Armstrong World Industries Inc (AWI) 2009 Q4 法說會逐字稿

Good day ladies and gentleman and welcome to the fourth quarter 2009 Armstrong World Industries, Inc. earnings conference call. My name is Jeri and I will be your coordinator today. At this time all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Miss Beth Riley, Vice President Investor Relations, Communications and Diversity. Please go ahead, ma'am.

Thank you Jeri. Good afternoon, and welcome. Please note 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 afternoon are Tom Mangas, our CFO and Frank Ready, the CEO of our North American and Asian floor businesses. Hopefully you have seen our press release this morning and both the release and presentation Tom 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 Friday. 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 measures is include in the Press Release and in the appendix of the presentation. Both are available on the website.

With that I will turn call over to Tom.

Thanks, Beth. Good afternoon, everybody. And thanks for participating in today's call. In addition to our review of 2009 performance and our 2010 outlook, this is my introduction to you, the investment community. I joined Armstrong just a month ago, and in the very best tradition of baptism by fire I will be conducting today's call. I certainly look forward to meeting each of you in person in the months ahead.

Mike Lockhart has been a phenomenal leader for Armstrong over the past decade and I was sorry to only have a month in February to work with him. Nonetheless I remain enthusiastic about Armstrong's business and share the Board's confidence in the broader leadership's team.

As you may know, I came to Armstrong from P&G where I spent my career to date in a series of finance roles. I was most recently the CFO of their $28 billion beauty and grooming business. I had both domestic and international responsibilities and experiences. And I hope my expertise and tough cost management, exploitation of new growth opportunities and organization development in particular, will provide value at Armstrong.

I must say that my first impressions of the business and the organization affirm my decision to join Armstrong. I'm impressed by the passion and commitment of the Armstrong organization to deliver high quality, innovative products with great service and value to our customers. The entire organization possesses a firm commitment to strong principles and values grounded in almost 150 years of doing business under the Armstrong name.

Finally I have been positively surprised by the level of data base and analytical rigor that goes into decision making here for the benefit of shareholders and all our stakeholders. I am thrilled to be a part of this team and am very confident of our ability to build shareholder value in the years to come.

Now, let me turn to the business. I will first recap our performance of quarter four and then share our 2010 outlook and assumptions before opening the call for your questions. In total, we were pleased with our fourth quarter performance in the context of what remained a very difficult environment. We believe we continue to outperform competitors in nearly all of our businesses, while continuing to take costs out of the business, and generating significant cash flow.

Like everyone else, our macro experience was largely more of the same. Our commercial markets continue to decline at double digit rates. Ceilings volumes were down 17%, floors slightly less than that. Our residential market showed erratic potential of bottoming against very easy prior year comparisons. Residential resilient grew share slightly from new products. Conversely, cabinets volume was down about 10% due to their significant exposure to multifamily construction.

The primary trends we talked about all year continued through quarter four, volume decline and weak markets. Sustained weakness in most markets compressed the opportunity to realize price and contributed to trading down and reduced product mix. We continue to execute the things we can influence to offset margin-related volume declines, manufacturing, SG&A expenses, and working capital.

This included closing a cabinet's plant in December, continued head count reduction, where we were down 11% year-over-year, and driving productivity in everything we do.

Now, let me turn to a more complete review of the past quarter's financial results. I will refer to slides that are available on our website.

Net sales on the quarter declined 10% on a constant exchange basis. Factoring in the impact of foreign exchange, sales in the quarter -- sales declined by 8%. This sales decline compares against quarter four 2008 where we experienced substantial distributor inventory destocking, particularly in floors. We believe this destocking impact in the base yielded a 2% positive impact on sales for the quarter. Despite the decline in sales, adjusted operating income grew by 14.5%, translating into earnings of $0.22 per share. Free cash flow was $53 million and our year-end cash amount exceeded debt by $97 million.

If you move to the next chart, let me briefly review the key adjusting elements that explain our adjusted operating income results compared to reported net income. The most significant item in quarter four was a charge of $21 million for asset impairments, largely related to our Bruce and HomerWood trademarks.

As you can see in the chart, we took a similar, though larger charge against these brands in 2008 reflecting our ongoing assessment of the value of these trademarks. In addition we incurred $6 million of charges in order to drive further cost improvements including the decision to permanently close the Nashville wood facility, and the Auburn, Nebraska cabinet plant.

The next slide shows changes in fourth quarter sales and adjusted operating income by segment. The flooring business delivered strong operating income growth despite the decline in resilient and wood flooring sales. Building products continued to suffer from market contractions in the commercial building sector with sales down 16% and adjusted operating income down $15 million.

Like our competitors, we saw some moderation in the residential home building and remodeling side of the business, while the commercial sector continued to struggle with significant market contraction. Pricing in the quarter was down slightly versus 2008 after three quarters of favorable price performance as price competition became more aggressive and we anniversaried increases in building profits from early November 2008.

We will continue to seek price increases to offset inflationary pressures when possible or respond to aggressive competition with targeted dollar price adjustments when necessary to defend share.

Moving to the next slide, strong cost control and favorable material and energy commodity costs help offset the sales short fall as you can see in our bridge of adjusted operating income for quarter four 2008 to quarter four 2009. Volume, price and mix contributed nearly $43 million of operating income decline with each of the businesses -- business segments experiencing lower volume versus year ago.

Mix was favorable in building products but partially offset by mix hurts in wood and resilient. As I mentioned before, negative price impacts were mostly driven by building products as we anniversaried their price increase and as we have had to take targeted price reductions to remain competitive.

Input costs from lumber and petroleum based ingredients such as PVC and plasticizers declined year-over-year and provided a substantial offset to the volume impact on adjusted operating income.

In addition, productivity efforts contributed $16 million of overall improvement. This was primarily a product of the manufacturing footprint rationalization actions we took in 2009, including idling facilities in our resilient, wood, and ceiling businesses at Montreal, Vicksburg, Mississippi, and Mobile.

Slide six shows how we generated strong free cash flow in the quarter. Working capital improvement was the disproportionate contributor as we continue to sell off inventories and manage receivables consistent with the sale declines we have experienced. And as we continue to improve inventory turns, days outstanding and payables outstanding.

We closed the fiscal year with quarter four inventory turns at 5.6 and days sales outstanding at 37 days. WAVE dividends declined $28 million as a result of the special dividend in quarter four 2008 that was not repeated.

Slide seven shows the full year key measures. Net sales declined 15.6% to $2.7 billion at the midpoint of our guidance on a constant foreign exchange basis. Operating margin declined 180 basis points versus the prior year as cost improvements could not offset the sales decline. Adjusted earnings per share finished at $1.41 at the high end of our estimate, but down $0.84 from 2008. Free cash flow finished at $211 million, significantly exceeding our guidance.

Though hard data is difficult to obtain, we believe we built share in both floors and commercial building products over the last year.

Turning to slide eight, this compares our adjusted operating income results for the year to 2008, and shows how we get to a net income of $78 million for the full year. Similar to our discussion on quarter four, the trademark impairments and cost reduction initiatives drove the majority of the differences in both years along with the impact of the accelerated stock-based compensation expense.

Let me use this opportunity to remind you of the dynamics that are generating an extremely favorable effective tax rate in 2009. You will recall from our quarter three earnings call, Bill Rodruan explained the $46 million tax benefit we booked associated with two US corporate income tax items as a result of the IRS finalizing their audit of our $170 million ten-year carry back tax refund.

First, $36 million in IRS audit-related tax benefits from foreign exchange credits. And second, $10 million in interest which we would have had to pay the IRS if a portion of the refund was disallowed. Obviously, this benefit results in our overall help to net income.

Slide nine shows our fiscal year sales and adjusted operating income by segment. Each of the four business segments saw double digit sales declines for the year, consistent with what we talked previously. Volume decline, driven by steep market declines, drove the negative results. Pricing and mix were essentially neutral across the units, so mix was negative on the year in flooring as consumers traded down. Operating income improvements in resilient flooring essentially offset losses in wood flooring leaving the bulk of the year-over-year decline in operating income attributable to building products.

Slide ten shows the bridge for operating income for the full year. Favorable raw material and commodity energy costs influenced by similar macro economic market declines contributed favorably by $91 million to operating income. Manufacturing footprint rationalization, productivity improvements, and overall head cost reductions contributed another $61 million.

WAVE, our Worthington and Armstrong joint venture contributed $16 million less versus year ago driven by a commensurate reduction in bridge sales following the ceiling tile market. Price and mix were essentially neutral for the full year taken together. Unlike 2006 to 2008, when our pricing generally matched material and energy inflation, 2009 was unprecedented, in that we were able to hold prior year pricing and mix gains on average for the year at a time when commodities were declining.

That said, pricing taken in 2008 eroded through 2009, as commodity prices declined and competition elected to fight more on price. We remain committed to defending our market shares and responding to pricing actions by our competition.

Slide 11 shows that we are -- that working capital delivered significant free cash flow improvement. We enjoyed year-over-year contributing $154 million of cash improvement as we took significant inventory and receivables out of the system. Lower cash earnings and a lower cash contribution from WAVE dividends as described earlier were the big negative building blocks year-over-year.

I would now like to turn to guidance for 2010 starting on Slide 12. From an overall market perspective, we expect 2010 to be another down year for commercial construction and remodeling. Overall we are expecting North American commercial markets to decline roughly 10%.

In North America residential markets we expect a pick up in housing starts. However, given the timing of the starts, the lag effect we experience between starts and when we benefit in sales, and our belief that remodeling and renovation activity will decline 4%, we see our residential market driven opportunity declining by 5%.

We recognize that we remain relatively pessimistic about the outlook for residential. This caution is grounded in the things you have heard us discuss before. Growth in housing starts is uncertain due to the potential for further significant foreclosures, unsold home inventories, and expected mortgage rate increases as Government support goes away.

Factors influencing renovation spending remain mixed. Unemployment levels, household income, reduced homeowner equity and more limited access to it are negative forces. Despite what we saw in January, existing home sales in what is broadly believed to be significant pent up demand, may be positive.

As a result, we expect 2010 sales to be between $2.65 billion and $2.85 billion. Adjusted operating income is forecasted to be in the range of $135 million to $165 million, compared to $156 million in 2009, when adjusted for the foreign exchange assumptions we are using for 2010. 2010 adjusted earnings per share is expected to be between $1.20 to $1.50 per diluted share compared to $1.43 per diluted share in 2009.

As the adjusted operating income ranges indicate, we expect 2010 to be very volatile as commodity material costs begin to turn unfavorable versus 2009 while pricing remains weak. As you know, we announced late in January price increases of 4% to 6% in the US and Canada on select hardwood, commercial sheet vinyl, linoleum, and residential sheet and tile, an 8% increase on vinyl composition tile, effective with shipments March 15th.

Due to competitive reactions we were forced to delay increases on resilient products. Similarly on building products we took effective February 1, a 5% pricing on ceilings and grids in US and similar pricing actions in Canada, and the UK in February and March. Holding wood and ceilings pricing and coming back on resilient is critical to our 2010 plans and life of anticipated input costs.

We will benefit in 2010 from the restructuring efforts already announced and further manufacturing and SG&A cost reduction efforts. We intend to continue to invest in our brands, and in product innovation so that we are better positioned to win when the market growth returns. We recognize this is below the current consensus.

However, we believe that these plans and our investment profile against strategic initiatives will yield a better long-term, value-creation opportunity for Armstrong shareholders, rather than trying to show faster cyclical improvement than the construction remodel market can support. We remain committed to achieving the goals we shared with you back in July to deliver growing operating margins of 10% to 12% by 2012.

Slide 13 shows some of the key assumptions and investments underpinning our estimates. We expect to maintain our manufacturing margin in 2010 as a result of our previously implemented manufacturing footprint rationalization program and productivity efforts, despite the sales decline, and head winds on commodity costs of roughly $10 million to $20 million.

We have approximately $10 million in higher costs spread through manufacturing and SG&A due to a reduced pension credit in 2010. This is a result of a lower estimated result on assets in our pension plan, and higher amortization of unrecognized losses in our pension assets due to the financial markets decline in 2008. This is a non-cash item.

Importantly, we intend to make strategic investments through SG&A in order to accelerate priority efforts, including geographic expansion and further value chain restructuring including a new focused effort to bring lean manufacturing practices to our supply chain worldwide. We believe these initiatives will position us well for the inevitable market recovery and generate returns well above the cost of capital over the long term. Though, they will likely be dilutive over the next 24 months. Even with these investments we do expect SG&A to be essentially flat year-over-year on a normalized basis as we continue to take other overhead costs out of the business.

We expect the earnings from our WAVE JV to be flat to down $10 million following the softness in the commercial ceiling's market.

In terms of cash taxes and the effective tax rate, we expect cash taxes to remain quite low at about $10 million. With our net operating loss carry forwards in the US we expect to continue to shelter earnings through 2012. We estimate the net present values remaining net operating losses to be around $130 million.

We expect our effective tax rate for 2010 to be in the range of 45% to 50%. As you have heard before, the effective tax rate is exacerbated by unbenefited foreign losses. Those unbenefited losses increase the effective tax rate in 2010 by about 10 points. That said, we will continue to use an adjusted effective tax rate of 42% for comparability purposes.

In terms of phasing of adjusted operating income across the quarters, we expect a similar pattern in 2010 as we experienced in 2009, with the exception of quarter three likely coming in lower as a percent of the total year. We expect to spend roughly $125 million on capital in 2010. This is up 19% versus 2009, driven by incremental investments to support our initiative programs and further footprint restructuring.

Like 2009, our 2010 capital spending will skew toward more investment and initiatives than our past historical pattern of three-fourths for maintenance and one-forth for initiatives. Depreciation and amortization will be down about $25 million in 2010, as fresh start assets that were assigned three year lives have now been fully depreciated.

We intend to exclude from our adjusted operating income roughly $11 million for executive severance. You will find further reconciliations to GAAP measures for quarter four and the year in the appendix for the total Company and the segments.

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

As you can see by our guidance and our investment profile, we are focused on long-term value creation. This is an exciting time for Armstrong despite one of the most challenging economic environments most of us can remember.

As I close, I want you all to know how confident the entire leadership team is that we have the clear potential to make the next decade one of the best for our shareholders, our employees and our customers in Armstrong's 150 year history.

Now, we will be happy to take your questions.

(Operator Instructions). Your first question comes from the line of Keith Hughes from SunTrust. Please proceed.

A couple of questions on the hardwood segment. We've seen some nice margins for two quarters in a row in the 8% range. Is that a sustainable number in the future if sales are roughly where they are right now. Is there something unusually good there? Just any sort of view on that in the future.

I think the key, Keith, will be as lumber inflation continues to get more intensive in 2010, what's our ability to cover that with price. We have gone out with a price increase announcement of 4% to 6% that's effective in mid-March. And, we will see what competitive reaction is going to be. But I think the key for us will be our ability to cover with price against that lumber inflation in 2010.

That would be a good number if you are able to cover it. Is that what you are saying.

Yes.

Second question on the cash flow guidance, even with the lower depreciation, still looks like you have a lot higher number than that based on your EPS range. Can you just -- besides the EPS range which we have walk through the other elements of cash flow expected in the quarter? Or the year?

Yes. The -- if you can start with our operating income estimate of around $140 million the range of $135 million to $155 million. We take off about $120 million to $130 million of, pardon me, $110 million to $120 million of depreciation and amortization. Take off the capital expense we said and the pension credit. You will get pretty close to it.

The working capital improvement really on a year on year basis is in the 10 to 20 range which was a massive contributor in 2009. And just at the levels we are at now with the softer business, we don't see a lot more progress on working capital, which was the hero of 2009.

If you are working on from net income though, which is normally how most of those equity guys do it, you should be running $70 million to $80 million of net income. This is a slight degradation from capital expenditures being above D&A but with that and the tax credit, just seems like you would be a lot higher. Why don't I talk to you offline and we'll --.

Yes, I think we feel pretty confident that we've got the range about right and we will work it off line then. Thanks Keith.

Your next question comes from line of David MacGregor with Longbow Research, please proceed.

Good morning everyone or good afternoon. Tom, welcome.

Thank you.

Is there anyone on the call that can speak to strategic issues. Mike's gone, Nick's gone,

I will try.

Well, what changes here? Will you explore the sale of the Company or substantial portions thereof? Will you revisit the strategic issue from a couple of years back? Where is Company going now with the change of management and help us understand the big picture here.

I think, one, I didn't come on board to sell the Company. As I sat with the Board last week we had our first board meeting. It was clear to me that the Company wants to grow and they are looking for new opportunities to grow and continue to drive costs out of the system.

I don't interpret Mike's departure as a significant change in strategy. Certainly, the things we are working on in the next months and quarters are all focused on how to jump start growth. As I did a review of the business really since 2004, the business has not been able to generate volume growth since then -- even before the economic crisis.

So I think we will be talking about how do we drive more growth in the business, and then benefit from the cost restructuring that we have done in order to get full leverage out of that growth. Certainly, as I come on we will be reviewing the portfolio to see if there are elements of the business that makes less sense in that future but I would not interpret Mike's departure as a significant change in our strategic direction.

Okay. Thank you very much.

Your next question comes from the line of Jim Barrett with CL King & Associates. Please proceed.

Good afternoon, everyone.

Hello, Jim.

Yes, Tom good luck in your new position.

Thank you.

I really just had two questions. The first would be a follow up to your last answer. In terms of growth opportunities is the Company seeing greater growth opportunities in terms of acquisitions or in terms of expanding the product line into underdeveloped markets?

I would say we certainly see the opportunity in underdeveloped markets clearest. We have got an operation -- we have the operations in China, we are selling into Russia and we see tremendous upside there also India. So we have great presence in many of the Brit countries and see tremendous growth opportunity, both in flooring and in ceilings there. And simply need to, develop a path to access it faster.

In terms of adjacencies or new product categories, we really haven't explored that. Again, I've been here a month, I haven't explored that with the Board. It is probably not the first thing that we are doing is expanding our product portfolio to new areas of building products or residential products.

But it is certainly something that I think over the next five to ten years, we have a great infrastructure here. We have terrific selling organizations. So we ought to look for ways to leverage that in the fullest way. But it is not something that I think we will be out aggressively pursuing in the near term.

Then on an unrelated note, the targeted price cuts that building products was required to make. Is that broad based geographically or is it differing between the US and Europe?

I can't speak specifically to Europe. I would say that most of our -- we are a bid based, project by project based business and also geographically focused. So I think most of our price cuts were generally targeted and mainly in response to that.

Your next question comes from Dennis McGill with Zelman. Please proceed.

Good afternoon, guys. Thanks for taking my questions.

Hello, Dennis.

Continuing on the theme in ceilings, something that you guys have always described as a competitive advantage in that space is obviously a consolidated nature in pricing. Competition had not been very prevalent; even the volumes had been down through much of the year. And I know you highlighted the difference with some the raw material changes.

But can you talk about what's happening specifically within maybe North America since you're more familiar with that as far as the pricing goes? And if that structural industry benefit that you talked about where pricing was more protected if you think that's changing because the non-res downturn turning out to be more significant.

And, then kind of along the same lines, if you need the 5% increase to protect margin as we go into 2010 and things are still very competitive, what's your view on the success of that going through.

It is Beth. I don't think that there's anything programmatically that has changed in the price at this point in the industry. It is more a slight erosion that reflects the fact that this is a downturn of unprecedented degree. But so far, as far as the price increases that we've put in place now we are seeing those start to take hold with both ceilings and grid. So we are cautiously confident that we should have success going forward.

So is your expectation as you think about 2010 that the incremental margin or decremental margin relative to the volume declines would look more like the first three quarters of the year than the fourth quarter.

Yes.

Okay. And then, second question would be in resilient flooring. Last quarter you guys had talked a lot about the European business getting back to profitability which was sooner than what you had thought. Can you just talk about where that business is and the profit cycle -- how fourth quarter compared to your expectations and maybe give us a little color on what your thoughts are in 2010, if it's based on different levels of volume I suppose.

Sure. First I'll say that the European resilient business came in slightly ahead of our expectations in the back half and including quarter four. They're still negative but significantly less negative and better than we thought despite sales being down beyond our plan going into the quarter.

We remained confident in their capability to continue to improve. We generally believe it will get better by about 50% in the coming year. And really it is a matter of trying to take the costs out. We know why we are uncompetitive there -- it is a highly overcapacity market.

We believe our best path forward likely is further plant cost rationalization. And, ideally, if we could find the right partnership, we'd make a partnership there. But we are generally pleased with what we are seeing and continue to work with the teams to make it even better.

Just to clarify in terms of Q3 versus Q4 -- Q4 is seasonally the weakest quarter for that business. So we always see margin contraction as we did last year.

Right, so if in the third quarter you were marginally positive or close to break even fourth quarter seasonality causes you to lose a little bit of money.

Precisely.

For the full year 2010, it could be a break even business or positive business?

No.

We're not anticipating that.

As Tom said, we look to cut that loss by about in half in this year. What remains is to take the manufacturing costs out and that has a much longer tail. We are still committed to what we originally committed to which is to hit a break even rate by the end of this year.

Okay. What was the dollar loss for 2009?

It was about 25.

Okay. And then just lastly, I guess broadly speaking across the businesses, I don't know if your guidance explicitly breaks out the benefit of prior restructuring actions or some of the cost cuts that you guys had put in place. How should we think about that within the -- I guess it would be embedded in the manufacturing productivity. What type of savings are you guys expecting to realize from prior actions?

Yes, I would say the number is in the $15 million to $20 million of savings and that's what is generally allowing us to offset the commodity pressure and maintain the neutral margins.

Okay. And within the guidance, there's no further expectation for additional cost cuts that haven't been implemented yet?

There are some. Although the ones we have announced so far are by far the biggest contributors in 2009. Any more that we haven't announced, pardon me 2010, anymore than we haven't announced won't have that big of an impact on the current year call it in the three to seven range.

Okay. All right. Thanks for all the help, guys.

You're welcome.

Your next question comes from the line of John Baugh from Stifel Nicolaus. Please proceed.

Good morning, welcome Tom.

Thank you.

I guess it is afternoon. I'm so used to mornings. Can we just be clear on the pricing assumptions. Particularly, well we can go through every segment, but I want to be clear on what the thought process is in the guidance. In other words, with the ceiling 5% hold or you just assuming only 2% or 3% of that holds or will be the wood increase fully hold or some small fraction on it or none? Any clarity or help with what you are thinking and for that matter as well, raw materials, the offset.

I will speak for ceilings first. We have announced 5% and generally our yield is we get about two-thirds to about half of it to stick. As we sort back promotion spending and other forms of price gifts. So we haven't counted on the full 5% to stay through but we intend to stick with the pricing plan we put out there.

I will let Frank speak to the floors.

Hi John, how are you doing? On resilients, we did announce but rescinded because competition didn't follow. So as of right now, we have no increased announce for resilients. We are going to see what transpires here over the next couple of months.

On wood, as I mentioned, we announced four to six, and typically we'll get about half of that to stick. If we get half of that to stick, then we'll feel ok given where lumber is today. If lumber continues to go up, we will have to come back with a second announcement later in the year.

Frank, give us some kind of a feel for what raw material and resilient and wood have gone up.

Lumber has probably been the most significant, John. If you go back to mid last year, it probably hit its low point in terms of cost per thousand board feet. If you look at the hardwood market report, it would have reported that around $410 per thousand board feet. Right now, that's approaching $490 per thousand board feet.

So it's gone up rather dramatically, impacted by weather. You can't get in and log the forest in ice, snow, and rain. That's had a big impact as well as saw mill capacity has been taken off the market through this downturn where guys just couldn't make it.

What would be the drag in '10 on resilient if you weren't able to get any pricing relief for the whole year, Frank. And your raw materials stayed at the rate they have elevated to today.

Order of magnitude is mid single digits in terms of margin impact.

Okay, so it's pretty big. And then I know you said, you'll give the building blocks offline on cash flow, but I think everybody has got some questions about that guidance number. So I think it would be helpful and maybe take a second and walk through those building blocks again quickly, please.

Okay. Basically we're starting off with our operating income estimate on the year. We have got we about $110 million to $120 million of depreciation and amortization to add back. We've got about $125 million of capital we told you is coming off. We have that pension credit that's sitting in our operating income that we have to back out of this, which is probably the big adjustment factor that you guys may or may not be counting -- about $50 million. We have got our interest expense --.

$50 million or $15 million, Tom, 50?

5-0.

Okay.

5-0. Interest expense, some one-time expense we have taken out of our operating income related to severances that I told you about. So interest expense is around $15 million. We have got the one timer severance of around $11 million. And then there's between post-retirement benefits, foreign pension plans, cash, taxes that's the balance of it.

Okay. So it sounds like the severance, post-retirement and the pension are the big numbers that make that gap bridge. Was there any discussion that you can share with us at the board meeting or otherwise with the net cash position now, and the building cash position as to what you may or may not do with that?

It wasn't too long ago, when people were thrilled to have a ton of cash and I know that's some of the posture we have been taken going through the crisis. Certainly, things have become much more liquid externally. And, certainly we are not here to accumulate tons of cash and eventually we will have to find a way to either pay down our debt. We have got total debt still between our revolvers and term loans of about $470 million.

And, we do face a maturity on our term loan A in October of next year. So, we are thinking through what is the best way to handle that maturity. And also what cash do we want to maintain for investments if we find great ways to expand in developing markets or adjacencies. And then finally repatriate to shareholders.

We did not discuss it with the Board. We had a lot of other things to work on as you can imagine with the Board and that is something we will need to prepare. One of the things I am focusing on in the next months ahead is what to do with the balance sheet in order to get maximum value creation and also make sure we are delivering on shareholder's expectations for that cash.

Okay, thanks. My last question is just relating to the remodel forecast, I think that we said negative five on that number and that would be I presume, consensus forecast. And a little counter to what some of the home center chains are saying and some of your flooring competitors are saying about the remodel replacement market showing bottoming.

Are you seeing something specific in your orders in the first quarter that lends you to be cautious there? Or are you just conservatively nature or what are you assuming that's going keep that number down for the full year at that rate?

As Tom mentioned, we tend to be somewhat on the conservative side in terms of our outlook. And right now when we look at our orders, they're pretty consistent, if not slightly better than that outlook that we just articulated.

But for all the reasons Tom mentioned around high unemployment, equity, lack of equity in homes, we believe it is going to be slower rather than faster recovery.

Great. Thanks for the color. Good luck.

Your next question comes from Robert Kelly of Sidoti.

Thanks.

Hello Robert.

Question on the fall through margins in building products. A little bit worse than we saw thus far in '09. Is there a way to quantify how much price discounting hit you there.

Yes, certainly, the fact that we had consistent price erosion over the year since the original price increase in 2008. It is a contributor to the disproportionate fall through. I don't know that I can specifically quantify the difference.

Would that be the majority of the difference in 4Q?

Yes, it is the majority of what drove the differential in the fallthrough, yes.

Okay. Great. And then as far as the comments on resilient flooring -- hoping to halve the loss in 2010. How would that phase in? Would it be similar throughout the year, would you be profitable again in 3Q10, just some thoughts on how resilient flooring would play out?

I couldn't quite hear the question. Was it resilient where?

The resilient flooring, you are hoping to halve the loss in 2010? Just a question about phasing -- would the loss be 1Q10 half of the 1Q09 loss? Do you expect to be profitable assuming flat demand in 3Q '10 just how that would play out.

Okay. I would imagine it will get sequentially better over time. We do have still a somewhat a tough O&D quarter. It probably doesn't all wash out in O&D, but certainly the first quarters probably look better relative to the first quarters we had in 2009.

Understood. As far as if demand plays out as you expect it in 2010, the fit capacity you have in place. Any changes that you would make and what would be the trigger to maybe cut back more?

I would say based on the idling and closures that we have made to date, and with accruing that we have put in place behind that, our capacity utilization on a scheduled basis is not too bad. We are at a between 70% and 80% of capacity. And if the market plays through on that we might have one closure still ahead of us in the current year but if things get weaker we will have more.

And we are constantly evaluating what is the right footprint to have, both from supply chain logistics as well as just demand by product form. We don't have anything yet to announce, but feel like we don't have a lot more to go at the current volumes save maybe one other plant closure.

Thanks.

(Operator Instructions). You do have a follow up from David MacGregor with Longbow Research. Please proceed.

Just a question on market conditions in the flooring segments. Clearly there's been some trouble getting traction on pricing and I realize it's a pretty weak environment. Are imports becoming more of a factor and I realize we've had a weak dollar here. But are you seeing more imports competing for share and that's an impediment to price success.

On the resilients side, no. Imports in term of their degree of impact on the business hasn't really changed at all. What I spoke to earlier about trying to give price on resilients, that was all relative to actually domestic suppliers.

On the wood side, we have not seen a significant increase in imports and I think a big reason for that is the trade off between maybe getting a little bit lower price import but significant cash tied up in inventory and working capital that many customers and distributors aren't willing to make today.

So my comments about pessimism on price are really around the resilient business. I think we will get what we need on the wood side. Resilient we did announce and did have to rescind but that was around domestic competition not global.

Any resolution on could bring us up to date with what is going on with Congoleum. Are things improving there for you at all?

In terms of -- they're still working through their bankruptcy. They've announced that they have seen some positive movement in that bankruptcy. The impact of that in the marketplace to this point has really been a non-event.

Great. Thank you very much.

Your next question comes from the line of Justin Boisseau from Gates Capital Management. Please proceed.

Hi. Thanks. I got -- I heard some of the earlier comments about your uses of cash. What's your targeted leverage ratio now looking forward into the future?

We ended the quarter on leverage of EBITDA of 1.8 -- that's quarter four. And so, we will continue to stay at 2 or better over the next several quarters would be my expectation. Is that the question you were asking?

I was saying, really asking longer term, what sort of leverage ratio would you be comfortable with.

I have to tell you, Justin, I haven't been a CFO over for a month. That's one thing I haven't figured out yet. I need to study that with my treasury guys and talk to some banks to see what's ideal and also dialogue it with the Board. I am not in a position to frame out what I think is the best balance sheet structure for the Company yet. But give me a few months -- maybe a quarter to sort that one out. I think it is an important question for us to answer.

Understood. Thanks.

Your next question comes from the line of Sherman Chao with Impala. Please proceed.

Good afternoon. Thanks for having the call. Just a clarification on the cash flow items and your pension. My recollection was that you had a pension asset not a liability on a net basis. If you could just clarify that for me. And then two, as far as the pension contribution, you just mentioned the $50 million for 2010. Can you square that with my recollections of what your net pension asset and liability position is? Thank you.

The US pension is an asset as we are receiving a pension credit which is a help to operating income and our earnings, which is not an adjusted item. And now as that credit is get getting smaller, year-over-year, which is causing the earnings impact we described in the guidance.

I see. That's why you have the deduction from the (multiple speakers).

Exactly.

It is a non-cash.

Exactly.

Thank you very much.

Thank you.

This concludes the question-and-answer portion of the conference today. I would now like to turn the conference over to Miss Beth Riley for closing comments. Please proceed.

Thanks. Just want to thank you all again for joining us. I know we had a little bit of unusual timing in our reporting this quarter. So I appreciate your flexibility in accommodating us. And as always, I will be available for follow up calls. Thank you.

Thank you very much.

Thank you.

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