Armstrong World Industries Inc (AWI) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second-quarter 2011 Armstrong World Industries Incorporated earnings conference call. My name is Regina, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). Today's event is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Tom Waters, Vice President, the Treasury and Investor Relations. Please proceed, sir.

Thank you, Regina. 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, Frank Ready, the CEO of our Worldwide Floor Business, and Vic Grizzle, CEO of our Worldwide Ceiling Business. Hopefully you have seen our press release this morning, and both the release and the presentation Tom Mangas will reference during this call are posted on our website in the investor relations section.

In keeping with SEC requirements, I advise that during this call, we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong, please review our SEC filings, including the 10-K filed this morning. We undertake no obligation to update any forward-looking statements beyond what is required by applicable securities law. 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 press release and in the appendix of the presentation. Both are available on our website. With that, I will turn the call over to Matt.

Thanks, Tom. Good afternoon everyone, and thanks for participating in our call today. The second quarter of 2011 was characterized by a continuation of what I described in our first-quarter earnings call as lumpy demand. Sales this past quarter of $749 million were up $24 million, or 3% from the second quarter of 2010, but the entire increase was due to changes in foreign exchange rates. Sales were within our guidance range of $740 million to $790 million. Volumes were down just over 4%, but adjusting for the businesses we exited in Europe, sales volumes were off about 2%. Price and mix were up 4% combined, with price increases slightly outpacing input inflation.

We continued to experience volume declines across most of our businesses and geographies, with the exceptions of our wood business in Asian markets, sales volumes were down versus 2010. Wood sales increased 3% driven by higher mix, price, and volume at retail, offsetting continued softness in the builder market. In the Pacific Rim, our businesses grew 8%, excluding the impact of foreign exchange movements. China and India grew sales while Australia declined. EBITDA for the second quarter of 2011 was $109 million, up $21 million, or 24% from 2010, and within our guidance range of $105 million to $120 million.

Of note, some of our more challenged businesses posted significant improvement in the second quarter versus last year. The European Flooring business had a positive EBITDA of $500,000, an improvement of $4 million from 2010. We continue to believe this business will achieve breakeven EBITDA for the year. The Cabinets business had $1.4 million of EBITDA, up from a slight loss in 2010. And finally, our wood flooring business posted EBITDA of $15.4 million, an improvement of over $10 million from last year, despite only very modest volume improvements. Tom Mangas will walk you through more specifics when he reviews the numbers for the quarter.

Also of note during the second quarter, we closed our Holmsund, Sweden flooring plant, completing the manufacturing restructuring of our European flooring operations. We also idled our Statesville, North Carolina engineered wood plant. We continue to make progress on our cost-down initiatives, and now forecast $165 million in cost reduction through 2012. That's an increase of $15 million from our previously-announced target. Additionally, we've accelerated our execution of these initiatives and now expect to achieve approximately $90 million of the improvement in 2011, up from $65 million when we first laid out the program.

This cost savings serves as a bridge to growth as conditions improve and our emerging markets manufacturing investments come online. We continue to make good progress with all 4 of our plants currently under construction. Shipping is scheduled to start at our Millwood, West Virginia mineral wool plant in the first quarter of 2012, the homogeneous Flooring plant in China the second half of 2012, the second China Ceilings plant in early 2013, and heterogeneous Flooring plant in late 2013. We continue to believe that 2011 will see a modest recovery at best in North America and Western Europe. We came into the year expecting a macroeconomic environment in line with 600,000 new home starts, residential repair/remodel activity flat to slightly down, and commercial repair remodel activity slightly up.

Although the most recent housing start figures were encouraging, we now believe the 2011 macroeconomic climate will be somewhat softer than we initially projected, as the recovery appears to be delayed. Until there's a real catalyst for improvement in the economy, we expect to continue to see month-to-month and quarter-to-quarter volatility and demand. With the footprint actions and other cost-down process improvement initiatives we have taken, we remain positioned to drive significant EBITDA gains in 2011, despite little help on the top line.

Our current full-year outlook is for sales of $2.9 billion to $3 billion. This consolidation at the high end of our previous guidance is driven by foreign exchange rates and not an indication of a better organic sales outlook. We expect EBITDA to be in the range of $385 million to $415 million, that's an increase of $10 million on the bottom end of our previous range, driven by the increased and accelerated cost reductions I mentioned a moment ago.

During our last quarterly call, I took a few moments to discuss progress we're making in new product development, and highlighted a few exciting recent success stories. In a similar vein, I want to take a moment during this call to discuss our lean journey, and talk about a project that's an illustration of the power of process improvement. Armstrong embraced Lean 2 years ago. The fruits of this effort are showing in our results. Lean is a philosophy, not just an initiative. Lean seeks to eliminate waste and in doing so, drive improvements in cost, quality, working capital, customer service, and safety.

Using lean tools and methodologies, our Team Valley, England Ceilings plant was able to enhance equipment reliability, and reduce required crew size to create a virtual fourth shift. Plant management and staff worked together through a series of kaizen events aimed at simplifying processes, improving equipment reliability, and eliminating bottlenecks. Additional kaizen events targeted plant configuration challenges, and developed solutions from which layouts were reconfigured, and technology like cameras and sensors were employed to allow a single operator to monitor and control multiple pieces of equipment.

The end result of these and other efforts was a reduction in required crew size of almost 30%. This reduction was applied to all 3 of the Team Valley crews and a fourth crew was created, with no additional labor cost. This effort illustrates 2 of the central tenets of lean here at Armstrong. First, we engage the entire workforce to solve problems. We found untapped potential and creativity in our workforce, that can help make our Company better. Secondly, lean improvements do not lead to job losses. People are redeployed to new roles, often leading to new lean events, where jobs are filled as natural attrition occurs, with no required training.

Today, we have conducted 955 lean events, and have fully deployed lean at all of our manufacturing locations around the world, and in the SG&A business processes here in the US and in Europe. These are the tools we use to thoughtfully and swiftly move to simplify our business. Now I'll turn it over to Tom Mangas for a discussion of the financials and our segments. Tom?

Thanks, Matt. Good afternoon everybody, and thanks for participating in today's call. In reviewing our second-quarter results, I'll be referring to the slides available on our website, starting with slide 3. Matt mentioned the significant improvement in EBITDA, despite flat sales on a comparable foreign exchange basis. Operating income and EPS results were up also 37% and 27% -- pardon me, 23% respectively. I'll address the drivers of EBITDA growth and cash flow changes on upcoming slides.

Slide 3 details the adjustments we made to EBITDA and provides a log to reported net income. Our adjusted EBITDA of $109 million excludes $2 million of restructuring expense, primarily related to the cost reductions in our European Flooring operations. It also excludes cost reduction expenses of $5 million that relate largely to the closure of the Beaver Falls Ceilings plant, and other non-restructuring charges in European Flooring. These items are for cost reduction activities that we do not classify as restructuring, but which we do not expect to recur. There was also $3 million of accelerated depreciation in the second quarter, the majority of which related to Beaver Falls, which obviously does not impact EBITDA but does impact adjusted operating income.

You will recall, in the second quarter of 2010, we had impairments of $5 million on our previously-owned aircrafts and a European warehouse property, and $2 million of cost reduction expenses related to the shutdown of our St. Gallen, Switzerland metal ceiling facility. Interest expense was higher in 2011 versus the prior year, due to our recapitalization in the fourth quarter of 2010. Finally, the effective tax rate for the second quarter of 2011 was lower than 2010, due to the partial release of state valuation allowances.

Moving to slide 5. This provides our sales and adjusted EBITDA by segment. As you can see, all business units contributed to EBITDA growth with Wood Flooring leading our second-quarter sales and EBITDA improvement. Corporate was down due to the expected decrease in our non-cash pension credit, which we have discussed in the past. Matt highlighted our wood results, so I'll move on to the other businesses. Resilient Flooring had a sales decline of 4%, driven by the exit of our residential business in Europe. Otherwise, resilient mix and price gains offset other volume losses. Price, mix and cost reduction efforts more than offset significant raw material inflation to drive the EBITDA gain.

The Building Products segment drove sales gains through continued price and mix improvements, as volumes declined in most developed markets. Emerging market volumes were up. Our US commercial unit volume declined mid-single digits, in line with the overall market. The majority of our volume decline was in the commodity segment, with sales from our high-end product lines up mid single digits versus the prior year quarter. We saw a general slowdown behind continued softness in new commercial construction, and a weaker than normal seasonal lift from education remodeling spending due to tighter state budgets. Despite that, sales for the Building Products segment are up 8% year-to-date.

Consistent with Resilient Flooring, price, mix and cost improvements more than offset material inflation in the Building Products segment. Our WAVE joint venture contributed $1 million less to EBITDA in the second quarter. As we mentioned on our first-quarter earnings call, WAVE's April price increase drove volume into March and out of the second quarter, leading to the year-on-year unfavorable result in the second quarter. Year-to-date, WAVE is more than $4 million or 14% ahead of 2010. Finally, the Cabinets segment swung to a gain driven by strong SG&A cost reduction, despite lower sales. Volume and mix both negatively impacted sales, as multi-family homes were the strongest of the channels in the second quarter, and this is the lowest margin channel.

Slide 6 shows the building blocks from the second quarter of 2010 adjusted EBITDA, to our current results. Price realization from our second-half 2010 and first-quarter 2011 pricing actions, along with mix improvements, more than offset input cost inflation of $11 million. This was crucial for us, as we fell short of covering inflation with price in 2010. Continued SG&A and manufacturing cost reductions drove the remainder of the improved EBITDA result, and offset lower volumes and the pension credit reduction. Manufacturing cost and SG&A reductions continued to provide critical benefits, while we are faced with soft end markets. As Matt mentioned, we have been able to increase our savings target and accelerate the timing of actions, and as a result, we delivered $35 million in combined SG&A and manufacturing cost savings in the second quarter, versus the prior year. Year-to-date, the savings total roughly $70 million.

Inflation remains a significant challenge. Despite the modest easing in oil prices since our last call, PVC and plasticizer remain at record levels. Capacity constraints and export opportunities have dampened the competitive forces which normally cause these materials to trend with oil and related petrochemical feedstocks. We also see capacity constraints negatively impacting other commodities like titanium dioxide. As you'll see shortly, we are increasing our forecasted inflation for 2011.

To offset these pressures, we announced additional pricing actions beginning in the second quarter of 2011, including an increase of 6% to 8% on Resilient Flooring in the Americas, effective in June, and an increase on European Resilient Flooring of 4% to 5% effective in July, an increase on ceiling tiles in the Americas and Europe, up 5% to 6% and 3% to 6% respectively, effective in August. And finally, we announced a 5% increase in grid prices in the US, also effective in August.

Turning now to slide 7, you can see our results for free cash flow. Reduced year on year free cash flow of $39 million was driven by smaller improvements in working capital. Working capital did positively contribute to free cash flow in the second quarter, just not as much as in the same period last year, when we were more aggressively right-sizing our balance sheet. The other significant changes are increased capital expenditures in 2011 as we build our West Virginia and 3 Chinese plants. Increased interest expense, driven by our refinancing and higher restructuring and other payments.

Slides 8, 9 and 10 illustrate our year to date financial results. Year to date adjusted EBITDA is up 40% on sales growth of only 1.5%, when excluding foreign exchange. Of note on slide 9, you can see that all of the business segments are contributing to EBITDA improvements, with only the Building Products business achieving higher sales. As with the quarter, the decrease in the corporate segment is entirely driven by the non-cash pension credit decline from our pension derisking strategy. The bridge on page 10 of year to date EBITDA change tells an almost identical story as the second quarter bridge we reviewed earlier, except for the year-to-date WAVE contribution being positive.

Slide 11 updates our guidance for 2011. Driven by foreign exchange, and with half the year past, we are raising and narrowing our full-year sales range to $2.9 billion to $3 billion. Essentially our macro outlook for the full year has weakened, given our second-quarter experience and the indications we are seeing in the market. However, we expect easier year over year comps in the second half, especially in our domestic residential markets. Specifically, for the balance of the year, we expect domestic commercial repair/remodel and new construction to be flat. Sales growth will be driven by price and mix in commercial markets.

On the residential side, given the Home Buyer Tax Credit effect of pulling forward demand into the first half of 2010, we expect repair and remodel to be up single digits in the second half. We expect new construction to be positive on the back half. However, despite the softer full-year volume environment and commodity headwind, we are raising the low end of our full-year EBITDA guidance to a range of $385 million to $415 million. We are pleased with the significant operating income EBITDA and EPS improvement Armstrong employees worldwide are driving through strong pricing and cost savings execution from a top line that is only up modestly when foreign exchange impacts are removed.

Given our results to date and our growing confidence in our plans going forward, we are raising our overall SG&A and manufacturing productivity program goal from $150 million to $165 million, as Matt previously mentioned. This is detailed on slide 12. Versus our previous guidance, we have increased our full year 2011 savings expectation by $25 million on the successful execution and acceleration of SG&A, plant closure and lean cost take-out efforts. Specifically, we expect to deliver $15 million in incremental savings over the 3-year program, all in 2011. And pull forward $10 million of savings into 2011 from 2012. These savings are providing the foundation for us to offset a weaker market and a worse commodity cost environment.

Slide 13 provides the more detailed assumptions going into our earnings guidance, and includes the specifics on the third quarter. As mentioned, inflation remains a challenge. We now anticipate $50 million to $60 million net input cost increases for the year. This is up $10 million from guidance last quarter. We expect improved manufacturing margins of 175 to 225 basis points in 2011, as a result of our manufacturing footprint rationalization program, lean productivity efforts and through year over year price and mix improvements. This is an increase of 50 basis points on the bottom end of the range from our guidance last quarter. The improvement is primarily due to the increase and acceleration of our cost reduction efforts.

Our estimated cash taxes for the year have increased $10 million due to the timing shifts and expected refunds. We project third-quarter sales of $780 million to $830 million versus $740 million in 2010. Note, we expect to receive about a mid-single digit lift in reported sales just from year on year changes in foreign exchange rates. We estimate third-quarter adjusted EBITDA of $115 million to $130 million compared to $112 million on a comparable basis in the prior year. The fall through from sales is lower than you might expect, as the sales gains from price and mix are required to offset higher commodity costs. We continue to expect to spend between $180 million to $200 million in capital in 2011.

For the full year of 2011, we anticipate excluding from our adjusted EBITDA between $18 million and $22 million for restructuring and other adjustment items for cost reduction efforts that we have already announced but not yet completed. This is lower than our previous guidance. Year-to-date, we have excluded $16 million from adjusted EBITDA as well as incurred $9 million of accelerated depreciation. You'll find further reconciliations to GAAP measures for the second quarter in the appendix for the total Company and the segments.

Finally, I want to take a moment and clear up a misconception that several investors have shared with us. The first quarter 2011 13-F filings for Armstrong appear to show TPG selling 1 million shares. This is not accurate. TPG's investment in Armstrong remains unchanged from their initial purchase in August of 2009. When they made their initial investment, the ownership of 1 million shares was structured so that TPG had an economic interest in the shares, but did not technically own them. This was done to avoid a change of control under the previous credit agreement. These shares technically remained with the Asbestos Trust until 2013. However, in earlier TPG 13-F filings, these 1 million shares were included by error. This most recent filing corrected this.

In closing, we are pleased with our second quarter results, and with our ability to increase the midpoint of our 2011 EBITDA guidance despite a very challenging macro environment. I remain confident that we are well positioned to achieve these results and we are putting in place a cost structure that is poised to deliver significant operating leverage when the markets do improve. I will now turn it back to Matt.

Thanks, Tom. In closing, I want to reiterate that I too am pleased with our first-half results, and we continue to anticipate uneven demand, inflationary pressures and slow growth here in North America and Western Europe, but we are confident that we've got the plans in place to execute the strategic and cost saving actions we've just updated, and deliver significant year on year improvement in our operating results. With that said, I want to thank everybody for your time and attention on the call today, and now we'll be happy to take any questions you might have.

(Operator Instructions). Your first question today comes from the line of Kathryn Thompson with Thompson Research Group.

Hi, thank you for taking my questions today. The first question just stepping back and looking at today's results, could you tell us what's happened in the last 90 days in the market and what are you at Armstrong doing to respond to this change?

Well, hi, Kathryn, let me start with that. Like we said, I think we saw a -- certainly saw slower demand in the second quarter. We, I think, commented at the end of our first quarter call, again, using this kind of clunky term called lumpy demand, but we saw it get a little uneven at the end of the first quarter. We saw that continue in the second quarter. I think specifically in both ABP and AFP businesses in commercial, we saw softness as it related to education. These guys normally see a seasonal pickup during the end of the second quarter, as we start working on remodel work in schools. Didn't see that.

In some cases it was significantly less than we typically experience and somewhat later in the quarter than we typically experience. So what's happening right now, since there isn't a lot of large commercial projects to track, most of the demand signals we get are just order flow from the channel and that makes it a little bit tougher for us to forecast demand, a little bit less transparency around what's happening in the marketplace. We're seeing some unevenness, as we said, lumpy, and we think that's kind of the new normal if you will as we go forward for the balance of the year and that's reflected in the guidance we provided.

Next question is two-fold. You alluded in the prepared comments, some of your assumptions regarding the fiscal 2011 guidance. I was going to see if you could really break it down more by end market, maybe give a little bit more color, and then second, if we do head into another recession, what is your game plan?

Well, I think we've -- in terms of commenting on the structure, I mean, as we look at the second half, I mean, we're expecting to see commercial volumes flat in both of our businesses, gains we'll see will be pricing, which I think we've demonstrated our performance of full price in the marketplace and mix. Particularly, again, I'd say -- well, in both of our businesses. I think on the commercial side. We've been talking about a slightly more favorable second-half comparison, quite frankly, in the residential market, as you have the demand sort of pull into the first half of last year with the credit, so we are staying with that outlook. So we expect a little bit of improvement in residential remodel, and again, that's not a recovery in the market as much as it is just a little bit more favorable demand.

Just in terms of -- you asked in your last question, what are we doing to respond to it, I think that kind of dove tails into what are you doing if we have another recession. Fundamentally we saw lot of commodity increases, so we have successfully taken pricing to recover commodity costs and that will continue to be a theme of ours to respond to that changing market environment. We've accelerated our cost take-out, and you've soon that in our revised guidance. We've been pushing harder, certainly stretching for more aggressive plans than we've talked before, and now we're happy to be able to bring those forward. I think that because becomes the play we continue to drive against.

Look for ways to continue to take costs out of SG&A, continue to take manufacturing productivity to new levels as a way to continue to provide earnings momentum going through what will continue to be a choppy market environment. The one thing we're not doing at this point is stopping our investment for emerging market growth. We're still fully investing in developing our manufacturing footprint, investing sales resources outside the US and so we're not going to get too caught up in the short-term gain here and forfeit that long-term opportunity that we see.

You may have had this in the prepared comments, but I missed it. Could you remind me what the cost saves were in Q2 and the buckets for the increased cost cutting targets that was raised?

Yes. Probably the best way to look at that, Kathryn, got a couple of slides in the PowerPoint that we shared. Specifically, the Q2 bridge is probably the most helpful there for you, which is on slide six. We picked up $22 million of manufacturing cost productivity, and another $13 million of SG&A cost productivity quarter two to prior-year quarter two. Totaling that, $35 million. And then there's a slide that we put in there towards the back that outlines the -- chart 12, that kinds of breaks out the year-by-year, so we're expecting of the $90 million now in 2011, $55 million of that to be from manufacturing and $35 million to be from SG&A.

I think, Kathryn, the last part of your question was what's the source of that. What we're seeing is just higher yield on the projects we have in place, so the -- we're just getting more out of what we've been working on, so we wanted to turn that in.

Thank you for taking my questions.

Thank you, Kathryn.

Your next question comes from the line of Rodny Nacier with KeyBanc Capital Markets.

Hi, hello, everyone.

Hi, Rodny.

Hi. On the Ceilings business you mentioned some demand that was pulled forward in the first quarter and you had mentioned that also on the last earnings call. But excluding that impact in the quarter, would you estimate that volumes would have been up or flat excluding that demand pull forward?

Most of the comments in the script related to WAVE specifically, which we did see a substantial pull forward. You can kind of trend through the month by month, by comparing the Worthington statements and ours, and you can see there was a big March effect for volume that hit EBITDA and WAVE demand in sales. We didn't really say there was a ton of pull-forward in the last call in Ceilings, although we do think there was probably some as we kind of look at the first quarter to second quarter, demand trends, we do feel like there was some that happened, and I suspect largely because the distributors thought there was going to be a bigger build coming in the spring and the summer that didn't really materialize. Vic, do you want to give some additional color?

I think that's well-said.

Thank you. In the cost cuts that -- the incremental $15 million that you just commented on, I just wanted to follow up. Would the distribution of those cuts across the individual business segments be consistent with the prior cuts, or is that $15 million geared towards, say, resilient or wood?

We really haven't given a breakdown on the 150, kind of which segments it would fall to. Clearly, the bulk of the actions relative to manufacturing footprint rationalization have been in the wood and the resilient spaces, so I would think the benefits would be disproportionately falling that way on the manufacturing side, and as you kind of compare our previous guidance to this one, most of the $15 million incremental is in the manufacturing side of the cost house versus SG&A. So I think it's a reasonable assumption to project more of them to the Flooring side versus the Building Products side.

Is that an ongoing process where you're reviewing to find incremental cuts, or would the $15 million in addition be kind of tied to the revised market outlook that you have?

Well, the $15 million, Rodny, was really just better execution on the projects that we had. So, I mean, this was -- our team's just executing crisply across the whole project deck. I would say we think that $165 million' fairly ambitious already but as I think we've said in the past, there's no finish line here. The Company's focused on continuous improvement. We don't think you're ever done. I'd point to all the efforts we have, SG&A, lean in the SG&A processes is an opportunity to keep plugging away. Right now we're saying $165 million.

Okay. Thank you.

You bet.

Thanks, Rodny.

Your next question comes from the line of Bob Wetenhall with RBC.

Hi, good afternoon.

Hi, Bob.

Nice job on the cost-cutting increase. That's pretty impressive. Could you just take a minute and outline the schedule again for new plant openings and is there any way you can give us a little clarity on magnitude of revenues you're expecting from the plants?

Well, let's see. The West Virginia mineral wool plant opens we said first quarter of 2012. We have two Flooring plants in China. The homogenous Flooring plant opens back half of 2012. The heterogeneous Flooring plant happens late third, fourth quarter 2013. And we're building a second ceiling plant in China that's going to open early in 2013. So that's kind of the timing.

From a revenue standpoint, could you give us a little color on impact?

I think we said in the past, I'm pretty sure we covered this in the first quarter, but we're looking at about $200 million worth of incremental revenue. That's from the three plants in China. Just to remind you, the plant in West Virginia makes a raw material that we use in our Ceilings products. So it does add to margin, manufacturing productivity, but it is not necessarily contributes -- doesn't necessarily contribute to the top line.

I'm just trying to understand or frame it a little bit. If you expect stagnant domestic growth in terms of volumes in North America and Europe, do you expect to get some improving volumes through expansion into Asia?

Well, yes. And we are getting improving volumes through Asia already. We're getting double-digit growth today in China. We're getting it in India. We're getting outside of Asia in Russia and the Middle East. Those are places where we haven't put new steel in the ground for plants but we dramatically increased selling resources in our sourcing.

As you know, Bob, we already produce today ceiling tiles in China. We source a lot of the Asian consumption out of that plant, as well as some other international locations. Russia's being supplied out of Europe. So we're able to meet demands in those places with our current capacity and they are providing good volume support although on a relatively small base.

One final question. Do you think incremental margins on the new plants coming online will be equal to or better than existing margins that you have for the Flooring plants?

I think they're going to be equal to, to slightly lower than existing Flooring. So not today's existing Flooring, as we're going through our restructuring and taking the plants out, but as we set our goals internally for what the North American plants are going to do, we're expecting the same level of productivity out of the Chinese plants, although, again it's going to be a tough competitive environment, but I wouldn't be using today's base for resilient as the comparison as we are taking out our network capacity to the current market demand.

You're expecting better margins domestically which is why the new margins out of China won't be comparable; is that correct?

That's correct. And we're starting from a reasonably low base, right? On our resilient segment margins are already fairly low, right? They're 3% in the first quarter on an up income margin and 6% in the second quarter. That's not our goal for the segment.

How about in the second ceiling plant?

Second ceiling plant would be a comparable margin of the current ceiling plant which is an attractive average ABP margins.

Terrific, thanks very much.

Thank you.

Your next question comes from the line of David MacGregor with Longbow Research.

Good afternoon, everyone.

Hi, David.

Within the wood business, how much of that business is home centers? Maybe you could just maybe update us on your end market mix there by distribution, home centers versus mom and pop versus -- maybe just walk us through that.

This is Frank, David. About a third of the business is big box, so obviously the remaining third or two-thirds is the independent through distribution. And of that two-thirds, about 80% of it is remodel/replace, the remaining 20% is new construction.

So it looks like you may have gained some share in wood in the quarter. Could you just comment on that?

Yes. The gains were predominantly through the remodel/replace segment, both through the big box and to a lesser degree independent retailers, largely driven by new products. We had fairly significant activity in new products in the portfolio earlier this year and the response to those have been very strong, I think is what's helped drive the share began.

Congratulations on the progress there. I guess, I just wanted to get a sense from you on your feeling about the commercial remodeling trend, which has been so strong over the past six quarters, I guess. Are we seeing deceleration overall and maybe you could delineate between office and non-office?

I'd just say, just comment, can add, Vic and Frank, but I think we're seeing it fairly stable. In the Ceilings business, there's a benefit because it actually mixes up. So while we can see kind of flattish volumes, we're seeing price performance in remodel and mix up. And I would say that's probably true for both businesses, but Vic, did you have any -- ?

I think in had the commercial Ceilings business we saw low single digit growth and it's been very consistent that quarter-over-quarter, so we see that continuing to be very solid, very stable. It's that new construction segment that's really soft.

And Frank?

Agreed. I think a similar situation with floor.

When you look at the commercial remodel segment, both of our businesses are performing about the same.

Okay. Can you just talk about office versus non-office? You were talking a little about the education. I appreciate that color. Is there anything you can add to that?

Again, I think overall office has been very stable and again, I think a lot of the single digit growth is probably in that office segment.

And for floor, David, office really isn't a segment for us given we're hard surface. The dynamic we're seeing is healthcare is pretty active and pretty positive. Retail is hit or miss, and as we talked earlier, education driven by public funding is soft, particularly through the renovation season in the summer.

Education would represent what percentage of the business?

In floor, it's about high 20% to 30%.

And about the same in Ceilings.

Okay. Thanks very much, everyone.

Thank you.

Your next question comes from the line of Dennis McGill with Zelman & Associates.

Hi. Thanks for taking my question. First question, just wanted to get your sense on Ceilings' profitability and if we think about it pre-WAVE, how the first half of the year impacts your thinking about the second half of the year. Seems pretty atypical to see margins decline 1Q to 2Q but you talked about some of those softening order patterns and maybe some pull-forward in the first quarter, but what does that imply for the second half of the year? Is it a softer margin environment than you would have suspected or how should we think about that, relative to, I think last quarter, you talked about mid-20s EBITDA margin, if that's still a good bogey for the year.

Yes, I think for EBITDA margin, I think that's still a good bogey. This is Tom. I don't -- we're not expecting a different pattern really first half, second half on margin structure in the Building Products and we had a quarter blip really driven by WAVE but the fundamental structural profitability of the Ceilings business is only getting stronger. We just took down the Beaver Falls plant at the end of the first quarter and still winding that down. We'll have benefit from the Beaver Falls plant closure, have benefit from the SG&A reductions that will continue to benefit from last year. So and we have modest margin but we've got good mix -- modest volume but good mix and price gains, so I'm not expecting a different pattern than you would have seen in the past for seasonality of those margins and overall in that mid-20 bogey for EBITDA is still a good number.

Thanks. I'm not sure who this question is maybe bet geared towards but your comments on the non-res market, obviously new construction is lagging, and the remodel piece seems to be stable, maybe a little bit better. How would you characterize that relative to prior non-res recoveries, and where do you think we are in that cycle and what are you most focused on as far as taking that from a choppy bottom to a recovery that's got some legs to it?

I tell you, if -- I haven't found anybody that's done a good job forecasting the recovery. It's a quarter by quarter sort of update. I guess the way we would look at it is we're not seeing any good news about nonresidential construction. We would look at the architectural building index and that continues to trade down below 50, so that doesn't give us a lot of optimism.

On a more subjective basis, we are hearing about projects that are being taken off the drawing board or taken off the shelf, put back on the drawing board and being reworked, so we're seeing a little bit of, I'd say generally speaking a little bit more activity there. But it's anybody's guess really as to when this thing is going to recover. So we're pegging it sort of one quarter at a time.

Was that just related to new construction, or that was the remodel side as well?

I'm sorry, it was only new construction.

My question was more broad around the whole sector, realizing new construction is lagging here, can we read anything into the remodel side of the business and maybe how that's trended in prior cycles.

I'm sorry.

That's okay.

I think the factors driving remodel are tenant churn in the office space, I think there's a tremendous amount of updating that's going on in the healthcare infrastructure, so that's what Frank's talking about a fairly robust healthcare remodel market. That's driven by technological advancements and just improvements there. That's offset partially by state budget reductions and we see that in the educational softness that we experienced in the second quarter.

If I could say, one of the things, Dennis, that we see is that the commercial remodel business closely tracks the GDP development in the US particularly in and international markets too. It's scary how well they track. So we were not at all surprised when the second quarter GDP came in lower, revised down, because we felt it. And it's almost immediate. So that is consistent with our past experience. Are we seeing a different pattern? No. I think we're relative to our business to the economy, I do think we're seeing a different pattern relative to the economy recovering, and our -- and we believe the market will continue to be tied to that GDP development. We get a good recovery at GDP, we get more sustainable level of repair/remodel.

Last question on wood profitability. Strong results this quarter. How much of that is related to timing of price versus raw materials versus, see the true take-out of the costs flowing through.

David, it's primarily due to the restructuring of the operations and the costs we've taken out. That is the primary driver, as well as on the top line incremental sales year on year of about 3%. So it's a direct result of the activities we've taken.

We're still catching up on last year's lumber increases.

Correct.

Okay. Thanks again.

Your next question comes from the line of Keith Hughes with SunTrust.

Thank you. Two questions. One, if you look at demand in July, is it the rate change different any of the businesses versus what you saw in the second quarter? And secondly, on raw materials, what raw materials have gone up that caused you to raise the raw material hit in the quarter?

Let me take the first one. If we look at our July -- the best way to characterize July is it's where we would have expected to see it. It's in line with our revenue forecast for the quarter. So we showed a little bit of strengthening towards the end of the second quarter and that strengthening in general continued into July. That's kind of a general comment. I think that holds true for -- I'm talking about here in the US, and I guess in Western Europe and that's for both businesses. We continue to see robust growth in the emerging markets, China, India, Russia.

Specific to your questions on raw materials, Keith, this is Tom. The plasticizer that goes into Resilient Flooring, PVC that goes into resilient flooring, and TiO2 which goes into both that and Ceilings have remained incredibly high and have accelerated versus our last outlook despite a little bit of moderation in the price of oil, versus PVC as an example is a derivative of chlorine and ethylene. Ethylene's up 22% versus January 2010, plasticizer is made from propylene, propylene is up versus January 2011. So we're really feeling those are hitting us the hardest and particularly in the resilient segment.

So in the second quarter, price and mix less the raw material hit was still a positive, so obviously all this is coming in the third and the fourth. Will that extend in 2012 as well?

I lost you on the last. We couldn't hear the last part there, Keith. Could you ask the question again?

Looks like in the second quarter price and mix outstripped the raw material inflation. Obviously the third and fourth quarter when it would be hit, when this hit would come, would you expect that to extend into 2012?

We're not really commenting on 2012. Other than to say historically we've been able to get price over inflation.

A couple things going on, Keith. I think we don't have any reason to believe that these materials are going to come down in the back half, or in 2012. I will say that we have seen lumber come down. So there will be a little bit of a segment mix effect going on. Lumber ought to be coming down in the back half year-over-year comparison on lumber inflation offset by this increase on the PVC and TiO2 and plasticizer. So total AWI to total AWI, it's in our guidance right now but in terms of that specific raw material line it will have more netting effect than maybe you imagined.

All right. Thank you.

Thanks, Keith.

Our next question comes from the line of John Baugh with Stifel Nicolaus.

Good afternoon, Matt and Tom. My questions, let's see, first on sort of the outlook. You mentioned I think on the Flooring, you expect or at least residential, you expect second half remodel to be up mid-single digits. Is that -- my impression is it's slowed sequentially in the last 90 days, so have you adjusted your thinking for Flooring in the second half? And yet it still yields a mid single digit increase because of what happened a year ago, or have you just held your assumption for Flooring in the second half?

Let me let Frank comment, but I think what you're really seeing is just like we said. It's just more favorable comparison. We had such a soft second half last year. We all learned, we pull 12 months of demand in the first four months of the year in 2010. So we just anticipate just an easier compare. So this is not a -- when we talk about mid single digits, we're not pointing at any sort of recovery at all. We're just being fairly grounded in a fairly easier -- fairly easy comparison, rather, I'm sorry. Frank, anything?

I think that's exactly right, John. We had a very low base in 2010 we're going against.

Frank, while I've got you, the comment that the wood was driven I guess more so by big box than independent, did you gain shelf space, if you will, at the big box year-over-year with these new products you talked about? Or did you have a similar position, and you felt that they gained share, maybe a little of both?

We did gain some shelf space in the big box, John, with some of the products I referenced earlier. So that's a piece of it. But I think also a piece of it is the big box has taken on a more concerted effort to improving their position in the marketplace so they've been more active promotionally, and more active in the category than they were in 2010.

Great. Lastly. I apologize. You went through those price increases and timing so quickly, I couldn't jot them all down. Tom, if you could run through those again real quick, that would be helpful.

You bet. I think we can also make a table available on our website of the pricing if that's helpful because I do know we put a lot out there and we say it awfully fast. Specifically, we took an increase of 6% to 8% on Resilient Flooring in the Americas effective in June. Increase on Resilient Flooring in Europe of 4% to 5%, effective in July. An increase on ceiling tiles in Americas and Europe of 5% to 6% and 3% to 6% respectively. So that's 5% to 6% in the Americas, 3% to 6% in Europe. And 5% finally on grid in the US in August. And the Ceilings was effective in August.

Great. Thanks. Good luck.

You bet.

Thank you.

Your next question comes from the line of Jim Barrett with CL King and Associates.

Hi, everyone.

Hi, Jim.

Matt, could you talk about -- you just listed those price increases. Could you discuss if you could rank order them in terms of the pricing discipline you're seeing in each of those industries and are there any major competitors in any of those industries that have not yet followed your lead?

Well, listen, I'm not sure that it's appropriate for me to comment on pricing discipline in the industry. Let me just say this. We're getting our normal yield on our price increases, and that's been the case the last several months. So Tom laid the prices out there. I think we've demonstrated that we're getting price over inflation. And the yields we're getting are in line with our historical experience. We're leading in each of these price increases, and we're generally seeing the competition has followed us.

Right.

They announced they followed. A lot of these haven't taken effect yet.

The thing about it is, everybody feels the same pressure on raw materials.

Understood. Well, that's very helpful. Thank you very much.

Thanks, Jim.

This concludes the question-and-answer session portion of today's event. I'd like to turn the call back over to management for closing remarks.

I want to thank everybody for your time and attention today and the questions and all your support. Thank you very much. Have a great week.

Ladies and gentlemen, this does conclude the presentation today. Thank you so much for your participation. You may now disconnect. Have a wonderful day.