Ladies and gentlemen, thank you for standing by, and welcome to the Armstrong World Industries Q2 2015 Earnings Conference Call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to introduce your first speaker for today, VP of Treasury and Investor Relations, Mr. Tom Waters. You may begin, sir.
Thanks, Andrew. Good morning and welcome everyone. Please note that members of the media have been invited to listen to this call. The call is being broadcast live on our website at armstrong.com. With me today are Matt Espe, our President and CEO, Dave Schulz, our CFO, Don Maier, CEO of the Worldwide Floor Businesses, and Vic Grizzle, CEO of our Worldwide Ceilings Business. Hopefully, you have seen our press release this morning. Both the release and the presentation Dave Schulz will reference during this call are posted on our website in the investor relations section. I advise you that during this call, we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied.
For a more detailed discussion of the risks and uncertainties that may affect Armstrong, please review our SEC filings, including the 10-Q we 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. 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'll turn the call over to Matt.
Thanks, Tom. Good morning, everyone. On our call today, I'll provide an overview of our quarterly and year-to-date results and refresh our full-year guidance. I'll update you on conclusions we've reached with regard to our wood flooring business. I'll also provide a few new details on our business separation efforts. Dave will give you a detailed discussion of the financials and guidance. For the second quarter, reported sales of $633 million are down $26 million or 4% from the prior year. Almost the entire decline is due to foreign exchange movements, particularly in Europe. Adjusted EBITDA of $112 million is up $8 million from prior year. Year-to-date, reported sales of $1 billion, $184 million are down $65 million or 5% from the first half of 2014. Again, the majority of the decline is due to foreign exchange.
On a comparable foreign exchange basis, sales are down 2% year to date. Adjusted EBITDA for the first six months of 2015 of $186 million is essentially flat with last year. Versus our initial expectations for the year, sales have been disappointing. The strength of the dollar has been a factor, but we've also seen shortfalls in sales of wood flooring and significant economic declines in Russia and China. In addition, we continue to see market-related weakness in North American ceilings. Despite strength in new construction, repair and remodel activity has been below our initial expectations. Our order backlog and visibility to large projects gives us confidence that the second half will improve on our starts of the year. The full-year market opportunity looks a little softer now than at the beginning of the year.
Of note, on the positive side of the sales ledger, commercial flooring sales are up in the Americas, aided by market share shifts as a result of competitive product availability issues and our service levels relative to competition. India and Southeast Asia continue to show strength with double-digit sales improvements in the quarter. Dave will provide more details on our guidance, but we'll be lowering our sales outlook for 2015 for both businesses. EBITDA performance year to date has been in line with our expectations. For the total company, we are reaffirming our guidance for the year. Year to date, our bottom line has been aided by lower input costs in the flooring division, primarily lumber, continued price and mix gains, and productivity across our plant network.
Our North American flooring sales and marketing team continues their efforts to execute on our planned SG&A investments with our distributor and retail channel partners. To date, we've placed over 2,500 new displays in the market and are on schedule to have the full rollout of over 5,000 completed by the end of the third quarter. As we've discussed in the past, this spending is necessary to recapture lost share, drive deeper channel penetration with independent specialty retailers, and support our LVT, laminate, and wood new product launches. Collectively, these go-to-market investments will help position Armstrong Flooring to succeed as an independent public company. As many of you know, I've been leading a deep dive review of our residential flooring business. The wood segment has been a critical part of our study.
For several months now, Don Maier and I, along with the residential team, have been exploring operational, financial, and market-related aspects of the wood business. We've had numerous conversations with a variety of constituents, both internally and externally. The culmination of this analysis has reaffirmed to us that the wood business remains a key part of our portfolio. As I've discussed here in the past, we look at strategy on an annual basis. If the facts and data change, we'll evolve our strategy accordingly. As opposed to the businesses we have exited, Cabinets and our flooring business in Europe, the Wood business has a leading market position, is profitable, and contributes significant cost and selling synergies with our other product categories. Financial performance is likely to continue to be volatile, with both demand and input costs creating challenges.
However, we're confident that our investments in engineered wood capacity and enhanced capabilities at our Somerset facility, the recommissioning of the Vicksburg plant finishing line, and solid plant productivity projects will improve our manufacturing costs and capabilities. We also feel that our improved sales and marketing capabilities with an increased emphasis on premium products will drive improved results over time. Turning now to our separation plan. We continue to make progress on a number of important work streams, including IT infrastructure, the separation of our facilities, and organization design. I'm pleased to report that upon separation, Dave Schulz, currently the Chief Financial Officer of Armstrong World Industries, will be joining Armstrong Flooring as the Chief Operating Officer. Until then, Dave will continue as Chief Financial Officer of AWI, lead the finance work for the separation, and continue to report to me.
Upon separation, he'll report to Don and work closely with him in all aspects of running the Flooring business. Dave will provide leadership to investor relations, the strategy and business planning processes, business development activities, and then partner with Don and the other members of the AFI leadership team to best support our critical stakeholders, those being employees, customers, and shareholders. Upon separation, Brian MacNeal, who's currently Vice President of Finance for our Building Products division, will become the Chief Financial Officer of Armstrong World Industries, reporting to Vic Grizzle, who we previously announced will become President and Chief Executive Officer of Armstrong World Industries. Brian joined just over a year ago and has worked with Vic and the ABP leadership team to drive real value creation.
Prior to joining Armstrong, Brian spent 20 years with the Campbell Soup Company, progressing through roles of increasing responsibility, which included Division Chief Financial Officer of Europe and Finance Director of Soup. Prior to Campbell's, Brian worked at PwC as a public auditor. Finally, I'm pleased to announce that Jay Thompson will be joining Armstrong in August as Vice President of Finance for our Flooring division, and upon separation, Jay will become the Chief Financial Officer for Armstrong Flooring, reporting to Don Maier. Jay comes to us from Chobani, the Greek yogurt company, where he's been Acting Chief Financial Officer since 2014. Prior to Chobani, Jay provided interim executive financial leadership and operational support to a variety of portfolio companies at TPG Global, and he's held several senior finance roles at PepsiCo. Jay's early career included roles at KPMG, Bain, and Goldman Sachs.
More details on the separation will be available when we file our Form 10 in September. With that, I'll turn the call over to Dave for a detailed review of the quarter and an update to our guidance for the year. Dave?
Thanks, Matt. Good morning to everyone on the call. In reviewing our second quarter results, I'll be referring to the slides available on our website, starting with Slide 4, Key Metrics, as Tom Waters already covered Slide two, and Slide three is an explanation of our standard basis of presentation. Sales in the quarter of $649 million were down less than 1% versus 2014 on a comparable foreign exchange basis. Operating income, EBITDA, and EPS were all up. Free cash flow for the quarter was $77 million, improved from last year by $68 million. Net debt was down $140 million, driven by our cash generation over the past year. Return on invested capital was down due to lower as-reported profitability in the trailing 12 months, including higher non-cash pension expense and separation costs.
Slide five details the adjustments we made to EBITDA and provides a reconciliation to our reported net income of $30 million in the quarter. As mentioned during our first quarter call, we exclude the impact of our non-cash U.S. pension expense of $6 million and costs associated with the Flooring separation process of $5 million from our adjusted numbers. In addition, we are excluding a $4 million duty charge related to engineered wood imported in the second half of 2012 through the first half of 2013. While similar duty reviews remain pending for 2013 and 2014, we do not expect future duty rates to have a significant impact on our results, as we currently import limited quantities of wood. The $7 million cost reduction charge in 2014 was largely related to expenses associated with exiting our Kunshan, China, engineered wood facility.
The interest/other line is improved this year as a result of non-cash intercompany foreign exchange gains. The second quarter tax expense was similar to 2014. Moving to Slide six. This illustrates our sales and adjusted EBITDA by segment for the quarter. I'll talk through the businesses on the next few slides, but want to note here that corporate expenses were lower than last year. Slide seven provides additional color on the Building Products segment results. Ceiling sales were up slightly on an equivalent foreign exchange basis, with price and mix gains in all geographies offsetting volume declines. Sales in emerging markets were down $9 million year-over-year, with greater than 20% volume declines in Russia and China and a mid-teens drop in the Middle East due to significant project volume in the base period. Sales to India and Southeast Asia were up more than 20%.
As Matt mentioned, repair and remodel activity in the Americas was soft in the quarter, in sync with the erosion of the U.S. GDP outlook. New construction activity was up, but as you know, this represents only 20%-25% of our volume. Australia sales were up as a result of architectural specialties related projects. Building Products EBITDA was down $2 million in the quarter. Volume declines, lower earnings from WAVE and foreign exchange headwinds more than offset continued price and mix gains and the benefit of manufacturing productivity. For the quarter, Americas EBITDA margins expanded 100 basis points. In Europe, EBITDA was down $5 million, driven by volume declines in Russia and the Middle East, as well as increased fixed manufacturing costs driven by our new Russian plant. Pacific Rim EBITDA was down slightly due to weaker currencies in India and Australia and the lower China volumes.
Slide eight illustrates our resilient segment results. Excluding the impact of foreign exchange, resilient flooring sales were up 4% as gains in North American VCT share, particularly in retail and education, more than offset the continuing impact of the residential share loss that started in the third quarter of 2014. Price and mix were down as we reduced prices to stem the residential share losses and as VCT volumes were up disproportionately versus higher priced products. Sales in the Pacific Rim were up slightly. Resilient profitability was up $3 million. Commercial volume gains and lower input costs more than offset our SG&A investments and lower residential pricing. Page nine lays out our wood segment results. Wood sales were down $12 million as volume declined 9% from the second quarter of last year.
This is a continuation of the share loss that we experienced starting in the third quarter of 2014 and was impacted by service issues and engineered products as Somerset capacity ramps up. Wood-adjusted EBITDA was up $3 million, or more than 40%, as a result of lower input costs and improvements in fixed manufacturing expenses. Mix was up as we continued to prioritize higher-margin products. Slide 10 shows the building blocks of adjusted EBITDA from the second quarter of 2014 to our current results. We benefited from lower input costs, primarily in the flooring business, as lumber and PVC costs declined, and improvements in price, mix, and manufacturing costs. Lower volume continues to be a headwind. You can see the continuation of our SG&A investments in the flooring business, which drives the vast majority of the year-on-year SG&A increase. Turning now to slide 11.
You can see our free cash flow for the quarter versus last year. Cash earnings were higher with the big drivers, a year-on-year improvement from working capital in the quarter and lower capital spending. Working capital was aided by our exit from European flooring and timing. Slide 12 and 13 depict our key metrics in our sales and adjusted EBITDA by segment for the first half of 2015. These slides are self-explanatory. I'll move on to our year-to-date bridge on slide 14. As you can see, for the year, adjusted EBITDA is relatively flat. There are large moving parts within the story. We continue to face volume challenges, particularly in the wood business and ceilings in Europe and the Americas. Our SG&A investments in the flooring businesses also presents a headwind. However, we have benefited from lower input costs.
We continue to deliver price and mix gains and drive lower manufacturing costs despite the addition of the Russian plant to our network. Slide 15 shows year-to-date cash flow versus the prior year. As with the quarter, the big contributions are coming from capital expenditures and working capital. Slide 16 shows our guidance for 2015. As Matt mentioned, we have reduced our sales outlook for the year by $125 million at both the high and low end of the range. The ranges for operating income, EBITDA, and EPS all have tightened from previous guidance. The midpoints are unchanged. Slide 17 provides more details on our outlook for the year. You can see that we have reduced sales in both businesses, but somewhat more in ABP, largely due to their foreign exchange exposure and Russia.
We have tightened the ranges of the business' EBITDA guidance and reduced ceilings at the midpoint and raised flooring at the midpoint. We are increasing capital spending as a result of an investment in our Pontarlier, France, ceilings facility. This $25 million investment, spread over 2015 and 2016, will improve our cost profile and product capabilities in the fast-growing smooth white acoustical tile category that has become preferred in Europe and the Middle East. In addition, our separation plan now includes standalone IT infrastructure for each business as of the date of the flooring spin-off. This accelerates IT-related capital spending into 2015. I'll turn it back over to Matt.
Thanks, Dave. As most of you know, we're nearing the completion of our investment in LVT manufacturing here at our Lancaster facility. The plant is currently producing product to support the creation of promotional collateral. However, as a result of equipment delivery delays, we're about a month and a half behind our original timeline, but on budget and with a perfect safety record. Upon completion, this plant will be capable of producing a full line of glue-down and floating residential and commercial LVT. These domestically manufactured products will feature revitalized designs with increased customization capabilities, industry-approved coatings technology, and enhanced installation options. While the delay is frustrating, we're committed to delivering the products, service levels, and performance that the marketplace has come to expect from Armstrong. With that, we'd be happy to take questions.
I would comment that both Vic and Don are in the room with me and Dave. We'd be happy to take your comments.
Ladies and gentlemen, if you have a question or comment at this time, please press star then one on your touchtone telephone. Once again, if you have a question or comment, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question or comment comes from the line of Matt McCall with BB&T Capital Markets. Your line is now open.
Good morning. This is Reuben in for Matt. Thanks for taking my questions. In the queue, you talked about regional weakness in office, and I think that had to do with the R&R activity being down in the Americas. Can you elaborate a little bit on that, what you're seeing? And do you think the weather had any impact on this, and what's your thoughts are on a go-forward basis?
Reuben, this is Vic Grizzle. Let me take that. As Matt and Dave alluded to, overall in the Americas here, our volume was down just slightly, and it was really driven by the R&R segment, as you alluded to. We did have really nice volume growth at the high end of our portfolio. We continue to see nice growth on our high-margin, high-value products, which was very encouraging. We continue to get good price and mix across the Americas, which allowed us to have a 3% revenue growth in the Americas. Overall, that was pretty positive, but we did see kind of uneven activity across the regions in the U.S., primarily driven by that R&R segment. I can say, though, first quarter to second quarter activity improved significantly. Sequentially, we saw really nice improvements in the volume.
I would say, the big difference was the rate of improvement in each of the regions was different, that created a little bit of that unevenness that we saw that overall kept the volume slightly negative. Our outlook, when you look at where we're sitting today, we had a nice strong finish to the quarter in June. A lot of that was weather related, as you alluded to. Some of the schools in the Northeast, in particular, got out later than normal, that education cycle started a little bit later than normal. We did see that pick up in the second half of June, that's carried over into July nicely. Our outlook remains biased to the positive. We're hoping these trends continue, our outlook gives us hope that we should see some positive volume growth in the second half.
Our next question or comment comes from the line of Robert Wetenhall with RBC Capital Markets. Your line is now open.
Hey, good morning, and thanks for all the color, Matt. Yeah, I just wanted to kind of ask a direct question. You spent a lot of time talking about the flooring business, and I'm just trying to understand, if you think this is a good fit with Resilient and if there was an effort by management to sell the business at any point in time.
Thanks, Bob. Yeah, that's a good question. The direct answer to the question is no, there was not an effort to sell the wood flooring business. Our assessment really started and ended with, do we think that this business makes sense and is a good quality fit in our portfolio at this point in time? The answer is yes. If we concluded that it didn't, then a potential sale would be an exit or a potential exit after we made the decision. We never got to that point because, after our analysis, Don and I agreed that based on our assumptions, at this point, it makes perfect sense. Like the reasons I said, we've got a strong share position. The business is profitable, it's very distinctive from the two businesses we have exited, namely cabinets and our flooring business in Europe.
Thanks for the question.
Let me ask you, that's a helpful answer. Just trying to think about the back half of the year in wood flooring. I know that in the third quarter of last year, volumes were down 15%, I was thinking of a very favorable comp going into 3Q. I wanted to think, and maybe Dave can address, with that easy comp, does this mean your volume should grow in 2H? I think some of your previous guidance that you'd provided said that flooring EBITDA was going to be flat, if you have this great volume tailwind in the second half, do you think then you're going to have good acceleration in 2H wood flooring EBITDA? What's the implication for margins? A lot of things there. Sorry for that.
Hi, Bob. Morning. It's Dave Schulz. Thank you for your question. As you mentioned, we did have a relatively tough Q4 in the prior year. We do anticipate that we will continue to show the appropriate level of sales growth here on our wood flooring business against a relatively soft comp. Again, we recognize that there are actions that we're taking, particularly with some of the SG&A investments and some of the progress that we're currently seeing within certain channels that gives us a reason to provide you with the guidance that we did on the overall flooring business, of which, of course, wood will play a critical role in delivering that sales guidance.
Could you just touch, though, on your expectations, how we should be thinking about margins if you get better volumes? Our thinking was you would see improved operating leverage, which would help EBITDA performance.
Yeah, I think that that's a fair assumption. Obviously, one of the things that we're looking at very closely is the trend on lumber costs and how that will impact our margins going forward. We've incorporated our view, obviously, into the guidance that we've provided. As you take a look at the back half versus the front half on wood, we did have a relatively strong delivery of EBITDA margin in Q2. We're monitoring the situation relative to lumber. If the lumber prices are staying relatively consistent, we would expect that those margins will continue to be in the area of our first half, slightly better, given the volume growth.
Got it. Just if I can sneak one in. You called out negative price mix in resilient in the quarter, and I was just wondering if you expect that this trend continues through the balance of the year, or if you're expecting it to show slight improvement. Thanks very much, and good luck.
Bob, again, it's Dave answering that question. Right now, the issue that we've been seeing within the resilient category, as we specified in our prepared remarks, is we've had a higher growth in our VCT business relative to the balance of resilient flooring. We would anticipate that that will continue into the back half. Therefore, we would anticipate that there will be a continuation of a mix impact on the results going forward.
Our next question or comment comes from the line of Dennis McGill with Zelman & Associates. Your line is now open.
Hi, good morning, thank you. I don't know if this is for Don or Dave, but can you maybe just put a little color behind the VCT benefit in the quarter, maybe what that product category was growing before the competitive disruption and maybe what you think about, on a go-forward basis, whether this is an opportunity for you to hang on to some of that share, or if you feel like it's more of a timing impact in the second quarter?
Dennis, this is Don Maier. I'll take this question. Thank you for that question. The VCT business in total for us, we have a market-leading position in this business. What we've been presented with is an opportunity, given our ability to provide much better service to the market, to take share in a segment which is frankly flat to declining on a year-to-year basis. We're obviously doing everything we can to try to maintain that share, as I'm sure that our competitor will get their manufacturing facility running. As they do that, they will certainly try to take that share back. We're doing everything we can to serve our customers and make sure that we hold onto that business.
Our next question or comment comes from the line of Keith Hughes with SunTrust. Your line is now open.
Thank you. First half of the year, Building Products is up modestly at $1 million in EBITDA. The guidance would seem to imply that it would be a good bit faster growth than that. Number one, am I reading the comparisons right? Number two, if that's the case, what do you expect to improve in the third and fourth quarter?
Keith, this is Vic. When you look at the overall numbers, globally, when you look at the numbers, I think some of the headwinds have been, and I think Dave and Matt both mentioned this, China and Russia markets, which are key markets for us, key growth markets for us, and where we've made some good investments, have been really tough markets. In fact, in the second quarter, we saw some significant weakness in the second quarter in both China and Russia. Negative volume there, plus the additional costs associated with our Russia plant investment, has created really the biggest headwinds for us. When you look at the Americas business, we've actually gotten very good leverage on our results in the first half. Again, second quarter, EBITDA was up 6%. We improved our margins 100 basis points.
That's on slightly negative volume, as I talked about earlier, driven by the R&R segment. We're continuing to see very nice new office construction activity. That's been really keeping us very busy, and we really like what we see in terms of the overall activity in the markets. Healthcare and education have been a little bit slow to develop in the first half of the year. Again, the outlook so far for education has been very positive in the short season that we've experienced so far. Again, we remain really cautiously optimistic that this recovery will continue. Again, I mentioned that the rate of improvement across the Americas has been uneven, and that should lead us to believe that we're still in the early innings of a market recovery.
Our next question or comment comes from the line of Kathryn Thompson with Thompson Research. Your line is now open.
Hi, thanks for taking my questions today. The first is just a follow-up on ceilings, and if you could just quantify what volumes in the quarter were down, specifically in the U.S. Just pulling the string a little bit more in terms of you looked at yourself relative to peers. Are you seeing any type of different behavior
From some of your smaller peers in the ceiling segment and new entrants such as Rockfon. Thank you.
Yeah, Kathryn, this is Vic. With regards to your first question on volume, again, it was just barely slightly negative, and let me leave it at that, okay? Very low single-digit type volume contraction in the second quarter. Hopefully that addresses your question there. With regards to competition, specific to Rockfon, we continue to take them very serious in the marketplace. We continue to see them showing up at customers. We're continuing to strategize and do the things that we can to serve our customers better. We have, I think, all of the right levers here to win and to compete against them effectively. There's been no meaningful share gain or shifting, if I get the essence of your question, with regards to Rockfon. Again, we continue to take them serious and battle with them, and we expect that to continue. Thanks for your question.
Our next question or comment comes from the line of James Armstrong with Vertical Research. Your line is now open.
Hi, guys. This is actually Brian Lynch filling in for James.
Hey, Brian.
The question I wanted to ask is, in the press release, you guys talked about inventory adjustments in the wood products segment at the major home centers. I was wondering if you could elaborate a little further on that, and if we are likely to see more of that as the year goes on.
Brian, this is Don Maier. I'll take that one. Thank you for the question. One of our large ASA accounts has been undertaking an internally driven inventory modification, and they're pulling inventory back to their regional distribution centers. While we've seen good flow through in point-of-sale sales, the net impact of the inventory reduction has created a negative mill shipment to them. That's something that has continued through Q2, and I think we'll see a bit of it running into Q3, then it should be hitting a steady state position.
Thank you, Don.
Thank you.
Our next question or comment comes from the line of Michael Wood with Macquarie Securities, your line is now open.
Hi, this is Michael Wood at Macquarie. Thanks for taking my question. Just to follow up on that earlier question in terms of market share, because I get a lot of questions from clients on whether or not the separation itself is causing any kind of near-term distractions. Looking at your performance, slightly negative versus your largest peer who has been reporting positive North American volume growth, and then you guys also have decorative architectural as an additional driver. I'm just curious if you can give a little bit more color if that is regional mix or regional growth variations. Thanks.
Mike, it's Matt. Let me just comment on the separation, and then I'll hand it over to Vic to comment on the market share question. We have a very focused, dedicated organization driving the separation with oversight provided by a subcommittee of the board. Clearly, there are times when we involve Don and Vic or members of their team in decisions that will affect them as standalone companies moving into the future. We are not trying to do this in a total bubble. We are extremely mindful of the amount of time and effort required to run these two businesses and continue to execute and compete effectively against some very good competition, not only here but around the world.
We try to take a balanced approach to engaging them or their teams when it's appropriate, and we try really hard not to bug them for stuff that doesn't require their attention at this point. We believe that to the extent it has been a distraction, it's minimal. Given the nature of our businesses, the standalone nature that exists today, the fact that there's no overlap between the two businesses, that allows us to avoid a lot of the distractions that we would have if these two businesses were intertwined. Because of the organic nature of the two businesses today, the amount of distraction is very minimal. We don't think that's really a factor. I'm going to hand it over to Vic to comment on the market share question that you had based on the regional commentary we shared earlier. Vic?
Yeah. Thanks, Matt. Hey, Mike. With regards to your question, and I think you alluded to really the crux of where the answer resides here, too, which is there are regional differences between the players in the Americas market. As I talked about, there's uneven activity across the regions, and the rate of improvement in those regions is a little bit different. Quarter to quarter, that could create a little bit of noise, and so that could be driving a little bit of those differences. The other part of this is there's a big part of the market, or a larger part of the market, I should say, that is new construction activity. Projects here and there in the quarter could also drive a little bit of these differences. As you know, in this industry, share gains and losses don't happen quarter to quarter that quickly.
You really have to think about share gains over much longer periods of time to really see the shifts and the differences. I think that, hopefully, that answers your question, but I think that really explains maybe some of the differences you may be seeing.
Our next question or comment comes from the line of John Baugh with Stifel. Your line is now open.
Thank you for taking my questions. Just quickly, I was curious what your lumber cost outlook was for the balance of the year, maybe put that in the context of where your pricing is currently, and whether or not there's tailwind, headwind, neutral from that delta. Thank you.
John, this is Don Maier, and appreciate your question. We have seen some nice movement on lumber prices through the first half of the year. That's allowed us to recover some of the margins that we had to concede back in the back half of last year. It's always difficult for us to really understand exactly where the lumber prices are going. What we're including in the guidance that we're providing here assumes that we're having a leveling out in the pricing on wood for the back half of the year.
Our next question or comment comes from the line of Will Randow with Citi. Your line is now open.
Hi, this is actually Scott Schrier for Will. Can you please discuss about WAVE and what you're seeing there and how the outlook has been trending?
Yeah. This is Vic. With regards to WAVE, some of our grid volume, or the Americas volume, the negative cause of some of the negative, it was the WAVE business. Our grid volume was off in the second quarter slightly. Again, I think when you look at the WAVE business, it's very much tied to our ceilings business as we sell a system in the marketplace. The dynamics that we're seeing, we're talking about overall in the Americas commercial market, we're seeing that replicated in our WAVE business. Off a little bit in volume so far, but seeing a lot of activity around the new construction pulling second half volume opportunities for that business. The profitability in that business remains. In fact, margin expansion that I spoke about in the Americas, we're also seeing in our grid business at WAVE as well.
Hopefully that addresses your question.
Our next question or comment comes from the line of Stephen Kim with Barclays. Your line is now open.
Yeah. Thanks very much, guys. I know you guys have talked a fair amount about sales, I just wanted to put it in the context of your comments last quarter and just make sure I really kind of understand how things trended throughout the quarter. I think last quarter you said on the call that your trends across both businesses strengthened in April, maybe the first 1Q kind of had a soft start, the exit rate was quite good and that it continued into April. Just sort of looking at the results here, you can kind of see that in Resilient, showing up as a good 2Q volume quarter, aided, I'm sure, by the VCT thing. If you could sort of comment on the other two segments, because it didn't seem to be as broad-based.
You're saying again today, I think that, at least in ceilings, things kind of were choppy, the exit rate was pretty good at the end of June. I just want to make sure I can kind of really understand, was your exit rate of 1Q into 2Q strong across your businesses, and how did that progress into the rest of the quarter in 2Q? Thanks.
Thanks, Steve. Here's how I'm going to try to answer that. I think that's a real opportunity to allow us to kind of comment from both of our business leaders. I'm going to ask Vic to give you the ceilings side of that, I'm going to ask Don to give you the view from the flooring side. Vic, why don't you go first with ceilings?
Hi, Stephen. Yes. As we sat on this call talking about our first quarter results, we were experiencing a pretty robust April, and we did. We had a very strong April. Nice volume growth in April. Then we got to May, and May was a very lackluster, very soft May. That carried up into, I'm going to talk about the Americas specifically. I think that's your question. That carried into the first half of June, then the second half of June, we saw a nice volume pickup. Overall for June, we had nice positive volume growth, but not enough to offset May. That was what I was trying to characterize, that what we're seeing is very uneven regional activity, and overall softer R&R part of the business.
Again, we're sitting here in July results look terrific in terms of volume growth. We're going to have a very strong July. So we're hoping that this continues on into the summer. We've all seen this movie before in terms of this recovery having a little bit of choppiness and unevenness to it that we experienced in the second quarter for sure.
Vic, thanks. I'm going to ask Don to comment on the flooring side of it.
Yeah. Thanks, Stephen. Yes, I would say that we did continue to see that trend continue into April as well as through the remainder of the quarter. In particular on Resilient, that really shows up. Versus our expectations, we were also encouraged by what we saw on the wood side of the business and the support in the second quarter there. The delta really is looking at year-over-year comparables Given the share loss that we experienced in the back half of last year in wood, which creates a difficult comparable comparison there. All in all, we saw the general orders coming in to our expectations as we communicated in the last call.
Our next question or comment comes from the line of Michael Rehaut with JPMorgan. Your line is now open.
Thanks. Appreciate it. Two quick questions if I could squeeze them in, one just technical. When you mentioned at the end of the call that you had some IT spending with regards to the different businesses ahead of the spin accelerate into 2015, just wanted to make sure that I understand that the EBITDA guidance was reiterated and that's inclusive of that spend, and just trying to get a sense of how much that is and if that's a separate line item. Secondly, just going back to ceilings again. I appreciate all the commentary from Vic in terms of some of the ups and downs during the quarter.
I guess the only, maybe you could address again, and obviously every competitor is different, but a week or two ago, we did hear a bit more of an optimistic tone with regards to end market demand trends from your big competitor in the space, and just trying to get a sense, again, if you feel like it's more influenced by geography or certain end market, perhaps healthcare or education, if you have a stronger presence in those where it's slightly weaker. Just again, trying to reconcile the commentary on the end markets, which seem a little different.
All right.
Hey, Mike, it's Dave Schulz. Let me address your first question about the IT comments that we made. We have increased our capital spending guidance for the year, and that's including some of the spending that's required on the information technology side in preparation for the spin of the flooring business. That's capital. The expense component of our IT separation was already included in our exclusions from EBITDA, and we've confirmed that guidance for Q2, similar to what we had in Q1, the $20 million-$40 million of cost associated with the separation.
Mike, this is Matt. Let me comment on the ceilings business. I appreciate the comments with respect to the color that we've been trying to provide. I guess my first comment is, I'm not going to really comment on what my competition may say about the marketplace. It's just kind of not our practice. I would say that the revenue pressure that we felt in the first quarter was primarily regionally oriented, and that our primary competitor has relatively different strengths in different regions than we do, and that we are optimistic that the second half will be stronger. Some of the regional differences, as you might imagine, are exacerbated because of weather issues in the first and second quarter. Those weather issues drive some timing of the recovery of the weather-related volume.
Our next question or comment comes from the line of George Staphos with Bank of America. Your line is now open.
Hi, this is actually Alex Wang sitting in for George. Thanks for all the details. Maybe just starting out in wood, can you just provide some color on where we are in terms of the price mix optimization initiatives and specifically relative to any market share developments that we should be mindful of?
Alex, this is Don Maier. As you've noticed, we did improve our profitability significantly on the wood business, up about 40% from last year. Obviously, as we discussed, lumber pricing has allowed us to recover a lot of the margins that we were seeing there. Also, we've had major initiatives supporting our independent channel as well as our strategic accounts, and we've seen some solid success, in particular on the solid side of the business. This is really focusing in on the high-end products, so we are continuing to drive the mix. With that said, obviously, this is something that's going to take quarters to really get us positioned where we need to be, but we've made meaningful progress to date on that.
I think the piece that Matt mentioned, really on the engineered side of the equation, it is critical because we are not in a service position that we would like to be, given the demand that's come into the Somerset facility. The actions with Vicksburg, the improvements that we're making at Somerset, have us targeted to have those resolved as we enter into Q4 completely and get back to the service levels that we'd like to see. A dynamic situation on wood, in general, very pleased with the progress that we've made. Obviously, a lot more work to be done.
Our next question or comment comes from the line of Nishu Sood with Deutsche Bank. Your line is now open.
Thanks. My question is about the resilient business, the $7 million SG&A drag on a year-over-year basis from the higher go-to-market. Matt, you mentioned that a lot of the displays, I think you said something, 3,000 and you're going to get up to 5,000 in the third quarter. Does that mean that the expense drag would probably continue into the third quarter then would that be the end of it? We probably wouldn't see it in the fourth quarter. I just wanted to also get a sense of these go-to-market, sounds like it's a successful rollout. Any sense yet of what kind of incremental sales it is driving?
Yes, Nishu. We said, I think it was 2,500 have been installed since the first half of the year, we're going to go to 5,000. Over half of those are in support of our LVT product launch. We have the plant coming online. We commented on the product being manufactured to help us with commercial collateral. That collateral, among other things, will be used in some of those displays. The balance of those displays are driving placements for all the other residential products. Resilient sheet, other tile formats, of course, our wood business. I think the team has done a phenomenal job executing 5,000 displays from a standing start or standing stop is great execution. As I said, we'll have them completely in place by the end of the third quarter, which times extremely well with the plant coming online.
We have to get those in place, get them full before we start to see the benefit. We would expect the benefit from the displays across the product line to time more into 2016. A little pop in late 2014, the real benefit for those investments carries into 2016.
Our next question or comment comes from the line of Kenneth Zener with KeyBank. Your line is now open.
Good morning, gentlemen.
Hi, Ken.
Vic, my question's for you. Sorry, guys. In ceilings, people are obviously focused on this. It has been historically the largest contributor to EBIT. The quarterly question, we deal with your business sequentially, and you have these monthly things that tends to smooth it out. It seems like you guys were more robust coming in, as you said in April. If you could put this into context and not talk too much about it, last year, the Analyst Day, you guys thought volume was going to come up in the year. You came off of that because of what was lower volume, it goes to the visibility in the business. Is there something that's kind of changed? Volume fell cyclically 2003 from 2000, about 15%. This year is set to be trending modestly down. We're closer to 30% down cyclically now.
What year do you kind of say, I wonder if volume is not going to come back as opposed to just remain flat or stabilized? How close are you to raising those type of questions as opposed to just looking for cyclical elements?
Yeah, Ken. I understand the nature of the question. Over the last three years, if you look back in this industry, there's been a little bit of a start and stop with the recovery. Certainly many conversations and discussions, outlooks around an economic or commercial construction recovery that seems to be elusive. The underlying economic drivers, including the GDP overall, has continued to be downgraded throughout the year. In fact, this is the third year, again, we're going to see a revised GDP outlook downward. We keep looking at those factors, and it doesn't look like to me there's any change in economic drivers that are changing this. The economic drivers continue to be downgraded. Again, I think that's what we're seeing a repeat of.
Here's what's different, I think, though, in this market now is new construction is clearly sustaining itself, and we're starting to see that as a nice pickup in the overall business. I will remind you, though, that the new construction portion of the overall demand profile in the industry is still the minority of demand. The remodel and renovation portion of the demand profile is much larger, and that becomes more susceptible to these economic drivers that continue to get downgraded. With that, I don't see any structural change or any change in the economic drivers that would change how we think about this market or where the volume is going to be driven from.
I will say our outlook, again, even though some of these economic drivers that we're tracking are being downgraded, they're still positive, and we still think that we should have a positive volume growth in the second half as a result of that.
Our next question or comment comes from the line of David MacGregor with Longbow Research. Your line is now open.
Hey, good morning, guys. This is Conor Sweeney on for David today. Thanks for taking the question. Just real quick, going back to the lumber prices, could you maybe talk about the time lag for spot pricing for wood and when that ultimately flows through your COGS?
Conor, this is Don. We realize the material as it's consumed in the plant. We dry all of our lumber, and depending on the species, that can be up to three months of time through the drying process. That would be the lag of when it's realized in the financials. Hopefully, that answers your question.
Okay. No, it does. Thank you for assigning me with that.
Our next question or comment comes from the line of James Barrett with C.L. King & Associates. Your line is now open.
Good morning, everyone. Matt, could you give us a 30,000-foot view on wood flooring, whether it's since 2005, 2006, or since we first joined the company? What, if anything, has changed in terms of the dynamics of that business, aside from higher input cost? What has changed, if anything, especially competitively?
Sure. I'll do the best I can. First of all, I joined the company in 2010, not '05 or '06, but our view goes back that far anyway. There's a couple things. Clearly, there has been a shift. The biggest mega trend that comes to mind for me is the shift in consumer preference from solid to engineered, and that's a function of the improvement in the performance of engineered wood as it relates to how it feels underfoot, and of course, the visuals, which is the most important. Getting that shift right and investing into that as we have in Somerset and as we mentioned, expanding the finishing capability in Vicksburg, is key to that. I think the second thing is, we certainly have had, over the last 10 years and certainly the last five years, a certain amount of influx from offshore suppliers, mostly from Asia.
We've got big box retailers that take advantage of that product and opening price point merchandising and promotion. That's kind of new. That drives a little bit of price pressure. Our research indicates that the consumer still values durability, values surface and surface performance, that the brand has great value, that the brand can pull, and that this is somewhat of an emotional purchase on the part of our customers. Flooring is a fashion product. It's a purchase that they do very infrequently. These are thoughtful, considered purchases by our customers. While we try to do our part in terms of demand creation and preference and great products, we also need to partner very closely with retailers, be they small independent retailers or large big box, and that's why the refresh of the retailing tools and the refresh of the displays is so critical to us.
I'm showing we have a follow-up question from the line of Keith Hughes from SunTrust. Your line is now open.
Thank you. You talked a little bit about the SG&A cost spend in Resilient earlier. I think you were up to about $9 million you've called out in the first half. Will that look second half based on the rack comments you made earlier?
Hi, Keith. It's Dave Schulz. Obviously as we look at the timing of the displays, that'll have some influence on the overall SG&A cost within Resilient. We also do have some costs associated with our LVT launches in the back half, the second half. I think it's fair to say that we'll have a slight decrease in the overall SG&A on our Resilient business.
That concludes today's question and answer session. With that said, I would like to turn the conference back over to CEO and Chairman, Mr. Matthew Espe, for any further remarks.
Thank you very much. We appreciate everybody's attention and questions today, and we look forward to the follow-up discussions we'll have over the next few days. Thank you, everybody. Have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect.