Good day, ladies and gentlemen. Welcome to the Armstrong World Industries twenty fourteen First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this call may be recorded.
I'd now like to introduce your host for today's conference, Tom Water, Vice President of Treasury and Investor Relations. You may begin.
Thanks, Ashley. Good morning and welcome. Please note that members of the media have been invited to listen to this call and the call is being broadcast live on our website at armstrong.com. With me today are Matt Espie, our President and CEO Dave Schultz, our CFO Tom Mangus, CEO of our Worldwide Floor businesses and Vic Grizzle, CEO of our Worldwide Ceiling business. Hopefully, you have seen our press release this morning and both the release and the presentation Dave Schultz 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 filed this morning. Forward looking statements speak only as of the date they are made. We undertake no obligation to update any forward looking statements beyond what is required by applicable securities law.
In addition, our discussion of operating performance will include non GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation. Both are available on our website. With that, I will turn the call over to Matt. Thanks, Tom, and good morning, everyone.
Overall, the first quarter of twenty fourteen was in line with the guidance we provided in February. Sales of $634,000,000 were on the low end of our guidance range of $625,000,000 to $665,000,000 Adjusted EBITDA for the quarter of $83,000,000 was right in the middle of our guidance range of $75,000,000 to $90,000,000 We had a steady quarter and key themes were price improvement and reduced manufacturing costs. Additionally, we've seen that our strategy in the Wood segment has had a positive impact on our performance. I also want to highlight a few events including the impact of the weather on our North American business, Russia and the most recent secondary offering by the Trust and TPG. Isolating the impact of weather from the other variables in our business is difficult, but we believe that versus our guidance weather impacted the top line by about $5,000,000 to $10,000,000 and the bottom line by about half of that.
Now versus prior year, we estimate that the top line impact was $10,000,000 to $20,000,000 with a little more than half of that hitting the bottom line. EBITDA was impacted not only by the lost sales, but also by additional operational costs driven by the snow, ice and freezing weather as well as higher energy prices. Our projection is that more than half of the loss business will come back during the year, but timing will be project specific and influenced by labor availability. Now weather provided some noise during the quarter, but all indications are that the macroeconomic climate we expected entering the year is still on track. We did see markedly different regional sales results with certain flooring markets in the West and Southwest up double digits year on year, but the Northwest and Midwest Northeast rather and Midwest were down significantly.
The situation in Russia didn't impact our first quarter top line results. Most immediate effect was a decline in the value of the ruble. As a result of this, we instituted a 10% price increase effective in April, which drove buy ahead activity into March. Net net, the currency decline and the March volume increase offset each other on the sales line. The bottom line impact of the ruble decline was about $2,000,000 most of which was anticipated in our guidance.
This impact is essentially all in the Siemens segment. As you know, the geopolitical situation in Russia continues to be in flex, so we're monitoring conditions closely. We have semi weekly calls with our Russian leadership team as well as our external advisors. On the ground, our operations are continuing and to date products are entering the country without delays or complications at the border. Armstrong engineers have been able to travel to and from Russia without incident.
Construction of the plant in Olapuga remains on schedule. We're getting excellent support from the leaders of the local Special Economic Zone. We continue to build out our go to market capabilities and invest in our manufacturing footprint in this very important market. Overall, we remain optimistic and committed for the long run-in Russia. In the Wood segment, I'm pleased to report that our new strategy of aggressive price increases to drive price and mix has started to pay off.
Both price and mix were positive in the quarter, contributing about 10% to our sales. Volumes were down as anticipated due to our constraining solid wood production to minimize pre kiln dried lumber purchases and overtime. Wood profitability was up versus last year as the price and mix gains together offset year over year inflation. Manufacturing improvements were driven by a stable workforce, low over time and almost no PKD lumber purchases. Inflation remains an issue as we experienced $12,000,000 of lumber cost increases in the quarter and lumber costs are even higher than we anticipated in February.
So to counteract this, we are once again raising wood prices by 4% to 10% effective mid June. As we'll experience lumber inflation for the entire quarter and did not realize the additional price benefit until mid June, with margins on a percentage basis, we'll take a step back in the second quarter. Now barring further unforeseen lumber cost inflation, margins will resume rising in the second half of twenty fourteen. There's still a lot of work to be done to drive margin improvement back to levels necessary to earn the return on capital we expect in this business. But I'm encouraged by the early results of the new strategy and the improved performance in our plants.
Lastly of note in the quarter, TPG and the Asbestos Trust executed another secondary offering of 3,900,000.0 shares of Armstrong stock in March. As you likely saw in our proxy and other recent disclosures, Kevin Burns, a TPG partner will not stand for reelection or a board in June. Our board size will shrink to 11 that's 10 independent directors and me. So to close, our team remains focused on our investments in manufacturing here and abroad, while staying agile in order to actively address or capitalize on market conditions. So with that said, I turn the call over to Dave for more details on our financial performance and a look at guidance.
Thanks, Matt. Good morning to everyone on the call. In reviewing our first quarter results, I'll be referring to the slides available on our website starting with slide four, key metrics as Tom Waters already covered slide two and slide three is simply an explanation regarding our standard basis of presentation. Sales of $631,000,000 were up 3% versus 2013 on a comparable foreign exchange basis. Operating income and EBITDA were up as well.
EPS was up significantly driven by operating performance as well as the change in the tax rate that I will address in a moment. Free cash flow for the quarter was a use of $55,000,000 similar to last year. The first quarter is seasonally a use of cash for Armstrong as receivables grow off a low year end level and as we build inventories for the busier summer season. Net debt was up $185,000,000 driven by our two sixty million dollars share repurchase in September of twenty thirteen and partially offset by operational cash generation. Return on invested capital was lower driven by as reported profitability in the last nine months of 2013 versus the comparable period in 2012 and by increases to the invested capital base.
Slide five details the adjustments we made to EBITDA and provides a reconciliation to our reported net income of $17,000,000 in the quarter. We had minimal cost reduction expenses in 2014, but had $6,000,000 of expenses related to headcount reductions in our flooring businesses in Europe and Australia in 2013. Interest expense was higher in 2013 due to the expensing of the previously capitalized fees as part of our prior year refinancing. The 2014 tax rate of 53% is actually fairly typical for us in our first quarter as North American profitability is seasonally low, so our unbenefited foreign losses have a larger than average impact on the rate. Twenty thirteen's rate of almost 80% was unusual as North American profits were reduced by the refinancing costs, which greatly magnified the effect of the foreign losses.
Moving to slide six. This illustrates our sales and adjusted EBITDA by segment for the quarter. Excluding the impact of foreign exchange, resilient flooring sales were down 2%, driven by volume declines in North America and Europe. North America was impacted by weak demand in education and healthcare, weather and a comparable period that included significant sales to a major U. S.
Retailer as they refurbished their stores last year. European sales were impacted by continuing weakness in Central Europe. Pacific Rim sales were up with India and Southeast Asia notably positive. Mix in North America was also a positive sales driver. Despite lower sales, the Resilient segment delivered flat EBITDA as improvements in Europe and The Pacific Rim offset the volume declines in America.
Matt discussed the Wood segment results, so I'll move on to Building Products. Ceiling sales were up 6% on an equivalent foreign exchange basis as all regions experienced sales and volume growth. EBITDA was flat on a global basis as gains in The Americas were offset by declines in Europe and the Pacific Rim. As Matt mentioned earlier, we saw some impact due to weather in The Americas with about $2,000,000 of incremental expense associated with higher energy costs and repairs. Europe was impacted by the foreign exchange headwinds Matt mentioned as well as weaker mix driven by strong sales to Russia and softness in The U.
K. We believe The U. K. Issue is related to distributor inventory levels and not the market, so we expect improvements in future quarters. The combined impact of higher energy costs due to weather and the foreign exchange headwinds associated with Russia negatively impacted margins by 130 basis points.
Excluding these items, EBITDA margins were comparable to the prior year. The Pacific Rim also suffered from weaker mix as China volume growth was in the low margin retail sector as government spending on higher end projects slowed. Corporate expenses were flat versus last year. Slide seven shows the building blocks of adjusted EBITDA from the first quarter of twenty thirteen to our current results. Of note, price and mix offset inflationary headwinds primarily driven by lumber.
Volume was a slight negative as declines in flooring were only partially offset by gains ceilings. Manufacturing was a positive across the board with notable improvements in wood flooring. SG and A was up year on year, partially driven by increased spending on promotional activity. Turning now to slide eight, you can see our free cash flow for the quarter was very similar to 2013 in total, but the factors differed. Earnings are up, but working capital was down versus 2013 when working capital was unusually favorable.
Capital expenditures declined as the investments in China are complete. Interest expense improvements reflect our March 2013 refinancing and WAVE was favorable versus last year. The other category reflects foreign exchange and VAT payments. Slide nine updates our guidance for 2014. The ranges for sales and EBITDA for the full year are unchanged from the initial guidance we issued in February.
Russia is a concern, but wood and the ceilings business in North America should be able to provide an offset. Free cash flow is lower than previous guidance due to accelerated capital expenditures related to our LVT investment here in Lancaster. Slide 10 provides more details on guidance. Our inflation expectation for the year is up $10,000,000 to $30,000,000 to $40,000,000 almost entirely due to our latest expectations for lumber. Productivity, SG and A, WAVE and cash taxes are all unchanged from our initial guidance.
On taxes, we now anticipate an effective tax rate of 48% to 50% reflecting an increase in the amount of unbenefited foreign losses relative to our earlier guidance. For Q2, we expect sales of $7.10 to $750,000,000 At the midpoint, this would be an increase of 4% from 2013 on a comparable foreign exchange basis. Adjusted EBITDA should be in the range of $90,000,000 to $110,000,000 At the midpoint, this would be a slight increase from the prior year. Profitability in the second quarter will be impacted by the dynamic of wood lumber inflation versus price realization of the recently announced increase. Russia and higher year on year SG and A spending will also impact Q2 guidance.
With that, I'll turn it back over to Matt. Thanks, Tay.
Despite the weather and developments in Russia, I'm pleased that we were able to deliver on our first quarter guidance and reiterate our sales and EBITDA guidance for the year, Strengthen our North American ceilings business, continued progress in the Wood segment and team efforts around the globe should allow us to deliver these financial results. And so with that, we'd be happy to take your questions.
Thank you. Our first question is from Dennis McGill of Zelman and Associates. Your line is open.
Hi, good morning. Thank you guys. Just quickly on the Wood Flooring business, I think volume was down about a high single in the quarter. As you look at some of the decisions you're making with where you're doing business and certain customer accounts, when would you expect volumes to at least match market activity over the next, I guess, the rest of this year into 2015?
Good morning, Dennis. Tom Mangus. Yes, you're right. We were down in units high singles. That's a reflection of our strategy to both drive price and mix to recover our structural margins as well as to constrain our production to what we can dry in our own yard.
As you recall last year we're using a lot of PKD to enable that. We are making investments in this quarter that will enable us to increase our drying capacity and that will start to come online in the July period. The and so we'll have capacity to be able to expand with market growth in the back half of the year that will ramp through the back half of the year. That said though, we are focused on a margin recovery path for the Wood Flooring business. While we had a reasonable start to the year, we continue to see aggressive commodity inflation on the lumber side.
You saw that in the higher guidance. We just recently went out with another 4% to 10% price increase on solid wood and engineered wood. So we're going to continue to as the market leader be the price leader and drive pricing. And we don't hope for it, but we expect there will be some competitive scraping going along the way that will in the short term maybe cost us some share growth which could constrain some of that matching market growth underlying your question. Clearly though, Dennis, our priority in 2014 is margin restoration.
I think responsible investments to Tom's point to expand our capacity a little bit, but it's really price margin and mix.
Thank you. Our next question comes from Catherine Thompson of Thompson Research Group. Your line is open.
Hi, thanks. I mainly wanted to step back and you alluded to talking about better trends in certain geographies versus others that were less affected by weather. But maybe could you progress through the quarter in terms of trends on your Seamings business to get a sense of what is really reflected in true demand? And maybe do it particularly be helpful if you could look at areas that were perhaps harder hit by weather and how they're doing now versus when they were dealing with snow and ice and the like? Thank you.
Sure. Let me I think Dave's got a little bit more detail by sort of region in The U. S. But just to reiterate, if you look at the weather impact for us kind of $5,000,000 to $10,000,000 it's just isn't that significant. I think to your point, Catherine, the details are sort of in specific regions.
I mean, we had some regions that were relatively robust and regions obviously, predictably the Midwest and Northeast that were affected. We got hit two ways. We got a little market softness as a result of the weather as reported by our distributors. But also remember we had a couple million dollars of additional expenses particularly in the ceilings plants related to the increased maintenance and energy costs as a result of the weather. So we got kind of squeezed both times.
And similar in Florida, one of our big plants being in Kankakee, Illinois just South of Chicago. So you can imagine that they were affected as well. So Dave, I mean, you want to give some more transparency on the regions?
Sure. So it's Dave Schultz. So Catherine
just to provide a little bit
of color on this. As Matt mentioned, it's extremely difficult for us to pull out the pure impact of weather. One of the things that we looked at was the number of days that our distributors reported that they lost during the quarter due to bad weather. And that ranges in the Northeast and the Midwest between five and ten days lost on shipping. In the Mid Atlantic, it was between three and five days.
And then even in the Southeast because of some of the freezing weather, we lost up to five days of shipments from our distributors. So we've used that to estimate the range between both of our businesses on the impact of the weather on sales. If we take a look at some
of the
trends during the quarter from a sales perspective. Obviously, those regions where we had the larger impact on lost shipping days, we were it's very difficult to pull out the impact of the weather. But some of the regions that were not impacted by the weather, we were very pleased with the results. I mean, we saw mid singles in some parts of the country even low double digits in some parts of the country relative to the prior year within our ceilings business.
Thank you. Our next question comes from George Staphos of Bank of America Merrill Lynch. Your line is open.
Thanks, everyone. Good morning. Congratulations on the progress. Two part question kind of same theme to the extent that you can cover it. If we look at Resilient Flooring, you mentioned some of the items that hurt you in the quarter in terms of why The Americas volumes or revenues today were down.
Is it possible to parse the traditional products relative to luxury vinyl tile? And when should we expect that LVT could ultimately drive positive sales comps in The Americas realizing a lot of it ultimately could be driven by what the market is doing? And then I don't know if I heard you say, will Russia and devaluation conspire to keep margins flat or lower in ceilings and building products over the rest of the year? And what are the puts and takes there? Thank you.
Sure. Let me I'll frame it and I think we'll ask Tom to comment on resilient flooring and maybe Vic to add a little color on Russia. But in terms of Resilient Flooring, the major driver for the weakness was market segment performance. Remember that our Resilient Flooring business plays extremely plays hard in healthcare and education and those market segments are a little softer than anticipated coming in. LBT is a fairly robust product platform inside Resilient Flooring but on a fairly small basis so far.
But Tom anything to add to that? Sure. So George, the we do about we did about $150,000,000 or so in North America total Resilience sales in the first quarter. LVT is just shy of 10% of that. So it's a growing segment for us and we have high expectations particularly as we bring this plant on.
I think LVT can be a disproportionate profit driver for us. But it still pales in comparison to the VCT market within that segment. So looking at the dynamics that we expect, the VCT will lose share to LVT, which is why we're investing in it and also LVT will continue to take share from sheep. I think it's a very exciting category. We've got aggressive growth plans there as well as productivity plans.
But it's going to be a few quarters before it's really going to be a driver of the segment in The Americas. And just to reiterate, we did announce the or conduct a groundbreaking ceremony for the new LBT plant here in Lancaster about two weeks ago. So we're committed to the product, committed to the platform. We think it's a very exciting part of the Brazilian flooring business. In Russia, we did comment a little bit on the quarter more than the year.
It's hard to really predict what the ruble is going to do on a go forward basis. But as we said, the ruble devaluation in the first quarter resulted in our executing a 10% price increase. The effect of that price increase falls outside of the quarter, so that increase is effective in April. There was no it didn't the ruble devaluation of the market dynamic didn't affect our revenue performance in Russia. We do suspect there was some buy ahead in advance of the price increase.
So and we think the bottom line impact of that was about $2,000,000 On a go forward basis, the team is prepared to continue to offset inflationary price increases as necessary. And as I said, we're monitoring the situation semi weekly and frankly more fluid way than that. But we're staying very close to the dynamics and we're adapting our structure and our approach as the situation warrants. Any additional comments? I think you covered it well.
I would just add that if the ruble stays where it is with our 10% price increase, we should be able to claw back the margin impact to what we saw in the first quarter. And as you said, if it continues to devalue, then we'll be back out with the price increases our plan. Thank you.
Thank you. Our next question comes from David MacGregor of Longbow Research. Your line is open.
Yes. Good morning, everyone. A question on flooring, I guess two part question on flooring for Tom. First of all, on the wood business,
do you sense
that your wood costs are beginning to level off here? I know you've got some drying capacity coming on here mid year, but do we start to level off? And if that's the case, at this trajectory, when do margins normalize in the wood business? And is that at a sort of a 10% to 12% level as you've seen sort of peak margin performance in the past? And then the second part of the question is really more with respect to the resilient business.
And Tom I've asked this before I'm just I guess looking for your most recent thinking on this given you've been in the job a little bit now. But how do you improve on the structural profitability of Resilient longer term? Thanks.
Very good. Thank you, David. So we continue to see wood inflation. So that's why we took our guidance up at the company level over $10,000,000 We continue to
see
it. The one common, two common, three A for Appalachian Wood continues to move up and we're pricing behind it. And that is where our focus is right now. It's hard to kind of anticipate a timeline David that wouldn't we achieve normalized margins as we're chasing inflation. I mean our study of our history at least suggests as long as we're chasing inflation up we're going to have subpar margins.
And as soon as that crests and starts to normalize or come down we will have strong margins competition forces us to price it away. Over time, we've demonstrated that we lose it on the way up and we gain it on the way down and we net hole. So we're reluctant to and we still haven't put an anchor into the ground when we expect margins to normalize. Now relative to target margins, I think you can we have mid cycle guidance on the Woods segment there. We haven't moved off of that target margin at mid cycle.
I think mid cycle has over the years crept away from us in terms of timing. But our goal is still to be in the teens in wood. And when you think back to the anchor point that you framed, it's 11% or so that was at trough volumes for the wood business, but in a stable commodity environment. So what we need to have happen to get back to that mid cycle guidance of the teens for wood is going to be a stable commodity environment. We're going to be pricing and mixing up getting productivity back, but I got to have that commodity cycle level out.
If everything were to stop today, we'd make a lot of progress by the end of the year. I'm not expecting it to stop today. On your resilient question, absolutely, we're looking for ways to continue to improve the structural profitability of the resilient business. Let me start with what we've done since I've gotten the job in December. We took charges roughly around Dave maybe you can correct me around $8,000,000 in total in the fourth quarter for restructuring.
We took a line crew out of our Braysite Australia plant. We've executed and we had people walk out the door yet. We've announced with the Works Council and agreed 60 people to leave our Delman Horst facility. So we've taken restructuring actions already in the year. Those we're already benefiting from the improved run rates in Greyside and we expect in the last quarter of the year to start benefiting from the productivity improvements in Bellman Horst.
But we're not necessarily done and we continue to look through our strategic planning process ways that we can drive the supply chain for additional cost out productivity. So stay tuned for that. I think there is more that we can be doing and particularly as we see a rotation of volumes into LVT, we'll look for ways to continue to take the right kind of structural actions and declining product categories to make sure our costs are very tight. Thanks for your questions. Thanks, David.
Thank you. Our next question comes from Eli Hackel of Goldman Sachs. Your line is open.
Thanks. Two questions. One just on wood quickly. Given that 1Q is normally the lowest margin quarter for you guys and you instituted a new pricing strategy trying to guess or at least estimate where you think wood inflation is going to be going out and pricing your product off that. Maybe you can just provide a little bit more detail in terms of why you expect margins to be lower next quarter and maybe at least the magnitude in your view for back half ramp, if that's possible?
And then second is just on the commercial market, clearly saying it's still choppy. When you talk to your distributors, what are they saying in terms of the number of bids they're getting or number of quotes they're having to give out, which could mean business in the second half of this year in early twenty fifteen? Thank you. Take the wood and then I'll talk about the market. Okay.
So Eli, good morning, Tom. Matt will take the commercial question. So I mean, you're right seasonally Q1 tends to be a lower quarter versus Q2, Q3. But again, the underlying driver is the commodity inflation. We're realizing it now.
We took pricing in December, which was great. It's what helped us achieve in the first quarter. But we continue to see the commodity inflation continue to go up. We see that dragging in the second quarter. Also the as we framed in Dennis' question, our units were down 9% in upper singles in the first quarter.
And so we're being cautious on what do we think is the relative sales growth rate we can achieve in the second quarter as we continue to drive significant price and mix in there. As you know the price was essentially effective in Feb March and so we didn't have a full year effect of that full quarter effect of that. So call us conservative, call us prudent here. I think we want to see sustained level of improvement and before we call the ball in it. Just a couple of comments on the market.
I think you get the noise a little bit of noise in the first quarter relative to the weather kind of out of the way. It wasn't that big a factor. I don't think it drives our outlook of the market. As we look at Q2 through the end of the year, the commercial market recovery is about as we anticipated. Maybe a little softer in Education and Healthcare, maybe a little stronger in Office.
But by and large sitting here today, the market looks like it's developing expected. We are expecting an acceleration in the improvement of the environment as we go into the second half. That is borne out by the views of virtually all of our distribution channels in both our flooring and the ceiling segments. So we anticipate continued improvement as we go through the year. But in total the year is going to land looking at it today, the year is going to land about as we expected.
Again, just to reiterate, commercial starts experienced this year really benefited us in 2015 and 2016. But I would say that our distribution channel answering your question is reasonably optimistic about a sustained commercial recovery in the second half. And yet coming in the year we called the market up kind of low single digits overall.
Thank you. Our next question comes from Nishu Sood of Deutsche Bank. Your line is open.
Thanks. In the last
couple of months, there's been quite a bit of investor excitement and focus on the prospect of splitting the flooring business from the ceiling tile business. And I think that comes from a perception that given the difficulties that's come out of flooring and the real focus on some of those problems that that has kind of increased your management's willingness to kind of consider splitting those two businesses. So I wanted to ask you if you could comment on that if that's an accurate depiction. And last quarter you'd made the comment that look we're open to things, but we're obviously focused on executing right now. And I was wondering if you could also give us an update in terms of that question on the timing of how you're considering it?
Yes. Not a lot of new information issue. I appreciate the question. We're certainly sensitive to the view in the marketplace held by some. I would just say this.
The leadership team is focused entirely on building shareholder value over the midterm. We are constantly looking and evaluating options and choices, alternatives and opportunities to increase that shareholder value. And that goes on in direct concert with the Board on a continuing basis. We seek advice from outsiders, outside advisors continuously to look at ways that we can drive shareholder value over the midterm. The management team in the here and now remains focused on improving the businesses we have.
I think we have real opportunity obviously real opportunity to drive much improved results in our roof flooring business. Tom and the team there are driving meaningful sustainable results. We're hearing about it today. We're making meaningful investments to improve the profitability and position Resilient Flooring for continued growth. The ceilings team continues to execute extremely crisply.
So any good leadership team has to do both, particularly in this operating environment. We've got some things we need to fix. The team is laser focused on getting those fixed. At the same time, we're in continuous discussion with our board and outside advisors on ways to unlock shareholder value in advance of that. And we remain strategically nimble in doing that.
Thank you. Our next question comes from Will Randell of Citigroup. Your line is open.
Hey, good morning. Thank you for taking my question. On the CapEx and capital allocation front, I guess over the medium term, where do you see capital expenditures normalizing, I'd say in call it 15%, sixteen % closer to D and A levels? And I guess what level of balance sheet leverage are you comfortable with today before you think about additional share buybacks?
Just kind of comment on CapEx and we'll let Dave talk about the balance sheet of debt leverage. Right now, we've got sort of two major projects that we're winding through or going through. We've completed our three plants in China. By the end of this year, we will complete construction in the ceilings plant in Russia. As we mentioned just a minute ago, we've initiated a LVT investment in North America that will be completed in 2015.
That's a little over $40,000,000 At the end of that sitting here today, we're not anticipating additional organic investments. So as we work through those, think about an increased level of CapEx spend over the norm in 2014, a little less than 2015 as we wind down the LBT plant. And we see normalized CapEx requirements on a go forward maintenance basis of about $100,000,000 after the completion of those plants. Dave anything? Sure.
So it's Dave Schulz. So on a long term basis excluding as Matt said any additional organic investments and we do not have any contemplated at this point. Our normal maintenance and repair productivity capital spend is between $100,000,000 and $120,000,000 per year. And so obviously as we complete the LVT facility, we complete the Russia plant as we get into 2015, we would anticipate that our capital expenditures into 2016 and beyond would moderate more to that $100,000,000 to $120,000,000 level. And I think your second question was about leverage.
So we're very comfortable with our leverage being in that two to three times EBITDA. We feel very comfortable that that gives us the flexibility that we may need if there are additional organic investments or perhaps some other opportunities for us to
question comes from Ken Zener of KeyBanc. Your line is open.
Gentlemen, good morning.
Good morning.
Going to do Wood first. The roughly 9% volume decline, could you give us the delta versus what you think the market was as well as the spread in margins of the business you're relinquishing versus the business the core business that you're planning on keeping which is facing obviously the incremental wood inflation?
Okay. Yes. So we did decline volumes high single digits. It wasn't I said nine, but I didn't mean that it was more high single digits. So we are pursuing through our price increases a rationalization of our businesses.
So we are seeing more of our low end opening price point products decline disproportionate to our high end, high margin products, which is what's achieving the significant price to mix result you saw in the first quarter. And we expect that to continue. And we've seen that that has been good for our business. It improves our ability to get productivity at the plants. And we've been able to maintain shelf space and share of mind of our customers and consumers at the high end.
So we think that's a smart strategy and one will continue. The what was your second question, Ken?
Ken's line has been removed.
All right. I forgot a second question. Sorry about that Ken. Maybe you can dial back in and ask me. There you are.
Thank you.
I'll go ahead and open the back up.
All right. Thank you.
You're welcome. Ken, your line is open.
Gentlemen, are we together still?
Yes. Sorry
about that. So my first question was still following up on the margin spread associated between the high end that you're keeping and pushing the price through versus sales you're relinquishing. Just so we can get an understanding of kind of the margin benefit you're getting from relinquishing sales that are unprofitable versus simply core inflation that you're trying to catch up on?
So I think I answered that question. So I wasn't going to answer more specifically than that.
Okay. I just wanted to make sure. The 130 basis points in ceiling basis point headwind was referring specifically to energy and FX. Could which piece is the FX? Is it roughly half and half and the FX is going to persist here for maybe a quarter or two?
And I know another competitor talked about spikes and energy curtailments. How would you kind of frame out the energy? Is that part of just the natural gas inflation we've seen? Or is that really tied to weather spikes in the quarter? Thank you.
It's to answer your question, this is Matt. The headwind we've received between energy related to the weather and FX mostly the ruble is almost fiftyfifty to your point. It's very difficult for us to forecast or anticipate additional headwind related to potential devaluations in the ruble. What we will say and what we have said is, and I think Vik made this comment just a moment ago, we're positioned to continue to increase prices to offset the valuation currency devaluation in Russia as we go forward. If there's no further devaluation than the increases announced effective in April will offset the headwind that we received in February and March as they devalue.
So we just as we experienced if we experienced additional devaluation, we'll continue to move our prices in accordance. Those increases appear to have been followed in the marketplace. So I think that's really got where it is. The energy increases as a result of the weather are predominantly natural gas. We had spikes in natural gas pricing related to weather and shortages.
So again given the fact that weather has stabilized and we don't anticipate any major weather events from this point forward, we don't anticipate any additional headwinds related to weather related to energy specifically natural gas. And again, if you look at the whole scheme of things, we wanted to point out both of those items, because there's a tremendous amount of interest in the ADT margins. We want to be clear as to what was driving that margin degradation Q1 twenty fourteen over 2013 and it could be attributed to both of the factors that you pointed out.
Thank you.
You're welcome. Thank you.
Thank you. Our next question comes from Mike Wood of Macquarie. Your line is open.
Hey, Mike.
Hello, Mike. You might want to check your mute button. All right. We'll move on to the next one. Michael Rehout of JPMorgan.
Your line is open.
Nothing. Mike?
All right. We'll move on to Keith Hughes of SunTrust. Your line is open.
Yes. Can you hear me?
Yes, Keith.
There we go. Question on building products. You referred in the Q2 price and mix adding $7,000,000 to the revenue line, but when we get to operating income negative $2,000,000 is that the negative mix from China you're referring to? Or what all is in those numbers that make it negative when we get to the operating income line? Perfect.
Yes. On the operating income line, there's two things really driving it. I think the weather and the FX was clearly articulated the impact of that. There was also some mix related to both really all the regions had negative mix. And some of it was channel mix like in The U.
S. And then we had market mix in both Europe and Asia. So China was mentioned. We had a stronger retail segment in the China market, which is a lower margin business for us. And then in our European business, part of the Western European business was softer relative to the stronger lower margin parts of the business.
So it was market mix in Europe contributing to that as well. And is that going to continue in the second quarter that kind of impact? No. We believe this is timing. It will balance out as we've expected it throughout the remainder of the year.
And the same line there was SG and A on $500,000,000 is that in Russia?
Yes. Hi. Keith, it's Dave Schultz. So we did have some year over year SG and A related to our emerging market investments. And then we also obviously had some inflation and then some also we had made some investments in the back half of twenty thirteen in our core markets for selling and promotion activity and that continued into the first quarter of twenty fourteen.
Those abate in the second quarter as
well. We would anticipate that those are structural increases to SG and A in the emerging markets and also the increase in go to market capability in the core markets so they will continue.
Thank you.
Thank you. Our next question comes from Robert Kelly of Sidoti. Your line is open.
Hey, good morning.
Hey, Robert.
Forgive me if you've covered this already. What's your confidence level that the most recent wood flooring price increase is going to stick?
Well, as Tom pointed out as our as a share leader, I mean, we'll continue to drive price increases to offset material inflation. Our experience so far has been that they've been followed, but it's difficult and probably not prudent for us to speculate on what our competition is going to do.
Okay. Fair enough. And then just one question on the full year GAAP for EBITDA. You mentioned in the earlier part of the Q and A about kind of banking on the second half acceleration. Is the difference between hitting the high end and the low end of your EBITDA guidance tied to the North American commercial story?
Any color you can provide on that?
Yes. I appreciate that. We're really not going to shade it that finally at this point in terms of where in the range we might land. I think we've got a couple of key drivers. One is frankly some we had relative softness in our wood performance in the third and fourth quarter last year.
So we expect the sustained improvement that Tom's team is driving will more than offset the softness experienced last year. Plus, as we said, just an acceleration or continued strengthening in our core commercial markets, the second half will help us there as well. And then beyond shading inside the expected ranges, we'll have to just execute as well as we can and see where we land. Thank you.
Thank you. Our next question comes from Jim Barrett of C. L. King Associates. Your line is open.
Good morning, everyone.
Hi, Jim.
This is a question for either Matt or Tom Angus. Could you talk about in your resilient flooring domestically, some sense of the degree of growth you're seeing in the sales of that business to the residential remodeling market? And could you just generally comment on the margin mix comparison in that market versus non res?
In Resilient, Jim? Yes. Okay. We haven't seen I'll kick it off and I'm sure Tom's got lots to add to this. But we haven't seen a resurgence meaningful resurgence in the repair and remodel business in resi.
Any significant improvement we would see in resilient would likely come in the remodel of multifamily. You're not seeing a lot of resilient flooring in single family homes. We haven't seen that come back as you would have anticipated with a kind of a broader recovery. Tom? Yes.
So I would say Jim that 90% or more maybe 95% of the resilient business in The Americas is the residential resilient business is repair remodel. There's not a lot of sheet vinyl going into new homes these days unless it's multifamily like Matt said. And so it is predominantly a repair remodel. And therefore, it's really up to standard margin for the business.
Thank you. Our next question comes from Stephen Kim of Barclays. Your line is open.
Thanks very much guys. Just had a couple of questions for you regarding LVT. I was curious if you could first give us a sense for what the cadence of charges is going to be or expenses will be associated with the start of the LVT and while we're at it maybe just throw in Russia there too. And then the second question is a broader one about LVT. The opportunity there has not gone unnoticed by a number of players in the industry.
And I was curious, if you could just sort of talk bigger picture about what your expectations are for being able to capture a dominant share in LVT like you do in Resilience, maybe share with us in your view what it is about the LVT market? How it's bought? And what other than just by virtual birthright, just getting into this new category will enable Armstrong to have a very strong share in this category like it does in the rest of Resilience? Thanks.
Thanks, Steve. This is Matt. Listen, we're a little reluctant to try to break out complex projects like Russia or LVT in sort of a quarterly phasing of expenses and cash drops. I mean, you could have significant pieces of equipment and the engineering associated with that equipment kind of land inside or outside any given quarter. So what we're trying to do is give you a sense within a current year of what we think that those expenses and CapEx is going to be.
So, yes, we'd like to sort of leave the guidance and the comments around both those projects kind of intact. If anything significant changes or pushes them outside the chronological timeframe we've laid out, we'll certainly share that with you. But other than that, we probably feel comfortable leaving that where it is. I know Tom wants to comment on the LVT. Just a couple of comments.
We have been in LVT for a while. So we've been sourcing that product. So the investment we're making will continue the momentum that we've developed in the LVT market. We believe that we're uniquely positioned to take advantage of this investment with this manufacturing technology. We also observe and understand and see that our competition is moving into this arena.
So again, no real surprises there. And Tom anything else to Sure. What I say is LVT is a fast growing market opportunity. It is one that is design and performance led. And these are two areas we think we excel in and provide a differentiated reason to believe that we'll earn a disproportionate share of the market.
I'll say today though we're not the share leader in LVT, although we have a a significant position. We're probably the number three player domestically in LVT. And but with that still between the residential and commercial segments, we expect to open this plant and earn significant margin by taking that sourced product onshore, which provide relative to the competition who is mostly sourced offshore today. A couple of guys have announced new plants, but create a significant advantage on cost, significant advantage on lead times and design flexibility by keeping it by bringing it in house. So while I don't think we have dominant shares in any business, I think we have leadership shares in VCT and we certainly hope to achieve that in LVT, although we don't need to achieve that to make this plan a very attractive return for the company.
Thank you. Our next question comes from John Boa of Stifel. Your line is open.
Good morning. Thank you. I wondered on ceilings, you were commenting about I believe a low single digit volume outlook. Was that a North American comment only? Or if it wasn't,
could you kind of go around
the globe in what you're seeing in key foreign markets? And then comment as well on pricing in ceilings in North America amount pricing anywhere else other than Russia where you already touched on it? Thank you.
Just well, the dynamic we talked about was entirely in North America. And we're not going to really comment on anticipated pricing announcements or anticipated pricing performance. Do you want to Vic give some flavor in Russia or rather in Europe and Yes.
I can
just go around that one real quick. As we've talked about The U. S. Is again our overall start with the worldwide look on the market outlook is as Matt talked about is playing out as we expected it to. So there's not any real surprises across the world in terms of the markets.
Again, U. S. Is flat to low single digits in The U. S. Commercial business.
That's what we expect to see. In Europe, it's mixed. We have, I think, seen the bottom in the European market overall. The U. K.
Market, there's some timing in our sales there, but the market actually is playing out to be flat to positive like we're seeing in The Americas. North Europe is overall better. And then you have a Southern Europe that is still weak and softer than prior year. And Russia is just very volatile right now. We don't know exactly where that market's to go based on the political events there.
What I do know is that we're playing very well and our teams are executing in Russia in spite of the headwinds that we're seeing there. And Asia again is playing out as expected. All of our emerging markets in Asia are positive growth and they're slower than what we've experienced in emerging markets in the prior three years, again as we expected. So I think overall favorable market conditions generally speaking and again as we expected. Guys, this is Matt.
I'm being told we have time for one more question. We're having some technology difficulty in this part, so I apologize for that. But we'd be happy to take one more question.
All right. Our final question is from Justin Berginger of Gabelli and and Company. Your line is open.
Good morning, everyone.
Hey, Justin. Quick question on ceiling volumes. With the weather being as it was, was there any was there any upside in the quarter from volumes associated with taking share from competitors that had sort of more weather challenges than Armstrong? Or were sort of the pretty strong volumes in North America a function of other factors?
Jess, I appreciate the question. It's always difficult for us to anticipate share gains and losses in and outside any quarter. There's just so many moving parts. So we're not sitting here believing we made any significant share gains in Q1. And again, I think that's really more of an annual dynamic than any issue or opportunity inside any given quarter.
There's just so many you have large projects that fall and don't fall. Different companies are affected differently by markets and weather in any given short term period. So we're always very reluctant to comment on that. But we do appreciate the interest and we understand the question. And with that said, I'd like to thank everybody this morning for your interest and the questions and hope you have a very nice day.
Thanks everyone.
Ladies and gentlemen, thanks for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.