We don't have any evidence that we've lost share. I think what we are experiencing is some short-term channel dynamics. But no evidence that we've lost any share. Frank, I don't know if you have anything to add that.

No,I think that's right.

Your next question comes from the line of Kathryn Thompson, Thompson Research Group.

On the wood segment, once again, could you clarify how much margins were impacted by mix versus higher cost? And particularly, how should we think about that going forward as we see a greater impact from new -- from growth in new residential?

Well, just a quick comment to frame it, and then we'll let Frank talk about it. But, yes, the major issue we had in this quarter was customer mix as much as product mix. I guess, the 2 are related. But this is a dynamic in our business where you have relative strength as a result of the residential construction increases. And we see that from increased revenue to the builder market, which as you might imagine is -- affects us somewhat negatively on mix and margin, affects us possibly on volume. What we're seeing is that associated with a relative weak market in residential remodel and some timing issues and some other dynamics in the big box channel. So I don't...

I would say that relative to the contribution to the drag, mix and material input costs are about equal in their contribution. They're both equal factors.

Okay. And also could you give a little bit more color on the impact of the fire at your mineral wool facility? What will be related cost as to downtime and supply chain disruptions?

Yes, well, we had -- as you know, we had a small fire in Millwood, West Virginia. First of all, nobody was injured. There are no injuries, so the employees are fine. We're going to lose about a week's production. We expect the plant to be fully operational by the end of next week or actually by the end of this week, I'm sorry. And the impact on the quarter at this point is not an issue.

Negligible impact.

And we have plenty of wool supply for all of our factories, so there's no impact to the manufacturing.

Your next question comes from the line of Bob Wetenhall, Royal Bank of Canada.

Nice job growing EBITDA off lower sales. That's quite impressive. You guys were able to take out $18 million of SG&A spending and bring it under $100 million in the quarter. That's pretty awesome. Can we expect SG&A now to trend below $100 million a quarter? Is this sustainable?

Yes, I would say that, no, it's probably not sustainable at that level. I mean we certainly are working hard to deliver it. Some of that SG&A coming out is a function of the Patriot divestiture, also coming out, I mean the SG&A associated with that, so that's some of the year quarter-over-quarter variance. Absolutely, were going to stay vigilant on SG&A going forward, but I would not take this quarter run rate and straight-line it out.

Okay, fair enough. Other question is in terms of Matt's commentary about the outlook. Europe has been tough for the whole year, and residential and R&R has been a bit sluggish, too. Do you -- in terms of -- without getting too specific, do you think from a volume perspective for '13, it would be okay to expect flat volumes against DC comparisons?

I'd say it's probably dangerous for us to go there at this point, Bob. I would say that the environment, as we said, next year is going to be very similar to this year. We expect sustained growth and new housing starts, that's a good guide; modest improvement in residential remodel, that's a good guide. Stability and a lack of erosion in Europe, while it's good, often the way that governments get there to austerity measures could be some headwinds. So while we look for a more stable Europe even with a little tailwind, on the short term, the way that government gets there is often not helpful to us in the short term. And we expect Russia and the Middle East, China and India to continue to be places where we're going to see volume and revenue growth. So I think what we want to do is we're going to -- at the next call, obviously, we're going to lay out the details around the 2013 guidance. Then the last comment I would say is while we're optimistic that 2013 would be -- represents some level of growth in commercial starts and broader expansion in commercial remodel, I'll just remind everybody that in fact, and because of the timing of our products in the construction cycle, while that's positive as we go forward, we'll be living with the 2012 sort of relative flat starts as it relates to our volume and revenue in 2013.

Your next question comes from the line of David MacGregor, Longbow Research.

You'd mentioned that you have sufficient capacity to support $4 million of revenues, and I guess that's for the consolidated enterprise. I wonder if you could just speak to the building products business and what your capacity utilization rates might look like there now?

Well, I would say that we haven't parsed out the $4 billion by business segment. But I would say generally today, our -- both business units are running capacity utilizations around 70%. So that gives you a sense of the volume upside potential in both businesses prior to the new plants opening. And you know we're opening 2 foreign plants in China -- one ceiling plant in China and Russia, which will extend that available capacity worldwide.

And then secondly, it sounds like maybe a little bit of CapEx is being pushed into 2013. I was just wonder if you could talk about the extent to which that push might be occurring? And also, with the emerging market plant construction, how does CapEx -- I realize you're not going to put a number on it this morning, but how does CapEx for next year look compared to the $210 million, $230 million for this year? Are we going to be up?

Let me just comment on the CapEx push. That's really just a matter of timing of big projects, and that's project timing in the fourth quarter this year versus the first quarter of next year. So that's capital sort of following the project. As we said, even with that, the 3 projects in China are slated to be on schedule. Frank is going to be producing floors for our material in China this quarter. So we're excited about that, and Vic's plant coming up in China early second quarter of next year is on track. We're looking good for heterogeneous coming up at the end of next year. And while we're in very early stages of Russia, it's -- all systems are go there, too. So these are big plants in emerging markets, complicated projects, and every once in a while, you have a little timing slippage quarter to quarter, and that's what's driving the CapEx changes.

Relative to 2013 -- this is Tom. We did, in our Investor Day back in May, talk about a glide on CapEx. We would expect CapEx to be down in 2013 relative to the current year, even with the push of a few million dollars given the timing Matt just described there. We are completing homogeneous on schedule. We'll be completing both the ceiling plant in China and the heterogeneous midyear. So there'll be heavy front-half CapEx, but that starts to -- then they roll off. And then we start spending on Russia. So Russia becomes the new add that comes on in '13. But again, in total, I would expect us to be down.

Is that what Russia represents?

We do not spell it up by year, but we did tell folks it's about $100 million CapEx program with production beginning of 2015.

Your next question comes from line of Stephen Kim, Armstrong.

That'll be Steve Kim from Barclays. So I guess, my first question relates to your cost-cutting initiatives, which are now complete, and what this could tell us about your ability to incorporate, let's say, acquisitions. And particularly, what I'm thinking about here is whether or not you're thinking about -- or what you're -- the attractiveness of acquisitions as you look around. I remember when we spoke with you maybe about 6 to 9 months ago, it seems like the roster of potential combination targets would've been very short. I was curious as to whether or not your success in your cost-cutting program gives you added [Audio Gap] to maybe expand that list or if you've seen some things that gives you -- enhance your interest in that area?

Well, Steve, it's Matt. The primary area where we would be interested in any sort of acquisition would most likely continue to be in Architectural Specialties, where we would look at -- what we sort of described as smaller tuck-in acquisitions. And I would point to the Simplex deal that we did about this time last year, and that gave us expanded product range in service capacity in North America, and also point out that the integration of that acquisition has gone flawlessly and well within plan. So those -- to the extent we're working on acquisitions and looking out they'd be more of that -- more on those lines. We're not sitting here grinding to a big transformational acquisition. Any deal we look like, any deal we look at, whether large or small, the economics, the standalone economics of the deal have to be very attractive for investors. We are confident that as we look at deals that to the extent we'd identify synergy opportunities, we've got the resources and ability to deliver against those. But sitting here in the midterm, our changing -- our thinking hasn't changed much around acquisitions as we spoke a few months ago.

Okay, great. Second question relates to the Wood Flooring business, a couple of things here. I was curious, I assume that your comment about the Patriot business, hopefully leading to that divestiture, hopefully leading to an improvement in actual sales into the Northeast region, reflects the fact that you're no longer going to be competing, I guess, directly with some of your distributors. Number one, can you talk to us about the timing around this sales? Is this something that you've been contemplating for quite some time? Number 2, are there any additional distribution that you still retain? And why would you retain them in some areas, if you do, versus other areas?

Good question. So this is a deal that we've been patiently working on for a while. We wanted to make sure that we've got good value and that the strategic objective of maintaining the channel into that marketplace remains intact. So we were patient. We were focused, but we were patient because we want to make sure we did a good deal for not only the folks acquiring the business, but also just to make sure our channel to market were secure. The divestiture or the sale of Patriot was really us sort of cleaning up the balance sheet, cleaning up the portfolio a little bit. We're not in the Distribution business. Those are 2 very, very different business models. My experience is you can do one of those well. So you're either really good at the Distribution business or you're really strong manufacturer. Very infrequently is it possible to combine those and do both effectively. Our job is to create innovative products, create demand for those products, create manufacturing capacity that delivers those products efficiently and of high quality and partner with independent distribution to serve our mutual customers. So that's basically our business. We don't really -- Patriot would represent the last distribution asset that we have, so we see that as kind of completing a journey we've been on for a few years. And, Frank, I don't know if you have anything...

If you recall, we get into the Distribution business through Patriot really out of necessity when our major distributor, wood distributor in New Jersey and metro New York went out of business. And at that time, it was absolutely the right thing to do to protect our share. We've accomplished that. We've actually built the business. And as Matt said, we want to be focused as a great manufacturer and marketer of flooring products, not a distributor. And so this opportunity came up with a distributor partner that strengthens them, gives them more relevance in the marketplace for the full portfolio products to sell both vinyl and wood and represents a great opportunity for us to transition back to what we know.

The next question comes from the line of Dennis McGill, Zelman & Associates. Dennis McGill - Zelman & Associates, LLC: First question, just generally on the revenue guidance for fourth quarter. I think you said the midpoint implied flat year-over-year on an organic basis, and third quarter would've been close to down, too. So can you talk about which businesses or maybe it's all the businesses you're expecting the growth rate to accelerate 3Q to 4Q? Or do you see that pick up, I guess, either by product category or geography?

Yes, number one, I would say, relative to the comparison period last year, we are lapping the Eurozone crisis. And so that is a driver from going from kind of down revenues to something that's more stabilized. That's probably the primary driver there. Also, we're launching good product initiatives across our portfolio, and we're expecting to benefit from some share gain in the fourth quarter. But I'd say, really, the big differentiator is the Eurozone lapping. And I would say both businesses benefit from that. Dennis McGill - Zelman & Associates, LLC: Okay. Second question would be on Resilient profitability. I think you said year-to-date you're up $20 million on the EBITDA line. So maybe for the year you end up $20 million or $25 million yet volumes are down. Can you do a similar bridge as far as '11 to '12, what that change was driven by either cost saves, price versus cost or mix? And then just talk to maybe what the tailwind would be heading into next year, some of those factors if volumes were flat across the business.

Yes, this is Frank, Dennis. The primary drivers are really 3. One is mix, driven by new products. We've really focused on higher end products like LVT, premium VCT and premium wood products to drive mix in what's a tough market. And then secondly, related to the overall cost out of SG&A is significant SG&A savings. And lastly, manufacturing productivity. So those are the 3 buckets that had driven year-on-year the growth in earnings. Dennis McGill - Zelman & Associates, LLC: Is there any chance you could maybe just break those down roughly? And then similarly on '13, is there a carry-through effect that you'll have on some of those items regardless of what volume does?

Yes, I think, Dennis, we should probably shy away from giving too much 2013 guidance here on the building blocks. Certainly, we're going to continue to focus on manufacturing productivity, we're going to continue to look at how we drive positive mix gains. And hopefully, given the macroeconomic outlook, hopefully volume is not as bad as it looked this year as a drag. But I think you can expect this to run over very similar play in '13 as we did in 2012.

Your next question comes from line of Keith Hughes, SunTrust.

I think you had said in the prepared comments that hardwood was flat in the quarter, excluding the Patriot divestiture. Is that correct?

Total sales were flat, correct. Volume was up mid-single digits, but offset by price and mix.

And the price mix was due to the strong home builder business. So my question really comes to the home center. It must have been down pretty substantial in the channel in the quarter. Is it more in stock products, special order? Just any sort flavor along that line would be helpful?

Yes, I think there's -- this is Matt. There's kind of 3 things that drove this general. One is the end market itself is a little weaker than we expected. So that if you take the channel dynamics away, we certainly have a weaker remodel replacement market than we expected. There were some timing of new product load-ins by some of the channel that affected us in the quarter. And then we did see a slight reduction of promotional activity, which would drive their end-market volumes. So I would point to these 3 things as the drivers.

Is this -- is it one specific large retailer or you're seeing this in several?

I think it's probably not really appropriate for me to comment on any specific retailer. I appreciate the question, but I think it's probably better that we just leave it at the comments that I went with.

All right, let me just set it to Resilient. you were down about 5% in the Americas there. Is the same phenomenon going on there?

Yes, I don't -- Resilient in the Americas, we weren't down...

We were talking about -- that was a global number, I think.

On a constant FX, we were down 4% with FX. With the Canadian, we were down 5% on sales. That's right.

And is the central phenomenon in the renovation repair channel going on there as well?

In commercial, Keith, commercial with public investment in education and health care had a significant effect year-on-year on the commercial side of the business.

Your next question comes from the line of John Baugh, Stifel, Nicolaus. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: I wanted to go into the vinyl segment and Resilient, I guess. Are you vertical in LVT? I can't remember. I'm wondering what you make versus outsourced there. And I'm wondering how that whole shift is impacting that business segment, both from a margin and volume standpoint.

John, this is Frank. We're not vertical in LVT. We source today predominantly from China for the Americas. We are vertical in Europe. We produce LVT in Bietigheim, predominantly, to support the Eurozone market. That business continues to grow both commercially and residentially. Residential, more of the floating and locking products. And we've done very well there with differentiated installation systems that the customer deems as value. And then on the commercial side, we have really differentiated ourselves through visual and design leadership, and that has helped us dramatically on the commercial side. So overall, kind of a mix on the production side. We're producing in Germany to support the Eurozone. We source from China for the Americas. And then as I said, residential commercial, we have points of difference that really have driven our growth year-on-year.

So, Frank, because you source from China for the U.S., is that, though, still a mix positive when you see the segment growing or more in line with your vertical stuff here?

It's mix positive, John. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And I guess, wanted to just go back to the Home Depot, Lowe's question again, and we won't speak specific customers. But is there some issue going on with their inventory position? Or is it more, as you said, maybe they're backing off promotions? Or because they're changing out their floor, there's some disruption on their floor?

Yes, the big drivers, as Matt said, John, really -- you put the weaker remodel replace versus what we thought it was going to be coming into the quarter. It's truly some timing of new product initiatives coming out of some of the review process that have been pushed back. And then it's reduction in promotional activity year-on-year that has driven the delta. It's really no more complicated than that.

Your next question comes from the line of Jim Barrett, CL King & Associates. James Barrett - CL King & Associates, Inc., Research Division: Matt, with the impending change in ownership of competitive business in European ceiling grid now in flooring with Pergo, do you expect any major changes in the level of competition because of those changes?

Not really. I think the consolidation industry is constructive. But we -- obviously, we're aware of those deals and made other choices. So no, I think it's largely positive. No surprises with any of the outcomes there, so we're comfortable with it.

One thing on that, Jim, is we look at the USG grid business in Europe and decided not to proceed with that largely because the lot of the business value was assigned to a joint compound business. So the grid business is pretty small. It actually went to a competitor in Knauf that we think was good natural holder for the compound business and not a bad set of hands to have the grid business follow, too. We thought there would be worse places for it to fall. So we felt pretty comfortable with the USG outcome specifically. James Barrett - CL King & Associates, Inc., Research Division: Good. And the Pergo assets in the U.S., were those assets the company took a look at? Could you give us any thoughts on that?

We did take a look at that business, this is Frank, Jim. We did take a look at that business and felt like -- where we were positioned in the marketplace and what we were trying to do in laminate, it wasn't a great fit for us, so we elected not to pursue it.

And your final question comes from Robert Kelly, Sidoti. Robert J. Kelly - Sidoti & Company, LLC: You took some price actions with wood flooring and ceiling. Just given what's going on in the competitive side and Resilient, do you see some opportunities to make some pricing moves in that business either by the end of '12 or at some point in '13?

I would say right now, we don't see that opportunity. I mean, part of the reason our guidance on inflation has come down is because we have seen moderation in petroleum-based feedstock. So we really don't have a cost basis to go out and ask for more pricing right now. And then I think that direction in commodity pricing is good for our business because, hopefully, we will be successful in holding onto the pricing we've taken in past for commodity cost increases in the Resilient. But we don't have a reason to go after our customers and ask for something there at this point. Robert J. Kelly - Sidoti & Company, LLC: Okay, great. And just one quick one. You talked about it. I believe it was ceiling, some -- a tough comp a year ago with storms and whatnot. You saw volumes down. Any way to quantify the benefit you saw across the business from storms and whatnot in the year-ago period?

Well, what I would say is you would -- I'd probably wouldn't quantify it very specifically, but if our kind of independent channel -- pardon me, our retail channel outlet saw a significant growth in the Northeast, we saw that driven by Irene, and it probably contributed a couple of points of volume differentially versus what we would have expected normally.

I would now like to turn the call over to Matt Espe for closing remarks.

Thank you very much. Just a quick summary. Obviously, we see the macro economy and the climate as a challenge. The team here continues to be focused on executing the things in our control all with the view on creating shareholder volume over the long term. We have delivered on the $200 million cost out initiative. And now we turn our focus to driving top line performance as we begin to benefit from the investments we've made over the last year or 2, and those investments start to yield benefit in 2013 and beyond. And we look at innovation, continued innovation and product introduction to drive our top line performance in the developed markets as well. Again, I want to thank everybody for your patience. I want to thank you for your flexibility as we rescheduled the call based on the hurricane. We certainly covered lots of material, and we appreciate your focus. Have a great day, everybody. Thank you.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.