Good day, ladies and gentlemen, and welcome to the Armstrong World Industries Inc. Q3 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call is now being recorded. I would now like to turn the call over to Kristy Olshan, Director of Investor Relations for Armstrong. You may begin.

Thank you, Michelle. Good morning and welcome. Please note that members of the media have been invited to listen to this call and the call is being broadcast live on our website at armstrongceilings.com. With me today are Vic Grizzle, our CEO; and Brian MacNeal, our CFO. Hopefully, you have seen our press release this morning and both the release and the presentation Brian MacNeal 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 World Industries, please review our SEC filings, including the 10-Q filed earlier this morning. Forward-looking statements speak only as of the date they are made. We undertake no obligation to update any forward-looking statements beyond what is required by applicable securities law. In addition, our discussion of operating performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation. Both are available on our website. With that, I'll turn the call over to Vic.

Thanks, Kristy and good morning, everyone. And thank you for joining our call. This morning I'll begin with an overview of our quarterly and year-to-date results and provide some perspective on market conditions and our outlook for the remainder of the year. I'll then turn the call over to Brian MacNeal, CFO who will walk you through a more detailed review of the financials. I'll conclude with some final comments around our growth initiatives and our market outlook. Overall our third quarter results were mixed. We saw a continuation of the positive value drivers for our company and we also experienced some prior timing-related expenses that we'll discuss. Excluding the impact of foreign exchange, we delivered the topline growth in the Americas and the EMEA area that was partially offset by a fractionally softer Pacific Rim. For the third quarter, consolidated reported sales of $335 million were essentially flat with the prior year. On a comparable foreign exchange basis, sales were up 2%. I'm pleased with the acceleration in our average unit value or AUV achievement globally. In fact AUV was positive in every segment this quarter. Like-for-like pricing, a key component of AUV, was also positive in every segment, which was a meaningful contributor to our overall improvement. AUV was particularly strong in the Americas, driven by both positive like-for-like pricing and continued strong growth in the high-end of our product range. Third quarter consolidated adjusted EBITDA of $97 million was flat compared to the prior year. Now turning to our largest and most profitable segment, the Americas, the third quarter sales were up 2% on a comparable foreign exchange basis. Overall, volumes in the Americas were fractionally down, driven by softness in the retail channel and sales in Latin America. Importantly, sales in our U.S. commercial channel, which…

Thanks Vic. Good morning everyone on the call. In reviewing our third quarter results, I'll be referring to the slides available on our website. I'll now quickly review slide number three, which details our basis of presentation used throughout this discussion. Please note that effective January 1st, 2016, in anticipation of the separation, the majority of our historic corporate support functions and costs were incorporated into the three new operating segments. Slides 13 and 14 detailed a pro forma adjustments made to prior year for comparability purposes by our new reporting segments. The primary difference to our reported results are expenses related to the separation and non-cash impact of our U.S. pension plan and a pushdown of standalone corporate costs into the reporting segments on a pro forma basis in prior year results. Starting with slide four, consolidated sales of $339 million were up almost 2% versus the prior year period on a comparable foreign exchange basis. We did not see our normal fall-through rate this quarter as adjusted operating income increased by 1%, but this translates to a 10 basis points of contraction in margins versus the prior year quarter. Adjusted EBITDA was flat and globally margins narrowed by 60 basis points versus the prior year period. I'll cover the drivers of the margin contraction on upcoming slides. Adjusted earnings per share improved by $0.17, mostly due to favorability in items below the operating income line versus the prior year quarter. You may recall in the third quarter of 2015, we took a large non-cash charge related to the revaluation of the inter-company loans we have in place to fund our Russia and Chinese investment. Net debt was down $33 million, driven by debt repayments and refinancing actions over the last 12 months. The chart at the bottom of…

Thanks Brian. We continue to make progress on both of our strategic imperatives; accelerating topline growth, and improving our returns internationally. Our year-to-date cost of currency sales in the Americas are up mid-single-digits behind our total solutions selling effort as we continue to gain share in our architectural specialties and drive higher AUVs, which we believe will continue. We continued to play resources to focus on our customer facing growth initiatives. Our modest investments and Total Acoustic selling capabilities are already driving results, particularly in the high end of the product range by strengthening relationships with architects and designers and improving the quality of Armstrong specifications. We also recently redesigned our commercial website, making it easier for our customers to find everything from technical product details, to the most extensive inspirational photo gallery in the industry, featuring photos of over 800 Armstrong project installations in over 30 countries. The initial feedback has been very positive and we're thrilled to have improved our customers' experience. If you haven't had a chance to take a look at this site, I'd encourage you to check it out. We're also building on the success of our Total Acoustics launch and I've just added some of our popular architectural specialty product families, MetalWorks and WoodWorks to the Total Acoustics line. Now our customers have even more options as they focus on designing beautiful spaces with superior sound absorption has blocking characteristics that deliver industry-leading acoustic performance. Innovation is a passion at Armstrong and it remains the key to leading the market the higher value products that will continue to deliver higher AUVs and higher margins. Given the large existing installed base, we expect tailwinds for years to come as our industry mix was up the higher AUV products. Internationally, we continue to deliver margin expansion…

[Operator Instructions] Our first question comes from Bob Wetenhall of RBC Capital Markets. Your line is open.

Hey, good morning. And thanks for all the great detail and especially about your preliminary thoughts on 2017. Vic I was -- there's obviously a disconnect between your focus on driving growth -- profitable growth and the stock's reaction to the strategy and I was kind of trying to understand great assets, solid management, what's the reluctance to use the balance sheet to buy back stock to support -- it just looks cheap and undervalued. Any thoughts?

Well as you know Bob, we are buying back shares as Brian updated and we continue to -- we continue on this path to do this in the coming quarter. So, we've announced $150 million worth of share repurchase and we think this is a good way to use our cash right now given the value of our company. So, I think we're addressing that very specifically.

Our next question comes from Trey Grooms of Stephens Inc. Your line is open.

Hey, good morning.

Good morning.

First couple of question from me or first question from me is I guess just on -- what you see in the Americas specifically around the volume, you pointed out that they had slowed versus what we've seen in the first couple of quarters for sure. With commercial being up and then the lower volume in retail in Latin America, how do we think about that mix and how we think about those different components as we're going into 4Q? It sounds like you're looking for continued volume improvement there as we get into 4Q. So, just trying to get a sense for -- is this retail starting to show some life or what's the driver of the improvement in the 4Q?

Yes. As we mentioned, our U.S. commercial business with solid, we saw positive like-for-like pricing, we saw positive mix, and we saw nice growth in the high end of the market there. So, we're very pleased with what we saw on the volume side in that U.S. commercial, especially at the high end of the market. We did decelerate. It feel like it decelerated into the third quarter based on what we saw in the first half of the year and it was primarily the R&R activity. We continue to see robust activity in the new construction, and really again, that shows up in these products that we're selling at the high end of the market. So, again, I think the deceleration was pretty broad-based. It wasn't one segment overall and when you look at the retail channel, which is our big box customers, that's really the patch-and-match and really the essence of a lot of the smaller R&R activity. That's where we saw a really -- I would say a big portion of the deceleration was in that retail channel. Now, I also mentioned here, in the retail channel, and we talked about this on prior calls. You can get some pretty big swings in timing and orders based on inventory levels of the big box guys. And I'm sure you've seen in other segments. So, part of this could be a little bit of a timing, but we clearly saw deceleration on R&R activity. So, -- again, when we look at the fourth quarter going forward, what we're seeing thus far and the activity that we expect to continue, especially on the new construction side, we're -- that's why we're continuing to see -- we should continue to see volume growth in the fourth quarter.

Our next question comes from John Lovallo of Bank of America. Your line is open.

Hey guys, thanks for taking my call. The first question here is on -- just on India, maybe if you can give just a little bit more detail on the project delays that you were talking about and on the credit conditions as well?

Yes, I'll let Brian add on the -- some of the credit conditions that you mentioned, but in India, overall, again this is an emerging market that is primarily project business, there's not a flow or underlying flow business to those markets. And so you can really ebb and flow based on large projects getting moved around quarter-to-quarter and that's clearly what we saw. We were continuing on a double-digit positive growth trajectory in India. We like what we see there. We like what we see in the market there. But again, time-to-time, we'll start to see certain things that influence these projects and that happened to be some of the tightening credit policies that we're seeing. I don't know Brian you want to add anything to that?

No, I think you hit it that one Vic. Just banks are -- projects are getting pushed out as credit a gets paid in a heated economy right now, growing as a nice mid-single-digit GDP. And again this is a major new construction type of the market versus your balanced R&R and new construction markets around the world.

Our next question comes from Nishu Sood of Deutsche Bank. Your line is open.

This is Rob Hansen on for Nishu. I just wanted to ask about your 3Q Americas' EBITDA margins, even if you add back the environmental reserves down a little bit, I know you're making some investments. So, when should -- once you start to get the revenue to absorb those investments and is using the kind of 40% to 45% incremental margins till the right figure going forward?

Yes, we alluded to some of the traction that we're already getting from some of those resources that we've added. We've talked on prior calls how we're adding to our design capabilities and some of our project management capabilities in addition to commercial coverage. That's allowing us to dissipate more broadly in the architectural specialty space. So, I think Brian alluded to this. We had over 20% growth in the third quarter. Actually all year we've had over 20% growth in the architectural specialties category. So, we're very pleased with what we're seeing with some of these early investments. And the investment we talked about making our -- kind of a layering in and continuing effort to support the capacity for driving architectural specialties growth going forward. So, I have to say I'm very pleased with what we're seeing there and I think the return from these was going to be on an ongoing basis.

Our next question comes from Garik Shmois of Longbow Research. Your line is open.

Hi, thank you. Just wanted to see if you can provide a little bit more on 2017 outlook that you provided some preliminary statements on earlier in the call. Just want to see if you can reconcile the comments around the slowdown in remodeling with the strength in new construction in the Americas. Should we assume that the patterns continues into 2017 or is there some expectation that the remodeling channel is going to stabilize?

Yes. I think the four leading indicators are pretty positive around the new construction activity and so everybody can look at those and put your own slams on those, what they will mean for your business, but we're pretty optimistic about those board leading indicators on the new construction activity. And that -- and again when we talked to our customers and you look at the pipeline of new projects going on around new construction, it gives us a good platform to talk about next year in light of that activity. The R&R activity as you know is a lot more difficult in terms of visibility to the call and -- but there's nothing out there that says that we should have a very different R&R environment than what we saw in 2016. So, I would expect to see -- as I called it, I think more the same on the R&R side. Again, the quarter-to-quarter splits or the first half to second half splits could be a little bit varies as that becomes -- that R&R activity remains uneven. But I think on the R&R side, we're expecting something fairly similar to what we experienced this year.

Our next question comes from Will Randow of Citigroup. Your line is open.

Hey, good morning, and thanks for taking my question. Regarding Russia and China, you talked about potential for improvement; I'm guessing predominately Russia on the outlook for 2017. And you also talked about this revaluation of loans, do either of those activities signal, if you will, your -- the planned actions you expect to take in 2017 or 2018? Or is this kind of -- we'll see how the business does and then make strategic actions to either improve profitability or potentially strip them away from the company?

I'll go back to what I said before because that's the play that we are running. We're almost assuming there is no help from the markets to right-size our businesses in those areas. We made these investments in China and Russia, we were certainly in a different market environment and a different outlook for those markets, they were double-digit growth markets. We don't really see those markets as double-digit growth markets going forward on a consistent basis. So, we're running were the play to right-size those businesses to the market conditions we're in now. And then if we get better markets, then obviously that upside. So, we're focused on the cost reduction actions, that we'll right-size those businesses now and we’re looking at ways to structurally alter the cost structures so that we can get there faster. So, that's the play we're running and that's how we’re thinking about it. And again if the markets come back fasten than we're expecting, that's all good.

Our next question comes from Kathryn Thompson of Thompson Research Group. Your line is open.

Hi, thank you for taking my questions today. In previous calls, you talked about other end markets beyond commercial improving education and healthcare. Could you give an update on those and other markets in terms of growth? And just additionally, any additional color you have on the environmental reserves in your Americas group? Thank you.

Yes. I'll let Brian talk to the environmental reserves. Let me just -- on the end markets, I alluded to a little bit, Kathryn, which is the deceleration that we experienced in the third quarter was primarily in the R&R activity. And the R&R activity was fairly broad-based and it was -- so it was across the retail. We saw education; we saw healthcare as well as the office segments. And when you look at some of the reports around what going on in 2Q, a deceleration and retail -- a deceleration of over 2% in state, local tax revenues. The discretionary spending in these segments, in particular, I think showed up in the quarter for us. And again it was on the discretionary spend focuses heavily on the R&R portion. And I think that's what we saw. So, it's fairly broad-based. Again, the new construction activity continues to be also fairly broad-based in terms of the activity there.

And then Kathryn environmental side we’ve disclosed over the years in our Ks and Qs that we’re involved in several ongoing environmental matters. They relate to the properties at or near our Macon and St. Helens plants. They are active matters and that we are working with applicable environmental agencies others that potentially related parties who previously owned or used the property or operated it at near the property. So, work includes both investigation of the site and then remediation once the plan is approved. So, by their nature, they are complex matters and typically take many years to resolve. As a result, it's difficult to predict the timing or amount of those costs that remain. So, we currently have those liabilities as I mentioned of $5 million on the balance sheet for future investigation and remediation work, but this is very unpredictable and it takes us quarter-to-quarter as we move along the path to execute the remediation plan.

Our next question comes is Jason Marcus of JPMorgan. Your line is open.

Good morning. My question is on the SG&A savings that you've been getting so far in Europe, which I think was about $1 million in the quarter. But based on the actions you've taken, do you think we should expect a similar type of improvement in 4Q or do you think that can improve? Then as you think about the SG&A position heading into next year, I guess how should we think about that?

Well, I think you can expect that the SG&A savings you're saying as a good run rate for at least the short-term. We know that we're not finished and so there's more to do in the coming quarters for us to get to the right return levels that we expect there. So, again I think a pretty good run rate short-term here, but as we get into next year and beyond we have to continue to reduce our cost structure there. So, we're running that play and that's where we're focused on.

Okay, great. Just one more, if I could, on the cash flow guidance. So, you are maintaining the EBITDA midpoint, but I think cash from operations is now expected to be about $10 million lower with I think interest expense also being a lower number. So, I just wanted to see if you could reconcile that.

So, we the $10 million swap impact from -- essentially we recorded Q1, but then the cash piece was Q2. So, our guidance excludes that $10 million hit.

Our next question comes from Sam Eisner of Goldman Sachs. Your line is open.

Yes, hey, good morning, everyone. Just on your EBITDA walk-through throughout the first nine months of the year, input cost in WAVE have been about $15 million benefit year-over-year of the roughly $17 million. That's roughly that $15 million from the first half of the year. Just curious how you guys are thinking about raw materials, specifically the input costs and WAVE into the fourth quarter and then also into 2017.

Yes, Sam, this is Brian. So, as you know we report the benefit of our WAVE joint venture through our equity accounting, right, so it's not included in our consolidated results. We did mention that we've taken a 5% price increase from WAVE and so we're expecting that benefit of that higher price to fall through Q3 and four in the second half. And as we look forward, we both on the -- call it the ceiling side and the grid side, it's sold as a system and we continue to maintain our business objective which is to drive gross margins and ultimately EBITDA margin. So, we'll adjust price accordingly depending on how inflation or deflation is playing out in each four markets.

Our next question comes from Scott Rednor of Zelman & Associates. Your line is open.

Hi, good morning.

Good morning.

In the Americas year-to-date your volume is up 3% and your full year guidance implies a pretty wide range for 4Q. So, Vic, based on what you've seen in October, should we see volume growth in the Americas in 4Q?

Yes, you should see -- again, we were expecting to see volume growth in the Americas.

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

Thanks. I just wanted to ask on the weak retail business, how much of that -- I'm sorry, of the Americas business, what percentage did that represent? And from a margin perspective is that above or below what you can see from your traditional commercial activity?

Yes, Keith, we don't breakout, so I can't give you a very specific answer on that. I understand your question, but I can't a specific answer because we don't breakout down to that level in the Americas. But again the retail channel of our business goes -- it is the sale that we sell into the big box retailers. And so it is, I think, a pretty good reflection of what you see at the ground level in terms of what we call the patch-and-match. It’s the small projects. It typically is the project where we're trying to match something in a space. So, I think, again, the softness that we saw there was a reflection of a deceleration in the overall R&R activity. And again I just will add the caveat that we have seen swings in order patterns with the big box guys based on their inventory adjustments that they'll make periodically. And I think part of this is also reflection of some of the timing and the inventory. So, I think those things are how to think about that channel, in particular, and how it fits into the overall Americas' business.

Our next question comes from Jim Barrett of CL King & Associates. Your line is open.

Good morning, everyone.

Hi Jim.

Vic, assuming international markets don't rebound from here near-term, is the rebound in Russia at least directionally sustainable? And would you give us more broadly your thoughts on international returning to breakeven or a little bit better than that based upon the Q3 performance on a going-forward basis as we look to 2017?

I really like what I see in Russia right now. But it up was 30% plus, so it was an extraordinary quarter. I wouldn’t say that's nice new normal run rate for Russia. But I think it does clearly signal that there's a rebound in activity there in addition to the fact that our teams are picking up share as we expand our distribution network there and as we ramp up the production of our new plant there. So, I like what I see there, but that is not sustainable run rate that we could count on. But again, I think what we're seeing in terms of the productivity in that plant, I couldn’t be more pleased with. It's really contributing meaningfully to the overall region and I expect the execution in that region continue to be really at a high level. So, that's how I'm thinking about it. I think we probably have hit bottom in Russia, but I wouldn’t say that this is sustainable run rate.

Yes, Jim this is Brian. One point of clarity I’d give is the overall market in Russia was down. We've benefited from share gains from some of the great work our team is doing there being local in manufacturing has also helped pretty dramatically. So, I wouldn't say this is a long-term run rate. We got to see the overall market bounced back in, but our share gains being driven by being local there.

Our next question comes from Ken Zener of KeyBanc. Your line is open.

Good morning gentlemen.

Hey Ken.

I realize there's a lot of different numbers here and I do realize you guys are trying to be as transparent as possible, so I'm just going to go over some of these numbers one more time so I'm not confused. You talked about architectural specialties, AS, being up about 20%. I think historically that you have said that it's about 15% of your business. Just trying to get weighting to sales here. In your last 10-K, which was pre the split, you talked about the big boxes being roughly 15% of sales. Don't know if that's still the kind of weighting bogie that we should use today. And the third part of that is with the U.S. commercial, which is different obviously than the retail; I assume you're talking about companies I'd say like GMS or distributors. Does that 5% -- that's including, I assume, the architectural specialty tailwind period. Thank you.

Yes, Ken, you're correct. So, the U.S. commercial business that we referenced is the business that we sell through independent distributor. So, you got that right. And we do sell architectural specialties to be independent distributors. So, that does includes architectural specialties. So, again, that's a revenue growth number. In the U.S. commercial business, we saw really all three like-for-like pricing, positive mix, and positive volume. And again I was particularly pleased with sales growth at the high end of the market and the products that we sell into the high end of the mineral fiber portion of that market, as well as the architectural specialties portion of the business. So, that really helped describe the overall mix as well as you can imagine. So, I thought that was worth highlighting. That's a nice continuation of similar activities that we saw from the first half.

Our next question comes from Sam Eisner of Goldman Sachs. Your line is open.

Hi. Just looking for a quick clarification here, so historically I think you guys have referenced that R&R volumes are about 70% of industry volumes. And so just trying to understand kind of -- get a better understanding of the comment where if R&R is decelerating in the third quarter, yet you're expecting it to grow in the fourth quarter, your overall business is expecting to grow in the fourth quarter, what is growing in the fourth quarter given this deceleration? Is it that you have easier comps? Is it that architectural specialties continues to grow nicely? I'm just curious how to think about that Americas comment for growth that you just made. Thanks.

Yes, sure Sam. This is Vic. So, the comment around deceleration is what we saw from the first half to really the third quarter activity around R&R. Again it was a deceleration. It wasn’t -- we didn’t call it out to be negative. It’s a deceleration from the positive growth that we saw in the first half. So, that's may be a point of clarification there. And I will mention that -- and that we probably didn't highlight this early enough -- or at least as much as we would have, but the comps that I talked about in the second quarter call, we’re going to get tougher in the second half of year because we started to see volume growth in the second half of 2015. So, as we said we're going to have a couple things going on in the second half, but one of the things that we were going to be -- we thought our volume growth would moderate a bit was based on the fact that our comps in the second half of the year were going to get more difficult. And so I'd say that's a little bit about what you saw in the third quarter as well as the deceleration over in the activity in the R&R segment. So, hopefully that clarifies that point for you.

There are no further questions. I would like to turn the call over to Vic Grizzle, CEO for any closing remarks.

Yes. Thank you again everybody for joining. Again we had, I think, mixed results and -- in terms of the overall EBITDA generation. Hopefully, we were able to clarify some of those points. And we're going to stay focused on driving topline growth irrespective of what this market gives us. And, hopefully, some of the comments today helped you see some of the traction that we're getting in on those growth initiatives and we'll keep you posted on future calls. Thank you all for joining.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.