Armstrong World Industries Inc (AWI) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Armstrong World Industries' fourth-quarter 2007 earnings conference call. At this time all participants are in a listen only mode and later we will conduct a question and answer session. Instructions will be given at that time. As a reminder, this conference is being recorded and I would now like to turn the call over to over to our host, Ms. Beth Riley, Director of Investor Relations.

Thank you Dana. Good morning and welcome. Please note that members of the media have been invited to listen to this call and the call is being broadcast live on our website at Armstrong.com.

With me this morning are Mike Lockhart, our Chairman and CEO; and Nick Grasberger, our Senior VP and CFO. Hopefully you have seen our press release this morning and both the release and the presentation Nick will reference during this call are posted on our web site in the investor relations section.

In keeping with SEC requirements, I advise that during this call we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong, please review our SEC filings, including the 10-K filed this morning. In addition, our discussion of operating performance will include non-GAAP financial measures within the meaning of SEC regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation. Both are available on our web site.

What that, I would like to turn the call over to Mike.

Thanks, Beth. Good morning everybody and thanks for taking the time to participate in today's call.

We announced this morning that we have ended our strategic review process. A year ago when we began the process, the world was very different. The economy was good, housing was at healthy levels, albeit weakening somewhat and the M&A market was unusually strong driven by low interest rates and an unprecedented appetite for risk on the part of lenders. You don't need me to recite how things have changed since then.

In 2007, the continuing erosion of the housing market hurt people's view of our flooring business. The changes in the financing market changed what people could afford to pay for acquisitions and ultimately affected the ability of people to obtain financing for M&A deals. These changes caused our process to stretch out and ultimately to end without a sale of the Company or parts of the Company. We evaluated offers for the Company and for parts of the Company. After extensive negotiations, we concluded that we would be able to close a transaction on terms that would be attractive to us.

Having called a halt to the sale process, we looked at what continuing to operate as an independent Company meant. In November 2006, Nick, Beth and I visited potential investors to talk about Armstrong. In those meetings, we said that we would be comfortable with more leverage than we had upon exiting bankruptcy and that is we generated cash excess to our needs, we would return it to shareholders. Sixteen months later, we find that however comfortable I might be at a higher leverage ratio, the market is no longer willing to lend at those levels on terms that are even marginally attractive. Indeed, for non-investment-grade companies, the debt might not be available at all and if available would come at a significant premium to our current debt costs and with covenants that would be far more restrictive than what we have today. It simply does not make sense for us to increase our leverage in today's debt markets.

It does make sense for us to fully utilize the credit lines we have available to us. First, we needed to amend these agreements to permit us to return cash to shareholders. We now have the freedom to return up to $500 million to shareholders in the next 12 months. We started the year with net debt of zero, but there are three factors which make this picture misleading. First is foreign cash, second is that we have minimum credit availability requirements under our credit lines, and third our quarterly cash utilization pattern. After the Board analyzed our cash position in light of these three factors, it felt comfortable declaring a dividend of $4.50 per share, or about $260 million, leaving capacity for the return of another $240 million later in the year. We chose a dividend because it's unusually tax efficient for us at this moment.

Assuming our operating results are close to expectations, we will later in the year take up the question of an additional distribution shareholders.

For those of you thinking damn the torpedoes with respect to leverage, let me caution you that increasing financial risk at this time of heightened business risk is really improvement. We will look at the question of leverage again, but not until the business climate improves when we begin to see GDP growth, improved debt availability and cost and to see that our end use markets begin to recover.

Some of you may disagree with us about the desirability of additional debt and this time, but we all likely agree that the current valuation of Armstrong is hard to understand given its performance relative to its peers. No one really knows why the stock is undervalued. One factor could be the lack of marketing of the Company. For over a year, we've been unable to talk to investors about how we view the Company and its prospects. Now that we are able to talk to investors, we will and we will be aggressive about it. Of course, without misrepresenting our prospects. We believe in this Company and we look forward to telling others why they should believe in it too.

Let me talk about 2007. Our fourth-quarter results modestly exceeded our expectations and we think outperformed the markets. Both sales and adjusted operating income grew despite ever weaker U.S. housing market and the beginning of softness in some of our domestic commercial markets. Adjusted operating income grew 2% for the quarter and 13% for the year, significantly better than the majority of our peers. We generated in excess of $500 million of cash for the year, including approximately $300 million in benefits from tax refunds and special dividends from WAVE, our joint venture with Worthington.

We continue to improve the factors within our control and thus mitigate the residential market related volume declines. For the quarter and the year, we improved product mix and price realization while reducing manufacturing expenses.

If we look at the segments of our business, we find that Building Products, our ceilings business, continues to perform well and delivered a record year. Product mix improved and price realization increased both for the quarter and the year. We continue to see benefits as process improvement begins to improve manufacturing efficiency.

North America Resilient sales declined about 2% in the fourth quarter. Volumes of our residential products were down mid single-digits in markets that were much weaker. Volume was reduced an additional 5% due to a special program we had in the fourth quarter of 2006 which was not repeated in 2007. Excluding that unusual volume pressure and continuing the annual trend, higher sales from commercial products and improved product mix in both residential and commercial products offset the residential volume pressure.

For the quarter, the incremental volume decline and year-end loaded SG&A spend more than offset improved product mix, price realization and reduced manufacturing costs. For the year, significantly reduced manufacturing costs, lower SG&A and spending and raw material deflation contributed significantly to profit growth.

In constant dollars, European Resilient sales increased about 2% for both the quarter and the year. The operating income benefits of higher sales were offset by higher raw material costs and negative synergies related to our divestiture of the textile and sports flooring business. These negative synergies should dissipate over time.

Wood Flooring has the greatest exposure to the new housing market in the U.S. Historically, approximately 55% of sales went to new houses, the remainder to residential renovation. As a result of weak new home construction, the renovation market is proportionately more important to the Wood business. Wood volume declined about 4% for the quarter and 7% for the year. Substantial benefits from manufacturing productivity offset lower sales and higher SG&A spending to increase operating income for the quarter. For the year, lower sales, higher lumber costs and increased SG&A more than offset significant manufacturing cost improvements.

2007 was a mixed year for cabinets. Sales and operating income grew in the first half as we benefited from our lack of exposure to large builders and big box customers which were the customers that took a disproportionate hit from the declines in new housing. As the downturn lengthened and deepened, our customer base of small- to mid-sized builders has been increasingly hard hit. In the second half, sales declined due to worsening markets. For the full year, a 2% increase in sales was more than offset by increased manufacturing costs and raw material inflation.

Overall, we delivered solid performance in the fourth quarter and believe we continued to outperform our markets in North America.

2008 will be a challenging year. Both the U.S. residential and commercial markets will decline. We do expect a reasonably good market outside the United States. In the U.S., elevated inventories of unsold homes, falling house prices, tightening of credit conditions and financial problems facing many builders point to further significant declines on housing starts. Our guidance assumes an approximate 25% decline in housing starts and mid single-digit declines in residential renovation, but there is clearly risk that the conditions could be worse than we expect. Anemic housing, tight credit and energy-related inflation are expected to cause our domestic ceilings business -- ceilings markets to soften.

Our commercial flooring business, which has a slightly different mix of markets, is expected to be approximately flat. There is also risk here, but less than that for the residential markets.

Our European ceilings business is performing at all-time highs and has a strong outlook. Our European floor business has price and volume improvements in January with somewhat more mixed results in January and February which speak to a less robust outlook. Based on our current aggregate market expectations, for the full year we expect to continue to outperform our markets with adjusted operating income expected to decline about 5%, at the midpoint of our range. The expectations are the result of several largely offsetting factors -- improved product mix partially offsetting mid single-digit volume declines; price realization and manufacturing productivity offsetting inflation; and flat SG&A spending weighted towards the first quarter.

The first quarter will be significantly more challenging due to factors not obvious to investors. Therefore, we are taking what is an unusual step at providing first quarter outlook. We expect adjusted operating income to decline about 30% -- difficult comparisons, particularly in Wood Flooring and Cabinets. Wood Flooring had significant growth in Home Depot in the first quarter of 2007 and Cabinets grew significantly in the first quarter of 2007 as we benefited from our lack of exposure to large builders. Increased promotional spending, particularly in Wood Flooring, which was expected to support special order sales growth later in the year, increased SG&A spending in European floor related to new product introductions, and negative synergies will cause the first quarter earnings to be worse than you might expect.

In this tough market environment, our objective remains to gain share and improve product mix through innovative products and services that deliver value to our customers. We will continue to control costs and to improve our productivity.

And now, Nick will take you through the numbers.

Thank you, Mike. My comments will refer to a presentation that has been posted on our website and I will start with a few charts on the fourth quarter of 2007.

The first chart which is numbered page 3 bridges the reported operating income for the quarter of $51 million to our adjusted figure of $48 million. The nonrecurring items for the quarter was a gain on an insurance settlement, the strategic review costs for largely legal tax and accounting fees to outside advisers that supported the strategic review process, and then we had some ongoing benefits from Fresh-Start accounting adopted in 2006 that we have stripped out.

So the adjusted operating income for the December quarter was $48 million.

The next chart shows the key metrics for the fourth quarter of '07 and these figures are adjusted for the nonrecurring items that I just mentioned. Starting with sales, sales were up about 80 basis points versus 2006. Price and mix were up about 380 basis points, unit volume was down 300 basis points. The gross profit margin improved about 110 basis points as the benefits of higher pricing and manufacturing productivity more than offset the impact of cost inflation. So operating income of $48 million compared to $47 million in 2006 was up about 2%. Cash flow for the quarter of $250 million was $160 million above the same quarter of last year, reported profit, cash profit, was about $30 million higher. The tax refund of $180 million related to our election to carry back our NOL 10 years, and we received a refund of that amount. And then, higher inventories offset those inventories to result in a favorable variance of $160 million in cash flow for the quarter.

The next chart, chart 5, shows the operating income bridge from the fourth quarter of 2006 to the fourth quarter of 2007. You can see on the chart that price gains resulted in higher operating income of about $10 million. The higher price realization was really derived from all businesses with the exception of wood. You can see that the price realization offset the impact of inflation in raw materials and energy. Volume and mix contributed a negative $1 million to operating income, the impact of lower volume was $9 million and the impact of a higher selling mix was $8 million, was a favorable $8 million. The mix gains that we saw were really across all of the business units.

The manufacturing productivity contributed $10 million mostly in the North American businesses, North American flooring, and the ceilings business.

The SG&A increase of $13 million was largely due to timing. For the full year, the increase in SG&A costs were $19 million, $13 million of that coming in the fourth quarter. For the full year, SG&A costs were up just 3%. So again, for the fourth quarter the adjusted operating income was up 2% versus year-ago.

Looking at the segment data, starting with sales, the Resilient Flooring segment had a sales decline of about 1% in the fourth quarter versus last year. The lower volume more than offset the improvements in price and mix. From a volume standpoint the U.S. Resilient business was down about 6% and international was up about 2%. Wood Flooring saw sales decline 3% in the quarter, all related to volume. Building Products an increase of 6%. The volume increases was just 1%, price and mix contributed 5 points of growth. In Cabinets, the 6% decline in sales was all due to volume.

Turning to operating income by segment, the Resilient Flooring business saw a decline of $7 million of operating income in the quarter due largely to volume and the phasing of SG&A spending, which was more pronounced in the fourth quarter.

Wood Flooring actually increased their operating income by about 30% for the quarter due largely to manufacturing efficiencies more than offsetting the impact of lower volumes. In Building Products, the growth of $9 million of operating income corresponds to 25% growth for the year due to price gains, better mix and manufacturing productivity. Cabinets saw a decline of $3 million of operating income for the quarter, swinging from a slight profit in 2006 to a slight loss in 2007 due largely to the impact of lower volume.

Turning to the full year, the first chart numbered page 7 is the reconciliation of the reported operating income for the full year to our adjusted operating income figure of $287 million. The nonrecurring item of $4 million was the fourth quarter item of a gain of an insurance settlement. We had Chapter 11-related costs of $7 million for the full year, mostly legal expenses with respect to resolving claims and costs associated with dissolving Armstrong Holdings.

For the year full year, we also incurred expenses of about $9 million for the strategic review process. And, again, these were largely fees associated with outside advisors for legal, tax and accounting support. We also strip out the impact of Fresh-Start accounting. For the full year, that was a positive $20 million. Just a brief reminder -- when we adopted Fresh-Start accounting, we saw benefits in the benefit plan expenses of about $30 million offset by about $15 million of incremental depreciation and amortization. So the adjusted figure of operating income for the full year was $287 million.

Next chart shows the key metrics for the full year, again, excluding the nonrecurring items. Net sells for the year increased about 1.3%. Price and mix improved 350 basis points, unit volumes declined about 220 basis points. Unit volume on a geographic basis is as follows. The unit volume in the U.S. business has declined about 4%. We saw a 4% increase in unit volumes in our European businesses and a 6% increase in unit volume in Asia.

Looking at the margins for the year, gross profit margin and operating margin each increased about 100 basis points as the benefits of price, mix and improved manufacturing efficiency offset the negative impacts of lower unit volume and higher inflation. SG&A expenses increased about 3% for the year. Free cash flow of $500 million for the year was $400 million higher than for the full year of 2006. Cash earnings were about $100 million higher year-over-year, offset by about $30 million of interest expense which we incurred in 2007 and had very little of in 2006. The tax refunds collectively were about $230 million, so cash flow from operations was about $300 million above year-ago, and then we had about $75 million in extraordinary dividends from WAVE. So those are the key components of the free cash flow variance year-over-year.

In a footnote there in the bottom, Item 2, you see that reported operating income was $297 million in 2007 versus $211 million in 2006. So as reported, operating income increased about 40% compared to a 12% increase in normalized operating income.

The next chart on numbered page 9 is the operating income bridge from 2006 to 2007 for the full year and many of the trends that you saw in the fourth quarter were really true for the entire year. We saw gains from price more than offset the impact of inflation and raw materials and energy, and that was true really in every business with the exception of Wood. An the significant item in 2007 versus 2006 and what we will see in 2008 is that we actually had deflation in many of the key input costs into the Resilient business.

The volume and mix decline of a net 2 was the result of a negative volume impact of 23 and positive mix impact of 21. And, again, every business saw gains and mix throughout 2007 versus year-ago.

We saw $27 million of benefit from lower manufacturing costs, mostly again in North American floor and in Building Products. SG&A increased about $19 million or 3% for the year. The SG&A in North American floor declined. The increase in Building Products was roughly in line with our growth in sales. We did make a relatively large investment in SG&A in Asia in 2007 and at corporate we saw higher expenses for Sarbanes-Oxley compliance costs which we did not incur in 2006, and also due to a full year of expense recognition on the emergence equity program provided to executives when we emerged in October of 2006. So, again, for the full year on a normalized basis, operating income grew about 12% year-over-year.

For the full year, looking at sales and operating income by segment, Resilient Flooring segment declined about 1%. Again, the lower unit volumes more than offset the positive benefits of higher price and mix. Looking at unit volumes in Resilient, in the U.S. our unit volume was down about 6% in Resilient and international Resilient was up about 2%. The 6% decline in sales in Wood Flooring was all related to volume. The 9% growth in sales in Building Products was really driven by price and mix. Volume increased about 1%. In Cabinets, the 2% growth for the full year was mostly price and mix.

Looking at the profit performance by business or by segment for the full year, you see Resilient increased $11 million, which was an 85% increase in earnings in Resilient. Lower manufacturing costs, reduced SG&A, better product mix and deflation in same key raw material input costs contributed to the significant growth in earnings in Resilient. In the wood business, earnings declined to $9 million for the whole year. The impact of a unit volume decline was a negative 20. We saw significant improvements in manufacturing efficiency that offset about half of the impact of unit volume decline.

Building Products earnings increased $44 million. Price, mix, volume in the international business in Building Products as well as manufacturing gains, mostly in North America, contributed to the significant growth year-over-year. In Cabinets, the earnings declined $2 million as the benefits of price and mix were less than the impact of inflation. Again, in corporate, I mentioned we had a relatively sizable increase in costs related to Sarbanes-Oxley compliance and benefit plan expenses.

So turning to 2008, I have a chart that shows the guidance for the full year that we provided in the earnings release, and I will just restate a few of the highlights. Net sales for the full year we expect to decline in a range of from negative 1% to positive 3%. Operating income on an adjusted basis we expect to decline 15% to improve 5% relative to 2007. Again, that is on an adjusted basis. Earnings per share of $2.30 to $2.90 compares to the 2007 figure of $2.79, implying a range of a decline of 18% to a gain of 4%. Cash flow returns to a more normalized level of 175 to $200 million compared to the $500 million in 2007 driven by the large 10-year carryback tax refund and the extraordinary dividends from WAVE.

A few comments on the outlook by segment for 2008. In Resilient Flooring we expect sales to be roughly equal with a year ago. Although unit volume will be down, price and mix will be better. In terms of unit volume, we are looking for a 5% to 7% decline in unit volume in the U.S. and a 4 or 5% improvement in unit volume in international. In terms of margins for Resilient, we expect the U.S. margin to decline somewhat but the international margins to improve. In the U.S., we expect not to cover inflation with price increases, although when you factor in manufacturing efficiencies we believe price and manufacturing will offset inflation. In the international business in Resilient, we expect the margin to improve largely due to better pricing, higher volumes and improved product mix.

In Wood Flooring, certainly we expect the market to be down significantly although we do expect some benefits from a Home Depot special order program in wood which will certainly mitigate in our case the negative impact of the market. So we are looking for Wood Flooring sales to be flat to slightly down for the full year. In terms of margins, we expect the impact of lower unit volumes to roughly be offset by improved manufacturing and the incremental margin that we'll gain from the Home Depot special order program. So we expect Wood Flooring margins to be roughly unchanged for the full year.

In Building Products, we expect sales to increase despite the decline in volume in the North American market. We expect good volume growth in international markets and we continue to expect higher pricing and better mix. In terms of margin growth, we expect the margins in Building Products to be roughly unchanged year-over-year. In the U.S., the benefits of price and mix will offset the negative impact of lower volumes and in the international businesses, gains in price, volume and mix should boost margins abroad.

In Cabinets, we expect a unit volume decline of about 10 or 15% and we expect the margin to decline somewhat significantly in Cabinets for the full year due largely to volume decline.

At corporate, we have taken actions to reduce staff costs, and so on a year-over-year basis we will have lower corporate costs -- will help to offset the margin declines in a few of the businesses.

A few other comments on the outlook for 2008. I'm on slide number 13. Raw material and energy inflation, which was about $35 million in 2007 we expect to increase to 55 to $65 million in 2008. We have assumed natural gas prices to be up about 10% for our businesses, [plaster sizer] price is up about 12%. Linseed oil, which is a major ingredient in linoleum, is up about 50%, and then the key input costs into Building Products, paper and starch, up about 10%.

Manufacturing and productivity we expect to continue to see productivity in excess of labor and overhead inflation, so that will be accretive to earnings growth for the year. SG&A costs we expect to be basically unchanged for the year. Interest expense, which was $40 million in 2007, should decline to 20 to $25 million in 2008 both due to lower rates and lower debt levels. We repaid about $300 million of debt under our term loan B in 2007. The effective tax rate for the year we expect to be 44 to 45%, the composition of which is as follows. The federal rate as you know is 35%. State taxes are about 3%. The fact that we have losses abroad that we cannot deduct for tax purposes boosts our tax rate by about 300 basis points. And then we are carrying interest through the tax line on a portion of the 10-year carryback that we are reserving based upon the outcome of the audit, so that increases the tax rate by about 300 basis points as well. So effective tax rate of 44 to 45% for the year versus 41% or so in 2007.

Mike had mentioned from a phasing standpoint that we expect the first quarter to be much weaker than the remainder of the year both due to difficult revenue and cost comparisons. 2007 first quarter was a relatively strong quarter. Last year in Q1, we saw sales increase 3% and operating income increase about 30%. Capital spending we expect to be about $100 million for the year, 2.8% of sales. Shares outstanding about $57 million. And we do have $20 million of nonrecurring items that we've built into our estimate for reported operating income and it relates to higher depreciation and amortization which is Fresh-Start related. We believe we will have $5 million of costs associated with ending the strategic review process, the largest part of that being a fee that we paid to our banks to amend our credit facility. And then cost reductions of about $6 million which would mostly be severances in our corporate operation.

The last chart that I have is just a restatement of the guidance for the first quarter that we included in the press release. You can see the figures are significantly worse in percentage terms than we expect for the full year. We expect sales to be down 3 to 5% in the first quarter, operating income to decline 32 to 39% and EPS to decline 36 to 45%. And again, these are adjusted for recurring items. The footnote there at the bottom shows that we would expect those figures to be on a reported basis.

Okay. That concludes the presentation. Mike and I are now available to take questions.

(OPERATOR INSTRUCTIONS) John Baugh, Stifel Nicolaus.

Commendable results in this environment. My question first of all would be on the Wood Flooring side, could you discuss some of the competitive dynamics that have changed in China and how that may be impacting your business here in the U.S.?

There's a couple of factors that have changed in China. One is, depending on how far back you want to go, China got a big surge a couple of years ago when red oak prices in the United States reached peak levels and you began to see a ton of solid wood imports from China or of Chinese white oak. And the first thing that happened is, as when red oak prices receded, those solid white oak things, the Chinese white oak, began to go away because Americans have a preference for red oak.

The other thing that you see out of China is that China is in fact a low-cost source of slice-based engineered product, which is very labor-intensive. When you make an engineered product, you put a veneer on top of a piece of plywood and if you peel the veneer you can do big sheets of it, so you can do kind of a 4-by-8 sheet all in one easy motion. If you're putting slices on top and stitching them together, it's very labor-intensive and China is much more competitive in that than any domestic or even Mexican facility, and that is why we built our facility in China which came online at the end of the year. So China has made great inroads in slice-based engineered products.

The other thing that -- the thing that has hurt China recently and in things like wood and laminate, the Chinese used a have essentially an export subsidy equivalent to about 8% of sales. It was in a term in the form of a tax rebate that occurred to people and they eliminated that. That's really -- the subsidy was 16%. They eliminated half of that. That has hurt the cost competitiveness of Chinese wood suppliers. It has also hurt the cost competitiveness of Chinese laminate suppliers and one of the things that we expect see the benefits of next year, or this year, 2008, is that we are moving a fair amount of our laminate sourcing from China to the United States because the U.S. producers are more cost effective today.

So that's a long answer of China is a less of a factor in the market today than they were a couple of years ago. They will be a strong competitive factor in slice-based engineered products which represents most of the high-end type of materials.

And, Michael, you still important and you mentioned you have a factory there. On balance, you still manufacture mostly in the United States, and so --.

If you look at our wood, we import about 11% of our total wood sales and we import about half of that from China and most of it is exotic species and slice-based. Obviously a lot of stuff we that were buying from outsiders in China we're now moving to the [Kunshan] plant to produce ourselves. So, again, depending on what happens to -- Chinese costs are going up, but our Kunshan plant is still very cost effective.

Help me a little bit with the European Resilient business, understanding the losses there and then some commentary on the negative synergies and the divestitures you did last year.

The negative synergy, in Europe, we bought the European business 10 years ago and it really was two unintegrated businesses -- one in the Resilient, which was -- which made commercial vinyl sheet and linoleum. And we put that together with two businesses we already owned, a cushion vinyl business which was residential and a heterogeneous vinyl business located in Sweden which was commercial. The profitability, it was a business that served Germany, 40% of the sales were in Germany. But from the time we bought it until 2006, we saw about a 5% a year decline in the German market, the German commercial market. So we saw a considerable sales decline that were mostly market related. That put real pressure on costs. We integrated the textile and the Resilient sales forces. So as of this time last year we had something close to 400 salespeople who sold both the Resilient and textile stuff. As we sit here today, we have 191 salespeople who sell Resilient only. And what we went through is in last year, we had a lot of people go away and we had some people leave and we wound up replacing about 15% of that 191 people. That created some issues for us terms of our coverage. That is the most important leverage, I think. The second part of course is, we sold our incremental business. Instead of have a business which was EUR5400 million, we now have a business which is 250 or EUR300 million and it's going to take us some time to reduce the SG&A costs to a level that makes sense for a 250 to EUR300 million business. We have a team of people looking at how to do that and we would expect that we will have a much harder story about SG&A in Europe when we talk to you guys next quarter.

Keith Hughes, SunTrust.

On the $240 million of future cash to shareholders, can you just give us an idea if you have restrictions on share repurchase and what your opinion is on that at this point?

We don't have restrictions on share repurchase. The $0.5 billion amendment that we sought and received from the banks would encompass both dividend and share repurchase.

As we generate cash this year, I think you said this earlier, I just what to verify. As you generate cash this year, would we expect cash that you don't need for strategic uses to come back to shareholders in some form or fashion?

We would certainly look at it. We have always said that there is no reason to pile up cash if we don't see a strategic need for it and I think the only reason that we are waffling a little bit about it is we're in a pretty uncertain world. But if we are close to what we think we (inaudible), then obviously the Board will talk about returning the additional cash to shareholders.

And Nick, do you expect working capital, will that be a source of cash in 2008 given your estimates, or what is your view there?

Working capital on a year-over-year basis will likely increase mostly due to the fourth quarter of '08 from a sales standpoint being higher than the fourth quarter of '07, so we will have higher receivables at year than we did at year-end '07.

And final question, on the laminate you talked about bringing sourcing more here in the United States. Would you consider at some point in the United States more manufacturing assets here and a backward integration into the MDF board manufacturing?

We've looked at it a bunch of times and unless there was a real change in the supply-demand balance for laminate, we would not backward integrate. There's plenty of excess capacity in the United States of people who are capable of producing the quality product we want. And so given that, we have no plans to backward integrate.

[Ben Wenger], [Tallick] Investments.

You had spoken earlier about not understanding why the share price is what it is. In my view, one of the things is a misunderstanding or a lack of understanding of the value at the WAVE JV. It looks like it performed very well in '07. I'm just quickly looking at the 10-K. Can you talk about maybe what we should expect out of EAVE this year? I realize that the credit markets are difficult, but in terms of cash generation there and what you expect to receive and any strategic plans you may have with WAVE once the credit markets straighten out. Thank you.

I will take the first part. We expect the cash earnings in WAVE to be about the same in '08 as they were in '07, which is to say about $100 million. And so generally, we have a policy where every quarter 80% or so of their cash earnings are dividended to their shareholders. We should receive about $40 million or so of dividends from WAVE in 2008. But the reason the earnings are expected to be flat largely the same reasons as we expect them to be roughly flat in Building Products. The commercial markets are declining somewhat and inflation.

On the strategic side of stuff, we obviously get asked periodically about whether or not we want to buy the other half of WAVE. We see Worthington contributing significantly to the joint venture in terms of their knowledge of the steel markets and steel manufacturing, and we are very comfortable with them as partners and we don't see any strategic value to going and taking Worthington out of the partnership.

That's well understood. Really I meant more along the lines of leverage. The business did $115 million in EBITDA and it has $5 million in CapEx and it's levered 0.5 times. Is that, with due consideration, to the credit markets right now? Could you maybe discuss comfort levels of leverage at WAVE?

I think the points that Mike made about leverage on Armstrong would apply to WAVE as well. I don't think there's any aversion to leveraging up in a good market as we did when we paid the extraordinary dividends in '07, but it's obviously not the time to do it.

Bruce Baughman, Franklin Advisory Service.

Good morning. Could you elaborate a little bit on where the -- what the nature of the product mix advantages were in the past year and how that's going to play out into the future? And then also address what drove the manufacturing productivity.

Let me take the manufacturing productivity first. Clearly in North American Resilient, we have a history of getting pretty good productivity in sort of the 3 to 8% range. Clearly when we get it at the high end of that range, it comes from shutting facilities. We have four vinyl tile plants, two sheet plants, six solid wood plants and four engineered plants, and that's down substantially from what it was a couple of years ago. And so closing plants has helped us eliminate fixed cost and get good manufacturing productivity. In addition, we also improved the basic production process. So in the wood business for example, we have improved our yields by drying more of the wood ourselves and doing a better job of drying it and we found that we get 2% higher yields with wood we dry than when we buy it dried. So things like that have helped us a lot. And we see the same thing in our flooring business in Europe.

The biggest change for us in terms of manufacturing productivity is in the ceilings business where we always got around 1% productivity. We brought in a new manufacturing leader and the guy running the North American ceilings business put a greater emphasis on process improvement and plant performance and we have seen just basic blocking and tackling improve substantially in the ceilings business. We have better uptime in the plant, better yields and it's why that has turned -- it has led to productivity.

On the mix side of things, it kind of varies by product line. Sometimes it's because we are selling a product form which is higher values. So if you look in Europe, we are selling more LVT which is a luxury vinyl tile which is higher price, higher margin product. Other times certainly in certainly in ceilings, we have a tendency to sell higher priced more design products. There's a part of the ceiling business we call Architectural Specialties which really are specialty items -- wood ceilings, metal ceilings, different trim details and that stuff. That business is growing double digits and has for the last several years. And it gives us an opportunity to improve mix substantially.

So, those are the kinds of things that are driving mix. We would expect Architectural Specialties to grow, but not as much relative to the business because as we see the markets turn down, we see more cost engineering and -- go down. And we are seeing somewhat, in the floor business, we're seeing somewhat of a tendency towards the lower-priced products. When I say that, we do have some new products like high-gloss laminate which is a very high priced product that has been growing just gangbusters for us, and it has been helping the mix. We expect that to continue because right now we're pretty much the only game in town in terms of that product line.

The other comment I would make on mix, if you think of the Resilient business, the margins on the commercial products are generally much higher than the margins on the residential ones. Of course in 2007, we saw pretty decent growth in commercial and declines in residential. So that helps actually both domestic businesses, the ceilings business as well as the flooring business.

Andrew Feinman, Iridian Asset Management.

Can you just, first of all on page 12 of your slides, when you talk about margin growth, do you mean -- are you talking about absolute dollars or a percent?

It's percent. I'm talking about the margin percent. I think the color coding here would apply equally in this case to dollars.

Okay. And second of all, can you just review, I mean the first quarter is going to be worse than the rest of the year. And from what I heard you say, SG&A is a big part of that. But I'm not sure I understand the full reason so I thought you might explain it again, please.

It really depends on the business. If you start with the Wood Flooring business, I had noted this special order program that is ramping up with Home Depot. There are sizable investments that need to be made into displays to accommodate that program. So that is one item. We also have in our European flooring business some product launch activity that is incurring expenses in the first quarter that will tail off then throughout the year.

The third item would be at corporate. I mentioned that we are planning on some rather sizable cost reductions in corporate throughout the year, but most of them will begin to occur, or realized let's say at the end of this quarter. So if you look at SG&A sequentially throughout the year, the highest point is actually the first quarter and then they decline in quarters 2, 3 and 4.

Okay.

And then on the top line, again, we had difficult comparisons in the first quarter really for all of the businesses. Mike mentioned that in the wood business we had some extraordinary sales to Home Depot in the first quarter last year. Cabinets was doing very well in the first quarter of last year. There was a large account in North America, the Building Products lost later last year and it's being replaced. But we still have negative comp on that account, major account in the first quarter. So there just are a number of items that --.

The other thing we have, Andy, is that clearly one of the things we're seeing on the residential side of businesses is all of the channels reducing inventory. So you will see -- we'll see softer volume than we would expect to see for the year as we live with the effects on our orders of the inventory reductions that are being taken at the retailer and at distributors to really deal with the lower volume that they expect to have in residential products in 2008.

Okay. So, what I read in your press release, basically what you are saying here is you're going to pay $4.50 March 31, and if you are going to make the numbers you think you're going to make, then you're going to pay another $4.20 later in the year. The second, third paragraph of the release makes it sound pretty matter-of-fact that that's what you're going to do. It says a special -- at least $240 million available will be returned to shareholders later in the year if the business performs as expected. So, that sounds like it's a pretty certain thing if you are going to -- if you make the numbers that you're laying out.

It was written in a way to say that money should be there. If it doesn't, it's obviously up to the Board of Directors and they have not yet discussed as to whether or not they would do it. Obviously, we will take the issue up and the only thing we have said is that from a company kind of -- I don't know if it's culture or a philosophy point of view, is it is not our desire to have excess cash -- cash in excess of our needs in the Company.

Andy, if you would look at our cash flow forecast throughout the year, it's quite negative in the first quarter, kind of breakeven in the first half of the year. And then by year end, we would expect to have, based on the forecast that we shared with you about $250 million of cash in the U.S. in addition to the $150 million or so abroad that is generally not available for tax reasons. So in addition to the $250 million of cash, we have a revolver of $300 million, about $50 million of which is spoken for and we would rather not tap into that. So what we really looking at doing is if we generate by year end this $250 million of cash in the U.S., which would be brought down to zero on March 31 after paying this dividend, then I think that's where we get comfortable with a second distribution.

Your cash at the end of this year was over $500 million.

That's correct. $350 million of that was in the U.S. and $150 million was abroad. We expect to burn through, as we typically do, about $100 million of U.S. cash in the first quarter. So we would think, by the time we pay the dividend on March 31, we will have about $250 million of cash in the U.S.

[Jeff Lynn], [Oz] Capital.

Can you update us on the NOL balances, federal, state and foreign as of the end of the year, and were there any material changes besides obviously the utilization in the year? And is $25 million of cash taxes a good proxy going beyond 2008, obviously given the NOL balances, or is there something unusual about 2008?

So on the NOL, at the end of 2007 we had about $700 million of losses available to be carried forward. We would expect that would shelter pre-tax income for the next four years and the present value of that tax shield is about $200 million. Okay? So what we have had to do though, I mentioned this briefly in my commentary, is that even though we received the refund of $145 million -- $180 million for the ten-year carryback, we have reserved on the balance sheet in a noncurrent liability the carried back portion of years three through ten. And we are accruing interest on that through the effective tax rate. But we do expect to prevail. The audit we expect will be completed by, let's say in the next 18 months or so. The $25 million of cash taxes that you mentioned, I think that is a reasonable proxy for the next three or four years.

Got it. Just a quick follow-up. You gave a little commentary on your high-level assumptions on the North American residential market with respect to your outlook for the flooring business. I guess thinking about Building Products, could you give some commentary on your high-level assumptions there in the market, both in the U.S. and in Europe, to get to what seems to be guiding towards modest growth in '08?

Again, if you look at the components of the sales growth, we expect unit volume to decline in the North American commercial ceilings business by about 4%. We expect kind of low single-digit volume growth in Europe, and then kind of mid to high single-digit growth in Asia. What is offsetting that is not quite at the same level as we have achieved the past few years, but still reasonable growth in price and in mix.

There is also one factor in Europe we can't forget, is (inaudible) there's no repeat for the Dubai Airport. We have a metal ceilings business in Europe which did the ceilings in the latest expansion on the Dubai Airport and we finished shipments of that I think in the fourth quarter and there is no repeat for that. So that will reduce the sales numbers somewhat in European ceilings.

Got it. And I guess my question, and let's just take North America of 4% sort of unit decline. Are you outperforming the market in that assumption? Does that assume taking share?

If you look at the -- if you compare our performance to USG's in the fourth quarter, they were pretty much equivalent. We have been outperforming USG every quarter for a long time. In the fourth quarter, they were pretty well even. They report both the ceiling tiles and the grid together, so you have to combine, put in the WAVE sales to get a real comparison. So we were about the same. It was part of a conscious strategy in our part to go more towards the upper end of the ceilings mix and so our pricing strategy gave up some share at the bottom end and taking some share at the top end.

The other side of the ceilings thing, the [face] that USG saw some benefit of, is that one of the big box customers is shifting share mostly because of a decision on our part, shifting share from Armstrong to USG. That tends to be at the lower end of the price range. So we would expect to be about -- the share to be -- we don't expect to gain lots of share, we don't expect to lose lots of share.

(OPERATOR INSTRUCTIONS) [Matt Sherwood], [ZS Fund].

Good quarter in a tough environment. Just two quick questions. First of all, on the ceilings business and the WAVE business, what is your current breakdown between tenant improvements or renovation versus new build?

We are about some 25 or 30% new and the rest renovation in both of the businesses.

And when you look at your forecast, have you seen -- are you seeing more of a decline on new builds relative to renovation, or is it about the same?

I hesitate to answer that because I don't know that I have asked the question that way. We would expect to see both of the things decline because one of the things that drives renovation is competition with new office space. So people who are competing with a brand new building, landlords who have an office that are trying rent it in competition with a new building tend to renovate it and people when times get tough they tend not to renovate. So I would expect in that business to see them sort of go down in parallel. We have a slightly different perception of how things move in the residential stuff.

So your renovation is more of a gut rehab of a building relative to someone -- it's more driven by that than relative to landlords competing for tenants in existing buildings and doing more TI work?

I don't know what you mean when you said TI.

Tenant improvement.

We see both. We obviously -- we see both. A lot of the stuff that's the TI work, we don't really see that stuff. It tends to be done by our distributors and it's never volume that affects us. When you get to a gut, that's a big enough deal that it gets competed and we tend to have people involved in the discussion around it. But we do both. We do both kinds of things. We just have a heck of a lot more visibility about the large projects than we do about just tenant improvement. Remember the World Trade Center? We sent a truckload a week -- a truckload a month to the World Trade Center just to replace tiles that were broken and stuff.

Then one quick question. You're clearly not a seller of the whole business at this time, but two questions is that -- are you potentially a seller of divisions where it would make sense first of all? And second of all, are you potentially a buyer of assets that might become distressed or available in this market?

Well we have talked a lot more about the buyer side than the seller side. We do have the list of things that we are interested in that if they were to become available we would be interested in buying them. That is one of the factors that the Board looks at when it makes a decision about what cash is available for the business. So there are clearly things we would be interested in. On the selling side, we are a public company. We work for the shareholders. Somebody walks in with a deal that makes sense for the shareholders, we're going to do a deal that makes sense for the shareholder. What we have said is we're not going to seek one out.

Is there any divisions where an asset purchase would provide greater synergies without discussing real specifics?

The ones we have in the biggest operating synergies today is probably in the wood business where we have excess capacity and we have a lot of small competitors who have one mill that we could close down. That is probably the single biggest thing would be to provide operating synergies.

Alright, thanks. Is there anything you're doing just on customer credit in a tougher environment?

We are paying on lots of attention to customer credit. Our exposure is -- it varies dramatically by business. So obviously, everybody is worried about builders. Where we have the most exposure to builders is in the Cabinet business. We have, our receivables are up at year end in the Cabinet business and we have our corporate credit guy working with the Cabinets people all of the time to keep and eye on that. But in our other businesses, we really don't have much direct exposure to builders. Now we do have indirect exposures through distributors, but there's no reason you guys should have known it or sort of picked it up, but we did have our largest wood distributor go bankrupt. Hoboken went bankrupt and we took about a $3 million write-off on that. That is by far our biggest exposure in that. As we look at our distributors today, we don't have anything which would be in trouble. The only one that we worry about and our total exposure to them is $300,000.

Great, thanks a lot. Keep doing your best in this environment.

John Baugh, Stifel Nicolaus.

Just a follow-up. We had a pretty nasty recession in the commercial interiors market in the United States back in '01 and '02. Could you give us some color on how your business, your ceiling tiles business, performed then and how it may or may not be different in terms of structure, competitive position, profitability today versus --?

You're talking about '01, '02 and '03?

Yes, kind of give us a peak to trough experience for the business unit then.

The peak to trough for sales was around 15%, if I remember, and we earned our cost of capital in the trough. So that's the --.

You remember what EBIT did, roughly, EBITDA?

I think it declined about 30 or $40 million.

You don't remember from where to where that was then?

We do have cost take-out potential in that business to help mitigate some of that sales decline.

Lastly, thank you for the color on the trough. We're all dying to know what their cash position is, how much they paid out, what the run rate is. Is there anything additional you can give us, or is that it in the press release?

Sure, I would like to know that too. I think, we don't speak for the Trust, but clearly they have asked us to include in the press release a statement about them saying that they have no short-term liquidity needs. And I know that they are doing just what you would expect a trust to do in terms of monitoring claims filings and doing actuarial studies of where they are going to be and looking at the value of the assets, but they don't have any short-term liquidity needs which would cause them to dispose of the Company stock. And how do they put it? That they have no liquidity needs for the foreseeable future.

Have they retained their financial advisor?

They have financial advisor, actuarial support, all of the things you would expect them to have.

[Steve] Baughman, Franklin Advisory Service.

Yes, Bruce Baughman. On the guidance section, the comment that -- on the basis of Fresh-Start reporting adjustments that are fully incorporated into both years, the 2007 number for that purpose is 305.7. The other number was 287.7. So can you flesh out what the $18 million difference is?

We have changed our basis of adjustment going forward now that we have a full year of Fresh-Start accounting both in '07 and in '08. Since we had a partial year in '06 and a full year in '07, what we had been doing is stripping out Fresh-Start accounting in both periods. Going forward, we have in effect reset the base for '07. We have the impact of Fresh-Start accounting in '07 for the full year, as we will in 2008. So it would just change the basis. So the difference between the 287 and the 306, whatever it was, is Fresh-Start accounting.

In the GAAP reconciliation filed in the press release, there is a reconciliation by quarter and by segment on that new basis.

But this language suggests that you are leaving the Fresh-Start accounting in for comparison purposes, or taking it out?

We're leaving it in going forward.

And the $18 million is all of the '07?

Yes, net of all of the adjustments.

Okay, good, thank you.

[George Dracos], [Bishop Rosen] & Company.

Congratulations on a good quarter given the circumstances. The question is, since you are now allowed to distribute earnings back to the shareholders, would it be out of the question about going on a regular dividend?

The answer to that is, it's not out of the question, it isn't something that we have as yet decided -- been comfortable doing, but it is something that the Board talks about.

Well, you know, the thing is I would have liked the Company to, given the circumstances, have a cushion of earnings in case something acquisition was to come up so that you would not have to worry about going to the banks for financing.

I think we feel that looking at the types of acquisitions that we might find attractive or would be available in the next year or so, that we would have sufficient credit capacity to finance them. So that it would go forward into 2009 and 2010, we expect to continue to generate 2 to $300 million of cash flow per your, and we certainly would believe that adequate to fund any acquisitions.

So basically, we're talking about add-on acquisitions.

I think that's right.

That's right.

Okay, fine. Once again, I want to congratulate you on a good year, given the circumstances.

Andrew Feinman, Iridian Asset Management.

Thanks. Regarding the $305.7 million of adjustment operating income, you gave in the press release the segments that add up to that number, and -- including corporate. And so that leads me to a couple of questions. First of all, since that's the number we've going to be looking at going forward, what earnings per share does that lead you to? Because the earnings per share that you have given on an adjusted basis uses the 287.7, and that's really not the number that we are supposed to be focused on. And then the second question that leads to is, if we're using 305.7, which I think we should, then what is that compared to by segment for 2006? Where do I find the comparable number for 2006? Because in my model, I want to put in the 2006 and 2007 numbers on that basis with the earnings per share on that basis, because that's what we're going to be comparing to going forward.

Let me start with your EPS question. Both in the press release as well as on my chart numbered 11, we show the EPS for 2007 actual in the context of guidance for '08 at $2.79, which does correspond to the operating income figure of 306.

Okay.

Now on the segment data, again, we have all of the detail in the reconciliation tables to do what you're asking to do, which is to restate '06 or to restate '08 by stripping the Fresh-Start out. So we kind of pivoted the way we're looking at it because we now have a full year of Fresh-Start accounting in '07 and '08. But you can, depending upon how you want to look at it, look at the reconciliation tables and analyze it on a like basis.

Wait a second, let me just make sure I understand it. I thought that we don't really -- we can't do the segments, including Fresh-Start through '06.

We couldn't restate it, but he could take the Fresh-Start adjustments for '07 and make some assumptions about what they might have been in '06.

Right. We have never -- we have been allowed to, but didn't do that (inaudible) it could be done.

Alright. Maybe after the call, Beth, you might help me figure that out.

Sure, Andy, happy to.

Thanks.

Alright. Thank you everybody very much for joining us and I will be available as much as possible to answer follow-up questions. 717-396-6354 is my direct line again. Thanks again, have a good day.

That does conclude today's conference call. Thank you for your participation, you may now disconnect at this time.