Armstrong World Industries, Inc. (AWI) Q2 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Armstrong World Industries Quarter Two 2015 Earnings Conference Call. [Operator Instructions] As a reminder this conference is being recorded. I would now like to introduce your first speaker for today, VP of Treasury and Investor Relations, Mr. Tom Waters. You may begin, sir.

Thanks, Andrew. Good morning, and welcome, everyone. 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 today are Matt Espe, our President and CEO; Dave Schulz, our CFO; Don Maier, CEO of the Worldwide Floor Businesses; and Vic Grizzle, CEO of our Worldwide Ceilings Business. Hopefully you seen our press release this morning and both the release and presentation Dave Schulz will reference during this call are posted on our website in the Investor Relations section. I advise you 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 we filed this morning. Forward-looking statements speak only as of the date they are made. We undertake no obligation to update any forward-looking statement beyond what is required by applicable securities laws. 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. On our call today I will provide an overview of our quarterly and year-to-date results and refresh our full-year guidance. I'll update you on conclusions we've reached with regard to our wood flooring business. I'll also provide a few new details on our business separation effort, and then Dave will give you a detailed discussion of the financials and guidance. For the second quarter reported sales of $633 million are down $26 million or 4% from the prior year. Almost the entire decline is due to foreign-exchange movements, particularly in Europe. Adjusted EBITDA of $112 million is up $8 million from prior year. Year-to-date reported sales of $1.184 billion are down $65 million or 5% from the first half of 2014 and again a majority of the decline is due to foreign-exchange. On a comparable foreign-exchange basis sales are down 2% year to date. Adjusted EBITDA for the first six months of 2015 of $186 million is essentially flat is essentially flat with last year. Now versus our initial expectations for the year sales have been disappointing. The strength of the dollar has been a factor, but we've also seen shortfalls in sales of wood flooring and significant economic declines in Russia and China. In addition, we continue to see market-related weakness in North American ceilings. Despite strength in new construction, repair and remodel activity has been below our initial expectations. Our order backlog and visibility of the large projects gives us confidence that the second half will improve on our start to the year. But the four-year market opportunity looks a little softer now than at the beginning of the year. Of note, on the positive side of the sales ledger, commercial flooring sales are up in the Americas, aided by market share shifts as a result of competitive product availability issues and our service levels relative to competition. India and Southeast Asia continue to show strength with double-digit sales improvements in the quarter. And Dave will provide more details in our guidance but we will be lowering our sales outlook for 2015 for both businesses. EBITDA performance year to date has been in line with our expectations and for the total Company we are reaffirming our guidance for the year. Year-to-date , our bottom line has been aided by lower input costs in the flooring division, primarily lumber; continued price and mix gains; and productivity across our plant network. Our North American flooring sales and marketing team continues their efforts to execute on our planned SG&A investments with our distributor and retail channel partners. To date, we've placed over 2,500 new displays in the market and are on schedule to have the full rollout of over 5,000 completed by the end of the third quarter. As we've discussed in the past, this spending is necessary to recapture lost share, drive deeper channel penetration with independent specialty retailers, and support our LVT, laminate, and wood new product launches. Collectively, these go-to-market investments will help position Armstrong flooring to succeed as an independent public Company. As many of you know, I have been leading a deep dive review of our residential flooring business and the wood segment has been a critical part of our study. For several months now, Don Maier and I, along with the residential team, have been exploring operational, financial, and market-related aspects of the wood business. We've had numerous conversations with a variety of constituents both internally and externally. The culmination of this analysis has reaffirmed to us that the wood business remains a key part of our portfolio. Now, as I've discussed here in the past, we look at strategy on an annual basis and if the facts and data change we will evolve our strategy accordingly. However, as opposed to the businesses we have exited, cabinets and our flooring business in Europe, the wood business has a leading market position, is profitable, and contributes significant cost and selling synergies with our other product categories. Financial performance is likely to continue to be volatile with both demand and input cost creating challenges; however, we are confident that our investments in engineered wood capacity and enhanced capabilities at our Somerset facility, the re-commissioning of the Vicksburg plant finishing line, and solid plant productivity projects will improve our manufacturing costs and capabilities. We also feel that our improved sales and marketing capabilities, with an increased emphasis on premium products, will drive improved results over time. Turning now to our separation plan, we continue to make progress on a number of important work streams including IT infrastructure, the separation of our facilities, and organization design. I'm pleased to report that upon separation Dave Schulz, currently the CFO of Armstrong World Industries, will be joining Armstrong Flooring as the Chief Operating Officer. Until then, Dave will continue as CFO of AWI, lead the finance work for the separation, and continue to report to me. Upon separation, he will report to Don and work closely with him in all aspects of running the flooring business. Dave will provide leadership to Investor Relations, the strategy and business planning processes, business development activities, and in partnering with Don and the other members of the AFI leadership team to best support our critical stakeholders -- those being employee, customers, and shareholders. Upon separation, Brian MacNeal, who is currently Vice President of Finance for our building products division will become the CFO of Armstrong World Industries reporting to Vic Grizzle, who we previously announced will become President and CEO of Armstrong World Industries. Brian joined just over a year ago and has worked with Vic and the ABP leadership team to drive real value creation. Prior to joining Armstrong, Brian spent 20 years with the Campbell Soup company progressing through roles with increasing responsibility which included division CFO of Europe and Finance Director of Soup. Prior to Campbell's, Brian worked at PWC as a public auditor. And finally, I am pleased to announce that Jay Thompson will be joining Armstrong in August as Vice President of Finance for our Flooring division and, upon separation, Jay will become the CFO for Armstrong Flooring supporting Don Maier. Jay comes to us from Chobani, the Greek yogurt company where he's been acting Chief Financial Officer since 2014. Prior to Chobani, Jay provided interim executive financial leadership and operational support to a variety of portfolio companies at TPG global and he's held several senior financials at PepsiCo. Jay's early career included roles at KPMG, Bain, and Goldman Sachs. More details on the separation will be available when we file our Form 10 in September. So with that, I will turn the call over to Dave for a detailed review of the quarter and an update to our guidance for the year. Dave?

Thanks, Matt. Good morning to everyone on the call. In reviewing our second quarter results I'll be referring to the slides available on our Web site starting with Slide 4, key metrics, as Tom Waters always already covered Slide 2, and Slide 3 is an explanation of our standard basis of presentation. Sales in the quarter of $649 million were down less than 1% versus 2014 on a comparable foreign exchange basis. Operating income, EBITDA, and EPS were all up. Free cash flow for the quarter was $77 million, improved from last year by $68 million. Net debt was down $140 million driven by our cash generation over the past year. Return on invested capital was down due to lower as reported profitability in the trailing 12 months, including higher non-cash pension expense and separation costs. Slide 5 details the adjustments we made to EBITDA and provides a reconciliation to our reported net income of $30 million in the quarter. As mentioned during our first quarter call, we exclude the impact of our non-cash U.S. pension expense of $6 million and costs associated with the flooring separation process of $5 million from our adjusted numbers. In addition, we are excluding a $4 million duty charge related to engineered wood imported in the second half of 2012 through the first half of 2013. While similar duty reviews remain pending for 2013 and 2014, we do not expect future duty rates to have a significant impact on our results as we currently import limited quantities of wood. The $7 million cost reduction charge in 2014 was largely related to expenses associated with exiting our Kunshan, China engineered wood facility. The interest/other line is improved this year as a result of non-cash intercompany foreign exchange gains. The second quarter tax expense was similar to 2014. Moving to Slide 6, this illustrates our sales and adjusted EBITDA by segment for the quarter. I'll talk through the businesses on the next few slides but want to note here that corporate expenses were lower than last year. Slide 7 provides additional color on the building products segment results. Ceiling sales were up slightly on an equivalent foreign-exchange basis with price and mix gains through all geographies offsetting volume declines. Sales in emerging markets were down $9 million year-over-year with greater than 20% volume declines in Russia and China and a mid-teens drop in the Middle East due to significant project volume in the base period. Sales to India and Southeast Asia were up more than 20%. As Matt mentioned, repair and remodel activity in the Americas was soft in the quarter, in sync with the erosion of the U.S. GDP outlook. New construction activity was up, but as you know this represents only 20% to 25% of our volume. Australia's sales were up as a result of Architectural Specialties related projects. Building Products EBITDA was down 2 million in the quarter. Volume declines, lower earnings from WAVE, and foreign-exchange headwinds more than offset continued price and mix gains at the benefit of manufacturing productivity. For the quarter, Americas EBITDA margins expanded 100 basis points. In Europe, EBITDA was down $5 million driven by volume declines in Russia and the Middle East as well as increased fixed manufacturing costs driven by our new Russian plant. Pacific Rim EBITDA was down slightly due to weaker currencies in India and Australian and the lower China volumes. Slide 8 illustrates our resilient segment results. Excluding the impact of foreign-exchange, resilient flooring sales were up 4% as gains in North American VCT share, particularly in retail and education, more than offset the continuing impact of the residential share loss that started in the third quarter of 2014. Price and mix were down as we reduced prices to stem the residential share losses and as VCT volumes were up disproportionally versus higher priced products. Sales in the Pacific Rim were up slightly. Resilient profitability was up $3 million. Commercial volume gains and lower input costs more than offset our SG&A investments and lower residential pricing. Page 9 plays out our wood segment results. Would sales were down $12 million as volume declined 9% from the second quarter of last year. This is a continuation of the share loss that we experienced starting in the third quarter of 2014, and was impacted by service issues and engineered products as Somerset capacity ramps up. Wood-adjusted EBITDA was up $3 million or more than 40% as a result of lower input costs and improvements in fixed manufacturing expenses. Price was down but mix was up as we continued to prioritize higher-margin products. Slide 10 shows the building blocks of adjusted EBITDA from the second quarter of 2014 to our current results. We benefited from lower input costs, primarily in the flooring business as lumber and PVC costs declined, and improvements in price, mix, and manufacturing cost. Lower volume continues to be a headwind, and you can see the continuation of our SG&A investments in the flooring business which drives the vast majority of the year-on-year SG&A increase. Turning now to slide 11, you can see our free cash flow for the quarter versus last year. Cash earnings were higher, with the big drivers a year-on-year improvement from working capital in the quarter and lower capital spending. Working capital was aided by our exit from European flooring and timing. Slide 12 and Slide 13 depict our key metrics in our sales and adjusted EBITDA by segment for the first half of 2015. These slides are self-explanatory so I'll move on to our year-to-date bridge on slide 14. As you can see for the year adjusted EBITDA is relatively flat, but there are large moving parts within the story. We continue to face volume challenges, particularly in the wood business and ceilings in Europe and the Americas, and our SG&A investments in the flooring businesses also present a headwind. However, we have benefited from lower input costs. We continue to deliver price and mix gains and drive lower manufacturing costs despite the addition of the Russian plant to our network. Slide 15 shows year-to-date cash flow versus the prior year and, as with the quarter, the big contributions are coming from capital expenditures and working capital. Slide 16 shows our guidance for 2015. As Matt mentioned, we have reduced our sales outlook for the year by $125 million at both the high and the low end of the range. The ranges for operating income, EBITDA, and EPS all have tightened from previous guidance but the midpoints are unchanged. Slide 17 provides more details on our outlook for the year, and you can see that we have reduced sales in both businesses but somewhat more in ABP, largely due to their foreign exchange exposure in Russia. We have tightened the ranges of the businesses' EBITDA guidance and reduced ceilings at the midpoint and raised flooring at the midpoint. We are increasing capital spending as a result of an investment in our Pontarlier, France ceilings facility. This $25 million investment spread over 2015 and 2016 will improve our cost profile and product capabilities in the fast-growing smooth white acoustical tile category that has become preferred in Europe and the Middle East. In addition, our separation plan now includes standalone IT infrastructure for each business as of the date of the flooring spinoff. This accelerates IT related capital spending into 2015. With that, I will turn it back over to Matt.

Thanks, Dave. As most of you know we are nearing the completion of our investment in LVT manufacturing here at our Lancaster facility. The plant is currently producing products that support the creation of promotional collateral. However, as a result of equipment delivery delays we are about a month and a half behind our original timeline but on budget and with a perfect safety record. Upon completion, this plant will be capable of producing a full line of glue down and floating residential and commercial LVT. These domestically manufactured products will feature revitalized designs with increased customization capabilities, industry improved coatings technology, and enhanced installation options. While the delay is frustrating we are committed to delivering the products, service levels, and performance that the marketplace is come to expect from Armstrong. So with that, we would be happy to take questions. I would comment that both Vic and Don are in the room with me and Dave and we will be happy to take your comments.

[Operator Instructions] And our first question or comment comes from the line of Matt McCall with BB&T Capital Markets. Your line is now open.

Good morning. This is Reuben in for Matt. Thanks for taking my questions. So in the Q you talked about regional weakness in office and I think that had to do with the R&R activity being down in the Americas. Can you elaborate a little bit on that what you are seeing and do you think there was weather have any impact on this, and what your thoughts are on a go forward basis?

Yes, Reuben, this is Vic Grizzle, let me take that. Yes. As Matt and Dave alluded to, overall in the Americas here, we -- our volume was down just slightly and it was really driven by the R&R segment as you alluded to. We did have really nice volume growth at the high end of our portfolio so we continue to see nice growth on our high margin, high value products, which was very encouraging. We continued to get good price and mix across the Americas, which allowed us to have a 3% revenue growth in the Americas. So overall, that was pretty positive but we did see kind of uneven activity across the regions in the U.S. primarily driven by that R&R segment. I can say, though, first quarter to second quarter activity improved significantly. So sequentially we saw really nice improvements in the volume, and I would say the big difference was the rate of improvement in each of the regions was different, so that created a little bit of that unevenness that we saw that overall kept the volume slightly negative. Our outlook, I mean when you look at where we are sitting today, we had a nice strong finish to the quarter in June. A lot of that was weather related, as you alluded to. Some of the schools in the Northeast in particular got out later than normal so that education cycle started a little bit later than normal. We did see that pick up in the second half of June and that's carried over into July night nicely. So, our outlook remains biased to the positive. We are hoping these trends continue and our outlook gives us hope that we should see some positive volume growth in the second half.

And our next question or comment comes from the line of Bob Wetenhall with RBC Capital Markets. Your line is now open.

Hi, good morning, and thanks for all the color, Matt. Yes, I just wanted to ask a direct question. You spent a lot of time talking about the flooring business, and I'm just trying to understand if you think this is a good fit with resilient and if there is an effort by management to sell the business at any point in time?

The direct answer to the question is, no, there was not an effort to sell the wood flooring business. Our assessment really started and ended with, do we think that this business makes sense and is a good quality fit in our portfolio at this point in time? And the answer is yes. If we concluded that it didn't, then a potential sale would be an exit or a potential exit after we made the decision. But we never got to that point because after our analysis Don and I agreed that based on our assumptions at this point it makes perfect sense. Like the reasons I said, we've got a strong share position, the business is profitable, and so it's very distinctive from the two businesses we have exited, namely cabinets and our flooring business in Europe. So thanks for the question.

Let me ask you -- that's a helpful answer -- just trying to think about the back half of the year in wood flooring. I know that in the third quarter of last year volumes were down 15% so I was thinking you have a very favorable comp going into 3Q, and I wanted to think -- and maybe Dave can address. With that easy comp does this mean your volume should go grow in 2H? And I think some of your previous guidance that you had provided said that flooring EBITDA was going to be flat. But if you have this great volume tailwind in the second half do you think then that you are going to have good acceleration in 2H wood flooring EBITDA? And what's the implication for margins? A lot of things there -- sorry for that.

Hi, Bob. Good morning, it's Dave Schulz. Thank you for your questions. So, as you mentioned, we did have a relatively tough Q4 in the prior year so we do anticipate that we will continue to show the appropriate level of sales growth here on our wood flooring business against a relatively soft comp. Again, we recognize that there are actions that we are taking, particularly with some of the SG&A investments and some of the progress that we are currently seeing within certain channels that gives us a reason to provide you with the guidance that we did on the overall flooring business, which of course wood will play a critical role in delivering that sales guidance.

Could you just touch, though, on kind of your expectations, how we should be thinking about margins if you get better volumes? Our thinking was that you would see improved operating leverage which would help EBITDA performance?

I think that that's a fair assumption. Obviously, one of the things that we are looking at very closely is the trend on lumber costs and how that will impact our margins going forward. We have incorporated our view obviously into the guidance that we provided, but as you take a look at the back half versus the front half on wood, we did have a relatively strong delivery of EBITDA margin in Q2. We are monitoring the situation relative lumber. If the lumber prices are staying relatively consistent, we would expect that those margins will continue to be in the area of our first half or slightly better given the volume growth.

Got it. And just if I can speak one in, you called out negative price mix in resilient in the quarter and I was just wondering if you expect that this trend continues through the balance of the year or if you are expecting it to show slight improvement?

Bob, again it's Dave answering that question. So right now the issue that we've been seeing within the resilient category as -- which was we specified in our prepared remarks is we've had higher growth in our VCT business relative to the balance of resilient flooring. We would anticipate that that will continue into the back half so therefore we would anticipate that there will be a continuation of a mix impact on the results going forward.

And our next question comes from the line of Dennis McGill with Zelman & Associates. Your line is now open.

I don't know if this is for Don or Dave but can you maybe just put of color behind the VCT benefit in the quarter? Maybe what that product category was growing before the competitive disruption and maybe what you think about on a go forward basis, whether this is an opportunity for you to hang on to some of that share or if you feel like it's more of a timing impact in the second quarter?

Dennis, this is Don Maier -- I'll take this question. Thank you for the question. The VCT business in total for us is -- we have a market-leading position in this business. But what we've been presented with is an opportunity, given our ability to provide much better service to the market, to take share in a segment which is frankly flat to declining on a year-to-year basis. We're obviously doing everything we can to try to maintain that share as I'm sure that our competitor will get their manufacturing facility running, and so as they do that they will certainly try to take that share back. We are doing everything we can to serve our customers and make sure that we hold onto that business.

Our next question comes from the line of Keith Hughes with SunTrust. Your line is now open.

First half of the year building products up modest, $1 million in EBITDA. The guidance would seem to imply that there would be faster growth in that. So, number one, am I reading the comparisons right? Number two, best case, what do you expect to improve in the third and fourth quarter?

Keith, this is Vic. When you look at the overall number -- so globally when you look at the numbers, I think some of the headwinds have been -- and I think Dave and Matt both mentioned this -- China and Russia markets, which are key markets for us, key growth markets for us, and where we've made some good investments, have been really tough markets. In fact, in the second quarter -- we saw weakness in the first quarter but we saw some significant weakness in the second quarter in both China and Russia. So negative volume there plus the additional cost associated with our Russia plant investment has created really the biggest headwinds for us. When you look at the Americas business, we've actually gotten very good leverage on our results in the first half, again, second quarter, EBITDA was up 6%. We improved margins 100 basis points -- that's on slightly negative volume, as I talked about earlier, driven by the R&R segment. We are continuing to see very nice new office construction activity. That's been really keeping us very busy, and we really like what we see in terms of the overall activity in the markets. Healthcare and education have been a little bit slow to develop in the first half of the year. Again, the outlook so far for education has been very positive in the short season that we have experienced so far. So, again, we remain really cautiously optimistic that this recovery will continue. Again, I mentioned that the rate of improvement across the Americas has been uneven and that should lead us to believe that we are still in the early innings of a market recovery.

And our next question or comment comes from the line of Kathryn Thompson with Thompson Research. Your line is now open.

The first is just a follow-up on ceilings, and if you could just quantify what volumes in the quarter were down specifically in the U.S.? And then just pulling the string a little bit more in terms of if you look at yourself relative to peers, are you seeing any type of different behavior from some of your smaller peers in the ceiling segment and new entrants such as ROCKFON? Thank you.

Kathryn, this is the back Vic. With regards to your first question on volume, again, it was just barely slightly negative -- let me leave at that. Very low single-digit type volume contraction in the first -- in the second quarter. So hopefully that addresses your question there. With regards to competition, specific to ROCKFON, we continue to take them very serious in the marketplace. We continue to see them showing up at customers. We’re continuing to strategize and do the things that we can to serve our customers better. We have, I think, all of the right levers here to win and to compete against them effectively. There has been no meaningful share gain or shifting, if I get the essence of your question, with regards to ROCKFON. So, again, we continue to take them serious and battle with them and we expect that to continue. Thank you for your question.

And our next question or comment comes from the line of James Armstrong, Vertical Research. Your line is now open.

Hi, guys. This is actually Bryan Lynch filling in for James. The question I wanted to ask is -- in the press release you guys talked about inventory adjustments in the wood products segment at the major home centers. I was wondering if you could elaborate a little further on that and if we are likely to see more of that as the year goes on?

Bryan, this is Don Maier. I'll take that one. Thanks for the question. One of our large ASA accounts has been undertaking an internally driven inventory modification and they are pulling inventory back to their regional distribution centers. So while we've seen good flow through in point-of-sale, sales, the net impact of the inventory reduction has created a negative mill shipment to them. So that's something that has continued through Q2 and I think we'll see a bit of it running into Q3 but then it should be hitting a steady state position.

Our next question or comment comes from the line of Mike Wood with Macquarie Securities. And your line is now open.

Hi, this is Mike Wood at Macquarie, thanks for taking my question. Just a follow-up on that earlier question in terms of market-share because I get a lot of questions from clients on whether or not the separation itself is causing any kind of a near-term distraction. But looking at your performance slightly negative versus your largest peer who has been reporting positive North American volume growth, and then you guys also have decorative architectural as an additional driver. So I'm just curious if you can give a little bit more color on if that is more regional mix or regional growth areas? Thanks.

Mike, it's Matt. Let me just comment on the separation and then I'll hand it over to Vic to comment on the market-share question. But we have a very focused, dedicated organization driving the separation with oversight provided by a subcommittee of the Board. Clearly, there are times when we involve Don and Vic or members of their team in decisions that will affect them as standalone companies moving into the future. We are not trying to do this in a total bubble. We are extremely mindful of the amount of time and effort required to run these two businesses and continue to execute and compete effectively against some very good competition, not only here but around the world. So we try to take a balanced approach to engaging them or their teams when it's appropriate, and we try really hard not to bug them for stuff that we -- that doesn't require their attention at this point. So, we believe that to the extent it has been a distraction, it's minimal. Given the nature of our businesses, the standalone nature that exists today, the fact that there is no overlap between the two businesses, that facilitates, that allows us to avoid a lot of the distractions that we would have if these two businesses were intertwined. So because of the nature, the organic nature of the two businesses today, the amount of overlap or the amount of distraction is very minimal. So we don't think that's really a factor. And then I'm going to hand it over to Vic to comment on the market-share question that you had based on the regional commentary we shared earlier. Vic?

Thanks, Matt. Mike, with regards to your question, and I think you alluded to really the crux of where the answer resides here, too, which is there are regional differences between the players in the Americas market and, as I talked about, there is uneven activity across the regions and the rate of improvement in those regions is a little bit different. So quarter-to-quarter, that could create a little bit of noise and so that could be driving a little bit of those differences. The other part of this is there's a big part of the market or a larger part of the market, I should say, that is new construction activity. And so, projects here and there in the quarter could also drive a little bit of this differences. As you know in this industry share gains and losses don't happen quarter-to-quarter that quickly, and so you really have to think about share gains over much longer periods of time to really see the shifts and the differences. So I think that -- hopefully that answers your question but I think that really explains maybe some of the differences you may be seeing.

And our questionnaire coming comes from the line of John Baugh with Stifel. Your line is now open.

Just quickly, I was curious of what your lumber cost outlook was for the balance of the year, and then maybe take put that in a context of where your pricing is currently, and whether or not there's tailwind, headwind, neutral from that delta?

John, this is Don Maier, and I appreciate your question. We have seen some nice movement on lumber prices through the first half of the year that's allowed us to recover some of the margins that we had to concede back in the back half of last year. It's always difficult for us to really understand exactly where the lumber prices are going. What we are including in the guidance that we are providing here assumes that we are having a leveling out of pricing on wood for the back half of the year.

Our next questionnaire coming comes from the line of Will Randow with Citi. Your line is now open.

Hi, it's actually Scott Schrier in for Will. Can you please discuss WAVE and what you are seeing there, and how the outlook has been trending?

Yes, this is Vic. With regards to WAVE some of our grid volume or the Americas volume -- the negative cause of some of the -- it was the WAVE business. So our grid volume was off in the second quarter slightly. And, again, I think when you look at the WAVE business, it is very much tied to our ceilings business, as we sell a system in the marketplace. And the dynamics that we are seeing, we are talking about overall in the Americas commercial market, we are seeing that replicated in our WAVE business. So off a little bit and volume so far but seeing a lot of activity around the new construction pulling second half volume opportunities for that business. The profitability in that business remains. In fact, margin expansion that I spoke about in the Americas we are also seeing in our grid business at WAVE as well. So hopefully that addresses your question.

And our next questionnaire coming comes from the line of Stephen Kim with Barclays. Your line is now open.

I know you guys have talked a fair amount about sales, but I just wanted to put it into context of your comment about last quarter and make sure I just really kind of understand how things have trended throughout the quarter. I think last quarter you said on the call that your trends across both businesses strengthened in April and maybe the first 1Q kind of had a soft start but kind of the exit rate was quite good and that it continues into April. So just sort of looking at the results here you can kind of see that in resilient showing up as a good 2Q volume quarter aided I'm sure by the VCT thing. But if you could just sort of comment on the other two segments, because it didn't seem to be as broad-based. And you're saying again today, I think, that at least in ceilings things kind of for choppy but the exit rate was pretty good at the end of June. So I just want to make sure I can kind of really understand -- was your exit rate of 1Q into 2Q strong across your businesses? And how did that progress into the rest of the quarter into 2Q?

Here is how I'm going to try to answer that. I think that's a real opportunity to allow us to kind of comment from both of our business leaders. So I'm going to ask Vic to give you the ceilings side of that and then I'm going to ask Don to give you the view from the flooring side. So Vic, why don't you go first.

As we sat on this call talking about our first-quarter results we were experiencing a pretty robust April. We did -- we had a very strong April -- nice volume growth in April. And then we got to May and May was a very lackluster, very soft May, and that carried up into -- I'm going to talk about the Americas, specifically, I think that's your question -- and then that carried into the first half of June and then the second half of June we saw a nice volume pick up, and overall for June we had nice positive volume growth, but not enough to offset May. And that's what I was trying to characterize that what we’re seeing is very uneven regional activity and overall softer R&R part of the business. So, again, it's -- we’re sitting here in July and July results look terrific in terms of volume growth. We’re going to have a very strong July, and so we are hoping that this continues on in through the summer. But we've all seen this movie before in terms of this recovery having a little bit of choppiness and unevenness to it that we experienced in the second quarter for sure.

And then Vic, thanks. I'm going to ask Don to comment on the flooring side of it.

Thanks, Steve. Yes, I would say that we did continue to see that trend continue into April as well as through the remainder of the quarter, in particular on resilient that really shows up. We -- versus our expectations we were also encouraged by what we saw on the wood side of the business and the support in the second quarter there. The delta really is looking at year-on-year comparables, given the share lost that we experienced in the back half of last year in wood which creates a difficult comparable comparison there. But all-in-all, we saw the general orders coming in to our expectations as we communicated in the last call.

Our next question or comment comes from the line of Michael Rehaut with JPMorgan. Your line is now open.

Thanks. Appreciate it. Two quick questions if I could squeeze them in -- one just technical. When you mentioned at the end of the call that you had some IT spending with regards to the different businesses ahead of the spend accelerate into 2015, I just wanted to make sure that I understand that the EBITDA guidance was reiterated and that's inclusive of that spend, and just try to get a sense of how much that is or if that's a separate line item? And secondly just going back to ceilings again, I appreciate all the commentary from Vic in terms of some of the ups and downs during the quarter. And I guess the only -- maybe you could address again -- and obviously every competitor is different, but a week or two ago we did hear a bit more of an optimistic tone with regard to end market demand trends from your big competitor in the space. And just trying to get a sense again if you feel like it's more influenced by geography or certain end market perhaps health care or education, if you have a stronger presence in those where saw it slightly weaker. Just again trying to reconcile the commentary on the end markets which seem a little different.

Hi, Mike, it's Dave Schulz. Let me address your first question about the IT comments that we made. So we have increased our capital spending guidance for the year and that's including some of the spending that's required on the information technology side in preparation for the spin of the flooring business. That's capital. The expense component of our IT separation was already included in our exclusions from EBITDA, and we've confirmed that guidance for Q2 similar to what we have in Q1, the $20 million to $40 million of costs associated with the separation.

Mike, this is Matt. Let me comment on the ceilings business. I appreciate the comments with respect to the color that we've been trying to provide. I guess my first comment is, I'm not going to really comment on what my competition may say about the marketplace. It's just kind of not our practice. But I would say that the revenue pressure that we felt in the first quarter was primarily regionally oriented and that our primary competitor has relatively different strengths in different regions than we do and that we are optimistic that the second half will be stronger. Some of the regional differences, as you might imagine, are exacerbated because of weather issues in the first and second quarter and those weather issues drive some timing of the recovery of the weather related volume.

Our next question or comment comes from the line of George Staphos with Bank of America. Your line is now open.

Hi, this is actually Alex Wong sitting in for George. Thanks for all the details. Maybe just starting out in wood, can you just provide some color on where we are in terms of the price mix optimization initiatives and specifically relative to any market share developments that we should be mindful of?

Alex, this is Don Maier. As you noticed, we did improve our profitability significantly on the wood business up about 40% from last year. Obviously, as we discussed, lumber pricing has allowed us to recover a lot of the margins that we were seeing there. But also we've had major initiatives supporting our independent channel as well as our strategic accounts, and we've seen some solid success, in particular on the solid side of the business. This is really focusing in on the high end products so we are continuing to drive the mix. And with that said, obviously this is something that's going to take quarters to really get us positioned where we need to be, but we've made meaningful progress to-date on that. So I think the piece that Matt mentioned, really on the engineered side of the equation, it is critical because we are not in a service position that we would like to be, given the demand that's come into the Somerset facility, and so the actions with Vicksburg and the improvements that we're making at Somerset have us targeted to have those resolved as we enter into Q4 completely and get back to the service levels that we would like to see. So a dynamic situation on wood but in general very pleased with the progress that we've made obviously a lot more work to be done.

And our next questionnaire coming comes from the line of Nishu Sood with Deutsche Bank. Your line is now open.

My question is about the resilient business -- the $7 million SG&A drag on a year-over-year basis from the higher go-to-market -- Matt, you mentioned that a lot of the displays -- I think you said something -- three something thousand that you are going to get up to five something thousand in the third quarter. So does that mean that the expense drag would probably continue into the third quarter? And then, would that probably be the end of it? So we probably wouldn't see it in the first quarter fourth quarter? And I just wanted to also get a sense of, of these go-to-market, it sounds like it's a successful rollout. Any sense yet of what kind of incremental sales it is driving?

We said I think it was 2,500 have been installed since the first half of the year and we are going to go to 5,000. Over half of those are in support of our LVT product launch. So we have the plant coming online; we commented on the product being manufactured to help us with commercial collateral. That collateral among other things will be used in some of those displays. But then the balance of those displays a driving placements for all the other residential products -- the resilient sheet, other tile formats, and of course our wood business. So I think the team has done a phenomenal job executing. 5,000 displays from a standing stop, standing stop is great execution. As I said, we will have them completely in place by the end of the third quarter, which times extremely well with the plant coming online. And we have to get those in place, get them full before we start to see the benefits. So we would expect the benefit from those displays across product lines to time more into 2016. A little pop in late 2014 but the real benefit for those investments carries them into 2016. Operator And our next questionnaire coming comes from the line of Ken Zener with KeyBanc. Your line is now open.

Vic, my question is for you -- sorry, guys -- so in ceilings, people are obviously focused on this. It has been historically the largest contributor to EBIT. So the quarterly question, we do look at your business sequentially and you have these monthly things that tends to smooth it out. It seems like you guys were more robust coming in, as you said, in April. But if you could put this into context and not in some bullet talk too much about it. But last year at the Analyst Day you guys thought volume was going to come up in the year. You came off of that because of what was lower volume but it goes to the visibility in the business. So is there something that's kind of changed? I mean if volume fell cyclically 2003 from 2000 about 15%. This year it's set to be trending modestly down, so we are closer to 30% down cyclically now -- is there something that -- what year did you kind of say, I wonder if volume is not going to come back as opposed to just remain flat or stabilized? How close are you to raising those types of questions as opposed to just looking for cyclical elements?

Yes, Ken, I understand the nature of the question. It's -- over the last three years if you look back in this industry there's been a little bit of a start and stop with the recovery. Certainly, many conversations, discussions, outlooks around and economic or commercial construction recovery that seems to be elusive, and the underlying economic drivers including the GDP overall has continued to be downgraded throughout the year. In fact, this is the third year, again, we are going to see a revised GDP outlook downward. So we keep looking at those factors, and it doesn't look like to me there's any change in economic drivers that are changing this. The economic drivers continue to be downgraded and, again, I think that's what we're seeing a repeat of. Here's what's different I think, though, in this market now is, new construction is clearly sustaining itself, and we are starting to see that as a nice pickup in the overall business. I will remind you, though, that the new construction portion of the overall demand profile in the industry is still the minority of demand. The remodel and renovation portion of the demand profile is much larger and that becomes more susceptible to these economic drivers that continue to get downgraded. So with that, I don't see any structural change or any change in the economic drivers that would change how we think about this market or where the volume is going to be driven from. I will say our outlook -- again, even though some of these economic drivers that we’re tracking are being downgraded, they are still positive and we still think that we should have a positive volume growth in the second half as a result of that.

Our next question or comment comes from the line of David MacGregor with Longbow Research. Your line is now open.

Hi, good morning, guys this is Conor Sweeney on for David today. Thanks for taking the question. Just real quick going back to lumber prices, could you maybe talk about the time lag between for stock pricing for wood and when that ultimately flows through your COGS?

Conor, this is Don. We realize the material as it's consumed in the plant. We dry all of our lumber and, depending on the species that can be up to three months of time through the drying process. So that would be the lag of when it's realized in the financials. Hopefully that answers your question.

And our next question or comment comes from the line of Jim Barrett with CL King & Associates. Your line is now open.

Matt, could you give us a 30,000-foot view on wood flooring, whether it's since 2005, 2006, since you first joined the company, what if anything has changed in terms of the dynamics of that business, especially aside from higher input costs? What has changed if anything, especially competitively?

Sure. I'll do the best I can. First of all, I joined the company in 2010, not ‘05 or ‘06 but our view goes back that far, anyway. So there is a couple of things. Clearly there has been a shift -- the biggest megatrend that comes to mind for me is the shift in consumer preference from solid to engineered and that's a function of improvement in the function of engineered wood as it relates to how it feels underfoot, and of course the visuals, which is the most important. So getting that shift right and investing into that as we have with Somerset and as we mentioned, expanding the finishing capability in Vicksburg is key to that. I think the second thing is we certainly have had, over the last 10 years and certainly over the last five years, a certain amount of influx from offshore suppliers, mostly from Asia. There have -- we've got big box retailers that take advantage of that product and opening price point, merchandising and promotion. So that's kind of new so that drives a little bit of price pressure. Our research indicates that the consumer still values durability, values surface and surface performance, that the brand has great value that the brand can pull. And this is somewhat of an emotional purchase on the part of our customers. It's flooring is a fashion product, and it's a purchase that they do very infrequently. So these are thoughtful, considered purchases by our customers, and while we try to do our part in terms of demand creation and preference and great products, we also need a partner very closely with retailers, be they small independent retailers or large big box. And that's why the refresh of the retailing tools and refresh of the displays is so critical to us.

And I am showing we have a follow-up question from the line of Keith Hughes from SunTrust. Your line is now open.

Thank you. You talked a little bit about the SG&A cost expanding in resilient earlier. I think you were up to about $9 million you called out in the first half. Will that was second half based on the rack comments you made earlier?

Hi, Keith, it's Dave Schulz. So, obviously, as we look at the timing of the displays, that will have some influence on the overall SG&A costs within resilient. We also do have some costs associated with our LVT launches in the back half of second half, but I think it's fair to say that we’ll have a slight decrease in the overall SG&A on our resilient business.

And that concludes today's question-and-answer session. So with that said, I would like to turn the conference back over to CEO and Chairman, Mr. Matt Espe for any further remarks.

Thank you very much. We appreciate everybody's attention and questions today, and we look forward to the follow-up discussions we’ll have over the next few days. Thank you everybody. Have a great day.