Armstrong World Industries Inc (AWI) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2010 Armstrong World Industries incorporated earnings conference call. My name is Keisha and I will be your operator for today. At this time all participants are in a listen only mode. We will conduct a question-and-answer session towards the end of the conference.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Beth Riley, Vice President Investor Relations, Communication. Please proceed

Thank you Keisha. 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 President and CEO, Tom Mangas, our CFO, and Frank Ready, the CEO of our Worldwide Floor businesses. Hopefully you've seen our press release this morning. 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 effect Armstrong, please review our SEC filings, including the 10-Q filed today. We undertake no obligation to update any forward-looking statements.

In addition, our discussion of operating performance will include Non-GAAP financial measures within the meaning of SEC regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the release and in the appendix of the presentation. Again both are available on our website.

And with that I'll turn the call over to Matt.

Thanks Beth. Good afternoon everyone and thanks for participating in our earnings call today. I'll discuss our refinancing and dividend announcement, provide an update on our strategy, and discuss some of the business highlights from the third quarter. Tom will then review the financial details, and after which, we'll answer your questions.

To begin, in addition to earnings, this morning we announced our intent undertake a leveraged recapitalization to refinance our existing credit facility to fund a special dividend. We finished the third quarter with net cash of $236 million, and expect to continue to generate cash. We've consistently stated that we'd be comfortable with more leverage and would likely return cash, beyond that required for our expected strategic and operating needs, in order to create shareholder value, while efficiently allocating our capital.

Recently the trust and TPG, which together own more than 60% of our shares, asked our Board of Directors to consider a large special cash dividend. Before deciding on an $800 million special dividend, the Board work with management to assess a number of relevant factors before agreeing to the request. Including, substantial net cash on our balance sheet, good availability and attractive pricing in the credit markets, funding required to pursue strategic initiatives, servicing the increased debt and maintaining operations.

The Board of Directors determined the leveraged recapitalization and special cash dividend, was appropriate and responsible and approved the pursuit of $800 million in new debt. Assuming the debt financing is successfully completed under acceptable terms, the Board expects to declare and pay the special cash dividend before the end of 2010.

And before reviewing the third quarter and updated outlook, I'd like to reiterate the building blocks of our strategy and report our progress executing against it. As the first strategic building block we're moving aggressively to strengthen our core business, which of course is Global Ceilings and Flooring. Our intent is to drive increased profitability and shareholder value independent of any macro economic recovery.

A more efficient cost structure is the foundation of that stronger core. And, as Tom first noted in our March call, we're committed to eliminating an incremental $150 million of cost over the next three years. The cost savings are coming from improvements in plant operations, more efficient global procurement SG&A reductions, particularly G&A. We've continued to develop and refine the plans to achieve the committed cost reductions.

The plans we're developing and have begun executing, should deliver the $150 million from each of manufacturing, procurement and SG&A. We began executing cost reduction plans as they were developed, and through the first ten months of 2010 our actions against this target have included the following --

We've been talking for some time about the plan, of permanently eliminate losses, in our European flooring business. Our commitment was to cut the $25 million 2009 loss, roughly in half this year, and approached breakeven in 2011. In September we announced restructuring actions that will deliver the bulk of that savings. We're narrowing the operations and focus of the business to the products and geographies where we can be a strong profitable market leader. These actions will reduce the European flooring workforce by 38%, or 520 jobs, and close two of our four manufacturing plants. In total, we expect the restructuring to incur severance and asset write down expenses of $30 million to $35 million through 2011.

Cash expenditures are expected to be approximately $25 million. Expected annual benefits of between $15 million and $20 million from these actions, should be fully realized by 2012. These savings will be in addition, of an estimated $15 million reduction in SG&A in 2010. As we discussed in the past, our cabinets business is entirely residential, and the most exposed to new construction, of all of our businesses. Consequently, while remaining cash positive, cabinets has not generated operating income since 2007. In 2010 we did aggressive manufacturing and SG&A expense reduction to resize the business for current market realities. For the full year these actions are expected to nearly eliminate last year's operating loss, despite further market related sales decline.

Continuing the manufacturing footprint rationalization the past several years, this year's announced closures include two wood plants and a ceilings plant in North America, and a metal ceilings plant in Europe. In order to fully leverage economies of scale, and the adoption of world-class sourcing technologies and methods, we have combined several regional procurement organizations in our consolidated global organization. We centralized 88% of our global spend, that's up from 51% in May of 2010. And were looking to strategically invest in locations that are aligned to future supplier footprint.

Tom has mentioned in prior calls, that we're aggressively executing a Lean transformation throughout our global manufacturing organization, and we've begun targeted application of Lean tools to improve transactional SG&A processes. We've already touched nearly every manufacturing location around the globe. And we've completed over 500 separate Kaizen process improvement events, and are developing on the ground Lean experts to sustain and amplify the rate of efficiency improvement.

In short, we're moving boldly to make the difficult but necessary decisions that will significantly change our cost structure to competitively position Armstrong to grow margins, even in flat markets, and to benefit from the eventual market recovery with significant incremental margins.

The second building block of our strategy is to enhance the core through increased investment in growth in emerging markets. While developed markets will continue to contribute the majority of our profit for some time due to their overwhelming relative size, rapid growth from the small base in emerging markets can and should contribute to margin expansion.

We're currently the market leader in emerging markets, such as China, India and Russia. We want to extend that leadership and are in the process of redefining our market opportunity much more broadly, and will utilize our technology and innovation assets to develop creative ways to address that expanded opportunity.

One step in that direction is the construction of the Chinese commercial vinyl plant we announced earlier this year. Producing in China, rather than sourcing from our manufacturing in Australia, will significantly increase our market opportunity by producing a more complete and cost-effective product portfolio for Chinese markets. This plant is on track to begin producing in 2012.

We'll be increasing our investment and market development resources investment in China to fully capture existing sales opportunities and to build broad market coverage. We're also reviewing our Asian leadership structure to find opportunities to align it more fully with our global business unit organizations. We also continue to evaluate opportunities in Eastern Europe, and expect to invest to grow faster there.

This year we've been expanding our market coverage through distributors in Russia, and are still evaluating the potential for future investments, perhaps up to and including Russian manufacturing capacity.

In summary, 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 cash generation ability. We're now aggressively taking actions to strengthen that foundation so we can deliver on the opportunity for the creation of real value.

Now, bringing the focus back to the near term, I'd like to make a few comments about the third quarter and our improved outlook for the remainder of the year. We had a good quarter, particularly given the weak housing market. We delivered significant operating income growth on flat sales. This increase in income, added to a strong performance in the first two of quarters of 2010, helped us deliver year-to-date operating income growth of nearly 30%.

Naturally, performance varied by segment. In light of a still volatile macroeconomic environment, we're pleased our operating profits are above both guidance and prior year. Prior macroeconomic trends continued in the quarter with commercial markets performing better than expected, and residential markets continuing to be worse. Excluding the benefit of foreign exchange, sales were flat for the third quarter. Adjusted operating income increased 5%, to $83 million, modest improvements in price and commercial volume offset lower residential buying.

We continue to generate cash with nearly $80 million of free cash flow in the quarter. Fundamentally, we continue to improve the factors within our control, achieving price realization at least partially ahead of inflation, and reducing manufacturing and SG&A expenses.

Our global ceilings business again delivered a very strong performance, with organic sales of 8% and 20% of adjusted operating income growth. The profit improvement was largely due to sales increase. Commercial volumes were stronger than expected, up about 4% domesticly.

North American Resilient Wood Flooring sales declined, due to lower residential market opportunities. Our domestic Resilient sales are split roughly evenly between residential and the commercial markets. Commercial Resilient sales grew modestly, offset by declines in the sales in the residential markets. Sales for both of the domestic flooring businesses were negatively impacted by customers reducing their inventory levels. We estimate their inventory actions contributed, roughly about a third of our sales decline, with big box being the largest contributor to that decline.

European Resilient Flooring sales declined 2% on slight market weakness. Despite modestly lower sales, we had modestly positive operating income, due to reductions in SG&A and manufacturing cost.

Cabinet sales were down nearly 9% on residential market weakness. However, they cut their operating loss by nearly half due to the cost reduction actions that I mentioned earlier.

Now for the full year we expect to continue to outperform our markets. Based on our year-to-date profit growth, which is primarily due to unexpected relative strength in the commercial renovation markets and our continued cost elimination. We're raising our 2010 operating income guidance by $10 million at the midpoint to $185 million to $195 million. This represents significant profit growth despite flat sales.

And now I'll turn it over to Tom for more detailed examination of the numbers.

Thanks Matt. Good afternoon everybody and thanks for participation in today's call.

Before reviewing the financials, I'd like to provide a little more detail regarding our announced intent to refinance and issue a special cash dividend approximately $13.74 per share. I know there's a lot of interest, but we are still early in the process. I can tell you that our lead banks are working through the financing plans with us, and we will start to implement as early as next week.

We expect the structure will include a secured term loans and a revolver. We do anticipate our credit rating will be lower as a result of incremental leverage. In addition, we expect this will increase 2011 interest expense by approximately $30 million.

This recapitalization would take our gross debt to normalized EBITDA to roughly 2.8 on a last 12 month basis, which is in the two to three times leverage range we have discussed before as our comfort zone. And which is more consistent with our building product public peers. This is clearly a more efficient capital structure than where we are today. And that will boost shareholder returns versus us sitting on the cash. And we expect to achieve this at a low borrowing cost.

Now turning to the results. I will be referring to the slides available on our website, starting with side two, as Beth already covered slide one. Despite weakness in our residential markets and significant raw material inflation, we were pleased to deliver organic sales that were level with 2009 and still grow normalized operating income by 5%. Our focus on reducing costs in the past 18 months via plant closures and idlings, 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.

Armstrong's core markets experienced trends similar to those we saw in the second quarter. In general, commercial markets were stronger than we expected and residential markets were weaker. Demand improved modestly in the US commercial markets in the third quarter of 2010, reflecting both new and remodel activity.

Residential remodeling activity is very difficult to measure. However, we believe this market was down overall year-to-date in the mid single digits, with relative strength in the first quarter overwhelmed by weakness in the mid to high single digit range in the second and third quarters. Single-family starts were down 12% in the third quarter. Clearly, the relative strength of remodeling activity in commercial markets has softened both the impact of new commercial construction weakness and the overall residential declines on our sales.

Asia and Eastern Europe were strong year-over-year. Specifically, sales in the third quarter were $765 million, were essentially flat versus a year ago when normalized and constant exchange rates. With the effects of foreign exchange included, sales were down 2%. The company delivered $83 million in adjusted operating income, exceeding the prior year by $4 million, or 5%, through operating cost reductions.

Normalized operating income margin grew 50 basis points versus a year ago, and was 280 basis points better than the second quarter of 2010, consistent with our -- the seasonality of our business.

Adjusted earnings per share grew to $0.83 per share versus $0.77 in the third quarter of 2009. We delivered $79 million in free cash flow in the quarter, which was below the third quarter last year with a difference due to relative changes of working capital. As a result of this cash performance, our cash on hand exceeds our outstanding debt by $236 million.

Slide three explains how you get from our adjusted operating income of $83 million to a net as reported income of $30 million. In the quarter we took $15 million in charges related to the restructuring of our European Flooring business, the details of which we announced in September. In addition, we took approximately $22 million in charges related to the closure of our Beaver Falls, Pennsylvania, ceilings plant, two wood flooring plants, one in Center, Texas, and the Oneida, Tennessee, strip mill, and the permanent closure of a previously idle vinyl tile plant in Montreal, Canada.

Finally, we took several million dollars in severance charges related to our SG&A reduction efforts. These non-recurring charges were partially offset by the receipt of $7 million of laminate duty refunds received as a result of successful customs litigation.

Moving to slide four. This provides our sales and adjusted operating income by segment.

Worldwide building products lead sales in income growth in the quarter. Despite the choppy macroeconomic environment, ABP grew sales 8% on a constant dollar basis, and adjusted operating income by $11 million. On a constant dollar basis, Asia lead the growth with sales up 27%, followed by the Americas with 7% growth, coming from strong contributions from the US commercial markets. Europe was up 4%. Total worldwide flooring sales were down about 5% in constant dollars versus prior-year on weakness in domestic residential markets.

Global Resilient Flooring, which achieves roughly one third of its product sales in residential markets and two thirds and commercial markets, kept sales flat versus the prior-year through growth in Asia and domestic commercial markets, and grew adjusted operating income by $10 million.

The wood segment saw sales decline 15% and earnings by $14 million with significant lumber inflation exacerbating the margin impact of the sales decline.

Benefiting from significant cost reduction's, cabinets decreased its operating loss by $1 million, despite sales declining 9%, following the residential market, as Matt already described.

Unallocated corporate expense was a $4 million drag on quarterly earnings versus the prior year, due to our investment in Lean manufacturing processes and the continued and expected decline of our non-cash pension credit.

Slide five shows the building blocks from the third quarter of 2009, adjusted operating income to our current results. As you can see, price mix, manufacturing cost improvements, and lower SG&A drove our earnings improvement. As we anticipated in our last call, input costs, which were particularly favorable in the third quarter of 2009, were a significant drag on earnings in the third quarter of 2010, as we have seen significant cost increases for lumber and PVC in our flooring statements. Similarly, we continue to see volume decline versus the prior year, primarily in our domestic residential markets.

We believe we have been about as aggressive as we can be on pricing to recover these costs in the current demand environment, particularly in soft residential markets. Let me take a few moments to recap pricing actions we have taken in the last nine months. In Americas floors we announced pricing of 4% to 6% across wood flooring products effective April 1 and a second price increase effective July 1 of 6%, only on solid wood products, which represents one half of our wood sales, in response to hardwood lumber inflation.

We took a 6% increase for resilient products on June 1. On October 1, we announced a 5% to 7% increase, effective January 1, 2011 for our European flooring products.

On ceiling tiles in the US and in Europe 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 16.

WAVE, our Worthington and Armstrong joint venture, took a 10% price increase in the Americas in May, and another 5%, effective in October, to recover from rapidly rising steel costs. WAVE Europe similarly took a 6% to 9% increase through the spring.

As we have described before, our effective yield is less than our announced pricing due to competitive pressures over time. The manufacturing cost improvements in the quarter show 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. As Matt described, we have announced the closure of several plants, including wood plants in Oneida and Center, a metal ceilings plant in Switzerland, the Beaver Falls ceiling plant, and two of our four European flooring plants. We continue to look for ways to drive improved costs, both in manufacturing and SG&A, and will make announcements as appropriate.

Slide six shows our results against free cash flow for the quarter. As mentioned before, we generated $79 million in free cash flow, compared to $117 million in the prior year, with relative change in working capital explaining the difference. Fundamentally, the third quarter of 2009 saw a substantial drawdown in our net working capital, as we were essentially liquidating the balance sheet in a slow economic environment.

In this most recent quarter, we essentially held net working capital flat, versus the second quarter of 2010, and reduced our net working capital position versus the prior year. However, given the substantial improvement in working capital that we enjoyed in the third quarter of 2009, the year-over-year impact on free cash flow is a drag. For perspective, though, inventory days are down nine days versus the prior year.

Slide seven simply summarizes our key metrics on a year-to-date basis for 2010. The sales declined less than 1% on a constant exchange basis, versus the first nine months of 2009. Despite this, normalized operating income increased nearly 30%, and we built 180 basis points of operating margin. Earnings per share are up $0.41, and we generated $21 million, less free cash flow.

Moving to slide eight -- for the first nine months of 2010 all of our reported business segments, except Wood Flooring, delivered earnings progress, versus the prior year, with only Worldwide building products showing any sales growth. Again, the $9 million dollars of incremental expense from corporate reflects our investment in Lean and the decline of the non-cash pension credit, partially offset by savings in other corporate areas.

We are already seeing our Lean investment pay dividends in the business units, and full exploitation of Lean will be critical to delivering the $150 million savings goal we have set.

Now turning to guidance, which starts on slide nine.

With less than three months remaining in the year, we have narrowed our guidance on both the low and the high end to our current sales estimate of $2.76 billion to $2.8 billion. For the balance of the year we're projecting that the commercial markets in the US will be essentially flat and Europe will be flat to down. We still project housing starts in the US to land between 575,000 to 625,000 units for the year. Finally, our outlook now assumes residential remodeling will be down mid single digits on the year, and down approximately 10% on the fourth quarter.

This is perhaps the biggest change in our outlook versus last quarter, and it is driven by the sustained softness we have seen through the summer and October.

Despite this slightly more pessimistic sales outlook, we are raising our adjusted operating income estimate to $185 million to $195 million, from the previous range of $170 million to $190 million. Driven by our stronger earnings in the third quarter and progress against our plans on SG&A and manufacturing cost reductions.

This takes our adjusted earnings per share guidance to a range of a $1.69 to $1.79, compared to our previous guidance range of $1.55 to $1.75. These ranges exclude any impact from our leveraged recapitalization.

We would expect there to be some impact on earnings per share in the fourth quarter, driven by highest interest expenses, if we are able to secure the financing. And there would be some accelerated expensing of fees for retiring our current financing and for implementing the new financing.

Our free cash flow follows the earnings and working capital improvements, with an increased range of $110 million to $130 million, up from $85 million to $105 million. Again, excluding the earnings impact from our new financing program.

This implies the use of cash from the fourth quarter which is contrary to our usual cash generation, due to smaller than average seasonal working capital reduction given our already low base at this point in the downcycle.

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. We are maintaining our assumption on material and energy inflation at $25 million to $35 million, net impact on the year, with the majority of the impact coming in the third and fourth quarters. Lumber and petroleum based inputs remain the primary drivers. This excludes any pricing to recover these cost. We've outlined our pricing action to date and 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 soft demand environment.

Our gross margin outlook also remains the same, from flat to plus 1 point change, versus 2009. While year-to-date gross margin is already up 90 basis points versus 2009, the heavier commodity inflation anticipated in the final quarter of the year tempers our outlook. We have taken actions to further reduce SG&A over the past nine months versus our original 2010 plan. Mostly in cabinets and corporate staff groups, as a way to ensure profit growth in the current year and contribute towards our $150 million savings goal.

Finally, we are excluding from our normalized presentations $15 million in CEO transition costs, both the $11 million severance and $3.5 million in sign on bonuses. In addition, we are excluding $50 million in one time charges and accelerated depreciation associated with several cost savings initiatives, including the previously discussed plant closures, restructuring of four Europe, SG&A related severances, and the closure and impairment of our airplane operations.

Too close, we are pleased with our third quarter results and we are pleased to be able to take up our full year guidance, despite a tough domestic economic environment. As Matt described, we are taking bold actions to drive systemic improvements in our underperforming businesses and take cost out of broadly. We are fixing our capital structure and returning cash to shareholders, and I am confident that these actions will lead to good results in the years to come.

I'll now turn it back to Matt.

Thanks Tom. Several months into the job I remain enthusiastic regarding our opportunities over the next several years. We're getting traction on broad ranging cost reduction, while continuing to deliver the outstanding products, quality and service that earned our leadership in the marketplace every day. We're comfortable with the leverage we'll assume with the intended refinancing and retain the flexibility we need to execute our long-term strategy. We've got the foundation and the plans for the creation of real value, and I'm excited to be a part of it. And with that said, I want to thank everybody for your time today and now we'll be happy to take any questions you might have.

Thank you.

(Operator Instructions)

Your first question comes from the line of Keith Hughes, representing SunTrust. Please proceed.

Thank you. I have two questions. First, if we interpolate for your annual guidance for the fourth quarter, it looks like you're going for a flattish revenue, but the EPS would be down significantly. Can you tell me what's causing that?

Yes. Hi, Keith. Tom Mangas, here. Essentially it's the raw material inflation that picks up in the fourth quarter versus the prior year. That's the full story.

And your assumption here is that those ten price increases, you don't get any of those? Is that correct?

We are getting it, but the rate of commodity inflation on the year-over-year basis is dramatic. It is a substantial step up versus what we saw -- what we had in the third quarter. And I think that the pricing, we've got it at market, but particularly on the flooring side, it's not all sticking. So we're having -- we've taken it, we're trying to hold it, but it's not holding as hard as the first one did.

Second question. At the beginning you highlighted for the $150 million plan three areas -- plant operation, G&A, global sourcing. But you also talked about enhancing the core. Is that part of the $150 million plan, or is that something separate?

Well, the way to think about it is the first phase is building a stronger cost position, which the $150 million will help obviously this year and next year. Enhancing the core looks at expansion opportunities to pursue attractive markets like China, India and Russia. So it's all part of one integrated strategy. I would think about it as Phase 1, Phase 2.

So the $150 million number you've given, if you're going to get to that goal some of enhancing the core strategies will have to work. Is that correct?

They are both in place. We will achieve the $150 million cost out. And we are going to continue to pursue opportunities in markets like China, Russia and India

So that would be in addition to the $150 million, if that works?

Yes

Okay. That's my question. Thank you.

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

Thank you. Good afternoon. A couple of things. The $150 million of cost savings. Did you outline a timeline on that, number one? And number two, did you -- how much of that by the end of 2010 will have already flowed through the P&L?

Okay. Hi, John. Tom Mangas, here. We've outlined a timeline to achieve it over three years and we are not in a position to say how much is going through in 2010 at this point. Largely because were not really ready to give guidance on what 2011 looks like.

Okay.

I would say we would expect to be in a position to lay out that for you in our first of the year call, and following the fourth quarter.

Okay. And then, if we just stuck with flooring for a minute -- and I realize we've got a lot going on with this inflating raw materials and pricing trying to offset -- but I'm just trying to look at flooring EBITD, and comparing 2011 to 2010, and if you had sales that were flat and you had no degradation of margin from higher raw versus pricing offset, what the restructuring efforts you've taken will improve EDITD at flooring year-over-year?

Hi, John, its Frank Ready. It's approximately $20 million.

Okay. And is that inclusive, Frank, of the -- I know you've had a rough transition in the new Lancaster fiberglass backing, or is that something incremental?

That would be incremental.

That might be another $5 million?

It's probably slightly less than that.

Okay. And then, Tom, what's the pension credit in '10 and '11?

In '10 is $50 million, we've guided for that. We really haven't said what is in '11, but we expected to decline, as it's declined in the current year.

And then, what's the current NOL in your estimated present value?

It's still the same, $130 million

Okay -- I'm sorry go ahead.

John, I just wanted to say, your question specifically is how much is in the 2010 estimate. One of the things we're trying to do for you and the investment community is lay out more transparently our restructuring program.

And so we've taken a lot of actions in the third quarter to achieve the 150 but not all those things are done and dusted in the first 2010 it will be beaver falls closure and several other actions will happen in 10 but I think are laying out the road map of how were getting there really with our third quarter release.

Okay. And then, my last question is for Matt. This commercial ceilings has really gotten better faster than any of us imagined. I was wondering what --? If you could tell us by either end market or types of customers where -- you mentioned is this new construction as well as remodel, which is surprising to me. I'm just wondering what additional color you can give us about what's driving that market right now and early thoughts on '11 for that end market? Thank you.

Appreciate the question. I guess I would echo your point, the commercial remodel market is far more robust than we anticipated coming into the year. I would say that -- I would point to the remodel activity as driving most of the ceilings growth, rather than commercial construction. And you just have tenant turn driving most of that. So, as people either renegotiate leases, and as part of that renegotiation they experience tenant improvement benefits, or as they change and move, in order to attract new tenants, landlords and owners are offering tenant improvement.

So it's that kind of general activity that driving most of the benefit we're seen coming through. And not in a position to comment on 2011 yet, but we're certainly very proud of the building products team for their ability to keep up with the demand and take advantage of it as a go forward.

So would it mostly be in the office market --? I know it's the biggest market for ceilings. But it can go in education and healthcare and other places, too. What end market's driving that?

Yes, good question. The vast majority is the office market, commercial office space and graphically we're seeing it here in the US, in North America.

Great Thank you

You bet

Your next question comes from the line of Dennis McGill representing Zelman. Please proceed

Hello everybody and thank you. First question just has to do with the ceilings business. If we look at it, pre-wave it, it seems like margins are probably running near mid-cycle levels, maybe a little bit better than that, even though were at really depressed volumes. So, when we look out how should we think about where margins can go in this segment? And, how you'll balance profitability and volume during the recovery?

Okay yes. These guys have done a great job building margins. On a normalized basis in the third quarter we've grown margin of 22% on a worldwide basis. And that compares three points better than last year. So, they put three points of margin on period-to-period worldwide. And they've done it through great mix of high-end innovation-led projects and pricing, despite the weak environment.

So, we do think there's upside in margin here, but it's probably not dramatic steps forward, because we do think that the competition will be tougher. And that, to the extent we extend margins too much, it invites additional competition in. But really as I look past on a historical basis, the last quarter is a terrific and benchmark level of performance. We expect, generally, that we would add new volume in at a incremental margin of 30% to 35% on an incremental margin on the way up. It's just a matter of, How much can you hold? as we see a rebound in the economy and competition starts fighting for that volume

Okay, that's helpful thanks.

On the restructuring action, it sounds like this might come with the added transparency you talked about, but of the $150 million can you give us a rough idea of how that might break down by business, segment and corporate?

No, not at this point. I would say that you saw the level of plant take out in SG&A, certainly SG&A is going across business unit and corporate, we've had just in the fourth quarter here we announced closure of five floor plants, one ceiling plant. All right? And certainly we are disclosing right now the overall magnitude of cost expected of those. We really haven't told you yet the overall savings expectations. But that gives you the sense of proportionality, where we see cost coming out and certainly as you look at the past actions as well.

What I would say is we want to be able to layout a good path for the $150 million, we've been a little hesitant because we want to make sure we put our plans in place, get them announced and be able to map a clear way forward in conjunction with our guidance for 2011, and we just don't want to get too far ahead of ourselves in laying out those building blocks. I also would doubt that we would break it into business unit level when we get there, though, we'll keep in a corporate level.

I guess to coattail that a little, clearly we'd want to -- our intent is to position both the flooring and ceiling businesses in a competitive way. And they're arguably maybe a different points in the cycle. As we've said, our flooring business is feeling the the residential and retail pressure far more than the ceilings business, just because of the nature of the application. So, our focus on cost and expense reduction is going to be determined by where those businesses are in their cycle. And the other thing I'd just add is, there is a cycle-time dimension between when we decide on actions within the $150 million, and the timing of those benefits through next year. So, having the plans and making the decisions and executing those plans doesn't necessarily result in the immediate benefit. So, some of the benefits will take place over a period of several months, or over the period of a fiscal year.

Okay, thanks for that. And then lastly, as it relates to some of your comments around residential remodel activity -- I think your guidance for the quarter might have been down as much as 10%, if I heard you right, and for the year it sounds like mid or high single-digit type declines -- sounds like some of that is maybe is inventory corrections? Can you elaborate at all what you are seeing across your business as far as point-of-sale versus the impact on the orders by the big retailers? Are you seeing that much drawback at the consumer level?

Specifically to the remodel number for the market that Tom cited earlier, that does not have any impact of inventory reduction in it, that's purely market related activity. We did see in the third quarter a significant rundown of inventories, both of the big box and distribution. They had built inventories when they saw the business doing pretty well in April, May and early June. And once the housing tax credit ended and activity dried up in the third quarter, we did see a significant reduction in inventory. So if you look at our numbers about a quarter of the year-on-year impact in sales we would estimate is due to inventory reduction.

And during the quarter did you see any difference, as far as were the drawdowns heavier at the start of the quarter versus the end, or consistent?

It actually picked up momentum as the quarter went on.

All right thanks for all the information guys.

Thank you, Dennis.

Your next question comes from the line of David MacGregor, representing Longbow Research. Please proceed.

Yes, good afternoon.

Hey David

The European business in Resilient. Nice upturn in the overall Resilient. I wonder if you could talk about the European number within that segment number?

Let me start first, and then Frank can join in. European Resilient for the quarter on an organic basis or a constant exchange rate was down 2%, coming off up 2% in the second quarter. So, holding their own, also benefiting from a relatively stable commercial base. Also, as you recall, at the end of the quarter we made several significant announcements, including the exiting of the residential business, which is a significant move to drive the structural attractiveness of that business and hone down into a core profitable business for us. Which, we saw some impact of that as we made those announcements in the quarter

I think Tom said it very well. If you look at it from a market perspective, we actually saw improved strength and market activity in Central Europe as the quarter went on. And a lot of that is due to some government investment in some of our core segments. Southern Europe was soft, but that's a very small piece of our business. And Scandinavia was actually pretty good, which is the third leg of the stool for us from a market perspective. So, we actually saw central Europe being a little bit better as the quarter went on.

Were the European operations still drag on the P&L this quarter?

Oh, yes. Absolutely. I would just tie into what Frank was saying. I think Frank and Charles Irving Smith, our leader in Europe, deserve tremendous credit for making some fundamental tough but strategic business decisions, as we said . This is simply a matter of tough calls around exiting underperforming geographical markets and underperforming segments. Exiting the residential market, building what we think is a much stronger, more competitively positioned, commercial business. And we are optimistic that we'll be at breakeven next

David, just on that. Generally the third quarter is the best quarter, given the seasonality of the business. And so this year, and in the prior year, the third quarter was essentially break even or little bit better than break even on normalized operating income basis. So to your question, was a drag in the third quarter? No, but it hasn't been in the last couple years because of the seasonality.

Because of the seasonality, right. Maybe I can follow-up with you a little bit more off line. The other question I have is with respect to the wood business. We saw revenues off 14%. I think Lumber Liquidators yesterday indicating that their sales comps for the quarter were up about 7.3% before they had their SAP blow up. Is it possible that the non-home center retailers that to go to market with are losing share of the trade?

You know, good question. You look at what Lumber Liquidators is doing. They were down in comps 6%, in real numbers they attributed a lot to SAP transition, who knows the impact of that. No question Lumber Liquidators has had a track record of picking up share. Where they're picking up share is from customers that don't offer the high touch, high service that they offer when someone walks into the showroom.

So, I think that impacts across channels, but customers where they're not offering that high touch service, I think we're losing to Lumber Liquidators.

Is that in turn having an impact on your business?

You know, I don't know. When we look at our third quarter, there was two major impacts in our wood business. One was the market, the significant downturn in new construction as well as remodel. And then, as I alluded to earlier, some fairly significant reduction in inventories in the channel.

Okay. Perfect. Tanks very much.

Your next question comes from the line of Robert Kelly representing Fidelity. Please proceed.

Good afternoon and thank you. On what you're implying for 4Q '10 in the full year guidance -- a year ago in ceilings you had a pretty poor relative margin. Some pull forward happened during Q3 '09. And the vines weren't there in 4Q. Is the expectation that you have a similar type of margin in ceilings again this 4Q?

I would say last year on the fourth quarter we saw sales decline of 15%. This year we're not expecting that type of sales decline. That said, the seasonality I described on commercial flooring is there a building products and so -- yes, the 22% margin we achieved a worldwide basis in the third quarter, you can't straight line that. It is moved through the quarter, so I would expect a substantial step down on a margin basis versus Q3 2010 but an improvement versus Q4 2009.

Okay, so not a single digit margin in ceilings? 14%?

No. A single digit margin is not our assumption for the company guidance.

Okay, great. And then, you just talked quickly about what you think mid-cycle incremental margins would be for the feeling business. When all the cost savings are in and demand equalizes for the flooring business, what type of incremental do you expect for margins from those businesses?

Generally, it's less. So, flooring it's more like 25% to 35% on the way up. In ceilings, is more like 30% to 40% on the way up, so it's a little bit lower. Also, in flooring our margin structure is a little more lumpy, it really depends on what product forms are going to be the ones that progress commercial versus residential wood versus -- engineered wood versus solid wood. But, it's less on the flooring side.

But that 20% to 25%, or whatever it might be for flooring, that will be after the cost savings are all in?

Well, I'm not sure I understand the question. With today's cost structure that's what you should expect with incremental volume. So, that's what I'm saying. So you take the cost structuring that we're describing and that's incremental.

Got it. Okay, thank you.

Your next question comes from the line of Bob Wetenhall, representing RBC. Please proceed

Good afternoon.

Hey, Bob.

I just was curious about your outlook. It sounds like residential continues to be soft. Could you share with us your expectations for 2011 on new home starts?

We're probably not in a position at this point to comment on 2011. I think we'll probably leave that to our first call in 2011.

Okay. And terms of the recap, you're expecting to consummate the transaction, refinance the current credit facility and make the distribution before year end, correct?

Yes

Got it. Okay, thanks very much.

You bet.

Thanks, Bob.

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

Hi everyone.

Hey, Jim.

Matt, could you talk a bit about the special dividend? Does that suggest that the firm will not be making material acquisitions over the next few years, at least with debt?

No, here's a way to think about it. First of all, as Tom pointed out, we've commented before that we would look for opportunities to return excess cash to our shareholder. We're comfortable with the leverage and the debt ratio that this -- that we end up with, if we're able to execute the special dividend.

As we look at our priorities over the next two to three years, this won't impact our flexibility to do the things that we want to do. Our primary focus is on organic growth. We've talked about opening plants in China, we're talking about the potential of a plant in Russia. This doesn't impact that. We've got a lot on our plate right now from an organic perspective in terms of SG&A reduction, LEAN cost out opportunities, Tom touched on that as well. And the redeployment of organic resources in key market development roles in places like China and Eastern Europe.

So we don't see it as impacting our flexibility at all as we think about the next two to three years.

Although it sounds like the next two to three years are unlikely to be years of material acquisition activity, based upon what you just said?

No, I wouldn't reach that conclusion.

Okay

And at this point I wouldn't speculate on what those opportunities would be. I wouldn't leap to that conclusion.

I see. And then, Tom, would you be able to venture as to what your capital expenditures outlook will be 2011 2012 as you go through the $150 million cost reduction program?

Yes. I will give you a little guidance on capital, simply. We do expect 2011 to be a heavier capital expenditure year. Somewhat in support of the plant closures we've described. As we ensure that the capacity capability at the existing plants is there. But largely because we're building the China vinyl plant. We just broke ground on that a couple weeks ago. So, we are going to be in the heavy spend on those new plans in '11, and some tail end of '12 .

So, I don't really think the $150 million savings program overdominates the capital spend, but really the organic growth and new plant construction will be the main

That's helpful and then thank you both.

Thank you.

Thanks, Jim.

We have a follow-up question from the line of Keith Hughes representing SunTrust. Please proceed.

Yes, on the balance sheet -- can you give me a break down on how much cash is in the US and how much is in international?

Yes, we've got about $200 to $230 international and the balance is in the US

It appears from the recap, you're still going to have a fair amount of cash on the balance sheet, given the numbers you put out there. Is that going to be the case?

We think we need about $200 million to run internationally. We have heavy investment demands, particularly if we're building the new plant in China, and our other growth expectations, we've got cash we -- there's friction cost to repatriate. And, also frankly Keith the seasonality of our business forces us -- we burn cash often in the first quarter, as we're ramping up for the seasonal inventory on a low sales base, so we think we need some cash to effectively run the business.

Okay. Thank you.

Thank you

We have a follow-up question from the line of John Baugh representing Stifel. Please proceed.

My question was just on the raw material inflation. Are you seeing it in lumber currently as well? Or, is it primarily in the petrochemical?

No, John, it's both. Significant inflation really in lumber as well as PVC and plasticizer.

And on the lumber can you explain? Because demand for furniture and wood flooring absolutely stinks, Frank .

It does, John. As unfortunately I know too well. Here's what I think is going on. You think about a log -- when they go to cut that tree down, they need to have an outlet for all grades of lumber off that log. And today they don't. So, what you just said -- they have nowhere to go with that upper grade lumber because there's not demand for premium mill work or furniture.

So, if you want to get that lumber you either have to take the higher grade or you have to pay a premium on the grade you want to justify them wanting to cut the log down or the tree down.

The other thing that's happened, John, is you've had about a 30%, 35% reduction in the number of sawmills in the US since the downturn started. And so intuitively I would say end use demand is down, so prices have dropped. But what's happening is that down market is driving the economics of that tree and where they can go without premium grade of lumber. In addition to that you've had a bunch of sawmills go out of business.

Are the Chinese influencing that at all?

Not at all. Everything that I just spoke to, John, is specific to solids. And the majority of lumber for solids, regardless of where it's milled, comes from North America. North American red oak. So it really doesn't have any impact.

Thanks for that wacky explanation.

I told you it would be wacky.

There is no further questions in the queue. I would now like to turn the call back over to Beth Riley, Vice President Investor Relations, Communications for closing remarks. You may proceed.

Thank you. Thanks again everybody for joining us and for your questions. Appreciate it, and as always, I will be available for follow-up questions through the day and into next week. Have a good weekend.

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