Good day, ladies and gentlemen, and welcome to the Second Quarter twenty twelve Armstrong World Industries, Inc. Earnings Conference Call. My name is Diana, and I'll be the operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session.
As a reminder, today's conference is being recorded. I would now like to turn the call over to your host, Mr. Tom Waters, Vice President, Treasury and Investor Relations. Please go ahead.
Thank you, Deanna. Good afternoon and welcome. Please note that members of the media have been invited to listen to this call and the call is being broadcast live on our website at armstrong.com. With me this afternoon are Matt Espie, our President and CEO Tom Mangus, Mangus, our CFO Frank Reddy, the CEO of our Worldwide Floor businesses and Vic Grizzle, CEO of our Worldwide Ceilings businesses. Hopefully, you have seen our press release this morning and both the release and the presentation Tom Mangus will reference during this call are posted on our website in the Investor Relations section.
In keeping with SEC requirements, I advise that during this call, we will be making forward looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong, please review our SEC filings, including the 10 Q filed this morning. Forward looking statements speak only as of the date they are made. We undertake no obligation to update any forward looking statement beyond what is required by applicable securities law.
In addition, our 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 afternoon, everyone, and thanks for participating in our call this afternoon. The second quarter of twenty twelve exhibited many of the same themes as the first quarter. European economies continue to struggle and market demand was below our already pessimistic assumption. North American commercial markets performed below our expectations, while new residential construction was up, albeit off a very low base and Asia was a mixed bag.
Given this macroeconomic backdrop, Armstrong's performance in the quarter was largely as you'd expect. Sales of $710,000,000 were down $39,000,000 or 5% from 2011
with the overwhelming majority of the
drop coming in Europe. European sales performance was exacerbated by the euro currency weakness. Excluding the impact of foreign exchange, sales were down $22,000,000 or 3% with more than all the difference in foreign exchange coming from the euro. Sales were below the low end of the guidance range of seven forty million dollars driven primarily by the issues in Europe, softness in U. S.
Commercial markets and severe inventory reductions at one of our big box customers all versus our expectation. Year to date sales are $1,378,000,000 down $56,000,000 or four percent from 2011. And as with the quarter, the sales decline is primarily driven by the Euro Zone and exacerbated by currency. On comparable foreign exchange basis, sales were down 2.5%. Despite the top line challenges, we were able to deliver adjusted EBITDA of 110,000,000 up 2,000,000 in the second quarter of twenty eleven and within our guidance range of $105,000,000 to $120,000,000 EBITDA performance was helped by continued productivity improvements and ongoing SG and A expense management.
I'm pleased to announce that we now expect to achieve $200,000,000 from our cost savings program by the end of twenty twelve. This is up from our most recent estimate of $185,000,000 and the original target of $150,000,000 The additional savings will come from both SG and A and manufacturing productivity. Given the prominence Europe has been receiving in the headlines, I wanted to help you contextualize the region for Armstrong. Europe for Armstrong reporting purposes includes The Middle East as well as Africa. In 2011, this region represented about 20% of our sales and 7% of adjusted EBITDA, with more than all the EBITDA coming from the ceilings business.
Italy and Spain represent about 7% of our European sales. Obviously, these are large economies that are going through difficult times and our sales of those countries are down more than 20% year on year. But Italy and Spain are only a fraction of the European story for Armstrong. The Middle East, Africa and emerging Eastern European countries including Russia produced almost 25% of the regional revenue and provide some offset to struggling Western European market. For instance, our sales to Russia are up 30% year to date.
As we've mentioned in the past, our ceilings business in Europe is broadly spread across the region and had significant sales to Russia and The Middle East. Thus ceiling sales for the quarter were only down 2% versus 2011 on a comparable foreign exchange basis. Our flooring business is largely concentrated in The Eurozone and experienced a sales drop of 17% on a comparable foreign exchange basis. Despite sales being down $25,000,000 for the quarter, adjusted EBITDA is actually up versus 2011 as Europe benefits from cost reduction action. In The Americas, we continue to see softness in commercial markets, particularly K-twelve education and healthcare as government budgets remain constrained.
Also the weakness we saw in the first quarter in the Northeast office market continued into the second quarter, although June activity actually ticked up. For Armstrong, these trends impact both our ceilings and resilient flooring businesses, but more so the flooring side, which depends on education and healthcare for over 50% of its sales. We're adjusting our outlook for U. S. Commercial activity down impacting both of our businesses and of course this is reflected in our updated guidance.
Residential sector continues to show signs of improvement, but even here activity is mixed. We see strong performance in our builder business as new home construction picks up and builder sentiment improves. However, repair remodel activity is fairly flat and recent consumer confidence reports and lower existing home sales figures leave us cautious on the subsegment. In the quarter, our residential resilient products saw sales increases versus 2011 with continued strong performance from our high end alternate and luxe plank products. And while our North American wood sales were down just under 5% year on year due to a big box customer, sales to independent retailers and builders were up despite lower sales in the wood business and adjusted EBITDA was up year on year.
The inventory and customer service issues we discussed in our first quarter results have been fixed as we've added staffing and capacity at three plants. In Asia, the office sector in China slowed and our ceilings business experienced year on year sales decline. Our flooring business in China, which is more exposed to education and health care, saw sales increases. The opposite was true in India, where ceiling sales were up but flooring was down. Australia continued to experience a soft commercial construction market and both businesses were down year on year.
As I mentioned before, on a consolidated basis, Armstrong's adjusted EBITDA for the quarter was up 2,000,000 over 2011. Cost savings in both manufacturing and SG and A and price and mix improvements offset volume declines and modest input cost inflation. Profitability in the second quarter was also negatively impacted by slower than expected ramp up of our Millwood West Virginia mineral wool plant and by environmental charges at our seedlings plants in St. Helens, Oregon and Macon, Georgia. Looking forward, we're lowering our sales and EBITDA guidance based on the market conditions just discussed.
We're essentially calling for flat sales year on year with gains in North American residential product and Asia being offset by significant weakness in our European flooring market. Adjusted EBITDA for the year should be in the range of $400,000,000 to $430,000,000 This is up from 2011 adjusted EBITDA of $377,000,000 but down from our previous guidance range of $420,000,000 to $460,000,000 Tom Mangus will provide more details on these figures as well as our guidance for the third quarter. So with that, I'll turn the call over to Tom to review the financials.
Thanks, Matt. Good afternoon to everyone on the call. In reviewing our second quarter and year to date results, I will be referring to the slides available on our website starting with slide four, key metrics. Tom Waters already covered slide two and slide three is simply an explanation regarding our standard basis presentation. As Matt mentioned, EBITDA for the second quarter rose 1% despite a sales decrease of $22,000,000 when excluding foreign exchange impacts.
Adjusted operating income and earnings per share results both increased by 3%. Second quarter free cash flow was $36,000,000 down 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 first quarter with net debt of $878,000,000 up from $4.00 $9,000,000 at the end of the first quarter and $542,000,000 at the end of the second quarter of twenty eleven as we paid our $500,000,000 special cash dividend in April. Slide five details the adjustments we made to EBITDA and provides a reconciliation to our reported net income of $42,000,000 on the quarter.
The cost reduction initiative and accelerated depreciation adjustments for the second quarter of twenty twelve are related to the permanent closure of our Mobile Alabama ceiling facility announced in our first quarter earnings call and SG and A cost reductions in our European ceilings business. You'll recall the second quarter of twenty eleven was impacted by restructuring and cost out efforts in European flooring and the closure of our Beaver Falls, Pennsylvania ceiling facility. Interest expense was higher in 2012 than 2011 as debt increased by about $250,000,000 as we financed a portion of the dividend we paid in April 2012. Tax expense was lower versus the prior year driven by an increase in international income from lower tax jurisdictions. Moving to slide six.
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 weakness in Europe which saw sales decline by 17%. The sales drop was more than entirely volume driven as price and mix were favorable. Again, excluding the impact of foreign exchange, sales in Asia were essentially flat with declines in Australia and India offsetting continued growth in China. North American Resilient was down slightly even though we saw mid single digit improvement in our independent residential resilient business.
Commercial flooring volumes declined mid single digits particularly in sectors driven by public spending offsetting gains in price and mix. Resilient flooring EBITDA improved due to our cost out efforts and price and mix gains. As Matt mentioned, wood flooring sales were down due to inventory reductions at a big box customer. However, we saw mid to high single digit gains in the independent retail channel and builder segments as new housing construction growth begins to flow through to our sales. Despite overall lower volumes, the Wood business was able to grow EBITDA versus 2011 driven by manufacturing productivity improvements.
Building product sales were flat as price and mix gains offset volume declines in all regions. In The U. S, we saw a continuation of the weakness in our commercial business that Matt has already discussed. For the quarter, commercial ceilings volumes were down in the low single digits. The sales decline in Europe was primarily the result of lower volumes in the Eurozone, although as Matt highlighted, sales in Eastern European markets grew.
Excluding the impact of foreign exchange, sales in Asia were down 4% as activity in new office construction in China slowed in the second quarter. Adjusted EBITDA in building products was also flat as the price gains and higher profit from our WAVE joint venture offset the volume drop and input inflation. As Matt mentioned, ABP's profitability was also suppressed by over $5,000,000 of costs in the quarter associated with the delayed start up of Millwood and the environmental charges at our domestic plants that we are carrying in our adjusted EBITDA results. Cabinet sales and adjusted EBITDA declined on lower volumes. 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 seven shows the building blocks of adjusted EBITDA from the second quarter of twenty eleven to our current results. Story on the quarter was a volume decline across our commercial oriented markets. This was $19,000,000 a $19,000,000 drag on quarterly earnings. For perspective, Europe volume weakness alone contributed to just over half the total EBITDA impact from volume versus the prior year.
Price and mix gains exceeded input cost inflation at the company level. Resilient flooring was particularly noteworthy in its ability to drive mix as luxury vinyl tile continues to grow faster than the market and our products like Alterna and pension credit. The net manufacturing cost improvement of $6,000,000 versus the prior year is inclusive of the $5,000,000 of costs associated with the Millwood startup and the environmental charges. Turning now to slide eight, you can see our free cash flow for the quarter. Cash earnings are higher than the prior year, driven by lower cash taxes, but more than offset by higher working capital and increased capital expenditures.
The increase in working capital is a year over year comparison story as we are now lapping our successful account payables actions that drove outsized payables gains in 2011. Accounts payable was still a contributor to free cash flow in 2012 as is typical in the second quarter. The large capital expenditures are associated with our emerging market plant construction projects. WAVE was also positive year on year. Finally, we made significant cash payments for restructuring in the prior year that did not repeat in this quarter and which makes up the bulk of the restructuring and other line.
Slides nine through '12 illustrate our year to date financial results. Sales were down 2.5% on a comparable foreign exchange basis driven by European macroeconomic issues and continued softness in commercial markets in The U. S. Operating income, adjusted EBITDA, earnings per share and free cash flow were also lower driven by largely our first quarter results. Slide 10 illustrates our sales and adjusted EBITDA by segment for the first half of twenty twelve.
The story is essentially the same as for the quarter, so I won't spend much time on this page. But I do want to remind you that in addition to the millwood and environmental headwinds that building products faced in the second quarter, the ceilings business absorbed $4,000,000 of expenses in the first quarter for our transition of the Marietta plant back to our permanent staff from the temporary workers who ran the plant during the lockout. Slide 11 is our year to date EBITDA bridge. And again, the story is very similar to the quarter. Lower commercial market opportunity across our core geographies has been a significant drag on EBITDA in the first half.
Like in the second quarter numbers, our European segments drove half of the impact to EBITDA from volume. It is this experience in Europe and the continued softness in The U. S. And Asia that is leading us to lower our full year sales and earnings guidance. I'll share more on that later.
Of note on this slide, you can see the combined $24,000,000 of savings we have achieved in manufacturing and SG and A expenses to date, which is on track with our updated savings target for the year of $50,000,000 Slide 12 is the year to date free cash flow bridge and just like the quarter cash earnings and WAVE are offset by working capital and capital expenditures. On slide 13, as Matt mentioned, we have increased the amount of our cost savings program to $200,000,000 a 33% increase from our original target of $150,000,000 And now we expect to achieve $50,000,000 of cost savings in 2012. While before we were not expecting to have additional SG SG and A savings in 2012 over 2011, the market conditions in Europe and in The U. S. Commercial segments have forced us to look deeper to find additional SG and A cost savings and we are seeing a higher yield from our efforts initiated in 2011.
The charges we took on the quarter for European restructuring and ceilings were to support some of these permanent savings. In addition, we are targeting further manufacturing productivity across our plant network. Our goal is to have the full $50,000,000 in savings fall through to the bottom line in 2012. Slide 14 updates the guidance for 2012. We are lowering our sales guidance from a range of $2,900,000,000 to $3,000,000,000 now to a range of $2,750,000,000 to $2,850,000,000 due to the macroeconomic issues and resulting lower market opportunity we've discussed.
Given an essentially flat sales expectation, we are lowering our EBITDA guidance range from $420,000,000 to $460,000,000 to a range of $400,000,000 to $430,000,000 At the midpoint of this guidance, we would realize a 10% improvement versus 2011 despite low single digit volume declines companywide. This again illustrates the power of our cost reduction initiatives. As a result of lower earnings, we now expect free cash flow to be in the $30,000,000 to $70,000,000 range down from $170,000,000 in 2011 as we do not anticipate a special dividend from WAVE in 2012 and as capital expenditures rise related to our three China plant and the recently announced Russia plant. The midpoint of our earnings per share range is down $0.3 from the previous guidance driven by our lower expected earnings for the year. Slide 15 provides some more detailed assumptions going into our earnings guidance and includes the specifics on the third quarter.
Raw material costs have moderated somewhat, but we still expect to see inflation of $20,000,000 to $30,000,000 from an array of items including PVC and plastic izers, TiO2, waste paper, cornstarch and other input materials. We continue to expect to fully offset material inflation with price in 2012. Despite flat sales, our manufacturing cost out efforts, continued focus on improving mix and measured pricing to recover commodity inflation should drive improved gross margins of 50 to 100 basis points. This is down versus our prior guidance as we are not able to benefit from as much fixed manufacturing cost absorption due to the lower volumes. Our non cash U.
S. Pension credit will decline to $12,000,000 as we reflect the final stages of our pension derisking derisking strategy, update demographic and discount rate assumptions and continue to amortize market losses from 02/2008. This is unchanged from April. We expect WAVE's earnings to be flat with 2011 as global revenues decline similar to our core business. This is down from our previous expectation of a slight increase.
We forecast cash taxes of roughly $10,000,000 to $20,000,000 on the year also unchanged from April. Our estimate for the third quarter projects sales to be in the range of $740,000,000 to $780,000,000 basically flat with 2011 on a constant exchange basis. We expect the third quarter of twenty twelve to produce EBITDA of $120,000,000 to $140,000,000 compared to $124,000,000 on a comparable basis in 2011. We expect worldwide volumes to continue the trajectories we saw in the second quarter with commercial ceiling volumes down in The U. S.
In the low single digits, commercial flooring to be down mid single digits and the Eurozone to be down double digits. We expect U. S. New residential and Asia to be the few bright spots with volumes to be up year on year. Global price and mix gains will help sales get back to flat on a year over year basis in the quarter.
Manufacturing productivity and mix improvements will be our core earnings drivers in the third quarter. Our capital spending range of $225,000,000 to $250,000,000 is lower than previous guidance as we uncover savings opportunities and the timing of some spending shifts into 2013. Our emerging market plans remain on schedule. Lastly, for the full year 2012, we now anticipate $10,000,000 to $15,000,000 in EBITDA adjustments associated with already announced actions. This also is unchanged from previous guidance.
Clearly, the macro climate is a challenge, which we remain confident we are doing all we can to manage in the areas we can control to deliver strong shareholder value creation over the long run. And with that, I'll now turn it back to Matt.
Thanks, Tom.
Well, as Tom just said, it is a tough macroeconomic environment. And just when one sector or region starts to show signs of recovering, another takes a step back. While the markets sort themselves out, everyone at Armstrong remains focused on on our strategic priorities. And of course, they include building and maintaining a competitive cost structure driven by our now $200,000,000 cost reduction program investing in organic growth in priority emerging markets as evidenced by building three plants in China and the ceilings plant in Russia. And finally, building a winning team, a globally aligned organization as illustrated by our recently formed Global Architectural Specialties team.
So thank you very much for your attention today. And with that, we'd be happy to take any questions.
Your first question will come from the line of Keith Hughes, SunTrust.
Thanks. My question is both on Resilient and on Hardwood about this inventory takedown. Your independent channel numbers were very encouraging, but and obviously kind of screwed the quarter up. Can you give us any sort of metrics around how big this was in terms of dollars or units or anything of that nature?
Go ahead Frank. Yes. Keith, the
inventory takedown was more than 100% of the decline in The Americas for the total business. So it was in the range of $10,000,000 to $15,000,000 of sales out as a result of the inventory reductions. I'm sorry, you said
$10,000,000
to $15,000,000 sales? Yes.
And is that wood?
The dominance is wood, but there's also some resilient in there as well.
Okay. And what are the big boxes telling you the reason for this to basically slower sales coming and they did this for a reason, I guess? What's their view?
Well, their view one, you have to ask them obviously why they did it. But what we've been told is they want to run the business on lower inventory. And so they're relying more on special order express versus in stock as a way to drive inventory out of the store.
Okay. And question in ceilings at least domestically, any changes in terms of trends in July?
And I guess I would say the
same thing for Resilient and Wood.
Well, I would say the July order rates supports the estimate for July for the quarter, Keith. What we saw was
a
fairly precipitous drop in the second quarter in almost every commercial sub segment education, healthcare, retail, not only in new construction, which was if you go back to the sort of September 2011, we laid in the 2012 operating plan, but also in remodel. We saw some a little bit of softening there as well.
All right. Thank you.
Next question comes from the line of Stephen Campbell, Barclays.
Hi, guys. It's John actually filling in for Steve. We're just trying to get a better idea of how to reconcile the sales decline in wood flooring to recent results from like lumber liquidators where they showed high single digit sales up high single digits. Do you think it could possibly be share shift? Or just trying to get a better idea around that?
Yes, John, it's Matt. I think as Frank said, I mean, we had a single big box retailer make a significant reduction in their in store inventories. We didn't lose share at that retailer, but that retailer's actions probably affected their sell through. We saw an offset not entirely, but through other independent channels. So I think that's the best way we could describe it.
As Frank said, it was more than 100% of the drop. So one customer, one decision affected us. Got it. And
for the wood flooring business, what is the percentage of big box sales done?
It's between 2530% of our total volume. Got it. Okay.
All right. Thank you.
You bet.
Your next question comes from the line of Mike Wood, Macquarie Capital.
Hi, good afternoon. Hey, Mike. Do you have visibility in your channel in terms of of weak supply of inventory? And could you give us that number?
You mean the inventory in the part of the channel themselves?
Yes. Do they give you that data to know what the current level of inventory is running? And I guess are we bottomed out now? Have they done the full destocking?
They don't I mean, we don't really have visibility to that. We try to manage or measure sales out. That's as good a proxy. We're obviously very close to the distributors.
Okay. And then sequentially in the wood flooring business, it looks like your incremental margins were something like 59% 1Q to 2Q. Is that largely a favorable margin shift from a higher independent retail mix?
I'm sorry, Michael. I'm not sure I understand the question. Could you repeat that?
1Q to 2Q on slightly higher sales, you had pretty big operating margin improvement. And I'm wondering if that was a favorable margin shift that you had from having less big box sales versus the independent retail sales in that Wood Flooring segment?
Yes, Mike, this is Tom. I would say, one, wood business is significantly benefiting from prior year cost takeout. And sequentially, sales were up almost $20,000,000 on a normalized basis. So I think you're getting simply a little bit of that SG and A and productivity benefit that we're taking the whole year up on as well as the fall through on the sale. So I think there's a big cost story there.
Productivity at
the wood plants have been good.
Okay. Thank you.
Your next question comes from the line of Catherine Thompson, Thompson Research Group. Hi. Thanks for taking my questions today. Not to beat a dead horse and talk about wood flooring again, but are big box inventory reductions just specific to flooring? Or are there other categories that are being impacted by push from this big box retailer to reduce inventory?
Well, in our case, Catherine, obviously, it's more significant in flooring than it is in building products just because it's a bigger part of Frank's business than Dick. So that one customer's actions affected both categories, both businesses, but was a bigger much bigger part of what happened to Frank.
So you're seeing it in other categories, so a push to reduce inventories meaningfully?
Well, we're seeing it not only in the categories that we sell, but across all of the a lot of the categories say merchandise.
What are the categories?
You mean beyond ceilings and floors?
Yes, yes.
You know what? I'd hesitate to comment on that. That's probably better left for them to on. I mean I would confirm that to the extent that they destock and it's a lesser impact on building products. Our building products business felt good as well.
And did they give a rationale for the broad based inventory reduction?
You know what? I just feel a little uncomfortable continuing to comment on what their strategy might be. Just our intent here is to point out the fact that that decision had an inordinate and probably disproportionate impact on our business. We are just trying to be transparent about it.
Okay. How much did a softer Europe impact ceiling demand in the quarter?
Well, I think ceilings because of the balance the breadth of the coverage, I mean, our Building Products business, it's significant benefit from a strong Russia. As we said, sales were up 30%. Middle East continued to be very strong in just in general terms for us. So it had a significantly less negative impact on us than it would have had in floors. Our business our flooring business is almost entirely Eurozone.
While centered in the Germanic countries, which was less effective than the Mediterranean countries, obviously, we had a more significant impact there. 90% of our business, our flooring business in Europe is tied to public spending. So with austerity and the austerity measures being taken and some of just the political stuff that went on in the quarter, it certainly affected our flooring business more than our sailings business.
So basically If I could add, Catherine, I would say, clearly, we expect Europe to be down on the second quarter. It just was worse than we expected. And it wasn't the whole miss on sales. And we have dramatic variation on our sales versus our guidance range. That wasn't all explained by Europe because we had to build some of that in, but it did get worse in what I'll call in the 5% to 10% range.
Okay. So flooring had a bigger impact than ceilings?
Yes. Absolutely. Yes.
All right. I'll get back in the queue. Thanks.
Thank you.
The next question comes from the line of Bob Wentzell, RBC.
Hey, good afternoon. Thanks for taking the question.
Hey, Bob.
Hey, so I wanted to understand last year you guys did around $375,000,000 of EBITDA and Tom had said in his prepared remarks that you're looking for $50,000,000 of cost savings to drop to the bottom line. So I'm just trying to understand that gets you to $425,000,000 and given what's going on in Europe and the difficult macro condition, are you very confident that the bottom floor for EBITDA this year is going to be $400,000,000? Or do you think that's what's the assumption going into that around Europe in the back half of the year?
Sure. This is Tom. Well, I would say that our guidance range of $400,000,000 to $430,000,000 is given the volatility of our business and the excellent on the way up and tough on the way down incremental margins. I mean it's a pretty tight range. So it does have an assumption of kind of some level of macroeconomic activity built in.
And I would say that we're still assuming Europe's down double digits in the back half and that the domestic market continues to be down as well in the commercial segments low single digits in North America ceilings as I highlighted. And on the commercial side of flooring also down low to mid single digits. So we have an assumption of continued pressure on volume heavily from Europe, but how much worse can Europe get? To lose $10,000,000 of EBITDA our average incremental margin we've talked about, we only have to lose $30,000,000 in sales to move $10,000,000 of EBITDA, right? So it comes down to what's your expectation of how bad Europe can get.
Right now, we feel like we've got it called accurately, but that's a tough crystal ball to read.
Understood. Obviously, the volume environment is kind of soft right now. Do you think the difficulty from demand side will impact the price and mix area where you're doing so well? Or do you think that's also susceptible? Well, yes, Bob, this is Matt.
Price and mix continues to be a bright spot for us. I think we're team's doing a great job driving price in both businesses. We're seeing mixed benefits from new products in some of the segment shifts. So we're hopeful that that holds on even in light of some demand
I do think the way to look at our pricing Bob will be kind of net of material costs. So if I think the indicator to watch is what's happening in commodity costs and inputs I think to the extent that we have kind of volatility, we'll continue to be able to price and hold price in that environment. I think if it's a straight nose dive down on commodities, we'll get a benefit there, but we also may not be able to get the price that we hope for. But I think in net, we'll still be we'll clearly be positive on the year and we'll still be able to likely do better than competition in that measure.
And if I could just sneak one last one in quickly. Could you just give a little color on what you're seeing in terms of the inflationary headwinds and where those are coming across? Well, we're looking at $20,000,000 to $30,000,000 of additional inflation this year. So it's increasing at a lower rate than we saw last year. And it still is based primarily on PVC, plasticizers and to a lesser degree TiO2.
Got it.
And one thing that's kind of rearing its ugly head force right now is cornstarch, which is a big ingredient in ceiling tiles with corn running hot. So I think it will continue to be in those key measures of materials.
Thank you very much.
Your next question comes from the line of Dennis McGill, Zelman and Associates.
Hi. Thank you very much. Matt, I think you touched on this a little bit, but correct me if I'm wrong, I think you said flooring Europe was down 17% for the quarter, ceilings was down 2%. Can you just talk about the pace of what you saw and maybe split it between both Europe's? And then kind of similar question on just domestic non res.
As far as the pace through the quarter and into July, are you seeing any bottoming or improvement in those rates of decline?
Yes. As Tom mentioned a while ago, we certainly expected Europe in total to be soft, was just softer than we anticipated. Again, the European business is very different or the European environment affects flooring and ceilings very differently. As you rightfully said, our business in flooring business was down 17%. It's been a tough year on the demand side for flooring all year.
We're tied 90% to public spending. It didn't it dropped a little bit through the quarter, a little bit more than we had anticipated. And again, we're seeing the geographically, we're seeing the relatively broad based drop geographically. The ceilings business was helped by The Middle East and pretty significantly by Russia. As we pointed out, we're up about 30% there.
So we have a broader economic base in ceilings. We also have a bigger position
in The U. K. In ceilings than we do in floor.
So it's we were while we're a little disappointed in the ceilings volume based on what's going on in the market, we're satisfied with that plus the earnings improvement we saw based on the cost reduction activities in both Mineral Fiber and Metal Ceiling architecture especially nice improvement there. In terms of North America non res, that's flattish. Certainly the new construction is up and kind of about where we expected it to be. So no good no better news than expected, but no worse news. But we did see softening in the remodel business as consumer confidence sagged and existing home sales sagged.
So we see them down 6% and that's a source of remodel. You buy an existing home, you remodel it. And so if that goes past zero that is going to put pressure on that remodel. So we see that of course in residential resilient and wood floor demand.
Okay. So that second comment on North America that was across all the products not ceilings related?
Exactly. That was North America would be almost entirely floors.
Right. So there are a lot of issues going on within the wood flooring between inventory correction this quarter and then the service issue last quarter and then you've got a little bit of a disconnect between the construction cycle and when the floors go in. How do you think about sort of the underlying growth between on the flooring side between residential new and home improvement if you think about pure customer demand?
Well, it's a good question. So the flooring service issues are behind us. So we executed the plan that Frank laid out for you a quarter ago. Service levels there are back to historic highs and really no perceptible impact on demand as a result of that. The downdraft in that we got in the big box certainly didn't anticipate it coming into the quarter.
We'd like to hope that that gets corrected. I think that we the fundamental demand in residential new construction will continue to sustain. It will be a positive, albeit kind of where we expect through the year. I am concerned about resi remodel because it is very dependent on consumer confidence and probably less directly on meaningful improvement in unemployment. So that isn't where we want it to be.
And we have a very, I think, modest view of that. That is factored into our outlook and estimate for the balance of the year though.
Okay. And then just to wrap that up, the residential side, realizing those consumer issues and you mentioned existing home sales, I could debate whether that's a driver or not. You've seen strength at the independent retailer side though. So do you feel like they're taking share? Or is there something else going on within that segment of your customer base?
Go ahead, please. Yes. I think as Tom and Matt had said earlier, Dennis, we experienced mid to high single digits growth in our independent business. I think largely driven off of the strength of new construction and the strength of that market. We think we did as well as if not slightly better than the market in terms of performance.
But clearly on the independent side with the mid to high single digits, we're benefiting from
the strength of new construction.
Okay. Thanks very much guys. Thanks.
Next question comes from the line of Jim Barrett, CLP and ANSWER.
Good afternoon, everyone.
Hey, Jim.
Tom, I think this is a
question for you. Can you give us your current outlook expect WAVE's margins to behave if steel prices were to subside near
to intermediate term from here?
Well, I would say number one, the I mean, grid had a very good second quarter. Largely a little bit of a history less on our wave on the margins. You recall last year they had a price increase in the first quarter that a couple of price increases that pulled a lot of volume in to the second first quarter of last year. So number one, they had a tougher second quarter of twenty eleven and a pretty easy comp this time around, although we did build some share we believe this quarter. And I think fundamentally given the uncertainty around steel prices, I don't think that they're going to be able to drive significantly more margin growth in the current year beyond what we've seen to add earnings.
I think really they're going to be a let's drive volume, let's drive share and that's going to be their orientation, particularly in Europe. And that will be the story that hopefully holds them flat despite a tough market environment. And to your first point on the actual price of steel that's factored in this forecast, I'll have to get back to you on that one. I don't have that off the top of my head, Jim.
And generally, is the view that you're taking share from your leading competitor or from some of the weaker player or players in the market? Yes. We don't think
we're winning share versus USG, which is the big player here in The U. S. Correct. We don't think we're winning in Europe. They're a player in Europe, although I wouldn't necessarily say they're the shared donor.
There are lots of more fragmented players. A lot of our key competitors don't have their own grid. They're sourcing a grid from a third party. And that's where our system sale I think is really adding value to us. Vik, do you want to add anything to that point?
No. I think that's fine.
Okay. Well, thank you both very much. Yes.
I'll get you back that data point you asked me. Appreciate it.
Your next question comes from the line of Rodney Napier, KeyBanc Capital Markets.
Hi, good afternoon, everyone.
Hey, Rodney. Hi, Rodney. All
right. I dropped off for a little bit, so sorry if my question has already been asked. But just going back to the wood business for my first question. You had commented on Big Box and it they're looking to run on a more just in time model, I think you said. And so I was wondering how does that impact your supply chain capabilities and your ability to meet demand on a more real time basis?
And specifically the impact on your margins and leverage going forward in the wood business? And then secondly, along those same lines, the your expectations of what would your expectations be of similar inventory actions potentially out of some of your other big box customers as a broader end market trend?
Our ability we haven't adjusted significantly the supply chain to address this. We're hopeful that they'll reverse the strategy quite candidly. There's no sign that any of the other big box would follow this strategy. And again, I don't want to comment on a customer's strategy at all. But I think if that does become a trend and it's unlikely Rodney, we'd be able to adjust accordingly.
And as Frank pointed out, we certainly picked up a lot of that lost share to the segment, if you will, through the independent channel. We saw pretty significant growth.
Okay. That's helpful. And my next question is more on your capacity build out in China. In the past, I think you framed out in aggregate the amount of sales you expect out of those three China plants at roughly $200,000,000 And with the current environment in China and you commented on maybe some slowdown in Asia. Could you provide some sensitivity around what sales outlook might be if trends don't improve?
And or perhaps maybe the timeline to ramp up to the $200,000,000
Yes. It's all good questions. At this point, we don't really we're not adjusting our outlook. We've seen a little softening in commercial office. Our building products team is working hard to drive specifications in flooring business.
So the relative strength you see in flooring there is the value proposition for resilient flooring is accepted in education and healthcare. We're working on conversion of cinder block and drywall in both those segments for ceiling. So we remain bullish on China. And despite a little despite the government managing the economy to sort of deflect inflation, they're still focused on segments of the economy that are traditionally very strong for us. So we're sitting here today optimistic that the plants open on time.
The teams are working to build demand. And we're not changing our outlook or timeline or guidance relative to that at all just based on what we've seen recently. And just the plants in China are to serve broad pan Asian demand. So that's to serve demand in India, it's to serve demand in Southeast Asia. And these are all places that that demand is being served today from capacity outside of Asia.
So a lot of this is still we still view a lot of this Rodney as catch up. Okay. All
right. Well, thank you very much.
You bet. Thank you.
Your next question is a follow-up from the line of Keith Hughes on Trucks.
Frank, just on the inventory takedown at the Big Box, was that the result of a kind of line review? Or have you lost some slots or SKUs? Or is it just simply emptying a warehouse though?
Absolutely not. We had no line review impact. Our relative share there hasn't moved. It's their broad based retail strategy. Keith, I don't know anything else?
No, that's correct. It's not a result of any line review. Our facings have not changed. In fact, the number of facings we have has gone up slightly in the last five months. It's clearly right now in inventory play.
And one follow-up on your comments on residential renovation. We've seen through earnings very similar comments to what you guys are making. Frank, as you talk to retailers in the flooring space, what are they telling you? What are they hearing from consumers? Why is it not followed along with this continuing boom here in new construction?
Well, I think there's a couple of things. One is what retailers tell us is there's not a lot of people in their stores. So there's just it's very sporadic. They'll have a Saturday where they'll have four, five, six appointments for installs and then they'll go three or four days with nothing. And what it comes back to is one is we talk about a boom in new construction on a percentage basis that's true.
But when you look at absolute number of housing starts incremental, it's not that significant. And there existing home sales are down, people don't have the equity to move. I think it's all that familiar tape that we've heard before that continues I think to suppress some of the remodel replace activity.
Yes. All right. Thanks, guys. A little bit of color on that, Keith. We tracked very closely existing home sales.
And first quarter according to the U. S. Census Bureau and National Association of Realtors, existing home sales existing home sales declined 6%. The trailing twelve month inclusive of the first quarter was off only 1%. So you saw a deceleration of the existing home sales.
And that churn of the housing stock is a much bigger driver existing home sales and that churn of the housing stock is a much bigger driver clearly obviously through model, but as a total portion of our residential business. So that's what we're watching closely and I think the step back of consumer confidence is a reflection of that.
All right.
Thanks guys.
Your next question is a follow-up from the line of Bob Wettnall with RBC.
Hey, thanks again for the color today. I was hoping as opposed to just talking about this quarter, you could give an update on what you're thinking about in terms of longer term growth prospects for 2013. I know you're building some stuff out in Russia and China. And I was trying to get an idea of if those will be coming on and kind of become the growth engine for the Armstrong story next year or if you feel that that's going to be delayed a bit due to macro developments? Well, we're not prepared to really talk about 2013 and beyond the information we shared at our investment at Investor Day.
But the Russia plant sort of comes on at the end of twenty fourteen, '20 '15. So that's a driver of relative growth then. The other plants in China are coming on as we've forecasted in the past. So obviously as we think about 2013, we need to consider exiting this year at a softer environment here in North America and Europe that we anticipated entering it. But we still think that even in a challenging operating environment making big bets in emerging markets like China, like Russia, expanding our presence in places like The Middle East, India make sense.
Our ability to adjust our value proposition to fit those whether it's resilient flooring in a hospital in Riyadh, whether it's architectural specialties in an airport in Dubai, whether it's just driving continued penetration in Russia by improved service and targeted products with a plant there, driving conversion in China from drywall and cinder block to mineral fiber ceilings are participating in the government's emphasis in healthcare and education in China. Our value proposition works. The investments are meaningful, but I think well placed and very responsible. So even if even in a tougher operating environment that may come our way in the next two to three years, we think these investments make frankly arguably more sense than ever.
One other point, if I could chime in there. We're on track for the plant startup. So you'll start seeing revenue show up in the first quarter from our homogeneous plant in China on schedule. You'll start seeing revenue from our ceilings plant in China in the end of the second quarter middle end of the second quarter. So they start coming on and our revenue contributors next year.
And as Matt framed, Russia is out a bit and Hetero is in the second half of twenty thirteen. So it starts to build in 2013. We haven't given specific revenue numbers, but we do see those plants as important contributors, because we think it's probably still going to be tough next year in the domestic market. And one of the things while we don't like the fact that our sales are down, we're very proud of the fact we are delivering year over year EBITDA and earnings per share performance despite tough volume and despite significant investments to build these plants and to build out the organizations in those markets, right? They don't those organizations don't turn on when the plants come on.
We're investing now with feet on the ground. We're investing teams to build these plants all running through the earnings that are dropping to the bottom line. And so we've talked about the savings program. I think the thing that's keeping our earnings afloat is the savings program. And we're really proud that we were able to frame now the goal up to $200,000,000 and net all falling to the bottom line is our goal in the current year.
We've never said that despite us building all four of these plants and building up the organizations and more to come. So, it's a little bit of the context there and hopefully these investments pay off soon and on schedule, but we're all a little bit of the wait and see mode at this point till those plans come online.
That's helpful and good luck with the growth story. And thanks for all the color. Thank you. Thanks, Bob.
And thank you ladies and gentlemen for your questions. This concludes today's conference. Thank you again for your participation. You may now disconnect and have a great day.