Armstrong World Industries Inc (AWI) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Armstrong World Industries Inc. fourth-quarter 2008 earnings conference call. My name is Mary, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Beth Riley, Vice President, Investor Relations and Communications. Please proceed.

Thank you, Mary. 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, currently our Senior Vice President and CFO.

Hopefully, you've seen our press release this morning, and both the release and the presentation Nick will reference during this call are posted on our website in the Investor Relations section.

In keeping with SEC requirements, I advise that during this call we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong, please review our SEC filings, including the 10-K filed today.

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.

And with 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 the call.

As you have no doubt repeatedly heard, the markets for building materials declined substantially in the fourth quarter of 2008. Our residential and commercial orders contracted dramatically in the final weeks of the year, and this is reflected in our results.

Inventory reductions by retailers and distributors had a significant adverse effect on our sales. In the fourth quarter, inventory adjustments reduced Armstrong Floor Products North American sales by over 10%. Excluding the benefit of foreign exchange, sales declined 14% for the quarter and 6% for the year. Adjusted operating income was down more than 50% for the quarter and 14% for the year, which is better than our peers.

We continue to generate cash, a total of $140 million of free cash flow for the year, and our balance sheet remains strong.

We are improving the factors within our control. We are improving product mix and price realization, while reducing manufacturing and SG&A expenses. I would like to take a second to just to talk about how we think about the downturn.

The economic downturn of the fourth quarter hit America with an unanticipated savagery. Sales collapsed and everyone's running hard to size their businesses for a 2009 volume no one has confidence in. We are no different, except that we expect to be profitable and generate cash in 2009. Here is how we are thinking about the downturn.

First, it will be deeper and longer than people think. Second, we have an opportunity to come out of the downturn substantially better positioned than when we went in. We can't do anything about the market, but we can work on price, volume, mix and cost.

In terms of price, first of all, we want to recover inflation where we see it, particularly in Building Products, where we are not seeing the kind of raw material price reductions we might expect. We won't initiate price reductions, but we will aggressively match competition when they do. We are not going to give up share to competitors who want to compete on price.

In terms of volume, we will continue to offer good quality and great service, and we will continue to invest in new product development, albeit at lower levels.

We have and will manage production capacity down. We've closed several Floor plants in the last few years. We announced the closing of two more this year. And you can expect that we will reduce capacity in Ceilings and in Cabinets to bring our capacity utilization rates up to over 80% in those businesses. We will continue to invest in the plants we are keeping open, both in terms of the capital and process improvement. We have to continue to become more productive in our plants, and our European problems are largely a result of underinvestment in plant infrastructure.

We will work to create in our SG&A functions the process improvement mentality which has enhanced our manufacturing productivity. We have and will reduce SG&A capacity as volume falls, where we've reduced recruiters, customer order service people. We will also de-integrate where possible, buying services by the drink where we need them.

We will continue to invest in new products, advertising and promotion to support the Armstrong brand as a safe haven for our customers.

Let me return to the year's results. Building Products, our Ceilings business, continues to perform well, and delivered a record year in increasingly difficult markets. In the fourth quarter, declines in the US commercial markets accelerated, Western European markets slowed and Eastern European and Asian markets faltered. For both the quarter and the year, product mix improved, and SG&A expenses were modestly reduced. Price realization offset inflation in energy and raw materials, and WAVE's income increased for the year, but declined in the fourth quarter.

North American Resilient sales declined about 16% in the fourth quarter. Residential volumes fell more than 20%, and commercial volume declines were in the low double digits. For the year, sales were down about 5%, with 10% lower volume offsetting better price realization and improved product mix. For both the quarter and the year, the adverse effects of lower volume and raw material cost inflation on operating income significantly exceeded the benefits of better price realization, lower manufacturing and SG&A costs.

In constant dollars, European Resilient sales declined 5% for the quarter and were flat for the year. Both periods benefited from improved product mix and modest price increases. Volume declines accelerated in the fourth quarter. For the year, lower sales and higher raw material costs increased the operating loss in European Floor. Fourth-quarter operating results were flat compared to last year.

Before I turn it over to Nick, I will take you through what we are going to do to return the European Floor business to profitability. Wood Flooring, which is almost entirely a US residential business, saw 34% lower sales in the quarter and 21% lower sales for the year. The margin effect of reduced volume more than offset lower manufacturing and SG&A costs, reducing income by more than 60% for the year.

Cabinets is also a US residential business. It experienced sales declines in excess of 20% for both the fourth quarter and the year, which resulted in operating losses in both periods.

2008 was an increasingly difficult year, as our fourth-quarter results demonstrate. 2009 will be even more challenging. Nearly every key residential and commercial market around the world is expected to decline significantly. In the US housing markets, inventories of unsold homes are high, home prices are falling, credit remains tight, consumer confidence has plummeted, unemployment is growing, and not surprisingly, no one is spending money.

Our outlook assumes a further 30% decline in housing starts and a low double-digit decline in residential renovation. It's pessimistic perhaps, but there is a risk that conditions could be even worse than we expect.

The weakness in domestic residential market is hardly news. In 2009, that pressure on our results will be exacerbated by unprecedented declines in commercial markets. Rising vacancies, lack of credit availability, overextended state and local budgets, and the broad general business weakness have caused commercial projects to be canceled or delayed and renovation spending to be drastically curtailed. As a result, we estimate that our commercial Ceilings market will decline 15% this year. That is about the total three-year peak-to-trough decline of the past few downturns.

Western European markets are also expected to contract significantly, and Asian markets are forecast to be mixed, with significantly softer than this year.

Despite the dire nature of the macroeconomic outlook, we will remain an industry-leading profitable Company. Despite the record volume declines in this segment, we expect Armstrong Building Products to have attractive margins, generate cash and realize modest price and mix improvements.

We have removed $55 million of costs from the business, and we are not done. Over the past few years, every one of our businesses had benefited from new product introductions and improved quality. We will not give up the momentum from these efforts that has led to improving market share in virtually every one of our businesses.

Our objective remains to emerge from the global economic downturn better positioned than we went into it and to remain profitable throughout the period. To obtain this objective, we will focus intensely on sustaining product innovation, investing in our brands, providing great customer service and industry-leading quality, investing prudently in our manufacturing capabilities, generating and conserving cash, and becoming more productive in all we do.

It is an uneasy time. As we navigate this downturn, we are lucky to be working for an industry-leading, profitable company with a conservative balance sheet. We will face significant challenges, but if we stay focused, we can emerge from this a better company.

Let me talk about Armstrong Floor Products Europe. We bought the bulk of this business in 1998, and it has been a troubled business since we bought it. It was focused in Germany, a market which declined 5% a year from 1998 to 2005. In 2004, we decided to transfer commercial sheet production from the US to Europe. The transfer was very successful. In the US in 2008, we earned $17 million of margin on European products sold in the US.

The strategy for AFP, therefore, has to take this into account. In 2008, we lost a total of $25 million in Europe. Counting commercial and residential products, we made $22 million in the US on European products.

The problems in Europe are pretty simple. We have high-cost production processes that add up to about 10 points of sales. They are high-cost because they are multiple steps and they have lower yields than integrated processes do. And we have an underleveraged SG&A infrastructure, about five points of sales disadvantage to competition.

Over the past year, we have corrected or made great progress against a variety of issues. We've improved our customer service by increasing inventory availability and reducing delivery times. We have improved our productline competitiveness, particularly in luxury vinyl tile, which is a vinyl base with a printed film and wear layer put on top, which is used in commercial applications, especially retail applications, where we broadened our productline to be more competitive. And in 2008, we actually saw the volume in that particular productline increase 17%, and thus far, in a particularly weak environment, orders for this product are flat. Last four-week orders for luxury vinyl tile are actually up 4% in Europe.

In linoleum, which is -- the new linoleum products are just being rolled out -- we've recolored the product line. We feel very good about -- we've expanded the number of SKUs, and we feel very good about its competitive position against for Forbo and have received good feedback from our customers, both in Europe and in the US.

We're in the middle of finalizing development of a linoleum acoustic product, which will be introduced later this year, which has particular application in Europe and particularly in France and Scandinavia. And we have begun intensive work on a linoleum tile product, which we expect to introduce next year in the US market, and we've brought the punching expertise that we have in the US to bear on solving this problem in Europe.

Our homogeneous and heterogeneous updates are next. In both instances, we expect to broaden our product portfolio, offer new color ranges and new visuals.

Troubled businesses have three fixes. You either fix it, close it or sell it. You may have heard that before. And of course, when we mean sell, we really mean sell, merge or joint venture. We've thoroughly explored all three options. Strategy and financial considerations in the US make closing the business unattractive with today's market outlook.

There are combinations of businesses in Europe which make strategic sense to us. Thus far, however, we haven't found one that is doable on terms that are superior to a go-it-alone option.

The strengths of Armstrong Floor Products Europe are linoleum, where we are number two and where we enjoy very good margins, and Central Europe, where we are number one and enjoy good market success. Especially with our improved customer service, in the fourth quarter, sales in Central Europe were actually up. And so far this year, sales are actually down 2% in a market that is down in the double digits. Another strength for us is the Rhino brand, which is well known in the UK residential flooring.

Let me first set the Teesside cushioned vinyl plant and the European residential business aside for a moment. Our residential business in Europe is expected to be slightly profitable this year. The issue for this business really comes in 2010, when our Lancaster, Pennsylvania state-of-the-art cushioned vinyl plant opens. Then, our UK cushioned vinyl plant will lose roughly half its volume, and we may have to close it if new product initiatives don't replace the lost intercompany margin. The cash closing costs for Teesside would be ‚11 million, which would be more than offset by cash generated from working capital liquidation and asset sales. We will look again at this business towards the end of the year.

Our commercial business comprises three plants. Delmenhorst, Germany, which is where we make linoleum, which I will remind you is a combination of linseed oil and cork dust. This is a plant in which we are investing to improve its power-generating capability, which will make us relatively cost comparable to Forbo, our leading competitor.

The other two planets are Holmsund, Sweden, where we make homogeneous sheet vinyl, and Bietigheim, where we make both -- I'm sorry, in Holmsund, we make it heterogeneous sheet vinyl. In Bietigheim, we make homogeneous sheet vinyl and luxury vinyl tile.

We've spent several months analyzing the best way to reduce our product costs. Do we source or do we invest to create a state-of-the-art production capability? We looked first at heterogeneous, because it provided -- in heterogeneous, we had the opportunity to close a plant. And we found that the best option for heterogeneous closes our Holmsund plant and builds a state-of-the-art heterogeneous capability in Bietigheim. We would go from two process steps to one and increase our yield from the high 70s to the low 90s. This would reduce direct costs by 7% to 10% of sales.

This is the preferred option, because we would also eliminate ‚5.6 million of fixed costs in Holmsund, offset somewhat by increased logistics costs and ‚1 million of incremental manufacturing period expense in Bietigheim. This fixed cost savings is worth over 10% of sales, making our total savings on this project roughly 20% of sales of the heterogeneous product. The cost is ‚14 million of capital in Bietigheim and ‚8 million of cash to close Holmsund. We are in the process of beginning discussions with our unions about implementing this plan.

When the heterogeneous investment is complete, we want to make an investment to obtain -- which would be in the middle of 2010 -- we want to make an investment to attain a comparable improvement in the cost of manufacture of homogeneous. Direct and fixed cost savings in the homogeneous investment amount to nearly ‚7 million annually, so 16% of sales, for a capital investment of ‚15 million.

We can address the manufacturing cost problems. We are in the process of addressing the SG&A problems. We have taken actions, both people reductions, moving work to our own facilities in Eastern Europe and outsourcing products, that will reduce SG&A by ‚5 million, which is over 2 points of sales. As I mentioned, we are investing in our Delmenhorst linoleum plant to achieve an annual cost reduction of ‚2.5 million.

When we put all that together, and by the second half of 2010, we should have a structure in Armstrong Floor Products Europe which is operating on a profitable basis and which will continue to improve when we make the homogeneous investment.

Okay, now, Nick will take you through the numbers. Before he does, I should mention that Nick -- we announced this morning that Nick is taking over the Armstrong Building Products business. Steve Senkowski, who has previously been head of it, has told us that 36 years is enough and that he has decided to retire. Steve led this business through a remarkable period of extraordinary performance. The best news for us is he is hanging around town, so that as Nick takes this over and we go through a much more difficult time, Steve is there to help us if we want him to. So we wish him well, and we are excited that Nick is going to have the opportunity to run one of the world's really great businesses. Nick?

Thank you, Mike. Good morning. My comments will refer to 10 charts that we've posted on the website. I will move somewhat quickly through the commentary on the fourth quarter and full year of 2008, and spend a bit more time on the outlook for 2009.

The first chart is simply a bridge of operating income for the fourth quarter from the reported loss of $7 million to our adjusted figure of $25 million. And the biggest adjustment here is an impairment charge, non-cash charge we took in the fourth quarter against the Bruce trademark in our Wood business. That was about $25 million.

Moving to the next chart, these are the key metrics for the fourth quarter, again, adjusted for nonrecurring items. Mike mentioned that sales were down about 14% for the fourth quarter. The composition of that is as follows. Unit volume was down about 18%, price was up about 2.5% and mix was up about 1.5%.

Operating income for the quarter was down about 50%. That is a fallthrough of about 23%. So looking at Delta operating income divided by Delta sales, you get about a 23% ratio. And you will see in a minute that we took out a good bit of SG&A and manufacturing costs in the fourth quarter.

Earnings per share on a reported basis for the fourth quarter -- I'm sorry on a normalized basis -- was $0.21. On an as-reported basis, it is $0.46. So in addition to the impairment on the wood business that I mentioned, we also took a charge of about $14 million, a non-cash charge, to increase the valuation allowance against some state tax NOLs.

In terms of cash flow, cash flow was well down versus the fourth quarter of year ago, $65 million versus $250 million. The principle difference there, as you may recall, we received $180 million in a 10-year carryback tax refund in the fourth quarter of 2007.

At year-end, our debt net of US cash was about $300 million, a reduction of about $124 million -- I'm sorry -- an increase of about $124 million versus year ago. We believe we have a strong liquidity position. Our liquidity, which we define as our US cash plus available credit capacity in the US, is about $450 million at year-end. Per our bank covenant, we are required to have $100 million of liquidity. So we view our liquidity net of that covenant as at about $350 million.

Let me just take a minute as well to walk you through our debt covenants and where we stand relative to those. We have two principal covenants, the first one debt-to-EBITDA. The covenant is 3.75 times; at the end of the year, we were about 1.25 times. On interest coverage, the covenant is not to fall below 3 times, and interest coverage was about 13 times in 2008. So we feel that our liquidity position is strong, and we are in good shape relative to our financial covenants in the debt agreements.

Turning to the next chart, this is a bridge of normalized or adjusted operating income for the fourth quarter of '07 to the fourth quarter of '08. You can see quite plainly the impact of volume, offset in part by lower manufacturing and SG&A costs. So SG&A costs were down about 13% in the fourth quarter, and that was across every business unit, including the corporate functions. Price basically offset the inflation in raw materials and energy.

Turning to the next chart, and Mike mentioned a few of these numbers. This is simply the sales change and the adjusted operating income change by segment in the fourth quarter. And the left-hand side, in terms of sales, most of these numbers, of course, are driven by volume declines. We did see some price and mix gains in Resilience and also in Building Products. But the 34% and 27% declines in Wood Flooring and Cabinets were all due to volume.

In terms of profit change, the consistent message across the categories here is that the impact of volume declines was more significant than the costs we were able to reduce. But again, every business, both in manufacturing costs as well in SG&A costs, reduced those costs to offset the impact of volume.

Turning to the full-year results for 2008, the next chart simply shows the reconciliation of the reported operating income figure of $211 million versus the adjusted figure of $262 million. The biggest components of that would be the impairment in the Wood business of $25 million and severance and write-offs that we've taken in the Floor Europe business throughout the year.

Next chart shows the key metrics for the full year. As Mike mentioned, sales declined about 6%. Of that, volume comprised 10%. Operating income was down about 15%. And again, that is about a 20% fallthrough. Earnings declined about $45 million. Sales declined about $215 million. So about a 20% fallthrough of earnings.

Earnings per share were down $0.28. The interest expense was down about $20 million year-over-year. It went from 40 to 20. The effective tax rate was about 50%. And the simpler bridge to that is domestic tax rates are about 40% federal and state. We have about a 4% penalty that we receive, given that we have losses abroad that are not deductible. And then we are continuing to accrue interest on our 10-year carryback refund. And the valuation allowance that we took against state tax NOLs in the fourth quarter increased the rate by about 6 points. So again, the rate for the year was about 50%.

Cash flow, Mike mentioned, was about $140 million versus $500 million in 2007. The largest component to that variance would be tax refunds of $200 million realized in 2007. We had extraordinary dividends from WAVE in 2007, which were about $50 million higher than the dividends that we received in 2008. Profit was down about $50 million -- or cash from those profits was down about $50 million. And working capital increased about $50 million.

Next chart is the operating income bridge, adjusted operating income for the full year, 2007 to 2008. What you see here is a theme that has been consistent throughout the year, which is that we, for the most part, have been able to recover inflation with price. We have a significant impact of a volume decline. Then we claw back some of that reduction and profit due to lower cost. And as Mike mentioned, on the full-year basis, the WAVE earnings were up about $10 million, or our portion of those earnings were up about $10 million. So for the full year, WAVE's earnings were up about 30%.

Next chart, the same chart for the quarter. This is the full year, looking at the change in sales and the change in adjusted operating income by segment. Again, there is nothing new here. Volume declines drove the sales performance in Wood and Cabinets. We did see in Building Products a volume decline across all businesses of about 4%. But that was offset with positive contributions from price and mix.

In terms of earnings, again, a similar story here for the quarter. The volume declines had a significant negative impact on earnings, and we did reduce costs to offset that, but only in part.

I will skip over the next chart, which is simply a cash flow reconciliation of the components in 2008 and 2007, and I mentioned those components just a minute ago.

So let's turn to some comments about 2009. Beginning with sales growth, you've seen in the press release the outlook by market, and Mike mentioned that as well. That translates into a sales decline of 10% to 20% versus 2008. And of course, some of that decline is driven by currency. So 4 to 5 points of that decline is weaker foreign currencies.

Adjusted earnings, we expect to be less than 50% of the 2008 figure. And when you translate the 2008 earnings at our budgeted rate for 2009, that figure is about $253 million.

And so what is -- let me just step through kind of the pluses and minuses of earnings in 2009. Clearly, volume is the big negative, but also WAVE. We expect WAVE earnings -- or our portion of those earnings to be down $20 million to $30 million versus what they were in 2008.

On the positive side, we do expect to see sizable deflation in PVC costs. And of course, we also expect to continue to reduce costs in manufacturing and in SG&A. Mike mentioned a few of the plant actions that we've taken, and we may well take more. So we do expect costs to be a good bit lower in 2009, specifically on SG&A. A little further down the page, we expect SG&A to be down about $50 million year-over-year.

Now certainly a chunk of that is currency, but we also expect to more than cover inflation with cost reductions. And not just inflation. We are seeing about a $10 million reduction in our pension credit, which we need to cover what cost reduction, as well. And we expect to do that.

In terms of free cash flow, again, the figure for 2008 was $140 million. We would expect 2009 cash flow to be about half of that. So even though cash earnings will be down, we expect the impact of that to be offset by lower working capital.

So what you are really left with in terms of a Delta in free cash flow year-over-year are two things. First, we expect about $35 million less in dividends from WAVE than we received in 2008. And secondly, we are investing about $30 million in restructuring programs in 2009 in excess of what we spent in 2008. And that is principally the investment in the plant in Lancaster that Mike mentioned, as well as the investments in our European Floor business.

In terms of raw material and energy inflation, when you add it all up, we expect the reduction year-over-year to be $25 million to $30 million. I mentioned a sizable decline in PVC costs, but we continue to expect inflation in ABP, in starch and mineral wool and in perlite.

Productivity and manufacturing I think is best manifest if you look at the expected change in the gross margin is only about a point. So despite the significant declines in volume, we expect the gross margin to remain relatively steady year over year. And what is driving that is the lower PVC costs and also the reduction in fixed costs and some direct costs through some plant actions that we are taking.

Earnings from WAVE, I mentioned, will be down $25 million to $30 million. And the way we account for that, you may recall, we don't have the sales of WAVE consolidated in our top line. But we do have the equity and earnings that affects operating income. So on a year-over-year basis, we expect the decline in WAVE earnings to reduce our operating margin by between 75 and 100 basis points.

In terms of cash taxes and the effective tax rate, we expect cash taxes to remain quite low at about $5 million. The NOL in the US, we expect now to continue to shelter earnings through 2011. And the net present value of that NOL today, after having applied it to 2006, '07 and '08 earnings, is about $150 million.

The effective tax rate for 2009, we expect to be in the range of 55% to 60%. And that is really exacerbated by these unbenefitted foreign losses that we have abroad. Those actually increase the effective tax rate in 2009 by about 20 points.

In terms of the phasing of sales and earnings throughout the year, we expect the first quarter to be a modest loss. But as we go into the fourth quarter and look at hopefully a much easier comparison, we would expect the fourth quarter in sales and earnings to be somewhat level with 2008.

In terms of capital spending, we are spending this year about $90 million on the core business. About two-thirds of that would be maintenance capital. And in addition, we are spending about $35 million on the restructuring programs in Lancaster and in the European Floor business.

And finally, the adjusted OI figure for 2009 will exclude about $20 million of costs for plant closings and severance, again, mostly in the European Floor business. So, Mike and I will now take your questions.

Before we do, one thing, Nick at one point said that we have two debt covenants, and then he explained three. We actually have three. So not a big deal, but we do have all three of those debt covenants.

Beth, do you want to --?

All right, we'll take some questions now.

(Operator Instructions) John Baugh, Stifel Nicolaus.

Good morning. Working capital guidance for '09, did I miss that, or could you just review that?

Yes, working capital, which was up about $60 million in 2008, we expect to be down -- kind of $60 million to $80 million in 2009. So we have been running at a working capital intensity or ratio to sales at about 20%, and we expect that to move up to 21% or 22%.

Okay, so source --.

Working capital will come down. And of course on an average basis, working capital will come down more. The figure I mentioned is kind of point to point. Because as you look at receivables in the fourth quarter, since we hope, if not expect, that sales in Q4 of '09 will be somewhat similar to those in 2008, you wouldn't see a big decline in receivables as we are seeing now and as we will see through most of 2008.

Okay, all right. So source of between 60 and 80. And I guess that is offset to a degree by -- severance is mostly cash, right? Is there a total cash out number for '09, Nick, in terms of all the severance, restructuring, etc. etc.?

Yes, all of the restructuring together, including the capital spending and the P&L items that are cash, will be between $40 million and $50 million.

So you will have a cash outflow in '09 of $40 million to $50 million, which incorporates all the changes you're making and severance?

Yes, well, about $35 million of that would be investments in the plants.

Okay, okay.

And the balance would be cash severance.

Got it. Okay. And then a lot of detail there, Mike, on European Flooring. And I tried to follow as best I could, and I'll review it in the transcript. But what is sort of the bottom line from an EBIT perspective? Walk me, from the starting point being calendar '08 to kind of how you see it progressing in '09 and '10, with the steps you are taking.

Okay. We think that we lose about $25 million -- we lost about $25 million in '08. We will lose somewhat more than that in 2009, but not significantly. In 2010 -- in the second half of 2010, we will begin to see the benefits that we expect in terms of the direct cost savings of the new heterogeneous plant. And we should have kind of high-single-digit profitability in 2011.

Okay. And that $25 million loss in '08, is that a quote unquote net number of this product you're selling and making money on to the US, or --?

No, that's gross. The right way to think about it -- in the US -- the $25 million is the loss in Europe, and there is a big chunk of the business which is intercompany. And it varies by business. But in cushioned vinyl, 40% of our volume goes to the US; that is the high end. And at the low end, linoleum, only about 11% of our volume goes to the US.

The US margin is in addition to that, and the margins we make on products -- margins we make in the US on products we source from our European business is around $22 million.

Okay. And what kind of revenue are we talking about in '08, '09 or '10 for the "European" piece only?

The trade sales will be ‚200 million, thereabouts.

Okay, so we are talking about losing 25 million US dollars on roughly 200 million trade -- ‚200 million trade, and we are thinking about swinging to a high-single-digit margin on, say, that same volume a couple of years from now. Is that correct?

Yes, sir.

Okay, super. And then help me just to -- on the Flooring side, huge declines, obviously, in the fourth quarter, and you alluded to that. Is there any way, because you're selling for the most part in vinyl and in wood to distributors, to differentiate between what you think the end market was actually consuming versus what you sold. In other words, how much of the decline was due to distributors, your primary customers, choking on inventory, just not wanting to take anything? Any color? Or is the end market wood down 35% year-over-year in the fourth quarter?

Here is how we look at it. And there is a -- as I say, we have very good visibility on what happens to the inventories at the big-box customers and at our distributors. Where we don't have good visibility is what happens to inventories at independent retailers. So we don't have any visibility of that.

But I think the effect of that is relatively small compared to what has happened in the big box and the distributors. It varies by business, but in the residential side, between 10% and 12% of sales was lost due to inventory reductions. So that says that year-over-year, the Delta inventory as a percent of prior-year sales was 10% to 12%.

Okay, got it.

In the commercial side, of course it is much less. And so the commercial inventory loss that we have was in the neighborhood of 3% to 6% of prior-year sales. And indeed, linoleum, which tends to be a product which is benefiting, inventories actually went up a little bit.

So on the -- you think about it on the residential side, it's 10% to 12% of sales effect, and on the commercial side, it is kind of 3% to 6% or 7%. And that is why when Nick said we expect fourth-quarter sales of next year to be about the same, that is one of the factors in it, is we don't expect to see the same kind of big impact on our sales from an inventory adjustment in the fourth quarter of 2009.

So it sounded odd that we would expect sales to be flat. It's not a recovery in the market.

Got it, yes.

We don't expect to see the same kind of inventory reduction.

When during the year, Mike, will be your best guess in terms of when your customers have more or less gotten their inventories closer to where they want them?

You know, we are -- again, I think if you look at the -- we are seeing some benefits of it today. And so if I look at my res sheet orders, my res sheet orders are actually up 7% in the last four weeks, because we are beginning to see orders as the big-box customers and people kind of restore some inventory that they took out at year-end.

So I think we are seeing an awful lot of that has already happened. We will see. I hate like hell to be optimistic in this environment, but clearly, the last four weeks for us has been significantly better on an orders -- it's still bad -- but significantly better on an orders basis than it was in the fourth quarter as it was in January. So we hope that we maybe got most of that behind us.

Thank you. I will defer to others.

Dennis McGill, Zelman & Associates.

Good morning, guys. Thanks for all the color. I was hoping to focus a little bit on the Ceilings side of the business. Mike, I think in prior discussions, just thinking about where margins could kind of stabilize in a down market, I would say you alluded to the fact that volumes you are seeing right now are already probably worse than the prior two downturns. So do you still feel good about being able to kind of maintain profitability above the prior cycles, given the volumes that are coming down and given the cost-cuttings that you are making?

I do think --. Now, obviously with the volumes lower than we thought they were going to be, the margins will be a little lower. On the other hand, we think we can sustain profitability. If you just look at employment now versus the previous trough we had in '03, our salaried employment in that business is below what it was in 2003. And as I said, we will announce next month some capacity reductions that I think will get us in better shape in terms of our production costs.

So we feel pretty good about the business, and we continue to be in a world where people want to make money and ceilings instead of just ceilings. And that is helping everybody. So --.

When you say capacity, do you think that will come in the form of an entire facility or will you start with lines or (inaudible) pulling back?

We've already started with lines, so the real question is can we close a facility, and the guys are in the middle of that analysis. And the advantages of closing an entire plant are substantial, so it is hard for me to imagine that isn't where we are going to come out.

Okay. I just want to clarify something I thought you said earlier, but it kind of stands in contrast to stuff we've talked about. I thought you said you are not going to give up volume share to those that want to compete on price. But maybe I misheard you.

No, no, I think that's right. We have worked too hard to get our share. And the point is that we have -- there are very different industry structures in our Ceilings and Grid business. The industry structure is such that people tend not to compete on price, which we think is a good idea.

And then obviously. in the context of the Floor business, intermittently we will have somebody decide they are going to try to cut price, and what we do -- we respond to that pretty aggressively.

Okay. So that comment was more in relation to the foreign business, as opposed to Ceilings, because you don't expect the price pressure on the Ceilings side?

To say we don't expect price pressure is wrong, because everybody competes on price. We don't expect to see wholesale price reductions. We have seen lower prices in the grid business already. That is one of the reasons which is driving grid prices down.

So I think I said that we don't compete on price. That is not true. We've compete on price every day. It is not the principal form of competitive activity in that industry.

Have you seen pressure yet on the tile side of the Ceilings business?

Mostly volume pressure -- than anything else at this point.

Okay. And I just wanted to kind of wrap up on some of the comments you were making on the inventory side, if I understood what you were going through. You are seeing some benefit as the inventory reductions weren't really rescaling to a new environment, but almost overcorrecting at year-end, so you are starting to get a little bit of a benefit here.

But do you feel like the customer base was kind of adjusting to a new 2009 reality, or you will get a good chunk of that inventory back through the year?

No, no, I think that the big-box guys may have over-adjusted a little bit. The other distributors is -- we are not going to see any benefit from that. Everybody -- I think we are all -- honestly, I think the biggest problem, nobody knows what the 2009 reality is. And so we want to believe that they've made an adjustment, and order rates would suggest that they have made the adjustment fully. But we have to continue to see economic activity at these levels.

If we see it go down, then I suspect we will see further erosion. But at the moment, we feel like we've seen most of the adjustment.

Okay, great. And just one follow-up. Just running some quick numbers on the math on the European restructuring. It seems like you've got to take out about $40 million or so of costs. Is that about right? Over the next few years?

No, not over the next two years.

No, next few years.

No, no. We said we could do that, we would do that. The first comment was around heterogeneous, where our sales are sort of around ‚30 million. And the second comment was around homogeneous, which is where our sales are around ‚45 million. So we are not -- the 20% is not on the total 200 million of trade sales.

Okay, got you.

Yes, just to be clear, Dennis, we would expect the cost savings on a full run rate basis to be about $20 million per year. So for us to get to breakeven in 2011, like Mike mentioned, or a slight profit, we will need some recovery from the market. So this is -- we can't -- at least at this point, we don't have plans to erase the entire $25 million with cost reduction. We do need some recovery.

Okay, thanks a lot, guys.

(Operator Instructions) Jim Barrett, C. L. King.

Good morning, everyone. Mike, you did mention grids and tiles in terms of the current pricing environment. Have you seen any evidence specifically currently in Wood Flooring or Resilient Flooring that competitors are getting more aggressive on the price front? Or cabinets?

We've seen somewhat -- we've seen some price aggressiveness in the Wood Flooring thing in January, which we had to react to. We saw some aggressiveness in PCT which we had to react to. On the sheet and on the residential side of the vinyl business, we never saw prices go up. So nobody -- all we are doing with the raw material cost reductions is offsetting some amount of the pressure that is coming from volume. So we haven't seen a lot of price pressure there. I think everybody was in tough shape last year because of the lack of ability to pass through prices.

So the answer is in wood, we've seen a little bit of it. Now, some of that is going to be due to we have slightly better raw material costs. And some of it is these -- we've been blessed in the sense that we had 10 Wood facilities. So as the market came down, we could close plants and respond to it. A lot of our competitors only had one facility, and they have a heck of a time responding to the downturn in the market except through trying to keep that plant full at lower prices.

So, as we said, we will continue to -- we are not going to give up the share we've fought so hard to win based on price. And everybody ought to sit back and compete on product and quality.

Do you expect to see a significant consolidation in the Wood Flooring industry by the end of this downturn?

Yes.

Okay. And is your guidance for '09, does it implicitly reflect the current pricing pressures you are seeing that you have referenced over the last couple of minutes?

Yes.

Okay. And how significant for Ceilings -- we are all reading anecdotally about half-started buildings that are not continuing to be constructed. How significant is that phenomenon worldwide, and what would be your expectation when the credit markets do thaw in terms of those buildings being restarted?

Oh, goodness. Here is the -- the importance of new construction varies dramatically based on where we are in the world. So in the developed markets, North America and Western Europe, new construction is relatively small percentage of things -- sort of 20%, 25% of total volume goes into new construction.

When we get into markets like Russia, India and China, new construction is a substantially bigger piece of the pie, and it is almost what the pie is. And we've seen -- in all three of those markets, we've seen significant dislocations as a result of economic downturns.

So now, when is it going to turn around? It beats the heck out of me. I don't know. I just -- I'm not smart enough to know that.

I understand that. But typically Ceilings, is it not a lagging phenomenon compared to a rebound in non-residential construction?

Sure. It does. It lags anywhere from nine months to a year, depending on what it is. And so --. But why don't I make sure I understand your question before I keep rattling on.

I think you essentially answered it. It sounds like in Russia, India and China, the market for ceilings may rebound faster than one would normally think, simply because these buildings have already been partially constructed. I guess that is what my question really was.

No -- there will be some of that.

Okay.

So the question is when will those markets rebound, and that is a much tougher question.

I know that's a separate question. And then my last question, and maybe I missed it, did you comment on the economic stimulus package and how that might impact your businesses?

You know, we didn't. We didn't do that on purpose, because I am not sure we know. I think the short answer on that is there was nothing in the economic stimulus package as it was passed which made us feel very optimistic about what it was going to do for us short term.

We do a lot in health care and education. We felt (multiple speakers) of course, the education is largely driven by state budgets. And so to the extent that there was at one point a proposal which would provide some money for states that could help in school construction, that was something that was going to be beneficial to us.

I think that got either a combination of eliminated and diluted to the point where we don't see a lot in the economic stimulus bill for us, except to the extent that it helps the overall economy.

Understand. Thank you very much.

Leah Villalobos, Longbow Research.

Good morning. In terms of your market share, I was wondering as we face this down market where you feel like you can gain share.

I'm sorry, Miss, I didn't hear that.

In terms of your market share, as we are facing a down market, where do you think that you might be able to gain share?

You know, we have just -- you know, what we've done is we looked at this fourth quarter and we sort of said, here is what the market -- we would think the market is for macro indicators, and here is what we know happened in terms of the inventory thing, which kind of plugs you to share. And what we saw in that instance is we have gained a little bit of share in virtually all of the forms of the floor business in North America. If we do the same sort of thing in Europe, where we feel good about it is we feel very good about what we've been able to achieve in Central Europe.

So we think we should be able to pick up little bits of share. It's not going to be tons of share unless one of the guys goes out of the business, which we don't see happening short-term. We do think that -- we do hope to benefit from a trend among retailers to reduce the number of suppliers they work with. Again, if vinyl was a declining category for a retailer, it has gotten worse, and so there may be more of an opportunity for us to become kind of the only supplier of that form of product. And we've done some things in terms of displays and other things which will help facilitate that change for retailers who would like to do it.

That's helpful. Thank you.

[Andrew Feinman, Meridian.]

Thank you. Could you please tell me what net debt is at the end of the year?

At the end of 2008?

Yes.

Yes, well total debt is about $500 million. US cash was about $200 million. So the way we look at it, that is -- we call net debt $300 million. But we also have $150 million of cash in Canada and the UK and a few other places. So if you look at the broader definition of cash, net debt is about $150 million.

Okay. And the cash taxes that you incurred for 2008?

I think it was about $15 million.

26 in total.

Okay, $25 million. And we expect that to be only about $5 million in '09.

Okay. And the depreciation and amortization for this year and next year?

It is about $145 million, $150 million.

For both years?

Yes.

And can you also tell us, you said that pension income would be down by $10 million in 2009. How much is it in 2008?

Well, the so-called net periodic pension credit, the pension income on the US defined benefit plan, was about a credit of $65 million. And we are thinking it will be around $55 million or so in 2009.

All right. Sorry to bother you with these things, but the only way you would be able to answer the questions is if I ask them on the conference call, because you can't tell me anything that you don't tell the whole world. And since this is the end of the year, I know the 10-K probably won't be out for a while.

Actually, it is being filed today. It has been filed.

Okay, well, I only have one more -- or two more things anyway. You got your unallocated corporate expense down to $2.4 million this year. So, that line includes pension income.

It does.

So we know that it is going to be up at least $10 million next year. But then you also seem to have not taken bonuses or something, so your compensation went way down in the fourth quarter.

So I wondered if you could ballpark how much that might be up in 2009, aside from the $10 million that we already know about from pension.

Aside from the $10 million, I think you'd see that figure go up to about $15 million.

Okay. And then the last thing I have is on interest. It seems -- I mean, I know you don't count the foreign cash as cash, but -- because of your covenants and because you would have to pay taxes to bring it back. But it is still cash, so I include it in net debt. You own it, and it affects interest expense.

So when I am trying to estimate interest expense for 2009, and in the past you guys have had a lot of interest income, too, from having so much cash. Could you possibly give some kind of a net number for what that might be in 2009?

I think it will be between $13 million and $15 million versus the $20 million in 2008.

It will be between 15 -- I'm sorry --.

Between -- the net number will be between $13 million and $15 million.

Okay.

Versus $20 million.

Great. That's very helpful, and thank you.

John Baugh, Stifel Nicolaus.

Just quickly, any update on the trust and any clarity or color on their cash needs?

John, we've said this before, that the flow of information between us and the trust is really one direction. And so that is not -- I think the short answer is we don't really know what their cash needs are. We don't -- as we said, we can't speak for them. And so we haven't -- we didn't say anything about it and we are not in a position to.

Okay, thank you.

Thank you. There are no other question in queue. I would like to turn the call to Beth Riley for closing remarks.

All right. Thank you, everybody, for spending the time with us. This was more thorough than we usually get, but we had a lot of information we thought it was important to impart. I will be available, as always, for follow-up calls. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a great day.