Armstrong World Industries Inc (AWI) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2011 Armstrong World Industries earnings conference call. My name is Derek, and I'll be your operator for today. At this time all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of the conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Tom Waters, Vice President of Treasury and Investor Relations. Please proceed.

Thanks, Derek. 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 our Matthew 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 press 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-Q filed this morning. Forward looking statements speak only as of the date they are made. We undertake no obligation to update any forward-looking statement beyond what is required by applicable securities laws.

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 turn the call over to Matt.

Thanks, Tom. Good afternoon everyone, and thanks for participating in our call this afternoon. Although end markets in most developing economies continue to present headwinds for us, we delivered solid bottom-line results in the third quarter, reflecting our continued focus on managing the items in our control, and achieving greater savings faster than previously planned.

End-market demand was clearly an area of concern coming out of the second quarter, and while third quarter sales were disappointing relative to our expectations, there wasn't an abrupt drop in sales or orders. Rather, markets continued to bounce along the bottom as recovery was further delayed. We had anticipated better demand in North American residential markets and improved sales versus last year, when the new home buyer tax credit pulled demand in, in the first half of 2010, but that didn't materialize.

Sales in the third quarter of 2011 of $774 million were up $34 million, or 5% from the same period of 2010, largely driven by changes in foreign exchange rates. Stripping out foreign exchange, sales were up just over $5 million almost 1%, including the exit of our European residential business.

Sales were below the low end of our guidance of $780 million, due to the market factors I just mentioned. While we did see some volume improvement in our residentially exposed wood and cabinets businesses, we believe much of it was share gain, rather than a rebound in overall demand. Sales in the Americas were up, driven by gains in ceilings, cabinets, and wood.

European sales were roughly flat after adjusting for exited businesses and Pacific Rim sales were down slightly due to declines in Australia, our largest market in the region. China and India, on the other hand, continued to grow. Globally, volumes are down 2%, but after adjusting for the businesses we exited in Europe, volumes were up slightly.

Price was up 2%, matching inflation. Adjusted EBITDA for the third quarter of 2011 was $124 million, up $12 million or 11% from 2010, and within our guidance range of $115 million to $130 million, despite lower sales.

Significant improvements continue to come from some of our more challenged businesses. The European flooring business achieved EBITDA of $4.6 million, an improvement of $2.4 million from 2010. I'll speak more about this turnaround in a minute.

The cabinets business generated $2.2 million of EBITDA, up from a slight loss in 2010, and finally our wood flooring business posted EBITDA of over $20 million, an improvement of almost $19 million from last year, despite only $7 million in additional sales. Year-to-date, the wood business has seen adjusted EBITDA improve from $8 million in 2010 to $41 million in 2011, despite relatively flat sales.

Our cost-out initiatives continue to help drive bottom-line performance. I'm pleased to say that we exceeded our expectations for the past quarter as projects were executed faster than anticipated. We now estimate $100 million in cost savings will occur in 2011. Tom Mangas will talk you through some more specifics and update guidance when he reviews the numbers for the quarters.

As I've done on previous calls I would like to take a moment to highlight a specific noteworthy product, process, or area of the Company that's indicative of the efforts we are undertaking to competitively position Armstrong around the world. This time, I'd like to focus on our European Flooring business.

As we've discussed in the past, this business has been unprofitable and a drain on resources and cash for many years. The difficult, but straightforward structural decisions that could have been taken in the past were not, as the Company explored complex quote-unquote, magic bullet solutions.

After Frank Ready was given responsibility for global floor products he moved swiftly to find a permanent solution to fix this business. We hired an experienced European leader with a background in structurally challenged businesses as the CEO for Floor Products Europe.

We exited the residential business, and shut and sold the Teesside UK manufacturing facility. We closed the high-cost and the logistically challenged plant in Halmstad, Sweden.

We aggressively deployed Lean after regaining manufacturing sites and our manufacturing cost base has improved as a result. Lean will drive $4 million in savings in 2011 alone and the business will have a break-even point in 2012, 30% lower than 2010, and 43% lower than the peak sales year of 2007, a year by the way we were still losing money.

Sales efforts have been focused on regions where we have competitive share positions, primarily Germany, Austria, Switzerland, and the Scandinavian countries, and on products where our offering is competitive, linoleum, commercial sheet and luxury vinyl tile products. This concentration allowed for significant reductions in SG&A expense.

Further G&A expense reduction is being achieved through Lean driven process improvements. Now, despite the emphasis on cost cutting, we've continued to invest in new product development to enable us to win in the market.

Earlier this year, we refreshed one of our key commercial luxury vinyl tile offerings in Europe and launched the completely reworked Scala 100 designer tile collection, offering extra-large planks and sophisticated cuts in a variety of shapes patterns and colors. Armstrong has also developed Scala Wall, which will allow designers to create unified room concepts. All Scala tiles are now available as wall coverings.

Some of the actions just described are still ongoing, so the full benefits will not be seen until 2012. That said, significant progress is already apparent. Year-to-date, the European flooring business has adjusted EBITDA of $3.5 million, up almost $10 million from 2010, with no help from the markets.

We've been talking about this business breaking even on an adjusted EBITDA basis in 2011, and we're growing more confident they will in fact make money in 2011. So, with that I'll now turn it over to Tom Mangas for a discussion of the financials in our segments.

Thanks, Matt. Good afternoon, everybody. Happy Halloween, and thanks for participating in today's call. In reviewing our third-quarter results, I'll be referring to the slides available on our website, starting with slide 3, key metrics, as Tom Waters has already covered slide 1, and slide 2 is simply an explanation regarding our basis of presentation.

Matt mentioned the 11% improvement in EBITDA, despite flat sales when excluding foreign exchange. And as you would expect, operating income and earnings per share results were also positive by 17% and 5%, respectively. Third quarter free cash flow of $73 million is just behind last year, by $6 million. I'll address the drivers of EBITDA and free cash flow changes on upcoming slides.

Slide 4 details the adjustments we made to EBITDA and provides a reconciliation to reported net income. The most recent quarter was relatively clean, with only minor charges for our previously announced plant closures and SG&A cost-out programs, and a modest write-down of the European property.

As you will recall, in the third quarter of 2010, we had several charges impact comparability including $15 million related to restructuring actions, primarily in European flooring, $20 million of accelerated depreciation, and $7 million of cost reduction expenses related to the Beaver Falls, Montreal, Center and Oneida plant closures. And finally, we benefited from $7 million of customs duty refunds. Interest expense in 2011 versus the prior-year was higher, due to our recapitalization in the fourth quarter of 2010.

Moving to slide 5. This provides our sales and adjusted EBITDA by segment. Resilient flooring had a sales decline of 6%, driven by the exit of our residential business and certain products and geographies in Europe. Otherwise, resilient price and mix gains offset core volume losses, resulting in essentially flat organic sales.

Significant inflation in our resilient flooring business exceeded price gains and cost reductions, driving EBITDA lower. This reflects the oil-based commodity inflation we had anticipated in our prior calls, but we simply have not been able to price fast enough to cover. Our third-quarter pricing actions in the US and Europe should address most of this in the fourth quarter.

As Matt mentioned, the wood business had significant EBITDA improvement, driven by higher gross margins, and SG&A cost reductions. Volumes were higher, but mix was lower versus 2010 as consumers moved to lower-priced wood products. Building products had a modest sales growth, and their usual fall-through ratio.

Sales gains came from continued price and mix improvements, as volumes were up low-single digits in the Americas and down in Western Europe. Overall for building products, the benefits of price, mix, contributions from our WAVE joint venture and cost improvements more than offset inflation.

The cabinets segment delivered a second consecutive quarter of positive EBITDA, driven by higher volumes and lower cost. Mix was negative once again, as the multi-family channel was the strongest of all the channels in the third quarter. And this is the lowest margin.

The corporate segment was down due to the expected decrease of our non-cash pension credit, which we have discussed in the past, partially offset by lower G&A expense. Slide 6 shows the building blocks from the third quarter of 2010, adjusted EBITDA, to our current results.

Within price and mix, price gains fully offset inflation at the Company level, but mix was negative for us this quarter. Mix was impacted by customers and consumers moving to more value-oriented products, largely in residential flooring, and by faster growth in the multi-family segment in the cabinets business.

Continued SG&A and manufacturing cost reductions totaling $30 million and higher earnings from WAVE drove our year-over-year earnings progress, more than offsetting the market-driven volume headwinds and the lower non-cash pension credit.

Manufacturing and SG&A reductions continue to provide earnings progress in the face of soft end markets. As Matt mentioned, we have been able to increase our savings target for 2011 to $100 million, up from our last guidance of $90 million, with all the recent improvements coming in G&A.

Obviously, we intend to run through the tape on our cost-cutting goals, especially in this uncertain macro environment, and we will continue to look for ways to deliver more. We will update you on 2012 and what more we think we can do to extend our $165 million cost-out programs where we share our initial thoughts of 2012 guidance, on our next call.

Turning now to slide 7, you can see our free cash flow for the quarter declined by $6 million, versus the prior year. Improved after tax earnings and working capital performance were offset by increased capital expenditures, as we build our 3 plants in China and the West Virginia mineral wool plant. In addition, we pay higher interest expense, driven by our refinancing, and made more restructuring-related cash payments than in the prior year.

Slides 8, 9, and 10 illustrate year-to-date financial results. Year-to-date EBITDA is up 27% with only a 1% increase in sales on a constant FX basis. Of note, on slide 9, you can see that all segments are contributing to EBITDA improvement.

As with the quarter, the decrease in the corporate segment is more than entirely driven by the non-cash pension credit. The bridge on page 10 of year-to-date EBITDA change tells a similar story as the third quarter bridge, with price, mix, and cost savings more than offsetting volume, commodity inflation, and pension credits headwinds.

Slide 11 updates our guidance for 2011. As a result of continuing softness in residentially-oriented markets and in Western Europe, we are lowering our sales and adjusted EBITDA guidance for the year. We now anticipate sales to be in the $2.85 billion to $2.9 billion range, up from $2.77 billion in 2010.

We expect adjusted EBITDA to be in the range of $380 million to $400 million, compared to $303 million, on a comparable basis in 2010. Our previous EBITDA arrange was $385 million to $415 million, so we are basically narrowing our range by lowering our top end by $15 million, and our bottom end by $5 million. As I mentioned, we are in the midst of our annual operational planning process, as we speak and we'll provide 2012 guidance on our next call.

Slide 12 provides the more detailed assumptions going into our earnings guidance, and includes the specifics on the fourth quarter. Of note, our inflation assumptions are unchanged from last quarter. Given the lower revenue outlook and weaker mix we saw in the third quarter, we are also expecting slightly less gross margin progress on the year than on our last call, though progress versus 2010 will still be 150 to 200 basis point better.

Our capital spending estimate for the year has been reduced, due to our efforts to find lower cost capital solutions to deliver our productivity and investment programs. In addition, some planned fourth quarter spending will slide into the first quarter of 2012.

Still, our 4 plants under construction remain on schedule with the Millwood, West Virginia mineral wool plant opening in the first quarter of 2012, the China homogeneous plant in the second half of 2012, the second China ceilings plant in the first half of 2013, and the China heterogeneous plant in the second half of 2013.

In closing, we are pleased with our third-quarter earnings, especially in light of still lumpy macroeconomic conditions. We're confident that with the actions we have taken and continue to take on our cost structure, we will be well-positioned to drive disproportionate earnings when the recovery comes. In the meantime, we'll continue to execute with excellence against the things we can control. With that, I will now turn it back to Matt.

Thanks, Tom. Well, in closing I want to mention that in October, we successfully concluded labor contract negotiations with our Macon, Georgia ceiling, and our Lancaster, Pennsylvania floor production unions. So for the year, we concluded 4 labor contracts, as we agreed to terms in Beverly, West Virginia and Oneida, Tennessee earlier this year. The Marietta, Pennsylvania, ceiling workers remain locked out.

Looking forward, we continue to expect soft markets for the remainder of the year, especially here in North American residential, but we continue to make progress against the targets within our control, creating a competitive cost structure, fixing underperforming businesses, investing in plants and people in growing markets, and building a globally aligned organization. With that, we'll be happy to take any questions.

(Operator Instructions)

Also, ladies and gentlemen, please limit yourself to one question and one follow-up question. Bob Wetenhall, RBC.

Hi, good afternoon. Thanks for taking the question. Just wanted to touch base, first question, ABI ticked up recently and I wanted to get your view on commercial repair and remodel demand, whether it's improving or it's stable or what have you been seeing?

Well, we saw it tick up. I think we just, more recently saw it soften again. Our outlook, the ABI is kind of bouncing up and down a little bit. The answer to your question, though, Bob, is really in terms of outlook and what we're experiencing, no real change in commercial remodel. We haven't seen it soften. We certainly haven't seen it get any stronger.

Got it. And just as a follow-up, wood flooring put in some very strong margin performance this quarter. Can you just provide a little more granularity on what went into that out performance and whether that type of margin is sustainable going forward?

I think -- let me let Frank comment on it, but just a quick comment before that. I think Frank and the team have done a phenomenal job driving a more competitive cost structure and we're seeing real productivity improvements. I'd also say that this is an organization that is as focused on the channel of customers as they are productivity and we refreshed the product line pretty significantly last spring. I think it's evidence of share gains, as we said, not really more robust market. So I'm very proud of the team for the accomplishments that you just pointed out. Frank, additional?

No, I think Matt hit the key points. We got a tremendous cost productivity from a lot of the restructuring we've done and, in spite of lower mix, we did see top line growth in the face of a weak market so, you roll all that together, and it gave us a pretty good result and pretty good margin position for the quarter.

And just on terms of sustainability of that going forward, given what you've done with the business?

Yes. The costs we've taken out are structural, so it's permanent cost-out. So we would expect to continue to see the kind of margin improvement we've seen year-to-date.

One thing I'd say, Bob, on that is, certainly, the third quarter is a seasonal high for that business so the fact that we delivered a 16% EBITDA margin in the third quarter, you shouldn't just straight-line that out. We're going to have the seasonal variability with the nature of the market demand.

Stephen Kim, Barclays.

Hi, guys. It's actually John filling in for Stephen. Just wanted to get an idea of sales strength throughout the quarter. Could you maybe just take us month by month throughout the quarter and then how things are looking in October thus far?

Okay. I would say that we did see July start off a little bit better than we saw September finish, so I think July, when we had our last call we were feeling pretty good about general demand trends. And certainly, first week of August clicked in, and we did feel a deceleration that carried through September. Which is why we missed our sales guidance, really.

We thought we'd be better off relative to the prior year comps, and with what we saw in July. It did definitely soften, and I would say that October has stabilized. It's not getting worse -- particularly on the residential businesses, I think we've seen them stabilize here. And I think a lot of it is reaction to the news. Consumers, builders, are all reacting to the external stimulus and the budget debate, which is really beginning of the third quarter, some of the other European shocks, I think, have had an impact on consumer and customer sentiment that resulted in those softer demand trends. And certainly, October is stabilized and certainly is factored into our fourth-quarter guidance.

Thanks a lot. I just -- it's Steve Kim, by the way. I just wanted to clarify -- so you were saying that you are actually seeing more weakness actually recently on the residential side than the commercial side?

Yes. I would say it was relative to our expectations. And, both businesses are generating relatively flattish volumes. Our guidance, we assumed we'd do better. We be seeing more of a consumer uptick, given the weak base period on residential. But as we said, volumes in global ABP were essentially flat on the quarter, which is a large driver of our overall volume results. And yes, on the commercial side on flooring, still relatively flat, plus or minus 2%. But I think on the consumer residential side, again, flat where we thought it would be better.

Steve, this is Matt. As Tom was pointing out, we thought we would have a little bit more robust residential performance, in the market, second half over second half, you know third quarter, fourth quarter over same period last year, just because of the tax benefit pull-in. And to Tom's point, we were expecting a little bit of strength there in the market. That strength isn't there. As a result, what we are seeing is, instead of sequential lift, we're seeing sort of flattish.

Okay. Great. That's a lot.

Just you know, overall, in the Americas, you know, for our commercial and flooring businesses we generated positive sales growth, it just wasn't through unit volume's, it was through price and mix on ABP, primarily.

Rodny Nacier, Keybanc Capital Markets.

Hello, everyone. My first question is probably for Frank. It appears the European margins in the resilient business are closing the gap with the US. Would that be related solely to the restructurings? Or would higher commodity inflation in the US or better pricing mix realization in Europe also be a factor?

Yes, the primary driver, Rodney, is all the structural changes we've made. The price mix dynamics, excuse me, price inflation dynamics -- they are pretty similar across regions, so the primary driver of the improved margins would be the restructuring and the cost down.

Thanks. And how long typically does it take for pricing to flow through the business? To realize the price?

On commercial, the non-specified work, you'll get within 1 to 2 months. Jobs that are being specified that are 3 to 6 months out, you have that kind of lag where you see the price come through.

And what's the approximate mix versus the near-term business versus a 3 to 6 month contract?

It's roughly in the flooring business, 35% short term, 65% long-term.

Thank you. And with the CapEx, thanks for providing the update on the capacity expansion programs. How much has been spent so far in terms of CapEx for those 4 plants that you're building?

Yes, I don't think we're prepared to disclose that specific run rate, Rodney.

Okay. And so into 2012, I know you haven't provided guidance but with some of that, the anticipated CapEx in the first half of next year, would the CapEx for 2012 look like 2011?

Yes, we haven't provided guidance, but you have got to remember that 2 of the plants don't open till 2013. So, we have 2 openings next year, the Millwood plant in the first half, the homogeneous flooring in the second half, so there will be continued spend to open both of those next year with those completion dates. But clearly, we're at the bulk of the CapEx on the second 2 plants in China that open in 2013 is going to be 2012 spend, and partially 2013.

Kathryn Thompson, Thompson Research Group.

Hey, how's it going? Just one thing just to make sure I'm clear on something. Last quarter, when you raised guidance when the primary drivers were favorable comps with residential, which you talked about earlier today, was residential the primary driver for lowering your guidance in the current quarter?

Yes. Yes, I think it like we said, it just didn't come through the way we anticipated. And we didn't see a precipitous drop as I think we said in the remarks, we just didn't see a lift. So what we're experiencing is flattish versus something that got significantly softer. So, think about it more as a lift we expected to see that we didn't versus softness that we didn't expect to see.

Okay. Europe was cited as a weak spot, not surprisingly, particularly for resilient flooring. How much of your resilient flooring business is in Europe and how much is it for your other divisions?

Europe, for total flooring, is roughly 25% of the total flooring business is in Europe and focused on Western Europe.

Yes. And then the building products business, it's the same ratio, about 25%.

Keith Hughes, SunTrust.

Thank you. On the $165 million restructuring plan, do we have 30 less if it stays at 165 coming next year? That's the first question. And the second question on resilient, given your views into the fourth quarter, specifically on the residential side, will we see profit margins roughly similar to what we saw in the fourth quarter of last year?

This is Matt. I guess the way to think about -- we're really not going to comment on 2012 yet, but as Tom said, we're going to sort of -- we're not giving up -- we're running through the tape this year. You know, you can -- we're clearly not finished. So when we talk 2012 next call, we'll be more explicit on the savings for next year.

Your question, Keith, was on should we see comparable margins to last year? Is that what you asked?

Yes, on resilient.

Certainly, we are still fighting the inflation headwind. I think will get it covered with price, so I think as you model out, I think a margin expectation consistent with last year, on worldwide resilient would be a fair assumption.

One other thing too, just on LVT and resilient in the United States, is that becoming a substantial part of the business? Just kind of any update there would be helpful, Frank.

Keith, LVT, there's probably different answers, commercial versus residential. Commercial, we continue to see nice growth organically. So it's becoming a bigger piece of the business, but off of a pretty small base. If you look at total demand and you look at LVT's role within that total demand in the market, it is only about 5% of the opportunity, but it is growing. Where we are seeing significant change is on the residential side, where it's gone from nothing 3 years ago to a very substantial piece of the business, today, both in terms of traditional installation with the glue down as well as floating. So that's where the real growth is coming from right now, is the residential and the floating segment of the business.

Dennis McGill, Zelman and Associates.

Hello. Thank you. Just quick question on the cost saves. Can you just revisit -- I know you touched on this a couple different times, but what's the absolute number for 2011 that you expect to net? And is that equal to the gross number? Or is there something in between?

Okay. Dennis, this is Tom. So when we first put out our cost savings goals of 150, now 165, we always said it was a gross goal, not a net goal, that we would be spending some back. Fortunately to date, it's all been net falling to the bottom line. And so, we are continuing to strive for that level of delivery, although we haven't promised it for that last tranche. So our goal -- we delivered $35 million in net last year. We have delivered year-to-date, you know, just shy of $100 million in net, and you know as we push forward, as Matt said, we're looking to do more, particularly as the economy continues to bounce around here. But so just so we're tying back, we never promised to be net but so far we're delivering it as net.

What would be some examples of things that would have been reinvestment that didn't have to occur?

Well, I didn't -- all our market investment in China, we are adding substantial headcount in emerging markets like China, Russia, Middle East, that have been incremental spends that we have executed, you just haven't seen them pop on the bridge because we've done more on our overall programs.

So you're saying the gross has come in ahead of the original net to offset the investments?

That's correct.

Got it. And just thinking about profitability within ceilings, I think you mentioned the flow-through being consistent with what you'd expect. I think that might have been including WAVE, I'm not sure. But for the quarter, it seemed like ex-WAVE margins were down year-over-year, so just wanted some color there. And then as we think about fourth quarter, I guess we will typically see a sequential decline, if we look at the last couple of years. Is that a good way of thinking about the profitability this year?

Okay. So I think -- certainly WAVE is embedded in our numbers and they're always embedded in our numbers so we talk about the typical flow-through, we are considering the impact of WAVE, and yes, WAVE has had a good quarter this last period.

I guess my question was -- so if we back WAVE out, just understand the tile side of business year-over-year, I think margins were down. I'm just trying to understand the puts and takes there.

Okay. So first I would say that we have continued to be under pressure in Europe and on commodity costs. So while we've experienced good pricing capability in North America, we continue to be fighting a commodity headwind battle in Western Europe, and a soft volume environment. So we're over-relying on the North America business to deliver our margin progress.

Gerard [Rapajit], Longbow.

Hey, guys. Good afternoon. Back to the wood segment. With the fixed cost reductions that you guys have taken to-date, what's your capacity utilization within that segment? And then while you're on that, just kind of across the other segments as well?

You know, we don't typically publicly state what our utilization is. What I can tell you is we're very comfortable that we are at a position where we can support the anticipated demand easily over the next 2 or 3 years. So, we have some flex capacity that we can crew up and crew down but feel very comfortable where we are today in our ability to go with the market.

Okay. Any -- maybe housing start guidance that potentially you would get up to at the current capacity? Any way to frame that?

Yes, I don't think we want to try and frame that, other than what I said earlier on. I feel very comfortable over the next 2 to 3 years -- we're in a very good position.

John Baugh, Stifel Nicolaus.

Thank you, good afternoon. Australia, can you relate the size of that market? What you see going on there? Maybe the prospects for 2012? And then you did add a lot of I think, salespeople in China in particular, I can't remember about India, but if you could just update us on sales trends in those 3 markets, thank you.

Yes, I'll frame it a little bit, but so Australia -- because we've been in China and India for 20 years but arguably, maybe have under-resourced it. So when we have talked a lot about the Pacific Rim and we focus on China and India because that's where, to your point, we are investing resources. The way to think about that, by the way, is we've invested a little over 100 heads in emerging markets, that would be China, India, and Russia, in general. I don't think we've been more transparent than that. So those investments are in place, and they are driving, what we think, are very attractive revenue progress in China and India.

Australia is a mature market for us. We have a relatively large share position there. We have a manufacturing facility there. So our presence is a little bit bigger and the Australian economy has been very similar to that that we've experienced here, soft. They had a stimulus package in 2010. They didn't repeat in 2011. They have had significant weather issues, and floods and things like that. So we've seen a very soft market in Australia, really throughout 2011. And that's a bit of an overhang on the broader Pacific Rim performance. As we don't really want to comment on 2012 like we said a couple of times, we're in the middle of putting together the operating plans, including those for Australia but, as we think about Australia, we're not expecting significant recovery in 2012.

Okay.

I don't know if anybody wants to comment further --

Well, if I can say one thing on Australia, because it is a long-term and a strong developed market, it's margins are disproportionate to the region. So when Australia has a hiccup, we feel it pretty significantly. So they are experiencing those soft trends as Matt described and it takes a lot of volume in China and India to offset it, profit wise.

Then a quick follow-up, if I could, on raw materials. I don't have in front of me, but it just seems like we've been battling inflating raw materials for a long time now. Is there a very recent flattening in your incoming input costs? And if we saw that flattening continue into 2012, would you take some level of pricing regardless where you think you maybe get some margin expansion as opposed to a net negative that seems to be happening between price and raws? Thank you.

Well, we're not seeing a lot of relief on the incoming, at least not to the extent that we are changing our outlook for 2011 on inflation. Again, we're not going to comment on 2012, we're in the process of going through that now. In some cases, you have supply constraints and some cases you have, as we have said, oil-based increases. The raw material suppliers have done a very good job balancing demand and supply extremely effectively. We're pleased with our progress on pricing, as we've said.

Year-to-date, at a Company level, we're pricing to offset inflation. Again, I think the teams have done a great job leading and executing on price increases. We're getting historical yields in both of the businesses. So we're comfortable with our position on performing there. I don't know if there's anything else we want to add in terms of the fourth quarter 2012. So when we sit down and talk about 2012, we'll have a view on what we think the outlook will be on inflation.

Jim Barrett, CL King.

Hi, everyone. Tom, I had a question for you. You did indicate $100 million of cost saves or close to it, I think, year-to-date. Should that give us reason to believe that you should exceed your $100 million target by the end of Q4? Or how should we look at that?

Well, I would -- first I would stay with the guidance we gave, but yes, our past track record is we've done a little better than we said we were going to do the last couple of quarters. Part of the way we got there in the third quarter is, we saw the market softening in early August, as I said, and so we made some choices not to go after some discretionary items that hopefully we'll get to in the fourth quarter. So I wouldn't assume that there is a ton of upside there. But sure, we're going to continue to push hard and accelerate as much as we can to deliver earnings progress that we need.

Okay. And, Matt, one question for you, with the Marietta plant on lockout, if that continues well into 2012, is there any impact on product availability? I understand that plant is running in any case. I mean, how should we look at that in terms of what risk that might represent?

We don't foresee any issue or challenge in maintaining customer demand and supply. There's been no significant disruption at all, so we're very pleased with the way the plant's running. Proud of the team that is in there running the plant; the output's terrific. So we're not concerned at all about that.

I see. Well, thank you both.

Thank you.

Jack Kasprzak, BB&T.

Thanks and good afternoon, everyone. With regard to the wood flooring and cabinets business where I think you guys said your improvement there was due to market share gains, could you talk about what's going on? Has that been a concerted effort to take share here lately? Is it the shift in the market more toward your products? Competitors falling away? Could you elaborate a little?

I think -- this is Frank -- I think the primary drivers is we introduced a series of new products earlier this year in the hand-scraped and exotics category, and have used that to really leverage our position and take shelf space and share from the competition. So what I would tell you is big driver of it is new products. There's also a piece, very honestly, with a stronger position on the cost side. We can be more aggressive in those more competitive segments to enhance our share position as well. So primarily driven by new products, but a conscious effort on our part to go after that market.

Okay. Great. Second question is, you guys also mentioned your various pricing initiatives that you've detailed recently -- could you just talk about how they're being accepted into the market right now, how you're feeling about getting most or all those pricing initiatives?

I was going say -- Jack, it's Matt. Just, as I said earlier, we're pleased with the team's execution on pricing, both in flooring and our ceilings business globally. We're getting historical yields, we're leading most of the increases, we feel pretty good about where we are. I think the teams are doing a great job.

Okay. Great. Thank you.

At this time, I'm showing no further questions in queue. I would like to turn the call back over to Mr. Matthew Espe for any closing remarks.

Thank you very much. Listen, everybody, we appreciate your attention and questions, and we wish you all a very good afternoon. Take care.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.