Armstrong World Industries Inc (AWI) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Armstrong World Industries 2014 first-quarter earnings conference call.

(Operator Instructions)

As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Tom Waters, Vice President of Treasury and Investor Relations. You may begin.

Thanks, Ashley. Good morning 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; Dave Schulz, our CFO; Tom Mangas, CEO of our worldwide floor businesses; and Vic Grizzle, CEO of our worldwide ceiling business.

Hopefully, you have seen our press release this morning. And both the release and the presentation Dave Schulz will reference during this call are posted on our website in the Investor Relations section.

I advise you that during this call, we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong, please review our SEC filings, including the 10-Q filed this morning. Forward-looking statements speak only as of the date they are made. We undertake no obligation to update any forward-looking statements beyond what is required by applicable securities law.

In addition, our discussion of operating performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation. Both are available on our website. With that, I will turn the call over to Matt.

Thanks, Tom, and good morning, everyone. Overall, the first quarter of 2014 was in line with the guidance we provided in February. Sales of $634 million were on the low-end of our guidance range of $625 million to $665 million. Adjusted EBITDA for the quarter of $83 million was right in the middle of our guidance range of $75 million to $90 million.

We had a steady quarter, and key themes were price improvement and reduced manufacturing costs. Additionally, we've seen that our strategy in the wood segment has had a positive impact on our performance.

I also want to highlight a few events, including the impact of the weather on our North American business, Russia, and the most recent secondary offering by the Trust and TPG. Isolating the impact of weather from the other variables in our business is difficult. But we believe that versus our guidance, weather impacted the top line by about $5 million to $10 million, and the bottom line by about half of that.

Now, versus prior-year, we estimate that the top-line impact was $10 million to $20 million, with a little more than half of that hitting the bottom line. EBITDA was impacted not only by the lost sales, but also by additional operational costs driven by the snow, ice and freezing weather, as well as higher energy prices. Our projection is that more than half of the lost business will come back during the year, but timing will be project-specific and influenced by labor availability.

Now, weather provided some noise during the quarter. But all indications are that the macro economic climate we expected entering the year is still on track. We did see markedly different regional sales results with certain flooring markets in the West and Southwest up double-digits year on year. But the Northwest and Midwest -- Northeast, rather, and Midwest were down significantly.

The situation in Russia did impact our first-quarter top-line results. The most immediate effect was the decline in the value of the ruble. As a result of this, we instituted a 10% price increase effective in April, which drove buy-ahead activity into March.

Net-net, the currency decline and the March volumes increase offset each other on the sales line. The bottom-line impact of the ruble decline was about $2 million, most of which was anticipated in our guidance. This impact was essentially all in the ceiling segment.

As you know, the geopolitical situation in Russia continues to be in flux, so we're monitoring conditions closely. We have semi-weekly calls with our Russian leadership team, as well as our external advisors. On the ground, our operations are continuing and to-date, products are entering the country without delays or complications at the border. Armstrong engineers have been able to travel to and from Russia without incident.

Construction of the plant in Alabuga remains on schedule. We're getting excellent support from the leaders of the local special economic zone. We continue to build out our go-to-market capabilities and invest our manufacturing footprint in this very important market. Overall, we remain optimistic and committed for the long-run in Russia.

In the Wood segment, I'm pleased to report that our new strategy of aggressive price increases to drive price and mix has started to pay off. Both price and mix were positive in the quarter, contributing about 10% to our sales. Volumes were down as anticipated, due to our constraining solid wood production that minimized pre-kiln dried lumber purchases and overtime.

Wood profitability was up versus last year, as the price and mix gains together offset year-over-year inflation. Manufacturing improvements were driven by a stable workforce, low overtime and almost no PKD lumber purchases.

Inflation remains an issue, as we experienced $12 million of lumber cost increases in the quarter. And lumber costs are even higher than we anticipated in February. So to counteract this, we are once again raising wood prices by 4% to 10% effective mid-June. As we'll experience lumber inflation for the entire quarter and did not realize the additional price benefit until mid-June, wood margins on a percentage basis will take a step back in the second quarter.

Now, barring further unforeseen lumber cost inflation, margins will resume rising in the second half of 2014. There is still a lot of work to be done to drive margin improvement back to levels necessary to earn the return on capital we expect in this business. But I'm encouraged by the early results of the new strategy and the improved performance in our plants.

And lastly of note in the quarter, TPG and the Asbestos Trust executed another secondary offering of 3.9 million shares of Armstrong stock in March. As you likely saw in our proxy and other recent disclosures, Kevin Burns, a TPG partner, will not stand for re-election for the Board in June. And our Board size will shrink to 11 -- that's 10 independent directors and me.

So to close, our team remains focused on our investments in manufacturing here and abroad, while staying agile in order to actively address or capitalize on market conditions. With that said, I would turn the call over to Dave for more details on our financial performance and a look at guidance.

Thanks, Matt. Good morning to everyone on the call. Reviewing our first-quarter results, I'll be referring to the slides available on our website, starting with slide 4, Key Metrics. As Tom Waters already covered slide 2, and slide 3 is simply an explanation regarding our standard basis of presentation.

Sales of $631 million were up 3% versus 2013 on a comparable foreign exchange basis. Operating income and EBITDA were up as well. EPS was up significantly, driven by operating performance, as well as the change in the tax rate that I will address in a moment.

Free cash flow for the quarter was a use of $55 million, similar to last year. The first quarter is seasonally a use of cash for Armstrong, as receivables grow off a low year-end level and as we build inventories for the busier summer season.

Net debt was up $185 million, driven by our $260 million share repurchase in September of 2013, and partially offset by operational cash generation. Return on invested capital was lower, driven by as-reported profitability in the last nine months of 2013 versus the comparable period in 2012, and by increases to the invested capital base.

Slide 5 details the adjustments we made to EBITDA, and provides a reconciliation to our reported net income of $17 million in the quarter. We had minimum cost-reduction expenses in 2014, but had $6 million of expenses related to headcount reductions in our foreign businesses in Europe and Australia in 2013. Interest expense was higher in 2013 due to the expensing of the previously capitalized fees as part of our prior-year refinancing.

The 2014 tax rate of 53% is actually fairly typical for us in our first quarter, as North American profitability is seasonally low, so our unbenefited foreign losses have a larger-than-average impact on the rate. 2013's rate of almost 80% was unusual, as North American profits were reduced by the refinancing costs, which greatly magnified the effect of the foreign losses.

Moving to slide 6, this illustrates our sales and adjusted EBITDA by segment for the quarter. Excluding the impact of foreign exchange, Resilient Flooring sales were down 2%, driven by volume declines in North America and Europe. North America was impacted by weak demand in education and healthcare, weather and a comparable period that included significant sales to a major US retailer as they refurbished their stores last year.

European sales were impacted by continuing weakness in central Europe. Pacific Rim sales were up, with India and Southeast Asia notably positive. Mix in North America was also a positive sales driver. Despite lower sales, the Resilient segment delivered flat EBITDA, as improvements in Europe and the Pacific Rim offset the volume declines in North America.

Matt discussed the Wood segment results, so I'll move on to Building Products. Ceiling sales were up 6% on an equivalent foreign exchange basis, as all regions experienced sales and volume growth. EBITDA was flat on a global basis, as gains in the Americas were offset by declines in Europe and the Pacific Rim. As Matt mentioned earlier, we saw some impact due to weather in the Americas, with about $2 million of incremental expense associated with higher energy costs and repairs.

Europe was impacted by the foreign exchange headwinds Matt mentioned, as well as weaker mix, driven by strong sales to Russia and softness in the UK. We believe the UK issue is related to distributor inventory levels and not the market, so we expect improvements in future quarters.

The combined impact of higher energy costs due to weather, and the foreign exchange headwinds associated with Russia, negatively impacted margins by 130 basis points. Excluding these items, EBITDA margins were comparable to the prior year. The Pacific Rim also suffered from weaker mix, as China volume growth was in the low-margin retail sector as government spending on higher-end projects slowed. Corporate expenses were flat versus last year.

Slide 7 shows the building blocks of adjusted EBITDA from the first quarter of 2013 to our current results. Of note, price and mix offset inflationary headwinds, primarily driven by lumber. Volume was a slight negative, as declines in flooring were only partially offset by gains in ceilings. Manufacturing was a positive across the board, with notable improvements in Wood Flooring. SG&A was up year on year, partially driven by increased spending on promotional activity.

Turning now to slide 8, you can see our free cash flow for the quarter was very similar to 2013 in total, but the factors differed. Earnings are up, but working capital was down versus 2013 when working capital was unusually favorable. Capital expenditures declined, as the investments in China are complete. Interest expense improvements reflect our March 2013 refinancing, and WAVE was favorable versus last year. The other category reflects foreign exchange and VAT payments.

Slide 9 updates our guidance for 2014. The ranges for sales and EBITDA for the full year are unchanged from the initial guidance we issued in February. Russia is a concern, but wood and the ceilings business in North America should be able to provide an offset. Free cash flow was lower than previous guidance, due to accelerated capital expenditures related to our LVT investment here in Lancaster.

Slide 10 provides more details on guidance. Our inflation expectation for the year is up $10 million to $30 million to $40 million, almost entirely due to our latest expectations for lumber. Productivity, SG&A, WAVE and cash taxes are all unchanged from our initial guidance. On taxes, we now anticipate an effective tax rate of 48% to 50%, reflecting the increase in the amount of unbenefited foreign losses relative to our earlier guidance.

For Q2, we expect sales of $710 million to $750 million. At the midpoint this would be an increase of 4% from 2013 on a comparable foreign exchange basis. Adjusted EBITDA should be in a range of $90 million to $110 million. At the midpoint, this would be a slight increase from the prior year.

Profitability in the second quarter will be impacted by the dynamic of wood lumber inflation versus price realization of the recently announced increase. Russia and higher year-on-year SG&A spending will also impact Q2 guidance. With that, I'll turn it back over to Matt.

Thanks, Dave. Despite the weather and developments in Russia, I'm pleased that we were able to deliver on our first-quarter guidance, and reiterate our sales and EBITDA guidance for the year. Strength in our North American ceilings business, continued progress in the wood segment, and team efforts around the globe should allow us to deliver these financial results. And so with that, we'd be happy to take your questions.

Thank you.

(Operator Instructions)

Dennis McGill of Zelman & Associates.

Hi, good morning. Thank you, guys.

Just quickly on the wood flooring business, I think volume was down about high-single in the quarter. As you look at some of the decisions you're making with where you're doing business and certain customer accounts, when would you expect volumes to at least match market activity over the next -- the rest of this year into 2015?

Good morning, Dennis, Tom Mangas.

Yes, you're right, we were down in units high-singles. That's a reflection of our strategy to both drive price and mixture to cover our structural margins, as well as to constrain our production to what we dry in our own yards. As you will recall, last year we were using a lot of PKD to enable that.

We are making investments in this quarter that will enable us to increase our drying capacity, and that will start to come online in the July-August period. So we'll have capacity to be able to expand with market growth in the back half of the year that will ramp through the back half of the year.

That said, though, we are focused on a margin recovery path for the Wood Flooring business. While we had a reasonable start to the year, we continue to see aggressive commodity inflation on the lumber side. You saw that in the higher guidance.

We just recently went out another 4% to 10% price increase on solid wood and engineered wood. We're going to continue to, as the market leader, be the price leader and drive pricing. And we don't hope for it, but we expect there will be some competitive scraping going along the way that will, in the short term, maybe cost us some share growth, which could constrain some of that matching market growth underlying your question.

Clearly though, Dennis, our priority in 2014 is margin restoration. I think responsible investments -- to Tom's point -- to expand our capacity a little bit. But it's really price margin and mix.

Kathryn Thompson of Thompson Research Group.

Hi, thanks. Mainly wanted to step back and -- you alluded to talking about better trends in certain geographies versus others that were less affected by weather. Could you progress through the quarter in terms of trends on your ceilings business to get a sense of what is really reflected in true demand? And do a -- particularly it would be helpful if you could look at areas that were perhaps harder hit by weather and how they're doing now versus when they were dealing with snow and ice and the like. Thank you.

Sure. I think Dave's got a little bit more detail by region in the US. But just to reiterate, if you look at the weather impact for us, $5 million to $10 million, it just isn't that significant. I think to your point, Kathryn, the details are in specific regions. We had some regions that were relatively robust, and regions obviously -- predictably in the Midwest and Northeast -- that were affected.

We got hit two ways. We got a little market softness as a result of the weather, as reported by our distributors. But also remember we had a couple million dollars of additional expenses, particularly in the ceilings plants related to the increased maintenance and energy costs as a result of the weather. So we got squeezed both times.

And similar in flooring, one of our big plants being in Kankakee, Illinois, just south of Chicago. So, you can imagine that they were affected as well. Dave, do you want to give more transparency on the regions?

Sure. It's Dave Schulz. Kathryn, just to provide a little bit of color on this. As Matt mentioned, it's extremely difficult for us to pull out the pure impact of weather. One of the things that we looked at was the number of days that our distributors reported that they lost during the quarter due to bad weather. And that ranges in the Northeast and Midwest between 5 and 10 days lost on shipping.

In the Mid-Atlantic, it was between 3 and 5 days. And then even in the Southeast, because of some of the freezing weather, we lost up to 5 days of shipments from our distributors. So we've used that to estimate the range between both of our businesses on the impact of the weather on sales.

If we take a look at some of the trends during the quarter, from a sales perspective, obviously those regions where we had the larger impact on lost shipping days, we were -- it's very difficult to pull out the impact of the weather. But some of the regions that were not impacted by the weather, we were very pleased with the results. We saw mid-singles in some parts of the country, even low double-digits in some parts of the country, relative to the prior year, within our ceilings business.

George Staphos of Bank of America Merrill Lynch.

Thanks. Hi, everyone. Good morning and congratulations on the progress. Two-part question, kind of same theme, to the extent that you can cover it. If we look at Resilient Flooring, you mentioned some of the items that hurt you in the quarter, in terms of why the Americas volumes or revenues to-date were down. Is it possible to parse the traditional products relative to luxury vinyl tile, and when should we expect that LVT could ultimately drive positive sales comps in the Americas, realizing a lot of it's ultimately going to be driven by what the market is doing?

And then, I don't know if I heard you say, will Russia and devaluation conspire to keep margins flat or lower in ceilings and Building Products over the rest of the year? And what are the puts and takes there? Thank you.

Sure. I'll frame it, and I think we'll ask Tom to comment on Resilient Flooring, maybe Vic to add a little color on Russia. But in terms of Resilient Flooring, the major driver for the weakness was market segment performance. Remember that our Resilient Flooring business plays extremely -- plays hard in healthcare and education. And those market segments are a little softer than anticipated coming in. LVT is a fairly robust product platform inside Resilient Flooring, but on a fairly small basis so far. Tom, anything to add to that?

Sure. So George, we do about -- we did about $150 million or so in North America total Resilient sales in the first quarter. LVT is just shy of 10% of that. So it is a growing segment for us, and we have high expectations. Particularly as we bring this plant on, I think LVT can be a disproportionate profit-driver for us. But it still pales in comparison to the VCT market within that segment.

Looking at the dynamics, though, we could expect that VCT could lose share to LVT, which is why we are investing in it. And also we do continue to take share from sheet. We think it's a very exciting category. We've got aggressive growth plans there, as well as productivity plans. But it's going to be a few quarters before it's really going to be a driver of the segments in the Americas.

Just to reiterate, we did announce the -- or conducted groundbreaking ceremony for the new LVT plant here in Lancaster about two weeks ago. So we're committed to the product, committed to the platform. We think it's a very exciting part of the Resilient Flooring business.

In Russia, we did comment a little bit on the quarter more than the year. It's hard really to predict what the ruble is going to do on a go-forward basis. But as we said, the ruble devaluation in the first quarter resulted in our executing a 10% price increase. The effect of that price increase falls outside of the quarter, so that increase is effective in April.

There was no -- the ruble devaluation or the market dynamic didn't affect our revenue performance in Russia. We do suspect there was some buy-ahead in advance of the price increase. And we think the bottom-line impact of that was about $2 million.

On a go forward basis, the team is prepared to continue to offset inflation with price increases as necessary. And as I said, we're monitoring the situation semi-weekly and, frankly, more fluidly than that. But we're staying very close to the dynamics, and we're adapting our structure and our approach as the situation warrants. Vic, any additional comments?

I think you covered it well. I would just add that if the ruble stays where it is, with our 10% price increase, we should be able to claw back the margin impact to what we saw in the first quarter. And as you said, if it continues to devalue, then we'll be back out with the price increase, is our plan.

Thank you.

David MacGregor of Longbow Research.

Yes, good morning, everyone. A question on flooring, two-part question on flooring for Tom. First of all, on the wood business, do you sense that your wood costs are beginning to level off here? I know you've got some drying capacity coming on here mid-year. But do we start to level off?

And if that's the case, at this trajectory, when do margins normalize in the wood business? And is that a 10% to 12% level, as you've seen peak margin performance in the past?

And then, the second part of the question is really more with respect to the resilient business. And Tom, I've asked you this before, I'm just looking for your most recent thinking on this, given you've been in the job a little bit now. But how do you improve on the structural profitability of resilient longer-term? Thanks.

Very good. Thank you, David. So will we continue to see wood inflation? That's why we took our guidance up at the Company level over $10 million. We continue to see it. The No. 1 common, No. 2 common, 3A, Appalachian wood continues to move up. And we're pricing behind it. And that is where our focus is right now.

It's hard to anticipate a timeline, David, that when we achieve normalized margins, as we're chasing inflation. Our study of our history, at least, suggests as long as we're chasing inflation up, we're going to have sub-par margins. And as soon as that crests and starts to normalize or come down, we'll have strong margins until competition forces us to price it away. Although over time, we've demonstrated that we lose it on the way up and we gain on the way down, and we net whole. So we're reluctant to and we still haven't put an anchor into the ground when we expect margins to normalize.

Now, relative to target margins, I think we have mid-cycle guidance on the wood segment there. We haven't moved of off that target margin at mid-cycle. I think mid-cycle has, over the years, crept away from us in terms of timing. But our goal is still to be in the teens in wood.

And when you think back to the anchor point that you framed as 11% or so, that was at trough volumes for the wood business, but in a stable commodity environment. So what we need to have happen to get back to that mid-cycle guidance with the teens for wood is going to be a stable commodity environment. We're going to be pricing and mixing up, getting productivity back. But I've got to have that commodity cycle level out. If everything were to stop today, we'd make a lot of progress by the end of the year. I'm not expecting it to stop today.

On your resilient question, absolutely we're looking for ways to continue to improve the structural profitability of the resilient business. Let me start with what we've done since I've gotten the job in December. We took charges roughly around -- and Dave can correct me -- around $8 million in total in the fourth quarter for restructuring.

We took a line crew out of our Braeside, Australia plant. We've executed, and we haven't had people walk out the door yet, but we've announced with -- Works Council has agreed -- 60 people to leave our Delmenhorst facility. So we've taken restructuring actions already in the year. We're already benefiting from the improved run rates in Braeside and we expect in the last quarter of the year to start benefiting from the productivity improvements in Delmenhorst.

But we're not necessarily done. And we continue to look through our strategic planning process, ways that we can drive the supply chain for additional cost-out productivity. So stay tuned for that.

I think there's more that we can be doing. And particularly, as we see a rotation of volumes into LVT, we'll look for our ways to continue to take the right kind of structural actions and, due to the declining product categories, to make sure our costs are very tight. Thanks for your questions.

Thanks, David.

Eli Hackel of Goldman Sachs.

Thanks. Two questions. One just on wood, quickly. Given that 1Q is normally the lowest margin quarter for you guys and you instituted a new pricing strategy trying to guess, or at least estimate, where you think wood inflation is going to is going out, and pricing your product off that. Maybe you can just provide a little bit more detail in terms of why you expect margins to be lower next quarter, and at least the magnitude and your view for back-half ramp, if that's possible.

And then, second is just on the commercial market -- clearly saying it's still choppy. When you talk to your distributors, what are they saying in terms of the number of bids they're getting, or the number of quotes they're having to give out, which could mean business in the second half of this year and early 2015? Thank you.

Take the wood, and then I'll talk about the market (multiple speakers).

Okay. So Eli, good morning -- Tom. Matt will take the commercial question. So you're right. Seasonally, Q1 tends to be a lower quarter versus Q2, Q3. But again, the underlying driver is the commodity inflation. We're realizing it now. We took pricing in December, which was great, it's what helped us achieve in the first quarter. But we continue to see the commodity inflation continue to go up. And we see that dragging in the second quarter.

Also, as we framed in Dennis's question, our units were down 9%, or upper-singles in the first quarter. And so we're being cautious on what we think is the relative sales growth rate we can achieve in the second quarter as we continue to drive significant price and mix in there.

As you know, the price was essentially effective in Feb-March. So we didn't have a full-quarter effect of that. Call us conservative, call us prudent here. I think we want to see sustained levels of improvement before we call the ball on it.

Just a couple comments on the market. I think you get the noise, a little bit of noise in the first quarter -- relative to the weather -- out of the way. It wasn't that big a factor. I don't think it drives our outlook of the market. As we look at Q2 through the end of the year, the commercial market recovery is about as we anticipated. Maybe a little softer in education and healthcare, maybe a little stronger in office, but by and large, sitting here today, the market looks like it's developing as expected.

We are expecting an acceleration in the improvement of the environment as we go into the second half. That is borne out by the views of virtually all of our distribution channels in both our flooring and our ceiling segments. So we anticipate continued improvements as we go through the year. But in total, the year is going to land -- looking at it today, the year is going to land about as we expected.

Again, just to reiterate, commercial starts experienced this year really benefit us in 2015 and 2016. But I would say that our distribution channel -- answering your question -- is reasonably optimistic about a sustained commercial recovery in the second half. Coming into the year, we called the market up low single-digits overall.

Nishu Sood of Deutsche Bank.

Thanks. Matt, in the last couple of months, there's been quite a bit of investor excitement and focus on the prospect of splitting the flooring business from the ceiling tile business. And I think that comes from a perception that, given the difficulties that's come out of flooring and the real focus on some of those problems, that, that has increased your -- the management's willingness to consider splitting those two businesses. So I wanted to ask you if you could comment on that, if that's an accurate depiction.

And last quarter, you had made the comment that: look, we're open to things, but we're obviously focused on executing right now. And I was wondering if you could also give us an update, in terms of that question, on the timing of how you're considering it.

Not a lot of new information, Nishu. I appreciate the question. We're certainly sensitive to the view in the marketplace held by some. I would just say this. The leadership team is focused entirely on building shareholder value over the mid-term.

We are constantly looking and evaluating options and choices, alternatives and opportunities to increase that shareholder value. And that goes on in direct concert with the Board on a continuing basis. We seek advice from outsiders, outside advisors continuously look at ways that we can drive shareholder value over the mid-term.

The management team in the here and now remains focused on improving the businesses we have. I think we have real opportunity -- obviously real opportunity to drive much-improved results in our Wood Flooring business. Tom on the team commenting they are driving meaningful, sustainable results. We are hearing about it today. We're making meaningful investments to improve the profitability and position of Resilient Flooring for continued growth. The ceilings team continues to execute extremely crisply.

So any good leadership team has to do both, particularly in this operating environment. We've got some things we need to fix. The team is laser-focused on getting those fixed. At the same time, we're in constant, continuous discussion with our Board and outside advisors on ways to unlock shareholder value in advance of that. And we remain strategically nimble in doing that.

Will Randow of Citigroup.

Hey, good morning. Thank you for taking my question.

Good morning.

On the CapEx and capital allocation front, over the medium-term, where do you see capital expenditures normalizing I'd say in, call it, 2015, 2016, closer to D&A levels? What level of balance sheet leverage are you comfortable with today before you think about additional share buybacks?

I'll just comment on CapEx, and we'll let Dave talk about the balance sheet that that leverages. Right now we've got two major projects that we're winding through or going through. We've completed our three plants in China. By the end of this year, we will complete construction in the ceilings plant in Russia. As we mentioned just a minute ago, we've initiated an LVT investment in North America that will be completed in 2015 -- that's a little over $40 million.

At the end of that, sitting here today, we're not anticipating additional organic investments. So as we work through those, think about an increased level of CapEx spend over the norm in 2014, a little less in 2015, as we wind down the LVT plant. And we see normalized CapEx requirements on a go-forward maintenance basis of about $100 million after the completion of those plants. And then, Dave, any --

Yes, sure. It's Dave Schulz. So on a long-term basis, excluding, as Matt said, any additional organic investments -- and we do not have any contemplated at this point -- our normal maintenance and repair productivity capital spend is between $100 million and $120 million per year. So obviously as we complete the LVT facility, we complete the Russia plant, as we get into 2015, we would anticipate that our capital expenditures into 2016 and beyond would moderate more to that $100 million to $120 million level.

I think your second question was about leverage. We're very comfortable with our leverage being in that two to three times EBITDA. We feel very comfortable that, that gives us the flexibility that we may need if there are additional organic investments, or perhaps some other opportunities for us to drive shareholder value.

Ken Zener of KeyBanc.

Gentlemen, good morning.

Good morning.

Going to do wood first. The roughly 9% volume decline: could you give us the delta versus what you think the market was? As well as the spread in margins of the business you're relinquishing versus the business -- the core business that you're planning on keeping, which is facing, obviously, the incremental wood inflation?

Okay. So we did decline volumes high single-digits. It wasn't -- I said 9%, but I didn't mean that. It was more high single-digits. So we are pursuing through our price increases a rationalization of our businesses. We are seeing more of our low-end opening price-point products decline, disproportionate to our high-end, high-margin products, which is what's achieving the significant price and mix result you saw in the first quarter. And we expect that to continue.

We've seen that, that has been good for our business. It improves our ability to get productivity at the plants. And we've been able to maintain shelf space and the share of mind of our customers and consumers at the high-end. So we think that's a smart strategy and one we'll continue. What was your second question, Ken?

Ken's line has been removed.

All right. I forgot his second question. Sorry about that, Ken. Maybe you can dial back in and ask me. There you go, thank you.

I'll go ahead go ahead and open it back up.

All right, thank you.

You're welcome. Ken, your line is open.

Gentlemen, are we together still?

Yes.

All right. So my first question was still following up on the margin spread associated between the high-end that you're keeping and pushing the price through, versus the sale you're relinquishing. Just so we can get an understanding of the margin benefit you're getting from relinquishing sales that are unprofitable versus simply core inflation that you're trying to catch up on.

I think I answered that question. I wasn't going to answer it more specifically than that.

Okay, I just wanted to make sure. The 130 basis points in ceiling basis-point headwind, was referring specifically to energy and FX. Which pieces -- the FX, is it roughly half and half, and the FX is going to persist here for a quarter or two?

And I know another competitor talked about spikes in energy curtailments. How would you frame out the energy? Is that part of just the natural gas inflation we've seen? Or is that really tied to weather spikes in the quarter? Thank you.

To answer your question -- this is Matt. The headwind we received between energy related to the weather and FX -- mostly the ruble -- is almost 50/50, to your point. It's very difficult for us to forecast or anticipate additional headwind related to potential devaluations in the ruble.

What we will say and what we have said is -- I think Vic made this comment just a moment ago -- we're positioned to continue to increase prices to offset the currency devaluation in Russia as we go forward. If there's no further devaluation, then the increases announced effective in April will offset the headwind that we received in February and March as they devalue. So if we experience additional devaluation, we'll continue to move our prices in accordance. Those increases appear to have been followed in the marketplace, so I think that's really about where it is.

The energy increases as a result of the weather are predominantly natural gas. We had spikes in natural gas pricing related to weather and shortages. So again, given the fact that weather has stabilized and we don't anticipate any major weather events from this point forward, we don't anticipate any additional headwind related to weather, related to energy, specifically natural gas.

And again, if you look at the whole scheme of things, we wanted to point out both of those items because there was a tremendous amount of interest in the ABP margins. We want to be clear as to what was driving that margin degradation Q1 2014 over 2013. And it can be attributed to both of the factors that you pointed out.

Thank you.

You're welcome. Thank you.

Mike Wood of Macquarie.

Hey, Mike.

Hello, Mike, you might want to check your mute button. All right, we'll move on to the next one. Michael Rehaut of JPMorgan.

Nothing? Mike?

All right. We'll move on to Keith Hughes of SunTrust.

Yes, can you hear me?

Yes, Keith.

Here we go. Question on Building Products. You refer in the Q to price and mix adding $7 million to the revenue line, but when we get to operating income, negative $2 million. Is that the negative mix from China you're referring to? Or what all is in those numbers that make it negative when we get to the operating income line?

Yes, on the operating income line, there's two things really driving it. I think the weather and the FX was clearly articulated, the impact of that. There was also some mix relating to both -- really, all the regions had negative mix. And some of it was channel mix, like in the US. And then we had market mix in both Europe and Asia.

But China was mentioned -- we had a stronger retail segment in the China market, which is a lower-margin business for us. And then in our European business, part of the Western European business was softer relative to the stronger lower-margin parts of the business. So it was market mix in Europe contributing to that, as well.

Is that going to continue in the second quarter, that kind of --?

No, we believe this is timing. It will balance out as we've expected it throughout the remainder of the year.

And the same line, there was SG&A, an unfavorable (technical difficulty) million. Is that in Russia?

Yes, hi, Keith. It's Dave Schulz. So we did have some year-over-year SG&A related to our emerging market investments. And then we also obviously had some inflation. And then also, we had made some investments in the back-half of 2013 in our core markets for selling and promotion activity, and that continued into the first quarter of 2014.

Do those abate in the second quarter, as well?

We would anticipate that those are structural increases to SG&A in the emerging markets, and also the increase in go-to-market capability in the core markets. So they will continue.

Thank you.

Thanks.

Robert Kelly of Sidoti.

Hey, good morning.

Hey, Robert.

Forgive me if you've covered this already. What's your confidence level that the most recent Wood Flooring price increase is going to stick?

Well, as Tom pointed out, as a share leader, we'll continue to drive price increases to offset material inflation. Our experience so far has been that they've been followed. But it's difficult and probably not prudent for us to speculate on what our competition is going to do.

Okay, fair enough. And then just one question on the full-year guide for EBITDA. You mentioned in the earlier part of the Q&A about banking on a second-half acceleration. Is the difference between hitting the high-end and the low-end of your EBITDA guidance tied to the North American commercial story? Any color you can provide on that.

I appreciate that. We're really not going to shade it that finely at this point, in terms of where in the range we might land. I think we've got a couple key drivers. One is, frankly, some -- we had relative softness in our wood performance in the third and fourth quarter last year. So we expect the sustained improvement that Tom has seen as driving will more than offset the softness experienced last year.

Plus, as we said, just an acceleration or a continued strengthening in our core commercial markets in the second-half will help there us there, as well. Beyond shading inside the expected ranges, we'll have to just execute as well as we can and see where we land. Thank you.

Jim Barrett of CL King Associates.

Good morning, everyone.

Hi, Jim.

This is a question for either Matt or Tom Mangas. Could you talk about in your Resilient Flooring domestically some sense of the degree of growth you're seeing in the sales of that business to the residential remodeling market? And could you just generally comment on the margin mix comparison in that market versus non-res?

In resilient, Jim?

Yes.

Okay. We haven't seen -- I'll kick it off, and I'm sure Tom's got lots to add to this. But we haven't seen a meaningful resurgence in the repair and remodel business in resi. Any significant improvement we would see in resilient would likely come in the remodel of multi-family. You're not seeing a lot of resilient flooring in single-family homes. We haven't seen that come back as you would have anticipated with a broader recovery. Tom?

So I would say, Jim, that 90% or more -- maybe 95% of the resilient business in the Americas is repair, remodel. There's not a lot of sheet vinyl going into new homes these days unless it's multi-family, like Matt said. And so it is predominantly a repair-remodel, and therefore, it is at the standard margin for the business.

Stephen Kim of Barclays.

Thanks very much, guys. Just had a couple of questions for you regarding LVT. Was curious if you could first, give us a sense for what the cadence of charges is going to be, or expenses will be, associated with the start-up of the LVT. And while we're at it, just throw in Russia there, too.

But then the second question is a broader one about LVT. The opportunity there has not gone unnoticed by a number of players in the industry. And I was curious if you could just talk bigger-picture about what your expectations are for being able to capture a dominant share in LVT like you do in resilient. Share with us, in your view, what it is about the LVT market, how it's bought and what, other than just by virtue of birthright, just getting into this new category will enable Armstrong to have a very strong share in this category, like it does in the rest of resilient. Thanks.

Thanks, Steve. This is Matt. We're a little reluctant to try to break out complex projects like Russia or LVT in a quarterly phasing of expenses and cash drops. You could have significant pieces of equipment and the engineering associated with that equipment land inside or outside any given quarter.

What we're trying to do is give you a sense within a current year of what we think that those expenses and CapEx is going to be. So beyond -- we'd like to leave the guidance and the comments around both of those projects intact. If anything significant changes or pushes them outside the chronological timeframe we've laid out, we'll certainly share that with you. But other than that, we probably feel comfortable leaving that where it is.

I know Tom wants to comment on the LVT. Just a couple comments. We have been in LVT for a while, so we've been sourcing our products. So the investment we're making will continue the momentum that we've developed in the LVT market. We believe that we're uniquely positioned to take advantage of this investment with this manufacturing technology. We also observe and understand and believe that our competition is moving into this arena. So again, no real surprises there. Tom, anything else that --

Sure. What I'd say is, LVT is a fast-growing market opportunity. It is one that is designed and performance-led, and these are two areas we think we excel in and provide a differentiated reason to believe that we will earn a disproportionate share of market.

I will say today, though, we're not the share leader in LVT, although we have a significant position. We're probably the number three player, domestically, in LVT. But with that, still, between the residential and commercial segments, we expect to open this plant and earn significant margin by taking that source product on-shore. Which will provide, relative to the competition who is mostly sourced offshore today -- a couple guys have announced new plants -- but create a significant advantage on cost, significant advantage on lead times and design flexibility by bringing it in-house.

So while I don't think we have dominant shares in any business, I think we have leadership shares in VCT, and we certainly hope to achieve that in LVT. Although we don't need to achieve that to make this plant a very attractive return for the Company.

John Baugh of Stifel.

Good morning, thank you. I wondered on ceilings -- you were commenting about a low single-digit volume outlook. Was that a North American comment only?

Or if it wasn't, if could you go around the globe and what you're seeing in key foreign markets, and then comment as well on pricing in ceilings in North America -- amount and timing and pricing anywhere else other than Russia, where you already touched on it. Thank you.

The dynamic we talked about was entirely North America. And we're not going to really comment on anticipated pricing announcements or anticipated pricing performance. Do you want to, Vic, give some flavor in Russia, or rather in Europe, and (multiple speakers) --

Yes, I could just go around the world real quick. As we talked about, the US is -- again, our overall -- start with the worldwide look on the market outlook is, as Matt talked about, is playing out as we expected it to. So there's not any real surprises across the world in terms of markets.

Again, US is flat to low single-digits in the US commercial business. That's what we expect to see. In Europe, it's mixed. We have, I think, seen the bottom in the European market overall. The UK market -- there's some timing in our sales there, but the market actually is playing out to be flat to positive, like we're seeing in the Americas. North Europe is overall better, and then you have Southern Europe that is still weak and softer than prior-year.

And Russia is just very volatile right now. We don't know exactly where that market's going to go, based on the political events there. What I do know is, we're playing very well, and our teams are executing in Russia, in spite the headwinds that we're seeing there.

And Asia, again, is playing out as expected. All of our emerging markets in Asia are positive growth, and they're slower than what we've experienced in emerging markets in the prior three years. Again, as we expected. I think overall favorable market conditions, generally speaking -- and again, as we expected.

Hey, guys, this is Matt. I'm being told we have time for one more question. We're having some technology difficulty in this part. So I apologize for that. But we would be happy to take one more question.

Justin Bergner of Gabelli & Company.

Good morning, everyone.

Hey, Justin.

Quick question on ceiling volumes. With the weather being as it was, were there any -- was there any upside in the quarter from volumes associated with taking share from competitors that had more weather challenges than Armstrong? Or were the pretty strong volumes in North America a function of other factors?

You know, Justin, I appreciate the question. It's always difficult for us to anticipate share gains and losses in and outside any quarter. There's just so many moving parts. So we're not sitting here believing we made any significant share gains in Q1.

And again, I think that's really more of an annual dynamic than any issue or opportunity inside any given quarter. There's just so many -- you've got large projects that fall and don't fall, different companies are affected differently by markets and weather at any given short-term period. So we're always very reluctant to comment on that. But we appreciate the interest and we understand the question.

And with that said, I'd like to thank everybody this morning for your interest and the questions. And hope you have a very nice day. Thanks, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.