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Executives

Tom Waters – VP, Treasury and IR

Matt Espe – President and CEO

Tom Mangas – SVP and CFO

Frank Ready – EVP and CEO, Armstrong Floor Products

Analysts

Kathryn Thompson – Thompson Research Group

Robert Wetenhall – RBC

Rodny Nacier – KeyBanc Capital Markets

Mike Wood – Macquarie

Stephen Kim – Barclays Capital

John Baugh – Stifel, Nicolaus

Keith Hughes – SunTrust

Dennis McGill – Zelman & Associates

Jim Barrett – C.L. King & Associates

David MacGregor – Longbow Research

Armstrong World Industries, Inc. (AWI) Q1 2012 Earnings Call April 30, 2012 1:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 World Armstrong Industries Incorporated Earnings Conference Call. My name is Dominique, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Tom Waters, Vice President of Treasury and Investor Relations. Please go ahead, sir.

Tom Waters

Thank you, Dominique. Good afternoon 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 this afternoon are Matt Espe, our President and CEO, Tom Mangas, our CFO, Frank Ready, the CEO of our Worldwide Flooring business and Vic Grizzle, CEO of our Worldwide Ceilings business. Hopefully, you have seen our press release this morning, and both the release and the presentation that Tom Mangas will reference during this call are posted on our website in the Investor Relations section.

In keeping with SEC requirements, I advise that during this call, we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong, please review our SEC filings, including the 10-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 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.

Matt Espe

Thanks, Tom. Good afternoon, everyone, and thanks for participating in our call today.

During the first quarter of 2012, we experienced many of the same uneven or lumpy results that have characterized the past 18 months, as global economies seek stability. Our sales for the quarter were $668 million, down 2.5% from the first quarter of 2011 and just below the low end of our guidance range of $670 million. Despite the soft sales, we delivered $82 million of adjusted EBITDA, right in the middle of our guidance, though down $10 million from a very strong first quarter of 2011.

EBITDA performance was helped by continued productivity improvements and ongoing SG&A expense management. Sales in January and February were relatively strong, especially in the North American residential flooring markets, continuing the strength we saw in the fourth quarter of 2011. An unexpected drop in demand, especially in North American commercial markets, and some temporary service issues in wood flooring impacted our March results.

The entire quarter saw weakness in Europe and U.S. commercial sectors tied to public spending, particularly K through 12 education. However, these trends were expected.

North American residential markets were positive in the first quarter. Our residential foreign volumes grew despite wood sales being down versus last year, due to our inability to ramp up solid wood production and time to meet to greater than expected demand. We’re adding crews to three of our solid manufacturing facilities and service levels will be restored in the second quarter. If not for these issues, wood sales would have been up in the quarter and for the year, we’ve increased our forecast for wood sales.

Residential Resilient Flooring had a solid quarter, as volumes were up and we continue to see excellent performance from our high-end Alterna and Luxe Plank products that have been driving both favorable mix and volume growth. When analyzing performance – when analyzing commercial performance in the first quarter, it’s important to keep in mind that we’re comparing against a very strong first quarter in 2011 when for instance, our North American ceilings business saw sales increase 14% versus 2010.

We also had pull ahead sales in Asia in the first quarter of 2011 in advance of an April price increase. For the first quarter of 2012, commercial sales were down in all of our geographies, especially in public sector-funded ed markets. Some of this weakness can be attributed to project delays in Asia and uneven regional activity in North America.

While March sales were concerning, our order balance and project outlook for May and June lead us to believe that March was something of an air pocket as opposed to a structural change in the market. In North America, we continue to see strength in certain commercial subsectors, such as privately-funded office tenant improvement.

As you’d expect, Europe overall remains weak. However, CIS, where ceiling sales grew 40% in the first quarter, remains an area of strength within Europe. The CIS and Middle East are pockets of market growth we are targeting in an otherwise very soft European environment.

A highlight of our first quarter was the declaration of a special cash dividend of $8.55 per share or approximately $500 million. This dividend was funded via $250 million of additional debt and surplus cash on the balance sheet.

The dividend was paid on April 10. This dividend is yet another example of management’s focus on either putting cash to work to create value, as in our $300 million of extraordinary capital expenditures to build five plants, or returning cash directly to shareholders.

Also in the first quarter, we completed construction of our Millwood, West Virginia, mineral wool plant. This facility is now up and running and is beginning to provide us with a secure supply of critical raw material. Benefits of this facility will begin to show up in our results in this quarter and will continue for many years, as we take advantage of this high quality wool and develop new ceiling products with improved acoustical performance.

We continue to execute on the cost and innovation initiatives that are under our control as a recovery gains traction. Toward that end, earlier today, we announced the closure of our idle ceiling plant in Mobile, Alabama. This is the second ceilings plant closure since the downturn started. In 2010, we announced the closure of the Beaver Falls, Pennsylvania facility. Despite these two closures, we’re confident we have the capacity at our remaining facilities to not only serve current demand, but also meet future volume growth. As we’ve discussed in the past, one of the benefits of lean, in addition to the elimination of waste and the reduction of the cost5 is the creation of free capacity and this has occurred at our other North American building products facilities.

So, with that, I’ll turn it over to Tom Mangas for a more detailed discussion of our financial performance and then update on guidance and the outlook for the second quarter. Tom?

Tom Mangas

Thanks, Matt. Good afternoon to everyone on the call. In reviewing our first quarter results, I will be referring to the sides available on our website, starting with slide four, key metrics, as Tom Waters previously covered slide two and slide three, as simply an explanation regarding our basis of presentation.

As Matt mentioned, EBITDA for the quarter declined 11% on a sales decrease of 2% when excluding foreign exchange impacts. Adjusted operating income and earnings per share results also declined by 14% and 7% respectively.

First quarter free cash flow was a use of $50 million as the seasonally typical and similar to 2011, when we used $44 million. I’ll address the drivers of EBITDA and free cash flow changes in more detail on upcoming slides. We closed the first quarter with net debt of $409 million, but keep in mind, we paid the $500 million special dividend on April 10, so current net debt is closer to $900 million.

Slide five details the adjustments we made to EBITDA and provides a reconciliation to our reported net income of $18 million in the quarter. The adjustments for the first quarter of 2012 are almost entirely due to the just-announced closure of the previously idled Mobile facility, while in the first quarter of 2011, it was impacted by restructuring and cost out efforts in European flooring and the closure of the Beaver Falls, Pennsylvania, ceiling facility. Tax expense was lower versus prior year, driven by a mix of sound tax planning projects as well as additional state valuation allowances negatively impacting 2011.

Moving to slide six, this provides our sales and adjusted EBITDA by segment for the first quarter. Resilient Flooring had a sales decline of 3%, driven by weakness in Europe, which saw sales decline by 18%, again, excluding the impact of foreign exchange. The European results were impacted by soft market conditions, but were also impacted by 2011 sales containing the last of our discontinued products in Europe associated with our now closed Holmsund, Sweden plant.

Sales in Asia were up 8%, which includes our Australian business. North American Resilient was essentially flat, with the residential products delivering strong growth, offset by a weaker commercial market. Resilient Flooring EBITDA improved, due to our cost-out efforts and price and mix gains.

Matt mentioned the Wood business’s service issues. So I won’t dwell on them here, but you can see the sales decrease contributed to the flat EBITDA performance in the quarter, offsetting otherwise good cost performance.

Building Products sales declined 1%, due to the difficult 2011 comparison and a soft March in North America that Matt discussed. The unexpected March weakness in the U.S. was largely concentrated in the New York and New England markets, which is typically where we have strong share positions and strong sales of our higher margin products. Other U.S. Ceiling markets performed as expected. Our order balance in the Americas is at a healthy level and we believe we are positioned for growth going forward, consistent with our guidance.

Favorable price in North America and Europe partially offset volume weakness and commodity inflationary pressure. In addition, the Ceilings business absorbed $4 million of expense to transition the Marietta plant back to our permanent staff from the temporary workers who ran the facility during the lockout, as we discussed in our February call. These activities were concluded in the quarter.

Finally, we incurred normal start-up expenses ahead of production at our new mineral wool plant in Millwood, West Virginia. In addition to these expenses and sales growth of 14% in the base period, we are anniversarying WAVE’s strongest quarter of 2011, which included $3 million of EBITDA benefit that was accelerated from the second quarter, driven by the February and April 2011 price increases.

In Cabinets, sales were down 2%. Volumes were lower versus the prior year, as distributor demand remained weak and this reflects some spillover from the service issues we fixed in the fourth quarter. Distributor orders are recovering, as we continued to demonstrate shipment reliability. EBITDA was impacted by the lower volumes, as well as higher rubber wood pricing.

The Corporate segment was down, due to the expected continued decrease of our non-cash pension credit, driven by our derisking of the plant and a continued amortization of market losses.

Slide seven shows the building blocks of adjusted EBITDA from the first quarter of 2011 to our current results. Within price and mix, price gains fully offset inflation at the company level. Mix was relatively flat. The mix on the EBITDA line was impacted by the relative strength in Residential segments in North America and by a decline in the New York and Northeast markets for Ceilings, as I mentioned before.

For Flooring, mix at the product level continues to be positive. As Matt mentioned, the high-end residential Resilient products are driving favorable mix in North America.

Continued SG&A and manufacturing cost reductions of $9 million partially offset volume headwinds, lower year-on-year earnings from WAVE and the lower noncash pension credit. The net manufacturing cost improvement of $5 million versus the prior year is inclusive of the $4 million of cost associated with the end of lockout at Marietta.

Now, turning to slide eight, you can see our free cash flow for the quarter is similar to the first quarter of 2011. Cash earnings are higher than prior year, driven by lower cash taxes, but are more than offset by greater capital expenditures associated with our plant construction projects. WAVE’s first quarter cash dividend reflects the partnership’s ability to operate with minimal cash balances, now that they have $25 million of undrawn capacity on the revolving credit facility. This over delivery versus earnings will not repeat. The $9 million in other reflects one-off cash benefits in the prior year.

Slide nine updates guidance for 2012. We are maintaining our sales guidance of $2.9 billion to $3 billion. Given sales performance in the first quarter and our sales outlook for the second quarter, we believe we may be toward the lower end of that range. With regard to EBITDA, we are reaffirming our previous range of $420 million to $460 million. At the midpoint of this guidance, we would realize a 17% improvement versus 2011, despite only modest sales improvement. This once again illustrates the power of our cost reductions.

We continue to expect free cash flow to be in the $50 million to $100 million range, down from $170 million in 2011, as we do not anticipate a special dividend from WAVE in 2012 and as capital expenditures rise related to our three China plants and the recently announcement Russia plant. The EPS range is down $0.10 from previous guidance, reflecting higher interest expense, driven by our recent borrowing.

Slide 10 provides more detailed assumptions going into our earnings guidance and includes the specifics on the second quarter. Our assumptions across most of the elements are largely unchanged from our February guidance. We continue to expect inflationary pressure between $25 million to $35 million from an array of items, including PVC and plasticizers, TiO2, waste paper, packaging, steel and other input materials and we continue to fully offset – we continue to expect to fully offset material inflation with price in 2012.

Driven by our manufacturing cost-out efforts, continued focus on improving mix and measured pricing to recover commodity inflation, we expect to improve gross margins by 100 basis points to 150 basis points. The last leg of our $185 million cost-out effort remains on track.

Our non-cash U.S. pension credit will decline to $12 million, as we reflect the final stages of our pension derisking strategy, update demographic assumptions and continue to amortize market losses from 2008. This is a change from February. We anticipate WAVE contributing equity earnings growth of up to $5 million, before cash taxes of roughly $10 million to $20 million in the year. And our estimate for the second quarter project sales to be in the range of $740 million to $780 million, up modestly versus 2011.

We expect the second quarter of 2012 to produce EBITDA of $105 million to $125 million, compared to $108 million on a comparable basis in 2011. We expect worldwide volume will be essentially flat, with Europe offsetting a rebound in wood sales and modest volume growth in North America building products. Manufacturing productivity will continue to be our core earnings driver in the second quarter.

As you can see, much of our year-over-year improvement will occur in the second half of the year, which reflects the abnormal pattern of our 2011 earnings, when more than 53% of annual EBITDA was earned in the first six months of the year. Since 2009, it has been much more typical for us to earn closer to 55% of our annual EBITDA in the second half of the year and our 2012 plans and guidance reflect this.

Also, keep in mind that the second half of 2011 included $15 million of costs associated with our negotiations and contingency settlements that occurred in the second half of 2011, and we will lap those in 2012. Our capital spending range is unchanged. Lastly, we now anticipate $10 million to $15 million in EBITDA adjustments associated with announced actions. This up from previous guidance, as it now incorporates expense associated with the closure of our previously idled Mobile, Alabama Ceilings plant. Matt mentioned the special dividend and that was partially funded by additional borrowing of $250 million.

I want to elaborate on the point for a moment and provide more details. Given the favorable conditions in the capital markets in the first quarter, which was a factor in the timing of the dividend, we were able to borrow the additional $250 million by increasing the term loan B portion of our existing credit agreement without increasing pricing. We continue to borrow under the term loan B at LIBOR plus 300 basis points with a 1% floor.

You should note that we subsequently swapped this additional debt from floating to fixed for the term of the loan, effectively paying just over 5% interest on this new debt. Close to the dividend, we are right in the middle of our targeted net leverage ratio of two to three times trailing adjusted EBITDA and our credit ratings were reaffirmed.

We are disappointed with our sales results, but pleased with our overall EBITDA performance on the quarter, given the labor and inflation headwinds and the tough base period comparison. In spite of issues with our wood service levels, which we are addressing, we seek slightly stronger residential demand in the months ahead, but commercial markets worldwide continue to be a challenge. You can be confident we are doing all we can to manage the areas we can control to deliver strong and sustainable shareholder value creation.

With that, I will turn it back to Matt.

Matt Espe

Thanks, Tom. This is an uneven recovery. Many parts of the global economy need to heal and this isn’t happening evenly or predictably. We entered 2012 expecting minimal help from the macro economy. Outside of China and other emerging markets, we expected modest GDP growth at best and slightly negative GDP in the euro zone, which would have translated into a flat commercial opportunity in North America and a decline in Europe.

We expect the new home starts to be about 700,000 in the U.S., with multi-family growing faster than single-family and favorable residential renovation trends. Our view of the commercial markets in the Eurozone and the public sector in North America is slightly more negative than it was a few months ago, but our Residential outlook is slightly more positive.

We remain focused on driving increased profitability, even in difficult market conditions, as a bridge to growth.

So thank you very much for your time today. And with that, we’ll be happy to take any of your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Kathryn Thompson with Thompson Research Group. Please proceed.

Kathryn Thompson – Thompson Research Group

Hi, thanks for taking my questions today. First is on Ceilings, two somewhat tied together. First, how much did a softer Europe impact ceiling demand in Q1 and also, we know that there is a February mid-single digit price increase for building products. Will this be enough to offset cost increases and what can we think in terms of expectations for a typical lifetime for this increase in tax numbers?

Matt Espe

Kathryn, hi, it’s Matt. We didn’t see – the Ceilings performance in Europe from a volume perspective really didn’t affect our revenue in the first quarter. Again, it’s our expectations. I mean most of pressure we saw in the first quarter from a volume perspective, I think Tom mentioned in his remarks, were in the U.S. and most of those were related to kind of a softness in the Northeast market. Where we continue to see a very robust Russia, CIS and for architectural specialties in particular, fairly strong Middle East.

Tom Mangas

Yeah. And just we were – so relative to the March miss versus our guidance, Europe was not a driver, but relative to prior year, Europe was down and Ceilings about 3%. On the point on recovering commodities, yes, I mean, I think we feel bullish that the pricing we’ve taken last year and continuing through the increase we took in the first quarter will continue to keep us at pace with inflation that we’re seeing across the building product input materials.

Kathryn Thompson – Thompson Research Group

Great. Thanks very much.

Tom Mangas

Thank you, Kathryn.

Matt Espe

Thanks, Kathryn.

Operator

Your next question comes from the line of Bob Wetenhall with RBC. Please proceed.

Robert Wetenhall – RBC

Hey, good afternoon.

Matt Espe

Hey, Bob.

Robert Wetenhall – RBC

Could you guys provide a little bit more color in terms of what’s happening with the wood flooring business and is there – should we be anticipating that some of the issues that you faced in the first quarter are now fixed? And accordingly, should we be looking for better sales volume and stronger margin performance in 2H?

Matt Espe

Yeah. Bob, it was a combination of a couple of things. We took inventory down at the end of last year and early this year and frankly, had much stronger demand in wood than we had forecast or expected. Overall, we saw strength in resi in the fourth quarter last year and continue to see it in the first quarter this year. So we’re ramping, we need to get the inventory in place.

And then we had some yield issues in one of the plants. Frank expects or anticipates that the service issues will be resolved in the quarter, that we’ll be back within the quarter in terms of our regular service levels. We are looking at a stronger wood year than we had originally thought. So we’re optimistic that we’ll continue to see the strength in the balance of the year. Frank, I don’t know if you want to add anything or...

Frank Ready

No, that’s well said. And to your point earlier, Matt, we’re adding crews in three of our plants.

Matt Espe

Good point.

Frank Ready

That will be added beginning May 1, really throughout the month in May. So we should see an appreciable improvement as we go through the second quarter.

Robert Wetenhall – RBC

That’s helpful. On – just a follow-up question, are you guys comfortable in terms of progress with your cost reduction program and the pace of development in the new plants you’re building?

Matt Espe

Yes. At this point, we are confident in the incremental savings this year, that $185 million total and the plants are on track, no issues there.

Robert Wetenhall – RBC

Okay. Thank you very much.

Matt Espe

Thank you.

Tom Mangas

Thank you Bob.

Operator

Your next question comes from the line of Rodny Nacier with KeyBanc Capital Markets. Please proceed.

Rodny Nacier – KeyBanc Capital Markets

Hello, everyone.

Matt Espe

Hey, Rodny.

Rodny Nacier – KeyBanc Capital Markets

So my first question is on the Wood business. Just with some of the shift that you’re adding to meet demand, in the past, you’ve spoken about that business being able to handle some incremental capacity with the currently staff. So could we get a utilization update just in terms of fully crewed and how much incremental demand you think that business could handle with the increased head count you’re bringing on?

Frank Ready

Yeah, Rodny, this is Frank. With the Incremental crews we’re adding, we will have no issue at all with our current outlook for the year. In addition to that, we have even more upside with additional crews we could add throughout the network to support next year and beyond. So at this point, we feel very good about the three crews we’re adding. We feel like it puts us in a great position to support the growth we anticipate this year. And we have more upside in terms of additional crewing that we could add upside in terms of additional crewing that we could add to support 2013 and 2014.

Rodny Nacier – KeyBanc Capital Markets

Thanks, Frank. And in the past, you said, I believe the incremental margin in the wood business is 25%. Would that be the case still with some of the crews you’re adding on this year?

Frank Ready

Yeah, I think that’s fair.

Rodny Nacier – KeyBanc Capital Markets

Okay. And on the Resilient business in Europe, it looks like sales were down in the double-digits and you had mentioned some divestitures impacting that number. How – what would wood sales have been, excluding the exited product lines and geographies?

Frank Ready

Just based on the core markets, it would have been down approximately 11.5%, 12%.

Rodny Nacier – KeyBanc Capital Markets

11.5% to 12%. Okay and the building products unit was down in Europe as well in the low single digits. So I’m just trying to get a sense of, if I’m thinking about the European market for Armstrong, which, I guess, business is more reflective of what we can anticipate for 2012, down double-digits or down single digits?

Frank Ready

Let me try to answer that, maybe let Vic comment as well. But there’s a – the reason that comparison is tough is because of the geographical mix difference between the Flooring and the Ceilings business. The Flooring business, Frank’s business, is centered in the Eurozone and thankfully, it’s centered in the Germanic countries, Benelux and Nordics, so we’re avoiding some of the pressure you see in Southern Europe.

But Frank doesn’t have a – our Flooring business doesn’t have a big presence in Russia or the Middle East. Our building products business, Vic’s business, by comparison, has a significant presence in both Russia and the Middle East and we’re seeing – and we report that through our European segment obviously and we’re seeing much stronger growth there.

So if you compared our building products business in the Eurozone to the Flooring products in the Eurozone, they’re similar. The relative performance – the relative strength in the building products business versus flooring really is as much related to our mix in Russia and the Middle East as it is to anything going on within the Eurozone.

Tom Mangas

If I could add to that, the segments in which these businesses sell into, I mean, the Flooring business in those markets largely sell into education and healthcare versus office. So education and healthcare are obviously more state-funded, state budget controlled. And so physical austerity impacts the ability for Flooring to sell in, whereas Ceilings, that market mix is also heavily office-dominated in the segment for our products and that’s more privately funded.

Frank Ready

Yeah, that’s a very good point. Our building products business isn’t as related – isn’t as dependent upon government spending as the Flooring business is within the Eurozone. Of course, that’s what – that where we’re seeing the macro pressure. That’s a very good point.

Rodny Nacier – KeyBanc Capital Markets

Thanks. That’s very helpful and both businesses have pretty tough comps in the second quarter. Would that be mostly tied to currency?

Matt Espe

Well, the first quarter comps were challenged. We had a very strong quarter last year across the board.

Tom Mangas

We haven’t provided any guidance on second quarter by segment level.

Rodny Nacier – KeyBanc Capital Markets

I was looking more at the European Resilient and the European building products segments. They were up – they were down 6% in Resilient, but up 16% in the building product business and would that have been tied to currency?

Tom Mangas

You’re talking, I’m not tracking, are you talking second quarter?

Rodny Nacier – KeyBanc Capital Markets

The second quarter, yeah, of 2011.

Tom Mangas

Yeah. So the – it looks like you are looking at currency affected numbers, yes. So what I have on an actual FX would be plus 15% on Europe building products and minus 5% on Flooring, with currency reflected. On the absent – with the absence of currency, Europe was up 4% in the prior year second quarter. Europe was down 15% prior year second quarter on Flooring. Again, we were going through massive product exits in the Europe Flooring last year.

Tom Mangas

Okay, all right. Thank you, guys.

Tom Mangas

Thank you.

Matt Espe

Thanks, Rodny.

Operator

(Operator Instructions) Your next question comes from the line of Mike Wood with Macquarie. Please proceed.

Mike Wood – Macquarie

Hi, good afternoon.

Matt Espe

Hi, Mike.

Mike Wood – Macquarie

You said the building product margins had a negative mix shift on margins. Can you just quantify that and talk about how much of the decrementals year-over-year were from mix versus cost inflation. And would you expect that to bounce back next quarter?

Matt Espe

Well, the mix effect was geographical, so in the Northeast – the Northeast portion, Northeast region in the United States happens to have our richest mix in the building products, so obviously, within – the margins would follow. We’re not getting into regional level price over inflation performance, but as we said, I mean, we continue to get price over inflation. So, the margin pressure seen was largely mix. There really wasn’t an inflationary component to the margin issue that we saw in the first quarter.

Mike Wood – Macquarie

Okay. And then in wood, you’d mentioned that big box customer trends were worse than the independent retail on the press release. Do you get point of sale information? Can you tell us whether there was destocking or what trends you saw at point of sale at the big box?

Tom Mangas

Yes, we do get point of sale information, and in essence last year, several of the big box customers were running in large promotional kind of end-cap activities that they did not repeat first quarter of this year. So, that really drove the primary negative comparison year-on-year. Conversely in the independent channel, you saw an uptick in new construction as well as general remodel/replace activities. So, that was positive year-on-year.

Mike Wood – Macquarie

Great. Thanks.

Matt Espe

Thanks, Mike.

Operator

Your next question comes from the line of Stephen Kim with Barclays Capital. Please proceed.

Stephen Kim – Barclays Capital

Thanks very much, guys. First question relates to growth opportunities. I guess in your comments, you made – you indicated that your outlook for U.S. residential was a little bit below, or the business was slightly more positive than you expected and you thought Europe was a little slower than you expected, but just slightly.

And I’m trying to square that with your comment that in wood products, you kind of got caught flatfooted. Obviously, the volume came in – the requests came in a lot faster than you were expecting. That would seem to suggest that your outlook for U.S. resi was significantly lower in wood than what you actually saw in terms of demand.

And so, I just wanted to see if you could clarify that for me in terms of your reality versus your expectations, and if that has any ramification for what you intend to do in terms of investing in things related to U.S. resi over the next six months to a year?

Matt Espe

Well, I think it’s all a matter of – it’s all relative, Stephen. I mean, we saw a slow but gradual increase in demand in the fourth quarter. We forecasted the first quarter, we positioned the inventory what we thought was appropriately. And then two things happened, the demand came in higher than we expected, so we expected an increase in demand to continue into the first quarter and the balance of the year, as reflected in kind of our outlook. The increase in demand was actually greater than we anticipated and exceeded the inventory we had in position. At the same time, we had some throughput issues in one of our plants. So those two items sort of conspired against us in the first quarter.

At the same time, we were expanding – as Frank has said, we’ve expanded our capacity by adding three new shifts track. At this point, we think that plus the corrective actions Frank has in place on the productivity or output challenges we had put us in pretty good position for the balance of the year. We are able to flex up as demand flexes up without significant investment. The nature of the investment, if necessary, would be a few more shifts.

So we’re not – we don’t have to, there’s no CapEx required. There is no plants that would sort of come off – come back online or anything like that. So, the good news is, we are seeing strength in the resi market. We expected some of that and it’s slightly better than we expected and that’s coming through in not only the wood business, as again, that will be corrected in the quarter. We’re also seeing relative strength in residential Resilient Flooring as well.

Stephen Kim – Barclays Capital

Right. That’s really where I was kind of going with it, is whether there was some read across to actions that you might take, anticipating some strengthening in the resi Resilient. Can you also give us an update on how demand trends are faring for your – in the markets where you are adding capacity?

I’m thinking particularly your Chinese flooring plant, but also if you could just comment more generally about how demand is shaping up in these markets, if they – how they’ve continued in the place where you’re adding capacity?

Matt Espe

I mean, in China, as you know, we’re building two flooring plants and a ceiling plant. The first flooring plant comes online later this year, the first ceiling plant early next year and the second flooring plant later next year.

There are no significant changes in the demand outlook as it relates to those three investments. Those investments are serving China demand and beyond that, Asian demand, so that would also serve demand that we would see in India, for instance.

But there is no – there is nothing on the horizon that causes us any concern about the demand. I would submit – I think we’ve said this before, in some ways, these plants are almost late. The demand is – the demand outlook is pretty robust.

The government continues to invest in healthcare, continues to invest in education. So we – that demand seems fairly robust. So we’re very optimistic that when these plants come online, we’ll be able to fill them

Stephen Kim – Barclays Capital

Great. Thanks very much, guys.

Matt Espe

Thank you.

Operator

Your next question comes from the line of John Baugh with Stifel Nicolaus. Please proceed.

John Baugh – Stifel, Nicolaus

Good afternoon and thank you. I wanted to – it sounds like vinyl is a little stronger. Is that true in sheet or is this LVT working? And then, how would the ability to get pricing, which I know has been difficult, particularly in the resi market, be influenced perhaps by improved volumes?

Frank Ready

John, this is Frank. No question, LVT is stronger than sheet. They’re both positive on the quarter. So I think that’s more reflective of the underlying demand and improvement in some of the segments, like new construction.

So no question, LVT continues at a very, very healthy pace, but we’ve also seen growth in sheet vinyl as well. In terms of inflation and price, things have quieted down a quite bit. The inflation has somewhat stabilized for resilient raw materials, except for TiO2, and there has been no change in dynamics in terms of price versus inflation, from what we’ve historically realized.

John Baugh – Stifel, Nicolaus

Okay. And then back to the wood again, just for clarification where are you seeing the strength. Is it single-family new build, is it remodeling activity? Why the increase?

Frank Ready

Yeah, really, in the two segments you reference. Obviously, wood doesn’t really go into multi-family at all, but where we’re starting to see some pickup is kind of the opening and mid-level new starts for single-family. And then as I said, remodel replacement, it’s not robust, but we’ve seen some pickup year-on-year in that segment as well.

John Baugh – Stifel, Nicolaus

Great. Thank you.

Tom Mangas

Thanks, John.

Operator

Your next question comes from the line of Keith Hughes with SunTrust. Please proceed.

Keith Hughes – SunTrust

Thank you. You had mentioned in the prepared statement about an air pocket in March in commercial. I assume you’re talking about U.S. Is that correct?

Matt Espe

Yeah, Keith, yeah. It’s what we experienced here in the U.S.

Keith Hughes – SunTrust

And so what have you seen over the last six weeks in terms of orders? What kind of order of magnitude, what are you seeing there?

Matt Espe

Yeah, well, April, we see early part of April look a little bit like March. We’re seeing relative strength, though, in terms of loading of orders for May and June. Backlogs for the second half of the year, to the extent we have visibility of those, are building. So April looked a little bit like a continuation of March, but as we look in the second half of the quarter and the second half of the year, we’re relatively confident and we’re confident that we will be able to land some place in that range.

Keith Hughes – SunTrust

That’s kind of mid-single digit growth or worse or better than that?

Matt Espe

Well, I mean we are guiding sort of 2.9% to 3%, and as Tom said, we’re – because of the softness in the first quarter, specifically March, we’re probably near the lower end of the 2.9%, which would be about 3% growth over last year. The high end of the range is about 6%.

Keith Hughes – SunTrust

Okay. Switching to flooring, Frank, and the January, February were better months, March is not as much, it seems like in the industry. What’s kind of your read on the residential flooring sales over the last sort of six weeks to eight weeks?

Frank Ready

Yeah, residential, Keith, it did soften slightly in March, but honestly from our perspective, not to the level of being concerned. The softness we saw in Resilient was more on the commercial side, where education most notably has really slowed down. And the activity related to public investment just isn’t at the levels that we anticipated or that we saw last year. So that was a fairly significant driver in March. Residential, it did slow down some, but not enough to be a concern at this point.

Keith Hughes – SunTrust

So still running positive year-over-year?

Frank Ready

Yes.

Keith Hughes – SunTrust

And then finally, if we talk about the hardwood orders–

Frank Ready

Yes.

Keith Hughes – SunTrust

The good orders you saw, was that back-end of the quarter related – back-end of the quarter weighted?

Frank Ready

Yes, the orders in wood got better as the quarter progressed, started out pretty good and got sequentially stronger.

Keith Hughes – SunTrust

And you started adding the new capacity here in April, is that correct?

Frank Ready

Yes, excuse me, no, May 1, the first shift comes on. Then we have a shift coming on two weeks later and one two weeks after that. So all three crews will be operational come end of May.

Keith Hughes – SunTrust

All right, thank you.

Frank Ready

Certainly, Keith.

Operator

Your next question comes from the line of Dennis McGill with Zelman & Associates. Please proceed.

Dennis McGill – Zelman & Associates

Hi, just the first question on wood, it’s not clear. Is the business that was lost due to the service issues in the first quarter gone or is that delayed?

Frank Ready

No, it’s delayed. We’re carrying a significant order balance for stuff we could not ship in March that will ship as we restore our service position in the second quarter.

Dennis McGill – Zelman & Associates

Okay. And then I guess just bigger picture, you guys have done a lot of work on the cost structure and realizing that the manufacturing footprints changed, the capacity has changed between this and the service disruption in cabinets. You wouldn’t normally expect to be caught short this stage of the cycle.

So, just curious as you think through sort of the cycle and how it could unfold, could you maybe just talk through where you are capacity across the business, how much incremental demand you can absorb in the various businesses? And then just maybe big picture, sort of confidence in the footprint as it existed, a) to make sure that any other disruptions wouldn’t be material as you think about residential could turn pretty quickly, it has in the past, making sure that you are not in the same position to potentially lose demand as you recover here?

Matt Espe

That’s – this is Matt. I guess a couple of comments. Number one, the good news is, we did forecast demand increasing a little stronger than we thought, as Frank says we’re able to catch up relatively quickly and we didn’t experience significant loss of demand or orders, if any at all. We have plenty in the wood business and we can add and flex capacity up by adding crews in our plants and that’s facilitated by a lot of the lean work that got done in the last couple of years, a lot of investment in automation. So, in terms of what I think, we’re in very good shape. Resilient, resi resilient plenty of capacity there.

So, as we think about residential demand increases in North America, we’re relatively confident that we’d be able to quickly flex up, if necessary. Again, we expected an increase in demand this year and planned for it. So, we’re – it’s not like we’re caught completely flatfooted, it’s just little stronger than we expected in one segment.

The way we think about and the way we’ve talked about our ability on a more macro basis across the world from a footprint perspective is that if you count the plants that we’re adding in Asia, but not the one in Russia yet.

But if you count the plants we’re adding in Asia and think about demand creation on a dollar basis, we’re thinking we could flex up between $4 billion and $4.5 billion in revenue from our base today to call it $2.8 billion to $2.9 billion. So, without adding footprint, without any significant CapEx at all, we can flex up to, again, $4 billion to $4.5 billion worth of demand.

Dennis McGill – Zelman & Associates

Okay. And I guess if I could just sneak in one on the Ceiling side. If I remember correctly, last year, the education business was very soft. And just curious, you made a comment that, I think education was down in the Resilient business. I’m not sure if that’s also true on Ceilings, but what your view be this summer would be down again potentially on top of that or the easy comps allow you to be relatively steady?

Matt Espe

Okay. Our outlook now on education in the U.S. market is stable to what it was last year, not any worse than last year, but we’re not counting on getting any better than last year’s, either.

Dennis McGill – Zelman & Associates

Okay. Thank you, guys.

Matt Espe

Thanks.

Operator

(Operator Instructions). And your next question comes from the line of Jim Barrett with C. L. King and Associates. Please proceed.

Jim Barrett – C.L. King & Associates

Good afternoon everyone, Frank, I think this is a question for you. In the wood business, as it relates to price, with demand improving with Armstrong’s temporary inability to meet demand, I would have thought pricing would have been fairly solid. Can you sort of give us a current snapshot on what’s happening on the pricing front?

Frank Ready

Yeah, sure. As you know, lumber prices have come down dramatically over the last 12 months to 15 months.

Jim Barrett – C.L. King & Associates

Yeah.

Frank Ready

We have seen as a result of that some pressure on wood. But in the quarter, it was very small. And so, there’s no significant dynamic either way in terms of pricing action right now or significant change from what we saw last year.

Jim Barrett – C.L. King & Associates

And is the same true for mix in wood as well?

Frank Ready

Yeah, mix – the only impact on mix is segment. So as an example, if new construction is stronger than everything else, that tends to be a lower mix product. But within segments, there’s no significant mix dynamics going on.

Jim Barrett – C.L. King & Associates

Okay, thank you very much.

Frank Ready

Sure.

Tom Mangas

Thanks, Joe.

Operator

Your last question comes from the line of David MacGregor with Longbow Research. Please proceed.

David MacGregor – Longbow Research

Yes, good afternoon, everyone. Can you just talk about the West Virginia mineral fiber plant coming on? You said it will start to have a positive impact in 2Q. Is there any chance you can quantify that for us and what would it represent for full year 2013?

Matt Espe

Well, it’s coming up to speed. So the contributions in the second quarter will be minimal as we ramp up.

David MacGregor – Longbow Research

Okay.

Matt Espe

The benefit of the – it’s coming up about on speed and on time, so that’s baked into our expectations for the second half.

Tom Mangas

That’s right. We’ve not quantified the specific year-by-year contribution. This will show up to us as lower raw material costs, so that will be how appears on the bridge. And you can be sure we justify the project with attractive economics, but that’s about all I think we would say at this point.

David MacGregor – Longbow Research

Okay, this isn’t in the $35 million of restructuring savings this year?

Tom Mangas

It is not a building block to the $35 million, no.

David MacGregor – Longbow Research

No, okay. Second question is just again on the wood, it sounds like it’s a timing issue as you responded to the earlier question. That would suggest that your second quarter production ought to exceed your sales rate and therefore, you should have lower unit costs and therefore, better margins. And I’m just wondering if that’s built into your guidance at this point or is that a possible source of upside?

Tom Mangas

You’re talking – can you say that question again?

David MacGregor – Longbow Research

Well, on the wood business, you got a backlog that you’ve got to clear up here. It sounds like as you answered the previous question, it’s a timing issue and that you should address that in the second quarter. To that extent, your production levels would exceed sales and I’m just wondering if therefore, you’ve got lower unit costs coming here in the second quarter than you would normally see and as a consequence, better margins?

Tom Mangas

Sure, sure. I think that’s a logical conclusion and all I’d say is you should assume that those – we’ve done the math and it’s reflected in our second quarter guidance.

David MacGregor – Longbow Research

That was the question. Thanks very much.

Operator

I would now like to turn the call over to Matt Espe for closing comments. Please proceed.

Matt Espe

Thank you. Thanks, everybody. The environment continues to be a challenge. The leadership team will continue to execute against the actions and the items that are under our control, and everybody here is focused on continuing to build a stronger Armstrong. So with that, I want to thank you very much for your interest and your time and wish you everybody a good day.

Operator

Ladies and gentlemen, that concludes today’s conference. We thank you for your participation and you may now disconnect. Have a great day.

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