Armstrong World Industries Inc (AWI) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Armstrong World Industries fourth-quarter 2015 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Tom Waters, Vice President, Treasurer and Investor Relations. Please begin.

Thanks, Latoya. 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; Don Maier, 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-K filed earlier this morning.

Forward-looking statements speak only as of the date they are made and we undertake no obligation to update any forward-looking statement 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 to everyone the call. Today I want to briefly discuss our first-quarter results, provide an overview of our market outlook for 2016, and discuss actions and expectations in light of the macro environment. Then, finally, I will update you on our separation process and then some key upcoming dates and activities.

For the quarter, sales of $577 million were down $10 million, or 2%, due to weaker year-on-year foreign exchange rates. Adjusting for exchange rates, sales were up 2% from the prior year, with all the gains coming in the Americas. The sales result is essentially in line with the guidance we issued last quarter.

Adjusted EBITDA for the quarter of $76 million compares to $81 million last year and for the full year is at the top end of our guidance range.

The ceilings business posted sales growth of 1%, excluding the impact of exchange rates, and had an adjusted EBITDA improvement of 2%. In the Americas, sales were up 2.5% with gains in volume, price, and mix. EBITDA benefited from year-on-year price versus inflation gains, remaining at historical levels, as well a significant productivity gains and profits from WAVE, which were up almost 20% from last year. SG&A costs were higher as we invested in go-to-market initiatives.

In Europe, sales were flat on a comparable foreign exchange basis, but down 14% as reported. Europe had pockets of strength, particularly in the UK, but continued weakness in Russia and the Middle East. Continental Europe was flat in total, but with volatility from market to market. European profitability was up marginally year on year.

In the Pacific Rim, sales were down 4%, excluding the impact of foreign exchange, with particular weakness in China. Southeast Asia was up 20%. Australia and India were up low single digits. India finished a very strong year with sales up in the mid-teens.

India was our largest market for ceiling sales in the Pacific Rim in 2015. Despite the sales decline, Pacific Rim adjusted EBITDA was up more than 50% to over $4 million in the quarter.

Flooring business saw sales growth of 3%, excluding the impact of foreign exchange, with strong volume gains being partially offset by price declines. Flooring adjusted EBITDA was up 9% in the quarter with the benefits of lower input costs offset by SG&A investments and start-up costs at Lancaster and Somerset.

For the quarter, the North American resilient business saw sales growth of 3% on a comparable dollar basis, but as expected, profitability was down as our SG&A investments in Lancaster start-up costs continued in the quarter.

Our wood business grew sales by 3% in the quarter, excluding foreign exchange, with volume gains offset by modest price reductions and slightly negative mix. I am pleased to report that our Somerset plant is now producing the volume and breadth of product that we have been targeting, allowing us to grow engineered wood volumes by 20% versus last year.

Adjusted EBITDA in the wood segment was up $16 million versus last year's loss of $4 million. Resilient sales in the Pacific Rim were up 5% on a comparable foreign exchange basis, with a slight improvement in adjusted EBITDA.

I now want to shift to our outlook for the 2016 operating environment.

We expect ceilings' market conditions in Europe and China to continue the challenging environment we experienced last year. As a result of this, we are taking steps to adjust our cost position in these regions.

We just announced that we will be idling one of our Chinese plants until such time as market demand improves. We've reduced China SG&A headcount by 20% and increased our focus on the balance of the region.

In Europe, we've made a change in leadership and also initiated SG&A reductions. Given the mixed regional performance we are experiencing in Continental Europe, we are redeploying sales and marketing resources within the region to focus on the best opportunities for growth. We anticipate the Pacific Rim flooring specific market opportunity to be up low single digits in 2016.

In the Americas, we feel more sanguine about the 2016 market opportunity and our ability to grow sales and profitability for both of our businesses. We continue to expect tailwinds for new construction activity and anticipate that commercial repair and remodel activity will improve modestly in 2016.

This backdrop, coupled with sequential improvements we have seen in the past few quarters, has us feeling more confident that at this time last year. We anticipate the commercial markets in the Americas will improve low single digits for the year.

Turning now to the separation process, we continue to meet all the important internal and external deadlines and are on track to complete the transaction on April 1. We received approval to apply to list the flooring company on the New York Stock Exchange and have reserved AFI as the ticker symbol. We expect to file our final Form 10 in the coming weeks, and once we have SEC approval, we will be in a position to execute.

We will be hosting a separation and business update meeting for investors on March 10 where Don and Vic will outline their views of the business, review their forward-looking strategies, and provide guidance for 2016. The event will be webcast. We anticipate [WIN] issued trading will begin in late March followed by regular WAVE trading in early April. At that time, holders on AWI shares will receive one share of AFI for every two shares of AWI.

This has been a significant undertaking by all our corporate departments and the senior leadership team. I want to commend them for their efforts. I also want to commend our operational teams who have not allowed this process to distract them from producing, innovating, selling, and delivering a 2015 EBITDA result at the high end of our initial guidance range.

With that said, I will turn it over to Dave for a more detailed review of our financial results, including a discussion of the full-year 2015 results. Dave?

Thanks, Matt, and good morning, everyone. In reviewing our fourth-quarter results, I will be referring to the slides available on our website starting with slide 4, key metrics, as Tom already covered slide 2 and slide 3 as an explanation of our standard basis of presentation.

Matt already discussed sales and EBITDA for the quarter, so I will note that EPS is down 34%, impacted by $0.08 a share due to a $7 million non-cash charge in other income related to the revaluation of the intercompany loans we have in place to fund our Russian and Chinese investments. As you may remember, we had a larger charge related to these loans last quarter.

Net debt is down almost $100 million for the last year as a result of our operational cash generation. Return on invested capital was down due to lower as-reported profitability in the trailing 24 months, including higher non-cash pension expense and separation costs.

Slide 5 details the adjustments we have made to our results and provides a reconciliation to as-reported net income. We continue to exclude the non-cash pension expense associated with our main US plan. We incurred $18 million of separation-related expenses in the quarter, and I will give you more details of those items at the end of my discussion.

The $8 million in cost-reduction initiatives relates to the actions Matt discussed in China and Europe. Last year we had a $10 million impairment of the Bruce brand name. Taxes in the quarter were $1 million on a small pretax loss. For the year, our effective rate was 57.5% as we continued to have significant unbenefited foreign losses and our pretax earnings denominator was impacted by the separation costs and increased SG&A spending.

Slide 6 provides an overview of our segment-level results. I will cover the business unit results on the next slides, but I will point out that corporate spending was up $9 million versus last year. This was driven by several factors, including a $4 million environment charge related to our Macon, Georgia, facility. Higher expense was also driven by the timing of IT spend and higher year-on-year incentive payments.

Page 7 lays out the results for our ceilings business. Matt mentioned the positive volume, price, and mix in the Americas, which was the key driver of global sales growth. European sales were flat, with good pricing and mix performance offset by declining volumes and weak currencies, especially in Russia.

The Pacific Rim was down due to China as sales throughout the rest of the region were up. Americas sales, input costs, manufacturing productivity, and earnings from WAVE more than offset increased SG&A investments, primarily in the Americas, and drove adjusted EBITDA higher by $2 million.

Page 8 addresses fourth-quarter resilient segment results. Volume and mix gains in the Americas and higher sales in the Pacific Rim offset price declines in the Americas, leading to a 4% increase in sales. We had particularly strong sales in the residential tile and commercial LVT categories.

Adjusted EBITDA was down $14 million as we continued to invest in our go-to-market intiatives and restore our presence at retail. Continued favorable input costs were offset by startup costs at our LVT plant.

Page 9 illustrates our wood segment. Mid single-digit volume growth, driven by engineered products was only partially offset by lower pricing and mix. Mix was lower in the quarter as we sold off a backlog of off-goods and does not represent a deviation from our strategic focus on higher-end products.

While lumber costs stabilized in the quarter, we continued to see significant year-on-year favorability and we are pleased with the improved profitability in this segment.

Slide 10 provides a bridge of the entire company's results for the quarter. Our year-long theme of lower input costs being offset by SG&A investments continues.

Free cash flow for the quarter is presented on slide 11 and you can see that lower cash earnings in the quarter, including the impact of separation expenses, drove cash flow down. Gains in working capital in the quarter were offset by the non-recurrence of a one-time foreign exchange hedge gain in 2014.

Slide 12 provides a full-year view of our key financial metrics. Sales are flat as volume declines in wood and ceilings Europe and price declines in Americas flooring were offset by continued global price and mix gains in the ceilings business, volume recovery in the North American resilient, and improved mix in the wood business.

For the full year, profitability was flat as lower input costs were offset by our strategic SG&A investments and manufacturing expenses in Russia and Lancaster. EPS was lower by $0.13. EPS was impacted $0.23 per share by a $21 million non-cash revaluation of the loans we have in place to fund our Russian and Chinese investments. Free cash flow was up year-on-year primarily due to lower capital expenditures.

Slide 13 provides a view to sales and EBITDA for the year by segment. Resilient flooring grew sales on the back of volume strength in LVT and VCT, but profitability was lower as we increased SG&A spending in the segment by over $30 million.

Wood flooring sales declined as production issues in Somerset constrained output for the first three quarters of the year. Prices down modestly in the face of substantial declines in lumber costs. Mix was positive. Adjusted EBITDA in the segment recovered almost 90% as only modest price concessions were needed in the face of lower lumber costs and mix gains fell to the bottom line.

For the year, ceiling sales grew 1% as price and mix gains were partially offset by volume declines. Price gains, manufacturing productivity, and lower input costs offset higher fixed costs, driven by the Russia plant and higher SG&A spending globally. Full-year corporate spending was up modestly, largely due to the environmental reserve I mentioned earlier.

The full-year total company bridge on page 14 is very similar to the story for the quarter. Lower input costs largely offset a $53 million increase in SG&A. $35 million of the increased spending was in the flooring businesses.

Page 15 illustrates the annual change in free cash flow. Lower cash earnings were offset by working capital improvements and lower capital spending as we concluded most of our international investment spending in 2014. WAVE dividends were down modestly year on year to fund several tactical acquisitions in 2015.

Page 16 is an update on our separation expenses and cash flow. As you can see, in 2015 we incurred $34 million of expenses and spent $9 million on capital to advance the separation. Both of those figures represent exactly half of the total cost we expect once the project is complete.

Cash flow was skewed into 2016 as many of the 2015 expenses were accrued. The expenses are primarily for consulting and legal advice, as well as retention and severance payments. The capital spending is almost entirely IT-related.

We have made progress on financing arrangements for both companies and anticipate closing on a $1.05 billion credit agreement for AWI and a $225 million asset-backed loan for the flooring business, contemporaneously with the completion of the spin. We have also reached a decision on the US pension plan and anticipate transferring about $360 million of pension liabilities to the flooring business. The assets to be transferred, along with this liability, will be determined based on ERISA guidelines as of the separation date.

Given the well-funded nature of the current plan, we are confident that future flooring plan will not require cash contributions in the near term.

Finally, it has been our practice to provide earnings guidance as part of our fourth-quarter calls; however, given the separation and business update meetings that Matt mentioned would be held on March 10, we will not be providing 2016 guidance until that time. With that, I will turn the call back to Matt.

Thanks, Dave. As I reflect back on the last five years, I feel privileged to have served as CEO of a company with such a distinguished legacy, upstanding corporate culture, and commitment to excellence. I'm proud of the steps we've taken to strengthen the Company and to create the foundation for two successful independent entities.

Over the past five years we have upgraded the senior management team and reinvigorated the entire organization with our succession planning efforts. We've exited underperforming businesses in flooring Europe and cabinets; created an efficient capital structure and introduced lean principles to drive efficiency and working capital improvements. We have invested in important future growth engines in Russia, China, LVT, and architectural specialties, and we have returned $1.5 billion to shareholders.

So I leave here knowing that Armstrong World Industries and the future Armstrong Flooring companies are in very capable hands. I look forward to watching these two businesses grow and flourish in the years to come.

So with that, thank you, and we will be happy to take your questions.

(Operator Instructions) Mike Wood, Macquarie Security Group.

Good morning. In light of the CDC update on Lumber Liquidators last night, which highlighted that increased cancer risk, perhaps it would be useful for you to just update us on your internal processes and how you are different in your own Chinese-made resilient flooring to just ease investors' fears about any risk to Armstrong Flooring.

Absolutely. Don, you want to comment?

Thanks, Mike. Really we have discussed this in detail in our Q3 earnings call and our position really remains unchanged since that discussion. Since this really broke back in, I guess it was last March, we expanded our already comprehensive testing program to ensure that Armstrong products meet or exceed all applicable industry standards.

Since June, we've received results on hundreds of independent raw core and core deconstruction tests. And based on these tests and our strict certification and specification requirements, we continue to remain confident that our laminate flooring products are safe and meet or exceed all applicable standards, just as they always have, Mike.

Understood. On the hardwood side, I guess you got your operating margins over the past two quarters back to that level that you were before the input costs really had a hit. Going forward here would you expect pricing to become more challenging in that segment and more range-bound margins, or do you still see upside from the repositioning that you've done?

Well, yes. Clearly, we have benefited over the course of the year with the reduced input costs and that has improved our performance for 2015. I think it would be advisable not to extend or extrapolate that forward into 2016.

We've been able to hold on to a lot of that through our pricing discipline, but over the long-term you do see downward pressure as it relates to the sustained lower lumber costs.

(Operator Instructions) Kathryn Thompson, Thompson Research Group.

Thanks for taking my questions today. On ceilings, the 2.5% sales increase in Americas, you had $4 million contribution from price mix for the whole segment. How much of that $4 million was to the Americas? And then further breaking down, how much was price mix?

Then just a follow-up from the previous question, if you could just remind us what percentage of sales, laminate sales are of your total flooring revenues? Thank you.

Vic, you want to answer the first question and then Don can (multiple speakers)?

Hi, Kathryn; this is Vic. On the Americas, in the fourth quarter, we had positive AUVs supported by price and mix and we also had positive volume that supported that 2%-plus growth rate.

As far as the split between the price and the mix, we don't normally provide that level of granularity. I will just say that it was nearly equally contributing from both price and mix in the quarter. Again, I want to emphasize also there's some nice volume growth that supported the 2.5%.

Kathryn, this is Don Maier. Our laminate business is fairly small. It's less than 5% of our total revenue.

Matt McCall, BB&T Markets.

Good morning. This is Reuben Garner in for Matt. So several one-time items, both positive and negative, in the flooring business this year. Can you -- and I know you're not giving guidance, but can you just talk about your general expectations for profitability in 2016 and maybe some of the moving parts going away? Just give us a quick recap, thank you.

I think what we're going to do is we will leave the 2016 guidance for Don's investor day, so we're not giving --. Again that is a little change from our custom, but taking advantage of these guys having their individual sessions in a couple weeks, we decided not to issue individual or collective guidance today.

I don't know, Dave, if you want to comment on any of the one-timers.

The one I will comment on, because we have discussed this in the past, is the multilayer wood flooring. We did provide you with a reconciliation of that impact during 2015. That was primarily triggered by our previous practice of importing engineered wood products from China from our manufacturing facility there.

We have closed that facility, so our exposure to that multilayer wood flooring import duty going forward is minimized dramatically.

Scott Rednor, Zelman & Associates.

Good morning. This question is for Vic or for Matt. On the SG&A side in ceilings there was a $5 million headwind for go-to-market initiatives. I was hoping you guys could further dive into that. And then is that something that we should think about reversing into 2016?

Thanks, Scott. Go ahead.

Yes, this is Vic. That $5 million had three components to it to provide the granularity there. Number one, the timing of the expenses around the new launches that we talked about, our total acoustics launch in late third quarter disproportionately fell into the fourth quarter. That was a good portion of it.

We also made some partial -- partially some timing here around some investments in US commercial capacity to support those new product launches. And then the final smaller component of it was some expenses related to our change in our European leadership. Those were the three major components that drove the $5 million of incremental SG&A.

Ken Zener, KeyBanc.

Morning, gentlemen. Following up on that last question, I think the higher SG&A in ceilings -- just to be clear, that's the $5 million on slide 7. If you could just go into that, what that means for the acoustic launch or the commercial capacity that you're expanding, how that is impacting the SG&A, because I think people are sensitive to the fact that there's rising pressure that is offsetting your price mix.

So if you could kind of go into that and explain why that's not related to any change in the industry structure, Vic or whoever, that would be certainly appreciated because that is kind of a lingering thought in people's mind. Thank you.

Good question, Ken. Let me say this clarity upfront, too, because maybe this is part of the question. There is no price discounting in the SG&A line. We don't account for price discounts that way. It's above the line in our net sales numbers, so let me clarify that point first.

The investments in our US commercial capacity are incremental investments in key areas that are driving our specification leadership around these new total acoustic products that we talked about in our third quarter. It's also in support of our design capabilities around architecture specialties, both at the high end of the market, the fastest-growing part of the market; and these resources are supporting those growth initiatives, as we've talked about in the past.

Bob Wetenhall, RBC Capital Markets.

Thanks for taking the question and, Matt, good luck on what you do after Armstrong. It's been a fun run and you did a great job with the Company.

Just wanted to ask in ceilings, kind of said low single-digit growth and I'm trying to think about this and any help would be appreciated. I'm not looking for guidance. Between North America, EMEA, and Pacific Rim, what are your expectations for volume trends?

I think you guys had mentioned there was some negative pricing action at the low end of the product category that showed up in the second quarter and one of your competitors actually reported earlier and said ceiling tile pricing was accelerating year over year. How do we think about North American pricing environment for entry-level and more architecturally spec'd tile? Thanks a lot and good luck.

Okay, two parts here. Let me take the first part, Bob, in terms of our -- the way we're looking at the market overall. I think the way Matt and Dave described it in their opening comments is with EMEA and Asia we saw tough market conditions in both of those regions in 2015, and we think that's going to continue. And that is really driven by the emerging market portions of those regions.

The Middle East is very soft. Russia continues to be very soft based on the very public issues going on there. And then in Asia, China being a very, very soft market as the government cracks down on office -- commercial office development there. So we think that is going to continue through 2016 and that's the remarks that I think Matt and Dave described for you.

In North America, as we've been talking about on the last couple of calls, we've seen sequential improvements in really the new office construction segment as that -- as we saw the growth in late 2013 and 2014 in new construction starts -- and as you remember in this business, ceilings are the final thing to go into a new construction build out. As those new starts lag out, we started to see new construction in the business start to show up in our numbers in the second half of 2015.

We saw that in fourth quarter, that sequential improvement, and based on the new construction starts, that continued into early parts -- late parts of 2014 and early parts of 2015, our expectation is that those new construction, new business activity continues into 2016. And that leads us to the outlook that again Matt and Dave described, which is low single-digit growth really being driven by the new office -- new construction in the office segment in particular.

That's your first question. Your second question was around the pricing environment. Again, I'll point to our third-quarter performance and then again our fourth-quarter performance in pricing.

We had, again, positive net AUVs in both of the quarters. Again, in any quarter or in any part of this market, we have pieces of business that are Armstrong-advantaged where we get the specification and they are a unique solution to Armstrong, and those are less price sensitive. Then there's parts of the market that are less advantaged and are more price sensitive, and those are the ones where we have to be competitive and we fight everyday on those pieces of business.

This environment has not changed and it continues to be that way. It was that way in the third quarter, it was that way in the fourth quarter, and we'll expect that to continue going forward.

So I think we're continuing to focus on making sure that we're driving price over inflation. I will just call your attention to, in 2015, our margin dollar contribution from pricing above inflation was up over 50%. So in a more talked about pricing environment, we continue to be successful in driving good price over inflation and margin expansion through the period.

James Armstrong, Vertical Research Partners.

Good morning. Thanks for taking my question. Just as we go into the first quarter you talked about costs coming down in wood flooring. Do you see any further price erosion in the wood flooring segment as lumber remains down, or are you really able to keep those -- keep that pricing and seeing a more steady price environment in wood flooring?

James, this is Don. I will try to address that without getting too far in front of my skis here.

What we are seeing is a leveling off in the lumber prices and we've obviously been able to hold quite a bit of our price in the wood business over the course of 2015. Our experience is that over time the lumber costs eventually translate into lower wood flooring prices. We remain committed to maintaining our price discipline that we put in place, while staying very competitive in the marketplace.

Nishu Sood, Deutsche Bank.

Thank you. I wanted to ask about the resilient flooring division. The go-to-market expenses and the higher SG&A costs that are associated with that, that's something you have talked about pretty clearly from the time that the businesses were intended to be separated.

It has seen a real acceleration, though, just in terms of the pace. The $14 million drag compares to $7 million or $8 million in the last couple of quarters. So just wanted to get a sense of the flow of that. What has driven that and how should we expect that to carry forward as we head into 2016?

Thanks, Nishu. In fact, I think you saw a lot of the investments at the recent SURFACES Trade Show as we toured the booth. Stepping back on our Q4 results, our volume on the resilient business and mix gains were just partially offset by price declines, leading to the 4% increase in sales. In particular, we really saw strong sales in the residential tile and the LVT segment, which are key strategically to us.

Our EBITDA was down as our SG&A investments exceeded our product mix gains. This was really driven in a number of areas, but significant investments in our go-to-market initiatives to really restore our presence at retail. And on the manufacturing side our input costs were offset by the start-up costs related to the LVT plant.

Like to share a lot more with you on March 10, but that's really what happened in the quarter.

Keith Hughes, SunTrust.

Building on that last question on SG&A within resilient, that had been characterized earlier in the year as spending for 2015 that would fall away. Is that still the view that at least some of this spending will not be repeated in 2016?

Again, Keith, would like to hold off until March 10, but in general terms some of that spending will continue on. We're encouraged by the growth in the strategy that we put in place and where it makes sense to do that.

On the LVT plant startup, we will continue to ramp that plant up over the course of 2016 and so that will continue to have additional costs associated with it. We see really the LVT plant having a meaningful impact on our EBITDA performance as we exit 2016.

Stephen Kim, Barclays.

It's John Coyle filling in for Steve. Just want to stay on resilient. In the slide deck you indicated that you saw like a 3% decline in price mix with mix actually being up. So with price down mid single digits in the category, can you talk about maybe specifically what resilient flooring types saw the most pricing pressure?

And was this just broad-based or was it specific to one competitor that may be trying to regain market share that they lost earlier in the year? Thanks.

John, I don't think we disclosed down to that segment level. I can tell you that where we are really focusing our energies are in driving our LVT, a product that is where the market is seeing the most growth opportunities. And it's also where we are seeing a nice mix improvement in our products and some of our more traditional and longer legacy lines are where we are seeing the pressure.

Michael Rehaut, JPMorgan.

Good morning, it's Jason Marcus in for Mike. My question is around WAVE.

WAVE of a pretty strong increase in earnings in the quarter and the margins expanded pretty nicely. Just wanted to see if you could talk a little bit more about the trends that you are seeing there in terms of grid pricing and what the main drivers for margin expansion were in WAVE and kind of how you are thinking about that going into 2016.

There was two major drivers of the increase in WAVE in the margins and also the EBITDA generation. One was an acquisition. It was a small tuck-in acquisition that the WAVE joint venture did. It was a backward integration of a supplier to one of our components that added some nice meaningful EBITDA and margin overall.

Then, as you know, lower steel prices in the industry contributed as well as those bled through the P&L. Those are related the two big drivers of the fourth-quarter comparison over fourth quarter.

George Staphos, Bank of America.

It's actually Alex Wong sitting in for George. Thanks for taking the question.

In ceilings at least, some capacity additions have been announced in North America recently. Have you had any conversations with your distributors, given the strong attachment rate nature of the industry? Then related to that, do this present any hurdles for the price mix lever that has been a nice source of earnings in recent periods?

Let me kind of recharacterize. The announcement around the investment of capacity by one of our competitors in the marketplace -- we talked about this a little bit on the last call, but just again to reframe. The investment is relatively a small investment in the overall capacity of the US market, somewhere in the neighborhood of 3% to 5% once the capacity is fully utilized. So I think that is an important contextual understanding to have about the investment.

But with any new competitor or entrant into the marketplace, we at Armstrong are taking it very serious and we are treating the competitive threat as an opportunity for us to accentuate the features and benefits of our products and our capabilities versus this new competitor. And so we continue to be very effective at that and we're going to continue that going forward as well.

Will Randow, Citigroup.

Good morning, guys. Was just curious on two points. One is it appears like there might've been an under-investment in the flooring business and potentially the ceilings business.

I know you think you are not losing share, but do you think there's a secular shift in ceilings? I hope not, but could you characterize that a bit better in terms of volume growth and what you are doing to make sure that the ceilings business continues to grow with the market?

Let me just be very direct: we don't see a secular shift in the ceilings business as a way to explain why the repair and renovation part of the market has not rebounded like everybody had expected. So we have done lots of market research and testing to evaluate this point, and at this point, our data doesn't point to any secular shift or structural change in the industry. I wanted to be very clear and direct on that.

And the other part of the question?

Yes, I think maybe just a quick comment on the deferral of some of the investments in the flooring business. Just since that was done on my watch, let me take that one.

We made conscious decisions with the generally weak overall macro environment the last three to five years to defer certain investments in the flooring business, and so we did that in anticipation of a volume recovery with a broader strengthening of the marketplace. That recovery didn't occur as robustly as we anticipated and I think we're far from being alone in that outlook.

But last year, under Don's leadership, we went to the Board and asked for a fairly significant investment in the go-to-market structure and collateral around the go-to-market structure for primarily our small independent retailers in the form of displays: new displays, new designs of the displays. As I think we were -- regularly updated everybody last year, we set some 5,000 new displays in 2015, so consider that a significant refresh of that part of our business and that investment.

I would say that the business is beginning to see some return on those. It's early days, but we certainly expect that to continue into 2016. I would consider that a significant catch up, at least that portion of the investment a significant catch up on expenses and that we deferred over the last three to five years.

Don, I don't know if you have anything to add.

No, I think you hit it right down the center of the fairway. We're really pleased with the progress we've made on rejuvenating our retail business. As Matt articulated, we have a very focused and integrated effort in creating consumer demand, better supporting our retailers and our distribution partners to that regard.

I would say their feedback and the results we're beginning to see, frankly, are exceeding our expectations at this time. Obviously, we have a lot more work to do, but encouraged by what we've seen thus far.

Jim Barrett, CL King.

Good morning, everyone. Don, as it relates to the 5,000 new displays at retail, can you give us some sense as to the installation as to what percentage of the independent volume is now being served by these displays? Even directionally, what level of sales pickup would you expect to justify the time and the investment in that?

Yes, I will give you a little bit of color. I'm not probably going to share all of the details, but I think what we discussed in Q3 was that we plan to have all 5,000 of our LVT displays deployed by the end of the year. And we got that completed in the fourth quarter. That is being synchronized with the launch of our new Vivero LVT product.

So having these displays in place, we've seen a nice increase in our existing product sales and we look forward to that propelling our new Vivero line. It's, frankly, just a little bit too early to give you any sort of read on that at this point in time. But suffice it to say, we're pleased with our investments here and continue to have significant demand and pull from our retailers and distributors.

Brandon Rolle, Longbow Research.

This is Brandon Rolle on for David McGregor. I had one question relating to the market share trends in hardwood. Could you update us on your share trends in hardwood throughout the year for 2015? Thank you.

It's Dave Schulz. Just in terms of our overall share position, obviously on engineered wood we saw sizable growth in that market opportunity. Unfortunately, we were not able to service the market completely and so we do believe that we did have some share leakage on the engineered side.

We do have a leading position on the solid wood side of the business. We did see considerable volume growth, particularly in the fourth quarter as it relates to solid wood. Again, we are willing to give up some of the volume at the lower end of that business in order to focus on the higher end to mix up our overall sales and impact to the margin.

Justin Bergner, Gabelli & Co.

Good morning and thank you for taking my question today. I was curious in regards to the earlier comment about some of the tailwind from input costs not continuing or potentially becoming a headwind in 2016. Is there any sort of, I guess, clarity you could provide us in terms of how much of a headwind we might expect versus the positive $68 million contribution from lower input costs to your EBITDA bridge in 2015 versus 2014?

This is Don. Being able to predict what the wood prices are going to do is very difficult, but I would say that we -- like we've seen those prices stabilize a bit on us versus what we've seen in the past several years. While we're seeing, I would say, normal course of business pricing pressure in the market, over the long term we tend to see the kind of swing that we've seen in input costs drive pressure on the pricing.

We're going to continue really to focus on our pricing discipline though, as we need to, we will respond to stay competitive in the marketplace. The piece I think I had mentioned earlier was I think to model a continuation of the trend that we saw it in 2015 would probably be aggressive.

Ken Zener, KeyBanc.

Hello again. Just thinking back two years ago when you guys had your last analyst day, I know you guys kind of talked about housing recovering at that point and then there was some noise in the channel.

At that point you guys started talking about seasonality in the business. So in regards to Americans and ceiling, are you guys seeing normal seasonal sequential trends in that business in terms of what your dealers are talking about? Just so we can put the growth rate kind of in a little better cadence quarter to quarter. Thank you.

Ken, I think there's two parts to your question; one is the seasonality of the business. I can say that we are not seeing any difference really in the seasonality of the business from quarter to quarter or anything in the construction cycle that is shifting or moving around.

As far as the overall demand and the fundamentals that are driving the demand in the marketplace, those fundamentals are still, I would say, uneven and choppy, which is driving a very uneven recovery as we've talked about. Both on the new side as well as the R&R side.

The new side, as we talked about, is pretty robust the office side, but on the healthcare and education we're not seeing as robust of the fundamentals driving demand there. And similar in the R&R there's lacking fundamentals that are keeping that for being a very robust part of the overall market demand. So I would say, again, we are still experiencing a choppiness and an unevenness across the US in terms of the recovery in both the new segment as well as the R&R segment.

Scott Rednor, Zelman & Associates.

Just one quick follow-up on ceilings. Relative to the $9 million of EBITDA improvement for all of 2015, how much of that was Americas? And with the actions you announced today should the international results begin to contribute more meaningfully next year?

The majority of that was the Americas, clearly, and then the actions that we are taking to address the lower market expectations for both Europe and Asia should -- and I expect them fully to contribute to EBITDA and margin generation in 2016.

(multiple speakers) It's Dave Schulz. Just to make sure that we provide you with the right information on that, we saw the continuation of some of the EBITDA issues we have had in the international markets. So I would say that the growth in the Americas was offset then by some of the losses that we had in our international markets.

As Vic mentioned, we've taken some specific actions to address that in Q4 2015, but I did want to clarify that. So when you take a look at the year-over-year increase in our ceilings division, it's the Americas offset by the international markets at this point.

Stephen Kim, Barclays.

Just wanted to follow-up. Following the plant closure in China in ceilings, being that that region has probably been the most invested in here over the last five years for long-term growth initiatives, has your long-term view on the region changed any? Obviously, your view for the next 12 months is pretty clear. But how are you thinking about China looking out over the next five years relative to maybe where you were three, four years ago when a lot of these investments were being made?

If I could just real quick clarify, then hand it over to Vic to give you our views. Just, Stephen, we didn't say we were closing the plant; we're idling the plant, which is significantly different in terms of how you manage a plant. So there will be a maintenance presence. The plant will be able to come up and online in relatively short order when demand returns.

I'm glad you asked the question. We're not closing it by any means. We're just idling it until we see the market recovery.

And I think that is indicative of how we think about the regions, frankly, so really when -- if you take a look back or step back and look at the entire region, we actually had double-digit growth in all the other parts of Asia-Pacific region in the fourth quarter.

China continues to be the tough spot for us. We did build these plants in China to support our Asia business; they're not just China-only plants. But the recession and the retreat in the office segment in particular in China has given us pause and given us the opportunity to idle a plant to save costs in the meantime, until the market does come back.

We do expect it to come back. This market still has tremendous potential in it. As they adopt the acoustical solution for education and healthcare, we still believe that they will be adopting this technology and there's no disruptive technology out there to replace it. Longer term we're still optimistic about this market.

Keith Hughes, SunTrust.

Thank you. On capital spending, according to the K it came down about $50-something-million in 2015 versus 2014. At least directionally, would that be to units -- is that going to continue to trend down in 2016 and 2017?

Keith, it's Dave Schulz. We're not going to provide that guidance. We will wait until the March 10 meeting where we will provide you more specifics about our capital plans for 2016.

It is -- you will be able to see this in the 10-K, but the reduction in capital spend in 2015 versus 2014 was about the same across both businesses. Again, that's the capital spending that we had on the ceilings business in Russia. And then, obviously, we had some spending in the flooring business, including the first phases of the project bolt, or the LVT plant.

Justin Bergner, Gabelli & Co.

Thank you for taking my follow-up. In regards to the asset-backed facility for Armstrong Flooring, why did you opt to go with an asset-backed facility versus standard revolver?

It's Dave Schulz again. We looked at various financing options for an independent Armstrong flooring business and we felt that the asset-backed loan, given the effect of collateral we have on the flooring business, was a cheaper way for us to go. So that will be a $225 million revolver that will be an asset-backed revolver.

Thank you.

Thank you very much for your interest and support for the past 5.5 years. I just want to say that being the CEO of this company has been a pleasure and privilege. I look forward to watching both Don and Vic lead both of their businesses forward in the months and years to come. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.