Armstrong World Industries Inc (AWI) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter 2011 Armstrong World Industries Incorporated earnings conference call. My name is Regina and I will be your conference operator for today. At this time all participants are in a listen-only mode. Later, we will be conducting 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 of Treasury and Investor Relations. Please go ahead, sir.

Thank you, Regina. Good afternoon everyone. Thank you for your patience as we worked through our phone problems there. 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 www.Armstrong.com. With me this afternoon are Matt Espe, our President and CEO; Tom Mangas, our CFO; Frank Ready, the CEO of our Worldwide Flooring 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 presentations that 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. 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 will turn the call over to Matt.

Thanks, Tom. Good afternoon everyone and thanks for participating in our call today. In the fourth quarter of 2011, we saw some stability in North America, but the turmoil surrounding Greece and the Euro zone precipitated a sharp drop in demand in Western Europe late in the quarter. Against the backdrop of global uncertainty and macroeconomic volatility, our sales for the quarter were $652 million, within our guidance range, albeit near the low end, primarily reflecting the weakness that we saw in Europe. Year-on-year sales were up $9 million, or $6 million on a comparable foreign exchange basis, both about a 1% increase. Europe was the only geography with lower sales.

Adjusted EBITDA for the fourth quarter of 2011 was $51 million, up $4 million, or 9% from 2010, but below our guidance range of $55 million to $75 million. Driven by weaker than anticipated sales in Western Europe, in both our businesses, flat volumes in North American ceilings versus our expectation of a small uptick, and weakness in our cabinets division. For the year, net sales of $2.86 billion were up $90 million, or 3% from 2010. Excluding the impact of foreign exchange and product category exits in our European Flooring segment, sales were also up 3%. The sales increase came in the form of price and mix as global volumes were roughly flat. Now, when excluding exited businesses, 2011 marks the first time in the last three years that volumes have not declined year-over-year. Despite no meaningful help from the markets, full year adjusted EBITDA was $377 million, up $74 million, or 24% from 2010.

All business units contributed to this result with significant contributions from the following operations. Wood Flooring grew adjusted EBITDA from $5 million in 2010 to $53 million in 2011, despite flat sales. This result is our best example of cost reduction and lean improvements. Our Cabinets division swung from an EBITDA loss of over $4 million in 2010 to a profit of $2 million in 2011, on lower sales. And finally, our European Flooring operation reduced their EBITDA loss from almost $10 million in 2010 to $3 million in 2011.

When we last spoke in October, we discussed the turnaround we were executing in this business and our expectation that we could realize an EBITDA profit in European Flooring in 2011. Unfortunately, the significant macroeconomic events in Europe late in the quarter transpired to leave us short of the target. While I'm disappointed in our fourth quarter result from this business, I am extremely proud of the significant restructuring efforts, which barring unforeseen further deterioration in the European economy, will lead to a profitable business in 2012.

Our cost out initiatives continue to help drive bottom line performance as we realized $115 million in savings in manufacturing and G&A overhead costs in 2011. Combined with the $35 million saved in 2010 and an additional $35 million expected in 2012, our total cost out effort is now approaching $185 million. Despite the macroeconomic volatility in 2011, we continue to build the foundation for future growth. We added well over 100 sales and marketing resources in China and other emerging markets. We acquired a metal ceilings manufacturer, Simplex, in Montreal, Canada, allowing us to accelerate the growth of our architectural specialties business.

Our plant construction plans continue to be on schedule. In March, we'll begin production at our Millwood, West Virginia mineral wool facility, and we'll realize the benefits of lower cost and better acoustical performance associated with higher quality wool in coming quarters. Our Chinese plants are also on schedule. As a reminder, our homogeneous flooring plant is scheduled to open in the fourth quarter of this year, the second mineral fibers ceilings plant in the first half of 2013, and the heterogeneous flooring plant in the second half of 2013.

Lastly, just this past week, our Board approved the construction of a mineral fiber ceiling plant in Russia. When it comes online in early 2015, this will be the first local plant of its kind in Russia, enabling us to maintain and expand our leading position in this important and rapidly growing market. Russia is the third largest suspended ceilings market in the world and Armstrong is the market leader. This plant will cost approximately $100 million to construct with most of the capital spend occurring in 2013.

Another significant fourth quarter event was the refinancing of our WAVE joint venture and the payment of a $50 million special dividend to each parent, Armstrong and Worthington Industries. WAVE will celebrate its 20th anniversary later this year and continues to be a model joint venture. With 550 employees and eight plants in six countries, WAVE levers Worthington's strength in procuring and manufacturing steel products and Armstrong's capabilities in marketing and selling ceiling systems around the world. WAVE's innovation and industry leading cost position have contributed to its outstanding results. In 2011 WAVE generated $135 million of EBITDA on sales of $385 million. WAVE provided regular dividends to each of its parents of over $50 million in addition to the special dividend. We look forward to continuing our close relationship with Worthington and supporting the continued success of WAVE.

We enter 2012 expecting minimal help from most macroeconomic environments. Outside of China and other emerging markets, we expect modest GDP growth at best. We expect GDP growth of just over 2% in the US, slightly positive in the UK, and slightly negative in the Euro zone. This type of macro climate translates into a flat commercial opportunity in North America and a slight decline in Europe. We believe new home starts will be about 700,000, but this is obviously a volatile number. We also expect that much of this new home start growth will be in multifamily homes, which while helpful, aren't as profitable for us as single family homes. We do anticipate modest volume improvement, partially driven by share gains resulting from our investments in selling and marketing resources and new product innovation. We're looking for sales of $2.9 billion to $3 billion, and EBITDA of $420 million to $460 million in 2012.

Tom Mangas will provide details on guidance and the outlook for the first quarter when he reviews the numbers, and so with that I'll turn it over to Tom for a more detailed discussion of our financial performance and outlook.

Thanks, Matt. Good afternoon and thanks for participating in today's call. In reviewing our fourth quarter results, I'll be referring to the slides available on our website, starting with slide 4, Key Metrics, as Tom Waters previously covered slide 2, and slide 3 is simply an explanation regarding our basis of presentation.

As Matt reviewed we delivered a 9% improvement in EBITDA on a 1% increase in sales when excluding foreign exchange impacts. Adjusted operating income and earnings per share results were also positive by 36% and 45% respectively. Fourth quarter free cash flow of $90 million was well ahead of 2010 driven by the WAVE special dividend which we disclosed in early January 2012. I'll address the drivers of EBITDA and free cash flow in more detail on upcoming slides. We closed 2011 with net debt of $362 million, down almost $200 million from year-end 2010 levels.

Slide 5 details the adjustment we made to EBITDA and provides a reconciliation to our reported net income of $9 million on the quarter. The most recent quarter was relatively clean with only minor charges related to our cost reduction program. As you'll recall, in the fourth quarter of 2010 we had more cost reduction and restructuring adjustment as we were in the early stages of our cost out efforts. We also had $11 million of accelerated depreciation in 2010, primarily related to the shutdown of the Beaver Falls, Pennsylvania ceiling plant, and the Center, Texas wood flooring plant. Finally, we took an impairment charge of $22 million on the Bruce brand name in 2010. No impairment on the Bruce brand was required in 2011.

Moving to slide 6. This provides our sales and adjusted EBITDA by segment for the fourth quarter. Resilient Flooring had a sales decline of 4%, primarily driven by the exit of our residential business and certain products in geographies in Europe. Sales were also negatively impacted by the very soft demand environment within the Euro zone economies late in the fourth quarter. North American and Pacific Rim resilient sales were up largely on mix and sum price. Resilient Flooring EBITDA was down versus 2010, primarily due to the volume drop in Europe and price realization lagging aggressive commodity inflation.

Matt mentioned the wood business' significant full year improvement in EBITDA and this is true for the fourth quarter as well. Sales grew 3%. EBITDA went from a slight loss in 2010 to a profit of $12 million on only $3 million of higher sales. Cost reductions, lower lumber costs, and higher volumes drove the improvement. Building Products grew sales 5% driven by price and mix gains in North America and Europe and volume growth in the Pacific Rim. Unit volume in North America was flat in the fourth quarter, as it was in the third quarter, and for the full year. Strong price gains were required to offset higher material input and freight costs.

Clearly, we did not experience our typical sales fall-through margin ratio in the quarter in the Building Products segment. EBITDA improvements were hampered by labor contingency and one-time contract incentive costs at our Marietta, Macon and Pensacola plants. In addition, we could not make the kind of progress on productivity within the plant network that we typically strive for as we focused resources from around the region to operate the Marietta facility and meeting customer demand requirements during the second half of the year. As a result, WAVE's equity earnings growth essentially drove the full year-over-year improvement on EBITDA for the Building Products segment. We expect the sales margin to fall through -- the sales margin fall-through relationship will be restored starting in the second quarter of this year.

In Cabinets, volumes were lower versus the prior year as demand remained weak and we lost some temporary share as our service delivery windows extended out too far in the third quarter impacting fourth quarter orders in the multi-family segment. These issues were resolved in the fourth quarter. For perspective, second half 2011 to second half 2010 sales are up 2%. The lower sales in the fourth quarter drove EBITDA down $1 million versus last year. The corporate segment was down due the expected decrease of our non-cash pension credit which we have discussed in the past.

Slide 7 shows the building blocks from the fourth quarter of 2010, adjusted EBITDA to our current results. Within price and mix, price gains more than fully offset inflation at the Company level, but mix was slightly negative for us this quarter. Mix continues to be impacted by consumers moving to more value oriented products, particularly in residential flooring and in Europe, as higher mix geographies in Continental Europe saw weaker demand in the quarter, while lower mix geographies in Russia and Eastern Europe grew significantly. Continued SG&A and manufacturing cost reductions of $17 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. The net manufacturing cost improvement of $5 million versus the prior year is inclusive of the Building Products labor contingency and one time contract incentive costs mentioned before.

Turning now to slide 8, you can see our free cash flow for the quarter is up more than $50 million versus the prior year. The special dividend from WAVE and improved working capital performance more than offset increased capital expenditures as we build our three plants in China and the West Virginia mineral wool plant.

Slides 9, 10, and 11 illustrate full year financial results. EBITDA is up 24% reflecting a margin improvement of 250 basis points from 2010, on only a 1% increase in sales. Free cash flow for the year totaled $170 million. Adjusted earnings per share were up 29% for the full year. Of note, on slide 10, you can see that all business segments are contributing to EBITDA improvement, especially Wood Flooring. The Building Products segment would have had even more impressive results were it not for roughly $15 million of costs associated with labor contingency and contract incentives during the year, split fairly evenly between the third and fourth quarters. Despite 2% lower sales for the year, Cabinets improved EBITDA by $6 million. 2011 marks a return to positive EBITDA for the Cabinets segments for the first time since 2007, on 42% lower sales. As with the quarter, the decrease in the corporate segment is more than entirely driven by the non-cash pension credit, partially offset by G&A savings.

The bridge, on page 11 of full year EBITDA change tells a similar story as the fourth quarter bridge, with price mix and cost savings more than offsetting volume, commodity inflation and pension credit headwinds. WAVE delivered at the high end of our expectations. For the year, we drove $115 million of cost savings in SG&A and manufacturing, net of investments, as a result of our cost out program.

Slide 12 provides color on the full year free cash flow. Improved cash earnings and the special dividend from WAVE almost offset changes in working capital, increased capital spending, higher interest expense from our 2010 dividend recap, and cash restructuring payments. We achieved a $20 million improvement in working capital in 2011, as we continued to focus on payable terms and inventory levels. However, working capital performance was just not as favorable as it was in 2010 when our inventory was dramatically reduced to match our smaller sales base.

Slide 13 updates our cost out program which we continue to drive throughout the organization. As I described, in 2011 we realized $115 million of savings following $35 million of savings in 2010. Now we are raising our total target to $185 million, with remainder of our savings in 2012 coming in manufacturing cost reductions. These savings in 2012 will be less obvious on our financial bridges going forward as we will have about $15 million of manufacturing overhead expense in our cost structure associated with the new plants in China, West Virginia, and Russia as well as the Simplex metal ceilings facility. Most of these plants will not contribute to sales or margin improvements in 2012.

Our efforts to reduce costs have yielded $80 million in manufacturing structural and labor productivity savings over the past two years, which have played a leading role in improving our gross margins more than 140 basis points from 2009 to 2011. In addition, we have reduced SG&A by $70 million from 2009 to 2011. These efforts can be seen in our financial statements and have been achieved despite wage and benefit inflation and significant investments in sales and marketing in China, India, and the Middle East. Essentially, we delivered on our original goal of $150 million in less than two years, drove those results to the bottom line and expect to achieve an incremental $35 million in 2012.

Slide 14 updates our progress against return on invested capital on a GAAP basis. If you recall, we prioritized this measure starting in 2011 given its direct linkage to shareholder value creation. As the chart shows, we made good progress in 2011 despite restructuring and cost reduction charges of $36 million. This is the highest ROIC the Company has delivered since its emergence from bankruptcy. In fact, we exceeded our prior post emergence record of 6.4% achieved in 2007, despite a 20% reduction in sales. Worldwide EBITDA margin is up 100 basis points over the same period. Still, we have more work to do to raise our ROIC above our weighted average cost of capital, which remains our goal for 2013.

Slide 15 provides guidance for 2012. Matt discussed sales and EBITDA, so I will not belabor those points. As you can see, we expect free cash flow to be in the $50 million to $100 million range, down from $170 million in 2011 as we do not anticipate a special dividend from WAVE in 2012, and as capital expenditures rise related to our three China plants and the new Russia plant Matt just announced.

Slide 16 provides the more detailed assumptions going into our earnings guidance and includes the specifics for the first quarter. First, we expect carryover and continued incremental inflationary pressure from an array of items including PVC and plasticizers, TiO2, waste paper, packaging, steel, and other input materials between $25 million to $35 million. We've taken numerous pricing actions to combat this headwind. Since the first of the year, we've implemented price increases of 4% to 6% in most geographies globally for Resilient Flooring and in most regions for ceilings and grid. With these actions we expect to fully offset material inflation in 2012. Next, driven by our manufacturing cost out efforts, continued focus on improving mix, and measured pricing to recover commodities, we expect to improve gross margins by 100 basis points to 150 basis points.

We expect our non-cash US pension credit to decline modestly to a range of $15 million to $25 million, as we reflect the final stages of our pension derisking strategy and continue to amortize market losses in 2008. We anticipate WAVE contributing equity earnings growth up to $5 million. We forecast cash taxes of roughly $10 million to $20 million in the year. We expect to fully utilize all our federal NOLs in 2012. As a result, we will be a partial US federal taxpayer in 2013, as we have foreign tax credits available to offset earnings. We expect an effective tax rate of roughly 40% for 2012, reflecting a reduction in unbenefited foreign losses going forward.

Our estimate for the first quarter projects sales to be roughly flat with 2011, with price and mix offsetting flat to down volume. So far in January and February, we continued to experience flat unit growth in North America commercial markets. Market driven volume declines in the high single-digits in the Euro zone and a slight volume growth in US residential markets. We expect the first quarter of 2012 to produce EBITDA of $75 million to $90 million, compared to $93 million on a comparable basis in 2011. This decline is driven by several one time items, specifically we are faced with a one time headwind of about $4 million associated with the end of the lockout at Marietta as we restaffed and ran dual workforces in January. Also in the first quarter, we have ramp-up costs associated with our Millwood, West Virginia mineral wool plant.

As Matt mentioned, this plant will begin production in March and will contribute benefits in coming quarters. Finally, as you may remember from 2011, our WAVE joint venture had an April price increase that drove significant volume and $3 million of EBITDA into the first quarter and out of the second quarter. Given our continuous buildout of the three Chinese plants and the just announced Russia mineral fiber plant, we expect capital spending to grow dramatically in 2012 to a range of $240 million to $270 million. Lastly, we anticipate only a $5 million to $10 million in EBITDA adjustments associated with already announced actions. Given the continued macro uncertainty, we may announce further actions to keep our cost structure competitive.

On a separate note, as you may have noticed, we filed a shelf registration with the SEC this morning. The shelf will enable us to register and issue debt and equity securities in the future. This shelf expires in three years and the Company has no immediate plans to utilize it. In closing, we are pleased with our 2011 financial results especially in light of still volatile 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 growth when the recovery comes. In the meantime, we will continue to execute with excellence against the things we can control. With that, I will now turn it to Matt.

Thanks, Tom. One of our major issues entering 2011 was labor. I'm happy to report that during 2011, we renegotiated seven collective bargaining agreements at six of our plants including reaching agreement with our locked out production workers at the Marietta ceilings plant in December 2011. These employees are now back at work and the plant is running well. We're pleased have these negotiations behind us and to have been able to maintain our safety performance and customer service levels throughout the entire process. These negotiations were at times painful and costly, but they were necessary. We now have contracts that more closely reflect today's local economic realities, address legacy cost issues, and provide the Company with an appropriate cost structure going forward. Our employees receive a competitive wage and benefit package and we've improved the odds that our manufacturing facilities can remain viable and survive in an increasingly competitive global marketplace.

As Tom noted, we feel good about the actions we've taken and plan to take and are confident that we'll continue to drive operational and financial improvements in 2012. So with that, we'll be happy to take any questions. Thank you.

(Operator Instructions)

Stephen Kim with Barclays Capital.

Thanks very much, guys, and obviously strong performance over the year.

Wanted to touch on incremental margins. If you could -- particularly what I'd love to hear you expound on is, given the numerous changes you've made -- taking costs out, and also given the rising fixed costs that you're implementing here, overseas -- what do you think your incremental margins are across your major segments -- Building Products, Resilient, and Wood, at this point?

Very good. Thank you, Stephen. This is Tom Mangas.

We are pleased with the margin progress we've made and continue to make. I would still say we're in the range of incrementality, new sales, and the segments as we've talked before. So we've talked before in building materials -- Building Products, rather -- that the incremental margin should be 30% to 40% on new sales on the upside; and on the Flooring, both Wood and Resilient, in 20% to 30% incremental margin range.

Okay. And it doesn't really matter if, let's say, the increase is skewed geographically? Let's say -- US housing were to come back stronger than you're forecasting over the next two years -- that wouldn't necessarily change where you would -- the kind of incremental margins you might see?

Well, I would say, not over the next couple years. Really, we do expect that the US recovery will come slightly ahead of when we're opening the new plants in China, if you think late 2013 for the ABP plant as an example. Absolutely, we have better margins in the US as our home market for both businesses. But we're working in all regions to improve margins and profitability. And as we expand our footprint and put plants out there, we're striving to achieve US-like margins. We likely won't be there out of the gate as we open plants up and are not quite at scale, but certainly that's our objective.

And then lastly -- I was curious if you could give us a sense for, again, in your -- particularly in your Ceilings and your Resilient business -- how much of an increase in overall volumes do you think you could accommodate before needing to bring some increased capacity back online?

Well, let me answer it a little more generally than that. We've -- this is a question that's come up a few times, and we think it's important to give a good answer. We feel like we have a sales capacity as a Company of around $4.5 billion, with the current installed infrastructure, inclusive of the Chinese plants. So that's not quite as specific on Resilient and Ceilings, but all in all, we feel like we've got good growth capacity from where we are today, reflective both of the installed US base as well as the new plants we're bringing online.

And that includes the Russia? Not, right?

Yes, you mean -- yes, within rounding, sure.

Yes. Okay. Got it.

Ladies and gentlemen, we ask that in the interest of time, and so that everyone has the opportunity to ask a question, that you hold your questions to one question and one follow-up, please.

Bob Wetenhall with RBC Capital Markets.

Nice work across the year. Congratulations.

You made a lot of progress on the Wood Flooring segment, and I wanted to understand how much of the improvement is due to raw material tailwind as opposed to inflation? And do you think this improved level of profitability is sustainable as we go into 2012?

Bob, it's Vic.

Just a couple general comments. The performance of wood is remarkable, and it's a combination of things. I mean, we've driven significant manufacturing productivities. We've pointed to lean improvement. I think that really serves as our best example of effective deployment of lean resources in the throughput. Frank's also driven mix, as we've positioned new products over the last year. We gained share of wallet, or shelf space, at our key distributors here in the US; and managed, I think, the relationship between some lumber inflation and price extremely well.

So it's really a combination of all those things. I don't know -- Tom or Frank?

Definitely, wood deflation relative to last year -- I mean, if you remember 2010, we had significant lumber inflation that was a drag to earnings in 2011. We didn't see that level of inflation. It actually tailed off a little bit, and some deflation in the back half of the year. So that was a contributor on a year-over-year basis. But by far the bigger contributors are the structural improvements that Frank has put in place, both in the SG&A structure as well as in the manufacturing cost structure.

Frank, do you want to add anything?

No, I think you guys --

Got it.

And it sounds like this is kind of the final year of the initial cost savings, and then you have a pretty aggressive schedule to expand internationally. I was hoping you could just walk through the timing of the plants you're bringing on; and somewhat, very rough outlines of the revenue contribution you expect to achieve in the next couple year when they come online?

Well, we've got the homogeneous Flooring plant coming out the end of this year. We have the second Building Products, or Ceilings, plant coming out in the first quarter of 2013; and then the second, heterogeneous plant coming out the end of 2013. The plant we just announced in Russia would come online, at this point, it looks like 2015.

First quarter 2015.

So that's the way we're thinking about feathering it in.

I'd just comment, Bob, we're not -- we're certainly -- this team isn't done with manufacturing productivity, or SG&A savings. And we've got a -- I think we've been very aspirational and aggressive in setting and resetting targets. As we pointed out, we're $185 million here, and we expect to accomplish that in 2012. But that doesn't mean we're at the finish line. I think some of the major structural stuff would be behind us, for sure, but we'll continue to commit to lean productivity. We're continuing to simplify our G&A related processes to get hidden cost out of there; and so we're not going to be finished with our focus on cost as we exit 2012, for sure. And then incremental revenues --

Yes. So Bob, on the three China plants -- we've outlined, we think, that at full capacity utilization they can generate about $200 million in revenue. So you ought to imagine that feathering, beginning with the first opening over the next several years -- we're not going to open them at full capacity. So you can probably think about it in increments of $25 million or so over the next several quarters, through the final opening of the heterogeneous plant.

In Russia, we've really not outlined a revenue goal there. Really, that was as much about cost savings as it is incremental revenue. It's already is a very large market for us. And we really see this plant as helping us get a more competitive cost position by in-country production; of letting a lot of the duties and freight that we're experiencing today. So it's less of a revenue play, although there is some certain share growth and market participation that we expect to reap out of the plant in Russia. But it's actually a margin-enhancing program for us.

And significant improvement in customer service.

Yes.

(Inaudible) reliability in-country.

That's great color, guys. Thanks very much, and good luck.

Dennis McGill with Zelman & Associates.

First question -- you ran through some of the recent trends on volumes quickly, so I didn't get it all. But can you just review what you're seeing on the residential side? And then, just touch on what, what might be the lag there, from production that comes through, to when you actually see it?

Okay. So, on the residential side, Dennis, we've seen some light. I think the fourth quarter ended okay; January, February started out positive. So I would say we're seeing some good signs of life in the residential segment, both at independent retailers and at big box. We're participating in both. And I will say that January and February, a little bit ahead of what we thought was possible; so it's a good start in residential. I will caution, though. We said that the last two years in a row; so we're a little cautious on the sustainability of it, but so far all signs are good on the domestic residential market.

Okay. And on the other side of it, did I hear you say that Europe was down high single volumes? And if so, maybe just talk to the sensitivities there about what could happen, where you're seeing the pressure between Flooring and Building Products? And any type of comfort you can give us that if it does fall further, there's actions that you can take to offset?

The question was on how we're thinking about Europe. Let me start with -- we have seen a significant deceleration in what I'll call the Euro zone. We've been very specific in using that language in our remarks here. As you look at our financial statements, Europe to us, both in Building Products and in Flooring, includes the UK, obviously Continental Europe, Eastern Europe, Russia, and Middle East. Okay?

And they're not all behaving the same. Obviously, our Flooring business is much more concentrated in Euro zone countries, very Germanic, Switzerland, Benelux-based. Ceilings is less concentrated there, in fact it has a big UK business, big Russia business, big Middle East. So, both businesses have been hit equally in the Euro zone in the last five months or four months, with what I'd call high single digit volume declines, which we've continued to see in January and February.

And I guess the second part of that was flexibility you would have around the cost structure, if that continues to decline?

Sure. Well, one thing is, we're very grateful that we embarked on the cost restructuring we pursued in Floor Europe a little over 15 months ago under Frank's leadership; that despite the volume falling off the back of the truck last quarter, we still eked out good improvement year-over-year on Flooring. We shut down two of the four plants. Right now we don't see a way to shut down other plant in Flooring.

We feel like we've got the right capacity in Europe manufacturing-wise for Ceilings. Obviously, we'll look at ways to improve our crewing and staff to the volume, but I don't see big structural changes on the plant footprint, Europe. In SG&A, we continue to make efforts against both Building Products and Ceilings on the SG&A front; but at the same time, we're investing. We're investing in Russia. This new plant's going to come with significant SG&A investment as well.

So we're cautious on Europe. There's probably not huge swaths of costs to take out if Europe gets materially worse. But trust me, we're working around the edges to make sure we are staying cost competitive and delivering earnings improvement in the region, despite tough macroeconomic environment.

I would just add, our total exposure to Europe is 20%. And while it's a significant challenge economically, and obviously, we take even a 20% exposure very seriously, just to put everything in context.

Yes.

Very good. Thank you guys.

Mike Wood with Macquarie.

You mentioned the growth coming from multi-family for the 700,000 that you forecasted. Can you tell us how you model that out in terms of the mix impact and average ticket on your Businesses?

Well, we're talking residential, we're really talking from primarily the Floor business, a little bit of Ceilings. So it's an important component, but not the big driver. Certainly commercial is a bigger driver.

We were, frankly, looking at a lot of the data that's showing that multi-family is growing at double the rate of single family. And certainly the multi-family consumer, with builders who are building in the multi-family segment, are generally buying mid-tier quality and mid-tier margin products from us. So, fundamentally, you know Frank's business, both in Cabinets and Flooring, sells a lot into the multi-family segment. And just generally we're seeing the product forms that go in there, both the Resilient and the Wood forms carry a little bit lower margins. So that's how we're modeling it out versus individual family -- individual home buyers who often looking for higher value-add products that we're producing.

Yes, I mean, you'll find more Resilient Flooring, less Wood Flooring in multi-family. In the Cabinets businesses, as Tom said, they're going for value lines. We just look at the margins in those lines and the mix of the products as we think about the, again, the mix between multi-family and single family housing.

So, listen, while we're thrilled to have increase in both, from a mix effect, we would certainly rather see a more robust single- family expansion than multi-family.

Okay, that's helpful.

And on the Cabinets side, you'd mentioned the market share loss related to the service levels. Is that a function of the restructuring that you've done? I mean, you managed the margins extremely well in that segment. I'm curious how that's affected your service levels; and in a recovery scenario, what would you have to do to regain those service levels?

The way I would characterize it, we had some supply chain challenges in the quarter that, I think, we corrected in the fourth quarter going forward. No significant impact on our existing customer service. We had to play catch-up. Again, I think we're in fairly good shape now, and are able to fulfill orders. So we're sort of back on track. I would call it a 60- to 90-day blip.

Frank, I don't know if there's anything else?

No, that's right. I think it's behind us. It did impact us in the quarter. But I would not anticipate it having an impact in the first quarter.

I think again, even on weaker sales in the quarter -- softer sales in the quarter, I mean -- that Business has done a phenomenal job in turning around its profitability from a loss of -- what -- $6 million last year, to plus $2 million. So, it helped a little bit, by, as we just said, robust multi-family housing. Great execution across the board there, and nice recovery in EBITDA.

One point if I might add.

Really, the issue was not because of our plant consolidation, our SG&A. It was much more of a supplier (multiple speakers). Yes, one supplier that got really long on us on critical parts that created our service problems.

Exactly right.

Okay. Thank you.

David MacGregor with Longbow Research.

It's actually Jarrod Rapalje filling in for David.

On the commercial Business within the America Ceilings Business, you guys mentioned that volumes came in little bit lower than expected. Can you just talk about what you're seeing within the remodel business, and how it's changed your expectations for 2012?

The way I would talk about that is, Tom and I probably had a little bit more ambitious view of where the Ceilings business was going to come in. So it was sort of the uptick that we had expected to see. I would say the business itself probably came in pretty close to where they expected.

That's right.

And we're seeing a continuation of the performance in the year. Office -- commercial office space -- remodeling remained strong, healthcare remained strong. We continued to see some softness in education related to state budgets. So not a lot of difference within the quarter.

I don't know, Vic, anything to --?

No, I would say, the commercial business in the US has been very stable. Our volume is, in the last two months or three months, actually shown some improvement in activity. But it's just very stable right now. So I'd say what you said is accurate.

Okay. That's helpful.

The cost reductions, $35 million next year -- can you talk about where these are by segment? And then, how, on a consolidated basis, you're talking about 100 to 150 basis points of gross margin improvement? How should we expect to see that play out throughout the year? Is it primarily second-half weighted?

Yes, it will be more second-half weighted. First, I would say that we don't disclose the cost out program at the segment level on a prospective basis. Obviously you'll see it in the financial results when it comes. It's going to come in manufacturing productivity across all the plants, but particularly AVP will be a good beneficiary of it, given the embedded costs they absorbed on the labor contingency and the incentives they paid in the back half of this year. So they'll lap those in the back half of the year.

Also, it's going come in the form of pricing. We're continuing to take several price increases to chase commodity input costs, and I think that, that provides an opportunity for some margin growth at the total Company level as we pursue our pricing strategies, which we've implemented already in the first quarter.

Okay. Thanks, guys.

Keith Hughes with SunTrust.

You had mentioned a $15 million on the work stoppage. Was that for third and fourth quarter combined? Or was that just for the fourth quarter?

That was third and fourth quarter combined.

And of that, is it roughly split equally between the two?

That's correct, Keith.

And then we have another $4 million coming in the first quarter; correct?

That's correct.

Right.

Okay.

And, Vic, to expand on your comments on seeing something in the pipeline coming -- is there a specific segment you see strength versus others? Where is that coming from?

No, I think generally the Office segment is where we're seeing the strength.

And is that for short-term projects, or longer-term projects?

Renovation projects. So those tend to be short- to medium-term projects.

Okay. And you had talked about residential and seeing better months here in the last month or two. Is there a geographic breakout of that, or is that in all geographies?

Not really -- this is Frank, Keith.

Really across the board, regionally as well as segments -- remodel, replace -- as well as already has been well talked about, some of the new construction associated with multi-family.

Okay.

John Baugh with Stifel Nicolaus.

Quickly, two things -- one, you mentioned the 20% consolidated exposure to Europe. Is there appreciable flooring, ceilings difference on that number?

Not really. I think what is different is the geographical mix within that. So, as Tom pointed out, when we think about Europe at the Armstrong level, we include the UK, Russia, Middle East, as well as Continental Europe. Our Ceilings business has a much stronger presence in Russia and the UK. The Flooring business has a much stronger presence in Continental Europe. So the Flooring business is going to get affected more by relatively soft, as Tom said, high single digit softness we're experiencing in the commercial segments in the Euro zone. Our Ceilings business is benefiting -- while they're experiencing the similar kind of performance in the Euro zone, that's offset by stronger relative presence in more robust markets, like Russia, which is very strong for us, and the UK.

So that sort of explains the relative difference in operating performance between the two Businesses.

Yes. That's very helpful.

And then, you're one of the few companies I follow that's seemingly been able to offset raw materials with pricing; and I assume we've still got titanium dioxide going up, plasticizer's going up. I'm curious, and yet you mentioned all these price increases you've got in place. Are we going to stay ahead of that curve again in 2012? And maybe a first quarter snapshot on that in particular?

I think we talked about the -- we commented on the inflation we expect to see -- $25 million to $35 million range. We continue to drive price over inflation totally, as a Company. We continue to get the traditional yield from our price increases. So it's obviously our intent to continue to price over inflation as we go through 2012.

Yes, I think first quarter-wise --we matched fourth quarter, but the commodities went up linearly in 2011, so I do think relative to year-over-year we've got pressure in the first quarter on commodities, which these price increases are intended to go after. And I think -- who knows where commodities go? With the oil run-up recently, we're cautious on our ability to continue to price to fully recover; and certainly our guidance reflects our ability to do that maybe a little bit better. But that will be more evident in the back half of the year, I think, than in the first half.

Thank you. Good luck.

Jim Barrett with CL King and Associates.

Matt, could you talk about your promotional calendar on Resilient and Wood Flooring in the home centers this year, year-over-year, how is that shaping up?

I tell you what, I'm going to buck that one right over to Frank, who is able to describe that in better detail than I am.

Yes -- when you look at both products through the home center, without getting into too much detail of what our plans are, we're pretty confident about where our position is and some new products we're bringing to market, and our ability to get them placed at the home centers. So we work hard with those guys every day in terms of customer service and quality of products. We've had some good momentum that we hope to continue in 2012.

Okay. Thanks.

And Tom -- on Wood Flooring, your margins are approaching the margins you achieved in 2005, 20%, 30% incremental margins in that Business. Do you have a target? I could back into it, but do you have a target as to what Wood Flooring margins would be in a more normal residential construction market?

No, I don't have one for you, Jim. I've kind of shied away, trying to describe what the segments are in a normalized market, simply because I'm not sure, without doing that, how I give away other mid-cycle guidance forms that we're not quite prepared to give yet.

Understood. Okay, well thanks anyway and good luck.

Rodny Nacier with KeyBanc Capital Markets.

I have some questions on the Ceiling tile and grid Business. The grid Business has outpaced the tiles throughout the year, and I was curious as to how much of that was FX, or perhaps better volumes, or price?

Okay. So not FX. All our results are normalizing FX out.

It is fundamentally a Business that's benefited by commodity volatility and the ability to price. We're very disciplined in that market on following steel price up. We sometimes get there a little bit ahead of the steel price and we can hold a little bit on the way down. So it's largely a price-driven result this past year.

Volumes probably outpaced Ceilings a little bit, as we made some volume gains in Europe ahead of the European volume gains; so it's price and volume is what's allowed them to stay ahead a little bit of the Building Products, mineral fibers segments.

Got you.

Near-term, would you expect the grid business to continue to outpace tiles? Or would you see tiles catching up?

Well, I think if you look at our overall guidance, you saw that we were only anticipating WAVE to be flat to up $5 million on its contribution, which would only be about something sub-10% earnings growth; total Company level we're anticipating much greater in our total EBITDA results. So I think WAVE -- you can't always have the price ahead of inflation that we've enjoyed this last year, so I think they take a little bit of a breather, and the mineral fiber portion business kicks in and delivers more than its fair share in the year ahead.

Got you.

And just lastly, on the $4 million of expense that you expect for contract renegotiations in the first quarter -- is that tied to the two plants that have expiring contracts in the second half of 2012?

No, no. This is fundamentally -- we ended the lockout middle of January -- early to mid-January -- and had both workforces -- one workforce training, essentially, while the other one continued to work; and so basically had double the labor cost. That's fundamentally what's driving the higher expense. It's not associated with the out-front labor negotiations to come.

Got you.

So the labor negotiations -- that would be excluded from the changes that you expect from the cost-cutting initiatives in 2012?

Are you talking about the labor negotiations later this year?

The expense, the $15 million of expense.

It's all inclusive. No, we've not excluded anything, it's all -- we've not tried to normalize that out. So everything -- the $115 million that we achieved could have been if we didn't have that --.

Call it $15 million more.

$15 million more. So it's not excluded, nor is the $4 million in the guidance in the year ahead.

Okay.

It's all in.

It's all in. It was what it costs to run the business, so we've not tried to normalize that out.

Okay. All right; thank you very much, guys.

Ladies and gentlemen, this concludes the question-and-answer portion of today's event. I'd like to turn the call back over to management for some closing remarks.

Okay. Thank you very much. We appreciate everybody's interest, and have a good day. Thanks.

Ladies and gentlemen, thank you so much for your participation today. This does conclude our presentation and you may now disconnect. Have a great day.