Armstrong World Industries Inc (AWI) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q1 2010 Armstrong World Industries Incorporated earnings conference call. (Operator Instructions)

I would now like to turn the call over to Beth Riley, Vice President Investor Relations, Communications and Adversity. Please proceed, ma'am.

Thank you. Good afternoon 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 afternoon are Tom Mangas, our CFO and Frank Ready, the CEO of our Worldwide Floor Businesses. Hopefully, you have seen our press release this morning and both the release and the presentation Tom will reference during the call are posted on our web site in the Investor Relations section.

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

With that I will turn the call over to Tom.

Thanks Beth. Good afternoon, everybody, and thanks for participating in today's call.

Before reviewing the quarter and our updated outlook, I would like to address a few questions that I know must be top of mind. First, our search for a new Chief Executive Officer is progressing well. A search committee of several Armstrong directors led by our Chairman of the Board, Mr. Jim O'Connor, is conducting the search on behalf of the Board. Heidrick & Struggles has been retained to facilitate the recruitment process. Interest in the position is very high, and the committee has cast the net wide, interviewing a number of extremely well qualified candidates to date. As you can imagine, the changing Board composition, as reflected in the slate of five new Directors standing for election in July, has added an extra step in the process. Based on the current plan, the Board has indicated they hope to announce a new CEO by early summer.

In the meantime, the management team has worked aggressively to drive the business forward with speed and agility. We have begun an effort to renew and focus our strategies working closely with the Board to ensure we are aligned in our priorities. While we are still working through the full scope of the strategies, you will not be surprised by their focus on our core businesses, building products and floors, and on getting our cost structures even more competitive through lean manufacturing process improvement and in SG&A to prepare for the eventual upturn in the markets.

First, let me describe, describe our efforts in a little more detail to reduce costs by applying lean. During the first quarter Armstrong completed four proof of concept pilots to determine the potential opportunities associated with a lean transformation. The pilots have resulted in significant improvements in safety, quality, delivery, and costs. In 100 days we have been able to implement significant productivity improvements ranging from set up, down time, and energy reductions while improving yield and on time delivery performance. Our focus on lead time reduction is not only driving productivity, but it is also improving our working capital associated with work in process, and finished goods inventory. At the heart of the lean transformation, is taping into the creativity and knowledge of all of our associates which is accelerating our rate of improvement. As a result of these successful pilots we have launched a global lean transformation focused initially at our manufacturing supply chain operations with a vision to roll this out enterprise wide. Through the aggressive adoption of lean practices and manufacturing, in purchasing, and in SG&A, through projects to standardize, simplify, and eliminate unnecessary activities and spending, we are seeking to remove at least $150 million of costs, by 2013. In the interest of managing expectations, progress towards this goal will be reflected in future guidance as appropriate, but may not be discretely reported. Please be aware that the attainment of this, or other any goal, is subject to internal and external risk factors and potential head winds, like inflation, as mentioned in our 10-K and 10-Qs.

Next we hope to accelerate our core business growth domestically, and importantly, internationally. You see the seeds of this in our progress in emerging markets this quarter where we have maintained our investment through the global economic downturn. Sales to Asian and Latin American markets represent less than 10% of our sales today. We would like to grow this share significantly by 2013. To support this goal, we have secured the Board's approval to build a new, vinyl flooring plant in China to support our growing businesses there. We expect to begin construction in late 2010 for an opening in 2012 to support this critically important market for us. We expect to invest $40 million to $45 million in capital to build this, with spending beginning in 2010 and lasting to 2012. That said, we do not intend to get too far ahead of ourselves in new markets until we can demonstrate the ability to win and be profit in the markets we are already in. To that end, we will be focusing on improving the structural profitability of the European flooring business where we continue to make progress, though not as fast as we would like. In Q1 2010, we cut our losses in half, from $15 million to $7.5 million, versus Q1 2009, on sales that were 7% lower. Still, we continue to bleed in Europe and are on a path to find value creating ways to stay competitive in the market, with margins that, at minimum, return the cost of capital, and we want to get there faster.

Similarly, we intend to improve margins on our cabinets business through further manufacturing and SG&A savings, as we have now fully consolidated manufacturing to one plant and have established a more efficient selling strategy to drive growth with our target customers. Despite operating losses this business has been, and continues to be, cash positive despite sales being down roughly 40% since 2007. Eventually, we will want to more practically consider acquisitions in our core segments internationally and domestically as well as near adjacencies. In the near term, however, we have plenty to do to improve our own current core businesses and are not looking to make a big acquisition. That said we would not necessarily walk past a great opportunity, even if the timing was not perfect. Unfortunately we have no control over when assets come up for sale, as you well know. Of course a new CEO will want to put his or her imprint on our strategy and we intend to use the next couple of months to refine our plans and continue to solicit Board input, but I am confident, as is the Board, we are heading in the right direction.

Let me talk about our balance sheet. As with many companies, Armstrong adopted a conservative approach to cash management during the financial crisis in 2009. As such, we currently have an extremely conservative balance sheet, with cash exceeding debt. We recognize that this is not an ideal long term capital structure, but for for several reasons we are comfortable with this structure for the immediate future. We have large capital projects in the coming years such as our previously announced mineral wool plant in West Virginia and now the new Vinyl plant in China. Our end markets are still weak, and the majority of our credit agreements become current in Q4 of this year. We have begun discussions with the Board on various refinancing opportun-- alternatives and plan to address these maturities in 2010.

Longer term, we will balance corporate needs and returning cash to shareholders. Barring any strategic actions we intend to manage Armstrong's balance sheet in a conservative fashion and are comfortable at our current credit ratings for the near term. This implies maintaining long term leverage at less than three times EBITDA. We believe that given the cyclical nature of our industry, having ready access to capital is reasonable and prudent.

Moving now to the quarter, I will be referring to the slides available on our web site starting with Slide two as Beth has already covered Slide one. Our first quarter results show that our strategies to reduce costs, invest to grow in emerging markets and preserve cash in what is still a very difficult market for building materials, are working. Armstrong's core markets continue to decline, in the first quarter versus Q1 2009. Though the rate of decline seems to be abating somewhat. As a result, sales in the first quarter were $670 million, or down 4% versus a year ago, at a constant exchange rate. With the effects of foreign exchange included, sales were down only 1%. Despite that, the Company delivered $27 million in adjusted operating income exceeding year ago by $24 million through significant manufacturing and overhead cost reductions. We are establishing the right cost platform that will enable us to reach strong earnings and sales growth, once our markets begin to turn favorable.

Operating income margin grew 360 basis points versus year ago, and essentially held flat versus Q4 2009. Adjusted earnings per share grew to $0.24 versus a loss of $0.01 in Q1 year ago. Against free cash flow, we used $30 million of cash, which was $15 million better than Q1 last year. As you know, the first quarter typically is our heaviest cash consuming quarter as we begin to rebuild inventories from the winter lows in anticipation of the spring construction season. As a result of this cash performance, our cash on hand balance exceeds outstanding debt by $59 million.

Slide three explains how you get from our adjusted operating income of $27 million to a net as reported loss of $19 million. The biggest driver is the executive severance relate to the departure of our CEO announced in February for $11 million. And we took charges related to closing our St. Gallen Switzerland metal ceilings facility and discontinuing our airplane operations, totaling close to $4 million. These charges were offset by a gain on property sales also associated with the St. Gallen closure.

Finally, we took a $22 million non-cash tax charge due to the US Health Care Reform Bill enacted in the first quarter. As you recall, this Act changed the tax-free status of the Medicare subsidy provided to employers, that provides prescription drug benefits to retirees effective January of 2013. We had previously announced this in an 8-K filing on April 6, 2010.

Moving to slide four, this provides our sales and adjusted operating income by segment. As you can see, resilient flooring, building products and cabinets experienced declines between 11% and 3% reflecting the continuing underlying market weakness. Floor -- wood flooring actually managed to grow sales versus year ago by 2% driven mostly by mix gains. This is the first quarter of growth for wood flooring since Q2 2006. These results in wood, which is nearly 100% residential in nature, show that the residential markets are starting to bottom out, led by remodeling activity. In addition, we believe there was some wood volume pulled forward into March 2010 due to the 4% to 6% price increase that was effective April 1, 2010.

Our 2010 outlook includes resilient share growth from product introductions we mentioned last year, Alterna, large format tile and floating planks. A primary focus of our strategy and a key contributor to our relative success through this downturn is that we are the design and innovation leader in all our major businesses, and have a robust new product development pipeline.

Commercial building activity continues to decline, though at a slightly less rapid pace than we feared. We are seeing the early signs of recovery and renovation activity for commercial ceilings and grid coming out of the northeast metro areas including New York, New Jersey, and Boston, where we have our highest share. In addition, countries like Canada, Russia, Mexico, Brazil and the Middle East are showing sizable growth off the depressed base periods versus year ago driven by improving consumption and share gains as we improve distribution.

In ceilings, we launched a high-end product with unique capabilities around washability and clean room applications targeted for the health care segment in the fall of 2009. This product's acceptance has exceeded our expectations and is being specified in a number of projects.

Adjusted operating income improved versus year ago in all segments, signifying our cost control efforts are working and are broad based. This is the first time all operating segments concurrently grew adjusted operating income since Q2, 2006.

Slide five shows the building blocks from Q1, 2009's adjusted operating income to our current results. As you can see, manufacturing cost improvements and SG&A reductions were the primary drivers of improved profitability contributing $31 million combined. Input costs are favoral by -- favorable by $8 million, largely driven by energy deflation and inventory valuations which reflect favorable material pricing from 2009 and lower inventory levels. Though this was fully offset by lower pricing as we were forced by competition to give back some price over the last nine months. Volume declines lowered profitability by $10 million.

Finally, our Worthington and Armstrong joint venture, or WAVE JV, enjoyed stronger profitability contributing $4 million.

As we described in our last call, and as we began to see toward the end of this quarter, the trend on commodity and energy costs is turning from a period of deflation to now a period of inflation. Sequentially, we saw $27 million of year-over-year benefits from raw materials and energy inflation in Q4 2009. This dropped to only $8 million of year-over-year improvement in Q1 2010. Our current expectation is that the total material and energy inflation will be a drag on operating income between $25 million to $35 million for the full year. We are looking for additional ways to take pricing to recover this.

As we mentioned earlier, and America's floors, we announced pricing over 4% to 6% in wood and resilient effective April 1, 2010. We were able too implement the wood price increase, but the competitive reaction resilient causes to delay the increase, and we have announced a new 6% increase effective June 1, 2010 on resilient. So far, most of our major competitors have announced similar increases but these are not fully sold through.

On ceiling tiles, the 5% increase we took in February 2010 also seems to be holding though our effective yield will likely be less. On grid, we are taking a 10% price increases in the Americas in May 2010 and a 6% to 9% increases in Europe through the spring to recover margins from rapidly rising steel prices. We continue to look for ways to drive improved productivity through additional plant closings and idlings. As mentioned before, during the first quarter of 2010 we announced a shut down of finished goods production at wood plants in Oneida, TN and Center, TX and we announced the closure of the St. Gallen Switzerland metal ceilings facility. We will continue to look for ways to drive improved cost both in manufacturing and SG&A as the year progresses.

At the beginning of 2009, we have closed and or idled six plants yielding going annual savings of $40 million. That said, where we see opportunities we are investing in new plants. Examples of this include the mineral wool plant where we are looking to secure a strategically important raw material and a high energy efficient lower cost way, and the new Vinyl plant in China.

Slide six shows our results against free cash flow for the quarter. As mentioned before we used $30 million in free cash flow compared to using $45 million in the prior year.

Working capital and reduced capital expenditures drove the improvement. Inventory days outstanding at the end of March 2010 were 72 versus 86 at the end of March 2009, some of this improvement was driven by unsustainably low inventories on lumber, as supplies were tight due to poor weather conditions to cut wood and saw mill availability. We will give back some of these gains in the second quarter as lumber inventories return to more normal levels, and as lumber costs rise. Receivable days stand at 36, down from 39 days in March, 2009. Negative cash earnings performance of $7 million mostly reflects the CEO severance costs and lower depreciation and amortization a year ago as we fully depreciated some of the fresh start three year assets.

Now turning to guidance, which starts on Slide seven. Given our sales performance in Q1, we are modestly raising our sales range from the previous range of $2.65 billion to $2.85 billion to our current estimate of $2.7 billion to $2.9 billion. This reflects our assumption that the commercial markets in the US will decline slightly less significantly than we expect at the beginning of year. We continue to protect housing starts in the US between 600,000 units to 650,000 units, we expect residential remodeling now to grow 2% versus a decline of the activity by 4% in our previous estimate. This slightly better sales outlook, combined with our progress and new plans on SG&A and lean manufacturing, allows us to raise our adjusted operating income estimate to $150 million to $175 million. This will take our adjusted earnings per share to range of $1.35 to $1.60 compared to our previous guidance of $1.20 to $1.50. Essentially we raising our range reflecting the Q1 results , and our savings plans. We continue to experience extreme volatility in the markets and our wide range reflects that. Our free cash flow follows the earnings improvement with the range of $50 million to $75 million.

Slide eight provides the more detailed assumptions going into our earnings guidance. We have noted where we have updated an assumption versus our previous call. Fundamentally, we are continuing to see more raw material pressures, particularly on lumber and petroleum based inputs, as suppliers continue to take price increases on materials like PVC and plasticizers. This range excludes any pricing to recover these costs, which of course, we will strive to do. Our planned pricing actions to date should offset roughly 40% of this inflation with more pricing needed in the back half.

Strength in the WAVE results from Q1 has us more optimistic on their potential for the year, especially as they seem able to price recover the steel price increases, which more more in doubt before. On our quarterly phasing guidance, we expect to be basically flat on adjusted operating income in Q2 and Q4, and down on Q3 versus 2009, as commodity costs pressure intensifies from last year, and we anniversary benefits from some of the bigger plant closings from last year. Essentially, we saw the greatest benefit from material cost deflation in the back half of 2009, while still holding on to some price benefits. In the back half of 2010, we will be hit by the significant inflation and only partially able to recover with price on a similar sales basis.

For capital spending, we are starting to show a range here, versus a single point target. We have built in some increase to capital spending at the high point to reflect that we will begin construction of the new Vinyl Flooring plant in China and this will be incremental to our previous plans. Though we will look for efficiency in our plans. The mineral wool plant in West Virginia was already anticipated in our previous guidance.

Finally we are excluding the restructuring charges for the cost reduction initiatives including the St. Gallen Switzerland metal ceilings facility closure, and the closure of our airplane operations totaling over $5 million.

Since it was a favorite question in the last call, we have included slide nine, which is a simple reconciliation of our adjusted operating income to free cash flow. Nothing has materially changed in the reconciliation versus what we said last time, except the stating point on adjusted operating income with our updated guidance.

As I close, I hope that our performance and the strategy details I have shared with you today demonstrate the confidence the Board and our leadership team have in our 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.

We will now be happy to take your

(Operator Instructions) Your first question comes from the line of Timothy Meany with Longbow Research . Please

Hi, good morning. This is Tim Meany in for David McGregor. How are you?

Hi, Tim.

You guys gave some great color on kind of the raw material cost inflation, and I am just curious if you can give us a little more on kind of when in the first quarter that became a head wind for you guys? And, I know you gave your guidance for the rest of the year, the $25 million to $35 million, you know, if that's kind of smooth through the remainder of 2010? Or if we should be thinking if we should be thinking about that more in the second quarter, third quarter?

Very good. Let me talk about this, the general phasing of the inflation, then I'll let Franks peak to what he's seeing in his business directly since both the PVC and the lumber are coming to him.

You know, we were favorable in the fist quarter on inflation so all of that [perked] from material inflation comes in the second through fourth with much more of it in the back half versus Q2. So, you know, disproportionate in the back half loaded.

On lumber, we felt the inflation effects in Q1. It will be very significant in Q2, and then actually begin to tail off as you get into the back half of the year. PVC, it echos Tom's comments on the overall. Very similar. Lumber's the one we're feeling the greatest effect in the first half.

Very good, I appreciate that. And, I guess, just as a follow up, in terms of some of the price increases that you guys have discussed, where do you see the greatest opportunity is in terms of your ability to pass through successfully those increases? And kind of what segments, or markets do you see the greatest headwinds? And just finally, in terms of the home center channel, how you view that, or your opportunities to raise prices relative to the independent dealers? Thank you.

Just to recap wat we've done, we announced at the beginning of the year a 4% to 6% price increase, in hard wood. That was effective April 1, 2010 across all channels, and given what is going on with lumber we are aggressively pursuing that in all channels.

On the resilient side, we announced initially at the beginning of year, and Tom mentioned, it got pushed back for competitive reasons. We just announced April 1, 2010 for an effective date of june 1, 2010. So very early in the game, but given that the pressures we are seeing in raw materials, really across the board, all channels we're going to push very hard to recover what we can in inflation.

Hi. This is Beth. Just a little bit of follow up , too, in general, we have more pricing power typically in our commercial businesses, which has been reflected in our prior performance. But across the board we are facing inflation and are seeking to recover that in

Great. Thanks for your time.

Thank you.

Your next question comes from the line of Dennis McGill with Zellman & Associates. Please proceed.

Hello everybody.

Hello Dennis.

First question was just realizing ceilings was a bit strong this quarter. Can you talk about sort of the mix of volume and price there on a year over year basis? And also maybe touch on, on the volume side you had mentioned some pull toward forward in wood flooring business, did you see any of that in the ceilings business with the 5% increase announced there?

Could you repeat the first part? We couldn't quite hear the beginning of the question.

Sure. Yes, just -- if you could maybe provide a little color on volume versus price in the first quarter on a year over year basis. I think you talked about price in total for the Company being deflationary, but if you can talk about ceiling specifically?

Okay. Well, we are not reporting unit volumes at this point. I mean, volume came in slightly better than what we expected, driven by the markets. So we were pleased by that, and that's reflected in our current outlook. Volume is still down, though, on ceilings.

Both price and volume were down modestly for ceilings for the quarter.

Okay. Did you --

And part of the --

-- pull forward there?

I'm sorry?

No, there was no pull forward because the price in ceilings was effective in February. So any pull forward would have been realized in January and lapped off with inventory depletion in the second couple months of the quarter.

In fact, it's more reflection of what happened in the prior year quarters. And so, I think we talked about last quarter, ceilings have a particularly difficult comp, because the prior year had had full headed into that quarter, and so we got the offset of that dynamic this quarter versus the prior year.

Okay. I think you had mentioned for the Company non-residential or commercial construction, you are modeling to be down 5% to 10% this year.

Correct.

I would guess with ceiling going down 3% organically in the first quarter, that's on the favorable side of that guidance?

Yes, we, we -- yes, that would suggest we built a little bit of share in the first quarter.

Okay. On the cost saves, I think you said --

-- (Inaudible) One other point, if I can make one other point.

Sure.

I mean the -- we have a particularly strong, in the international markets which contributed to that volume number being what it was. It wasn't, that wasn't 3% just in North America. I mean, Russia, Canada, Middle East, was all providing favorable growth.

Okay. And the 5% to 10% outlook is just North America?

That's correct.

Okay. On the cost saves, I think you mentioned annualized the actions taken since the beginning of last year's $40 million. How much of that is still left to be anniversaried in 2010?

We are expecting that we are getting half the benefit in 2010.

Okay. And some of that, some of that $20 million already was realized in the first quarter?

That's correct. See, we're getting benefits in the first quarter -- that's correct.

Okay. Great. And then, just lastly, on the raw material guidance, the $25 million to $35 million, the vast majority of that is in resilient and wood?

That's correct.

Okay. All right. Thank you, guys.

Thank you.

Your next question comes from the line of John [Ball] with Stifel Nicolaus. Please proceed.

Thank you. Good afternoon.

Good afternoon, John.

Hi John.

If I could-- My first question is on relating to pricing and the guidance. You mentioned you need additional pricing in the second half of the year. But you have got the negative $25 million to $30 million in input costs. So am I right to understand that you'd like to get pricing in the second half, but your assumption are you won't get any beyond what you're already announced?

No, we have some modest pricing in our guidance has not yet been announced, but it's not all the pricing we would like to take. So, we are probably half, half pregnant on that one at this point. We are not -- we're trying to see how the current pricing sell-in before we get too ambitious in building into our estimates. So we want more, but it includes some.

Okay. And, I appreciate you don't want to give out the exact unit numbers for ceilings in the US versus international, but is it fair to say that you're 5% to 10% down thinking for ceilings US, you are within that range and the surprise has come on the international and some of these economies recovering fast are getting share?

That's correct.

Yes.

Okay. And then, maybe a question for Frank on flooring, wood specifically. I guess you see in the, the residential side of wood pick up? Or is that laminate? And then, as we get closer to I guess more housing completions being up year-over-year -- and I don't know what quarter precisely that happens -- might we see the builder piece kick in? And how does that all come out, you know, on a revenue thought process for the rest of 2010 for wood specifically?

John, we would expect wood from a market perspective to continue to gain strength through the second quarter into the back half. I think it is in the back half we will start to see the, the strength due to new construction because obviously the lag between starts and completions and when our product's going. So, I think you will see that get progressively better as the year goes on. And as Tom mentioned remodel/replace has been a little better than we thought, in the last couple of months and contributed to the first quarter 2% growth.

Okay. And then on European flooring, I think the loss has been in the $25 million pre-tax range and I'm a little fuzzy, but the goal was to, I believe break even in 2011. Are, are you behind on that program based on your first quarter results, or on the way there, any color?

John, the way I would describe it is we feel good about the rate of improvement we saw in the first quarter. You know, we are taking a real hard look to see what we can do to be even more aggressive in Europe, with restructuring to accelerate some of the improvement opportunities. But what I would tell you is in the first quarter we did about what we expected we would expect to do.

Okay, so you're not necessarily behind. And was that the plan. Beth? To break even in 2011 on Europe?

That's correct, John. And so, the pathway to that was to cut that, that ball park $25 million half this year, and so we are on a path to do that.

Help us understand how is the new plant in Lancaster coming along, and the, and the targeted savings there, Frank?

Yes, the Lancaster plant started up in the first quarter. Not any significant beneficial production, John, came out of that plant, so you wouldn't see any financial benefit of that in the first quarter. You will begin to see some of that in the second quarter then it really ramps up in the back half.

So in the first quarter really no beneficial production came out of that plant that would impact the results. It was all startup.

Okay, and you still think you can maybe pick up $10 million annualized from that event?

We do. We think on an annualized basis it's worth that range, yes.

Okay. And then, I was curious, Tom, on the $150 million, I think you threw out by 2013. Is that in addition to this $40 million or something that's already been identified? And what, you know, I see you got rid of the aircraft and I don't know what else is in there, but any additional granularity on that would be helpful, as well as any possible guidance in timing. Thank you.

Yes, we are -- and this was primary topic in our last board meeting -- we are not perfectly clear on how this flows out over the years, and we're going after it aggressively. It is probably 2/3 manufacturing, purchasing, operations related, 1/3 SG&A related. And we do see from these pilots -- we've done these pilots -- and we're seeing the -- with implementation, real savings come through. So it's a matter of how fast can we ramp up the capability on lean across the manufacturing and purchasing in the organization to reap these benefits? How fast can you export those concepts into the SG&A space? So certainly, part of the contributors are going to be our improvement plans on cabinets, our improvement plan on European floors, we'll be contributing to the SG&A component here. And, so we're very excited. We've got some early plans, strong committment by the management team, and being encouraged by the Board to go as fast as possible there. And I am imagining we are going to need more time to kind of figure out what's the effect in 2011, not surprisingly that was one of their questions as well on how fast we can go. And you know again we are not intending to come back and report on this specific, as an initiative, this specific goal as an initiative. ideally, you will be seeing it in the coming guidance. And, yes, it is intended to be incremental to the already announced closings and the savings that we put on the books, like the $40 million I talked about today.

Would it be inclusive, though, of the restructuring in Europe, and the move to production in Lancaster? Or would there be incremental to that as well?

Okay, again, incremental to the already announced move of the cushion vinyl business to Lancaster.

Okay.

But really, this is like new plans today forward that we are talking about.

Okay. Super, and is that, is that -- are these TPG's ideas? Is that who's implementing kind of the lean? Is that where you're getting the thoughts from? I have always thought your Company was fairly well run and fairly tightly run, and the margin suggest that historically. There's a lot of money to find.

Yes, the -- I would say that, One, TPG certainly has been helping us understand the capability behind the lean approach and certainly we have hired, you know, as our operations leader an individual who comes with a terrific lean background, and he's the one on the management team evangelizing this, and offering the, the savings potential through his personal involvement in these pilots with his team. I mean, this is -- the people doing the work are, you know 99% Armstrong folks who see the opportunity and are making the plans and offering up the goals, similarly on SG&A. I mean, it's an Armstrong led team. But yes, of course, TPG and the Board is hungry for more savings. They believe there's more value to be had out of applying these kind of tools based on their experience in other companies and we're excited to apply;y them here at Armstrong.

Great. Thank you.

Your next question comes from the line of Keith Hughes. Please proceed.

Really two questions. Within building products, is there any way to provide commentary, or can you even tell, the difference between renovation and new construction right now? How wide of a gap is there?

Well, in terms of growth rates?

Yes, growth declines or however you want to look at it, however you want to phrase it.

I would say, new construction is well off our historical mix of business. So, I would say typically, we are already 60% remodel, 40% new construction, that is skewed much more to remodel in the last quarter and, but it's been relatively gone. Pardon me, relatively good. Now it's 75%/25% remodel versus the new construction if that gives you any, any color there.

That would imply the remodel business is actually up year over year. Is that fair to say?

Oh, I don't know that we would quite get there yet, but it is not, it's not down. It's not down too badly.

Yes, just -- we saw a little bit od strength in the northeast, which as you know is one of our higher margin regions. I think it would be too early to call it growth. And just a little clarity on the exposure, 70% to 75%repair model is kind of our domestic exposure. Globally, the business is more 60%/40%, primarily due to the emerging markets being mostly new.

That's a good (inaudible). Second question, the, the head winds of $25 million to $30 million, just to be -- in commodities, just to be clear, that includes the pricing actions you have already taken and the small future increases that you're contemplating at this point? Is that correct?

It is not a net number. That is a, that is the pure inflation component, does not include our pricing offset plans. Again, I've mentioned before, we think we've got plans in place to offset 40% of that.

Okay.

And we hope to put more on.

Okay. Thank you very much.

Thank you. Thank you, Keith.

Your next question comes from the line of Robert Kelly with Sidoti. Please proceed.

Good afternoon.

Hi Robert.

A question on the, on the improvement sequentially in building products, operating income, 1Q versus 4Q. Could you help explain that a little bit?

What, what are you -- ?

Your operating income profit improvement in 1Q compared to what you did in 4Q in building products?

Yes, fundamentally we're -- yes, we've been closing plants and getting significant cost leverage out of manufacturing. You, if you look at -- we're up 20 basis points on direct margin, 260 basis points on manufacturing margin. So it's really a cost story on down volume.

Okay, great. And then, as far as the raw material cost pressures you outlined, particularly for wood flooring, were you feeling that during 1Q? Or does the narrowing loss you saw year on year, is that all due to the manufacturing improvements?

We did feel it in the first quarter, modestly. It will really ramp up in the second quarter, and then as I said earlier, then I think we are going to hit a point where condition begin to ease in the second half. Part of this is driven by weather conditions, that we experienced earlier this year and just a shortage of logging, and lumber available, and I -- we think we some of that is going to mitigate as we go into the second half. But, we did feel some effects in the first quarter. Second quarter will be fairly significant and then you will see it begin to soften a little bit.

Okay, great. And then just as far as the flooring and building products are concerned, what you started to see, maybe March 2010 versus February 2010 and what you saw in April 2010 as far as demand, did you see your normal seasonal pick up?

If I -- if I may start, really, we might be accused of being a little conservative on our sales estimate, and the reason is really through February we were on plan with sales. And so we really saw March come in as the positive surprise. And our April continues to meet, or be slightly ahead, of our expectations. So we are, we are, you know, feeling that we maybe have come to the bottom, starting to turn, but we are -- one month does not make a year, and we are nervous by what we see in Europe, with the melt down there in the Mediterranean with what it can do to our demand. So, we are just trying to be cautious here and -- but, yes, we feel like March came in better than we thought it would.

And the momentum spilled into April?

Yes.

Okay. Thanks.

(Operator Instructions). Your next question comes from Jim Barrett with CL King & Associates Please proceed.

Hi, everyone.

Hi Jim.

Frank could you take us through the steps in Oneida and Center, and then the restarting of of what operations elsewhere, what was the logic with those moves?

Yes, sure. Let me start with Oneida. Oneida was a solid wood manufacturing facility. We have, over the last couple of years I think we have mentioned, gotten significant productivity in our plant system, and through that process, we saw the road to take out a facility. We chose Oneida because of location. Oneida is situated in an area where you have the highest cost of lumber, it is difficult drying conditions, and as we got these throughput gains and solids and saw the road to take a plant out, that one made the most sense to take out.

On the engineered side of the business, we closed the mill portion of our Center, Texas plant. Center, Texas both peels its own veneer as well as converts it into finished flooring. What we closed was the mill in Center, Texas. Given, again, on productivity gains we have gotten and some of our other facilities, we saw a road to reduce the overall footprint on the mill side. At the same time we did start up, because we see business starting to get incrementally better, our veneer peeling operation in Vicksburg, Mississippi. That just peels veneer, it doesn't finish flooring. But what it does is, the market begins to come back, we can support the growth of the business and the volume, by peeling our own veneers which is lower cost than buying veneers or finished plywood on the open market. Those were the pieces that were done in the first quarter of this year.

And then, secondly, can you discuss who your competition is in vinyl flooring, in China?

Yes, sure. It is a lot of the same companies that compete, we compete with in Europe. Gerflor, Tarkett, LG on a local basis, out of Korea, they would be the primary competitive set for vinyl flooring, in Asia.

And then my last question, thanks. Tom, can you talk -- give us a brief primer on the mineral wool as an input, and what kind of broadly speaking return would you expect to get from that, that starting or building that West Virginia plant?

Okay. It is -- mineral wool it is a key ingredient in the mineral wool, pardon me, in the ceiling manufacturing, we source it today, we are looking to in-house it. Largely as a security of supply move, not as a desire to get vertically integrated. But we're finding that our suppliers are increasingly exiting the business, and therefore in order to control our destiny, and drive costs, we have pursued building our own plant. We expect it to be greater than a 20% rate of return, on this investment and really more than just pure cost savings basis, is the long term continuity of supply which we felt was at risk for this ingredient.

Well, thank you both very much.

Thank you very much.

There are no further questions at this time. I would now like to turn the call back over to management.

All right. Thank you again, everybody for joining us. We very much appreciate your time, as always, and I will be available for follow up calls. Have a good day.

Thank you very much.

Thank you.

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect.