Armstrong Flooring's (AFI) CEO Don Maier on Q4 2017 Results - Earnings Call Transcript

Armstrong Flooring (AFI) Q4 2017 Earnings Conference Call March 6, 2018 11:00 AM ET

Executives

Doug Bingham - Investor Relations

Don Maier - Chief Executive Officer

Ron Ford - Chief Financial Officer

Analysts

Mike Wood - Nomura

Keith Hughes - SunTrust

Alvaro Lacayo - Gabelli & Company

Dillard Watt - Stifel

Scott Rednor - Zelman

Operator

Greetings and welcome to the Armstrong Flooring Fourth Quarter and Full Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Doug Bingham, Vice President, Treasury and Investor Relations. Thank you, sir. You may begin.

Doug Bingham

Thank you for joining us today for Armstrong Flooring’s fourth quarter and full year 2017 earnings conference call. Today’s call is hosted by Chief Executive Officer, Don Maier; and Chief Financial Officer, Ron Ford.

We trust you have seen our press release this morning. Additionally, a copy of the slide presentation to accompany this call is available on the Investors section of our website at www.armstrongflooring.com.

I refer you to Slide 2 of that presentation and 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 Flooring, please review our SEC filings. Forward-looking statements speak only as of the date they are made and 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 to the most directly comparable GAAP measures is included in the press release and in the appendix of this presentation.

With that, I will now turn the call over to Don.

Don Maier

Thank you, Doug. Good morning, everyone and thank you for participating on our fourth quarter 2017 earnings call. Today, I will discuss our operating highlights and business activity, Ron will then cover additional details on our financial results and outlook before I offer closing comments. After prepared remarks, we will open up the call to answer your questions.

Turning to Page 3 which provides some key highlights and updates. Fourth quarter 2017 adjusted EBITDA improved by 4% to $5.7 million compared to $5.5 million in the prior year. This progress was a reflection of the number of targeted productivity and cost control initiatives that we have taken to improve our competitive position amid continued market pressures on net sales. We are actively pivoting our product portfolio towards more attractive categories, such as luxury vinyl tile, or LVT, which continued to grow double-digits and we are driving innovation based in initiatives across our platform, including the extension of our Diamond 10 technology across our portfolio. The integration of our acquisition of the Mannington Mills’ vinyl composition tile or VCT asset is on track and we are excited to see the higher margin category contribute more meaningfully to results.

During the fourth quarter, we also addressed capacity in two of our legacy categories with the closure of two wood flooring plants and the expansion of LVT production by repurposing a portion of a resilient sheet plant, a major innovation milestone, the first in our industry. We are pleased with all these steps we are taking in our business, which allowed us to end the year in a stronger position than a year ago.

Full year adjusted EBITDA of $65 million compared to $83 million was primarily a reflection of challenging top line dynamics attributable to declining trends in our legacy categories that we are seeing over multiple years along with higher input costs, which were not fully matched by pricing actions due to stiff competitive pressures. That said, through better manufacturing costs and G&A savings, we were able to offset more than two-thirds of the combined adjusted EBITDA impact from legacy portfolio market pressures and higher than expected input costs.

We ended the year with a strong balance sheet position helped by a stronger free cash flow in 2017, particularly in the fourth quarter, which combined with cash on hand allowed us to repurchase approximately $40 million worth of shares throughout the year. We are actively working to build value in our company through all avenues. Our conservatively leveraged balance sheet and positive free cash flow generation gives us the flexibility to accomplish this through a range of initiatives.

Moving on to our strategic priorities on Page 4, we have a number of operational enhancements underway to address sustained challenges in our legacy categories and to reweight our portfolio towards more attractive categories to deliver on our medium-term goals. During the past few years, these strategic priorities have guided our investments and actions to help us improve our competitive position and drive transformative growth. In LVT, we continue to produce double-digit sales growth killed by innovation, new product introductions and our expanded supply capabilities. We grew LVT as a percent of our resilient sales to 25% in 2017 compared to 15% in 2015. This strong performance is a direct result of better designs and structures that validate our innovation efforts and our focus on this category.

In January at the main industry tradeshow, SURFACES, we debuted several new products including alternative planks, which has beautiful visuals and is grabbable like ceramic, but is warmer underfoot and faster to install. And Rigid Core Elements, which is a high-value Rigid Core product in a rapidly growing market segment. We have an exciting lineup of products in the next generation of LVT, including the continued rollout of Prism which has superior debt resistance and sharper visuals. Overall, we have one of the broadest and most compelling LVT portfolios in the industry.

In October, we began producing LVT from our second domestic plant made possible through technological advancements that allowed us to partially convert an existing resilient sheet plant. This reflects our commitment to innovation and leadership in the LVT category where we expect to sustain our strong growth rates through our industry-leading designs and structures. Additionally, the residential portion of the resilient sheet category has seen accelerating conversion of consumer preferences into LVT. So the repurposing of a portion of this plant delivered strategic benefits to both our resilient sheet capacity utilization and our LVT margin structure at the entry level price points, such as our American Personality’s line. While this expanded production capacity represents on a small portion of our current LVT sales, we are focused on pursuing additional opportunities to take advantage of rising LVT demand with existing capacity. We believe this approach gives us greater flexibility in a capital efficient way to expand our LVT production.

We are actively working on a number of promising avenues to leverage our existing infrastructure to produce Rigid Core products domestically. We look forward to providing updates on our progress on future calls. Looking at our broader portfolio continues innovation and durability and design across all major wood and resilient categories remains a central theme of our strategy. This focus will allow us to improve our next of sales the higher growth products while maintaining strong competitive positions in legacy categories. We have invested heavily in innovation based growth initiatives. In particular, we have made tremendous progress in expanding our Diamond 10 technology to numerous categories. This superior feature has gained exceptional market response and it advanced rapidly from LVT to resilient sheet and most recently to solid wood. Enhanced scratch and stain resistance offered by Diamond 10 technology is highly valued in wood for consumers actively look for products that can continue to look great after years of enjoyment.

Our new Paradigm wood product which have Diamond 10 technology won the Dealer Choice award in January at the Surfaces Trade Show which was voted on by independent retailers across the country, highlighting the excitement in the industry for these features. We are also pleased to be introducing Diamond technology on to VCT in 2018. VCT durability is critical and applying this technology to VCT will allow lower installation and maintenance costs along with an overall strength and value proposition to our customers. We are excited to continue adding this proprietary technology across our product categories and this platform approach to innovation has allowed us to rapidly enhance products across our portfolio. We are committed to winning with distribution and aligning ourselves with partners who are – has positioned to support our growth strategy.

Building on our previously completed 2017 actions, we have recently made some significant moves to grow sales and market share by leveraging our distributor relationships. First, in January, we announced the planned expansion of territories for three of our distributors, as part of our strategy to build partnerships and provide exceptional service throughout all channels. These distributors are great partners and we are enthusiastic about the energy and the dedication that they bring to their new territories. This change aligns with our goal to have the best distributors to serve our customers in these targeted channels and supports our efforts to grow our retailers and distributors as well as our own company. Second, in February we announced a plan to enhance our service to independent retailers by empowering distributors with increased responsibilities for marketing and merchandising of our residential flooring products. This will push the decision making closer to the customer and allow a faster response to local needs.

As distributors take on additional responsibilities in residential channels, we will be able to reduce some of our spending in these activities. We plan to use some of the savings to increase our investment in national retail and commercial accounts, specifiers, architects, designers and contractors. We also expect to enhance the funding we provide our distributors in support of our products so that we will get better share of wallet as they increase their focus on our products. In addition, we expect to keep some of the savings from increased efficiencies. We expect that the transfer of elements of our residential marketing and merchandising responsibilities to distribution will take a few quarters to complete. We expect to build upon these transitioning efforts to further improve our competitive positioning in the marketplace and achieve our goal of increasing service to our customers, while improving the cost efficiency of our business.

In our wood segment, in October we completed the previously announced consolidation of our wood flooring manufacturing network through the closing of two facilities, including a solid wood plant and an engineered wood plant. As a result, we entered 2018 with a more profitable growth foundation in our wood business. Our remaining capacity is more in line with current customer demand and able to better leverage productivity benefits realized across our wood flooring operations in recent years. In addition, we continue to work towards improving the margin profile of our engineered wood portfolio including sourcing more products as well as using a licensing model on the very low end as I will discuss later.

In our legacy categories, which mainly comprised our non-LVT products, we are actively revitalizing our portfolio to more effectively compete in our markets. In June 2017, we completed the previously announced acquisition of the Mannington Mills VCT assets which represents one of our most profitable categories within the hard surface flooring industry. The rapid integration in our VCT assets that’s been a great success so far, we are operating at improved capacity utilization levels in our VCT plant network as we layer in incremental volume using our existing production facilities and go to market structure. We continue to expect the acquisition to drive repeated benefits to our adjusted EBITDA beginning in 2018, having now fully ramped our production and selling efforts. In addition, we are taking further steps to revitalize our legacy portfolio. I previously, discussed our pioneering work in convert part of the resilient sheet plant to make LVT, which will also improve our capacity utilization. We have applied Diamond 10 technology to commercial and residential sheet to enhance our competitive position with minimal incremental investment. We also continue to drive productivity at our plants, so we have a cost efficient structure. And as Ron will discuss shortly, this was a major highlight during 2017.

In laminate, a non-core category which represents less than 5% of sales, we began migrating a portion of this category to a licensing model in place of the current sourcing model. This transition will occur throughout 2018 as the licensed product rollout to the marketplace and is expected to generate more attractive EBITDA margins on lower reported sales for the category, ultimately generating superior returns as compared to the prior sourcing model. We have discussed in prior calls that we also plan to a licensing model for a proportion of engineered wood and we will be able to apply the lessons learned in laminate to engineered wood.

Overall, we are driving improvements in each of the flooring categories we serve even as we work to adjust our cost profile we continue to pursue innovation across multiple categories with the goal of driving sales growth by providing an even more competitive lineup of winning products for our customers. While we still have a lot of work to do, we are proud of the dedication of the entire Armstrong Flooring team and strengthening our position as the leader in hard surface flooring.

I will now turn the call over to Ron to walk through the details of our financial performance.

Ron Ford

Thank you, Don and good morning to those on the call today. I will begin with a review of our fourth quarter financial results on Page 5. In resilient, net sales were essentially flat due to stronger volumes in LVT and VCT along with a favorable mix, which more than offset lower price across most categories. The improvement in VCT sales was a result of the recent acquisition of the Mannington VCT assets. Double digit volume growth in LVT with strong contributions from both sourced and manufactured products provided the positive impact on mix. The shift in consumer preference to LVT continued to pressure the legacy categories, which still comprises the majority of our resilient segment sales. Additionally, as mentioned on prior calls, residential sheet shipments were significantly impacted by lower sales in the strategic retail customer channel.

In wood, net sales of $105 million, were down 7.9% compared to the prior year due to the lower volumes. The solid wood decline was impacted by challenges in the strategic retail customer channel which we expect will continue to pressure comps to the first half of 2018. And engineered wood will continue to face challenges from import competition which has put pressure on our top line. Total adjusted EBITDA increased 4.4% to $5.7 million compared to the prior year quarter, with the increase primarily attributable to lower manufacturing costs and SG&A. It is more than unfavorable net sales contribution and significantly higher raw material input cost inflation.

Resilient adjusted EBITDA was $5.8 million compared to $5.3 million in the prior year quarter, largely reflecting improved manufacturing costs and lower SG&A. We experienced lower unit costs in our LVT manufacturing operations and strong productivity throughout our network. As we indicated on our last call, raw material inflation was significant in the fourth quarter and costs continue to rise, we are experiencing increases in energy, transportation, raw materials and operating costs, which we expect to continue rising throughout 2018. To offset some of these inflationary impacts, we have announced 3% to 6% price increase effective in April 2018 for some of our resilient products, particularly our legacy commercial products.

Wood adjusted EBITDA was essentially breakeven in both periods driven by the combined impact of lower net sales and year-on-year raw material inflation which offset production efficiencies and tighter SG&A spend. Lumber costs remained fairly steady in 2017, but unfavorable on a year-over-year basis throughout the year. We expect further increases in lumber costs in 2018. In response, we have announced a 5% to 7% price increase on our solid wood products which will be effective in the second quarter.

Turning to our full year results on Slide 6, during 2017 overall sales were down 5% as unfavorable market trends on our legacy portfolio impacted overall volume. Lower volumes in wood and residential sheet were partially offset by stronger shipments of LVT and VCT. Total adjusted EBITDA of $65.2 million compared to $83.1 million in the prior year. While the flow through of lower sales and significantly higher input costs were the primary factors impacting year-over-year EBITDA performance, we made tremendous strides on our manufacturing productivity initiatives across both segments.

Now turning to Page 7, we delivered our second year of positive free cash flow which improved to $19 million as compared to $17 million in 2016. For the full year, we invested $45 million in CapEx which for a second straight year was also below a run rate depreciation of roughly $50 million. The increase in CapEx from $37 million in the prior year wasn’t entirely attributable to 2016 investments paid for in 2017. During the fourth quarter, we closed to wood flooring facilities resulting in a cash charge of $4.2 million, while all other closure related charges were non-cash. Overall, we were pleased with our ability to generate free cash flow for the year.

During the year we completed the $36 million VCT asset acquisition and repurchased approximately 2.5 million shares of common stock worth $40 million, representing approximately 9% of shares outstanding. We ended the year with a strong balance sheet consisting of $47 million of net debt which places us conservatively below our longer term net leverage ratio of 1.5x to 2x and gives us the flexibility to invest in our ongoing transformational initiatives.

Turning to our full year 2018 outlook on Slide 8, during 2017, we continued to focus on controlling costs and realizing the benefits of targeted productivity initiatives. While top line challenges and competitive pressures impacted our 2017 results, we remain confident that our transformative steps put us on stronger footing for 2018. As such, we expect adjusted EBITDA in full year 2018 to be in the range of $70 million to $80 million driven by the initiatives and actions that we have highlighted. We have discussed previously many of the actions we have taken to improve our profitability including our investments in LVT and product innovation, the VCT asset acquisition, the wood plant closures and the SG&A realignment. In addition Don reference the increased efficiency we expect from the new distributor relationships as well as reductions in corporate overhead which we expect will be largely complete in the first quarter of 2018, the one-time charge of $3 million to $4 million and annualized savings of $10 million to $12 million.

We expect that input cost inflation will continue which will put pressure on margins to the extent we are not able to offset it to transactions or our continued productivity initiatives. In addition, we have reduced our incentive compensation in 2017 due to performance and we expect to reinstate at-risk compensation in 2018. Overall, our outlook for the full year 2018 adjusted EBITDA range assumes a combination of sales growth in the low single-digits and margin improvement year-over-year. Full year 2018 sales growth in the low single-digits will be weighted towards the second half of the year. In the first quarter, we expect sales to be lower year-on-year due to higher distributor inventories at year end 2017, particularly in the wood segment. Separately, while the new laminate license model as Don discussed earlier, the negatively impact full year on the top line by around 1% of total sales, the margin benefit is quite positive. We anticipate that our focus on growing categories, product innovation and strengthened distribution partnerships will allow us to accelerate sales in the second half which should more than offset the Q1 sales decline and the lower sales from the new laminate licensing model.

We expect our tax rate to be approximately 32% to 33% in 2018. Over the medium-term, our tax rate will drop to be more aligned with our federal plus state statutory tax rate at 25% under the U.S. tax reform as our un-benefited foreign losses decline as a portion of our overall income. With that said, on a cash basis, our net federal, state and foreign taxes are expected to be zero in 2018 as a result of federal NOLs. We are budgeting capital expenditures for 2018 to be in the range of $40 million to $45 million. Maintenance CapEx should be approximately 2% to 2.5% of sales. For the balance of the spending budgeted for high return investments consisting productivity projects with short paybacks or innovation projects where we expect the strong return. We anticipate that 2018 will be another year of positive free cash flow, in line with recent years. To grow our EBITDA margin over the medium-term, we expect free cash flow generation to increase as EBITDA increases. We expect in 2018 below our target leverage ratio of 1.5x to 2x EBITDA while preserving ample liquidity to invest in internal projects and other value enhancing initiatives.

I will now hand the call back to Don for closing comments.

Don Maier

Thanks Ron. Turning to Slide 9, 2017 was a year of numerous transformative initiatives which represents the building blocks for 2018. To recap our latest activities, we are expanding our LVT portfolio, extending Diamond 10 technology to legacy products, repurposing and consolidating spare capacity, licensing products and strengthening the distributor partnerships while controlling costs. As we have demonstrated, we are taking a disciplined approach to investing in our business with our technological acumen allowing us to implement many of these various initiatives while staying within our targeted CapEx spending levels. Beyond these examples, out of the many operational enhancements that we have underway, we have build additional value through effective deployment of share repurchases and acquisition activities.

These collective actions reinforce our commitment to achieve a 10% EBITDA margin by 2020 under a range of growth scenarios. We have a clear strategy with multiple levers to accomplish this goal. We believe we are taking the appropriate steps to improve our overall business performance through our strategic priorities. We are finding new growth opportunities while also taking the necessary actions to revitalize our legacy categories and operate more efficiently. We look forward to executing on all of her objectives as we build upon our strong brand and market leadership to drive shareholder return.

Operator, we are now ready to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from line of Mike Wood with Nomura. Please proceed with your question.

Mike Wood

Hi, good morning. Thanks for taking my question. First, I wanted to ask about the $10 million to $12 million annualized cost savings you called out in the release today, does that include the savings from the two wood plant closures in addition to the distributor program savings and overhead reductions?

Ron Ford

Mike thanks. No that’s in addition to the plant closures that we announced uncompleted in the – end of the last year, so that’s incremental, that does include the SG&A components that we took along with the go to market changes.

Mike Wood

Got it. So again congratulations on that 15% EBITDA growth midpoint of your guidance is the strong growth number, but if we look at the 2018 growth components for the $5 million to $15 million EBITDA growth, there is a lot of cost reductions that you previously called out in addition to the one today that you just mentioned, so correct me if I am wrong, but it looks like outside of those cost reduction benefits that profitability related to price cost volume is declining, is that the right way to think about it or are there a number of investments that are going in that are offsetting the growth from the low single-digit volumes that you are expecting?

Don Maier

Yes. So if you look at our EBITDA impact of the items that we have disclosed, things like the VCT acquisition, the plant closures, the SG&A actions we just mentioned, my guess was you are going to can be getting them something in your model into the tune of about $23 million to $26 million in improvements. Offsetting that then are other factors including the inflation that we are anticipating in both segments as well as the higher expected incentive compensation somewhat offset by our productivity initiatives to offset those headwinds. And while we don’t guide on the top line as well, we do expect low single-digit benefits from the top line 2018 as well.

Mike Wood

Got it. And on the VCT you had mentioned in your comments, I think you mentioned previously that that’s one of the more profitable segments for you, what is it about that segment that is that makes it an attractive segment within your portfolio and is this at all impacted by LVT and how?

Don Maier

So, yes great questions Mike. VCT, first of all has I think of very favorable industry structure and while we have seen a pretty consistent couple of percent reduction in square footage volume every year, we have also seen the ability to get price and realized price in this category. Its end applications are very unique and especially for very high traffic areas largely in education as well as the mass retail the product kind of is unique from anything else that is out there and it’s been in its durability and does so it’s I would say minimal impact of with the substitution of LVT. But certainly I think LVT is impacting all categories that I would say to a much lesser degree on the VCT side.

Mike Wood

Okay. Thank you.

Operator

Our next question comes from line of Keith Hughes with SunTrust. Please proceed with your question.

Keith Hughes

Thank you. I am going [ph] to ask about the change in relationship or I think you talked about your distributors particularly when them doing more the marketing and merchandising, will you be changing the margin relationship, will they be seeing more the value chain margin from the products as a result of the change of responsibilities?

Don Maier

Yes. Keith, thank you for the question. So two things that we have announced there to put in perspective, number one is we expanded the geographies for three of our distributors are as we dealt with a distributor that wasn’t delivering the share gains in growth that we were looking for. And so I think we have discussed that on previous calls and just wanted to highlight that we are – that we certainly take that very seriously we are resolute in making sure that we have the very best representation in all of our geographies. That is being further amplified by this go to market change where we are leveraging the relationship and the capabilities that our distributors have to be more efficient, more responsive of – to the retailers out there. And there are some nice economies as well. And so as I said in the comments we are taking a portion of that savings and we are increasing our investments where we need to be, I think, focusing for our distributor partners which is with the national retailers as well as anything across our commercial business. And then we will be increasing the margins for our distributors which will be further fueled for the share gain opportunities that exist with distribution. So, it’s a win-win. Distribution is extremely excited about this. And in fact it’s something that they have been asking for, for some time. And so we are pleased to be able to get, I think, everything positioned to be able to execute this. It will run over the next several quarters. So, this is not a flip of the switch. We want to be very, very mindful that no balls are dropped in the hand off here if you will.

Keith Hughes

So, if you look at your business with the distributors from a margin perspective from a Armstrong Flooring perspective, if this goes to plan, will your margins stay the same with those customers given the offsetting cost or will they go down a little bit?

Don Maier

Yes. So, largely the costs that are going away are fixtures, display, samples, the associated costs there. So, that’s on the SG&A line. It will be – we will be increasing than the co-op funds that we pay to the distributors. We are picking up those elements. And then as I indicated there is as well a fairly nice savings as well that we will be investing into the commercial side and putting some of it to our bottom line as well.

Keith Hughes

Okay. And final question, how much of your business does this impact?

Don Maier

So this would really be our entire residential business and maybe I’d ask Ron Ford to comment on what percent that is to make sure we get the right number out there. Ron?

RonFord

It’s – residential is about two-thirds of our business and of course the business that we do with the distributors is about also have two-thirds of our volume.

Keith Hughes

Okay. So it’s, I am sorry the two-thirds of the two-thirds, is that correct?

RonFord

It’s probably a good way to think about it. Gee, that’s probably a good way to think about it.

Keith Hughes

Because the difference within residential would be, I think that you supply direct to retailers?

RonFord

That’s correct.

Keith Hughes

Correct. Yes, okay. And as you look at the – you discussed the revenue number for the year. Do you expect to see the same kind of mix with positive VCT, positive LVT and continued pressure on sheet vinyl and I assume engineered woods?

Don Maier

Yes, same dynamics there, Keith.

Keith Hughes

Okay, thank you.

Operator

Our next question comes from the line of Alvaro Lacayo with Gabelli & Company. Please proceed with your question.

Alvaro Lacayo

Good morning, gentlemen.

Don Maier

Hi, Alvaro.

Alvaro Lacayo

I just had…

Don Maier

Alvaro will be your name correct there.

Alvaro Lacayo

Thank you. Appreciate that.

Don Maier

It never happens to you. Good to hear you, Alvaro.

Alvaro Lacayo

Thank you, thank you. I just have two quick questions. One I guess, I wanted if you guys could maybe dig into a little bit more detail on what sort of the raw material inflation impact will be from a number standpoint based on what you are seeing today? And then secondly, maybe if you could talk about just on the top line in 2017 if you sort of separate the strategic retail channel situation and other one-time items, where did you see sort of organic growth outside of those items and would you expect that to be the run-rate going into the second half of ‘18 once you sort of lap these strategic retail channels issues?

Don Maier

Great. I will take the second part of your question first and then I will have Ron comment on the inflation outlook. So, we saw growth really across all elements of our portfolio with the exception of wood and res sheet. As we have discussed on prior calls really excited as we continue to see very robust growth in our LVT category, as I mentioned, that’s now representing 25% of our resilient sales, up from 15% just 2 years ago. We have talked about the wood business and all of the actions we are taking there and something I think that’s important to kind of put things in perspective, our residential sheet business is now less than 10% of our total sales. So we have been actively shifting our portfolio into those higher growth areas, obviously VCT and the rest of the commercial lineup as well. So as we are dealing with those anchors that have been holding us back, that’s really now Al the propellers that we have going on the other categories to come through. And with that I will turn it to Ron for his comments on inflation.

Ron Ford

Thanks Don. I would – really I would say that we are seeing inflation in input costs as is the rest of the industry in both raw materials on the wood and resilient side as well as sort of ancillary inflationary costs. Transportation is one that a lot of this will call out this year as that market continues to tighten for a lot of reasons. While we don’t guide to inflation specifically, I think maybe the best thing I can do is point you to towards the price increases that we have announced on the resilient side and on the wood side is some indication is to the kind of inflation that we are expecting and hopeful to recover.

Alvaro Lacayo

Okay. Thank you very much.

Operator

Our next question comes from the line of Dillard Watt with Stifel. Please proceed with your question.

Dillard Watt

Thanks. Good morning. Just wanted to get a little more clarity on maybe some numbers of what the changes to the laminate business will do, is it a good way to think about it maybe flat or slightly up in terms of EBITDA dollars on of course on smaller revenue piece or how should we think about that?

Don Maier

Yes. So Ron like you would take that one.

Ron Ford

Dillard, I assume you are talking about licensing…

Dillard Watt

Yes.

Ron Ford

Yes. So first off, what we are talking about at this point is a very small number just to put it in perspective. If we outsource our – the laminate business we are talking about in 2018 would impact our sales about roughly like 1%, but the significant – have a significantly positive impact on our EBITDA as well as working capital.

Dillard Watt

Okay, great. And then what’s the right number to use just in terms of modeling number for pension expenses and is that cash or is that a non-cash expense at this point?

Ron Ford

Give me just a second. Yes. I think Dillard the best number I can – the best guidance I can give on that is going to be similar to prior years, recent years and it is non-cash.

Dillard Watt

Okay, great. Thank you. All my questions have been answered.

Don Maier

Thanks Dillard.

Operator

Our next question comes from line of Scott Rednor with Zelman. Please proceed with your question.

Scott Rednor

Hi, good morning. Don, I was hoping you could maybe just expand on the Stillwater repurposing and obviously there is a comment that you would like to expand that, can you may be dig in a little deeper there about what seems have gone according to plan or maybe even faster to plan and what you can apply more broadly?

Don Maier

Yes. This is something that we did announce last quarter on the Stillwater plant and a real tribute to our scientists of – that have figured out how to repurpose this residential sheet line to be able to manufacture LVT. We were able to do that literally within a number of months and almost no capital investment. And while it’s early in the market, we are very pleased with the reaction and the up-tick that we have seen to that. So a great story that not only helps to build out our domestic LVT capabilities and our focus on LVT, but as well by absorbing cost for us also helps to deal with having a better cost structure for our residential sheet production as well. So we are continuing to focus on incremental tranches of similar activities, largely focused on the rigid core rigid structures of LVT and doing a similar process of repurposing existing assets that aren’t being utilized, which again will get us to market quicker and do so with minimal capital investment. So, we don’t have anything to disclose at this time that I have gotten a lot of questions, so I wanted to be upfront, but that is clearly a strategy that we are deploying and really, really excited about some of the things that are in the pipeline.

Scott Rednor

Great. And in terms of the distribution realignment that you spoke to earlier, does that make those entities exclusive to your product in those categories?

Don Maier

No, it does not, where most of them are exclusive in most categories with us already. The two exceptions are wood and LVT. And so clearly, we are very focused on creating a economic models along with all of the other elements that we bring to the party that will help drive that alignment.

Scott Rednor

Got it. And then just quickly on the run-rate D&A of 50 do you guys still think you will have some noise next year that you run above it?

Don Maier

I will let Ron to that, but no, I do not see that, Ron.

Ron Ford

Don is right. It should be fairly consistent in 2018.

Scott Rednor

Okay.

Ron Ford

As it turns out, depreciation is declining amortization is increasing principally as a result of the Mannington acquisition we made last year.

Scott Rednor

Great, thank you.

Don Maier

Thanks, Scott.

Operator

Our next question is a follow-up question from Keith Hughes with SunTrust. Please proceed with your question.

Keith Hughes

Thank you. Just going back to the licensing move on laminate, is that something you would consider on some of other products, most notably in the hardwood side?

Don Maier

Yes, Keith, this is actually I think going to be an opportunity for us to learn, make sure there is not something we are missing here in the equation and then be able to take that model and replicate it. As I have indicated, I think there is at the very low kind of entry price points on engineered wood, there is just not enough margin for us and for distribution to be competitive in the market and yet it’s important to have a product there to be able to get in the home models and get the up-sale to our higher margin products. So, I think it’s going to serve as a model for us and I will be surprised if we are not able to take that learning and move it over to the engineered side of the equation.

Keith Hughes

Okay, thank you.

Operator

Thank you. Mr. Maier, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Don Maier

Well, great. I want to thank everybody for joining us today. We truly appreciate your interest in Armstrong Flooring and we look forward to updating you on future calls. Have a great day.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.