Armstrong World Industries Inc (AWI) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter four 2012 Armstrong World Industries earnings conference call. My name is Patrick and I will be your coordinator for today.

At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference 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 proceed.

Thanks, Patrick. Good afternoon, everybody, 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 today are Matt Espe, our President and CEO; Tom Mangas, our CFO; Frank Ready, the CEO of our Worldwide Flooring businesses; and Vic Grizzle, CEO of our Worldwide Ceilings business. Hopefully, you have seen our press release issued 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 our 2012 10-K which we anticipate filing next week.

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.

Finally, forward-looking statements speak only as of the date they are made. We undertake no obligation to update any forward-looking statements beyond what is required by applicable securities laws.

With that I will turn the call over to Matt.

Thanks, Tom. I am pleased today to recap a challenging and exciting year for Armstrong. I will spend a minute on the fourth-quarter and full-year results, which were largely in line with our guidance, and then Tom Mangas will provide a comprehensive review of our financial results. I'm also going to review the operating environment we experienced in 2012, highlight our accomplishments, and then look forward to the environment and results we expect in 2013.

The fourth quarter of 2012 was characterized by mixed commercial sales in the US with continued weakness in the healthcare and education sectors which rely on public financing and modestly favorable performance in the office sector. New residential construction continued its strong recovery, but residential remodel activity, which is the real driver of our residential business, remains constrained.

High employment, unsteady consumer confidence, difficult access to credit, and a lack of clarity, both politically and economically, are constraining homeowners. Given these conditions, we believe homeowners are deferring discretionary remodel spending.

The fourth quarter in Europe, especially in the Eurozone, was weak even despite relatively easy year-on-year comparisons. Our ceilings business in Russia experienced a slight sales decline in the fourth quarter, but this was as expected as we completed our transition to a local sales model. I will talk about that and full-year Russian results in just a minute.

Both of our Pacific Rim businesses saw year-on-year sales growth despite overall weakness in Australia, our largest market in the region.

Net sales for the fourth quarter were $613 million, in the middle of our guidance range. Compared to the fourth quarter of 2011 sales were down $10 million or 2%. On a comparable foreign exchange basis, sales were down $7 million or 1%.

This sales drop can be attributed to our exit from the Patriot wood flooring distribution business we discussed last quarter. Patriot was in our 2011 base and contributed about $7 million in sales.

The foreign exchange impact year on year was fairly minimal and driven primarily by the euro. On a total company basis price gains offset small volume and mix declines in the quarter. In the flooring business volume declines in commercial markets in North America and Europe were only partially offset by price gains. Excluding the sale of the Patriot business, Wood Flooring sales were up with strength in independent retail and with homebuilders, which were partially offset by lower sales in the home center channel.

The Pacific Rim was up despite weakness in Australia. Global ceiling sales were up slightly as gains in the Americas and the Pacific Rim offset volume declines in Europe. Adjusted EBITDA for the quarter was $72 million, again, in the middle of our guidance range, and up $19 million, or 37%, from the fourth order of 2011. The EBITDA improvement was driven by manufacturing productivity, SG&A savings, and our continued ability to achieve price to cover inflation; all of which more than offset lower volumes.

A portion of the year-on-year improvement relates to our 2011 lockout at Marietta, which impacted last year's results but didn't occur in the fourth quarter of 2012.

Full year sales of $2.619 billion were down $104 million, or 4%, from 2011. On a comparable foreign exchange basis, sales were down $57 million or 2%. Again, the large majority of the FX impact was driven by the euro. All the sales decline was driven by volumes with both businesses driving favorable price and mix versus 2011.

For the full year we increased adjusted EBITDA by $26 million, or 7%, from last year despite global volume declines at 3.5%. Our actions to drive manufacturing and SG&A improvements in price over inflation offset more than $40 million of bottom-line impact related to market-driven volume declines. When we entered 2012 and provided guidance we expected a flat commercial market opportunity in North America, a slight decline in Europe and Australia, and robust growth in Asia.

On the residential side, we anticipated strength in new construction and modest improvement in repair and remodel activity. In reality, we experienced a slightly negative North American commercial market environment, particularly in education and healthcare. Europe, especially in the Eurozone, disappointed even versus our low expectations.

Asia was a mixed bag as office in China was down in the first half of the year, but recovered in the second half, and the education and healthcare sectors performed well as expected. New residential was the one surprise to the upside as 780,000 new home starts exceeded our outlook. The repair and remodel activity was constrained and below our expectations.

Outside of the global macroeconomic climate we are largely pleased with 2012. Some of the significant accomplishments Armstrong achieved during the year in chronological order include transitioning our Marietta ceilings plant safely back to their regular staff levels after the lockout that concluded at the end of 2011. Receiving Board and government approval to build and beginning work on the first mineral fiber ceilings plant in Russia.

Refinancing and raising $250 million of additional debt and paying a special cash dividend of $500 million in March and April, respectively. Completing construction of our Millwood, West Virginia, mineral wool plant. Closing our previously idled Mobile, Alabama, ceiling and Statesville, North Carolina, engineered wood flooring plants.

Exiting non-core businesses by divesting our Cabinets business and Patriot's distribution business. Opening an Armstrong ceiling distribution center in Russia, thereby, allowing customers to buy in Russia and in rubles directly from Armstrong. Russia was a real bright spot for us in 2012 with ceiling sales up over 25%.

Delivering the last $50 million of our $200 million cost reduction program. Building out our three plants in China; our homogeneous flooring plan just recently started production and the heterogeneous flooring plant and ceilings plants both start up later this year as planned.

Earning $400 million in adjusted EBITDA on sales of $2.6 billion. This 15.3% margin represents a record for the Company since emergence from Chapter 11. The only year since the emergence with higher absolute earnings was 2007 when on a comparable basis EBITDA was $427 million, but sales were almost $700 million higher that year.

Finally, 2012 was a record safety year for Armstrong. Our incident rate of 0.68% was down 30% from an already excellent 2011 performance and 18 of our global manufacturing facilities worked the entire year without a recordable injury.

As we look ahead to 2013, the headline suggests that the macroeconomic pieces of a recovery are falling into place in the US, albeit not always smoothly. But we have seen this before only to be disappointed as the year unfolds, which tempers our enthusiasm as we think about our market opportunity in 2013.

As we plan our business, we expect new residential construction to continue to be a bright spot and forecast 950,000 new home starts in 2013. However, we remain cautious on residential remodel activity as consumers seem willing to defer purchases of big-ticket items rather than trade down, and despite pent-up demand to freshen aging homes, a trigger to release this demand just isn't obvious to us at this time.

Our Wood business should achieve higher sales driven by new home construction as well as price gains in response to lumber inflation. As you know, our commercial business tracks GDP closely so as we look at another year of GDP growth around 2% in the US we anticipate a continuation of flat to slightly down commercial volumes with ongoing weakness in education and to a lesser extent healthcare. Price to recover in inflation and mix gains would offset the volume declines.

We recognize that McGraw-Hill and others have positive forecast (technical difficulty) construction. We have seen this before only to have the numbers revised downward as the year unfolds.

Also remember that as with residential repair and remodel activity, remodel activity is a real driver to our business, and even if these new construction forecasts are correct, our product sales lag starts.

In Europe we expect GDP to be (technical difficulty). Russia, the Middle East, and share building and pricing initiatives should drive sales gains that will more than offset the Eurozone market-driven volume declines in 2013.

I mention the softness we experienced in the office segment in China in the first half of 2012, which was quickly followed by a rebound in activity in the back half of the year and we believe the second half trend will continue into 2013. Coupled with continued growth in healthcare and education and our plant openings we anticipate China sales to be up double digits. We also expect to grow sales in India and Southeast Asia. We expect that Australia will continue to be a drag.

On the cost side, we are looking at a higher manufacturing overhead expense as we bring our new plants online, inflation on our raw material inputs, and increased SG&A expense as we invest to support emerging market sales and drive share and mix improvement efforts. We will continue to focus on driving price to cover inflation and continued productivity gains in our plants, but EBITDA margins will likely contract slightly in this plant start-up year.

2013 will be a transition year as we consolidate the gains of the past few years and position ourselves to benefit from growth in the future. For the year, we anticipate sales in the range of $2.7 billion to $2.8 billion, up from 2012, and EBITDA in the range of $390 million to $420 million, up slightly at the midpoint from 2012.

With that I will turn it over to Tom to discuss the financial results and guidance in more detail. Tom?

Thanks, Matt. Good afternoon to everyone on the call. In reviewing our fourth-quarter and full-year results I will be referring to the slides available on our website starting with slide four, key metrics, as Tom Waters already covered slide two and slide three is simply an explanation regarding our standard basis of presentation.

Matt mentioned quarterly sales and EBITDA results, so I will only point out that operating income and EPS were also up versus last year by 62% and 88%, respectively, with fourth-quarter EPS benefiting in 2012 from a 40% normalize tax rate versus the 42% used in 2011. Fourth-quarter free cash flow was $25 million, down $65 million from the fourth quarter of 2011. I will address the drivers of EBITDA and free cash flow in more detail on upcoming slides.

We closed the fourth quarter with net debt of $735 million, down from $784 million at the end of the third quarter, but up from $362 million at the end of the fourth quarter of 2011 as we increased leverage to pay our $500 million special cash dividend in April. Finally, our unadjusted return on invested capital, or ROIC, on a continuing operation basis was 9.8%, an increase of 220 basis points over the prior year and up from 1% in 2010. This represents a record since our emergence from chapter 11 and growing ROIC remains a focus for us.

Slide five details the adjustments we made to EBITDA and provides a reconciliation to our reported net income of $9 million in the quarter. As you can see, there were only a few minor adjustments in this past quarter and in the fourth quarter of 2011. In addition, interest expense was higher in 2012 than in 2011 as debt increased by $250 million to finance a portion of the dividend paid in April 2012.

Tax expense was significantly higher versus the prior year, primarily due to a release of foreign tax credit reserves in the fourth quarter of 2011 that did not repeat this past quarter. Our 70% unadjusted tax rate in the fourth quarter of 2012 is driven primarily by relatively large unbenefited foreign losses in the quarter. A high unadjusted effective tax rate is typical for us in the fourth quarter, reflecting the seasonal nature of our business and the small relative profit in the period.

I will discuss taxes on a go-forward basis when I talk about guidance in a minute.

Moving to slide six, this provides our sales and adjusted EBITDA by segment for the quarter. Excluding the impact of foreign exchange, Resilient Flooring sales were down 3% driven by weakness in Europe where volumes dropped double digits and by a soft North American commercial market. Sales in the Pacific Rim were up 9% led by strong performance in China.

Despite the sales decline, adjusted EBITDA for the Resilient segment was flat as manufacturing and SG&A savings offset lower volumes and start-up costs associated with our China plants.

Wood flooring sales were down 4% due to the Patriot divestiture we included in the third quarter. Excluding Patriot, North America Wood volumes were up mid-single digits. Price was a slight positive and mix was a slight negative as the builder channel outperformed retail and the home center channels.

Adjusted EBITDA in the Wood business was down $1 million year over year, primarily due to the higher lumber input costs. As a result of this, last month we announced price increases on our solid wood products of up to 10% effective March 1. This is on top of the 6% price increase we took on both solid and engineered wood products effective December 17.

Building product sales were up 2% as global price, mix, and volumes were all slightly positive. In the Americas our ceilings business sales were up 3% led by low single-digit growth in volumes. Growth in our architecture specialties business was a key contributor to this.

Sales in Europe were down 3% for the quarter, excluding the impact of foreign exchange. Matt mentioned the drop in Russia sales as we saw volume pulled into Q3 as we transitioned to a local service model in Q4, which we outlooked on our call last quarter. This coupled with market weakness in the Eurozone led to volume declines that more than offset mix improvements, which were driven by an improved quarter in the UK, our largest European market.

Pacific Rim sales were up despite continued weakness in Australia, which was down high-single digits. China and India both experienced solid sales growth.

Adjusted EBITDA in building products increased $20 million versus the fourth quarter of 2011, or more than 40%, as manufacturing productivity, SG&A savings, greater year-on-year contributions from WAVE, as well as price and mix gains all contributed to improved profitability. Some of the productivity gains we enjoyed were due to the higher costs we incurred at our Marietta, Pennsylvania, facility during a lockout in 2011.

Separately, we announced a 5% price increase in North America commercial ceilings and 4% for grid effective February. In Europe, we have ceilings and grid price increases of 2.5% to 4.5%, depending on product and market, that go into affect over the next month as well.

The corporate segment was flat as lower core corporate expenses offset the expected decrease of our non-cash pension credit.

Slide seven shows the building blocks of adjusted EBITDA from the fourth quarter of 2011 to our current results. The story of the quarter was similar to earlier quarters this year as volume declines across our commercially-oriented markets offset price and cost improvements. This quarter also benefited from lower input costs, mostly from petroleum-related materials.

Turning now to slide eight, you can see our free cash flow for the quarter. Cash earnings were higher than prior year driven by improved operating income. Working capital contributed $47 million to free cash flow in the quarter, but that was down by $17 million versus last year due to our 2011 accounts payable initiative that drove a one-time cash inflow last year. Capital expenditures were higher than in 2011 as we continue to build out our emerging market plants.

Interest expense was higher due to the additional debt in support of the April special cash dividend. And, most notably, we are anniversarying the $50 million waved special cash dividend in 2011.

Slides nine through 12 illustrate our year-to-date financial results. For the year, sales were down 2.1% on a comparable foreign exchange basis driven by European macroeconomic issues and softness in commercial markets in the US driving reduced unit volumes. Despite the sales decline, adjusted operating income, adjusted EBITDA, and adjusted EPS all improved. Free cash flow was lower, primarily due to higher CapEx spending, the 2011 payables program I just mentioned, and the nonrecurring waved special dividend.

Slide 10 illustrates our sales and adjusted EBITDA by segment for 2012. Resilient Flooring sales were down 4% due to weak European and North American commercial markets. European volumes were down in the mid-teens. Price and mix were both positive in the Resilient segment with mix benefiting from strong sales of luxury vinyl tile products, including residential products such as Alterna and Luxe Planks, which we have discussed with you in the past.

Despite lower sales, the Resilient business grew EBITDA by over 30% as SG&A savings, production expense improvements, as well as price and mix overcame the volume declines.

Wood sales declined due to the disposition of Patriot and lowers sales in the home center channel, as well as due to slightly lower price and mix. Sales to builders and independent channels were strong. Wood profitability dropped driven by the lower price and mix. Mix was negatively impacted by strong new home construction and relatively weak remodel activity.

Building product sales grew by 1% for the year as global price and mix overcame low single-digit volume declines. Adjusted EBITDA was up $18 million, driven by the higher sales, manufacturing productivity, and a greater contribution from WAVE. Corporate expenses were higher by $8 million due to a $14 million reduction in our non-cash pension credit partially offset by lower core expenses.

Slide 11 is our full-year adjusted EBITDA bridge and the story is familiar to those of you who have been following Armstrong. Lower commercial market opportunity across our core geographies remained a drag, but we were able to grow EBITDA by improving price and significant cost savings resulting in $400 million of adjusted EBITDA for the year.

Slide 12 is the year-to-date free cash flow bridge. Improved cash earnings benefited from both higher operating income and lower cash taxes. The working capital change was negative, but as mentioned before, this was driven entirely by our accounts payable initiative that delivered one-time outside gains in 2011. CapEx is, of course, related to our plant construction projects and interest expense to our March refinancing. Waved free cash flow reflects the 2011 special cash dividend.

Slide 13 provides guidance for 2013. As Matt mentioned, we expect sales of $2.7 billion to $2.8 billion, up 5% at the midpoint from 2012, and adjusted EBITDA in the $390 million to $420 million range. Matt provided the market color on how we came to these ranges, so I won't review those factors, but I do want to comment on a few additional details.

As most of you know, we will be bringing three new plans online in China this year and ramping up engineering and construction for our Russia ceiling plant. These four plants will add about $15 million of fixed production costs above 2012 while providing relatively little in terms of incremental sales as they ramp production, thus contributing negatively to margins in 2013.

We continue to ramp up SG&A investments in our architectural specialties business, as well as investments in Asia and other priority emerging markets in advance of the plants coming online, a further drag to 2013 profitability. Also, impacting 2013 margins is a further $10 million reduction of our non-cash pension credit. This is due mostly to us reflecting the lower market-based discount rate on our pension liabilities consistent with what we are all seeing across all defined benefit plans. This item impacts both manufacturing and SG&A expense.

I wanted to specifically call your attention to these items as they represent $30 million to $35 million of expense in 2013 that we have not guided on in the past.

The final 2013 detail I want to spend a minute on is our tax rate. We were pleased to reflect a lower normalized effective tax rate of 40% versus the prior year's 42% when we initially guided 2012. We, in fact, delivered an unadjusted actual rate of 34.5% driven by the release of foreign tax credit reserves, domestic production deductions, and a better mix of foreign earnings versus 2011.

As we look further into the future, we now project and will be using a normalized effective tax rate of 39%. However, that will likely not be our experience in 2013. We anticipate an unadjusted effective tax rate closer to 42% for 2013. This is driven largely by a temporary deterioration in our foreign subsidiary level profitability, mostly related to the plant start-up costs I just mentioned.

Finally, on the guidance key metric slide you can see that free cash flow should be in the $75 million to $125 million range, similar or slightly up from 2012.

Slide 14 provides a more detailed assumptions going into our earnings guidance and includes the specifics for the first quarter. We anticipate inflation in the range of $40 million to $50 million with a significant portion of the increase impacting Wood Flooring. Our two recent Wood price increase announcements are in direct response to this lumber inflation.

We also anticipate raw material inflation in the ceilings business as input costs are increasing across an array of items including perlite, mineral wool, wastepaper, starch, and others. Once again, in 2013 we anticipate offsetting inflation with price increases.

We continue to remain focused on driving continuous productivity in our cost structure. To that end, we have set an internal manufacturing productivity goal of 2.5% annually. This replaces our discrete $200 million cost out effort from the past three years. This 2.5% goal is on a gross basis, which should more than offset our new plant start-up costs and manufacturing and labor inflation.

Despite this productivity program, we expect the sheer magnitude of the commodity inflation and the offsetting pricing we must take to result in slightly lower gross margins for the Company. Wood will be the hardest hit. I already mentioned the impact of the further reduction in our non-cash pension credit, so I will skip the item.

We expect WAVE's earnings to be flat to slightly up as they experience the same global end markets as our other commercial businesses. Cash taxes will be in the $25 million to $50 million range, up from prior years, as we exhaust our Chapter 11 federal NOL and begin to utilize foreign tax credits. Our estimate for the first quarter projects sales, including anticipated FX impacts, to be in the range of $600 million to $650 million, which at the midpoint is basically flat with 2012 when excluding foreign exchange impacts and the Patriot divestiture.

We expect to earn $68 million to $83 million of adjusted EBITDA compared to just over $83 million on a comparable basis in 2012. The adjusted EBITDA estimate is impacted by lower commercial volumes and the higher start-up costs I just discussed. Our capital spending range of $170 million to $190 million reflects the completion of our Chinese facilities, the continued construction in Russia, and our typical maintenance improvement CapEx of $90 million to $100 million.

Lastly, for the full year 2013, we currently anticipate a few million dollars in EBITDA adjustments associated with crew eliminations in Australia and severance payments for additional redundancies in the European flooring business as we continue to try to match the cost structure with the market reality.

As you may have noticed in our press release, we are about to go to the capital markets and refinance our current credit agreement. This transaction will not change our level of debt or liquidity. We are looking to borrow $1.025 billion, essentially equal to our current credit agreement debt.

We are simply seeking to lower our interest rate to current market levels, extend maturities to 2018 and 2020, and make a few minor technical improvements to our current credit agreement. We hope to conclude this transaction in March and will discuss with you the results when we host our first-quarter call in April.

In summary, in 2013 we look forward to consolidating the gains we have made in the past few years and to setting the stage for the growth that we expect in the coming years. We have shared with you in the past our midcycle guidance where we believe we can achieve $4 billion in sales and $800 million of EBITDA. We are even more confident of that outcome with our cost out program fully realized, our emerging market plants about to open, and, hopefully, a more robust domestic commercial recovery to follow what has started to become a strong housing recovery.

With that I will now turn it back to Matt.

Thanks, Tom. I hope that when we host this call next year we are reflecting back on 2013 where consumer remodel spending was a surprise to the upside, where commercial activity met or exceeded outside estimates, and where Europe started to recover. While this scenario is possible, and we certainly have the capacity to meet this opportunity, it is just not one that we see today.

While I always hope for better market conditions, with or without them Armstrong will continue to focus on the factors within our control to drive profitable growth, create shareholder value, and position ourselves to win in the markets.

With that, thanks for your question today. We would be happy to take -- thanks for your attention today and we would be happy to take any questions.

(Operator Instructions) George Staphos, Bank of America Merrill Lynch.

Good afternoon and congratulations on the year. I guess my question is this. You obviously had a very strong fourth quarter when you look at the percentage growth rate. You enumerated a number of factors that sort of talked to why growth will decelerate this year. You had easy comps. You have $30 million of start-up and other expense to contend with this year. The cost reduction program has more or less completed. You have a new productivity program on tap.

Is there anything else within the business that is driving this deceleration? Is it purely those factors? Is there any lessening in your ability, as you see it, to create margin or return over time from your pricing and distribution model? Thanks.

Thanks, George. No, really it is the factors we are pointing to. The GDP outlook causes us to be very cautious, somewhat pessimistic about volume opportunities in the commercial market.

We continue to be really pleased with new housing starts that obviously contributed to relatively strong Wood Flooring growth. The issue there is that really only represents about 10% of our total revenue.

So if you look around the world, we are expecting challenging markets again in the US and Europe. We expect Asia to continue to be robust with the exception of Australia, so that -- we are going to offset that with price and mix. Then we have, as Tom pointed out, $30 million to $35 million worth of expense investments this year that help position our emerging market opportunities and bring the plants out of the ground.

We are certainly not -- we are never done with SG&A and manufacturing productivity, but I think we have a one-year plant start-up phenomenon here that we have to consume.

Matt, if I could, just if you were in our seats what would you look to in terms of the green shoots of a commercial recovery in the US or --? I will leave it there. Other than seeing it in your numbers in one of these quarters. Thanks.

Sure, I think the answer there is a couple of things. I think the first thing would be real traction in commercials starts and, of course, traction in commercial remodel activity. That really drives our business. Then sustained positive growth in the Architectural Billing Index.

George, this is Tom. Just on your first question, I wanted to come back -- I think one difference between 2012 and 2013 is the inflation environment. As you looked at our bridges, we essentially had no inflation on the year in 2012 and we were able to execute a lot of pricing, particularly in the [ASP] business.

Next year we are anticipating significant inflation, particularly in Wood, which is typically not our strongest market in terms of ability to hold and win price there. We are being very aggressive there, so I think for the difference in 2013 to 2012 is our ability to achieve price over inflation.

Thank you, guys.

Bob Wetenhall, RBC.

Good morning. Just wanted to ask, are you expecting stronger trends in the second half of 2013 relative to 1H? And I'm just trying to infer this from your guidance for the first quarter.

We are slightly improved second half; that generally helps us close the year strong, relatively strong. If we see a meaningful rebound in commercial starts in commercial activity in the second half, of course, Bob, that doesn't roll through for us in revenue for quite a while. That is revenue we would see in 2014, but we are expecting, at least in North America, a slight improvement in second half versus first half.

Got it. You had mentioned $4 billion in revenues, $800 million of EBITDA midcycle. I'm just trying to understand and thinking about that number, is that including the foreign emerging market investments you're making?

It does.

It would include the additional plants coming online in China and Russia. And it also assumes kind of a normalized operating environment with respect to housing starts and commercial starts.

Any guess on timing on that?

Boy, I tell you, if I could do that I would probably be in a different job.

Got it. All right, guys, good luck this year. Thanks.

Keith Hughes, SunTrust.

Thank you. Just to go back over something you said earlier, you had three items that were hurting you coming up in 2013 -- $15 million on fixed production costs, $10 million on lower pension credit. I believe there was a third one; can you repeat what that was?

Yes, it was SG&A-related investments associated with the architectural specialties priority investment, as well as emerging market SG&A to support the plants. So expanded sales presence, promotion vehicles, displays, that sort of stuff.

In China are you not going to be able to offset some of the production overhead by not having to ship in the country anymore, or is that included in that estimate?

It will take a few years to load the China plant, so we will be incurring the freight expense as we import into China as the plants kind of ramp up this year and next.

Okay then, final question, interpolating between your numbers it looked like about $110 million of D&A in 2013. Is that correct?

That sounds about right, Keith.

I am looking at the difference between the operating income range in 2013 and --? Does that come pretty even throughout the year?

I'm sorry, Keith, you broke up there.

Does that come fairly even throughout the year?

I think you would see it build because as we start opening these plants we start the capitalization and the depreciation process, so we are functionally operating the homogeneous plant now. The hetero and the ceilings plant will start coming online in the second quarter, third quarter, so that -- it will ramp through the year a bit.

Okay, thank you.

Ken Zener, KeyBanc Capital Market.

Afternoon, gentlemen. Could you maybe just -- taking a step back, if you look at the three different segments I realize this year with plant closings or plant openings and costs there is some different impacts, but generally could you give us a rule of thumb for operating leverage or incremental EBIT that you would expect for each of your segments?

Absolutely. Ken, we -- and we talked about this a bit in our midcycle discussion, we believe very strongly that with incremental volume here, and I think that is the key is with new volume on building products segment we think we can achieve 30% to 40% incremental margins. On the flooring segments, on Resilient somewhere between 25% and 35% and Wood at 25% to 30% incremental margins.

So we are excited for the day we start growing volumes. Part of the issue behind our -- and those are EBITDA margins, by the way. In our guidance, sales growth of 5% at the midpoint, the bulk of that is actually from pricing and mix, not from incremental volumes. You took Matt's outlook and you talked about flat to down commercial markets, flat to slightly up residential remodel markets.

So you are not seeing that incrementality on the sales because the sale is not being driven by unit volumes. It is by price and mix. But when the volume starts kicking in we do expect to have a great engine of growth that yields to that $800 million of EBITDA at mid-cycle or effectively at 20% EBITDA margin, up from 15% in the fourth quarter.

Okay, good. Then it sounded like in the comments with building products it did sound the plant opening and you have some price coming in in February. If you could maybe give us an update or if that is just to offset incremental costs that you are facing.

But in building products are you going to have up margins? It sounded like you said down margins. Could you just confirm that for the year?

The price increases that we have announced effective in February are related to raw material increases that we are going continue to see. And our yield on the price increases continues to be at our historical average. And with respect to margins --

We haven't guided at the segment level where we expect margins to go. The margin guidance was purely at the company level which is reflective of the total company's pressure on commodity as well as plant start-up costs.

Sure. And if I could, the Wood Flooring that you describe, the mix impact to new builders, could you give us a sense of how much lower perhaps margins are to the new side, which is obviously very helpful for the volume, but just so we can think about the impact as 2013 continues to have a lot of new construction impact? Thank you.

Ken, we generally are not disclosing the magnitude of differentiation. Obviously, the builder market can be very competitive and you are bidding big developments and generally it takes a lower end product than the residential remodel. So we are not giving that level of transparency.

But as you can imagine, given that builders are trying to hit specific price points they are selecting product forms and conducting bid processes that lead to lower margins.

So just to build on what Tom said, what that means is we have got a mix impact from new construction, not pure price. So we are selling a somewhat lower mixed product line; it doesn't necessarily drive margins quite the same way pure price would.

Great, thank you.

Stephen Kim, Barclays.

Thanks very much, guys. Two main questions I had. First, with respect to your commentary about the public sector portion or public sector influenced portion of commercial, could you break that down for us a little bit in a little bit greater detail? Maybe quantify of your commercial exposure how much of it would you say is affiliated with public sector related. I know you called out education, but if you could maybe just be a little bit more granular on that that would be great.

In the four major commercial segments it is almost equally split if you look at the entire company. It is a little differentiated between businesses.

Where we see public spending affecting the most, obviously, is the public schools and that is a function of state government and municipality budget challenges driving some of that. So we would see that.

To a somewhat lesser degree we experience it in healthcare. If you think about office construction that is not obviously publicly or tied to public spending, but we do see some regional differences or a range in the terms of the activity there.

But if you look at the ceilings business and you think about office retail, education, and healthcare, and you could throw other in there, but if you look at that office is about 30% to 40% of the total business. Retail -- and this would be ceilings for stores, not ceilings sold through stores -- would be 20% to 30%. Education is 15% to 25%. Healthcare is 5% to 15%.

If you look at the flooring business, healthcare again represents about 20% to 30% of the total. Retail, and again this is retail sold into stores for their use not through stores, 20% to 30%. Education is about the same as ceilings in terms of 15% to 25%. And office and flooring is a smaller part of the mix; versus ceilings office is about 5% to 15%.

Got it, that is very helpful. Appreciate it. Okay, great.

Secondly, I have wanted to ask you about the Wood Flooring business. You have been talking now for a little while about the home centers with their challenges. Obviously, they have a significant competitor out there who has been doing a good job on Wood Flooring.

I was curious whether or not you guys had any view on how you can -- addressing things that are in your control, how you can address the ongoing weakness in Wood Flooring home center sales?

Well, we have commented in the past, Stephen, on a particular home center channel that drove a significant variance or deviation from our expectations. That didn't occur this quarter, so we are kind of withholding any specific comments.

We are constantly evaluating and reviewing our channels to market and looking for opportunities to expand. At this point, with respect to Wood, the independent channels are doing a phenomenal job for us. They are seeing real growth there, as is builder direct.

So we think we are holding, arguably gaining, a little share there. But Frank and his team are always evaluating and looking at channels that optimizes our customer access.

Sure, okay. Well, let me throw in a last question then with respect to the trends throughout the quarter. In particular, I guess we are all wondering whether or not there was any incremental signs of improvement as you headed into 2013. I think I believe it was a couple of days ago you had one company in the commercial market commenting about very strong orders, for example.

I was curious whether or not you have seen any incremental improvement in the trajectory of your business, particularly on the commercial side or as you remodel as you enter 2013.

I mean it is always hard to compare one company versus the other, different cycles and things like that, but we didn't see a significant improvement in the fourth quarter in the commercial activity. As we said, the residential new starts continues to be strong. Commercial activity across the board continued to be a bit of a challenge in the US.

Europe softened in the fourth quarter and Asia had a very strong second half. So nothing beyond what we described for the fourth quarter. Again, given the GDP outlook in North America and continued pressure in the Eurozone, we are not anticipating any help at all from the economy in 2013 and we would love to be surprised on the upside.

Sure. Okay, great. Thanks very much guys.

Kathryn Thompson, Thompson Research Group.

Thanks for taking my questions today. On Resilient flooring margins, improved year over year but still a touch below our expectations, how much of this was driven by higher costs? Or at least the negative margins, how much was driven by higher cost versus volumes maybe coming in a little bit lighter or any other event that could have explained the little bit softer operating margins for Resilient? Thank you.

Sure, Kathryn, nothing meaningful in costs. We are driving price over cost and have through the year. The major driver in the variances most likely are mix in commercial versus residential, so commercial was down and relative margins are stronger there.

Kathryn, I guess it is all relative to expectations. I mean worldwide Resilient EBITDA margin in 2012 was 9.3%, up from 6.8% on declining sales, so we felt that was a pretty good margin outcome. As I looked across the different elements, I mean they all have contributed to offset that lower -- the good news and the bad news is our incremental margin is on an EBITDA basis with new volume we are growing significantly. And when we lose volume you have got a big hole to dig yourself out of.

So I think the business did a great job to significantly grow EBITDA margins 250 basis points in a declining volume environment.

Wanted to just make sure that there weren't any specific trends that would result in a deceleration in margins as we go into next year. We definitely saw the year-over-year improvement but want to make sure that there isn't anything else that we should take into consideration.

Again, relative to 2013 Resilient segment will have two new plants opening through the year and with only half a year or less benefit of the heterogeneous. So that segment will see pressure from that new -- the portion of that $30 million to $35 million of incremental cost that I talked about.

Okay. Again, on the Wood segment margins, mix versus higher cost. I know that our checks are showing some good acceptance in price increase, but a little bit more color on margins in that segment too.

On which segments, Kathryn?

Wood.

On Wood. Wood did see slightly down margins in 2012. We closed at about 10.6% EBITDA margin at the global wood level versus 11.1%, so down about 50 basis points. Again, that one is the volume story; year-over-year sales on a constant FX basis down about 5%. A lot of that is Patriot coming out in August on a sales basis.

I think the business started to see lumber inflation in the fourth quarter, started ramping pretty aggressively. In the summertime we were seeing pretty moderate lumber inflation and that ramped through fourth quarter pretty aggressively and is a big driver of our 2013 inflation guidance. So really the business is there; the challenge there will be to take pricing to offset that inflation fully in 2013. Obviously in 2012 we weren't able to take any pricing because it came at us late.

Okay, great. Thanks for taking my questions.

Keith Hughes, SunTrust.

Just one follow-up question. The $40 million to $50 million of hit from raw material energy inflation is that before pricing impacts?

That is what pricing impact, Keith?

Is that before pricing impacts?

Yes, yes, yes. That is a gross; that is not net after pricing. That is a -- consistent with the way it would show up on our bridges to you, so we split out pricing versus inflation.

Okay. And you are planning to offset how much of that this year in your guidance?

Our goal is 100%.

Is that what you included in the guidance is the question.

It is.

Okay, thank you.

David MacGregor, Longbow Research.

Good afternoon, everyone. Tom, question for you. The $30 million to $35 million in additional expense in 2013 how does that play out over the four quarters?

I think you are going to see it be -- well, let's start with the easiest one, the pension credit, that will get spread pretty evenly, like peanut butter unfortunately. The SG&A and manufacturing start-up loans are going to be more up front-half loaded. You can see that certainly in our first-quarter guidance as we are bringing up three plants basically in the first half and trying to get the SG&A out there to support the commercialization.

Okay. Then just secondly, in saying flat to slightly down commercial opportunity in 2013 you called out education and healthcare. What are you assuming for each of those verticals in terms of possible negative comps?

I don't know that we have been that specific on it. I would say that those two non-office segments we are expecting it to be the same trajectory as we saw in 2012, so it would be kind of low-single digits to maybe as bad as mid-single digits.

Okay. And just how much forward visibility do you have right now in terms the ceilings business?

I don't think we have any incremental visibility than what we had last year. We still have the flow business that is very much a warehouse restock for our distributors, and that is, at best, 30 to 45 days of visibility. The projects that are related to big remodel or big new construction we have the same kind of visibilities we had before -- long, six, or 12 months of visibility -- there is just not enough of them. And that is what the mix of high flow business and not a lot of projects leads to pretty poor visibility in general.

As Tom said, we just see that part of the business as restocking orders from the distribution channel, just kind of flow business.

Thanks very much and good luck.

[Michael Reinhardt], JPMorgan.

Good afternoon. Thanks for taking my questions. First, I just wanted to make sure I understood with the Wood Flooring and you talked a lot about inflation continuing to impact that business, with the margin declines that we have seen in 4Q 2012 and 3Q 2012 if those year-over-year declines on a quarterly basis may accelerate in the first half of 2013, if you are seeing incremental inflation and maybe not being able to fully offset it with price.

I know that you have announced another price increase of 10% for March, but just trying to get an understanding of the timing of that and if the incremental cost is going to hurt you before you can offset it.

Let me start with, Michael, we do have a seasonal business in Wood and so that is the primary driver for the deceleration you would see in our margins in 2012. You would have seen the exact same pattern in 2011 and 2010.

So just the absolute level of sales in Q2 and Q3 driven by the seasonality of the repair/remodel cycle and also the new building cycle. No matter what the size of that is is leading to the significant decline you see between Q3 and Q4. I would expect that you will see it rebuild in the second and third quarter and tail off again.

But, Tom, I guess I am talking about the year-over-year comparisons, not -- excluding seasonality. In other words, 3Q you were down 270 bps roughly year over year, in 4Q 2012 you were down about 120 year over year, so that actually was a -- you had a better year over year, a less negative comp in 4Q. I am just trying to think about incremental cost inflation versus pricing offsets in the first half of 2013.

Sure. So I do think that the second half of the year starting in Q3, as I said, we started to see the lumber inflation kick up. We have also been adding crews in anticipation of demand and those crews aren't productive when you first add them. You have probably seen several announcements by us that we added crews to meet increased demand and it takes them three to six months to become effective. Those are probably the key drivers there.

I do see your point. Yes, Q3 to Q3 down a few hundred basis points on margins on lower sales. There is probably also an impact from Patriot in there, because we did sell the Patriot business in the middle of Q3 2012. We sell other people's products without any thoughts on it through the Patriot business, so that is also part of the deterioration.

Okay. Also, just wanted to make sure I understood. When you talk about the start-up costs of the plants in terms of the extra fixed production costs, those are obviously permanent costs that you are adding in now that you will eventually lever with a sales cut materialize. Are there any type of what you would consider maybe one-time start-up costs that you were expecting in 2013, or is this just kind of additional investments that you are making that you will reap returns on in 2014 and 2015 as the sales ramp?

There are one-time costs in there, Michael. Each of these plants has to go through a commissioning and qualification phase that includes running product and scrapping the old product that you are not making, going through color trials which is what the homogeneous plant has been doing.

So there is a usage of materials that is one-time. There is the de-bugging activity that happens with increased resources to get the plant to work and run effectively. So I don't think all of the 2015 incremental is a permanent add, if that is your core question.

Yes. Any granularity in terms of what you would think would be temporary or one-time, and if any of that is also on the SG&A side?

No additional granularity to offer on that one. I don't think we would be prepared to guide at that level of specificity. The SG&A is more of a long-term add.

Okay. Then just couple of minor clarifications. The unallocated corporate of $51 million expense in 2012, should we just add the $10 million to that as the pension credit goes down and it should be in the $60 million range for 2013, or are there offsetting items there?

I would say that at least add the $10 million. We will endure some level of inflation in our corporate expenses as well, and we will also look for ways to offset it and drive it. But right now I would assume it is at least a pension credit plus a little bit of inflation on the core SG&A expense there.

Okay. Then one last one. The tax rate of 39% versus the reported of 42%, which number is reflected in the EPS guidance of $2.30 to $2.60?

We show it both ways on the slide. If you are referring to the earnings guidance slide, which is number 13, in the big number, big print that is going to be on the 39% basis. So the normalized, so everything -- operating activity with the EPS is on a normalized basis there. But at the bottom there you see those little footnotes; we try to give you the range on an as-reported basis.

Okay. So the $2.30 to $2.60 is the 39%?

Yes.

Thank you.

Dennis McGill, Zelman & Associates.

Thank you. I was hoping to just drill in specific to volumes in the Americas, if we were to just look at it for the full year, I think you reported that revenue was down a percentage or so. Wondering if you could tell us what that was in volume terms.

Then to the extent that you can, can you split that between residential and nonresidential?

You were talking which --

2012?

2012 for the Americas across the business.

For both businesses.

Yes.

So on a volume basis for Resilient and the Americas, like we said, low-single digits down for Resilient. Exclusive of Patriot, up mid-single digits in Wood. And then for ceilings on volume basis low single-digit growth.

That is in total or that was --?

That is fourth quarter. That is fourth quarter. Were you asking a different question?

Yes, I am sorry. I was looking at the full year, but I was wondering if you have the rough splits between residential and nonresidential, just to differentiate between the overall numbers you mentioned.

Okay, let's see. I don't know that I have got that. Yes, I am not sure that I'm going to be able to give you the -- give me a second here and I will come back to you on that.

Okay. Well, maybe a bigger picture question is, even if you would just focus on revenue for the year, I think across the Americas you disclosed it down a little more than 1%. And last year was up somewhere in the 3%, 4% range.

So even considering all the headwinds that you mentioned, Matt, with public spending and uncertainty on the home improvement front, all of those things being relatively challenging last year as well, I guess I'm trying to figure out why volumes and revenue would be weaker on a year-over-year basis in 2012 than in 2011 when you had an accelerating residential market and you could argue nonres is no worse. So I'm just trying to piece through maybe the relative shifts.

Well, residential is -- in the Americas is about one-third of the total revenue. So we had that volume was up. Really half of Frank's business, half the flooring business in the US and virtually all of the ceilings business in the US is commercial. So you just had that volume softness just offsetting the relative strength in resi. Tom?

On a full-year basis -- let me just come back, and I think I understand where you are probing here. For ABP in the Americas, total unit volume was again down low-single digits for the full year. On a residential Resilient basis, or total residential basis, total residential basis full year down low-single digits.

Now that is probably -- Frank, that includes a little bit of a Patriot drag in there. Yes, that has some Patriot drag in there. So call it flat to slightly up total residential on the full year.

Again, with builder coming in strong in the back half then a pretty weak consumer remodel all year long. Then on the commercial side the Americas was down mid-single digits.

So I think your thesis of the housing is getting going we agree. We see that, we see it significantly in Wood but we have not seen it translate into a differentiated commercial growth rate. And as Matt said, new construction for the total company is only 10% and so we are much more dependent on seeing that commercial number respond.

When we see it we will be happy to pass it through. I think that we have tried to piece out our outlook to you all so if you have a different view of what the macroeconomic looks like in the market opportunity for commercial and residential you can piece it in there in your own way. I think we feel like over the last several years -- at this time of year everyone is a little euphoric about (multiple speakers).

That is why I am asking you historical numbers, so it is more factual. But just to be clear though, the commercial, or nonresidential as you think about it, volumes in the Americas was down mid-single in 2012 and that decline was greater than the decline in 2011. Is that fair?

It is -- it was greater, yes.

Okay, thank you.

That concludes the time allotted for questions today. I would now like to turn the call back over to Matt Espe for closing remarks. Please proceed, sir.

Thank you. Just real briefly, we certainly covered a lot of ground today. We appreciate your attention and thank you for your questions. Please, have a good day.

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