Good day, ladies and gentlemen, and welcome to the Q3 twenty twelve Armstrong World Industries Inc. Earnings Conference Call. My name is Laura, and I will be your operator for today. At this time, all participants are in listen only mode, and we will conduct a question and answer session toward the end of this conference. As a reminder, this call is being recorded for replay purposes.
I'd like to turn the call over to Mr. Tom Waters, Vice President of Treasury and Investor Relations. Please proceed, sir.
Thank you, Laura. Good morning and welcome. We appreciate all of your flexibility as we've delayed this call from our normal release time of Monday as we and more significantly you have dealt with Hurricane Sandy and the aftermath and we hope that everyone has come through that safely. Regarding this call, please note that members of the media have been invited to listen to this call, and the call is being broadcast live on our website at armstrong.com. With me this morning are Matt Espie, our President
Okay.
As we've delayed this call from our normal release time of Monday as we and more significantly you have dealt with Hurricane Sandy and the aftermath and we hope that everyone has comes through that safely. Regarding this call, please note that members of the media have been invited to listen to this call, and the call is being broadcast live on our website at armstrong.com. With me this morning are Matt Espie, our President and CEO Tom Mangus, our CFO Frank Reddy, the CEO of our Worldwide Floor businesses and Vic Grizzle, CEO of our Worldwide Ceiling business. Hopefully, you have seen our press release issued Monday morning and both the release and the presentation Tom Mangus will reference during this call are posted on our website in the Investor Relations sections. In keeping with SEC requirements, I advise that during this call, we will be making forward looking statements that involve risks and uncertainties.
Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong, please review our SEC filings, including the 10 Q filed Monday. Forward looking statements speak only as of the date they are made. We undertake no obligation to update any forward looking statement beyond what is required by applicable securities law. In addition, our discussion of operating performance will include non GAAP financial measures within the meaning of SEC Regulation G.
A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation. Both are available on our website. With that, I will turn
the call over to Matt. Thanks, Tom. Good morning, everyone. We've got a lot to cover this quarter, so I do appreciate you taking the time to join the call. I'm going to ask you to bear with us as we go through a lot of material.
I'll start out by providing you a high level view of the market environment and our results in the quarter and update you on a few recent Armstrong specific actions. I'll then turn the call over to Tom Mangus, who will give you a detailed review of our financial performance as well as guidance for the remainder of 2012. And then finally, I'll share our current thinking on 2013 macroeconomic outlook and recap where we stand as a company. Our third quarter adjusted EBITDA margin of 19.3% was the highest achieved by Armstrong since we emerged from bankruptcy in 02/2006. This achievement is a testament to our cost out and productivity efforts as global end markets remain challenging.
Market conditions in the third quarter of twenty twelve continue to exhibit many of the same trends as the first half of twenty twelve. Commercial sales in The U. S. Were down slightly with particular weakness in the healthcare and education sectors, which of course rely on public financing. The office sector was slightly down, but performance varied as regions with technology or energy driven economies have done well, while most other regions lag 2011.
New residential construction continues to be a bright spot and our flooring businesses have seen strong year on year gains in the builder channel. However, high unemployment, low consumer confidence and general uncertainty have constrained resi repair and remodel activity as homeowners remain cautious. In Europe, the Eurozone economies continue to struggle, but sales declines have moderated and there are signs that the region is nearing bottom. Russia, Eastern Europe and The Middle East continued to do well and provided something of an offset to the weak Western European markets, especially for our ceilings business, which actually saw sales and profitability improve year on year. In The Pacific Rim, both flooring and ceilings continue to see strong growth in the healthcare and education verticals in China and India.
In Australia, our biggest market in The Pacific Rim continues to be down from twenty eleven. Our net sales for the third quarter were $695,000,000 which after adjusting for disposed businesses was within, albeit at the low end of our guidance range. I'll talk more about these divestitures later. Sales in the quarter were largely as anticipated when we issued guidance with exception of flooring sales in the home center channel, which were lower than expected. Compared to the third quarter of twenty eleven, sales were down $40,000,000 or 5%.
On a comparable foreign exchange basis, sales were down $15,000,000 or 2%. The large majority of the FX impact was driven by the euro. On a total company basis, volume declines in the big box channel and softness in North American and Eurozone commercial activity were only partially offset by price and mix gains. Year to date sales of just over $2,000,000,000 are down $94,000,000 or 4.5% from 2011. On a comparable foreign exchange basis, sales were down $50,000,000 or 2%.
Again, the large majority of the FX impact was driven by the euro. More than all the sales decline was
driven by volumes, as again, both
businesses are driving favorable price as again both businesses are driving favorable price and mix. Adjusted EBITDA for the quarter was $135,000,000 within our guidance range of $120,000,000 to $140,000,000 and up over $13,000,000 or 11% from the third quarter of twenty eleven. Manufacturing productivity, SG and A savings and our continued ability to achieve price to cover inflation more than offset lower volumes and drove the adjusted EBITDA improvement. As of the end of the third quarter, we've delivered the $200,000,000 in manufacturing and SG and A savings from our cost out program. I will obviously monitor costs closely going forward, but the structural changes identified in 2010 have been achieved.
Despite global volume declines of more than 4% year to date, we've been able to increase adjusted EBITDA by more than $6,000,000 or 2% from last year. Our actions to drive manufacturing and SG and A improvements and price over inflation have offset more than $40,000,000 of bottom line impact related to market driven volume declines. We continue to execute on our strategic priorities and in this quarter announced the divestiture of two non core businesses, our Cabinets division and our Patriot wood flooring distribution businesses. We've been talking about Cabinets as non core for some time now and I'm pleased that we've been able to announce a sale that maximizes cash value for Armstrong shareholders and provides the business and its employees with more appropriate ownership. This transaction is expected to close later this week.
I want to personally thank all of the Cadence employees for all their hard work over the past several years as they successfully executed a significant and difficult restructuring of their business. Patriot is a small wood flooring distributor in the Northeast that was included within our Wood Flooring segment results. Now by selling Patriot to one of our existing distributors, we better position them to succeed and successfully sell Armstrong branded wood products in the region. Despite the relatively modest proceeds from these divestitures of just over $40,000,000 these are nonetheless critical steps for Armstrong. We are now more aligned with our preferred business profile.
As we've said in the past, we are strategically focused on global businesses, businesses with critical size and scale, leading market positions in categories where our brand can add value, and businesses where we can lever our relationships with leading architects and designers to pull product through our distribution partners. While many of our end markets are softer now than a year ago, Armstrong is continuing to execute on the items in our control. Our plant construction projects remain on schedule and we look forward to starting production at our China homogeneous flooring plant later this quarter. Our cost cutting program has just hit the $200,000,000 mark and we've successfully divested our non core businesses. Based on those divestitures and the market conditions I discussed, we are lowering our sales and adjusted EBITDA guidance for 2012.
We now anticipate $2,600,000,000 to $2,650,000,000 of sales for the year, which translates to the low end of our previous guidance when adjusted for the divested businesses. We now anticipate adjusted EBITDA for the year in the range of $385,000,000 to $415,000,000 This is up from 2011 adjusted EBITDA of $375,000,000 but down from our previous guidance range of $400,000,000 to $430,000,000 Tom Mangus will provide more details on these figures and specifically break out our guidance for the fourth quarter. So with that, I'll turn the call over to Tom to review the financials. Tom?
Thanks, Matt. Good morning to everyone on the call. In reviewing our third quarter and year to date results, I'll be referring to the slides available on our website starting with slide four, divested businesses, as Tom Waters already covered slide two and slide three is simply an explanation regarding our standard basis of presentation. Before we get into the details of our financial results, I
want to spend a minute to
make sure everyone understands the reporting impact of our recently announced divestitures. As you would have seen in our 10 Q, the Cabinets segment is being treated as a discontinued operation and my discussion today will relate only to continuing operations with the exception of cash flow which includes this Cabinets segment's small use of cash to date. As you can see on slide four, Cabinets' prior and current year performance needs to be removed from our historical comparisons and guidance as we included the segment when we last issued guidance in July. For perspective, we anticipated Cabinets contributing a total of $135,000,000 to $145,000,000 in sales in 2012 and EBITDA of roughly $5,000,000 on an adjusted basis. The Patriot business, while a smaller business than cabinets, is a little more complicated for comparison purposes as historical Patriot sales remain in our Wood Flooring segment results.
As a result, the Patriot divestiture impacts both guidance and prior period comparisons. As you can see, there is a $10,000,000 to $12,000,000 sales impact on the last four months of twenty twelve and approximately $24,000,000 to $27,000,000 sales impact in the first eight months of twenty thirteen. The sales impact from Patriot is a result of their sales of non Armstrong products to end retailers and the small distributor margin on Armstrong products. We will continue to sell wood flooring products in the Northeast and anticipate neutral to slightly positive growth of Armstrong branded products in the region as a result of this increase of two thirty basis points from last year. Adjusted EBITDA margin for the third quarter of '19 point '3 percent was a record for Armstrong, an increase of two thirty basis points from last year.
Adjusted EBITDA was also a record at $135,000,000 and was up 11% from 2011 despite a 2% drop in adjusted net sales. Adjusted operating income rose 15% and adjusted earnings per share results increased by 14%. Third quarter free cash flow was $78,000,000 up $5,000,000 from the same period in 2011. I will address the drivers of EBITDA and free cash flow in more detail on upcoming slides. We closed the third quarter with net debt of $784,000,000 down from $878,000,000 at the end of the second quarter, but up from $467,000,000 at the end of the third quarter of twenty eleven as we increased leverage to pay our $500,000,000 special cash dividend in April.
One additional fact I want to highlight is our unadjusted return on invested capital or ROIC. On a continuing operations basis, reported ROIC achieved 9.5%, an increase of four thirty basis points over the prior year and reflects the highest level we've achieved since emergence. We continue to focus on sustained ROIC performance with a goal of delivering at least 15% mid cycle. Please refer to the Financial Overview section of our May 2012 Investor Day materials on our website to see how we define mid cycle. Slide six details the adjustments we made on EBITDA and presents a reconciliation to our reported net income of $74,000,000 in the quarter.
As you can see, there were only a few minor adjustments in this past quarter and in the third quarter of twenty eleven. Interest expense was higher in 2012 than in 2011 as debt increased by about $250,000,000 to finance a portion of the dividend paid in April 2012. Tax expense was significantly lower versus the prior year, primarily due to a decrease in the valuation allowance and favorable impact from our foreign mix of income. The decrease in valuation allowance is based on a based on foreign tax credits and our projected ability to utilize these credits to offset future taxable income. Moving to slide seven.
This provides our sales and adjusted EBITDA by segment for the quarter. Excluding the impact of foreign exchange, Resilient Flooring had a sales decline of 5%, driven by declines in the home center channel, continued softness in the education and healthcare commercial markets in North America and weakness in the Eurozone, where sales declined by 10%. The sales drop was entirely volume driven as price and mix were favorable. Despite the sales decline, Resilient Flooring adjusted EBITDA improved by $12,000,000 or over 54 percent from the third quarter of twenty eleven as manufacturing and SG and A savings as well as pricing mix improvements more than offset lower volumes. Wood flooring sales were down 4% largely due to the Patriot divestiture I mentioned earlier.
Excluding Patriot, North America wood volumes were up mid single digits, but were offset by slight declines in price and mix resulting in essentially flat sales. The builder channel remains strong with sales up double digits compared to 2011 as new construction activity flows through to our sales. However, sales to the builder channel tend to be lower mix than our retail offering, thus contributing to the drop in mix. As in the second quarter, wood flooring sales were down in the home center channel. Adjusted EBITDA in the wood business was down year over year primarily due to price mix and higher lumber costs.
As a result of this, last week we announced a price increase on our solid wood products of approximately 6% effective mid December. Building product sales were up slightly as global price and mix gains offset volume declines in North America. In The U. S, commercial sales were essentially flat as we saw a continuation of the volume weakness in the business that Matt already discussed. Retail channel was also down.
In total, unit volumes were down mid single digits in North America. Some of the softness in retail can be traced back to a strong third quarter of twenty eleven when we had a series of storms including Hurricane Irene which drove retail repair activity. Sales in Europe were up 3% including pardon me, up 3% excluding the impact of foreign exchange as volume gains in Russia and The Middle East offset continued weakness in the Eurozone. Sales in Russia were up 50% in the quarter as we sold ahead of our go local initiative to ensure continuity of service. We expect some of this inventory build will bleed off in the fourth quarter as we bring our new expanded distribution service model online.
Price was up in Europe, but mix was down as Russia has a lower mix profile than Western Europe. Pacific Rim sales were up despite continued weakness in Australia, our largest Pacific Rim market. China sales were up 13% despite a tougher commercial construction backdrop. Adjusted EBITDA in Building Products increased $8,000,000 or almost 10% as the price gains and manufacturing productivity offset the volume declines. Some of the year over year manufacturing performance is due to the higher cost we incurred in 2011 to continue operations at our Marietta, Pennsylvania facility during the lockout.
Separately, we also took a 4% price increase in North America ceilings and grid effective October 1 in response to rising steel, starch and pearlite input costs. All indications in the market suggest others have followed our price increase. The corporate segment was down due to the expected continued decrease of our non cash pension credit. Core corporate expenses were lower year on year. Slide eight shows the building blocks of adjusted EBITDA from the third quarter of twenty eleven to our current results.
The story of the quarter similar to earlier quarters this year was volume declines across our commercially oriented markets offset by price and cost improvements. Volume was a $12,000,000 drag on quarterly earnings. Mix gains were driven by North America, resilient flooring as high end luxury vinyl tile products continued to gain share. In addition, weakness in the K-twelve education segment helped resilient as many of those projects use basic VCT products. Mix was also favorable in North America ceilings as we continue to drive sales of our high end products such as Ultima and products from our Architectural Specialties initiative faster than the market.
Offsetting these favorable mix trends were weaker mix in the builder channel and wood flooring and emerging market growth prior to our new plants opening. Price and input costs contributed modestly. Continued SG and A and manufacturing cost reductions totaling $25,000,000 more than offset volume headwinds and the lower non cash pension credit. Turning now to slide nine. You can see our free cash flow for the quarter.
Cash earnings were higher than the prior year driven by improved operating income. Working capital contributed $8,000,000 more to free cash flow in the quarter than the prior year. Capital expenditures were higher than 2011 as we continue to build out our emerging market plants. Interest expense was higher due to the additional debt from our March refinancing in support of the April '5 hundred million dollars special cash dividend. The restructuring other line was primarily related to several small 2011 items including prior year asset disposals.
Slides 10 to 13 illustrate our year to date financial results. Adjusted sales were down 2.4% on a comparable foreign exchange basis, driven by European macroeconomic issues and softness in commercial markets in The U. S. Despite the sales declines, adjusted operating income, adjusted EBITDA and adjusted EPS all improved. Free cash flow was lower primarily due to higher CapEx spending.
Slide 11 illustrates our sales and adjusted EBITDA by segment for the first three quarters of twenty twelve. The story is similar to the third quarter for the ForEx segments, so I won't recap those areas. Building Products saw gains in the third quarter of twenty twelve, but year to date EBITDA was essentially flat as favorable price and manufacturing productivity gains were not able to offset volume declines, investments in emerging markets and the start up costs at our new Millwood mineral wool plant. Slide 12 is our year to date adjusted EBITDA bridge. And again the story echoes the quarter.
Lower commercial market opportunity across all our core geographies remains a drag on EBITDA. As you can see by adding the manufacturing costs and SG and A columns, we have achieved the revised $50,000,000 of savings targeted for 2012. This means we have fully delivered the $200,000,000 savings program that began in 2010 as we sought to right size our cost structure. Slide 13 is the year to date free cash flow bridge. Improved cash earnings benefited from both higher operating income and lower cash taxes.
Working capital change was negative, but this was driven entirely by our accounts payable initiative that delivered one time outsized gains in 2011. Accounts receivable and inventory changes were favorable to the prior year. CapEx is of course related to our plant construction projects and interest expense to our March refinancing. Wave's free cash flow reflects the Partnership's ability to operate with minimal cash balances now that they have undrawn capacity on the revolving credit facility. Barring this impact, which occurred in the first quarter, WAVE's cash distribution was up marginally.
The other column is primarily driven by prior year restructuring payments that have not recurred in 2012. Slide 14 is our last presentation on our cost out program. As I mentioned a minute ago, we have now achieved $200,000,000 in cost out savings since 2010. And while the line items may change in coming quarters, the full amount has been captured and is reflected in our results. Going forward, we will remain diligent about costs and adapt our spending to market conditions and opportunities, but we will no longer report out on costs in this fashion.
Slide 15 updates guidance for 2012. As Matt mentioned, we are lowering our sales guidance due to our divestitures and continued market headwinds to $2,600,000,000 to $2,650,000,000 in sales. As a result of this sales decline, we are lowering our adjusted EBITDA guidance range from $400,000,000 to $430,000,000 to a new range of $385,000,000 to $415,000,000 At the midpoint of this guidance, we would realize a 7% improvement versus 2011 despite low single digit volume declines company wide. This once again illustrates the power of our cost reduction initiatives and the operational leverage we are building into the business. The midpoint of our adjusted EPS range is down $0.05 from previous guidance, but up 0.27 from 2011.
We now expect free cash flow to be in the $50,000,000 to $80,000,000 range, up from our previous guidance, driven by improved working capital performance and lower capital expenditures as we continue to fine tune the timing of our plant spending and find savings in our programs. As you'll recall, our free cash flow guidance for 2012 is below $170,000,000 we delivered in 2011 as we do not anticipate a special dividend from WAVE this year and as capital expenditures have risen related to our plant construction programs. Slide 16 provides more detailed assumptions going into our earnings guidance and includes specifics on the fourth quarter. First, petroleum related raw material and energy costs have moderated, but we still expect to see inflation of $10,000,000 to $20,000,000 versus 2011. We continue to expect to fully offset material inflation with price in 2012.
Our recent solid wood price increase announcement is an example of our focus on offsetting cost increases on a real time basis. Given our cost out efforts, continued focus on improving mix and measured pricing to recover commodity inflation, we continue to expect improved gross margins of 50 to 100 basis points despite lower volumes. Our non cash U. S. Pension credit will decline to $12,000,000 This is also unchanged from July.
We continue to expect WAVE's earnings to be flat and cash taxes of roughly $10,000,000 to $20,000,000 Our estimate for the fourth quarter projects sales, including anticipated FX impacts, to be in the range of $585,000,000 to $635,000,000 which at the midpoint is basically flat with 2011 on a constant FX basis. We expect the fourth quarter of twenty twelve to produce adjusted EBITDA of $60,000,000 to $90,000,000 compared to $53,000,000 on a comparable basis in 2011. Our top line assumes a continuation of the macro environment we've experienced these past two quarters. The adjusted EBITDA estimate benefits from our 2012 cost, price and mix improvements and from 2011 comparisons where we experienced higher costs associated with the lockout at Marietta. Our capital spending range of $210,000,000 to $230,000,000 is lower than previous guidance as we uncover continue to anticipate $10,000,000 to $15,000,000 in EBITDA adjustments associated with already announced actions.
This is unchanged from previous guidance. Clearly, the macro climate is a challenge, but you can remain confident we are doing all we can to manage the areas we can control to deliver strong shareholder value creation over the long term. We have delivered our cost out savings program and now we are focusing our attention to driving top line growth in the quarters and years ahead as we begin to benefit in 2013 from our investments in emerging markets and developed world innovation program. And with that, I will now turn it back to Matt.
Thanks, Tom. As you'd expect, we're in the midst of building our annual operating plant. As I've talked with many of you at recent investor events, I know that 2013 is on your mind as well. While I'm not yet ready to provide guidance for next year, I'd like to update you on the macroeconomic climate we're anticipating as we frame our operating plan. Utilizing the September McGraw Hill data and blue chip consensus estimates, we expect modest GDP growth in The U.
S. Similar to that of this year. These data sources project that commercial construction starts in The U. S. Will be up double digits.
But remember, our product lags starts, so we'll be living with twenty twelve's flat starts in 2013. Retail and office should be the best performing subsectors with education again lagging. Commercial repair remodel activity will be up modestly with office leading and education lagging. New residential construction will continue to grow with housing starts in the $850,000 to 900,000 range and modest growth in residential repair and remodel activity as consumers gain a measure of confidence as the economy slowly improves and house prices stabilize and then rise. Outside of North America, GDP consensus forecasts project very tepid growth in Europe with the Eurozone experiencing essentially no GDP growth and The UK doing only slightly better.
Now if correct, this translates in a lower volume of Armstrong products, especially in segments impacted by austerity measures, and again speaking about the Eurozone here. The outlook for Russia and The Middle East remains bullish. Incensus forecasts indicate that China and India will grow GDP in the mid to high single digit range, and we continue to expect that our target sectors of healthcare and education will grow faster than the overall economy. So in summary, it's a fairly similar story to this year. So to recap, the Armstrong team is delivering on factors within our control and driving earnings growth in the down market.
We're increasing our focus on our core businesses and divesting non core assets. And we're making strategic investments to grow in global markets where construction is strong. Turning to next year, we have a cautious view on the global macroeconomic situation.
But as
a reminder, we have capacity to achieve up to $4,000,000,000 in sales with our current and under construction manufacturing footprint. And given our record adjusted EBITDA margins, the operating leverage to drive significant profitability. So again, thanks for your attention. We covered a lot of ground. And with that, we'll be happy to take any questions.
Thank you. Your first question comes from the line of Ken Zener, KeyBanc Capital Markets. Please proceed.
Good morning, gentlemen. Good morning, Ken. Appreciate your changing in the schedule. Given that you've talked about not specifics in 2013, but that it could very well look like 'twelve in terms of lower volume, but you're getting earnings growth in a down market perhaps. Can you talk about the material versus cost inflation that you're seeing right now?
So you've announced recent price increases. Is that necessary to hold current operating margins? Or is that going to be net accretive? It sounds like net accretive.
Well, we're not really commenting specifically on the impact of those price increases in 2013. The increases we've announced in our ceilings and grid business this fall and those announced in our wood flooring business in December affect us somewhat differently. So the ceilings and grid price increases and their anticipated yields are included in our current thinking and current guidance. The increase in the wood in mid December really won't be effective have a big impact at all either way in this year. And again, we'll comment on that as we issue guidance for next year.
One thing
I'll take and this is Tom. Certainly part of our business model is we want to make sure we're at least covering commodity inflation. But our history is we with volatility, we're able to get it a little bit sooner and hold it a little bit longer as it comes down. So I think generally we you should count on price being a driver for our sales growth and potential margin growth for the future.
Okay, good. I mean excluding the wave, it seems as though your third quarter did very well and you're still looking at price. And then I guess if I could switch over the wood business, obviously the retailers how they're handling inventory doesn't change end market demand. But overall, given the shift more to the independent channel, would you still be reiterating your comments that you're holding share in that wood business notwithstanding how the channel is handling inventory
changes? Yes. So we don't have any evidence that we've lost share. I think what we are experiencing is some short term channel dynamics, but no evidence that we've lost any share.
Frank, I don't
know if
you have anything to add.
No, that's right on one. Yes.
Thank you very much.
Thanks Ken.
Thank you for your question. Your next question comes from the line of Catherine Thompson, Thompson Research Group. Please proceed.
Hi. Thanks for taking my questions today. In the Woods segment, could you clarify how much margins were impacted by mix versus higher costs? And particularly, how should we think about that going forward as we see a greater impact from new from growth in new residential?
Well, just a quick comment to sort of frame it and then we'll let Frank talk about it. But the yes, the major issue we had in this quarter was customer mix as much as product mix. I guess, the two are related. But this is a dynamic in our business where you have relative strength as a result of the residential construction increases. And we see that from increased revenue to the builder market, which as you might imagine is affects us somewhat negatively on mix and margin, affects us positively on volume.
What we're seeing is that associated with a relative weak market in residential remodel and some timing issues and some other dynamics in the big box channel. So I don't
I would say that relative to the contribution to the drag mix and material input costs were about equal in their contribution. They're both equal factors.
Okay. And also could you give a little bit more color on the impact of the fire at your Renewable Wool facility? What will be related cost due to downtime and supply chain disruptions?
Yes. Well, we had as you know, we had a small fire in Millwood, West Virginia. First of all, nobody was injured. There are no injuries. So the employees are fine.
We're going to lose about a week's production. We expect the plant to be fully operational by the end of next week or actually by the end of this week, I'm sorry. And the impact on the quarter at this point is not an issue. Negligible impact. And we have plenty of wool supply for all of our factories, so there's no impact to the manufacturing.
Great. Thanks so much.
Thank you, Catherine.
Thank you for your question. Your next question comes from the line of Bob Wettenhall, Royal Bank of Canada. Please proceed.
Hey, nice job growing EBITDA of lower sales. That's quite impressive. You guys were able to take out $18,000,000 of SG and A spending and bring it under $100,000,000 in the quarter. That's pretty awesome. Can we expect SG and A now to trend below $100,000,000 a quarter?
Is it sustainable?
Yes. I would say that no, it's probably not sustainable at that level. I mean, we certainly were working hard to deliver it. Some of that SG and A coming out is a function of the Patriot divestiture also coming out. I mean, that has SG and A associated with that.
So that's some of the year the quarter over quarter variance. Absolutely, we're going to stay vigilant on SG and A going forward, but I would not take this quarter run rate and straight line it out.
Okay. Fair enough. Other question is, in terms of Matt's commentary about the outlook, Europe's been tough for the whole year and residential and R and R has been a bit sluggish too. In terms of without getting too specific, do you think from a volume perspective for 2013 it would be okay to expect flat volumes against DC comparisons?
I'd say it's probably dangerous for us to go there at this point, Bob. I would say that the environment as we said next year is going to be very similar this year. We expect sustained growth in new housing starts. That's a good guy. Modest improvement in residential remodel.
That's a good guy. Stability and a lack of erosion in Europe, while it's good, often the way the governments get there through austerity measures could be some headwinds. So while we look for a more stable Europe even with a little tailwind, in the short term, the way the government gets there is often not helpful to us in the short term. And we expect Russia and The Middle East, China and India to continue to be places where we're going to see volume and revenue growth. So I think what we want to do is we're going to at the next call, obviously, we're going to lay out the details around the 2013 guidance.
The last comment I would say is, while we are optimistic that 2013 would be represent some level of growth in commercial starts and broader expansion in commercial remodel. I'd just remind everybody that in fact, because of the timing of our products in the construction cycle, while that's positive as we go forward, we'll be living with the 2012 sort of relative flat starts as it relates to our volume in revenue in 2013.
Totally makes sense. Thanks for the great color.
Thank you. Thanks Bob.
Thank you for your question. Your next question comes from the line of David MacGregor, Longbow Research. Please go ahead.
Yes. Good morning, everyone. You had
mentioned that you had sufficient capacity to support $4,000,000 of revenues. And I guess that's for the consolidated enterprise. I wonder if you could just speak to the building products business and what your capacity utilization rates might look like there now?
Well, I would say that we haven't parsed out the $4,000,000,000 by business segment. But I would say generally today our both business units are running capacity utilization around 70%. So that gives you a sense of the volume upside potential in both business prior to the new plants opening. And as you know, we're opening two flooring plants in China, One ceiling plant in China and Russia, which will only extend that available capacity worldwide.
Okay. Thanks. And then secondly, it sounds like maybe a little bit of CapEx is being pushed into 2013. I was just wondering if you could talk about the extent to which that push might be occurring? And also with the emerging market plant construction, how does CapEx I realize you're not going to put a number on it this morning, but how does CapEx for next year look compared to the $210,000,000 2 30 million dollars for this year?
Are we going to be up?
Let me this is Matt. Let me just comment on the CapEx push. That's really just a matter of timing of big projects. And that's project timing in the fourth quarter this year versus the first quarter next year. So that's capital sort of following the project.
As we said, even with that, the three projects in China are slated to be on schedule. Frank is going to be producing floors flooring material in China this quarter. So we're excited about that. And Vicks plant coming up in China, Early Second Quarter Of Next Year is on track. We're looking good for heterogeneous coming up at the end of next year.
And while we're in very early stages of Russia, it's all systems are go there too. So these are big plants in emerging markets, complicated projects and every once in a while you have a little timing slippage quarter to quarter and that's what's driving
the CapEx changes. Relative to 2013, this is Tom. We did in our Investor Day back in May talk about a glide on CapEx. We would expect CapEx to be down in 2013 relative to the current year even with the push of a few million dollars given the timing Matt just described there. We are completing homogeneous on schedule.
We'll be completing both the ceiling plant in China and the heterogeneous midyear. So there'll be heavy front half CapEx, but that starts to then they roll off. And then we start spending on Russia. So Russia becomes the new the new ad that comes on in 2013. But again in total I would expect this to be down.
Have you said what Russia represents?
We did not spit it out spell it out by year, but
we did tell folks about $100,000,000 CapEx program with production beginning of 2015. Terrific.
Thanks very much.
Thank you for your question. Your next question comes from the line of Stephen Kim, Armstrong. Please proceed.
That would be Stephen Kim from Barclays. Yes, thanks.
Welcome to Board. Thanks, Steve. How are you?
Things move fast. So I guess my first question relates to your cost cutting initiatives, which are now complete. And what incorporate, let's say, acquisitions and particularly what I'm thinking about here is whether or not you're thinking about or what you the attractiveness of acquisitions as you look around. I remember when we spoke with you maybe about six to nine months ago, it seemed like the roster of potential combination targets would have been very short. I was curious as to whether or not your success in your cost cutting program gives you added to maybe expand that list or if you've seen some things which give you enhance your interest in that area?
Well, Steve, it's Matt. The primary area where we would be interested in any sort of acquisition would most likely continue to be in Architectural Specialties, where we would look at what we sort of describe as smaller tuck in acquisitions. And I would point to the Simplex deal that we did about this time last year and that gave us expanded product range in service capacity in North America. I'd also point out that the integration of that acquisition has gone flawlessly and well within plan. So those to the extent we're working on acquisitions or looking at it, it'd be more that more along those lines.
We're not sitting here grinding through a big transformational acquisition. Any deal we look like, any deal we look at whether large or small, the economics, the standalone economics of the deal have to be be very attractive for investors. We are confident that as we look at deals that to the extent we'd identify synergy opportunities, we've got the resources and ability to deliver against those. But sitting here in the midterm, our changing our thinking hasn't changed much around acquisitions as we spoke a few months ago.
Okay, great. Thanks. Second question relates to the wood flooring business, a couple of things here. I was curious I assume that your comment about the Patriot business hopefully leading to divestiture hopefully leading to an improvement in actual sales into the Northeast Region reflects the fact that you're no longer going to be competing I guess directly with some of your distributors. Number one, can you talk to us about the timing around this sale?
Is this something that you've been contemplating for quite some time? Number two, are there any additional distribution that you still retain? And why would you retain it in some areas if you do versus other areas?
It's a good question. So this is a deal that we've been patiently working on for a while. We wanted to make sure that we got good value and that the strategic objective of of maintaining the channel into that marketplace remains intact. So we were patient. We were focused, but we were patient because we want to make sure we did a good deal for not only the folks acquiring the business, but also just make sure our channels to market were secure.
The divestiture or the sale of Patriot was really us sort of cleaning up the balance sheet, cleaning up the portfolio a little bit. We're not in the distribution business. Those are two very, very different business models. My experience is you can do one of those well. So you're either really good at the distribution business or you're a really strong manufacturer.
Very infrequently is it possible to combine those and do both effectively. Our job is to create innovative products, create demand for those products, create manufacturing capacity that delivers those products efficiently and of high quality and partner with independent distribution to serve our mutual customers. So that's basically our business. We don't really Patriot would represent the last distribution asset that we have. So we see that as kind of completing a journey we've been on for a few years.
And Frank, I don't know if you have anything else?
No, that's right on. If you recall, we got into the distribution business through Patriot really out of necessity when our major distributor, wood distributor in North Jersey and Metro New York went out of business. And at that time, it was absolutely the right thing to do to protect our share. We've accomplished that. We've actually built the business.
And as Matt said, we want to be focused as a great manufacturer and marketer of flooring products, not a distributor. And so this opportunity came up with a distributor partner that strengthens them, gives them more relevance in the marketplace with a full portfolio of products to sell both vinyl and wood and represents a great opportunity for us to transition back to what we know.
Great. Thanks very much, guys.
Thank you, Dave.
Thank you for your questions. The next question comes from the line of Dennis McGill, Zelman and Associates. Please proceed.
Good morning. Thank you guys.
Hey, Dennis.
First question, just generally on the revenue guidance for fourth quarter, I think you said the midpoint implied flat year over year on an organic basis and third quarter would have been close to down two. So can you talk about which businesses or maybe it's all the businesses you're expecting the growth rate to accelerate 3Q to 4Q? Or do you see that pick up, I guess, either by product category or geography?
Yes. Number one, I would say relative to the comparison period in last year, we are lapping the Eurozone Crisis. And so that is a driver from going from kind of down revenues to something that's more stabilized. That's probably the primary driver there. Also, we're launching good product initiatives across our portfolio and we're expecting to benefit from some share gain in the fourth quarter.
But I'd say really the big differentiator is the Eurozone lapping.
Okay.
And I would say both businesses benefit from that.
Okay. Second question would be on resilient profitability. I think you said year to date you're up $20,000,000 on the EBITDA line. So maybe for the year you end up $20,000,000 or $25,000,000 yet volumes are down. Can you do a similar bridge as far as $11,000,000 to $12,000,000 what that change was driven by either cost saves, price versus cost or mix?
And then just talk to maybe what the tailwind would be heading into next year of some of those factors if volumes were flat across the business?
Yes. This is Frank, Dennis. The primary drivers are really three. One is mix driven by new products. We've really focused on higher end products like LVT, premium VCT and premium wood products to drive mix in what's a tough market.
And then secondly, related to the overall cost out in SG and A, significant SG and A savings. And lastly, manufacturing productivity. So those are the three buckets that have driven year on year the growth in earnings.
Is there any chance you could maybe just break those down roughly? And then similarly on 13, is there a carry through effect that you'll have on some of those items regardless of what volume does?
Yes. I think, Dennis, we should probably shy
away from giving too much 2013 guidance here on the building blocks. Certainly, we're going to continue to focus on manufacturing productivity. We're going to continue to look at how do we drive positive mix gains. And hopefully, given the macroeconomic outlook, hopefully volume is not as bad as it was this year as a drag. But I think you can expect us to run a very similar play in 2013 as we did in 2012.
Okay. I appreciate it. Thanks. Thank you.
Thank you for your question. Your next question comes from the line of Keith Hughes, SunTrust. Please proceed.
Thank you. I think you had said in the prepared comments that hardwood was flat in the quarter excluding the Patriot divestiture. Is that correct?
Total sales were flat. Correct. Volume was up mid single digits, but offset by price and mix.
And the price mix was due to the strong homebuilder business. So my question really comes to the home center. It must have been down pretty substantially in that channel in the quarter. Is it more in stock products, special order? Just any sort of flavor along that line will be helpful.
Yes. I think there's this is Matt. There's kind of three things that drove this in general. One is the end market itself is a little weaker than we expected. So that if you take the channel dynamics away, we certainly have a weaker remodel replacement market than we expected.
There were some timing of new product load ins by some of the channel that affected us in the quarter. And then we did see a slight reduction in promotional activity, which would drive their end market volume. So I would point to these three things as the drivers. Is the is it one specific large retail or are you seeing this in several? I think it's probably not really appropriate for me to comment on any specific retailer.
I appreciate the question, but I think it's probably better that we just leave it at the comments that I went with. All right. Let me just shift it to resilient. You were down about 5% in The Americas there.
Is it
the same phenomenon going on there?
Yes. I don't resilient in The Americas, we weren't down
We were talking about that was the global number, I think.
Yes. On a constant FX, we were down 4% with FX. With Canadian, we were down 5% on sales. That's right.
And is the central phenomenon in the renovation repair channel going on there as well?
That in commercial Keith, commercial with public investment in education and healthcare had a significant effect year on year on the commercial side of the business.
All right. Thank you.
Thank you for your question. Your next question comes from the line of John Bauch, Stifel, Nicholas. Please go ahead.
Good morning, everyone, and terrific cost controls here. I wanted to go into the Vinyl segment and Brazilian, I guess. Are you vertical in LVT? I can't remember. And wondering what you make versus outsourced there and wondering how that whole shift is impacting that business segment both from a margin and the volumes standpoint?
Thank you.
John, this is Frank. We're not vertical in LVT. We source today predominantly from China for The Americas. We are vertical in Europe. We produce LVT in Bittingham predominantly to support the Eurozone market.
That business continues to grow both commercially and residentially. Residential, more of the floating and locking products and we've done very well there with differentiated installation systems that the customer deems as value. And then on the commercial side, we have really differentiated ourselves through visual and design leadership and that has helped us dramatically on the commercial side. So overall kind of a mix on the production side. We produce in Germany to support the Eurozone.
We source from China for The Americas. And then as I said, residential commercial, we have points of difference that really have driven our growth year on year.
So Frank, because you source from China for The U. S, is that still a mix positive when you see the segment growing or more in line with your vertical stuff here? It's mix positive, John. Okay. And I guess I wanted to just go back to the Home Depot Lowe's question again and we won't speak specific customers, but is there some issue going on with their inventory position Or is it more as you said maybe they're backing off promotions or because they're changing out their floor there's some disruption on their floor?
Yes. The big drivers as Matt said, John, really you put the weaker remodel replace versus what we thought it was going to be coming into the quarter. It's truly some timing of new product initiatives coming out of some of the review process that have been pushed back. And then it's a reduction in promotional activity year on year that has driven the delta. It's really no more complicated than that.
Great. Thanks for that color.
Yes. Thanks, John.
Thank you for your question. Your next question comes from the line of Jim Barrett, CL King and Associates. Please proceed.
Good morning, everyone. Hey, Jim. Matt, with the impending change in ownership of competitive business in European ceiling grid and now in flooring with Pergo, do you expect any major changes in the level of competition because of those changes? Not really. I think the consolidation industry is constructive.
But we obviously were aware of those deals and made other choices. So, no, I think it's largely positive. No surprises with any of the outcomes there. So we're comfortable with it.
And one thing on that, Jim, is we look at the USG grid business in Europe and decided not to proceed with that largely because a lot of the business value and was assigned to a joint compound business. So the grid business is pretty small. It actually went to a competitor in Knopf that we think was a good natural holder for the compound business and not a bad set of hands to have the grid business fall into. We thought there would be worse places for it to fall. So we felt pretty comfortable with the USG outcome specifically.
Good. And the Pergo assets in The U. S, were those assets the company took a look at? Could you give us any thoughts on that?
Yes. We did take a look at that business. This is Frank, Jim. We did take a look at that business and felt like for where we were positioned in the marketplace and what we were trying to do in laminate, it wasn't a great fit for us. Okay.
So we elected not to pursue it.
Understood. Okay. Well, thanks, everyone.
Thank you, Jim.
Thank you for your question. And your final question comes from Robert Kelly Sidoti. Please proceed.
Good morning. Good morning. You took some price actions with flooring and ceiling. Just given what's going on in the competitive side and resilient, do you see some opportunities to make some pricing moves in that business either by the end of twenty twelve or some point in 2013?
I would say right now we don't see that opportunity. I mean part of the reason our guidance on inflation has come down is because we have seen moderation in petroleum based feedstock. So we really don't have a cost basis to go out and ask for more pricing right now. Net, I think that direction in commodity pricing is good for our business because hopefully we will be successful in holding on to the pricing we've taken in the past for commodity cost increases in the resilient. But we don't have a reason to go out to our customers and ask for something there at this point.
Okay, great.
And just one quick one. You had
talked about I believe it
was sealing some a tough comp a year ago with storms and whatnot. You saw volumes down. Any way to quantify the benefit you saw across the business from storms and whatnot in the year ago period?
Well, what I would say is you would we probably wouldn't quantify it very specifically, but if our kind of independent channel pardon me, our retail channel outlet saw significant growth in the Northeast. We saw that driven by Irene and it probably contributed a couple of volume differentially versus what we would have expected normally.
Okay, great. Thanks.
Thank you.
Thank you for your question. I would now like to turn the call over to Matt Asby for closing remarks.
Thank you very much. Just a quick summary. Obviously, we see the macro economy and the climate as a challenge. The team here continues to be focused on executing these things in our control, all with a view on creating shareholder volume over the long term. We have delivered on the $200,000,000 cost out initiative and now we turn our focus to driving top line performance as we begin to benefit from the investments we made over the last year or two and those investments start to yield benefit in 2013 and beyond.
And we look at innovation, continued innovation, new product introduction to drive our top line performance in the developed markets as well. Again, I want to thank everybody for your patience. I want to thank you for your flexibility as we certainly covered lots of material and we appreciate your focus. Have a great day everybody. Thank you.
Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.