Armstrong World Industries Inc (AWI) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2010 Armstrong World Industries Incorporated earnings Conference Call. My name is Katrina and I'll be your coordinator for today. At this time all participants are in a listen only mode. We will be conducting a question and answer session towards the end of today's conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Beth Riley, Vice President of Investor and Public Relations. Please proceed.

Thank you, Katrina. 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 Matt Espe, our new President and CEO, Tom Mangas, our CFO, and Frank Ready, the CEO of our worldwide floor businesses. Hopefully you've seen our press release and both the release and the presentation Tom will reference during the 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-Q filed today. We undertake no obligation to update any forward-looking statement. 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 are included in the press release and in the appendix of the presentation. Both, again, are available on our website. With that I'll turn the call over to Matt.

Thanks, Beth, and good afternoon, everybody. We're going to ask Tom to take you through our results, but what I'd like to do is just open with a few remarks. First of all, I'm pleased and thrilled to join Armstrong as a CEO, especially as our Company marks its 150th Anniversary. The longevity of Armstrong is a direct result of our dedicated employees and I think a remarkable ability to respond to diverse market conditions. We've navigated through various economic environments over the past 15 decades. Each of those decades bringing with it a new set of challenges and opportunities. I intend to build on our legacy of successfully adapting to these changing market dynamics and taking advantage of opportunities that fit our strategy. My arrival here at Armstrong is a signal that we're ready to move quickly at executing our existing strategy of growth and focus on the customer, while at the same time taking actions on our cost structure, which enables us to be more competitive in our industry.

And while I was considering Armstrong as the next step, I discovered a great Company with terrific opportunities and a very strong foundation. It's a great match for me. I have a strong customer orientation, I've got an appetite for growth and a readiness to make tough calls. I look forward to working with our very active and aligned Board, who in turn have been working closely with the Management team to develop a robust road map for our future. I'm here because I think the strategy is sound and the ground work for our success has been established. We need to prioritize our opportunities, pick up the pace, and execute the plan. So my focus will be more about rate and pace. We need to move quickly and more boldly than we may have moved in the past. I see my job as refining the specifics around our strategy and enable thoughtful, yet decisive actions. My priorities will be our customers, specific markets and growth opportunities.

I like to look at things from the outside in. I care about customers and I want to know what our competition is doing. I want to know what's going on in the marketplace. Our opportunities here are big and broad. During my first 60-90 days I'm going to spend a lot of time in the field, particularly focused on Europe and Asia. I'll be meeting with customers and customer facing employees. I'll develop an understanding of our operations, particularly in those markets and the related opportunities and challenges that I think they present. When we report out next quarter I look forward to giving you an update on what I've learned and the actions we're thinking about taking to capitalize on the opportunities we find, but for now let me turn it over to Tom, who will reinforce the building blocks of our strategy, review our performance in the quarter and our outlook for the remainder of the year. Thanks and I look forward to leading Armstrong as its CEO and meeting each of you in the months ahead. Tom?

Thanks, Matt. Good afternoon, everybody, and thanks for participating in today's call. Speaking for the Board and the Armstrong Management team, we are very excited to have Matt on Board as our new CEO. I also want to recognize Matt's appointment to the Armstrong Board of Directors effective yesterday. He has jumped in with both feet and his energy, experience, and strategic thinking are already being felt in very positive ways. We are all very confident that his leadership will help us continue to unlock significant value in our business, both domestically and internationally. Moving to the business results and progress against our emerging strategies, we are pleased with our second quarter performance, despite what has been a very choppy market. Like many building material companies experienced, April continued the momentum we saw in the first quarter; however, as we got into May and June, we saw a deceleration in our domestic residential markets versus the first four months of the year.

The elimination of home buyer tax credits, bad macroeconomic data, and their impact on consumer buying patterns were translated into softer demand. Commercial markets, while still weaker than the prior year, came in stronger than we anticipated in the second quarter and helped compensate for the weaknesses in the residential markets. In addition, this quarter we saw commodity material inflation turn from a help to a hurt on our results, as we anticipated. Despite the volatile markets, we are pleased to grow organic sales nearly 2% versus the prior year and grow normalized operating income by 22%. Our focus on reducing cost via plant closures and idlings in the past 15 months drove the improvement in operating income and we continue to aggressively pursue manufacturing and SG&A cost reduction as a key building block for future value creation, since this is something we can control.

As we discussed last quarter, we continue to make progress renewing and focusing our strategies, working closely with the Board of Directors and now with Matt to insure we have the right plans and building blocks for value creation in any macroeconomic environment. Let me remind you what the major elements of our strategy are. First, we want to grow profitably in our core businesses in North America. As you know, North America represents nearly 70% of our sales today and last year provided over 100% of our total profitability. We are the share leaders in mineral fiber ceilings, grid, and in wood and resilient flooring. We want to grow these businesses profitably and prepare our cost structures and tune our supply chains so that we can disproportionately benefit from the eventual market rebound.

Our next strategy is expanding our core businesses of ceilings and flooring into emerging markets. As we talked last time, emerging markets represent less than 10% of our total Company sales and we want to significantly grow our sales in those markets in the absolute and improve the relative proportion of total Company sales, even with an economic rebound in the developed markets. Our third strategy is to restructure our European foreign business and return it to profitability. We recently announced the appointment of a European flooring General Manager who will lead this transformation with strong support from Frank Ready and the worldwide flooring business team. As you'll recall, we've gone vacant in this position for the past three years and this appointment represents the first European leading our European flooring business in over 10 years. We now have the additional leadership, resources and the focus to turn this from a significant leader in our portfolio to an important contributor to our global scale and value creation road map.

Similarly, we are pushing forward with our aggressive restructuring of the cabinets division, with a goal to make this business breakeven for the full year of 2010 and return it to above its cost of capital in 2011. Despite one time severance costs, the business approached breakeven in the second quarter for the first time since the second quarter of 2008, despite sales declining 4.5% versus the prior year. Driving out non-value-added costs and becoming a lean organization is our next strategy. Armstrong has always had a strong cost focus and this served us well over the past three years of soft commercial and residential markets, but we believe there is more we can do and that is why we announced in our last quarterly call our intent to save an incremental $150 million over the next three years. This is clearly an area we're can control. We do not simply want to be at the mercy of our end markets for continued profit improvement.

We expect the $150 million to come from improvements in plant operations, more efficient procurement, and SG&A reductions. Lean is the primary methodology we are deploying across our plant and staff networks to reach these goals. Please be aware that the attainment of this or any other goal is subject to internal and external risk factors, onetime costs and potential headwinds, like inflation, as mentioned in our 10-K and 10-Qs. Finally, though not a strategy but a reality, we have a very strong balance sheet with cash exceeding our debt that gives us flexibility to act on good value creating ideas when we see them. I'm sure some of this may seem quite obvious and simplistic.

If so, we think that's good, as the overall strategy should hit the obvious key value drivers. But to deliver the results that we believe are possible requires not only clear strategy, but exceptional execution against them. And now with Matt on the ground, he and his entire leadership team are focused on insuring our capability to extend and execute this strategy. Moving now to the quarter, I'll be referring to the slides available on our website starting with side two, as Beth already covered slide one. As I mentioned, Armstrong's core markets continued to be volatile in the second quarter. In general, we experienced roughly a mid single digit decline in the US commercial markets in the second quarter of 2010, reflecting both new and remodel activity. This was stronger than we expected going into the quarter.

Residential remodeling market activity is very difficult to measure; however, we believe this market was down overall in the first half of the year in mid single digits with the first quarter coming in stronger than the second quarter. New residential construction was up in the second quarter 10% to 15% on a very low base. As we've talked before, roughly 70% of our combined North America business comes through remodeling activity. So despite the recent wobbles, the relative stability of remodeling activity in both residential and commercial markets compared to new construction activity has softened the impact of the overall building material sector decline on our sales. In addition, stronger Asia and Eastern European growth helped offset the relative weakness in the US. Specifically, sales in the second quarter were $745 million or up 1.8% versus year ago when normalized at constant exchange rates.

When the effects of foreign exchange is included, sales were up 3%. The Company delivered $59 million in adjusted operating income, exceeding the prior year by over $10 million or 22% through manufacturing cost reductions and the benefit of sales growth. Normalized operating income margin grew 130 basis points versus year ago and doubled versus the first quarter of 2010, consistent with the seasonality of our business. Adjusted earnings per share grew to $0.56 per share versus $0.46 in the second quarter of 2009. We delivered $89 million in free cash flow in the quarter, which is essentially flat versus second quarter of last year. As a result of this cash performance, our cash on hand exceeds our outstanding debt by $141 million. Slide three explains how you get from our adjusted operating income of $59 million to a net as reported income of $27 million.

In the quarter we took additional charges relating to the closing of our St. Gallon Switzerland metal ceilings facility, which we talked about last quarter. In addition, we took an additional $3 million impairment on our two idled airplanes, as our disposal efforts over the last quarter suggested the market for small jets like ours was softer than we expected and thus the value we initially assigned to these assets in the first quarter was too optimistic. Finally, we wrote down the value of a Berlin warehouse that we owned and leased to third parties by roughly $2 million, as again our disposal efforts over the past year suggested our carrying value was too high. These non-recurring charges were partially offset by favorable foreign exchange effects that we also remove from our normalized reporting.

Moving to slide four, this provides our sales and adjusted operating income by segment. Worldwide building products led sales in income growth in the quarter. Despite the choppy macroeconomic environment, we grew sales nearly 5% on a constant dollar basis and adjusted operating income by $12 million. Asia lead the growth with sales up 22%, followed by the Americas with 3% growth, with strong contributions from Latin America and Canada. Europe was up 2%. Worldwide flooring was essentially flat versus the prior year on sales. Resilient flooring, which achieves roughly one-third of its product sales in residential markets and two-thirds through commercial markets, managed sales growth of 1% versus the prior year and grew adjusted operating income by $3 million. The wood segment saw sales decline 1% and achieved flat earnings growth despite significant commodity headwinds on lumber input costs. Cabinets improved its operating loss by $2 million, despite sales down 5% following the residential markets. Unallocated corporate expense was a drag on quarterly earnings by $6 million, due to our investment in lean manufacturing processes and the continued expected decline of our non-cash pension credit. Given the current order backlogs and order rates, we continue to see commercial building activity down in the balance of the year in mid single digits in the US, but this is better than we feared in April and it's offsetting the residential markets weakness we saw in May through July and that is continuing into August.

Slide five shows the building blocks from the second quarter of 2009's adjusted operating income to our current results. As you can see, manufacturing cost improvements, volume and earnings from our Worthington and Armstrong joint venture, or Wave JV, which already reported their number through May within Worthington's results, drove our earnings improvement.

As we anticipated on our last call, input costs, which had been highly favorable since the first quarter of 2009, have turned into a drag on earnings, as we have seen significant cost increases for lumber and PVC for flooring. Similarly we continue to see price mix erosion versus the prior year, mostly in resilient flooring and European building products. As you'll recall, we announced pricing in resilient effective February, but we were forced to delay the increase until June due to competitive pressures. Pricing has gone through and we would expect to recover a more significant portion of the cost increases in the third quarter.

Finally, Wave enjoyed stronger profitability, contributing $4 million driven by strong volume. The trend on commodity and energy cost has turned from a period of deflation to now a period of inflation, as we anticipated in our last call. Sequentially, we saw $27 million of year-over-year benefits from raw materials and energy inflation in the fourth quarter of 2009. This dropped to only $8 million of year-over-year improvement in the first quarter of 2010. And as described above, material inflation relative to the prior year hurt the second quarter by $4 million. We continue to maintain our outlook of $25 million to $35 million of net inflation on the year and this is obviously back loaded. We believe we have seen -- we have been about as aggressive as we can be up to now on pricing to recover these costs in the current soft demand environment, particularly in the soft residential markets.

Let me take a few moments to recap pricing actions we have taken in the last six months. In Americas Floors we announced pricing of 4% to 6% in wood and resilient effective April 1. We were able to implement the wood price increase as planned, but as mentioned earlier, we delayed the resilient 6% increase to June 1. We took a second price increase of 6% on solid wood products, which represents two-thirds of our wood sales effective July 1. Again, in response to hardwood lumber inflation. On ceiling tiles in the US, we took a 5% price increase effective in February. In July we announced an additional 5% increase nationally and a 15% increase in selected southeastern US markets effective August 16th. Wave took a 10% price increase in the Americas in May and 6% to 9% increases in Europe through the Spring to recover from rapidly rising steel costs. Typically, our effective yield is less than our announced pricing due to competitive pricing pressures over time.

The manufacturing cost improvement in the quarter shows our efforts to optimize our production footprint are translating into tangible savings and are contributing to our earnings growth, offset partially by our investments in lean. Already this year we announced a shutdown of finished goods production at wood plants in Oneida and Center, announced a closure of the St Gallon Switzerland metal ceilings facility, and early July we announced the closure of our Beaver Falls ceiling facility effective in 2011, with production moving to existing plants. We will continue to look for ways to drive improved costs, both in manufacturing and SG&A as the year progresses and make announcements as appropriate.

Slide six shows our results against free cash flow for the quarter. As mentioned before, we generated $89 million in free cash flow compared to $87 million in the prior year. As you can see, there was not much movement in the individual building blocks versus the prior year. Lower depreciation and amortization from the roll-off of shorter lived assets reset to market value during adoption of fresh start accounting at the emergence and severances in Europe are driving the bulk of the differences between normalized operating income growth and cash earnings. Inventory days at the end of June were 68 versus 80 days at the end of June, 2009. Receivables days stand at 36 down from 37 days in June, 2009.

Slide seven simply summarizes our key metrics on a year-to-date basis for 2010. Sales declined 1% on a constant exchange basis versus the first half of 2009. Despite this, normalized operating income increased nearly 68% and we built 250 basis points of operating margin. Earnings per share are up $0.34 and we generated $18 million more in free cash flow.

Moving to slide eight, for the first half of 2010 all four of our reported business unit segments delivered earnings progress versus the prior year on flat to down sales. Again the $5 million incremental expense from corporate reflects mostly investment in lean manufacturing and the decline in our non-cash pension credit, partially offset by savings in other corporate areas. We are seeing our lean investments pay dividends in the business units and full exploitation of lean will be critical to delivering on the $150 million savings goal we have set.

Now turning to guidance, which starts on slide nine. Given our 1% decline on sales in the first half and the soft residential markets we described, we are modestly lowering the high end of our sales range by $50 million to our current estimate of $2.7 billion to $2.85 billion. This reflects our assumption that the commercial markets in the US and Europe will continue to decline in the mid single digits in the balance of the year.

We now project housing starts in the US between 575,000 and 625,000 units. Finally, our outlook now assumes residential remodeling activity will be flat on the year, with the second half showing mid single digit growth. Despite this slightly more pessimistic sales outlook at the top end, we are raising our adjusted operating income estimate to $170 million to $190 million from the previous range of $150 million to $175 million, driven by our stronger earnings in the second quarter and progress against our plans on SG&A and manufacturing cost reduction. This will take our adjusted earnings per share to a range of $1.55 to $1.75 compared to our previous guidance of $1.35 to $1.60. We continue to experience extreme volatility in the markets and our range reflects that. Though we have narrowed the range somewhat, reflecting that we've only got six months of the year left, our free cash flow -- let me say that again. Though we've narrowed the range somewhat reflecting that we only have six months of the year left, our free cash flow follows the earnings and working capital improvements with a range of $85 million to $105 million, up from $50 million to $75 million.

Slide 10 provides the more detailed assumptions going into our earnings guidance. We continue to note where we have updated the assumption versus our last call. As mentioned earlier, we are maintaining our assumption on material and energy inflation at $25 million to $35 million net impact on the year, with a majority of the impact coming in the third and fourth quarters. Lumber and petroleum based input costs remain the primary drivers. This excludes any pricing to recover these costs. As we've outlined our -- we have outlined our pricing actions to date and we will continue to look for ways to offset these costs with cost savings or incremental pricing as we see opportunities, which may be limited in our softer residential markets.

We are reflecting an improved gross margin outlook from plus or minus one point of change versus 2009 to a new range of flat to plus one point. Year-to-date manufacturing margin is up 120 basis points versus 2009, supporting the improved outlook; however, the heavier commodity inflation anticipated in the second half of the year tempers our enthusiasm. We have taken actions to further reduce SG&A over the past six months versus our going in plans, mostly in corporate staff groups and in cabinets as a way to insure profit growth in the current year and contribute towards our $150 million savings goal. We are providing more specific quarterly phasing guidance for normalized operating income for Quarter three, which we expect to be between $62 million and $72 million of normalized operating income compared to $79 million last year. This is consistent with the directional guidance we provided in our last call.

Again, the driver for lower earnings in the third quarter versus the prior year is the year-over-year change in the material inflation coming into the back half and as we anniversary benefits coming from our idling of bigger plants last year like Mobile, Montreal and Vicksburg. Finally, we are excluding from our normalized presentations $50 million in CEO transition costs, both the $11 million in severance and $3.5 million in sign on bonuses. In addition we're excluding $25 million in onetime charges and accelerated depreciation associated with several cost savings initiatives, including the St Gallon Switzerland metal facility closure, the closure and impairment of our airplane operations, our Beaver Falls plant closure and the impairment of the Berlin warehouse.

One last area I want to update you on is our refinancing plan. As you know, our revolver credit facility and term loan A will come due in October of 2011 and therefore go current in the fourth quarter of 2010. Our term loan B comes due in October, 2013. Assuming stable credit markets and of course subject to successful negotiations with the banks, our intention to put in place a new credit facility this fall to replace these. Our objective in doing this are to secure long-term financing at today's attractive rates. With that I'll now turn it back to Matt.

Thanks, Tom. Listen, I just want to reiterate my enthusiasm regarding our opportunities over the next several years. We've got a great future ahead of us. We've got terrific brands, a great reputation, world class products, quality and service. We've got market share leadership in virtually all of our product lines and a strong balance sheet. This is a foundation for the creation of real value and I'm thrilled to be here and I'm thrilled to be part of the team. And so with that said, I want to thank you for your time this morning or this afternoon and now we'll be happy to take any questions you might have.

(Operator Instructions) And your first question comes from the line of John Baugh from Stifel Nicolaus.

Good afternoon, Matt, Tom and Beth.

Hi, John.

I guess the first question is relating to ceilings. You gave a lot of information and I'm sorry if I missed it. What did ceiling volumes do in the first and second quarter year-over-year or for the six months? What was the volume change?

Yes, it's down in the low single digits.

And that is tracking certainly better than I thought and I assume better than you thought and if that's correct, where is the strength coming from?

It is tracking better than what we thought it would be going to. It's largely domestically from the northeast markets where we have seen substantial repair/remodel activity going on as that market goes through substantial churn as rents come down and tenants are trading out for better spaces and getting a remodel with that. Also we're seeing as a worldwide division good strength coming from Canada, Latin America and Eastern Europe, on a unit basis particularly.

Okay. And then staying on US ceilings, we had the 5% pricing in February and then you said 5% nationally and then a higher number in the southeast. I guess will those all be in place fully for the third quarter, obviously, the February increase is, but just curious as to the year-over-year change in price per unit if there's no change in mix as it relates to pricing in ceilings?

The effective date of the pricing is 16th of August, so at best we would get half a quarter yield, but my guess is it won't (inaudible), people will have a little bit of a buy forward on that and therefore we won't get much of a quarter impact on pricing.

So we could be looking at though what, 10% pricing fourth quarter year-over-year in ceilings domestically?

Well that will be how much we've announced, but we don't typically get that full yield. Our general expectation is it will be priced competition and we'll get something less than what we've announced.

Okay, and then a comment on the flooring price increases. How effectively are those going through in light of the fact that obviously the end markets are weakening?

John, this is Frank. The increase we implemented in April is fully in and we've been consistent with realization with what we've gotten historically. The increase for vinyl just went in June 1, so it's a little early in the game to tell you exactly what that looks like, but early read is we're getting historically what we've gotten with this increase. Obviously, as the markets get softer it's going to get a little bit tougher to realize price, but so far we're in line with historical standards.

Right. And then my last question is for Matt and I'm just curious, you haven't had too much time on the ground so I appreciate that, but as you come in with your background and experience and I think some of the opportunity is international growth in particular, I'm curious as to what your thought process is about what you need to do to get that going. Is it acquisition oriented? Is it facilities? Is it too early to comment on CapEx requirements or investments in that form of growth? Thank you.

Thanks, John. Well, let's see, I'm five or six days into the job so I'm not sure that I'm qualified to give you a real thoughtful deep answer on the question, but let's just start with the fact that we think we have a significant opportunity in Asia, particularly China, and I would say China is my sort of initial priority in terms of the Asian opportunity. We're also going to spend time in Europe, of course. I think I'm going to have to spend some time in China understanding what the opportunities are, scoping them. There's lots of options available to us. You've named them. We can make organic investments to expand manufacturing capacity. There's joint venture opportunities. There's a range of options available to us.

I've spent a lot of time in China over the years in other assignments I've had, so I'm familiar with the operating environment and I'm also familiar with the opportunities there. I'll be in China at the end of the month and so that's really kind of the first business trip I'm taking, so and I expect to be in China three or four times a year. I'm sort of thinking about getting over there every quarter until we get, until we understand what the opportunities are, ground a strategy and start executing it. So I'm going to have to let me get back to you on that in subsequent calls if that's okay.

That's fine. Thank you.

You bet.

Thanks, John.

And your next question will come from Keith Hughes from SunTrust.

Thank you. Just kind of two areas question. First on the -- you had talked about looking at the Term A loan that expires in a year from this fall. As you look at the balance sheet you talked in the past that with more cash than debt that's not really where they need to be in terms of the Armstrong balance sheet. Will your focus in the fall just be about dealing with the near-term maturity or are you going to look more expansively at what the balance sheet should look like longer term?

Certainly, thanks for the question, Keith. Certainly, we are in, as part of our strategy development, thinking through what is the role of the balance sheet in executing our strategy and as we go through refinancing, our plan would be to secure financing that allows us to access and drive our overall strategy. So it's not just a let's get the maturity pushed out. We're looking to insure that we're creating a low cost flexible platform for us to execute with and how we deploy that balance sheet we've not driven any conclusions on. With Matt being new here, he will want a bite at the apple on that and continue to touch the strategy and how we access these different domestic and international growth opportunities, but certainly we're not looking to make the refinancing anything that limits us, but if anything increase our flexibility.

So what we would know by the end of the year what that looks like, is that fair to say?

I'm hopeful that we with good speed be able to both secure the refinancing and also be able to articulate in some, to the extent possible, what our ideal deployment of resource would be, but again, that's a little premature because we need to get there.

Okay, that's fine. Second question, just to make sure I understand. In the financial outlook page, the $25 million to $35 million increase that's under the raw material and energy inflation line, that is for the full year; is that correct?

That is correct.

Okay. And that does not assume you get any of the pricing that you detailed earlier in the call?

That is independent of pricing, that is just a pure commodity impact versus prior year.

All right, that's what I needed. Thank you.

All right, thanks a lot, Keith.

And your next question will come from David McGregor from Longbow Research.

Yes, good morning everyone, afternoon, I guess, now. Mike, welcome. Just on the resilient business we could talk about that. Can you give us just your overall assessment, is the resilient category taking share within the overall flooring business as value oriented consumers kind of bring the purchases down market?

This is Frank Ready. We think there's been a minor tic but nothing dramatic and that dramatic tic we see is on the do-it-yourself side. The professionally installed consumer, we don't see any really shift at all from other categories to vinyl. As I said, we do see a small tic in the DIY segment through Home Depot and Lowe's.

Okay. And Mike, I realize again, you've only been on board a few days now, but I presume that this resilient business was a sort of a central point of discussion with the Board prior to you signing on to the team and I'm just wondering what your early assessment is on the prospects of eventually generating a competitive return on capital in this business.

Well, David, first of all my name is Matt. Mike was the old guy.

I'm awfully sorry about that.

Couldn't let that one pass.

No, my mistake, I'm sorry.

No, it's fine. Obviously, increasing the return on capital is a key priority for us and a metric the team is looking at and I think it's really balanced execution of plan. I think Tom has done a nice job of laying out the priorities and as I talked about, my arrival isn't anything other than I think a statement of the fact that I support the strategy, I support the evolving priorities, and I think what I bring to the table is a sense of urgency and, like I said, maybe pick up the pace a little bit and help the team move quicker. But I think balanced execution, we're looking at targeted growth opportunities. We know we have to build a more competitive cost structure. I think the outlook is very positive for continued cash performance and I think all that adds up to a nice increase in return on capital. At this point that's about all I can say I think.

Maybe I could just one more. Is it possible to achieve those goals within the current competitive environment or does something have to change there as well?

Well, obviously an improvement in the environment helps. I think that a lot of what we -- a lot of our opportunities -- let me frame it this way, a lot of our opportunities are within our own control and I think we're teaming with Tom and Frank and others on the senior team here, we're putting together some plans that I think will allow us to achieve the guidance that Tom articulated earlier without a significant increase and improvement in the operating environment and just steady execution on the plans we have in front of us.

Great. Well thanks for addressing that and good luck to you.

Thank you very much.

Your next question will come from Dennis McGill from Zelman & Associates.

Hi, congratulations, Matt. Quickly, on the retail side, the home improvement side, I think if I heard you correctly in the first half of the year, I realize it's tough to measure, but first half of the year we were down around mid single and second half of the year we're looking for mid single digit growth and if that's correct just wanted to understand sort of what the biggest driver are there on the delta.

We were talking specifically was on the remodel side of the business residentially, not the channel itself, not the retail channel. So it reflects things going through big box as well as the distributors and smaller individual retailers.

Right, but the better home improvement category.

Yes, so it was on a remodel basis, not necessarily the home improvement channel. So, the net of it is we saw strong demand in the first quarter, likely driven by the tax credits and people improving their homes, getting them ready for sale, having some pent-up demand from the crisis and then with -- we did see really starting in May and June a substantial deceleration of products through the remodel side of the business and we are still a little bit blind of what the driver of it. Was it a pull forward of demand and that it stabilizes out? It's sustained through July and starting into August we're still seeing relative weakness in that portion, but we have confidence, both based on kind of our plans in place to drive improvement but also the easier comps in the second half that we'll see a slight lift to get to a net flat on remodel on the whole year.

Okay, so your expectation would be the weakness that we've seen more recently would stabilize and on a year-over-year basis that would imply something up in the mid single?

That's exactly right. We don't have a crystal ball, but we do think it's not a sustained malaise here that we'll get some bounce back after some point, at least our outlook is based on that.

Okay. And then in relation to the international business, maybe you could go into a little bit more in depth on what you guys are seeing there. I think going into the quarter there was obviously some expectation that that business would be struggling more just based on what's happened with some of the economies and the news flow during the quarter, so anything you could help us with as far as what you're seeing from your customer base as far as new projects or confidence in the marketplace as we head into the second half of the year?

International you're asking?

Correct.

Yes.

And principally Europe, I guess, within that.

Yes, I mean on a region by region basis we've actually done pretty well. I mean, we do disclose our external segments, our regional mix, and on floors Europe on a constant FX basis was up slightly in the low single digits, as well as building products. So we, it's not as bad as I think people have perceived it to be. Europe was not in meltdown mode in the last quarter. Certainly the first quarter was a little bit weaker, but it was more of a positive for us than we expected. Asia is on fire with both building products and flooring growing in excess of 20% in the second quarter. So and then finally, the Latin America, while very small for us, the team down there has done a terrific job and they're building buildings down there and using our product, ceilings particularly, so international has been a source of growth and has compensated for the relative weakness from the domestic market.

Okay. That's helpful. Thanks again.

Your next question will come from Jim Barrett from CL King.

Good morning, everyone. Matt, a question for you. Aside from European flooring, which business is most in need of quicker, bolder action by your team?

Well, I think both our businesses in Europe could be strengthened significantly. I think we've got different, as I'm learning, we have different opportunities there and we're starting from different positions, but clearly I think both of our businesses in Europe could strengthen and I think bigger and bolder action speaks to geographic expansion in China and, again, as I said that's a priority. I think it's an enormous opportunity that we are -- listen, we've done a nice job in China and I think as Tom said we're seeing some nice very respectable growth. It's a somewhat modest base when you think about the potential opportunity and I think we just have to rethink and reset our strategy in China and fundamentally think bigger than we're thinking, get the absolute revenue big enough where those V's really add value not only to the top-line but to the bottom-line.

Same could go for India and I think Tom just commented on, again, strong growth off of a modest base in Latin America. So if I think about turnaround/transformation strengthening opportunities, it's both business platforms in Europe. Now if I think about exciting prospects for growth, share gain and sort of game changing opportunities, you've got to think about China, you've got to think about India and you've got to think about Latin America. Now obviously we aren't going to do all this in the next six months. My idea is let's prioritize. I think we have an opportunity to focus on our businesses in Europe. I think we're starting to develop some very good plans there. I'm confident that we've got the right ideas to get those businesses heading in the right direction and then China. So when I think about outside the US, it's the two businesses in Europe and China, initially, and that's where I'm going to be prioritizing my time, energy, and travel.

Okay. When you look out three to five years, would you expect most of the growth to come from this type of expansion or alternatively what's your philosophy and experience in making and integrating acquisitions?

Well, it's a very good question and aga, I'm going to hedge a bit, seven days on the job here, but I think if you think about the opportunities we have for targeted revenue growth and productivity, I think we ought to look at every opportunity. I think there's opportunities to drive productivity through organic investments and manufacturing. We can expand. There's opportunities to expand there. I think we have a balance sheet that allows us to consider thoughtful, strategic responsible acquisitions to help strengthen the core, expand the core a little bit, and then just basic organic execution. If you talk about three to five years, I mean my vision would include a much bigger presence in Asia and a much stronger presence in Europe and we continue to protect, defend and invest right here in the Americas where we have a terrific franchise in both of our businesses.

Great. Thank you, Matt, and good luck. I did have one last question for Frank. Your margins in wood flooring were 8% in the third quarter of last year. Assuming sales are flattish, more or less, you've had two price increases. Does that position that business to return to the kind of margins we saw in Q3 of last year?

To be determine. Right now, and I said this in the last call, the rate of increase in inflation on lumber continues to out pace our ability to implement price increases, so I think there's going to continue to be margin pressure there. How much is to be determined, but the rate of inflation continues to be significant.

Okay, well, thank you both.

Yes.

Thanks, Jim.

(Operator Instructions) And your next question will come from Robert Kelly from Sidoti.

Good afternoon.

Hi, Robert.

You might have said this, did you give us the sales metrics for European resilient flooring? Year-over-year?

I think I had it in the answer, but the year-over-year in a constant FX was plus 2% on the quarter.

Okay, great. And as far as the general manager hire over in Europe, does that put us on target, ahead of, behind target for your kind of breakeven expectation in that business by next year?

Yes, I mean, Tom said this in his comments. We haven't had a full time General Manager in that business for three years and if you are going to achieve the kind of improvement that we've targeted, we need somebody on the ground every day driving the plans and the initiatives we have to make sure they get done. So putting a General Manager there always in line with driving the rate of improvement we're trying to accomplish.

We haven't given up on our objective to get it to cut the loss in half this year and we're working hard on that and getting this person in place is essential to getting that plan implemented and getting to breakeven next year is still our goal, so this is part of the plan. You've got to remember, Frank took this as a worldwide responsibility on only in February and has moved with great pace to develop plans and again I think you'll continue to see great momentum on this plan, both with the new General Manager and with Frank's overall stewardship and leadership of the business globally.

As far as the Beaver Falls shut down, you're seeing some stability in your business, the trends that are surprising you. What was the impetus for closing that business down and is that part of the overall $150 million kind of cost savings project?

Okay, so it is part of the $150 million. The Beaver Falls has been a great plant for us. It's serviced us incredibly well, highly dedicated employees there. The problem is it was an old plant and the layout was poor, the product mix there was such that it was just not economic to maintain that plant, so we're moving most of the product lines to other plants, taking on some product lines. We may discontinue because it's not attractive returns there. So it was not a scaled plant and we felt we had just better overall economics by shutting it down and moving it.

And then when would we start to see some of the cost savings, productivity gains from that?

That was more in 2011. I mean, we haven't picked a specific date, but it's not in this calendar year. We're still working through the plant -- I mean, there is still very important volume in that plant that needs to be transitioned and that will take some time.

And then as far as the wood flooring business you took some shut downs in Q2. Did we see any benefit towards the back of the quarter or did we start to see the benefits from fixed cost closures more in the second half?

Very little, if any at all in Q2. The wind down costs and the severance really masked any fixed period savings. You'll begin to see that in quarter three.

Thank you.

Thank you, Robert.

Your next question is a follow-up from Keith Hughes from SunTrust.

Yes, just a follow-up question on ceilings. Are you recruiting for a head of worldwide ceilings, I believe that position has been vacant for some time.

Keith, it's Matt. Yes, the answer is we are. We're looking at reviewing candidates for the CEO of the billing products business globally, structured just like Frank is in Florest.

Do you think you'll have that in place end of year or do you have any kind of timeframe on that?

Well, listen, I'd like to have that job staffed as quickly as possible. The next several weeks would be a timeframe I'd be comfortable with. I'd certainly would expect to have it staffed by the end of the year. It's a critical job for us. It's a priority for me and I'm working on it as we speak.

All right, thank you.

You bet.

And your next question is a follow-up from John Baugh from Stifel Nicolaus.

Yes, a question for Frank on the fiberglass backed vinyl plant in Lancaster. Is that behind schedule, on schedule? I believe the savings were supposed to be $10 million annually. Is there a change in that number, are we getting the benefit of any of that now, any color there, thank you.

Sure. The investment in Lancaster, and we said this I believe in the last earnings call, was about two and a half, three months behind. So we're beginning to see the benefit from that investment and would expect to continue to see that benefit grow in the second half. The equipment is in. It's making commercialized product. We're shipping product and we're now achieving the goals we set for that project.

So the $10 million annual savings is still on target, it's just a little delayed?

Absolutely, John, absolutely.

It shifted a few months.

Yes.

Thank you.

And that concludes the Q&A portion of the call. I'll now turn it back to Beth Riley for closing remarks.

Thanks, Katrina. Thanks again, everybody, for joining us. We very much appreciate your attention and as always I will be available later today and through next week for your follow-up questions. Have a good weekend.

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