Armstrong World Industries, Inc. (AWI) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Armstrong World Industries Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Tom Waters, Vice President of Treasury and Investor Relations. You may begin.

Thank you, Frances. Good afternoon, 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 web website at armstrong.com. With me to this afternoon are Matt Espe, our President and CEO; Tom Mangas, our CFO; Frank Ready, the CEO our Worldwide Flooring businesses; and Vic Grizzle, CEO of our Worldwide Ceiling business. Hopefully, you have seen our press release this morning, and both the release and the presentation Tom Mangas will reference during this conference 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 detailed discussion of the risks and uncertainties that may affect Armstrong, please review our SEC filings, including the 10-Q filed this morning. Forward-looking statements speak only as a date they are made. We undertake no obligation to update any forward-looking statement 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 afternoon, everyone, and thank you for participating in our call today. The first quarter of 2013 unfolded largely as expected with the exception of demand for wood flooring, which was greater than we anticipated. We experienced continued commercial softness in North America, Western Europe and Australia. Emerging markets, for the most part, remained strong but with choppy shipment activity impacted by large projects and distributor inventory adjustments. The U.S. residential market continues to recover with particular strength in new home construction. We are starting to see some signs of life in the remodel area, but existing homeowners are still cautious on big-ticket purchases. I'm pleased to announce that the first quarter also marked the opening of 2 of our new emerging markets plants with the Chinese homogeneous flooring plant and mineral fiber ceilings plant beginning shipments in March. These plants were built safely, on time and on budget. The teams did a great job with these projects and I want to commend their efforts. Sales for the quarter of $622 million were in the middle of our guidance range of $600 million to $650 million. Sales were down just over 2% from 2012 with minimal year-on-year foreign exchange impact. Most of the sales decline was driven by the disposition of our Patriot Hardwood Flooring distribution business in 2012. Excluding the impact of Patriot, sales were down less than 1% with volume declines offsetting mix and price gains. Adjusted EBITDA of $79 million was on the high side of our guidance range of $68 million to $83 million. EBITDA was down $5 million from 2012, driven by the volume declines. Wood Flooring, our most residentially exposed segment, saw strong demand in the first quarter. Excluding $9 million in sales from the Patriot business in 2012, volumes were up in the mid-20% range. Demand was strong in all channels and aided by Big Box promotional activity and opening price point share gain. In fact, demand was so strong that we're challenged to keep up with orders for solid hardwood flooring. And to that end, we added a crew at our Beverly, West Virginia facility in January, and we're now in the process of adding and training crews at our Witt, Arkansas and Jackson, Tennessee plants. We also have plans in place to add an additional crew to Beverly in June. In total, we'll add over 400 employees to meet this demand and absorb the hiring, training and inefficiencies associated with these new crews. In addition, we're currently running maximum over time at all of our solid hardwood plants. It should be noted that solid hardwood represents about 2/3 of our Wood Flooring segment, the other 1/3 being engineered hardwood where capacity isn't an issue. The other impact that surge in demand is having is on costs. Inflation in lumber is significant with composite lumber prices up approximately 40% year-on-year and up 20% from December. As a reminder, we purchased hardwoods, primarily Red Oak, as opposed to the more frequently quoted softwood lumber, which is used in framing and other construction applications. Softwood lumber prices are up 60% year-on-year. The flooring grade of lumber we buy is the same grade used for truck bed liners, railroad ties and energy drilling platforms. So we're competing for materials with other sectors, which are also seeing strong growth. We believe hardwood lumber prices will continue to increase in the coming months and not begin to stabilize until the third quarter. Thus, despite the price increases we took in December and March, we've announced another increase on wood products effective in May. This price-versus-inflation pattern is typical for the wood business where price increases run behind lumber inflation on the way up. In periods of strong demand, we recapture inflation with price. This solid wood flooring situation is a nice problem to have after years of declining volumes, but it will take a couple of quarters to work through. Wood profitability was down in the first quarter despite the higher volumes and that will be the case in the second quarter as well. As expected, Resilient Flooring, which has minimal exposure to new residential activity, saw sales declines in all regions with continued weakness in the education and health care sectors, which are tied to public spending here in North America and Western Europe. The Pacific Rim was also down, driven by significant volume declines in Australia. But sales in China were up over 20% from last year. Mix and price in North America and Europe both improved year-on-year, and manufacturing and SG&A performance were largely in line with our guidance. The ceilings business saw lower sales with the same commercial sector weakness I mentioned in the flooring business, impacting the Americas. Sales in the Americas have also been variable month-to-month and by region. This reinforces our feeling that a broad commercial rebound is not yet occurring and we think is unlikely for the next several quarters. Canada and Latin America were down versus last year due to strong project sales in the base period. Sales in Europe were down high single digits with continued weakness in Western Europe and no offset from Russia as we lap a strong first quarter of 2012 and the Russian economy has weakened somewhat. As a reminder, in the last 2 quarters, we've transitioned almost all of our Russian business from an export basis at our U.K. and German plants to Armstrong in-country distribution. Some of the first quarter European volume declines, especially in the U.K. and Russia, is just timing. And we continue to anticipate growth in Russia for the full year. However, the Eurozone weakness, especially in France, is likely to persist for the entire year and maybe beyond. Volume declines in Australia drove ceiling sales in the Pacific Rim lower. China and India continue to grow, but were unable to offset Australia. Our global architectural ceilings business experienced strong growth everywhere but Europe where the comparison is difficult due to 2012 airport projects in Berlin and Dubai. Despite first quarter weakness in Europe, we're optimistic that our Architectural Specialties business can grow in Europe for the full year as we won significant project business that we anticipate shipping in 2013. We remain very bullish on this business outside of Europe. Ceilings profitability was up in the quarter, but it should be noted that some of this was driven by onetime expenses related to getting our locked out Marietta plant back up and running in 2012. And of note, in the first quarter, we took advantage of favorable capital markets and refinanced our credit agreement, resulting in lower future interest expense and an extension of maturities to 2018 and 2020. The level of debt was essentially unchanged. This refinancing further strengthens our balance sheet and leaves us in a position to focus on operational and strategic issues. Construction in our Chinese heterogeneous flooring plant and Russian ceiling plant continues on schedule. I was just over in Russia for the groundbreaking ceremony of the ceilings plant and I can tell you that the team is excited to be in the next phase of construction. I look forward to opening the heterogeneous flooring plant in China later this summer and the Russian ceilings plant late next year. So with that, I'll turn it over to Tom Mangas for a more detailed discussion of our financial performance and an update on the guidance and the outlook for the second quarter. Tom?

Thanks, Matt. Good afternoon to everyone on the call. In reviewing our first quarter results, I'll be referring to the slides available on our website starting with Slide 4, key metrics, as Tom Waters already covered Slide 2 and Slide 3 is simply an explanation regarding our standard basis of presentation. Matt mentioned quarterly sales and EBITDA results. So I will only point out that adjusted operating income and adjusted EPS were also down versus last year by 9% and 55%, respectively. EPS was impacted by the noncash write-off of fees related to our previous credit agreement of $19 million or $0.19 per share as a result of our recent refinancing. First quarter free cash flow was a use of $51 million, similar to the use of $50 million in the first quarter of 2012. This use of cash in the first quarter is typical due to the seasonality of our business. I will address the drivers of EBITDA and free cash flow in more detail on upcoming slides. We closed the first quarter with net debt of $792 million, up from $409 million at the end of the first quarter of 2012. This increase is largely driven by the $500 million special cash dividend that we paid in the second quarter of 2012, partially offset by cash generation over the past year. Finally, our unadjusted return on invested capital on a continuing operations basis was 10.3%, an increase of 210 basis points over the prior year. This continued improvement represents another record since our emergence from Chapter 11. Slide 5 details the adjustments we made to EBITDA and provides a reconciliation to our reported net income of $3 million in the quarter. As you can see, this past quarter, we incurred $6 million of expenses related to headcount reductions in our flooring businesses in Europe and Australia. In 2012, we had $14 million of accelerated depreciation and impairments associated with the closure of our Mobile, Alabama ceilings plant and $2 million of severance in European flooring business. Interest expense was higher in 2013 due to the expensing of the previously capitalized fees I just mentioned. Tax expense was essentially flat despite earnings being down year-on-year, primarily due to a greater unbenefited foreign losses in 2013. This year-on-year increase in foreign losses is largely a result of the expenses in China and Russia associated with plant construction and start-up costs. Moving to Slide 6. This illustrates our sales and adjusted EBITDA by segment for the quarter. Excluding the impact of foreign exchange, Resilient Flooring sales were down 5%, driven by volume declines in North America, Europe and Australia. Despite the sales decline and start-up costs in our China flooring plants, our ongoing productivity efforts enabled us to keep adjusted EBITDA flat with 2012. Wood Flooring sales were up 9% and would have been up 18% if not for the Patriot divestiture. Volume growth exceeded sales growth as mix was negative, driven by strong builder product sales and the opening price point share gains we made in the home center channel. We were obviously pleased to have wood demand coming back, but the velocity of the increase is causing manufacturing inefficiencies as we staff up to meet demand. Matt mentioned our ongoing pricing actions on wood. Just to be sure you're aware of the details of recent actions, I want to remind you that we took a 6% price increase on both solid and engineered wood products effective in December, increases of up to 10% on solid wood products effective in March and just recently we announced another increase of 10% on all wood flooring products effective in May. Building Products sales were down 4% as volume declines in the Americas and Europe more than offset global mix and price gains and modest volume increases in the Pacific Rim. Adjusted EBITDA in Building Products increased $3 million versus the first quarter of 2012 despite the lower sales, driven by costs we incurred at our Marietta, Pennsylvania facility in 2012. The Corporate segment was down partially driven by the expected continued decrease of our noncash pension credit, foreign pension expense and by insurance program reserves. Slide 7 shows the building blocks of adjusted EBITDA from the first quarter of 2012 to our current results. As you can see, mix and price were modestly beneficial, but volume was a significant headwind for the quarter. You may be surprised to see the input costs show up as a positive given all of our discussion on lumber inflation. However, keep in mind that while our cash purchase costs are indeed rising sharply, inventory accounting rules hang this immediate increase on the balance sheet to be released when products are sold. So the inflation we are experiencing know will impact our income statement in coming quarters. Manufacturing costs show up as a slight negative on the earnings bridge, but really illustrate 2 stories: one, we are absorbing several million dollars of overhead and inefficient production expenses as our Chinese plant start up; and two, we're partially offsetting these costs with ongoing productivity gains in our developed world ceilings and resilient facilities. SG&A was flat year-on-year despite our continued investment in the emerging markets. However, we still anticipate SG&A increases in coming quarters consistent with prior guidance. WAVE had an excellent quarter and added $2 million to our year-on-year results. Finally, our noncash pension credit is lower in 2013 as we mentioned in our guidance in February. Now turning to Slide 8. You can see our free cash flow for the quarter was very similar to 2012. Cash earnings were lower than prior year, driven by reduced earnings and a higher tax rate. Working capital was a use of $48 million of free cash flow in the quarter, but that was improved from last year by $20 million. Keep in mind that working capital can be volatile from quarter-to-quarter, and that for the full year, we don't anticipate significant changes. Capital expenditures were higher than in 2012 due to the timing of equipment purchases for emerging market plant builds. Cash interest expense increased by $3 million, primarily due to the additional debt from our March 2012 refinancing in support of the April 2012 special cash dividend. WAVE's contribution in cash was slightly negative as they were able to squeeze more from their operational cash accounts in 2012 due to their then newly available revolving credit facility. The remaining positive contribution of free cash flow of $11 million, illustrated in the other bar, relates to the timing of certain payments in 2012. Slide 9 updates our guidance for 2013. As Matt said, we're largely maintaining our prior guidance. We have not significantly changed our view of the market opportunity since our last call. We expect new residential construction to continue to be a bright spot and forecast 990,000 new home starts in 2013, up slightly from our prior estimate of 950,000. But as you know, this growth has skewed a bit to multifamily, which is not a large segment for us. However, we sought -- we see some improvement in residential remodel and are now projecting low single-digit growth in the segment for the year, up from our flat outlook in February. This has positively impacted our wood sales and gives us confidence on our price actions to mitigate lumber inflation. On the commercial front, in the U.S., we intend -- we anticipate a continuation of flat to slightly down commercial volumes, with ongoing weakness in education, and to a lesser extent, health care. Retail has been a bright spot domestically. However, Europe has been weaker than we anticipated and will experience mid-single-digit volume declines on the year. In the Pacific Rim, we continue to anticipate China's sales to be up double digits. We also expect to grow sales in India and Southeast Asia. However, we expect that Australia will continue to be a drag and will partially offset our emerging market gains in the Pacific Rim for the year. Net -- of these changes -- net these changes will result in us holding our sales guidance for the year. Specifically, we continue to expect sales of $2.7 billion to $2.8 billion, adjusted EBITDA in the $390 million to $420 million and free cash flow of the $75 million to $125 million. EPS guidance is down $0.15 on both the high and the low end of our previous range, driven by the expensing of $0.19 per share of fees associated with previous credit facilities with a slight offset from lower interest expense in the coming quarters. Our interest expense pattern has been complicated by the refinancing, so let me spend a moment to lay it out. We incurred $33 million of interest expense and financing fees in the first quarter and expect to incur an additional $36 million over the remainder of the year for a total interest expense of just under $70 million for 2013. The real income statement benefit of our recent refinancing will show up in 2014 where we anticipate interest expense to drop to less than $50 million. Slide 10 provides the more detailed assumptions going into our earnings guidance and includes the specifics on the second quarter. We now anticipate inflation in the range of $50 million to $60 million, up $10 million from our previous guidance with more than all of the increase coming in the Wood segment. Inflation on the other input costs is slightly lower than our previous guidance. Guidance on the pension credit, earnings from WAVE and capital expenditures are unchanged from February. Cash taxes of $10 million to $30 million are down from our previous guidance of $25 million to $50 million due to the increased tax expense -- due to the increased interest expense in 2013, triggered by the refinancing as well as additional tax planning actions and analysis. Our estimate for the second quarter projects sales, including anticipated FX impacts, to be in the range of $680 million to $730 million. At the midpoint, sales will be up over 5% from the second quarter of 2012 when adjusted for the Patriot disposition. We expect to earn $85 million to $105 million of adjusted EBITDA, compared to $110 million on a comparable basis in 2012. The adjusted EBITDA estimate is impacted by significant lumber inflation, startup manufacturing expenses in China and Russia and higher SG&A spend in our growth platforms. Lastly, for the full year 2013, we currently anticipate $5 million to $10 million associated with cost reduction initiatives in our Western Europe and Australian flooring businesses. This up slightly from our initial guidance as we are more taking our actions to adjust our cost platform to the lower market opportunities in both regions. We look forward to catching up with wood demand and inflation and to driving meaningful growth from our margin market expansion now that our plant footprint is coming online. With that, I will now turn it back to Matt.

Thanks, Tom. By and large, 2013 is unfolding as expected as you can see from our reiterated guidance. Aside from market softness, especially in Europe, our biggest challenge and opportunity is in our Wood business. We're implementing the necessary pricing actions and deploying the required resources to service our customers and take advantage of the strong wood flooring demand. We remain hopeful that the strength we're seeing in new residential drives confidence in home owners to spur remodel activity and eventually, commercial activity. But we remain cautious on those in 2013. So with that, thank you for your time today, and we'd be happy to take any questions.

[Operator Instructions] Our first question is from the line of Stephen Kim from Barclays.

I guess, a lot of questions I could ask. But let me ask you about the Wood Flooring. You made a couple of statements, I just wanted to follow up a little bit. One, you mentioned that engineered was -- you were not seeing as much of a bottlenecking there in your solid. I was a little surprised -- I guess, I was trying to understand what that tells us about the underlying demand. Most of the new builds that I go into, actually I see a lot of engineered. So I just wanted to -- maybe you could provide a little bit of color around that? And while you're on wood, if you could give us an understanding of when you're talking about this lagging effect of your price versus your costs, it sounds like you're looking for an inflection at the end of the year, maybe third quarter or fourth quarter, it sounds like? Can you give us a sense for where you see margins likely to sort of settle out after you reach this inflection in the lag effect of price versus costs?

Let me -- Steve, this is Matt. Thanks for the question. Let me give you some context and then we'll hand it over to Frank for additional comments, right? The drivers for the wood demand are residential, which is largely new residential. And that would be -- that drag's a mix, somewhat down a little bit, it's builder base or builder-grade hardwood flooring. Engineering demand, at this point, while robust, is more than served by our existing footprint. So I wouldn't say that engineering demand -- engineering wood demand isn't relatively strong, but I think we have the manufacturing capacity to serve that demand. With respect to the crossover in inflation and productivity, we expect that by the end of the second half, we will be sort of on the other side of that hump, if you will, where our pricing actions will be in excess of the material we're experiencing -- the material inflation we're experiencing in the second half. We will not be ahead of the game for the pricing pressure that we've experienced early in the cycle. And then manufacturing productivity in the wood plants becomes positive at the end of the second half as well as these 400 new employees become productive or kind or move through the training phase. They're in place and yielding the results. So I don't know, Frank, if there's anything...

I guess, well said on the engineered -- the demand, as Matt said, is robust. We had flex capacity both in China and Somerset that we could bring on very, very quickly. The other difference is in solid, you have the lag time to get the green lumber where you don't have that same effect in engineered so you can respond more quickly to upticks in demand.

[Operator Instructions] Your next question is from the line of Michael Rehaut from JPMorgan. Jason Aaron Marcus - JP Morgan Chase & Co, Research Division: This is actually Jason Marcus in for Mike. So I think the past, you've mentioned that regarding potential M&A opportunity, you might consider an acquisition on Architectural Specialties. So just I guess on the acquisition front, I was wondering what you're seeing and if you've been examining any different opportunities and how you're thinking about that now?

Well, I mean, we're always looking and evaluating potential acquisitions, Jason. And what we've said in the past is an opportunity we think that exists is a smaller, we will refer to as tuck-in acquisitions in Architectural Specialties business. So Vic and the team are continuing to review and monitor those. Obviously, nothing to announce today. But I think we have the balance sheet strength to continue to evaluate good deals, and if one exists, take advantage of it. So we don't see that changing -- that part of our story changing at all based on anything we're experiencing either internally with the wood challenges or externally in the greater market.

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

Looking at each of your segments, Resilient wood and ceilings, could you give clarity on Q1 volume trends and the look into early Q2 for volume trends in those 3 segments?

Well, the -- in terms of volume trends in the first quarter on Resilient Flooring, the commercial market segments, we saw relative volume weakness in the first quarter, mostly in education and health care as we said in the prepared remarks. That's still somewhat publicly funded-driven. We did see and continue to see some attractive relative strength in retail. This is mostly retail remodel, not new retail. So that's encouraging. The ceilings volume is following a very similar pattern in North America. Western Europe continues to be weak somewhat across-the-board for Resilient Flooring and fiber ceilings. We got off to a slow start in Russia. That seems to be correcting itself somewhat even though the market's a little softer than we anticipated. And in Asia, just to remind everybody, our business in Asia and Australia more than offsets relatively strong volume growth we're seeing in both China and India. It's a little disproportionate at this point. So Australia as a mature market continues to be very, very soft for us. And the teams are taking actions in place to reduce operating expenses and SG&A to continue to improve our operating position there. Resilient Flooring in China is off to a very strong start. Volume's over 20% and ceilings are kind of low double digits there as well.

Yes, Kathryn, this Tom Mangas. On the commercial front, on the Americas, both sides of our commercial business ceilings and floorings saw volume declines in the mid-single digits. Europe was really the, as Matt said, the tough spot where we saw just over double-digit declines in volumes there. So that remains to be the tough part of our business, and the emerging markets remain strong.

I think the last part of your question was the outlook for the second quarter. I mean, what we can comment on is the order trends we're seeing, at least, thus far in April, give us confidence around our revenue guidance for the second quarter.

And our next question is from the line of Ken Zener from KeyBanc.

I want to compliment first your new disclosure in the Q. I think more companies should do what you guys did. It's very helpful and I want to explore that given that you're talking about your volume and price mix leverage. Can you kind of frame the building product leverage that you might have related to price mix as the cycle recovers so when you look at how much EBIT dollars you might have lost from mix of product, given that it looks like you're about 45% leverage, give or take, in each of those in price mix as well as volume? And then, if you could, also just expand on how different was price mix by region? Did you hold share or did you really see more pressure in one region or another?

Ken, your question was specific to building products, right?

Correct.

So -- this is Tom. So first, we continue to stand behind our incremental margin thesis on ceilings, which we believe is 30% to 40% with volume growth. That has been our historical achievement and is aided by the fact we're able to pick up significant fixed costs from our plant network. And yes, if we are able to continue the string of pricing ahead of inflation, I mean, that continues to be -- what puts us to the high end of that range of that 30% to 40% incremental margin range and that's something we believe is important part of our investment thesis.

Your next question is from the line of Dennis McGill from Zelman & Associates. Dennis McGill - Zelman & Associates, LLC: Matt, I was just hoping you could maybe put a little bit more detail behind what you're seeing on the public spending front. So it sounds like domestically, ceiling -- and specific to ceiling, I think, to start with domestically, volumes were down mid-single, I think you said, and that's being led by the public side. So how much is that business down? And realize this is, I think, the third year now where that's been the case we're up against 2 pretty tough years for school spending. Any sense on how close this is to a trough or how you guys think the summer period might unfold for that side of the business?

Well, as you said, Dennis, I mean, we continue to see state budget pressure translating to slower volumes in public education K through 12 and that affects not only Resilient Flooring but also mineral fiber ceilings. So we're seeing volume softness there in the mid- to high single digits in really both of our businesses. Health care is similar as they also get affected by a reduction in health care -- a reduction in public spending. And then in the health care industry, you have other capital allocation priorities in the short term. These guys continue to consolidate health care systems, so they're rationalizing the assets post the consolidation mode. We're seeing an increased investment in health care-oriented technology and software. So that stuff in the -- at least in the near-term, along with a broader reduction in investment, sort of keeps them out of the facilities upgrade activities for the short term.

And your next question is from the line of David MacGregor from Longbow Research.

I just wanted to explore the -- in the Building Products, the whole mix issue here and I wonder if you could just talk about the movement you're seeing within mix, if you think about the business in kind of 3 buckets, the commodity board versus the high-end board versus your Architectural Specialties products. And then I think there were a couple of questions earlier on Architectural Specialties, maybe just if you could elaborate on what we should think about in terms of growth over that business over the course of the year ahead and what percentage would that represent of the Building Products revenues now?

Yes, David, this is Vic Grizzle. On the trends in the marketplace, and this is something that's been continuing for the last 18 months, architects are preferring a higher quality, higher-end product in the specification cycle. So we've been developing and introducing new products at the high end for a number of years now and a lot of this is gaining critical mass and this is continuing. So we're seeing the growth at the high end and that's what's driving the mix both here in the U.S. and in Europe. So we see it in both places. Architectural Specialties is an extension of that. As architects want to create more, what we call, wow spaces or statement spaces in the buildings, we've expanded our portfolio to be more relevant and to have more offerings for them in that space. And we can see double-digit growth in that product line, which again adds to the mix. So we've got really kind of 2 things going -- driving a richer mix both in the U.S. and in Europe.

And your final question -- your final part of the question is Architectural Specialties is about 10% to 15% of the ceilings segment sales.

And your next question is from the line of George Staphos from Bank of America Merrill Lynch.

I was curious if you could put a bit finer point on the amount of start-up expenses from the new facilities, what the effect was in the quarter and how we might see that progress over the next several quarters? And related to that, might we not see also depreciation expense may be pick up a bit as you start to release what's been capitalized?

All right. George, this is Tom. Yes, to your last point there, yes, you should expect to see depreciation pick up as these plants get capitalized and roll through our depreciation schedules. I think we guided in the February call that we expected $10 million to $15 million of start-up expenses associated with the 3 plants. And as we said, the first 2 began shipments in March. So we are -- we're at the early phase of absorption. We had certainly some for these plants getting up to start-up curve. But as you saw, we were able to offset those with productivity efforts elsewhere, but you should expect that the production drag continues into the second and third quarters as we get these plants really shipping at going levels of capability and also bring up the heterogeneous plant. I'll also remind you, we also guided SG&A in the $5 million to $10 million range associated with incremental SG&A investment to these plants as well which will be a drag that comes with commercialization.

Your next question is from the line of Bob Wetenhall from RBC.

The midpoint of your second quarter guidance would suggest that sales were up 1.2% for the first part of the year. And then if I look at your full year guidance, it suggests that the back half would have to be up 8.8% for you to get to the midpoint of your full year guidance. And I'm just trying to get a little directional insight among your 3 product groups, what's the lever in the second half of the year, which is going to get you to sales out-performance? Is it price in ceilings or is it just better volumes across the portfolio? Where do you see that lift coming from?

Well, good question, Bob. So clearly, we expect to see continued growth in Residential Flooring, so we continue to see very strong demand and an improved ability to meet demand of our Wood Flooring business. We see volumes in commercial and the commercial segments stabilizing, flattish in the second half. We see continued strength in retail. We have some big shipments, big orders dropping in Architectural Specialties. We see orders rebounding in -- slowly, but surely rebounding in Russia. And we count on India and China to continue to drive double-digit revenue growth in both of those -- in both of our businesses there. And we see productive yield out of the new plants, the 2 new ceiling -- I'm sorry, the 2 new flooring plants and the ceiling plant in China.

First, Bob, you got to remember, we've got the Patriot divestiture that happened in August in the third quarter, so that's worth a couple of points in the back half alone of differential. And just to Matt's point, we are seeing strength in the residential segment so we expect that to carry forward. And as we outlook into 2014 and the continued evolution of domestic GDP, we do have a thesis here that the back half is a better back half on the commercial side. Certainly, as we've done our market checks and visit with customers and contractors, they're more optimistic in the back half and that's reflected in our guidance, which really is not that changed from a phasing view versus our view that we presented in February. I mean, even as -- just to continue the point, even going from first quarter to second quarter, I mean this first quarter on a constant FX basis, we were down 2% inclusive of the Patriot divestiture and at the midpoint we're at 5% in the second quarter, so we're starting to call that volume already in the second quarter. As Matt suggested, what we've seen in April confirms our guidance on that.

And your next question comes from line of Keith Hughes from SunTrust.

You had made some comments in the last question and earlier about your improved uptick on residential replacement demand. Is that a function of what you've seen in the March, April shipments or is that more just reading the same economic tea leaves we're looking at?

We're actually seeing -- we're experiencing very modest recovery in our results in sort of February, March and April. We expected or are anticipating that to be flat to slightly down. That was certainly the experience we had last year. So we see even a slight -- frankly, flat or moderately up results as a net positive to our expectations coming in. So again, it's tenuous. We're anticipating that continuing as we think about the second half of the year.

Yes, I think that's right, Keith. And we just couldn't look past what was happening in the wood business and attribute all that given how we see it flowing through our channels as only new construction related. So we did see a strong growth in our home center channel and certainly see that tie to more repair and remodel.

Your next question comes from the line of John Baugh from Stifel, Nicolaus. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: I guess, this question is directed to Frank. There was a reference to some price aggressiveness in Wood Flooring with the home centers. Was that on solids or engineered or both? And could you discuss the rationale in light of somewhat tight capacity situation?

Well, this is Matt. We wouldn't comment on any of our customers' retail or consumer pricing strategies. So I mean, we're -- I'll just say that we're enjoying pretty good flow of business at the Big Box channel. As we pointed out, we've seen an increase in promotions there. Beyond that, it's really not -- I don't think it's really for us to comment on any pricing that they might execute or not execute in the resale pricing. I don't know, Frank, if you have any additional...

No, I think it's great. I think, as they see the market come back and they're trying to compete in the marketplace, John, they've just become more promotionally active in their tabs around the category and I think that's driven people into their stores and we've been a benefactor of that.

Your next question comes from line of Will Randow from Citi.

This is actually Scott Schrier in for Will. Just wanted to see if you can help us think about house forward sales trends outside of North America, specifically as growth in the new Chinese plants that can help offset potential negative trends in Europe?

Well, the plants are just coming online. We expect the plants to be sort of full from a capacity perspective in 2015, '16. So call it sort of 3 years or so, so that'd be 2016, 2017. We're looking for an incremental -- I'm sorry, we're looking for a total revenue out of those 3 plants at that running rate of about $200 million. And we're saying about 75% or 80% of that represents incremental revenue. The plants weren't built obviously as a strategy to offset European weakness, but the plants are built to take advantage of the expansion of the market opportunities in China, India, Southeast Asia. In addition to the plants built, we've added hundreds of people there over the last couple of years in demand-creation roles in India and in China to help not only build broad demand for those plants but specifically targeting what we think are the most attractive segments, again health care, education to name 2.

Yes, the only thing I'd say on that, Scott, is I mean, absolutely, we're counting on China and the growth in those plants like we've enjoyed in the first quarter and the last quarter of 2012 to continue and to be an important offset to weakness in the developed world. The scale of Europe, though, is much greater than scale of China. So total European segment sales for us are about $550 million; and total Asia, including Australia right now, is in that $200 million and $250 million range. So China really needs to ramp up. We've got all that $200 million, over time, sure it's going to offset the European softness, but that's not coming all in 2013.

Right. And the European softness we're experiencing tends to be Western Europe, the Eurozone, and we're seeing, again, relative strength in Russia and we're very optimistic, long term, about the opportunities for both of our businesses in the Middle East, which we included in the European operating results.

Your next question is from the line of Mike Wood from Macquarie.

This is Adam in for Mike. Just to touch on the wood share gains one more time, has there been any change in inventory strategy at any of your key retailers, maybe keeping more product in stock versus special order?

This is Frank. Nothing of significance really at all. What we're seeing is really just increased demand and acceptance of our products in the marketplace. So there's no significant inventory shift that is driving the numbers we presented this morning.

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

I guess, following new home construction, historically, we've typically seen a recovery in existing home sales and remodeling spending. And I guess I'm just trying to get a sense of where that to occur again, let's hope it does, that you're going to see a better mix in terms of your wood product business. So I'm just wondering if you can help us quantify that.

Well, this is Matt. Let me kind of frame that a little bit. We were surprised at this time last year when kind of at the first quarter, second quarter, we began to see some sustained growth in new residential construction and we saw that sort of coming through our demand for wood flooring and we saw a softening, almost at the same time, with the remodel business. That hasn't happened before. So we're watching that very carefully. We think more -- we think the driver of the relative softness in remodel is sort of the macroeconomic overhang, I mean the relatively high unemployment rate, the relatively -- relative choppiness of the economic recovery we think that's keeping a lot of people on the sidelines. The other thing we're finding is that there is less a tendency now to sort of down select once homeowners have made choices around remodels. So if you've gone into a kitchen and you get decided on cabinets, floors and appliances and become comfortable with that, rather than go forward but down select in some other categories of products, you go on the sidelines, you wait for the recovery, you wait for a little bit more stability in the economy, a bit more confidence and then you move in. So that would suggest, to some extent, a pent-up demand for residential remodel and we're obviously waiting to see that. What we're seeing right now is kind of a year-over-year stability, so I would coin residential remodel as much as not getting worse is actually getting better. And again, our view is you'd have to see some continued improvement in unemployment and some continued improvement in actual GDP growth, not just forecasted GDP growth to kind of get those guys off to sidelines.

The other thing I'll throw in there, David, is we do offer a broad range of products in each of our categories in floor, as Vic also outlined in ceilings. And the price ranges is immense for consumers to choose from. And we're seeing in the builder business that they're typically putting in our lowest price -- opening price point-type product form, which also drives for us a poor mix. But as consumers are individually buying through our retail network, I mean they can be doubling the price point that they're paying on a per square-foot basis and even tripling if they went all the way to our HomerWood product lines and that brings commensurate levels of margin improvement. So that's why we talk about mix improvement that comes with remodel given the range of products that we have available and the margin structure that follows the tiering on the product mix.

And your next question is from the line of John Kasprzak from BB&T. John F. Kasprzak - BB&T Capital Markets, Research Division: You guys talked about the issues in wood flooring that you're facing meeting demand. Do you think that those issues will persist through the years such that even on a recovery in housing and higher sales, Wood Flooring operating profit will be down for the year?

Well, we certainly see and anticipate a second half correction over the first half run rate. As the 400 people we're adding become more productive and as our price -- our 3 price increases and potentially more offset continued inflationary pressures. So the second half of the year, we would anticipate stronger margins and stronger revenue. That's reflected in the guidance that we reiterated this morning in terms of revenue and earnings.

Yes, I think Jack, we're not going to get it all back this calendar year in 2013, so we do think that we've gone and dug ourselves a hole on a margin basis given that front half-back half dynamic Matt has mentioned. But clearly, we have all the confidence in the world that we're going to, through this pricing series that Frank has announced, recover our margins trajectory and deliver on the incremental economics we've talked about for the wood business.

And at this time, there are no other questions in the queue. I would like to turn the call over to Mr. Matt Espe for your closing remarks.

Thank you very much. We appreciate everybody's interest and everybody's questions. We will continue to operate and execute on the things within our control in a very challenging environment, and we hope to see you all very soon. Thank you very much.

And ladies and gentlemen, this concludes your presentation. You may now disconnect. Have a great day.