Armstrong World Industries Inc (AWI) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Armstrong World Industry's Incorporated earnings conference call. My name is Carol and I'll be your coordinator for today. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes.

It is now my pleasure to turn your presentation over to your host for today's call, Ms. Beth Riley, Vice President of Investor and Corporate Relations. Ma'am, you may begin.

Thank you, Carol. 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 Bill Rodruan, our Interim CFO.

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

In keeping with the 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-Q filed today. We undertake no obligation to update any forward-looking statements.

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 measure is included in the press release and in the appendix of the presentation. Both, again, are available on our website.

With that, I'd like to turn the call over to Mike.

Thanks, Beth. And good morning, everybody, and thanks for participating in this morning's call.

We're all painfully aware that in the first quarter, construction markets declined significantly. The fourth quarter was a turning point for construction markets around the world. And these markets continued to decline in the first quarter. And the US residential housing market continued its decline in the first quarter. Therefore, we'll surprise no one when we say the pervasive theme of our first quarter financial results is declining volume.

As we think about it, sales volume has three determinants -- market size, share change and the effects of changes in channel inventory. In nearly every geography we saw a smaller market. In nearly every business we believe our market share was equal to or better than last year.

Floor North America is the business where we have the best visibility of channel inventory. In the fourth quarter of 2008, the channel inventory effect on North American floor sales was substantial and negative, accounting for a third of the sales decline in the quarter. In the first quarter of 2009, the effect of channel inventory was small and positive.

In building products, distributor inventory reductions lowered ceiling sales by over 5% and grid sales by over 10%. The ceilings channel inventory adjustment is probably complete, while the grid adjustment will continue in the second quarter, likely reducing grid sales by 5% to 10%. All of our distributors and retailers continue to manage their inventories very, very carefully.

AWI's reported sales declined 19% for the quarter. Excluding the impact of foreign exchange, sales declined 15%. The primary reason for the sales decline was lower volume, which reduced operating income to virtually break even.

We normally consume cash in the March quarter due to seasonal working capital needs. In 2009, first quarter cash consumption of $45 million was 50% less than at 2008. Compared to last year, working capital reductions more than offset lower earnings in modestly higher capital expenditures. Our liquidity and balance sheet remains strong.

The operating income pact -- the operating income impact of a volume decline approximating 19% more than accounted for our decline in operating income. Operating income benefited from price gains and lower SG&A expenses. We did see lower flooring raw material costs in the first quarter. Some of these benefits will be realized in future quarters. The additional manufacturing overhead expense recognized because inventory fell, offset the reduction in manufacturing overhead spending.

For the full year, we anticipate that manufacturing overhead spending reductions will more than offset the additional overhead expense recognized because of inventory reductions.

The first quarter included nearly $9 million severance-related costs for approximately 800 people. The cost benefits of these layoffs will be realized over the remainder of the year.

Anticipating that your interest in today's call is as much on the outlook as the financial results, I will say we continue to be more pessimistic than most people, expecting longer downturn and a more shallow recovery. In this environment we continue to focus on coming out of the downturn substantially better positioned than when we went into it.

We can't make the market grow, but we can work on price realization, increasing share, improving mix, reducing cost and generating cash. We want to receive fair value for our products, recovering inflation where we see it. You will remember that in building products we're not seeing the raw material price reductions you might expect. And I should remind you that our natural gas hedging strategy will keep us from seeing the benefits of lower natural gas prices until 2010.

Our strategy is not to initiate price reductions, but we will match competition when they cut price. We're not going to give up hard-earned share to competitors who want to compete on price.

We will continue to compete by offering consistent quality and great service, as well as by continuing product innovation. Two exciting new products that we've just introduced are Tierra, a sustainable ceiling product we make in Ohio, which provides the performance of fiberglass but is made using jute, a rapidly renewable material. And Alterna, a premium, groutable tile we make in Mississippi. It's softer and warmer underfoot than ceramic, as well as being faster and easier to install.

We're continuing to invest in advertising and promotion to support the Armstrong brand as a safe haven for our customers. We reduced and will continue to reduce production capacity to be in line with our sales.

Productivity increases have allowed us to close five floor plants in the last few years. We have announced two more closings this year. We also announced the closure of a ceilings plant in the first quarter.

Based on our current market outlook, these actions plus crew reductions should keep our North American capacity utilization rates over 85%.

We need cost-effective, high-quality manufacturing facilities. Therefore, we continue to invest capital, both financial and human, in the plants we're keeping open.

In our SG&A functions, we're working to create the process improvement mentality, which has helped us so much in increasing manufacturing productivity. We have reduced and will continue to reduce SG&A expenses as volume falls.

Our headcount is down 500 from 2008 yearend. And when the announced plant closures are completed in the next couple of months, we'll realize a further 500 person reduction.

Let me now turn to segment results.

Worldwide Building Products, our ceilings business, remains solidly profitable despite volume declines in excess of 20%. In the quarter, US commercial volume was down about 18%. Western and Eastern European markets dropped nearly 30%. Asian markets were weaker than expected, but the rate of decline was more moderate.

Products mix improved around the world. SG&A expenses were reduced. Price realization offset inflation in energy and raw materials. But WAVE's income declined nearly 50% in lower volume. This had a negative impact on segment margin because we do not consolidate WAVE sales.

Our Global Resilient Flooring business had a modest loss because lower North American and Asian profits were offset by expected losses in Europe. North American Resilient sales declined about 15% in the first quarter. Residential volume fell approximately 12%, and commercial volume declined nearly 18%.

North American Resilient was modestly profitable since the adverse effect of lower volume on operating income was largely offset by lower manufacturing and SG&A costs.

In constant dollars, European Resilient sales declined 9% for the quarter due to lower volume. Improved product mix and price increases provided a very modest benefit. Lower sales volume accounted for all of the increase in the operating loss.

Wood flooring is almost entirely a US residential business and is skewed more heavily toward new construction than our Residential Resilient business.

Wood had 24% lower sales as the markets continued to decline. The margin effect of reduced volume more than offset lower SG&A and raw material costs.

Cabinets is also US residential business and heavily skewed to new construction. Cabinets outperformed the market with sale declines of approximately 13%. But the impact of reduced volume more than offset lower manufacturing and SG&A expenses to increase the operating loss.

Events have generally supported our pessimistic view of the markets. Our 2009 full-year outlook for global, commercial and domestic residential markets has eroded in the two months since our last call. We have responded with plans for additional cost cuts and further working capital reductions. As a result, we're maintaining our operating income outlook and have significantly increased the expected cash generation for the year.

Compared to when we last spoke, our sales outlook has declined around $100 million. Floor North America income should be better than expected. Ceilings Europe income will be worse than previously expected because of its exposure to the United Kingdom and Russia, two very weak markets.

The income of the rest of the businesses will be about the same as we expected in February, due to lower costs offsetting volume declines.

Nearly ever residential and commercial market around the world is expected to decline significantly. In the US housing market, inventories of unsold homes are high; home prices are falling; credit remains tight; unemployment is growing; and foreclosures are increasing. Our outlook now assumes a 40+% decline in 2009 housing starts and a mid-double-digit decline in residential renovation.

Commercial markets will see unprecedented declines. Rising vacancies, lack of credit availability, overextended state and local budgets, weak residential construction and the weak economy have caused commercial projects to be canceled or delayed and renovation spending to be curtailed.

We now estimate that our domestic commercial ceilings market will decline nearly 20% this year. The drop in 2009 will be greater than the total three-year peak-to-trough decline of the 2001 to 2003 downturn.

The Western European markets are also expected to contract significantly. And Asian markets, which for us really means China, India and Australia, are forecast to decline modestly.

The macroeconomic outlook is dire, but we remain an industry-leading, profitable Company. Admittedly, we just eked out a profit in the first quarter, but we should be profitable -- solidly profitable for the year.

We expect to prudently remove cost from the business. Every company has to strike what it feels is the correct balance between short-term results and long-term growth potential. Over the past few years every one of our businesses has benefited from our strong brand and innovative new product introductions. We're not at a point where it makes sense to give up the momentum from these efforts that have led to improving market shares in our businesses.

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

Now, Bill will take you through the numbers.

Thanks, Mike. My comments will follow the charts that are posted on our website. So please refer to them. Note that we are presenting adjusted numbers on the charts. We believe the adjusted numbers provide a clearer picture of our operating performance. The reconciliations from GAAP to these adjusted numbers can be found in the appendix.

Page 2 is a bridge of our reported operating income to adjusted income for the first quarter of 2009. The adjustments are primarily for organizational and manufacturing changes made in our European foreign business.

Page 3 reconciles reported earnings per share to adjusted earnings per share. Last quarter, we announced that we would use a standard 42% adjusted tax rate to allow better operating comparability between periods and to highlight the fact that our significant net operating loss means that we pay very little cash tax, despite an extraordinarily high effective tax rate.

The first quarter reported tax rate does not reflect cash taxes. We reported tax expense of $8.8 million, despite having an operating loss. The primary driver of the reported tax expense was $6.4 million, or $0.11 per share due to unbenefited foreign losses.

The impact of unbenefited foreign losses on the effective tax rate is significantly higher this year, primarily due to considerable reductions in domestic income, which makes modestly higher foreign losses a much more significant portion of the tax base. In addition to these tax adjustments, nonrecurring expenses cost $0.04 per share.

Page 4 shows our key metrics for the first quarter, and Mike touched on many of these. Net sales declined 15%. Volume declined ordinarily 19%. Price and mix combined were a positive 3.5%, offset primarily due to improved price. Operating income declined 90%.

So if you compare the change in operating income to the change in sales, you'll see a fall-through ratio of approximately 32%, a bit higher than last quarter, unseasonably lower volume.

Mike already mentioned that our year-over-year cash consumption was significantly better, primarily due to inventory reductions. And I'll discuss cash flow in a little further detail a few slides from now.

Net debt, or total debt less total cash, improved significantly from last year to $184 million. Like Mike said, we remain well within our covenants and feel good about our liquidity.

Page 5 bridges adjusted operating income from the first quarter of 2008 to the first quarter of 2009. As you can see, the margin effect from the volume decline is by far the largest contributor to the year-over-year decline.

Price gains, to offset inflation in our ceilings business, were augmented by raw material deflation in the flooring businesses. As Mike described, manufacturing costs were adversely impacted by the lower absorption.

Overall, we are quite pleased with plant efficiencies and expect favorable manufacturing cost comparisons for the full year.

Note, we reduced SG&A expense by $8 million. Also note that as Mike discussed, manufacturing and SG&A costs in the quarter included approximately $9 million of one-time severance costs, and they are split roughly evenly between those two items.

Finally, WAVE earnings were down by roughly half, almost entirely due to lower volume.

Page 6 shows sales and operating income performance by business segment. Mike covered the important takeaways in his comments, so I won't repeat them other than to reiterate that volume declines were the story for both sales and income.

Page 7 bridges free cash flow compared to the prior-year quarter. As previously mentioned, we consumed $48 million less free cash flow this year. The biggest change from last year is in our use of working capital, defined here as accounts receivable, plus inventories, less accounts payable and accrued expenses.

Of these items, inventories had the greatest impact. We usually billed inventories in the first quarter in expectation of seasonally higher sales in the second and third quarters. And last year we increased inventories by $36 million. This year, however, we reduced inventories by $26 million due to weaker markets.

Inventory change accounted for $62 million of the total $83 million contribution from working capital.

Since the first quarter of 2008, we've maintained our excellent customer service while still reducing inventories by approximately 9%, which is roughly half of our volume decline.

Relative changes in accounts payable and accrueds also contributed, and that amount totaled $38 million, largely due to lower incentive compensation payments in 2009.

Accounts receivable partially offset those contributions by approximately $17 million. Our sales terms differ by product category, customer and country, and the majority of the $17 million was due to a change in selling mix.

Note that our receivables generally increase in the first quarter as sales in the month of March are greater than December sales.

Cash income was $27 million below prior year. And capital expenditures were $6 million higher. The cash -- the increase in capital expenditures is timing. We expect our core capital spend for the full year to be below prior year.

The last chart is our expected outlook for the full year, which is based on the market expectations that Mike had already outlined. Items for which are outlook has changed have been noted. However, the main takeaway is that we are either confirming or improving what we told you in our February call.

That's a discussion of the notes, and I'll turn it back to Mike.

Thanks, Bill. Listen, at this point we'd like to throw it open for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) And your first question comes to you from the line of Dennis McGill at Zelman. Sir, you may proceed.

Thank you. Good morning, everyone. My first question just had to do with you mentioned on the natural gas hedges rolling off in 2010. Can you give us a sense of what the hedged cost is, on average, going to be this year, and if you'll have any hedges in place for 2010 or if it'll be at the market in that -- next year?

Our natural -- the way we handle natural gas is we hedge 80% of our projected usage 15 months ahead of time. So what we do, what we -- so today we're putting hedges in that will go in 2010. And we have hedges built in that just says that we'll get today's spot prices in 2010.

Year over year, this year, it's essentially flat. The cost we have this year is essentially flat with last year. And when you look at the -- if you look at the forward curve for gas it's kind of interesting because towards the second half of the next year, they expect gas prices to increase a lot.

Right.

But we don't speculate on gas. We have a relatively mechanical approach; 80% of our stuff, and of course the 80% has turned out to be a good thing because this year that means we have about 100% hedged. So one of the things we'd hoped for a couple of months ago is that we might see some benefit from spot purchases. But we will make few, if any, spot purchases of gas this year.

You're saying since the volumes have gone down since you predicted the 80%.

Since the volumes are down.

So can you give us what the absolute level is that will average this year? You said it's flat with '08. Just to gauge the benefit next year.

We don't disclose that.

Okay. My second question, just to clarify on the restructuring items, you mentioned you had $9 million of cost-reduction initiatives. So that would be -- that was not adjusted as of what time, in the release this morning?

That's right.

That's incremental to that?

Because we expect most of those -- most of the -- those expenses to be offset with cost reductions this year. And so we don't normalize for it.

Okay. And you said that was roughly half between COGS and SG&A?

Yes, sir.

Okay. And I realize you're still facing a lot of headwinds in the cabinets and the wood flooring and the revenues there. Probably -- certainly not happy with where the profitability is. But I think both of those segments actually surprised to the upside as far as being less negative. So could you walk through anything that could be incremental there, relative to what you've seen?

Yeah, that's -- in the wood business, you know, our sales are better than you would think, given the mix of stuff. And I think the real benefit there, the real thing we see in wood is better execution in the plants. So it's higher plant productivity. And of course the closure of the plants will help us.

The same thing in cabinets. We have significantly improved plant productivity. That's helped us. And of course we've taken out a lot of SG&A.

Now, we didn't emphasize it very much, but when you look at no change in first-quarter income in cabinets with a 13% decline in sales, those guys have done a great job taking costs down. So it's really around cost. It's around cost takeout.

And the lucky thing we have in the wood business or that -- well, I don't think -- it's not lucky. It's fortunate. It's, you know, that we have many plants. And so we've been able to reduce them as we -- as volume has gone down. So we've been able to take fixed cost out of the business, when competitors who have a smaller number of plants haven't been able to.

And then also --

Go ahead.

Sorry. Also on the revenue side it was better than we would have thought. And thinking about cabinets, for example, being only down 13% I think in this environment would be, you know, fairly positive. So is there, you know, any difference on the inventory side, or is that market share gains?

We would think it's market share gains. I mean, again -- now, when we see that we have a mix of distribution channels. We've done very well in first quarter in multifamily. So we were benefiting from that. But we've been pleasantly surprised with what cabinets does.

The guys have done a nice job of upgrading that product line. We have a first-rate product line and our customer service levels are good and the quality is good. So we've benefited. I think to some extent we're probably benefiting from the Armstrong brand name and having won the JD Powers award the last couple of years.

Right.

So it's been encouraging for us.

Okay. And then just my last question. On the total cost saves related to the initiatives you guys have taken. On the financial outlook page you're seeing gross margin benefit of about 100 [bits] and then SG&A costs of $50 million lower. Is that basically capturing all of those initiatives?

Yes, sir.

Okay. Great. Thanks again, guys.

Thank you.

Thanks, Dennis.

Thank you, sir. Your next question comes from the line of David Macgregor of Longbow Research.

Yes. Good morning. You talked about pricing and mix being up about 3.5%. I wonder if you could just walk us through your categories and talk about price trends you're seeing in these various categories.

Yeah, we can do that. The -- let me just dredge it up. I mean, what you're -- the interesting question, of course, is where is price going and what kind of -- it won't surprise you to know that we have some -- that in certain segments we've seen competitors start initiating price (inaudible).

But we've been able to see some price enhancements in most of our businesses. Certainly not in the wood business, but in most of the other businesses we've gotten some price. Certainly not nearly as much as we used to get. And now in building products we continue to be fortunate enough to be able to offset inflation with our -- with the price improvement.

But it is -- with the exception of wood floor, we have gotten price improvements everywhere. We get less price in Europe than we do in North America.

And then on the other side of that was the mix, and I just wondered -- you know, everybody's talking about weaker mix these days and people trading down.

That's a more -- that's a mixed story.

Yeah.

Clearly in our -- in the sort of residential businesses mix is uniformly negative.

Right.

And where we have seen -- we have been -- as a matter of strategy we have been lucky enough to see mix improvements in our commercial businesses. And then, of course, in building products in Europe we get some mix help from market shift. And Russia was an important market to us. It was very weak in the first quarter, which -- and is a -- and as a lower margin business, that shows up as a mix improvement.

Got it.

But what we find on the residential side is we think that people are mixing down in categories. So if they were going to buy ceramic they may buy vinyl. And if they were going to buy vinyl they'd buy a less expensive vinyl or a less expensive wood. So we're not seeing anything different there than you hear other people talking about.

Mike, you'd offered up a fairly dire outlook on the commercial side, and I'm just wondering how some of those niche product markets, like the architectural specialties, the metal ceilings, some of those markets are holding up.

You know, they're holding up surprisingly well. We just had a presentation -- we just had the lady who is responsible for architectural ceilings make a presentation to the Board of Directors on Monday. And everybody was just pleasantly surprised on how well that market's doing.

Now, we won't pretend that it isn't slower than it was, but, you know, it was a very strong growth business. And, you know, we do have a -- we do have hopes this year that that could be flat in this down market. Now, that may be too optimistic, but it is substantially better than the rest of the business.

Thanks for that. And then just turning to how you reinvest in the business, I think on the last call you'd indicated '09 in CapEx would be about $90 million prior to restructuring programs. I wonder if you could just --

Right. And there's a -- and we now would say it's about $80 million.

About $80 million now.

Yeah, so we've taken about $10 million out of that. And our depreciation is about $140 million. So we're spending substantially less than depreciation as we -- in this downturn.

Can you just -- can you talk about sort of the extent to which you might shift more towards manufacturing process and cost reduction and maybe a little less towards growth initiatives?

You know, we have not had to spend much in the way of capital towards growth initiatives. The nature of our businesses is that even in good times they get relatively modest growth, and we do get 3% to 5% to 6% of productivity each year, which creates capacity. So we have not had to add capacity to really serve the markets. And so most of our spending has been focused on maintenance and process improvement.

Okay, great. And then the last question just on WAVE. I mean, I wonder if you could just talk a little bit about the profitability outlook there given the opposing forces of -- I guess you've got lower materials prices, but on the other hand lower volume. Just talk a little bit about what you expect there in terms of profitability.

Well, it's a -- you know, it's a balancing -- it's clearly a balancing act between trying not to give up share and not to give up price faster than steel prices are going down. So, you know, the -- when we look at WAVE, we think that its profitability will be down a little bit.

I think one of the things to emphasize about WAVE, in like -- in our -- in the first quarter, it was pretty hard hit by reductions in its distribution channels inventory. So when we look at that, the reduction in WAVE sales was -- from that was about a third of the total. It was very much like it was for the floor business in the fourth quarter.

Right.

So the volume decline and the earnings impact was pretty substantial. What we're trying to do is to give up no more than the material cost reductions in the WAVE business. But we have had to give up price. And so I think -- we think it will continue to be a very high return, very profitable business, but not at the levels that we saw in 2008.

Okay. Good. Thank you very much.

Thank you, sir. Your next question comes from the line of Jim Barrett of CL King and Associates. Please proceed.

Good morning, everyone.

Hi, Jim.

Hi, Jim.

Mike, could you touch upon, for each of your key segments, maybe it makes sense to focus on North America, but where do you see the greatest share opportunities as we work through this trough and why?

Well, I think we see a significant share opportunity in the vinyl business because of weak competition.

Right.

You know, we have Congoleum struggling with their bankruptcy. And gosh only knows we understand the problems they're facing very well, so we have nothing but sympathy for them. That doesn't mean we're not going to try to take advantage of them in the marketplace.

So, you know, this Alterna -- you know, the things that we're -- that are the -- so we think vinyl is an opportunity. The other -- the part of it that we like is that the opportunities in some of the higher margin products, which we have just been -- we've got ourselves in a position of being able to make. So the Alterna product's a great example of a large format vinyl tile that looks for all the world like ceramic, is less expensive and is much better to go on. It sells for a couple of multiples of what our average tile product sells for. So we think that's an opportunity.

You know, the wood business, we're always -- the wood competition is under real pressure. And so we think that there's an opportunity to pick up some share there.

In the ceilings business, you know, it's -- we're all going to -- I suspect we're all going to be holding on as these businesses are weaker than we thought. We have been very successful in the architectural specialties business, and we expect to continue to be there in the basic ceilings business. We're not looking to move share significantly.

And then in the cabinet business we've been gaining share as a matter of just good execution as opposed to anything else.

So those are -- that's kind of -- in Europe, Europe is going to be weaker than North America in the commercial markets. And I suspect people are going to be looking just to hold on to what they got.

Okay. Which suggests that you should be able to gain share there as well given your balance sheet?

Well, you know, we don't have a lot of weak competitors in those things. I mean, we do compete with some pretty large guys. So we would hope -- I wouldn't -- no, I don't have great expectations about picking up share in Europe.

Okay. And just to move back to the cabinet business for a moment, are you taking share from the big three or is it the secondary players that are falling by the wayside?

You know, it's hard -- it's very hard to say. That business is so fragmented.

Okay.

That -- and the answer is that we compete with all those guys. You know, the big three are executing pretty well. And so I'd be surprised if they -- if we were taking lots of share from them.

Right.

A lot of the smaller guys are having the real trouble.

Okay. That's helpful. Thank you very much.

Gentlemen, your next question comes from the line of John Baugh Stifel Nicolaus. Please proceed.

Hi. Good morning.

Hey, John.

Did I read somewhere that you're actually hiring some people back at one of your wood flooring plants in West Virginia.

Sure. You know, we're closing a plant and we're hiring some -- we're redistributing some work. So we're hiring some people at Beverly -- at Beverly, West Virginia.

Okay. But it's sort of an offset for something?

This is all part of reallocating capacity as we close plants. It's not a --

Got it.

This is -- we don't see any upturn in wood production.

And did I hear you correctly in that you're roughly running today at 85% capacity utilization in Resilient wood and ceilings globally, US? Kind of help me out.

What I said was that when these plants get closed this year, and with the outlook we have, we -- in North America we will be over 85%.

Okay. And are they mothballed, Mike? Are they totally closed? I love your pessimism because I think it's a great way to plan. But in the event we get a little better climate and things start improving, what -- other than just taking these back up to 100%, is there an ability to bring some of these back online?

Yes. In most of the plants we -- the (inaudible) plants we just announced are idle as opposed to closed. So we can bring the capacity back on.

Okay. And then you gave a lot of numbers out and you probably alluded on this, but my brain is a little bit fuzzy. How do we look at -- if we're looking at flooring as a category, I know you're losing money in Resilient in Europe. I think you said you were making money in North America. Of course, you're losing some money in wood. How do we think about the rest of the year as you're adjusting? It sounded like you had two more flooring plants you were either closing this quarter or in the process of closing. How do I think about your ability, if your forecast is right on revenue for flooring, where do we -- do we break even on EBIT kind of the latter six months of this year? Just any color there.

Well, we should be profitable in North American Resilient. We should be profitable in North American wood. And so -- you know, for the rest of the year. The -- we will continue to be challenged as we go through our restructure in Europe. We expect to continue to have losses in Europe in the floor business. And we continue -- we expect to lose money in the cabinets business for the year.

But in Resilient North America we should make money. And in the floor business total in North America we should make money.

Okay. And then would the outlook for the losses, which you elaborated on a lot in the conference call a quarter ago, in Europe, would that outlook have changed for the worst, Mike, in the last 90 days, or is it about the same picture?

It's a couple million dollars difference.

Okay.

There's no significant thing. That isn't to say that they don't have their hands full in terms of market challenges. But you know, if you -- when you look at the sales decline, clearly the floor business in Europe did a lot better than you might have expected it to. And so we feel we've been pretty fortunate with respect to that. So there is some deterioration, but it's not material in the context of the Company. And it's offset by improvements elsewhere.

And then what is natgas as a percentage of COGS in the ceiling tiles business?

Okay. I don't know that number offhand, but my sense is -- my -- and I -- Beth's writing me a note this minute. So (inaudible). But I think -- you know, I -- she says it's about $80 million a year is what we spend on natural gas.

Okay.

So that's what we're spending this year and last year.

And then as I look at your free cash flow comment on Page 8, I think it was, being within 75% of $142 million, that puts you north of $100 million. That's for the year '09. And of course you're in the hole I think $45 million in the first quarter. So am I right in saying that the next nine months you plan to pay down debt by, say, $150 million, give or take?

Free cash flow is not before debt. But what we do anticipate is that we will have positive free cash flow in the second, third and fourth quarters.

Yeah. We generate a great deal of cash in the fourth quarter in a normal year. If the year, as we think it is, so the 2010 will actually be worse than the 2009, will generate more than normal from inventory reductions in the fourth quarter. But we tend to be very much a backend oriented cash generation.

Normally, a year for us, we'll use $90 million to $100 million in the first quarter and generate $150 million for the year. So we'll generate $250 million in the last nine months.

Okay. So but, Bill, I am looking at it correctly that if, say, the free cash flow figure for '09 is, say, around $100 million, it would actually be for the latter nine months closer to $145 million.

That is correct.

That's right.

Okay. Super. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Lavon von Redden of Hocky Capital. Please proceed.

Good morning. I wanted to focus a little bit on, I guess, the more commercial side of the business. I think you kind of mentioned WAVE, and you yourselves were pleasantly surprised with how that business was doing.

I think a lot of these projects are kind of going through and some of them are completing. I want to get your sense as to how you think that looks as we move into maybe 2010. Obviously you can't -- you don't know exactly what it's going to look like. But, you know, my thought is that a lot of the residential stuff is kind of bottoming out, and my only concern is that the commercial sides of the business may not be there.

We agree with you. I don't think we would say anything different. I'm a little less optimistic about the residential side of the stuff because I have -- I saw some very interesting analysis on foreclosures in the context of economic downturns and declining prices, in which said that, you know, in that instance, which has happened three times in the past, foreclosures were five to six times normal rates, and we're not there yet.

And so I'm a little -- I'm more pessimistic than residential than other people are. But there are indications that at least at some level people can buy stuff.

On the commercial side of stuff, you know, we think that it's going to be down in 2010. It won't be down as much as it is in 2009. So our plan -- our thinking is that it's -- you know, it'll be down in single digits in 2010 rather than the kind of nearly 20% that we see this year. So we're not very optimistic.

Now, the other side of it is when you look at us you have to remember that new is a relatively small part of what we do in the commercial business. You know, it's really -- at the highest segment of North America would be 30% -- would be -- 30% new, 70% renovation.

So we're much more affected by renovation. On the other hand, you know, new helps drive renovation. If an office building has to compete with a new building they renovate. On the other hand, if they're competing with empty space they renovate, too. So the renovation has some staying power.

But we're -- we wouldn't disagree with your notion that residential will do better than commercial and that commercial will be down in 2010.

And how does that impact your thoughts on what's going to happen with WAVE and its contribution to the business?

You know, we say, you know, if the market is -- if the market's off, WAVE will be off a little bit. It will continue to be a very attractive business. I mean, you know, it'll go from sort of unbelievable to extraordinary.

Okay.

I don't know if that's -- that may not -- that may be ill-considered. But you know, it's a terrific business in part because it has good products. It has good production. And you know, we participate in an industry where people want to make money as well as [grid]. You know, that's a good thing.

Thank you.

Sure.

Gentlemen, there are no questions in queue at this time.

Okay. Well, thanks very much, everybody. You know, we're really operating in a very challenging environment. You know, we say to ourselves and to all the people who work for Armstrong World Industries that we're lucky to be working for an industry-leading, profitable company with a conservative balance sheet.

You know, we face significant challenges like every Company, but we stay focused. We really believe that we can emerge from this a better Company.

Thank you for your interest. And as always, Beth will be available for your follow-up questions.

Thank you, ladies and gentlemen, for your participation today on the conference. You may not disconnect your line. Have a great day.