Armstrong World Industries Inc (AWI) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Armstrong World Industries, Inc. Q3 2016 earnings conference call. (Operator Instructions) As a reminder, this call is not (sic) being recorded.

I would now like to turn the call over to Kristy Olshan, Director of Investor Relations for Armstrong.

Thank you, Michelle. 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 ArmstrongCeilings.com.

With me today are Vic Grizzle, our CEO, and Brian MacNeal, our CFO. Hopefully you have seen our press release this morning and both the release and the presentation Brian MacNeal 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 World Industries, please review our SEC filings, including the 10-Q filed earlier 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 Vic.

Thanks, Kristy. Good morning, everyone, and thank you for joining our call.

This morning I will begin with an overview of our quarterly and year-to-date results and provide some perspective on market conditions and our outlook for the remainder of the year. I will then turn the call over to Brian MacNeal, our CFO, who will walk you through a more detailed review of the financials. I will conclude with some final comments around our growth initiatives and our market outlook.

Overall, our third-quarter results were mixed. We saw a continuation of the positive value drivers for our company and we also experienced some higher timing-related expenses that we will discuss. Excluding the impact of foreign exchange, we delivered top-line growth in the Americas and the EMEA area that was partially offset by a fractionally softer Pacific Rim.

For the third quarter, consolidated reported sales of $335 million were essentially flat with the prior year. On a comparable foreign-exchange basis, sales were up 2%.

I am pleased with the acceleration in our average unit value, or AUV, achievement globally. In fact, AUV was positive in every segment this quarter. Like-for-like pricing, a key component of AUV, was also positive in every segment, which was a meaningful contributor to our overall improvement.

AUV was particularly strong in the Americas, driven by both positive like-for-like pricing and continued strong growth in the high end of our product range. Third-quarter consolidated adjusted EBITDA of $97 million was flat compared to the prior year.

Now turning to our largest and most profitable segment, the Americas, the third-quarter sales were up 2% on a comparable foreign exchange basis. Overall, volumes in the Americas were fractionally down, driven by softness in the retail channel and sales in Latin America. Importantly, sales in our US commercial channel, which represents the majority of our sales in the Americas, were up 5%. Both volume and AUV were positive in the quarter.

We continue to see momentum in the new construction activity and strong growth in the high end of our product range, while repair and remodel activity moderated a bit. Now despite the top-line growth, we didn't see our normal fall-through to earnings as margins were off by 170 basis points, driven by legacy environmental site expenses and modest investments in our growth initiatives.

As I mentioned, our value drivers remain intact as we saw price, mix, and productivity all moving higher in the quarter. Despite some of these timing-related expenses and after absorbing standalone corporate costs, our adjusted EBITDA margins in the third quarter were industry-leading at almost 38%.

I am particularly encouraged by the positive like-for-like pricing we experienced, demonstrated good realization from our August 1 price increase in the Americas. Importantly, our total solutions selling effort are making a positive impact. We continue to gain traction by selling more products into every space and the acceleration in our overall AUV achievement this quarter is evidence of that.

Now turning to our Europe, Middle East, and Africa segment, on a comparable foreign-exchange basis sales were up 2%. Double-digit sales in Russia drove the result, offsetting continued softer markets in the Middle East and Continental Europe. Now in fact the volumes in Russia were up over 30% from the prior-year quarter as the team there continues to execute exceptionally well, outperforming in a down market.

The sequential sales improvement in the EMEA segment from the first half of the year is encouraging. Adjusted EBITDA margins improved 110 basis points in the third quarter, driven by our continuing cost-reduction actions. Although we are pleased with the progress, there's clearly more to do here and we remain focused on improving the margins and the returns in this segment.

In the Pacific Rim, third-quarter sales were down just under 2% on a comparable foreign-exchange basis. Improvements in AUV were offset by lower volumes in India as key projects were delayed. Sales in China and Australia were flat versus the prior-year quarter. Adjusted EBITDA margins in the Pacific Rim expanded significantly by 590 basis points. Again our cost-reduction actions are beginning to make a meaningful impact here.

Now on a year-to-date basis, consolidated reported sales of $937 million increased by $3 million, up marginally versus the prior year. On a comparable foreign-exchange basis, sales were up over 2%. Improvement in AUV drove the majority of the sales improvement year-to-date as solid volume growth in the Americas in the first half of the year was partially offset by lower volumes in the international markets.

Consolidated adjusted EBITDA for the first nine months of $249 million was up $17 million, or 7%, from the prior year, as we have expanded margins by 130 basis points. For the balance of the year in the Americas, we expect improvement in volumes from new construction activity to continue into the fourth quarter. We expect our AUV achievement to continue to improve in the fourth quarter as well, driven by like-for-like pricing from our August 1 price increase and sustained growth at the high end of our product range.

We continue to focus on our cost-reduction actions to improve adjusted EBITDA performance in our international segments. As a result, we're maintaining the midpoints of our constant currency sales and adjusted EBITDA guidance.

With that I will turn the call over to Brian.

Thanks, Vic. Good morning, everyone on the call. In reviewing our third-quarter results, I will be referring to the slides available on our website. I will now quickly review slide number 3, which details our basis of presentation used throughout this discussion.

Please note that effective January 1, 2016, in anticipation of the separation the majority of our historic corporate support functions and costs were incorporated into the three new operating segments. Slides 13 and 14 detail the pro forma adjustments made to prior-year for comparability purposes by our new reporting segments. The primary differences to our reported results are expenses related to the separation, the non-cash impact of our US pension plan, and a push down of standalone corporate costs into the reporting segments on a pro forma basis in prior-year results.

Starting with slide 4, consolidated sales of $339 million were up almost 2% versus the prior-year period on a comparable foreign-exchange basis. We do not see our normal fall-through rate this quarter as adjusted operating income increased by 1%, but this translates to a 10 basis points of contraction in margins versus the prior-year quarter. Adjusted EBITDA was flat and globally margins narrowed by 60 basis points versus the prior-year period. I will cover the drivers of the margin contraction on upcoming slides.

Adjusted earnings per share improved by $0.17, mostly due to favorability in items below the operating income line versus the prior-year quarter. You may recall in the third quarter of 2015, we took a large non-cash charge related to the revaluation of the intercompany loans we have in place to fund our Russia and Chinese investments. Net debt was down $33 million, driven by debt repayments and refinancing actions over the last 12 months.

The chart at the bottom of slide 4 shows the sales and adjusted EBITDA change by segment versus the prior-year period. Sales improvement in the Americas and EMEA segments were partially offset by softness in the Pacific Rim. The strength in the Americas was driven by a 5% sales growth in our US commercial channel and in EMEA by Russia, while the weakness in the Pacific Rim was primarily in India.

I will talk about the margin drivers in more detail on the upcoming slides, but do want to note that we are pleased with the margin expansion in both of our international segments as strong cost control actions continue to protect the bottom line, offsetting end-market softness.

Turning now to slide 5, you can see our consolidated third-quarter adjusted EBITDA bridge. Consolidated adjusted EBIT is flat compared to the prior-year quarter.

Positively, our AUV achievement accelerated, driven by the Americas. We drove favorable productivity gains, particularly in Russia, and saw a modest benefit from lower input costs. This was completely offset by pockets of volume softness in our segments, along with the impact of a $2 million environmental charge in the Americas, creating unfavorable SG&A costs year on year.

Globally this caused our adjusted EBITDA margins to decline by 60 basis points. Given its size, the performance of the Americas drives our global results, which is certainly the case this quarter, as margin improvement in both of our international segments was offset by lower margins in the Americas.

Turning to our segments in further detail on slide 6, I will discuss our Americas segment. As a reminder, the Americas absorbed $[16] million of standalone corporate costs this quarter. The basis of presentation that we show and will discuss holds these costs constant in 2015 to facilitate comparability between periods.

On a comparable foreign-exchange basis, the Americas saw sales increase by over 2%. Our US commercial channel, which represents the bulk of the Americas, drove our sales growth, which was offset by softness in the retail channel and Latin America.

Sales in US commercial were up 5% as our strategic growth initiatives around total solution selling and continued share gain in Architectural Specialties grow solid growth in the high end of our product range. While sales were down in the retail channel, they faced a challenging comp period with sales up high single-digit in the prior-year quarter. Architectural Specialties in America grew by 20% within the quarter, demonstrating that Armstrong continues to be the preferred partner for architects and designers for statements basis.

On a comparable-cost basis you can see the drivers of profitability on the bottom of this slide. Adjusted EBITDA margins were down by 170 basis points, driven by the impact of a $2 million environmental charge. The environmental expenses are related to the timing of activities at two of our US manufacturing facilities.

By their nature, the timing and amount of these environment charges are difficult to predict, but we currently have liabilities of $5 million recorded on the balance sheet for future investigation and remediation work at the sites. Excluding this charge, the Americas saw a flat adjusted EBITDA quarter as acceleration in AUV achievement was offset by the margin impact from lower volumes.

Continued solid growth in the high-end product range and another quarter of positive like-for-like pricing drove the AUV improvement. The AUV improvement was offset by volume softness in largely the retail channel, in part due to the strong comp period. We saw productivity gains offset by modest investment in our total solutions selling capabilities.

Moving to our EMEA segment on slide 7, quarterly sales were up almost 2% on a comparable foreign exchange basis driven by strong volume growth in Russia as volumes were up over 30% from the prior-year quarter. This was partially offset by weaker end-markets in the Middle East and Continental Europe, which performed as expected.

The drivers of our profitability are listed at the bottom of the slide. Adjusted EBITDA improved, driven by lower energy costs and favorable productivity in our Russia plant. This drove adjusted EBITDA margin expansion of 110 basis points.

Moving to our Pacific Rim segment on slide 8, quarterly sales decreased by 2% on a comparable foreign-exchange basis driven by weakness in India as projects get pushed out due to the challenging credit markets. Adjusted EBITDA doubled compared to the prior-year period as a result of AUV improvement and cost reduction actions.

Similar to EMEA, our prior cost actions aided the bottom line and improved both manufacturing and SG&A costs year on year, which led to adjusted EBITDA margin expanding by 590 basis points. We will continue to be focused on improving our international returns and recognize there is more work to be done here.

Year-to-date September results start on slide 9. On a comparable foreign-exchange basis consolidated sales of $946 million were up over 2% versus the prior-year period. A 5% growth in Americas was offset by weakness in the international markets.

Adjusted operating income increased by over 9%, which equates to 130 basis points of improvement. These results were driven by cost reduction actions internationally and impressive first-half result from WAVE and AUV acceleration as we continue to see strong growth at the high end of the market. Adjusted EBITDA improved by over 7%, which translates to 130 basis points of margin expansion by -- versus the prior-year period.

Slide 10 details our year-to-date September consolidated adjusted EBITDA bridge versus the prior-year period. Adjusted EBITDA increased by $17 million, up over 7% from the prior year. The key drivers of growth are WAVE equity earnings, which was also driven by volume growth and fuel costs, SG&A cost containment, energy deflation, and productivity gains in both the Americas and EMEA.

Slide 11 updates our 2016 guidance. We are maintaining the midpoints of our constant currency revenue and adjusted EBITDA guidance, but have narrowed the ranges. We now expect full-year constant currency sales to be in the $1.24 billion to $1.27 billion range, which is a growth rate of 1% to 4%.

Adjusted EBITDA guidance narrows and is now expected to range from $315 million to $325 million, which indicates a growth rate of 7% to 10% versus the prior year. Adjusted free cash flow remains unchanged at $80 million to $100 million, excluding a cash impact of separation. As a reminder, the cash impact of separation is expected to range from $50 million to $60 million, assuming normal accruals and payables at the end of 2016. The remaining separation activity is IT work to complete the physical separation of the SAP system and is still expected to be completed in Q4.

EPS guidance is now in the $2.20 to $2.30 range, but shows a 27% to 33% growth rate based on a 1.73 base. Our 2016 guidance excludes the one-time interest rate swap charge of almost $11 million incurred in the first half as part of the separation of the floor business. We expect interest expense to be around $35 million, excluding this $11 million charge.

You will note we are now expecting a large improvement in earnings per share compared to the prior-year period. This is driven by the inclusion of a large non-cash charge in the third and fourth quarter of 2015 associated with the revaluation of unhedged intercompany loans denominated in Russian rubles and the Chinese renminbi used to fund our plant investments.

As a reminder, this guidance is presented on a standalone basis. The financial performance of AFI is now included in discontinued operations and 2015 has been adjusted on a pro forma basis for comparability purposes.

The top-line and EBITDA guidance midpoints remain unchanged, driven by the strength of the Americas, particularly in the US commercial channel, and the cost reduction actions internationally that offset the reduced sales. We expect softness in our international markets, specifically sales in the Middle East, to continue in the near term.

I also wanted to provide a brief update on our share repurchase program. During the third quarter, we repurchased 187,000 shares for a total cost of $7.8 million as we executed against our $150 million repurchase authorization.

Finally, I wanted to discuss the 8-K filed last month. We wanted to provide more transparency in our historical results for each of our new reporting segments. This filing is meant to help investors better understand our business and provide clarity in analyzing our results. Please note, these results are consistent with the guidance we communicated earlier this year, and like I previously mentioned, we are still on track to meet those commitments.

To wrap up, we are reaffirming the midpoint of our 2016 revenue and adjusted EBITDA guidance. Although I'm disappointed with the overall Americas Q3 margin performance, our US commercial channel continues to produce positive results. I am pleased that continued cost-containment efforts in our international markets helped expand margins, although there is more work to be done.

With that, I will turn it back over to Vic.

Thanks, Brian. We continue to make progress on both of our strategic imperatives: accelerating top-line growth and improving our returns internationally. Our year-to-date constant currency sales in the Americas are up mid single digits behind our total solutions selling effort, as we continue to gain share in our Architectural Specialties and drive higher AUVs, which we believe will continue.

We continue to deploy resources to focus on our customer-facing growth initiatives. Our modest investments in total acoustic selling capabilities are already driving results, particularly in the high end of the product range, by strengthening relationships with architects and designers and improving the quality of Armstrong's specifications.

We also recently redesigned our commercial website, making it easier for our customers to find everything from technical product details to the most extensive inspirational photo gallery in the industry featuring photos of over 800 Armstrong project installations in over 30 countries. The initial feedback has been very positive and we are thrilled to have improved our customers' experience. If you haven't had a chance to take a look at this site, I would encourage you to check it out.

We are also building on the success of our Total Acoustics launch and have just added some of our popular Architectural Specialty product families, METALWORKS and WOODWORKS, to the Total Acoustics line. Now our customers have even more options as they focus on designing beautiful spaces with superior sound absorption and blocking characteristics that deliver industry-leading acoustic performance.

Innovation is a passion at Armstrong and it remains the key to leading the market to higher-value products that will continue to deliver higher AUVs and higher margins. Given the large existing installed base, we expect tailwinds for years to come as our industry mixes up the higher AUV products.

Internationally, we continue to deliver margin expansion as a result of our cost reduction actions. Again, we said before, we are making progress here and we are pleased with that, but we recognize there is also a lot more to go here. We are going to continue to stay focused on driving to double-digit ROIC.

Now, in closing, I would like to share our preliminary view of our end-markets as we head into next year. When we step back and look at this year in total, it's going to be a solid year of improvement in the commercial construction markets.

We will have seen low single-digit volume growth for the first time in many years. The first-half and the second-half splits were a little different than previous years with our strong first half, but overall we have seen a broad-based recovery in nonresidential markets with solid participation for both new construction and broader-based R&R activity with nearly all US territories showing positive volume growth. This is encouraging against the backdrop of a low GDP growth economy and we expect to see this improvement continue into next year.

Improving global oil prices should support volume growth in our international markets over the medium term as we expect activity to improve in markets like Russia, the Middle East, and China. This market backdrop supports the medium-term value creation model that we outlined earlier this year at our investor day.

What we are committed to here at Armstrong is driving growth irrespective of the market. Our growth initiatives around innovation, total solutions selling, components, and our increasing participation in custom design work will continue to gain traction and make an increasingly positive impact on both the top line and our margins. In addition, we will continue to look for bolt-on acquisition opportunities in the Architectural Specialty space to accelerate our participation here.

With that we will be happy to take your questions.

(Operator Instructions) Bob Wetenhall, RBC Capital Markets.

Good morning and thanks for all the great detail, especially about your preliminary thoughts on 2017.

Vic, there is obviously a disconnect between your focus on driving profitable growth and the stock's reaction to the strategy. And I was kind of trying to understand -- great assets, solid management -- what is the reluctance to use the balance sheet to buy back stock to support it? It just looks cheap and undervalued. Any thoughts?

As you know, Bob, we are buying back shares, as Brian updated, and we continue to -- we continue on this path to do this in the coming quarters. We've announced $150 million worth of share repurchase and we think this is a good way to use our cash right now, given the value of our company. So I think we are addressing that very specifically.

Trey Grooms, Stephens Inc.

Good morning. First couple of questions for me or first question for me is I guess just on what you are seeing in the Americas, specifically around the volume. You pointed out that they have slowed versus what we've seen in the first couple of quarters for sure.

With commercial being up and then the lower volume in retail and Latin America, how do we think about that mix and how we think about those different components as we are going into 4Q? It sounds like you are looking for continued volume improvement there as we get into 4Q. Just trying to get a sense for is this retail starting to show some life or what's the driver of the improvement in the 4Q?

As you mentioned, our US commercial business was solid. We saw positive like-for-like pricing, we saw positive mix, and we saw nice growth in the high end of the market there. So we are very pleased with what we saw on the volume side in that US commercial, especially at the high end of the market.

We did decelerate. It feels like it decelerated into the third quarter, based on what we saw in the first half of the year, and it was primarily the R&R activity. We continue to see robust activity in the new construction. Really, again, that shows up in these products that we are selling at the high end of the market.

Again I think the deceleration was pretty broad-based. It wasn't one segment overall. And when you look at the retail channel, which was our big-box customers, that is really the patch and match and really the essence of a lot of the smaller R&R activity. That's where we saw a really -- I would say a big portion of the deceleration within that retail channel.

Now I'll also mention here in the retail channel -- and we talked about this on prior calls -- you can get some pretty big swings in timing and orders based on inventory levels at the big-box guys. And I'm sure you've seen that in other segments. So part of this could be a little bit of timing, but we clearly saw deceleration on the R&R activity.

Again, when we look at the fourth quarter going forward, what we are seeing thus far and the activity that we expect to continue, especially on the new construction side, that's why we are continuing to see -- we should continue to see volume growth in the fourth quarter.

John Lovallo, Bank of America.

Thanks for taking my call. The first question here is just on India, maybe if you could give just a little bit more detail on the project delays that you were talking about and on the credit conditions as well.

Yes, I will let Brian add on some of the credit conditions that he mentioned, but in India overall -- again this is an emerging market that is primarily project business. There's not a flow or underlying flow business for those markets and so you can really ebb and flow based on large projects getting moved around quarter to quarter. And that's clearly what we saw.

We are continuing on a double-digit positive growth trajectory in India. We like what we see there; we like what we see in the market there. But, again, time to time you will start to see certain things that influence these projects and that happened to be some of the tightening credit policies that we are seeing.

I don't know; Brian, do you want to add anything to that?

No, I think you hit it dead on, Vic. Just banks -- projects are getting pushed out as credit gets tight in a heated economy right now, growing at a nice mid single-digit GDP.

And, again, this is a major new construction type of a market versus your balanced R&R and new construction markets around the world.

Nishu Sood, Deutsche Bank.

This is Rob Hansen on for Nishu. I just wanted to ask about your 3Q Americas EBITDA margins. Even if you add back the environmental reserve, it's down a little bit. I know you are making some investments, so when should you start to the revenue to absorb those investments? And is using the 40% to 45% incremental margin still the right figure going forward?

Yes, we alluded to some of the traction that we're already getting from some of those resources that we have added. We talked on prior calls how we are adding to our design capabilities and some of our project management capabilities, in addition to commercial coverage, that is allowing us to participate more broadly in the Architectural Specialty space.

I think Brian alluded to this: we had over 20% growth in the third quarter. Actually, all year we've had over 20% growth in the Architectural Specialties categories. So we are very pleased with what we are seeing with some of these early investments and the investments we talked about making our -- kind of a layering in and continuing effort to support the capacity for driving Architectural Specialties growth going forward.

I would have to say I'm very pleased with what we are seeing there and I think the return from these is going to be on an ongoing basis.

Garik Shmois, Longbow Research.

Thank you. Just wanted to see if you can provide a little bit more color on the 2017 outlook that you provided some preliminary statements on earlier in the call. Just wanted to see if you can reconcile the comments around the slowdown in remodeling with the strength in new construction in the Americas. Should we assume that the pattern continues in 2017 or is there some expectation that the remodeling channel is going to stabilize?

I think the four leading indicators are pretty positive around the new construction activity and so -- everybody can look at those and put your own slant on those, what they will mean for your business. But we are pretty optimistic about those four leading indicators on the new construction activity.

Again, when we talk to our customers and you look at the pipeline of new projects going on around new construction, it gives us a good platform to talk about next year in light of that activity.

The R&R activity, as you know, is a lot more difficult in terms of visibility to call, but there's nothing out there that says that we should have a very different R&R environment than what we saw in 2016. So I would expect to see, as I called it, I think more of the same on the R&R side.

Again, the quarter-to-quarter splits, or the first-half to second-half splits, could be a little bit varied as that R&R activity remains uneven. But I think, on the R&R side, we are expecting something fairly similar to what we experienced this year.

Will Randow, Citigroup.

Good morning and thanks for taking my question. Regarding Russia and China, you talked about potential for improvement -- I'm guessing predominately Russia -- on the outlook for 2017. And you also talked about this revaluation of loans.

Do either of those activities signal, if you will, you're -- the planned actions you expect to take in 2017 or 2018? Or is this kind of we will see how the business does and then make strategic actions to either improve profitability or potentially strip them away from the Company?

I will go back to what I said before, because that is the play that we are running, is we're almost assuming there is no help from the markets to right-size our businesses in those areas. When we made these investments in China and Russia, we were certainly in a different market environment and a different outlook for those markets. They were double-digit growth markets. We don't really see those markets as double-digit growth markets going forward on a consistent basis.

So we are running the play to right-size those businesses for the market conditions we're in now and then, if we get better markets, then obviously that's upside. We are focused on the cost reduction actions that will right-size those businesses now and we're looking at ways to structurally alter the cost structures so that we can get there faster.

That is the play we are running and that is how we are thinking about it. Again, if the markets come back faster than we are expecting, that's all good.

Kathryn Thompson, Thompson Research Group.

Thank you for taking my questions today. In previous calls you talked about other end-markets beyond commercial improving: education and healthcare. Could you give an update on those and other markets in terms of growth?

And just additionally, any additional color you have on the environmental reserves in your Americas group. Thank you.

I will let Brian talk to the environmental reserves. Let me just -- on the end-markets, I alluded to it a little bit, Kathryn, which is the deceleration that we experienced in the third quarter was primarily in the R&R activity and the R&R activity was fairly broad-based. It was across the retail. We saw it in education; we saw it in healthcare, as well as the office segments.

And when you look at some of the reports around what was going on in 2Q -- a deceleration in retail, a deceleration of over 2% in state and local tax revenues -- the discretionary spend in these segments in particular I think showed up in the third quarter for us. Again, it was on the -- the discretionary spend focuses heavily on the R&R portion and I think that's what we saw.

So it was fairly broad-based. Again, the new construction activity continues to be also fairly broad-based in terms of the activity there.

Kathryn, on the environmental side, we have disclosed over the years in our Ks and Qs that we are involved in several ongoing environmental matters. They relate to the properties at or near our Macon and St. Helens plants. They are active matters and we are working with the applicable environmental agencies, others potentially related parties who previously owned or used the property or operated it at or near the property.

The work includes both investigation of the site and then remediation once the plan is approved, so by their nature, they are complex matters and typically take many years to resolve. As a result, it's difficult to predict the timing or amount of those costs that remain. We currently have those liabilities, as I mentioned, of $5 million on the balance sheet for future investigation and remediation work, but this is very unpredictable and it hits us quarter to quarter as we move along the path to execute the remediation plan.

Jason Marcus, JPMorgan.

Good morning. My question is on the SG&A savings that you've been getting so far in Europe, which I think was about $1 million in the quarter. Based on the actions you have taken, do you think we should expect a similar type of improvement in 4Q or do you think that can improve?

Then as you think about the SG&A position heading into next year, I guess how should we think about that?

I think you could expect that the SG&A savings we are seeing is a good run rate for at least the short term. We know that we are not finished and so there's more to do in the coming quarters for us to get to the right return levels that we expect there. Again, I think a pretty good run rate in the short term here, but as we get into next year and beyond we have to continue to reduce our cost structure.

We are running that play and that's what we're focusing on.

Okay. Just one more, if I could, on the cash flow guidance. You are maintaining the EBITDA midpoint, but I think cash from operations is now expected to be about $10 million lower with I think interest expense also being a lower number. So I just wanted to see if you could reconcile that.

We had the $10 million swap impact from -- essentially we record it in Q1, but then the cash piece was Q2, so our guidance excludes that $10 million hit.

Sam Eisner, Goldman Sachs.

Good morning, everyone. Just on your EBITDA walk-through throughout the first nine months of the year, input cost in WAVE have been about $15 million benefit year over year of the roughly $17 million. That's roughly that $15 million from the first half of the year. Just curious how you guys are thinking about raw materials, specifically the input costs and WAVE into the fourth quarter and then also into 2017.

Sam, this is Brian. As you know, we report the benefit of our wave joint venture through our equity accounting, so it's not included in our consolidated results. We did mention that we've taken a 5% price increase on WAVE and so we are expecting that benefit of that higher price to fall-through through Q3 and Q4 in the second half.

And as we look forward, we both on, call it, the ceiling side and the grid side -- it's sold as a system and we continue to maintain our business objective, which is to drive gross margins and, ultimately, EBITDA margin. So we will adjust price accordingly depending on how inflation or deflation is playing out in each of our markets.

Scott Rednor, Zelman & Associates.

Good morning. In the Americas year-to-date your volume is up 3% and your full-year guidance implies a pretty wide range for 4Q. So, Vic, based on what you have seen in October, should we see volume growth in the Americas in 4Q?

Yes, you should see -- again, we are expecting to see volume growth in the Americas.

Keith Hughes, SunTrust.

Thanks. I just wanted to ask on the weak retail business, how much of that -- I'm sorry, of the Americas business, what percentage did that represent? And from a margin perspective is that above or below what you can see from your traditional commercial activity?

Keith, we don't break out, so I can't give you a very specific answer on that. I understand your question, but I can't give you a specific answer because we don't break out down to that level in the Americas.

But, again, the retail channel of our business goes -- is the sales that we sell into the big-box retailers and so it is, I think, a pretty good reflection of what you see at the ground level in terms of what we call the patch and match. It's the small projects. It typically is the projects where they're trying to match something in a space.

So I think again that's -- the softness that we saw there was a reflection of a deceleration in the overall R&R activity. Again, I just will add the caveat that we have seen swings in order patterns with the big-box guys based on their inventory adjustments that they will make periodically. And I think part of this is also a reflection of some of that timing in the inventory.

So I think those two things kind of think about that channel in particular and how it fits into the overall Americas business.

Jim Barrett, CL King & Associates.

Good morning, everyone. Vic, assuming international markets don't rebound from here near term, is the rebound in Russia at least directionally sustainable? And would you give us more broadly your thoughts on international returning to breakeven or a little bit better than that based upon the Q3 performance on a going-forward basis as we look to 2017?

I really like what I see in Russia right now, but it was up 30%-plus so it was an extraordinary quarter. I wouldn't say that's a nice, new-normal run rate for Russia, but I think it does clearly signal that there's a rebound in activity there, in addition to the fact that our teams are picking up share as we expand our distribution network there and as we ramp up the production of our new plant there. I like what I see there, but that is not a sustainable run rate than we could count on.

But, again, I think what we are seeing in terms of the productivity in the plant, I couldn't be more pleased with. It's really contributing meaningfully to the overall region and I expect the execution in that region to continue to be really at a high level. So that's how I am thinking about it. I think we probably have hit bottom in Russia, but I wouldn't say that this is a sustainable run rate.

Jim, this is Brian. A point of clarity I would give is the overall market in Russia was down. We benefited from share gains from some of the great work our team is doing there. Being local in manufacturing has also helped pretty dramatically.

So I wouldn't say this is a long-term run rate. We got to see the overall market bounce back in, but our share gain is being driven by being local there.

Ken Zener, KeyBanc.

Good morning, gentlemen. I realize there's a lot of different numbers here and I do realize you guys are trying to be as transparent as possible, so I'm just going to go over some of these numbers one more time so I'm not confused.

You talked about Architectural Specialties, AS, being up about 20%. I think historically that you have said that it's about 15% of your business. Just trying to get weighting to sales here.

In your last 10-K, which was pre the split, you talked about the big boxes being roughly 15% of sales. Don't know if that's still the kind of weighting bogie that we should use today.

And the third part of that is with the US commercial, which is different obviously than the retail; I assume you're talking about companies I'd say like GMS or distributors. Does that 5% -- that's including, I assume, the Architectural Specialty tailwind. Period, thank you.

Yes, Ken; you're correct. The US commercial business that we referenced is the business that we sell through independent distributors. So you've got that right.

And we do sell Architectural Specialties through the independent distributors, so that does include Architectural Specialties. Again that's a revenue growth number.

And that US commercial business, we saw really all three: like-for-like pricing, positive mix, and positive volume. Again, I was particularly pleased with the sales growth at the high end of the market and the products that we sell into the high end of the mineral fiber portion of that market, as well as the Architectural Specialties portion of the business. So that really helped us drive the overall mix as well, as you could imagine.

I thought that was worth highlighting. That's a nice continuation of similar activity that we saw from the first half.

Sam Eisner, Goldman Sachs.

Just looking for a quick clarification here, so historically I think you guys have referenced that R&R volumes are about 70% of industry volumes. And so just trying to understand -- get a better understanding of the comment where if R&R is decelerating in the third quarter, yet you're expecting it to grow in the fourth quarter, your overall business is expecting to grow in the fourth quarter, what is growing in the fourth quarter given this deceleration?

Is it that you have easier comps? Is it that Architectural Specialties continues to grow nicely? I'm just curious how to think about that Americas comment for growth that you just made. Thanks.

Sure, Sam; this is Vic. The comment around deceleration is what we saw from the first half to really the third-quarter activity around R&R.

Again, it was a deceleration. It wasn't -- we didn't call it out to be negative. It's the deceleration from the positive growth that we saw in the first half, so that's maybe a point of clarification there.

I will mention that -- and we probably didn't highlight this early enough or at least as much as we could have, but the comps that I talked about in the second-quarter call were going to get tougher in the second half of the year because we started to see volume growth in the second half 2015. So as we said, we are going to have a couple things going on in the second half, but one of the things that we were going to be -- that we thought our volume growth would moderate a bit was based on the fact that our comps in the second half of the year were going to get more difficult.

And so I would say that is a little bit about what you saw in the third quarter, as well as the deceleration overall in the activity in the R&R segment. So hopefully that clarifies that point.

There are no further questions. I would like to turn the call over to Vic Grizzle, CEO, for any closing remarks.

Thank you again, everybody, for joining. Again, we had, I think, mixed results in terms of the overall EBITDA generation. Hopefully, we were able to clarify some of those points.

We are going to stay focused on driving top-line growth irrespective of what this market gives us. Hopefully some of the comments today helped you see some of the traction that we are getting on those growth initiatives and we will keep you posted on future calls. Thank you all for joining.

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